Annual Financial Report (Part

RNS Number : 0651Q

Standard Life plc

07 April 2009

Standard Life plc

Annual Report

and Accounts

2008

PART 3 OF 6

14. Deferred acquisition costs

		2008	2007
	Notes	£m	£m
At 1 January
Cost		1,313	930
Accumulated amortisation and impairment		(620)	(485)
Opening net book amount		693	445

Costs deferred	5	307	365
Impairment charge	5	(1)	-
Amortisation charge	5	(165)	(135)
Foreign exchange adjustment		58	18
Closing net book amount		892	693

At 31 December
Cost		1,678	1,313
Accumulated amortisation and impairment		(786)	(620)
Closing net book amount		892	693

The amount of deferred acquisition costs expected to be recovered after more than 12 months is £744m (2007: £566m). Included in deferred acquisition costs above are costs deferred on investment contracts (known as deferred origination costs) amounting to £661m (2007: £570m).

15. Investments in associates and joint ventures

	2008	2007
	£m	£m
At 1 January	4,146	3,627
Share of profits from associates and joint ventures	101	181
Share of other recognised income from associates and joint ventures	2	-
Net (decrease)/increase in net investment holdings and movements between classifications of investments	(1,159)	291
Additions on assuming significant influence/joint control	34	111
Cessation of significant influence/joint control or disposal of interest held	(3)	(7)
Foreign exchange adjustment	105	35
Dividends received	(123)	(92)
Other	(5)	-
At 31 December	3,098	4,146

Share of profits from associates and joint ventures includes £130m (2007: £161m) arising from associates accounted for at fair value through profit or loss in accordance with IAS 39 Financial Instruments: Recognition and Measurement.

Net (decrease)/increase in investment vehicle holdings relate to the purchase and sales of units in Standard Life Investments (Global Liquidity Funds) plc. The majority of additions and disposals relate to the purchase and sale of non-principal associates and joint ventures.

(a) Investments in associates

The following are particulars of the Group's share of significant associates:


Name of associates	Country of incorporation or registration	% interest held	Year End	Nature of business	Assets £m	Liabilities £m	Revenues £m	Profit/ (Loss) £m
At 31 December 2008
Standard Life Investments (Global Liquidity Funds) plc*	Ireland	35.5	31 Dec	OEIC	2,754	8	136	134
HDFC Asset Management Company Limited**	India	40.0	31 Mar	Investment Management	16	7	19	10

At 31 December 2007
Standard Life Investments (Global Liquidity Funds) plc	Ireland	38.3	31 Dec	OEIC	3,844	13	162	160
HDFC Asset Management Company Limited	India	40.0	31 Mar	Investment Management	30	10	14	9
Name of associates	Country of incorporation or registration	% interest held	Year End	Nature of business	Assets £m	Liabilities £m	Revenues £m	Profit/ (Loss) £m
At 31 December 2008
Standard Life Investments (Global Liquidity Funds) plc*	Ireland	35.5	31 Dec	OEIC	2,754	8	136	134
HDFC Asset Management Company Limited**	India	40.0	31 Mar	Investment Management	16	7	19	10

At 31 December 2007
Standard Life Investments (Global Liquidity Funds) plc	Ireland	38.3	31 Dec	OEIC	3,844	13	162	160
HDFC Asset Management Company Limited	India	40.0	31 Mar	Investment Management	30	10	14	9

* Held at fair value through profit or loss

** Recognised using equity accounting

The Group also owns certain investments where its holding exceeds 20% of the equity instruments of the investees without having significant influence over their financial and operating policies. Certain investments held by mutual funds, unit trusts and unit linked insurance funds are therefore not treated as associates and recorded in Investment securities. Their operations are not significant in relation to the financial statements of the Group.

(b) Investments in joint ventures

The following are particulars of the Group's significant joint ventures, all of which are unlisted:


Name of joint ventures	Country of incorporation or registration	% interest held	Current assets £m	Long-term assets £m	Current liabilities £m	Long-term liabilities £m	Income £m	Expenses £m
At 31 December 2008
Castan Waterfront Development Inc.	Canada	50.0	-	21	2	-	(3)	-
First Real Properties Limited	Canada	49.0	2	81	9	6	13	8
HDFC Standard Life Insurance Company Limited	India	26.0	22	353	26	323	118	133
Heng An Standard Life Insurance Company Limited	China	50.0	13	197	8	161	64	74
At 31 December 2007
Castan Waterfront Development Inc.	Canada	50.0	-	21	1	-	1	-
First Real Properties Limited	Canada	49.0	10	69	12	10	17	7
HDFC Standard Life Insurance Company Limited	India	26.0	18	285	14	267	107	109
Heng An Standard Life Insurance Company Limited	China	50.0	10	103	3	72	33	37
Name of joint ventures	Country of incorporation or registration	% interest held	Current assets £m	Long-term assets £m	Current liabilities £m	Long-term liabilities £m	Income £m	Expenses £m
At 31 December 2008
Castan Waterfront Development Inc.	Canada	50.0	-	21	2	-	(3)	-
First Real Properties Limited	Canada	49.0	2	81	9	6	13	8
HDFC Standard Life Insurance Company Limited	India	26.0	22	353	26	323	118	133
Heng An Standard Life Insurance Company Limited	China	50.0	13	197	8	161	64	74
At 31 December 2007
Castan Waterfront Development Inc.	Canada	50.0	-	21	1	-	1	-
First Real Properties Limited	Canada	49.0	10	69	12	10	17	7
HDFC Standard Life Insurance Company Limited	India	26.0	18	285	14	267	107	109
Heng An Standard Life Insurance Company Limited	China	50.0	10	103	3	72	33	37

16. Investment property

		2008	2007
	Notes	£m	£m
At 1 January		10,646	11,338
Additions - acquisitions		56	365
Additions - subsequent expenditure		58	28
Disposal of a subsidiary		-	(74)
Transfers from property, plant and equipment	17	-	252
Net fair value loss		(2,342)	(792)
Disposals		(1,047)	(646)
Foreign exchange adjustment		305	183
Other		62	(8)
At 31 December		7,738	10,646

The fair value of investment property can be analysed as:
Freehold		6,152	8,360
Long leasehold		1,506	2,193
Short leasehold		80	93
		7,738	10,646

Further information on the valuation methods and assumptions in relation to investment property is shown in Note 45 - Fair value of financial assets and liabilities.

The rental income arising from investment properties during the year amounted to £599m (2007: £632m), which is included in net investment return (set out in Note 2). Direct operating expenses (included within other administrative expenses) arising in respect of such rented properties during the year amounted to £141m (2007: £156m).

17. Property, plant and equipment

		Land and buildings	Equipment	Total
	Notes	£m	£m	£m
Cost or valuation At 1 January 2007		1,047	172	1,219
Additions		211	22	233
Disposals		(136)	(2)	(138)
Transfers (to)/from investment property	16	(252)	-	(252)
Revaluations	27	(26)	-	(26)
Revaluation of property held by unit linked funds	27	5	-	5
Impairment losses (recognised)/reversed*	5	(16)	-	(16)
Foreign exchange adjustment		3	3	6
Other		1	-	1
At 31 December 2007		837	195	1,032

Additions		266	19	285
Disposals		(108)	(21)	(129)
Revaluations	27	(58)	-	(58)
Revaluation of property held by unit linked funds	27	(101)	-	(101)
Impairment losses (recognised)/reversed*	5	(137)	-	(137)
Foreign exchange adjustment		3	6	9
Other		(2)	(1)	(3)
At 31 December 2008		700	198	898

Accumulated depreciation
At 1 January 2007		-	(152)	(152)
Depreciation charge for the year	5	-	(9)	(9)
Disposals		-	2	2
Foreign exchange adjustment		-	(3)	(3)
At 31 December 2007		-	(162)	(162)

Depreciation charge for the year	5	-	(10)	(10)
Disposals		-	18	18
Foreign exchange adjustment		-	(4)	(4)
At 31 December 2008		-	(158)	(158)

Carrying amount
At 31 December 2007		837	33	870
At 31 December 2008		700	40	740

* Impairment (losses)/reversals recognised in the income statement were (£137m) (2007: (£16m) (refer to Note 5). In 2008, the impairment losses arose due to reductions in the market value of a number of properties below original deemed cost.

Land and buildings consists of property occupied by the Group and property that is being constructed or developed for future use as investment property. The value of property that is being constructed or developed for future use as investment property at 31 December 2008 was £515m (2007: £580m).

If land and buildings were measured using the cost model, the carrying amounts would be £755m (2007: £696m). Where the expected residual value of owner occupied property is in line with the current fair value, no depreciation is charged. Equipment primarily consists of computer equipment.

18. Tax assets and liabilities

		2008	2007
	Notes	£m	£m
Current tax recoverable	22	125	79
Deferred tax assets		428	111
Total tax assets		553	190

Current tax liabilities		174	252
Deferred tax liabilities		93	480
Total tax liabilities		267	732

All current tax assets and liabilities in 2007 and 2008 are expected to be recoverable or payable in less than one year.

(a) Recognised deferred tax

	2008	2007
	£m	£m
Deferred tax assets comprises:
Actuarial liabilities	175	102
Losses carried forward	65	28
Depreciable assets	29	18
Deferred income	41	20
Employee benefits	16	49
Provisions and other temporary timing differences	35	62
Insurance related items	225	217
Subordinated debt valuation differences	6	6
Unrealised losses on investment securities	193	-
Temporary valuation differences	35	-
Other	1	3
Gross deferred tax assets	821	505
Less: offset against deferred tax liabilities	(393)	(394)
Net deferred tax assets	428	111

Deferred tax liabilities comprises:
Insurance related items	16	75
Unrealised gains on investment securities	178	609
Deferred acquisition costs	210	127
Deferred gains on realisation	47	48
Subordinated debt valuation differences	4	4
Temporary timing differences	4	9
Employee benefits	22	-
Deferred tax on acquired assets	2	-
Other	3	2
Gross deferred tax liabilities	486	874
Less: offset against deferred tax assets	(393)	(394)
Net deferred tax liabilities	93	480

Movements in deferred tax assets/(liabilities) comprise:
At 1 January	(369)	(598)
Acquisitions of subsidiaries	(2)	-
Amounts credited to net profit	743	229
Amounts (charged) directly to equity	(41)	-
Foreign exchange adjustment	4	-
At 31 December	335	(369)

A deferred tax asset of £258m (2007: £28m) for the Group has been recognised in respect of losses of various subsidiaries and unrealised losses on investment securities. Deferred tax assets are recognised to the extent that it is probable that the losses will be capable of being offset against taxable profits and gains in future periods. The value attributed to them takes into account the certainty or otherwise of their recoverability. Their recoverability is measured against anticipated taxable profits and gains. The losses of the subsidiaries in Canada will expire between 2014 and 2028. The remaining losses do not have an expiry date.

(b) Unrecognised deferred tax

Due to uncertainty regarding recoverability, deferred tax has not been recognised in respect of the following assets/(liabilities):

• Cumulative losses carried forward of £121m (2007: £73m)

• Tax reserves of the German branch of Standard Life Assurance Limited of £166m (2007: £169m)

• Valuation allowance of the Canadian business of £nil (2007: £96m), and

• Unrecognised investment losses of £479m (2007: £nil)

19. Loans and receivables

The loans and receivables relating to Group at year end were as follows:

	2008	2007
	£m	£m
Loans and receivables comprise:
Loans secured by mortgages	11,835	12,929
Loans secured on policies	104	107
Other	135	21
Gross loans and receivables	12,074	13,057
Less: Allowance for impairment losses	(5)	(1)
Net loans and receivables	12,069	13,056

Loans and receivables with variable interest rates and fixed interest rates are £5,683m and £6,391m respectively (2007: £5,768m and £7,289m, respectively).

Included in loans secured by mortgages are mortgages subject to securitisations of £2,823m (2007: £5,515m).

Impairment losses of £5m (2007: nil) have been recorded in Note 2 - Net investment return.

Loans and receivables that are expected to be recovered after more than 12 months is £11,528m (2007: £12,840m).

20. Derivative financial instruments

The Group's insurance business uses derivative financial instruments in order to match contractual liabilities, to reduce the risk from potential movements in foreign exchange rates, equity indices, property indices and interest rates, to reduce credit risk or to achieve efficient portfolio management.

The Group's banking business uses derivative financial instruments in order to match or reduce the risk from potential movements in foreign exchange rates, equity indices and interest rates inherent in the banking book.

The Group designates certain derivative financial instruments as cash flow hedges, fair value hedges and net investment hedges to mitigate risk, as detailed below. Derivative financial instruments that are not designated part of a hedge relationship are held for trading under IAS 39 Financial Instruments: Recognition and Measurement.

		2008			2007
	Contract amount	Fair value assets	Fair value liabilities	Contract amount	Fair value assets	Fair value liabilities
	£m	£m	£m	£m	£m	£m
Cash flow hedges	886	14	31	2,039	27	2
Fair value hedges	352	51	-	352	2	7
Net investment hedges	215	-	9	-	-	-
Held for trading	37,566	2,735	1,308	36,317	491	633
Total derivative financial instruments	39,019	2,800	1,348	38,708	520	642

Derivative assets of £2,387m (2007: £391m) are expected to be recovered after more than 12 months. Derivative liabilities of £787m (2007: £470m) are expected to be settled after more than 12 months.

(a) Cash flow hedges

The Group designates as cash flow hedges those currency forwards and currency swaps used to reduce the exposure to variability in cash flows arising from the foreign exchange risk associated with foreign currency borrowings. The Group also designates as cash flow hedges those interest rate swaps used to reduce the exposure to variability in cash flows arising from the interest rate risk associated with floating rate borrowings.

Forward foreign exchange forwards with an aggregate notional principal amount of £123m (2007: £572m) and a net fair value of £14m (2007: £19m) were designated as hedges of future cash flows arising from debt issued in foreign currency. The cash flows from these instruments are expected to be reported in the income statement in 2009. In 2008, the ineffectiveness recognised in income statements that arises from these cash flow hedges was £nil (2007: £nil).

Interest rate swaps with an aggregate notional principal amount of £763m (2007: £1,467m) and a net fair value of (£31m) (2007: £6m) were designated as hedges of future cash flows arising from debt issued in sterling. The cash flows from these instruments are expected to be reported in the income statement between 2009 and 2012. In 2008, the (losses)/gains resulting from ineffectiveness recognised in income statements that arises from these cash flow hedges was £nil (2007: nil).

There were no transactions for which cash flow hedge accounting had to cease in 2008 or 2007 as a result of the highly probable cash flows no longer being expected to occur.

		2008			2007
	Contract amount	Fair value assets	Fair value liabilities	Contract amount	Fair value assets	Fair value liabilities
	£m	£m	£m	£m	£m	£m
Foreign exchange derivatives:
Forwards	123	14	-	572	19	-
Interest rate derivatives:
Interest rate swaps	763	-	31	1,467	8	2
Total cash flow hedges	886	14	31	2,039	27	2

(b) Fair value hedges

The Group designates as fair value hedges those currency swaps used to hedge changes in the fair value of foreign currency borrowings arising from exchange rate risk and those currency swaps used to hedge changes in the fair value of foreign currency borrowings arising from exchange rate risk and interest rate risk.

The Group hedges its currency risk exposure resulting from any potential change in the fair value of foreign currency funding of Standard Life Bank plc (Standard Life Bank) using cross currency swaps. The net fair value of these swaps at 31 December 2008 was £30m (2007: £2m). The gains/(losses) on the hedging instruments were £28m (2007: £7m). The (losses)/gains on the hedged items attributable to the hedged risk were (£28m) (2007: (£7m)).

The Group hedges all of its interest rate risk exposure resulting from any potential change in the fair value of long-term fixed rate funding of Standard Life Bank using interest rate swaps. The net fair value of these swaps at 31 December 2008 was £21m (2007: (£7m)). The gains/(losses) on the hedging instruments were £28m (2007: £3m). The (losses)/gains on the hedged items attributable to the hedged risk were (£28m) (2007: (£3m)).

	2008			2007
	Contract amount	Fair value assets	Fair value liabilities	Contract amount	Fair value assets	Fair value liabilities
	£m	£m	£m	£m	£m	£m
Foreign exchange derivatives:
Cross currency swaps	87	30	-	87	2	-
Interest rate derivatives:
Interest rate swaps	265	21	-	265	-	7
Total fair value hedges	352	51	-	352	2	7

The Group hedges part of the currency translation risk of net investments in foreign operations through forward foreign exchange contracts. Forward foreign exchange contracts with a notional principal of £215m (2007: £nil) were designated as hedges and gave rise to currency losses for the year of £9m (2007: £nil), which have been deferred in the foreign currency translation reserve. No ineffectiveness was recognised in income statements that arose from hedges of net investments in foreign operations. No amounts were withdrawn from equity during the year (2007: £nil), as there were no disposals of foreign operations.

		2008			2007
	Contract amount	Fair value assets	Fair value liabilities	Contract amount	Fair value assets	Fair value liabilities
	£m	£m	£m	£m	£m	£m
Foreign exchange derivatives
Forwards	215	-	9	-	-	-
Total net investment hedges	215	-	9	-	-	-

(d) Held for trading

Derivative financial instruments classified as held for trading include those that the Group holds as economic hedges of financial instruments that are measured at fair value. Held for trading derivative financial instruments are also held by the Group to match contractual liabilities that are measured at fair value or to achieve efficient portfolio management in respect of instruments measured at fair value.

	2008			2007
	Contract amount	Fair value assets	Fair value liabilities	Contract amount	Fair value assets	Fair value liabilities
	£m	£m	£m	£m	£m	£m
Equity derivatives:
Equity swaps	18	-	-	3	1	-
Dividends	3	-	3	-	-	-
Futures	1,222	15	17	374	-	2
Variance swaps	2	15	21	-	-	-
Options	1,367	452	12	1,800	135	-
Interest rate derivatives:
Interest rate swaps	24,700	1,506	585	22,660	143	428
Futures	2,556	40	26	2,573	6	8
Options	289	37	-	298	11	-
Foreign exchange derivatives:
Cross-currency swaps	1,081	461	-	3,056	142	48
Forwards	4,320	132	452	4,920	32	141
Options	683	20	59	76	3	-
Other derivatives:
Property index swaps	394	30	57	258	15	3
Inflation rate swaps	466	17	52	172	3	1
Swaptions	179	-	24	7	-	-
Credit default swaps	286	10	-	120	-	2
Total derivative financial instruments held for trading	37,566	2,735	1,308	36,317	491	633

21. Investment securities

	2008	2007
	£m	£m
Equity securities and interests in pooled investment funds:
Listed	38,360	53,149
Unlisted	1,389	1,348
Equity securities and interests in pooled investment funds	39,749	54,497

Debt securities:
At fair value through profit or loss:
Listed	43,058	40,434
Unlisted	7,909	7,373
Debt securities	50,967	47,807

Total investment securities	90,716	102,304

Of the unlisted bonds of £7,909m (2007: £7,373m), £7,631m (2007: £6,755m) relates to Canadian bonds which are categorised as unlisted because there is no regulated stock exchange for bonds in Canada, however these securities are actively traded.

Investment securities include £50m (2007: £95m) of floating rate notes which are pledged as collateral under sale and repurchase agreements.

The amount of debt securities expected to be recovered or settled after more than 12 months is £46,185m (2007: £46,521m). Due to the nature of equity securities and interests in pooled investment funds, there is no fixed term associated with these securities.

22. Other assets

		2008	2007
	Notes	£m	£m
Amounts receivable on direct insurance business		138	139
Amounts receivable on reinsurance contracts		2	3
Outstanding sales of investment securities		220	107
Current tax recoverable	18	125	79
Prepayments		24	17
Accrued income		844	789
Cancellations of units awaiting settlement		54	79
Collateral pledged in respect of derivative contracts		166	48
Other		686	493
Total other assets		2,259	1,754

The carrying amounts disclosed above reasonably approximate the fair values as at the year end.

The amount of other assets expected to be recovered after more than 12 months is £48m (2007: £49m).

23. Cash and cash equivalents

	2008	2007
	£m	£m
Cash at bank and in hand	462	543
Balance with central bank	506	212
Money at call and short notice	1,133	1,484
Demand and term deposits with original maturity of less than 3 months	5,163	4,789
Debt investments with original maturity of less than 3 months	2,788	2,307
Total cash and cash equivalents	10,052	9,335

		2008	2007
	Notes	£m	£m
Cash and cash equivalents		10,052	9,335
Bank overdrafts	33	(101)	(215)
Total cash and cash equivalents for cash flow		9,951	9,120

Balances with central banks include mandatory reserve deposits of £6m (2007: £8m) which are not available for use in the Group's day-to-day operations and are non-interest bearing.

Cash at bank and in hand, balances with the central bank and mandatory reserve deposits are non-interest bearing. Money at call and short notice and deposits are subject to variable interest rates.

24. Share capital

(a) Authorised share capital

The authorised share capital of the Company at the year end was:

	2008	2008	2007	2007
	Number	£m	Number	£m
Ordinary shares of £0.10 each	3,000,000,000	300	3,000,000,000	300
Redeemable preference shares of £1 each	50,000	-	50,000	-

(b) Issued share capital

The movement in the issued share capital of the Company during the year was:

	2008	2008	2007	2007
	Number	£m	Number	£m
At 1 January	2,174,077,106	217	2,106,070,469	210
Demutualisation shares	-	-	59,432	-
Shares issued in respect of employee share plans	559,061	-	518,200	-
Shares issued in respect of share options	3,142,947	1	-	-
Shares issued in respect of bonus issue	20,240	-	67,429,005	7
At 31 December	2,177,799,354	218	2,174,077,106	217

The Scheme of Demutualisation sets a ten-year limit for those eligible members of The Standard Life Assurance Company (SLAC) who were not allocated shares at the date of demutualisation to claim their entitlements. During the year ended 31 December 2008, no further (2007: 59,432) ordinary shares were issued to eligible members in respect of their demutualisation entitlements.

The Group operates share incentive plans, allowing employees the opportunity to buy shares from their salary each month. The maximum purchase that an employee can make in any one year is £1,500. The Group offers to match the first £25 of shares bought each month. During the year ended 31 December 2008, the Group allotted 559,061 (2007: 518,200) ordinary shares to its employees under the share incentive plans.

The Group also operates a Long-Term Incentive Plan (LTIP) for executives and senior management. During the year ended 31 December 2008 3,142,947 (2007: nil) ordinary shares were issued on exercise of share options in respect of the LTIP.

As part of the offer on the demutualisation of SLAC and flotation of Standard Life plc, holders of demutualisation shares, employee shares or shares acquired in the preferential offer who retained their shares for a continuous period of one year from 10 July 2006 were entitled to one bonus share for every 20 shares. In 2007, the Company allotted 67,429,005 shares in respect of the bonus issue. Shareholders who are entitled to bonus shares but were not allocated shares on 10 July 2007 have three years from 10 July 2007 to claim their entitlements. During the year ended 31 December 2008 a further 20,240 ordinary shares were issued to shareholders entitled to receive bonus shares.

All ordinary shares in issue in the Company rank pari passu and carry the same voting rights and the rights to receive dividends and other distributions declared or paid by the Company.

25. Share premium reserve

The premium arising on the shares issued during the year was:

	2008	2007
	£m	£m
At 1 January	792	799
Shares issued in respect of bonus issue	-	(7)
At 31 December	792	792

26. Retained earnings

		2008	2007
	Notes	£m	£m
At 1 January		776	298
Profit for the year attributable to equity holders		100	465
Dividends and appropriations		(220)	-
Transfer from equity compensation reserve for vested employee share-based payments	27	8	-
Actuarial gains/(losses) on defined benefit pension schemes	35	161	(3)
Aggregate tax items recognised in equity		(51)	(4)
Transfer from merger reserve	27	-	20
At 31 December		774	776

27. Reconciliation of movements in other reserves

		Revaluation of land and buildings	Cash flow hedges	Foreign currency translation	Net investment hedge	Merger reserves	Equity compensation reserve	Special reserve	Reserve arising on Group reconstruction	Total
	Notes	£m	£m	£m	£m	£m	£m	£m	£m	£m
At 1 January 2008		4	(3)	46	-	3,194	18	303	(2,065)	1,497
Fair value gains/(losses) on cash flow hedges		-	(37)	-	-	-	-	-	-	(37)
Fair value gains/(losses) transferred to income statement on cash flow hedges		-	(1)	-	-	-	-	-	-	(1)
Net investment hedge		-	-	-	(17)	-	-	-	-	(17)
Revaluation of land and buildings	17	(58)	-	-	-	-	-	-	-	(58)
Revaluation of property held by unit linked funds		(101)	-	-	-	-	-	-	-	(101)
Reallocation to unit linked funds		101	-	-	-	-	-	-	-	101
Exchange differences on translating foreign operations		-	-	479	-	-	-	-	-	479
Dividends and appropriations	12	-	-	-	-	-	-	(37)	-	(37)
Reserves credit for employee share-based payment schemes	43	-	-	-	-	-	10	-	-	10
Vested employee share-based payments - shares issued	43	-	-	-	-	-	(8)	-	-	(8)
Vested employee share-based payments - shares purchased		-	-	-	-	-	(2)	-		(2)
With profits funds: associated UDS movement recognised in equity	32	39	-	(275)	-	-	-	-	-	(236)
Amounts attributable to third party interest in consolidated funds recognised in equity	28	22	-	-	-	-	-	-	-	22
Aggregate deferred tax items recognised in equity		-	11	-	-	-	(1)	-	-	10
Aggregate current tax items recognised in equity		-	-	(6)	5	-	-	-	-	(1)
Share of other recognised income from associates and joint ventures		2	-	-	-	-	-	-	-	2
At 31 December 2008		9	(30)	244	(12)	3,194	17	266	(2,065)	1,623
Balance at 31 December 2008 comprises:
Total reserve before with profit fund adjustment		33	(30)	563	(12)	3,194	17	266	(2,065)	1,966
Total with profit fund adjustment		(24)	-	(319)	-	-	-	-	-	(343)
At 31 December 2008		9	(30)	244	(12)	3,194	17	266	(2,065)	1,623

The 'with profits adjustment' represents the cumulative amounts transferred to the unallocated divisible surplus as they represent movements attributable to participating policyholders, which would otherwise have been included in other reserves.

		Revaluation of land and buildings	Cash flow hedges	Foreign currency translation	Merger reserves	Equity compensation reserve	Special reserve	Reserve arising on Group reconstruction	Total
	Notes	£m	£m	£m	£m	£m	£m	£m	£m
At 1 January 2007		-	1	(90)	3,214	11	500	(2,065)	1,571
Fair value gains/(losses) on cash flow hedges		-	24	-	-	-	-	-	24
Fair value gains/(losses) transferred to income statement on cash flow hedges		-	(30)	-	-	-	-	-	(30)
Revaluation of land and buildings	17	(26)	-	-	-	-	-	-	(26)
Revaluation of property held by unit linked funds		5	-	-	-	-	-	-	5
Reallocation to unit linked funds		(5)	-	-	-	-	-	-	(5)
Exchange differences on translating foreign operations		-	-	175	-	-	-	-	175
Transfer to retained earnings	26	-	-	-	(20)	-	-	-	(20)
Dividends and appropriations	12	-	-	-	-	-	(197)	-	(197)
Reserves credit for employee share-based payment schemes	43	-	-	-	-	12	-	-	12
Other vested employee share-based payments	43	-	-	-	-	(5)	-	-	(5)
With profits funds: associated UDS movement recognised in equity	32	30	-	(41)	-	-	-	-	(11)
Aggregate deferred tax items recognised in equity		-	2	2	-	-	-	-	4
At 31 December 2007		4	(3)	46	3,194	18	303	(2,065)	1,497
Balance at 31 December 2007 comprises:
Total reserve before with profit fund adjustment		67	(3)	90	3,194	18	303	(2,065)	1,604
Total with profit fund adjustment		(63)	-	(44)	-	-	-	-	(107)
At 31 December 2007		4	(3)	46	3,194	18	303	(2,065)	1,497

Merger Reserve: On demutualisation of The Standard Life Assurance Company (SLAC), the demutualisation shares issued by the Company qualified for merger relief under Section 131 of the UK Companies Act 1985. Merger relief permits, where shares are issued at a premium, the difference between the issue value and nominal value of the shares issued to be transferred to a reserve other than the share premium account. The difference between the issue value and nominal value of the demutualisation shares was transferred to the merger reserve following the dividend in specie. £1,872m of merger reserves attached to the demutualisation shares was replaced with merger relief on the ordinary shares of the operating subsidiaries acquired by the Company.

Reserve arising on Group reconstruction: On demutualisation of SLAC, the value of the demutualisation shares issued was equal to the fair value of the assets and liabilities of the Group. Merger accounting principles were applied to the demutualisation transaction and therefore, all assets and liabilities were transferred at their book value at the time of demutualisation in the consolidated financial statements. The reserve arising on group reconstruction represents the difference between the fair value and book value of the assets and liabilities of the Group at the time of demutualisation of SLAC on 10 July 2006.

Special reserve: On 21 July 2006 the Court of Session confirmed a £500m reduction in the share premium account of the Company. Following the reduction, a special reserve was created for the same amount. The special reserve forms part of the Company's distributable profits for the purpose of Section 263 of the Companies Act 1985.

Of the dividends paid during the year of £257m, £37m (2007: £197m) has been treated as a deduction from the special reserve.

28. Minority interest and third party interest in consolidated funds

The movement in minority interest during the year was:

	2008	2007
	£m	£m
At 1 January	391	307
Foreign exchange differences on translating foreign operations	49	15
(Decrease)/increase in net assets attributable to minority interest	(83)	111
Net contributions	-	(40)
Distributions	(23)	(2)
At 31 December	334	391

The movement in third party interest in consolidated funds during the year was:

	2008	2007
	£m	£m
At 1 January	1,501	961
Foreign exchange differences on translating foreign operations	107	18
Change in liability for third party interest in consolidated funds	(598)	(78)
Net contributions and movements between classifications of investments	656	638
Distributions	(41)	(38)
Revaluation of property under development	(22)	-
At 31 December	1,603	1,501

29. Insurance contract liabilities, investment contract liabilities and reinsurance assets - terms, methods and assumptions

Insurance and investment contract liabilities include unitised, non-unitised, conventional and annuity business. Unitised contracts are those where the contractual benefits are determined with reference to units allocated to the contract; non-unitised contracts consist primarily of bonds where the benefits are linked to chosen indices although no units are allocated; annuity contracts are those where regular payments are made depending on the survival of life or lives or for a certain period of time and all other contracts are classed as conventional business.

The following sections give details of these main classes of business for each European long-term business fund - Heritage With Profits Fund (HWPF), Proprietary Business Fund (PBF), the UK Smoothed Managed With Profits Fund (UK SMWPF), the German Smoothed Managed With Profits Fund (G SMWPF), the German With Profits Fund (GWPF), together with the business of The Standard Life Assurance Company of Canada (SLCC).

(a) Heritage With Profits Fund (HWPF)

The business in this fund largely comprises business written by The Standard Life Assurance Company (SLAC) prior to its demutualisation.

(a)(i) UK insurance and investment contract liabilities - terms

This section describes the terms of business held within this fund, including the investment element of those participating contracts written in the PBF for which the HWPF is the appropriate participating fund (e.g. With Profits Bonds and participating pension contracts with a 0% investment guarantee). It also gives details of significant options and guarantees that have the potential to increase the benefits paid to policyholders. Under some options and guarantees the benefits paid depend on the behaviour of financial variables such as interest rates and equity returns. The significant options and guarantees are disclosed below.

Unitised pensions business

This class of business comprises single or regular premium contracts under which a percentage of the premium is used to allocate units in one or more internal linked funds, or on a participating basis. Most of this business is classified as investment contracts although there are some contracts that are classified as insurance, for example those with guaranteed minimum pensions. The major unitised pension products include Individual and Group Personal Pension business, Executive Pensions and Stakeholder.

Provision for additional death benefits may be provided by cancellation of units or through supplementary term assurance contracts.

Costs are recovered out of policies invested in internal linked funds by use of a fund management charge. Under Stakeholder contracts, this fund management charge has a maximum limit.

The significant options and guarantees under these contracts are the following:

• Participating contracts where, subject to specified conditions, it is guaranteed either that the unit price will rise at an annual rate of at least 4% per year or that the unit price will not fall, and, that there will be no unit price adjustment (UPA) at specified retirement dates or death, and

• Certain participating Trustee Investment Plan contracts where, subject to specified conditions and limits, it is guaranteed that there will be no UPA when units are encashed

Conventional pensions business

Conventional pensions business comprises contracts where a minimum level of benefit is set at the outset and applies at the date(s) specified in the policy, for example pure endowment contracts. Regular bonuses may be added to this initial minimum over the term of the policy and in addition, a final bonus may be paid. These contracts are classified as insurance contracts.

Guaranteed annuity options providing for payment of a minimum annuity, in lieu of a cash sum, are available under pure endowment contracts. Under some of these contracts the guarantee applies only at the maturity date.

Under other contracts, the option also applies for a specified period preceding the maturity date, in which case the sum assured and bonuses are reduced by specified factors and different guaranteed annuity rates apply.

Unitised life business

Unitised life business comprises single or regular premium endowment and whole life contracts under which a percentage of the premium is used to allocate units in one or more internal linked funds or on a participating basis. Some of this business is classified as insurance contracts, for example Homeplan and With Profits Bonds. Others are classified as investment contracts, for example Capital Investment Bonds.

The significant options and guarantees under these contracts are the following:

• Participating contracts where, subject to specified conditions, it is guaranteed on death and maturity either that the unit price will rise at an annual rate of at least 3% a year or that the unit price will not fall, and, that there will be no UPA at maturity, and

• For participating bonds it is guaranteed that no UPA will apply on regular withdrawals up to certain specified limits

The death benefit under regular premium contracts is the greater of the bid value of units allocated and sum assured under the contract. Some contracts also contain critical illness cover providing for payment of a critical illness sum assured on diagnosis of certain defined serious illnesses. Under single premium contracts, the death benefit normally equals 101% or 100.1% of the bid value of units depending on the type of contract and when it is taken out.

Under contracts effected in connection with house purchase the death benefit is guaranteed. Under other contracts, at any time after the first ten years, the Group may review the status of the contract and, if it deems it necessary, the sum assured may be reduced, within the limits permitted.

Under some contracts effected in connection with house purchase, provided the original contract is still in force the following options can normally be exercised at any time before the 55th birthday of the life assured:

• Future insurability option under which a new contract can be effected on then current premium rates, in connection with a further loan, up to the level of life and basic critical illness cover available on the original contract, without any further evidence of health, and

• Term extension option on then current premium rates under which the term of the contract may be extended by a whole number of years if the lender agrees to extend the term of the loan

Non-unitised life business

The non-unitised life business largely comprises single premium policies where the maturity value is linked to increases in the FTSE 100 Index subject to minimum maturity values established when the policies commenced. These bonds are classified as investment contracts.

Conventional life business

Conventional life business consists of single or regular premium endowment, whole life and term assurance contracts where guaranteed benefits are payable on death and under some products on permanent and total disability or on diagnosis of a specified critical illness. These contracts are classified as insurance contracts. Under participating contracts, regular bonuses may be added to the guaranteed sum assured over the term of the policy and in addition, a final bonus may be paid on death and maturity. Certain endowment assurances have minimum surrender value provisions and minimum paid-up values.

Annuities

This class of business consists of single premium contracts that provide guaranteed annuity payments and are classified as insurance contracts. The payments depend on the survival of a life or lives with or without a guaranteed period and may reduce on a specified death or increase each year at a predefined rate or in line with the increase in the UK Retail Price Index (RPI). Further details are provided below of those contracts which provide a guaranteed rate of increase and which are valued on the regulatory basis.

For those annuities in payment which increase at a predefined rate the total liability at 31 December 2008 is £2,606m (2007: £3,111m) and this represents about 26% (2007: 27%) of the total UK annuity business held within this fund. These are valued on the regulatory basis with allowance for the predefined rate of increase.

There is a subset of annuities where the RPI-linked annuity payment cannot fall or is guaranteed to increase at a minimum rate; the majority of such annuities are those whose payment cannot fall.

The total liability at 31 December 2008 for RPI-linked annuities in payment (including any guaranteed minimum rate of escalation) is £1,891m (2007: £1,885m) and this represents about 19% (2007: 16%) of the total UK annuity business held within this fund. These are valued on the regulatory basis with allowance for a positive rate of RPI escalation.

As shown in the sensitivity analysis for the HWPF (refer to Note 39), there is no impact on shareholder equity for either of the market movements scenarios. As explained in the limitations this is because although shareholders are potentially exposed to the full cost if the assets of the fund are insufficient to meet policyholder obligations, the assumption changes given are not severe enough for such an event to occur.

For some participating deferred annuity policies, at maturity the annuity income can be converted to cash on guaranteed minimum terms.

The Participating Pension Annuity is an annuity contract under which changes to the level of annuity are based on a declared rate of return but reductions in the level of the annuity are limited.

29. Insurance contract liabilities, investment contract liabilities and reinsurance assets - terms, methods and assumptions continued

(a) Heritage With Profits Fund (HWPF) continued

(a)(ii) UK insurance and investment contract liabilities - methods

Calculation of liabilities

The Financial Services Authority's realistic reporting regime seeks to place a realistic and market consistent value on both assets and liabilities for participating insurance and investment contracts. In particular, the liabilities reflect discretionary benefits such as future bonuses as well as both the intrinsic value and the time value of options and guarantees and allow for possible future management actions.

The realistic liabilities are based on the aggregate value of individual policy asset shares that reflect the actual premium, expense and charge history of each policy. The net investment return credited to the asset shares is consistent with the return achieved on the assets notionally backing participating business; any mortality deductions are based on published mortality tables adjusted where necessary for experience variations; for those asset shares on an expense basis the allowance attributed to the asset share is as far as practical the appropriate share of the actual expenses incurred or charged to the HWPF; for those on a charges basis the allowance is consistent with the charges for an equivalent unit linked policy. The calculation of asset shares is described in more detail in the Principles and Practices of Financial Management (PPFM) for the HWPF.

Other components of the realistic liability reflect policy related liabilities such as policy guarantees, options and future bonuses, which are calculated using a stochastic model that simulates future investment returns, asset mix and bonus strategies. The liabilities recorded in the balance sheet are also reduced by an offset in respect of the present value of future profits on non-participating insurance and investment contracts written in the HWPF where these do not form part of the recourse cash flow formula.

The liabilities for non-participating conventional insurance contracts are calculated using the gross premium method. The method brings into account full premiums receivable under the contracts, estimated maintenance costs and contractually guaranteed benefits.

The liabilities for annuity contracts are calculated by discounting the expected future annuity payments together with an appropriate estimate of future expenses at an assumed rate of interest derived from the yields on the underlying assets.

For contracts with guaranteed insurability options, the calculated liabilities reflect an assumption that the options are foregone by those experiencing the select mortality of newly underwritten lives. For Lifetime Protection Series term assurance business, the liabilities include an allowance for whichever options the policyholder has exercised.

For unitised non-participating insurance contracts and investment contracts the liability is based on the value of the underlying assets supporting the contracts. For non-unitised non-participating investment contracts, the liability is measured at amortised cost using the effective interest rate method. The effective interest rate is that which equates the value of the expected future cash flows over the life of the contract to the original investment value. The estimation of cash flows incorporates all contractual terms relating to the instrument.

Participating contracts allocations

Regular bonuses are declared at the discretion of the Group in accordance with the PPFM of the HWPF and are set at levels which aim to achieve a gradual build-up in guaranteed participating policy benefits whilst not unduly constraining investment freedom and the prospects for final bonuses. In setting these rates, the financial position (both current and projected) of the HWPF is taken into account, were it necessary, regular bonus rates would be set to zero. Regular bonus rates are set for each relevant class of participating policy and/or internal fund and reflect its characteristics, including any guarantees.

For some contracts, final bonuses may also be paid. These bonuses are not guaranteed and can be withdrawn at any time.

Participating contracts payouts

The Group's aim is that, subject to meeting all contractual obligations and maintaining an adequate financial position, payouts on a participating policy (including any final bonus applying) should fairly reflect the experience of the HWPF applicable to such a policy, after any adjustments for smoothing, and any distribution of the residual estate deemed appropriate by SLAL's board.

When setting payout levels, the Group seeks to ensure fair treatment between those participating policyholders who choose to withdraw and those who remain.

Asset shares are used as a tool to determine fair treatment. The calculation of asset shares varies between products, for example calculations can be on the basis of representative policies or on an individual policy basis. The calculation of asset shares is described in more detail in the Group's PPFM for the HWPF.

The methodology and parameters used in payout calculations may, of necessity, involve some measure of approximation. The Group reviews regularly the methodology and parameters used, and sets parameters on bases appropriate for the participating class and/or internal fund concerned.

In normal circumstances the Group seeks to offer some smoothing of investment returns to participating policyholders at the time of claims due to maturity for life policies or for pension policies where the Group has no right to reduce benefits as defined in the relevant contractual terms and conditions. The Group may, at its discretion, also provide some smoothing of investment returns for death claims and some types of withdrawal at the time of payment. The Group aims to operate smoothing of investment returns in such a way as to be neutral for participating policyholders as a whole over time. The Group monitors the anticipated cost of smoothing on a regular basis and, in some circumstances, it may be appropriate to reflect the costs in asset shares and/or adjust the approach to smoothing.

When calculating asset shares, the Group may at its discretion make fair deductions to reflect its assessment of the cost of guarantees. In April 2004 the Group announced that it would take an allowance for the assessed costs of guarantees when determining final bonuses payable on claims, calculating policy switch values and calculating surrender and transfer values. These allowances vary between types of policies, reflecting the nature of the guarantees provided. These allowances are kept under review. A deduction is also taken from participating asset shares, determined on an expense basis, of 0.5% pa as a contribution to the capital of the HWPF.

Mortgage endowment policies

In accordance with the Scheme of Demutualisation (the Scheme) (Schedule 4) eligible policies covered by the Mortgage Endowment Promise may receive 'top up' amounts, as defined in the Scheme.

(a)(iii) UK insurance and investment contract liabilities - assumptions

Most guarantees on participating contracts and future bonuses are valued prospectively using a stochastic model, which generates future investment returns. Within the projections, allowance is made for future bonus reflecting projected investment conditions and the Group's HWPF PPFM. For guarantees on participating contracts not valued using the stochastic model, the liability is calculated by applying the ratio of guarantee costs to the asset share for the product most similar in nature with appropriate adjustments.

The economic assumptions for the calculation of the present value of future profits on non-participating insurance and investment contracts are shown in the table below:

	2008	2007
Risk Discount Rate	4.52% - 4.74%	5.05%-5.79%

Investment returns
Equities	3.52%	4.68%
Property	3.52%	4.68%
FI - annuity/protection	3.74%	4.55%-5.85%
FI - other business	3.52%	4.68%
Expense inflation	2.58%	4.07%

The table above shows the changes in the basis between 2007 and 2008. The risk discount rates are calculated on a market consistent basis and are set equal to the risk free rate plus a margin to allow for the non-market risks inherent in the cash flows being discounted.

The investment returns for 2008 are the risk free rate of returns that are used to value the non-participating business on a market consistent basis.

The non-economic assumptions include expenses, mortality and withdrawals.

The expense and mortality assumptions are best estimate assumptions determined from the Group's recent analyses. They are consistent with the assumptions for non-participating insurance contracts with the explicit margins for prudence removed.

A withdrawal investigation is carried out each year and assumptions are set with reference to recent levels taking into account any trends evident. However, in general the results for participating business are not particularly sensitive to the overall level of withdrawals. For non-participating insurance business appropriate allowances are made for withdrawals on certain term assurance contracts.

For non-participating insurance contracts, the assumptions used to determine the liabilities are updated at each reporting date to reflect recent experience. Material judgement is required in calculating these liabilities and, in particular, in the choice of assumptions about which there is uncertainty over future experience. These assumptions are determined as appropriate estimates at the date of valuation. The basis is considered prudent in each aspect. In particular, options and guarantees have been provided for on prudent bases.

The principal assumptions for the main UK non-participating insurance contracts are as follows:

Valuation interest rates

The valuation interest rates used are determined in accordance with the Financial Services Authority's Integrated Prudential Sourcebook. The process used to determine the valuation interest rates used in the calculation of the liabilities comprises three stages: determining the current yield on the assets held after allowing for risk and tax, hypothecating the assets to various types of policy and determining the discount rates from the hypothecated assets.

For equity assets, the current earnings and dividends are considered and, if necessary, a deduction is made to reflect sustainability. Similarly, a deduction to the yields on property assets is made where necessary, to allow for the possibility of rental defaults. For corporate bonds, a deduction is made for the risk of default. The yield for each category of asset is taken as the average adjusted yield weighted by the market value of each asset in that category. The valuation interest rates used are:

Non-participating	2008	2007
1. Assurances
Life	3.00%	3.20%
Other	3.85%	4.05%

2. Annuities
Individual/group
Non-linked
Life	4.10%	4.15%
Pensions: reinsured externally	7.20%	N/A
Pensions: not reinsured externally	7.60%	5.20%
Deferred annuities	4.60%	4.30%

Linked to RPI
Linked to RPI: reinsured externally	1.30%	N/A
Linked to RPI: not reinsured externally	1.60%	1.50%
Deferred annuities linked to RPI	1.30%	1.05%

Mortality rates

The future mortality assumptions are based on historical experience with an allowance for future mortality improvement in annuities. The Group's own mortality experience is regularly assessed and analysed, and the larger industry-wide investigations are also taken into account.

Mortality tables used	2008	2007
1. Assurances
Assurances (excluding Lifetime Protection Series) Lifetime Protection Series	77.1% AMC00 Males: 69.0% TMS00/TMN00 Females: 69.0% TFS00/TFN00	90% AMC00 Males 87.2% TM92/ Females 87.2% TF92

2. Annuities
Individual and group in deferment	75.6% AMC00	90% AMC00
Individual after vesting	Males: 95.7% RMC00 Females: 104.4% RFC00	Males 95.7% RMC00/ Females 102.3% RFC00
Group after vesting	Males: 112.5% RMV00 Females: 115.2% WA00	Males 112.5% RMV00/ Females 116.4% WA00

29. Insurance contract liabilities, investment contract liabilities and reinsurance assets - terms, methods and assumptions continued

(a) Heritage With Profits Fund (HWPF) continued

(a)(iii) UK insurance and investment contract liabilities - assumptions continued

In the valuation of annuities and deferred annuities issued in the United Kingdom allowance is made for future improvements in the rates of mortality. The improvement factors assumed for males are in line with the average of CMI Medium and Long Cohort projections, with a minimum improvement of 1.5% pa. The improvement factors assumed for females are in line with 75% of the average of CMI Medium and Long Cohort projections, with a minimum improvement of 1% pa and are subject to an additional underpin so that 100% of the CMIR17 improvements apply. For contingent spouses' benefits an assumption is also made with regard to the proportions married, based on the Group's historic experience.

Expenses

The assumptions for future policy expense levels are determined from the Group's recent expense analyses. No allowance has been made for potential expense improvement, and the costs of projects to improve expense efficiency have been ignored. The assumed future expense levels incorporate an annual inflation rate allowance of 2.58% (2007: 4.07%) for UK business derived from the expected RPI implied by current investment yields and an additional allowance for earnings inflation.

For non-participating immediate and deferred annuity contracts and conventional non-participating insurance contracts, an explicit allowance for maintenance expenses is included in the liabilities. An allowance for investment expenses is reflected in the valuation rate of interest.

In calculating the liabilities for unitised regular premium non-participating insurance contracts, the administration expenses are assumed to be identical to the expense charges made against each policy. Similar assumptions are made, where applicable, in respect of mortality, morbidity and the risk benefit charges made to meet such costs.

Republic of Ireland

The contracts issued in the Republic of Ireland have features similar to those in the UK and have similar options and guarantees, including guaranteed sums assured on some conventional life business, no UPA at maturity or on regular withdrawals on some unitised participating contracts and guaranteed annuity options on some pension business.

The liabilities are calculated using a methodology and basis consistent with the UK approach but using assumptions appropriate to the Irish market. The value of options and guarantees on the Irish business are measured using a methodology consistent with the UK with due allowance for any appropriate interactions across the fund as a whole. However, the basis used is appropriate for the Irish market.

Germany

The contracts investing in the HWPF mainly consist of unitised participating endowment assurances and deferred annuities, under which a percentage of each premium is applied to purchase units in the fund. Certain unit prices in the HWPF are guaranteed not to decrease. The death benefit under endowment assurances is the greater of the sum assured on death or 105% of the current surrender value. The death benefit under deferred annuities is the greater of the sum assured on death, 100% of the current surrender value and, for regular premium paying contracts and certain single premium contracts, a refund of premiums.

Provided all premiums have been received to date, the maturity value, and for certain contracts the surrender benefits, are subject to guaranteed minimum amounts (except for the investment linked contract). For some participating unitised policies it is guaranteed that there will be no UPA on claims on or after the surrender option date. Some of these policies guarantee that the premium required for a given level of benefit will not exceed a specified amount. Deferred annuities have a guaranteed annuity at the selected benefit date and the annuity start date. In addition, certain contracts are subject to guaranteed annuity amounts.

The liabilities are calculated using a methodology basis consistent with the UK approach but using assumptions appropriate to the German market. The value of options and guarantees on the German business are measured using a methodology consistent with the UK with due allowance for any appropriate interactions across the fund as a whole. However, the basis used is appropriate for the German market.

(b) Proprietary Business Fund (PBF)

Both non-participating and participating business has been written in this fund, with most business currently being reinsured to Standard Life Investment Funds Limited, with the exception of protection business. For participating contracts written in this fund, the participating investment element is transferred to the appropriate with profits fund. Therefore, all the contract liabilities held in the fund are non-participating.

(b)(i) UK insurance and investment contract liabilities - terms

This section describes the terms of UK business held in this fund. It also gives details on significant guarantees on annuity business that have the potential to increase the benefits paid to policyholders.

Unitised pensions business

This class of business comprises single or regular premium contracts under which a percentage of the premium is used to allocate units in one or more internal linked funds. The major unitised pension products include Individual and Group Personal Pension business, Executive Pensions, Stakeholder and Self Invested Personal Pensions, which are classified as investment contracts.

Provision for additional death benefits may be provided by cancellation of units or through supplementary term assurance contracts.

The costs of policies invested in internal linked funds are recovered by use of a fund management charge. Under Stakeholder contracts, this fund management charge has a maximum limit.

Unitised life business

Unitised life business mainly comprises single premium whole life contracts under which a percentage of the premium is used to allocate units in one or more internal linked funds. This business comprises principally Capital Investment Bonds, which are classified as investment contracts.

The death benefit normally equals 101% or 100.1% of the bid value of units depending on the type of contract and when it is taken out.

Conventional life business - protection

Conventional life business consists of term assurance contracts where guaranteed benefits are payable on death and under some products on permanent and total disability or on diagnosis of a specified critical illness. These contracts are classified as insurance contracts.

Annuities

For those annuities in payment which increase at a predefined rate the total liability at 31 December 2008 is £84m (2007: £51m) and this represents about 6% (2007: 6%) of the total UK annuity business held in this fund. These are valued on the regulatory basis with allowance for the predefined rate of increase.

If the market moves in line with the adverse market conditions as shown in Note 39e(iii) - Sensitivity analysis (i.e. change in yields on 15 year gilt fixed interest bonds of -1%), then on a net of reinsurance basis there is no impact on shareholder equity from those annuities with a predefined rate of increase.

There is a subset of annuities where the RPI linked annuity payment cannot fall or is guaranteed to increase at a minimum rate; the majority of such annuities are those whose payment cannot fall.

The total liability at 31 December 2008 for RPI linked annuities in payment (including any guaranteed minimum rate of escalation) is £72m (2007: £46m) and this represents about 5% (2007: 5%) of the total UK annuity business held within this fund. These are valued on the regulatory basis with allowance for a positive rate of RPI escalation.

The RPI annuities are primarily backed by index linked securities and so if the market moves in line with the adverse scenarios as shown in the Sensitivity analysis, then there is no impact on shareholder equity from these annuities on a net of reinsurance basis.

(b) (ii) UK insurance and investment contract liabilities - methods

Calculation of liabilities

For unitised investment contracts the liability is based on the value of the underlying assets supporting the contracts.

The liabilities for conventional life insurance contracts are calculated using the gross premium method. The method brings into account full premiums receivable under the contracts, estimated renewal and maintenance costs and contractually guaranteed benefits, and includes an allowance for any options the policyholder has exercised.

(b)(iii) UK insurance and investment contract liabilities - assumptions

The principal assumptions for the main UK non-participating insurance contracts are as follows:

Valuation interest rates

The valuation interest rates used are determined in accordance with the Financial Services Authority's Integrated Prudential Sourcebook. The process used to determine the valuation interest rates used in the calculation of the liabilities broadly comprises three stages: determining the current yield on the assets held after allowing for risk and tax, hypothecating the assets to various types of policy and determining the discount rates from the hypothecated assets.

For equity assets, the current earnings and dividends are considered and, if necessary, a deduction is made to reflect sustainability. Similarly, a deduction to the yields on property assets is made, where necessary, to allow for the possibility of rental defaults. For corporate bonds, a deduction is made for the risk of default. The yield for each category of asset is taken as the average adjusted yield weighted by the market value of each asset in that category.

The valuation interest rates used are:

Non-participating	2008	2007
1. Assurances
Life	2.35%	3.25%
Other	3.00%	4.10%

2. Annuities
Individual/group
Life	4.85%	4.40%
Pensions	4.85%	4.40%
Linked to RPI	1.40%	1.10%

Mortality rates

Mortality tables used	2008	2007
1. Assurances
Assurances (excluding Lifetime Protection Series)	77.1% AMC00	90% AMC00
Lifetime Protection Series	Males: 69.0% TMS00/TMN00 Females: 69.0% TFS00/TFN00	Males 87.2% TM92 / Females 87.2% TF92

2. Annuities

Individual after vesting	Males: 90.9% RMC00 Females: 99.2% RFC00	Males 95.7% RMC00/ Females 102.3% RFC00
Group after vesting	Males: 106.8% RMV00 Females: 109.4% WA00	Males 112.5% RMV00/ Females 116.4% WA00

Expenses

Withdrawals

For non-participating insurance business appropriate allowances are made for withdrawals on certain term assurance contracts.

29. Insurance contract liabilities, investment contract liabilities and reinsurance assets - terms, methods and assumptions continued

(b) Proprietary Business Fund (PBF) continued

(b)(iv) Canadian business - terms, methods and assumptions

The only Canadian business written by the PBF is in respect of stacking policies and structured settlement assignment policies as detailed below:

• The issuing of new stacking business, in conjunction with, and indemnity reinsured with Standard Life Assurance Company of Canada (SLCC)

• Managing the portfolio of stacking business - a second position insurance on accumulation contracts and vested annuities, which had been issued by The Standard Life Assurance Company (SLAC) in conjunction with, and subsequently indemnity reinsured with SLCC, up to the time of demutualisation

• The issuing of structured settlement annuities to SLCC, in the case of third party structured settlement assignment policies issued by SLCC. These annuities are indemnity reinsured with SLCC

• Managing the block of third party structured settlement assignment policies issued between 1 January 2005 and 10 July 2006 by SLAC. In each case, SLAC had purchased an annuity benefit from SLCC to exactly match the liability it had accepted under the assignment, and

• Managing the portfolio of structured settlement annuity contracts which had been issued by SLAC as part of its regular operations until 31 December 2004 at which point this portfolio was totally indemnity reinsured with SLCC

(b)(v) European business - terms, methods and assumptions

Republic of Ireland

The contracts issued in the Republic of Ireland have features similar to those in the UK. The contracts issued are mainly non-participating business. The options and guarantees are similar to those in the UK.

Germany

The German contracts issued in this class mainly consist of unitised participating deferred annuities, which are written in the PBF with the participating element being transferred to the German With Profits Fund or German Smoothed Managed With Profits Fund. Certain unit prices in the German With Profits Fund are guaranteed not to decrease. The unit linked deferred annuity is also in this class. Under this contract a percentage of the premium is used to allocate units in one or more internal linked funds.

The death benefit under all the deferred annuities is the greater of the sum assured on death, 100% of the current surrender value and, for regular premium paying contracts and certain single premium contracts, a refund of premiums.

Provided all premiums have been received to date, the maturity value for certain contracts are subject to guaranteed minimum amounts. In addition, certain contracts are subject to guaranteed annuity amounts.

The liabilities are calculated using a methodology basis consistent with the UK approach but using assumptions appropriate to the market. The value of options and guarantees on the German business are measured using a methodology consistent with the UK.

(c)(i) UK Smoothed Managed With Profits Fund (UK SMWPF) - terms and methods and assumptions

This fund holds the investment element of UK Stakeholder pension contracts written post demutualisation and so the business is classified as investment contracts. The terms of this business and the method used to calculate the liability in respect of this business are described below.

The Group's aim is that, subject to meeting all contractual obligations and maintaining adequate financial strength, payouts on a participating policy (including any final bonus applying) should fairly reflect the experience of the UK SMWPF applicable to such a policy, after any adjustments for smoothing.

When setting payout levels, the Group seeks to ensure fair treatment between those participating policyholders who choose to withdraw and those who remain.

Asset shares are used as a tool to determine fair treatment. The calculation of asset shares is described in more detail in the Principles and Practices of Financial Management for the UK SMWPF.

The methodology and parameters used in payout calculations may, of necessity, involve some measure of approximation. The Group reviews regularly the methodology and parameters used and sets parameters on bases appropriate for the participating class and/or internal fund concerned.

In normal circumstances the Group seeks to offer some smoothing of investment returns on all claims. The Group may, at its discretion, cease smoothing of payouts or differentiate the smoothing approach for different types of claim, if it is appropriate to do so in the interest of policyholders or to protect the fund. The Group aims to operate smoothing of investment returns in such a way as to be neutral for policyholders as a whole over time. Investors in the UK SMWPF do not participate in the profits of the Group.

(c)(ii) German Smoothed Managed With Profits Fund (G SMWPF) - terms, methods and assumptions

The German smoothed managed product is a deferred annuity. A percentage of each premium is applied to allocate units in the G SMWPF. Investors in the G SMWPF do not participate in the profits of the Group. The death benefit is the greater of the sum assured on death, 100% of the current surrender value and a refund of premiums. Neither surrender nor maturity benefits are guaranteed.

The liabilities are calculated using a methodology consistent with the UK approach but using assumptions appropriate to the German market.

(c)(iii) German With Profits Fund (GWPF) - terms, methods and assumptions

The German contracts in this class consist of unitised participating deferred annuities, which are written in the Proprietary Business Fund with the participating element being transferred to the GWPF. Certain unit prices in the GWPF are guaranteed not to decrease. The death benefit under all the deferred annuities is the greater of the sum assured on death, 100% of the current surrender value and, for regular premium paying contracts and certain single premium contracts, a refund of premiums.

Provided all premiums have been received to date, the maturity value for the contracts is subject to guaranteed minimum amounts. In addition, contracts are subject to guaranteed annuity amounts.

The liabilities are calculated using a methodology consistent with the UK approach but using assumptions appropriate to the German market.

The value of options and guarantees on the German business are measured using a methodology consistent with the UK. However, the basis used is appropriate for the German market.

29. Insurance contract liabilities, investment contract liabilities and reinsurance assets - terms, methods and assumptions continued

(d) The Standard Life Assurance Company of Canada (SLCC)

(d)(i) Business written in Canada

Annuities

These contracts are similar to those issued in the UK and provide a guaranteed annuity payment based on the survival of a life or for a specified period. The majority of the portfolio are life contingent annuities and are classified as life insurance. However, there are some term certain annuities classified as investment contracts. Most of the annuity portfolio is written on a non-participating basis. The benefits may increase each year at a pre-defined rate or in line with increases in the Canadian Consumer Price Index (CPI) and will not decrease in periods of deflation.

For those annuities which increase at a predefined rate the total liability at 31 December 2008 is £463m and these represent about 12% of the total Canadian annuity business. The liability for annuities linked to CPI is approximately is £298m. This represents about 7.6% of the total Canadian annuity business.

The annuity liabilities, including these guarantees, are valued using the Canadian Asset Liability Method. The liability is set as the maximum reserve required under a number of projected economic scenarios including changes in the interest rate environment and inflation rates. For CPI-linked annuities, a 1% increase in the CPI would increase liabilities by £31m. However, inflation risk on these annuities is mitigated by investments in assets linked to inflation.

Universal Life insurance

The main Universal Life product written by the Canadian business is named Perspecta and is a non-participating life insurance product. Perspecta is a whole life assurance contract, under which premiums may be invested on both an index linked and non-linked basis. Premiums invested on a non-linked basis are placed on deposit at rates of interest guaranteed for periods from one day to 20 years. The rate offered is determined with reference to the financial conditions at the time of premium payment. The contract provides life cover, and in addition, on death the value of the index linked funds is guaranteed never to be less than 75% of premiums deposited into those funds, adjusted for expense charges and any withdrawals. The liability for these policies is £851m at 31 December 2008.

Perspecta contracts issued up to November 2003 provided the following interest rate guarantees:

• 0% for the Daily Interest Fund

For each term investment fund (TIF), the greater of 90% of the Government of Canada Bond rate for the same term, less 1.75%, and:

• 0% for the 1-year TIF

• 1% for the 3-year TIF

• 2% for the 5-year TIF

• 3% for the 10, 15 and 20-year TIF

Furthermore, it was guaranteed that at least one TIF at a minimum guaranteed interest rate of 3% would be offered as long as the policy is in force.

Perspecta contracts issued after November 2003 provide lower interest rate guarantees for terms of at least three years, there is no guarantee that a term with a 3% minimum guaranteed rate will be offered and the TIF investment option can be withdrawn.

In addition, on all Perspecta policies the value of the investment account may increase on guaranteed terms at specified policy anniversaries. The level of increase depends upon various conditions, including when the contract was effected.

Perspecta policyholders have the option to switch into TIFs some or all of their investments in the other investment options and can increase their premiums up to statutory limits. The guarantees that then apply are those set when the contract was effected.

These options and guarantees are valued using a stochastic model that has been approved by the Appointed Actuary in Canada.

A reduction of 1% in the yield curve would increase the value of the guarantee by £20m. At 31 December 2008, the liability for all the TIFs (i.e. pre and post November 2003) is £53m.

Accumulation contracts

This category comprises savings products that are classified as non-participating investment contracts. The major individual product is Ideal Solution for Savings and the major group product is SLX. Deposits can be invested on a non-linked basis at guaranteed interest rate for a given period. New market conditions apply if the plan renews after maturity.

Also included in this category are unit linked products sold on an individual or group basis. The individual product is non-participating and offers a death benefit guarantee of the greater of the fund value and 100% of the net deposits.

Provided that the monies have been invested for a minimum of ten years, the maturity benefit is the greater of the fund value and 75% of deposits at the annuity commencement date less any cash values previously paid out. Otherwise the maturity benefit is the fund value. The cost of the guarantee has been calculated in accordance with local regulations and results in a provision of £6m being required.

The group version of this product differs in that it does not offer a guarantee upon death or maturity.

Registered Retirement Income Fund (RRIF) and Life Income Fund (LIF) products

RRIF and LIF products are non-participating investment account contracts into which single premiums are invested on a linked or non-linked basis. Non-linked premiums are placed on deposit at rates of interest guaranteed for a selected term. The rate offered depends on financial conditions at the time of deposit. Proceeds at the end of a guarantee period may be reinvested at the then current rates. Regular withdrawals are made from the account to provide an income during retirement. The policyholder may vary the amounts withdrawn subject to the regulatory minimum. The unit linked version offers guarantees on death and maturity similar to the individual product described above.

Conventional life business

Conventional life business consists of participating or non-participating single or regular premium endowment, whole life and term assurance contracts where the guaranteed benefit is payable on death. Participating whole life and endowment assurance contracts contain scales of minimum guaranteed surrender values and paid-up policy amounts. Participating whole of life contracts issued prior to 1985 include a guaranteed annuity rate option where the lump sum death benefit can be converted into an annuity on guaranteed terms or retained by SLCC whereupon the value accumulates at an annual interest rate of at least 2.5%. For some participating whole life policies it is guaranteed that the interest on policy loans will not exceed 6%. There are some participating policies where it is guaranteed that the annual interest rate credited will be at least 4%.

(d)(ii) Canadian business - methods

The participating insurance contracts are set aside in a distinct fund from the other non-participating liabilities, with an undertaking on how the earnings of the fund will be distributed and how the participating liabilities will be valued in future. The liability in respect of participating contracts is set equal to the value of the fund, being the best estimate of the amount that will be distributed. This value is of the order of double the value of the liabilities in respect of guaranteed benefits, calculated in accordance with methods prescribed by Canadian regulations. The liabilities in respect of non-participating business are determined in accordance with methods prescribed by Canadian regulations, adjusted where appropriate to comply with UK accounting principles.

Under Canadian regulations, liabilities are determined according to the Canadian Asset Liability Method (CALM). SLCC's assets and liabilities are projected under a number of different economic scenarios. These scenarios include the current yield curve as at the valuation date and a number of various rising and falling interest rate environments. Under each scenario the assets required to support the liabilities are the value of assets which will achieve zero surplus at the end of the projection period. The liability is set equal to greatest value of the required assets.

(d)(iii) Canadian business - assumptions

The Canadian economic environment at 31 December 2008 is used to determine the expected interest rates for the current valuation. The expected experience scenario of risk free rates is derived from the yield curve of Canadian federal bonds at that date, as summarised below:

Yield curve - by duration	2008	2007
6 months	0.85%	3.95%
1 year	0.85%	3.95%
2 years	1.08%	3.77%
3 years	1.19%	3.86%
5 years	1.67%	3.90%
7 years	2.06%	4.00%
10 years	2.65%	4.03%
20 years	3.51%	4.23%
30 years	3.42%	4.23%

The following table shows other key investment returns used in the asset and liability projections under CALM:

Investment returns	2008	2007
Equities	6.85%	6.92%
Property	6.91%	7.06%

These investment returns are net of investment expenses and are prudent assumptions as they include risk margins determined in line with Canadian standards of practice. A further drop in the asset values of 30% for equities and 25% for property is applied, consistent with Canadian standards of practice, to allow for adverse deviations in projecting cash flows arising from capital gains on non-fixed income assets.

Mortality assumptions have a significant impact on the liabilities and are shown below:

Mortality tables used	2008	2007
1. Assurances
Perspecta Universal Life and Term Life	65%-120% of base table (where base table is 58%-71% of CIA 86-92)	65%-120% of base table (where base table is 66%-79% of CIA 86-92)

Participating and non-participating life, closed to new business	58%-82% of CIA 86-92	61%-84% of CIA 86-92

2. Annuities
Individual after vesting	65%-105% of IAM83M/IAM83F with internally developed projection scale CAN1921-2004 M/F (2009)	69%-111% of IAM83M/IAM83F with internally developed projection scale CAN1921-2004 M/F (2007)

Group after vesting	93%-123% of GAM94M/GAM94F with internally developed projection scale CAN1921-2004 M/F (2009)	93%-129% of GAM94M/GAM94F with internally developed projection scale CAN1921-2004 M/F (2007)

Mortality assumptions are derived from studies performed during 2008, with data to 2007, using a blend of industry and SLCC's experience. The rates are expressed as a percentage per the tables shown. For assurance business the percentages vary depending on the underwriting classification and the duration of the contracts. For annuity business the percentages vary depending on the gender of the annuitant.

Margins for adverse deviation are added and vary depending on the nature of the products and the strength of the underwriting criteria. These margins are consistent with Canadian actuarial standards of practice for use in local regulatory reporting.

(e) Healthcare business - terms, methods and assumptions

The contracts issued by Standard Life Healthcare Limited mainly consist of individual and corporate private medical insurance products that include a range of benefit options. All contracts are written on annual premium income basis. A provision for unearned premiums is calculated on a daily basis as the most accurate method for calculating the proportion of premium accounted for in periods up to the accounting date that is attributable to subsequent periods.

Claims incurred comprise claims paid in the year and changes in the provision for outstanding claims, whether reported or not, together with any adjustment to claims from previous years.

Outstanding claims comprise provisions for the claims incurred up to, but not paid at, the balance sheet date, whether reported or not.

Commission payable is deferred on the same basis as unearned premiums.

(f) Reinsurance - terms, methods and assumptions

The Group limits its exposure to loss within insurance operations through participation in reinsurance arrangements within the Group and externally.

On 14 February 2008 SLAL, a wholly owned subsidiary of the Group reinsured a portfolio of annuity contracts held within HWPF with Canada Life International Re (the reinsurer).

In order to limit counterparty credit exposure, the reinsurer was required to deposit back an amount equal to the reinsurance premium of £6.3bn (referred to as 'the deposit'). Interest is payable on the deposit at a floating rate. In respect of this arrangement SLAL holds a ring fenced pool of assets. The value of these assets is periodically compared to the amount of the required reserves for the reinsured liabilities. Any excess or shortfall in the value of the assets is then paid to or made up by the reinsurer by way of repayment of deposit or the making of a further deposit when required under the reinsurance treaty. The treaty also contains the requirement for the payment or receipt of Premium Adjustments, a term defined in the treaty, to ensure that the investment risk on the ring fenced pool of assets falls on the reinsurer. They are calculated periodically under the treaty as the difference between the value of the ring fenced assets and the deposit amount. If the Premium Adjustment is payable to the reinsurer, the reinsurer is required to deposit a corresponding amount into the deposit. If the Premium Adjustment is payable to SLAL a corresponding amount is repaid from the deposit. A floating charge over the ring fenced pool of assets has been granted to the reinsurer.

'Expenses under arrangements with reinsurers' includes interest on the deposit payable to the reinsurer using the effective interest method, and Premium Adjustments receivable in the period. Accrued interest and accrued Premium Adjustments are presented in 'Deposits received from reinsurers'.

The majority of the remaining business ceded externally is placed on a quota-share basis with retention limits varying by product line and territory.

Amounts recoverable from all reinsurers are estimated in a manner consistent with the methods and assumptions used for ascertaining the underlying policy benefits and are presented in the balance sheet as reinsurance assets.

Even though the Group may have reinsurance arrangements, it is not relieved of its direct obligations to its policyholders and thus a credit exposure exists with respect to reinsurance ceded, to the extent that any reinsurer is unable to meet its obligations assumed under such reinsurance agreements.

30. Insurance contract liabilities, non-participating investment contract liabilities, participating investment contract liabilities and reinsurance assets

		2008	2007
	Notes	£m	£m
Non-participating contract liabilities
Non-participating insurance contracts	30(a)	19,635	20,980
Non-participating investment contracts	30(b)	52,273	58,762
		71,908	79,742

Participating contract liabilities
Participating insurance contracts	30(a)	17,625	19,446
Participating investment contracts	30(a)	15,674	17,491
Unallocated divisible surplus	32	864	951
		34,163	37,888

Non-participating insurance contracts include £160m (2007: £161m) relating to Standard Life Healthcare and £3m (2007: £3m) relating to general insurance, conventional term assurances (Lifetime Protection Series), life contingent annuities, Perspecta Universal Life in Canada, and a small amount of linked Homeplan business.

The Heritage With Profits Fund (HWPF) was established as part of the demutualisation transaction on 10 July 2006. Under the Scheme of Demutualisation (the Scheme) certain non-participating contracts were transferred to the HWPF. The present value of future profits (PVFP) on these non-participating contracts can be apportioned between the component related to contracts whose future cash flows under the Scheme are expected to be transferred out of the HWPF to equity holders, and the component related to contracts whose future cash flows will remain in the HWPF to be applied either to meet amounts that may be charged to the HWPF under the Scheme or distributed over time as enhancements to final bonuses payable on the remaining policies invested in the fund.

These components are apportioned in arriving at the amount of participating contract liabilities and unallocated divisible surplus as follows:

	2008 £m	2007 £m
Participating contract liabilities before apportionment	32,413	37,117
Apportionment of non-participating PVFP	886	(180)
	33,299	36,937

Participating insurance contracts	17,625	19,446
Participating investment contracts	15,674	17,491
Participating contract liabilities after apportionment	33,299	36,937

Unallocated divisible surplus before apportionment	1,955	2,373
Apportionment of non-participating PVFP	(1,091)	(1,422)
Unallocated divisible surplus after apportionment	864	951

(a) Insurance contract liabilities, participating investment contracts and reinsurance assets

The movement in insurance contract liabilities, participating investment contracts and reinsurance assets during 2008 was as follows:

	Participating insurance contract liabilities	Non-participating insurance contract liabilities	Participating investment contract liabilities	Total insurance and participating contracts	Reinsurers' share of liabilities (reinsurance asset)	Net 2008
	£m	£m	£m	£m	£m	£m
At 1 January 2008	19,446	20,980	17,491	57,917	(476)	57,441
Annuity reinsurance impact	49	(1)	64	112	(6,573)	(6,461)
Expected change	(1,078)	(341)	(1,047)	(2,466)	234	(2,232)
Methodology/modelling changes	93	(73)	(117)	(97)	51	(46)
Effect of changes in:
Economic assumptions	402	(1,357)	455	(500)	757	257
Non-economic assumptions	(61)	8	(9)	(62)	(44)	(106)
Effect of:
Economic experience	(2,314)	(728)	(1,591)	(4,633)	15	(4,618)
Non-economic experience	33	(308)	149	(126)	2	(124)
New business	45	706	-	751	(1)	750
Total change in contract liabilities	(2,831)	(2,094)	(2,096)	(7,021)	(5,559)	(12,580)
Foreign exchange adjustment	1,010	749	279	2,038	(41)	1,997
At 31 December 2008	17,625	19,635	15,674	52,934	(6,076)	46,858

Following demutualisation it is necessary to recognise within the participating liabilities the residual estate in the HWPF as a liability since this will in due course be distributed to existing HWPF policyholders if it is not otherwise required to meet liabilities chargeable to the HWPF in accordance with the Scheme. The movement for the year therefore includes the movement in the residual estate.

As described in Note 31 Standard Life Assurance Limited (SLAL) entered into a reinsurance arrangement with Canada Life International Re on 14 February 2008 in respect of certain annuity contracts. For the gross participating insurance and investment contract liabilities the impact of the annuity reinsurance transaction shown reflects the change in the residual estate which therefore impacts the value of the planned enhancements (on an FSA realistic basis) included within these liabilities as covered by the Scheme. The increase in the reinsurance asset associated with the transaction represents the increase in the value of the reinsurance assets with external reinsurers due to this new arrangement.

Due to a change in the estimate of the amount required to compensate the HWPF for tax payable on certain income items participating contract liabilities reduced by £75m which is reflected within the change in non-economic assumptions above. There was a related increase of £14m in the tax expense attributable to equity holders' profits.

Non-economic experience changes in the year primarily represents higher than expected claims.

Economic experience changes in the year reflect lower than anticipated investment returns during the year.

	Participating insurance contract liabilities	Non-participating insurance contract liabilities	Participating investment contract liabilities	Total insurance and participating contracts	Reinsurers' share of liabilities (reinsurance asset)	Net 2007
	£m	£m	£m	£m	£m	£m
At 1 January 2007	20,225	20,202	18,563	58,990	(740)	58,250
Expected change	(480)	(332)	(731)	(1,543)	2	(1,541)
Methodology/modelling changes	(72)	(29)	38	(63)	5	(58)
Effect of changes in:
Economic assumptions	(60)	(94)	74	(80)	(9)	(89)
Non-economic assumptions	87	(267)	69	(111)	318	207
Effect of:
Economic experience	(2)	42	(37)	3	(5)	(2)
Non-economic experience	(623)	(290)	(728)	(1,641)	5	(1,636)
New business	60	885	154	1,099	(5)	1,094
Total change in contract liabilities	(1,090)	(85)	(1,161)	(2,336)	311	(2,025)
Foreign exchange adjustment	311	858	89	1,258	(47)	1,211
Change in unearned premium reserve	-	5	-	5	-	5
At 31 December 2007	19,446	20,980	17,491	57,917	(476)	57,441

(b) Non-participating investment contract liabilities

The change in non-participating investment contract liabilities was as follows:

	2008	2007
	£m	£m
At 1 January	58,762	50,931
Contributions	10,170	11,517
Initial charges and reduced allocations	(50)	(67)
Account balances paid on surrender and other terminations in the year	(6,584)	(6,685)
Investment return credited and related benefits	(10,907)	2,073
Foreign exchange adjustment	1,314	1,333
Recurring management charges	(333)	(344)
Other	(99)	4
At 31 December	52,273	58,762

Refer to Note 39 - Risk management for an indication of the term to contracted maturity/repricing date for insurance and investment contract liabilities. Reinsurance contracts are generally structured to match liabilities on a class of business basis. This has a mixture of terms. The reinsurance assets are therefore broadly expected to be realised in line with the settlement of liabilities (as per the terms of the particular treaty) within a reinsured class of business.

31. Annuity reinsurance

On 14 February 2008 Standard Life Assurance Limited (SLAL), a wholly owned subsidiary of the Company, reinsured a portfolio of annuity contracts held within its Heritage With Profits Fund (HWPF) with Canada Life International Re (the reinsurer), a reinsurer not related to the Company.

Prior to this SLAL had transferred the longevity risk in respect of these contracts to Standard Life Investment Funds (SLIF), a wholly owned subsidiary of SLAL, by a reinsurance agreement. SLIF had in turn retroceded certain of its obligations under this reinsurance agreement back to SLAL's Proprietary Business Fund (PBF) by a separate reinsurance agreement. On 14 February 2008 SLAL recaptured from SLIF its obligations in respect of the annuity contracts which were then reinsured to the reinsurer. The amount payable by SLIF to the HWPF related to this recapture was determined such that the economic benefits arising from entering into the reinsurance agreement with the reinsurer were shared equally between the HWPF and the Company.

In order to limit counterparty credit exposure, the reinsurer was required to deposit back an amount equal to the reinsurance premium of £6.3bn (referred to as 'the deposit'). Interest is payable on the deposit at a floating rate. The liability to repay the deposit is presented in 'Deposits received from reinsurers'. In respect of this arrangement SLAL holds a ring fenced pool of assets. These assets are presented in the relevant balance sheet line items. The value of these assets is periodically compared to the amount of the required reserves for the reinsured liabilities. Any excess or shortfall in the value of the assets is then paid to or made up by the reinsurer by way of repayment of deposit or the making of a further deposit when required under the reinsurance treaty. The treaty also contains the requirement for the payment or receipt of Premium Adjustments, a term defined in the treaty, to ensure that the investment risk on the ring fenced pool of assets falls on the reinsurer. They are calculated periodically under the treaty as the difference between the value of the ring fenced assets and the deposit amount. If the Premium Adjustment is payable to the reinsurer, the reinsurer is required to deposit a corresponding amount into the deposit. If the Premium Adjustment is payable to SLAL a corresponding amount is repaid from the deposit. A floating charge over the ring fenced pool of assets has been granted to the reinsurer.

At 31 December 2008 a reinsurance asset of £5.6bn and a deposit liability of £6.0bn arising from this transaction were recognised.

The impact of this transaction at the transaction date was to increase profit before tax by £105m, being the release of the component of the liability for reinsured contracts held outside the HWPF offset by the payment to the HWPF from SLIF under the recapture arrangements.

32. Movement in components of unallocated divisible surplus (UDS)

The movement in the UDS was as follows:

	2008	2007
	£m	£m
At 1 January	951	1,208
Change in UDS recognised in the income statement	(184)	(247)
Change in UDS not recognised in the income statement	236	11
Foreign exchange adjustment	(139)	(21)
At 31 December	864	951

33. Borrowings

		2008	2007
	Notes	£m	£m
Certificates of deposit, commercial paper and medium term notes	33(a)	573	1,843
Securitisations - mortgage backed floating rate notes	33(b)	2,411	3,983
Bank overdrafts	23	101	215
Other		142	77
Total borrowings		3,227	6,118

(a) Certificates of deposit, commercial paper and medium term notes

The Group has issued certificates of deposit through its subsidiary Standard Life Bank plc (Standard Life Bank). The Group has also issued commercial paper and medium term notes through Standard Life Funding B.V. a wholly owned subsidiary of Standard Life Bank. Standard Life Bank has guaranteed the liabilities of its subsidiary in relation to the issuance of this debt. The guarantee is in respect of notes issued and is for a maximum of US$2bn and €4bn in relation to the US commercial paper and Euro commercial paper programmes respectively, and €4bn in respect of the medium term note programme. This guarantee is internal to the Group and is considered a financial guarantee contract under IAS 39 Financial Instruments: Recognition and Measurement.

	Average interest rates		Carrying amount
	2008	2007	2008	2007
	%	%	£m	£m
Due within 1 year
Standard Life Bank certificates of deposit - GBP	4.13%	6.28%	228	989
Standard Life Bank certificates of deposit - EUR	-	4.77%	-	60
Standard Life Funding B.V. commercial paper - GBP	6.20%	6.61%	144	240
Standard Life Funding B.V. commercial paper - USD	-	5.51%	-	139
Standard Life Funding B.V. commercial paper - EUR	5.26%	4.99%	84	313
Standard Life Funding B.V. medium term notes - GBP	-	6.56%	-	9
			456	1,750

Due between 1 and 5 years
Standard Life Funding B.V. medium term notes - GBP	-	6.38%	-	4
			-	4

Due after 5 years
Standard Life Funding B.V. medium term notes - EUR	4.10%	5.03%	117	89
			117	89
Total certificate of deposits, commercial paper and medium term notes			573	1,843

The carrying amounts disclosed above reasonably approximate the fair values as at the year end.

(b) Securitisations - mortgage backed floating rate notes

Loans are issued by the Group, which are subject to securitisations (refer to Note 19). Under this arrangement, the beneficial interest in these mortgages is transferred to special purpose entities (SPEs). The issue of mortgage backed floating rate notes by the SPEs funded the purchase of the mortgages.

Although the Group does not directly or indirectly own any of the share capital of the SPEs, the nature of these entities, which are in substance controlled by the Group, means that the Group retains substantially all of the risks and rewards of the securitised mortgages.

The Group is not obliged to support any losses suffered by the note holders and does not intend to provide such support. The notes were issued on the basis that note holders are only entitled to obtain payment, of both principal and interest, to the extent that the available resources of the respective SPEs, including funds due from customers in respect of the securitised mortgages, are sufficient and that note holders have no recourse whatsoever to the Group. This has been clearly stated in the legal agreements with note holders.

The mortgage backed floating rate notes at year end are as follows:

	Average interest rates		Carrying amount
	2008	2007	2008	2007
	%	%	£m	£m
Lothian Mortgages No. 1 plc - USD - Maturity 2017	-	5.49%	-	79
Lothian Mortgages No. 1 plc - GBP - Maturity 2035	-	6.85%	-	572
Lothian Mortgages No. 2 plc - GBP - Maturity 2038	-	6.69%	-	202
Lothian Mortgages No. 2 plc - USD - Maturity 2038	-	5.53%	-	34
Lothian Mortgages No. 2 plc - EUR - Maturity 2038	-	5.10%	-	559
Lothian Mortgages No. 3 plc - USD - Maturity 2019	-	5.36%	-	38
Lothian Mortgages No. 3 plc - GBP - Maturity 2039	6.47%	6.71%	730	789
Lothian Mortgages No. 4 plc - EUR - Maturity 2040	5.12%	4.81%	175	263
Lothian Mortgages No. 4 plc - GBP - Maturity 2040	6.25%	6.56%	571	571
Lothian Mortgages Master Issuer plc - USD - Maturity 2028	0.61%	5.05%	59	122
Lothian Mortgages Master Issuer plc - USD - Maturity 2050	3.71%	5.31%	35	25
Lothian Mortgages Master Issuer plc - EUR - Maturity 2050	5.16%	4.85%	460	348
Lothian Mortgages Master Issuer plc - GBP - Maturity 2050	6.25%	6.58%	381	381
Total mortgage backed floating rate notes			2,411	3,983

The difference between the fair value and carrying amount of the mortgage backed floating rate notes is shown in Note 45.

34. Subordinated liabilities

	2008	2007
	£m	£m
Subordinated guaranteed bonds:
6.75% £500,000,000 Fixed rate perpetual	502	502
6.375% €750,000,000 Fixed/floating rate 12 July 2022	741	561

Subordinated guaranteed notes:
6.14% £265,000,000 Fixed rate perpetual	285	257

Mutual Assurance Capital Securities:
6.546 % £300,000,000 Fixed rate perpetual	314	314
5.314 % €360,000,000 Fixed/floating rate perpetual	362	274
Total subordinated liabilities	2,204	1,908

The difference between the fair value and carrying value of the subordinated liabilities is shown in Note 45.

Subordinated liabilities are considered current if the contractual repricing or maturity dates are within one year. The principal amount of subordinated liabilities is expected to be settled after more than 12 months. The accrued interest on subordinated liability of £75m (2007: £66m) is expected to be settled within 12 months.

The classification of amounts due under the subordinated loan arrangements is determined by the interaction of these arrangements with the internal subordinated loan note issued by Standard Life Assurance Limited (SLAL) to the Company, as set out below.

Subordinated guaranteed bonds

The subordinated guaranteed bonds were issued on 12 July 2002. The payment of principal and interest in respect of the bonds has been irrevocably and unconditionally guaranteed by SLAL. The claims of the bondholders to payment under the guarantee will rank below the claims of all senior creditors of SLAL including policyholders. This guarantee is internal to the Group and is considered a financial guarantee contract under IAS 39 Financial instruments: Recognition and Measurement.

The sterling denominated bonds are perpetual securities and as such have no fixed redemption date. However, the bonds are redeemable at par at the option of the Company on 12 July 2027 and on every fifth anniversary thereafter. If the sterling bonds are not redeemed on 12 July 2027, the interest rate payable will be reset to 2.85% over the gross redemption yield on the appropriate five year benchmark gilt on the reset date. The Company can elect to defer the payment of interest on the sterling bonds. Interest will accrue on any interest deferred at the then current rate of interest on the bonds. Any interest deferred becomes immediately due and payable on: the date of declaration or payment of dividends, interest or other payment in respect of any pari passu ranking securities or securities that rank junior to the sterling bonds; or the date any of the securities are purchased by the Company, SLAL or a subsidiary of the Company; the date fixed for any payment under a guarantee that ranks junior to the sterling bonds; the date of any redemption or purchase of sterling bonds, or the commencement of winding up of the Company or SLAL.

The maturity date for the euro denominated bonds is 12 July 2022 and all outstanding obligations under the instruments become immediately due and payable on this date. There are specific conditions surrounding the solvency of SLAL, which allow the repayment of the outstanding obligations to be deferred to the second anniversary of the maturity date. The Company does have the option to redeem at par the bonds on 12 July 2012 and on any interest payment date thereafter until maturity. From 12 July 2012 the euro bonds will bear interest quarterly in arrears at a floating rate determined by the three month euro deposit rate.

Subordinated guaranteed notes

On 29 June 2005, Standard Life Funding B.V. (SLF BV), a wholly owned subsidiary of Standard Life Bank, issued £265m of undated subordinated notes (the subordinated notes). In terms of a Subordinated Deed of Guarantee, Standard Life Bank guarantees the payment of all sums payable by SLF BV under the subordinated notes. The rights and claims of all subordinated note holders are subordinated to the claims of all senior creditors of both SLF BV and Standard Life Bank.

The subordinated notes are perpetual securities and as such have no fixed redemption date. However, the notes are redeemable at par at the option of the issuer on 29 June 2015 but if they are not redeemed on 29 June 2015, then interest rate payable will be reset to 2.80% over the gross redemption yield on the appropriate benchmark gilt on the reset date.

Mutual Assurance Capital Securities (MACS)

The MACS were issued on 4 November 2004. The payment of principal and interest in respect of the MACS is irrevocably and unconditionally guaranteed by SLAL. The claims of the holders of the MACS to payment under the guarantee will rank below the claims of all senior creditors of SLAL including policyholders.

The MACS are perpetual securities and as such have no fixed redemption rate.

The sterling denominated MACS started accruing interest from 4 November 2004 and bear interest at a rate of 6.546% per annum payable annually in arrears on 6 January each year, commencing on 6 January 2006. From and including 6 January 2020 and every fifth anniversary thereafter, these MACS will bear interest annually in arrears based on the aggregate of a margin plus the gross redemption yield of the specific gilts.

The euro denominated MACS started accruing interest from 4 November 2004 and bear interest at a rate of 5.314% per annum payable annually in arrears on 6 January, commencing on 6 January 2006. From and including 6 January 2015, these MACS will bear interest quarterly in arrears, commencing 6 April 2015, at a floating rate of interest to be calculated quarterly based on the aggregate of a margin plus the rate for three month euro deposits.

The payment of interest can be deferred at the option of the Company on an interest payment date and is mandatory deferred on any interest payment date on which the Company does not satisfy certain specified solvency conditions. SLAL has corresponding mandatory deferral rights in relation to payments under the guarantee. Any interest deferred becomes immediately due and payable on the date the payment of interest is resumed by the Company or SLAL, the date fixed for the redemption or purchase of MACS by the Company, the commencement of winding up of the Company or the date of any declaration or payment of securities that rank junior to MACS or the date any of these junior securities are purchased by the Company, SLAL or a subsidiary of the Company.

The obligation to pay any deferred interest must be satisfied with cash raised from the issue of ordinary shares or the sale of treasury shares.

Internal subordinated loan note

SLAL issued a subordinated loan note to the Company on 10 July 2006. The loan note at all times ranks senior to ordinary share capital and junior to Innovative Tier 1 capital of SLAL. There is no fixed redemption date for the note, but interest payments cannot be deferred and must be paid on the date they become due and payable. The note is ranked junior to the subordinated guaranteed bonds and MACS, therefore any interest deferred on the sterling guaranteed bonds or MACS becomes immediately due and payable on the date of interest payment in respect of the note. This removes the discretionary nature of the interest payments on the sterling guaranteed bonds and MACS.

35. Pension and other post retirement benefit provisions

The Group operates defined benefit and defined contribution schemes for staff employed by the Group.

Defined contribution plans

In the UK, since 16 November 2004, new employees have been eligible to join a defined contribution scheme. The assets of the scheme are held separately from those of the Group in an independently administered fund. In Canada employees have the option to have their current year of service credited on a defined contribution basis, the contributions under this option are equivalent to the amount that the Group would have otherwise determined using the projected unit credit valuation method under the defined benefit scheme.

Defined benefit plans

The Group operates defined benefit schemes for its employees in Europe and Canada. The plans operating in Europe are within the UK, Ireland and Germany with the scheme in the UK having the largest number of members.

Changes to the UK defined benefit scheme

With effect from 16 November 2004, the UK scheme was closed to new entrants. The benefits provided by the UK scheme have since undergone substantial further review. In November 2007, as part of a broader suite of changes and subsequent to appropriate consultation, members were given a choice of two options which took effect from January 2008:

(i)

Maintaining a link to final salary for benefit accrued to 31 December 2007, with future service benefits accruing on a defined contribution basis, or

(ii)

Linking benefits accrued to 31 December 2007 to movements in the Retail Price Index, with future service to be credited on defined benefit basis, as earned and revalued thereafter in line with the same index

Approximately 95% of members selected option (ii). The financial information presented in this note reflects the outcome of this activity. Further information is outlined below, where appropriate.

Contributions to plans

The following table shows the actual contributions made to the plans in 2007 and 2008:

	Defined benefit		Defined contribution
	2008	2007	2008	2007
	£m	£m	£m	£m
United Kingdom - normal funding	34	40	8	5
United Kingdom - additional contributions	20	20	-	-
Canada	3	3	3	2
Ireland	3	1	-	-

Expected contributions to the plans in 2009 are as follows:

	Defined benefit	Defined contribution
	2009	2009
	£m	£m
United Kingdom - normal funding	36	8
United Kingdom - additional contributions	20	-
Canada	2	4
Ireland	2	-

Note that the total contributions to the UK scheme include additional contributions paid in accordance with the existing agreement with the scheme trustees.

Canada - post-retirement medical benefits

In Canada, certain of the scheme plans provide employees with post retirement medical benefits. A 1% point change in assumed medical cost trend rates would have the following effects:

	One percentage point increase	One percentage point increase	One percentage point decrease	One percentage point decrease
	2008 £m	2007 £m	2008 £m	2007 £m
Effect on the aggregate of the service cost and interest cost	-	1	-	(1)
Effect on defined benefit obligation	2	5	(1)	(4)

(a) Analysis of amounts recognised in the income statement

The amounts recognised in the income statement for defined contribution and defined benefit schemes are as follows:

		2008	2007
	Notes	£m	£m
Current service cost		(64)	(57)
Interest cost on benefit obligation		(91)	(76)
Expected return on plan assets		88	91
Past service cost		-	(5)
Expense recognised in the income statement	6	(67)	(47)

Contributions made to defined contribution plans are included within 'Current service cost', with the balance attributed to the Group's defined benefits schemes.

(b) Actuarial gains and losses recognised in the statement of recognised income and expense

The actuarial gains/(losses) recognised in the statement of recognised income and expense is as follows:

	2008	2007
	£m	£m
Actual return less expected return on plan assets	107	(25)
Experience gains and losses arising on schemes' liabilities	12	1
Changes in assumptions underlying schemes' liabilities	195	21
Surplus not recognised	(153)	-
Actuarial gains/(losses) in the statement of recognised income and expense	161	(3)

The above surplus has not been recognised as the Group does not consider that it has an unconditional right to a refund.

The cumulative amount of actuarial gains recognised in the statement of recognised income and expense since 16 November 2003, the date of adoption of IFRS, is £126m (2007: losses of £35m).

The actuarial gains for the year ended 31 December 2008 of £161m (2007: losses of £3m) were recognised directly in retained earnings (see Note 26).

35. Pension and other post retirement benefit provisions continued

The present value of the defined benefit obligation less the fair value of gross scheme assets is as follows:

	2008				2007
	United Kingdom	Canada	Ireland	Total	United Kingdom	Canada	Ireland	Total
	£m	£m	£m	£m	£m	£m	£m	£m
Present value of funded obligation	(1,309)	(105)	(62)	(1,476)	(1,375)	(119)	(45)	(1,539)
Present value of unfunded obligations	-	(32)	-	(32)	-	(44)	-	(44)
Fair value of plan assets	1,462	123	44	1,629	1,212	133	39	1,384
Adjustment for unrecognised past service costs	-	(5)	-	(5)	-	-	-	-
Surplus not recognised	(153)	-	-	(153)	-	-	-	-
Net liability on the balance sheet	-	(19)	(18)	(37)	(163)	(30)	(6)	(199)

The Group also recognises a net liability of £5m (2007: £4m) arising from a scheme with a total defined benefit obligation of £5m (2007: £4m) administered for the benefit of employees in Germany giving a net liability on the balance sheet of £42m (2007: £203m).

(d) Defined benefit obligation

The movement in the present value of defined benefit obligation is as follows:

	2008	2007
	£m	£m
At 1 January	1,587	1,491
Foreign exchange differences	30	26
Current service cost	53	50
Interest cost	91	76
Actuarial gains	(207)	(22)
Past service cost	(6)	5
Benefits paid	(35)	(39)
At 31 December	1,513	1,587

The defined benefit obligation is as follows:

	2008	2007
	£m	£m
Wholly unfunded	37	48
Wholly funded	1,476	1,539
At 31 December	1,513	1,587

(e) Plan assets

The changes in the fair value of plan assets are as follows:

	2008	2007
	£m	£m
At 1 January	1,384	1,271
Expected return on plan assets	88	91
Actuarial gains/(losses)	107	(25)
Contributions by employer	60	64
Foreign exchange difference on foreign plans	23	22
Benefits paid	(33)	(39)
At 31 December	1,629	1,384

The distribution of the fair value of the plan assets at year end is as follows:

	2008				2007
	United Kingdom	Canada	Ireland	Total	United Kingdom	Canada	Ireland	Total
	£m	£m	£m	£m	£m	£m	£m	£m
Equities	709	56	19	784	779	72	20	871
Bonds - government	85	49	22	156	209	37	17	263
Bonds - corporate	259	4	-	263	10	10	-	20
Property	39	6	1	46	47	12	2	61
Other	370	8	2	380	167	2	-	169
Total	1,462	123	44	1,629	1,212	133	39	1,384

The expected return on plan assets in the UK is set with reference to the scheme's investment guidelines. Derivative instruments are used to modify the profile of the assets of the scheme to better match the scheme's liabilities and to execute specific strategies as defined within the scheme's investment guidelines.

The expected return on plan assets is based on market expectations at the beginning of the period for returns over the entire life of the related benefits obligations. The expected return by geography is as follows:

	2008			2007
	United Kingdom	Canada	Ireland	United Kingdom	Canada	Ireland
	%	%	%	%	%	%
Expected return on plan assets	6.20	7.00	5.90	6.39	7.00	6.20

The actual return on plan assets during 2008 was £195m (2007: £66m).

(f) Principal assumptions

The principal economic assumptions used in determining the year end pension benefit obligation for the Group's plans are as follows:

	2008			2007
	United Kingdom	Canada	Ireland	United Kingdom	Canada	Ireland
	%	%	%	%	%	%
Rate of increase in salaries*	4.35-5.35	3.50	4.83	4.45-5.45	3.50	4.55
Rate of increase in pensions	3.35	1.33	2.00	3.45	1.33	2.25
Discount rate	6.10	7.25	5.70	5.75	5.50	5.50
Inflation assumption	3.35	2.00	2.00	3.45	2.00	2.25

* The rate of increase in salaries for the UK staff pension scheme is relevant only for service accrued to December 2007 attributed to members who chose option (i).

The valuation of scheme liabilities is sensitive primarily to both the assumed discount and inflation rates and in particular to the difference between these two rates. A reduction of ten basis points in the discount rate used to value the UK scheme would increase the defined benefit obligation by £33m (2007: £38m).

The most significant non-economic assumption is that made in respect of mortality post retirement. The mortality tables (along with sample complete expectations of life) are illustrated below:

					Expectation of life
	Table	Improvements	Normal Retirement Age (NRA)		Male, age today		Female, age today
	Table	Improvements	Normal Retirement Age (NRA)		NRA	40	NRA	40
United Kingdom	PC(M/F)L00	'Double entry' table, CMI cohort projections with underpin	60	27		30	28	30
Canada	UP94 proj to 2015	scale AA	63	21		21	23	23
Ireland	PFA(M/F)92	Projected to 2025	60	25		27	28	30

(g) History of experience gains and losses

	2008	2007	2006	2005	2004
	£m	£m	£m	£m	£m
Present value of the defined benefit obligation	1,513	1,587	1,491	1,437	1,207
Fair value of the plan assets	1,629	1,384	1,271	1,051	735
Surplus/(deficit) in the plans	111	(203)	(220)	(386)	(472)
Surplus not recognised	153	-	-	-	-
Experience adjustments on plan liabilities	207	22	19	(115)	(65)
Experience adjustments on plan assets	107	(25)	(31)	137	23

36. Deferred income

	2008	2007
	£m	£m
At 1 January	340	257
Additions during the year	100	128
Released to the income statement as fee income	(65)	(47)
Foreign exchange adjustment	7	2
At 31 December	382	340

The amount of deferred income expected to be settled after more than 12 months is £322m (2007: £281m).

37. Customer accounts related to banking activities and deposits by banks

	2008	2007
	£m	£m
Current/demand accounts	2,828	2,542
Term deposits	2,172	2,089
Deposits by banks	1,991	1,449
Total customer accounts related to banking activities and deposits by banks	6,991	6,080

On 9 July 2008 Standard Life Bank launched its 5bn Euro covered bond programme with issues of £1.5bn and £0.6bn on 9 July and 26 November 2008 respectively. This programme will provide additional diversity of funding for Standard Life Bank, thereby helping to mitigate liquidity risk going forward. The covered bond issued was retained by Standard Life Bank to be used as collateral in funding operations. To date, £1,257m of funding has been generated by this deal. This has been used primarily to repay maturing funding within the Lothian securitisation programme.

Current/demand accounts are subject to variable interest rates and term deposits are subject to fixed interest rates.

The carrying amounts disclosed above reasonably approximate the fair values as at the year end.

The amount of term deposits expected to be settled after more than 12 months is £40m (2007: £63m). All other amounts are expected to be settled within 12 months.

38. Other liabilities

	2008	2007
	£m	£m
Contingent commissions	46	37
Amounts payable on direct insurance business	290	356
Amounts payable on reinsurance contracts	19	15
Outstanding purchases of investment securities	92	120
Accruals	262	275
Provisions	22	22
Creation of units awaiting settlement	66	45
Cash collateral held in respect of stock lending requirements	2,928	3,657
Cash collateral held in respect of derivative contracts	718	52
Other	693	521
Total other liabilities	5,136	5,100

Deposits received from reinsurers of £53m as at 31 December 2007 were previously included in other liabilities and are now presented as a separate line in the balance sheet.

Provisions comprise obligations in respect of compensation, litigation, staff entitlements and reorganisations. Additional provisions made during the year were £7m (2007: £10m). £5m (2007: nil) of this additional provision relates to Standard Life Bank's obligation under the Financial Services Compensation Scheme. Refer to Note 41 - Contingencies.

The amount of other liabilities expected to be settled after more than 12 months is £129m (2007: £167m).

39. Risk management

(a) Overview

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

The Group has developed and embedded an Enterprise Risk Management Framework (ERM framework) to enable the risks of the Group to be identified, assessed, controlled and monitored consistently, objectively and holistically. The ERM framework is built around a robust governance structure. The 'Three Lines of Defence' are an important part of this structure providing clearly defined roles and responsibilities:

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

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

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

During 2008, the Group has further enhanced the ERM framework, addressing and strengthening all the key elements and aligning it with external 'best practice' models. Enhancements in 2008 included the strengthening of the Group Policy Framework which provides a consistent high level approach to managing the key risks faced by the Group, and assists in ensuring that all business units operate effectively, efficiently, and in compliance with all applicable laws and regulations.

The GCE and the Group's senior management are responsible for the implementation of the ERM framework and for ensuring that it is operating effectively across the Group. The Group risk profile is assessed regularly against the Board approved risk appetite, and reviewed by the relevant executives and Group risk committees. Risk appetites and limits are established following due consideration of:

The nature of current risk exposures in business units
Gross exposures and concentrations of risk across the Group, and
The Group's overall corporate strategy

The GCE has established the Enterprise Risk Management Committee (ERMC) to provide him with support in the management of risks across the Group. The ERMC is responsible for overseeing compliance with the Group's ERM Framework and is supported by Group Risk Forums and Group Risk Management. In 2008 the decision was taken to reconstitute the ERMC, which consists of the members of the Group Executive, the Chief Risk Officer, Group Strategy and Corporate Finance Director. The ERMC meets at least monthly, and usually in conjunction with the Group Executive. The ERMC has proven to be a highly effective and responsive executive forum for the management of risk over the course of a particularly challenging year.

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

(b) The Group structure

Significant business units are required to report risk information to the ERMC and CRO in accordance with the Group's policies. The definition of 'business unit' is not constrained by the Group's legal structure and in practice risks are monitored and controlled along the reporting lines that the Group believes are most appropriate given the materiality, purpose and strategic significance of each of its operations.

Furthermore, the Group's structure is such that where an event gives rise to a loss, that loss may not always be fully attributable to equity holders.

This possibility arises in particular in respect of participating business where losses will be attributed to policyholders, or the estate of the relevant funds, where it is permitted and believed reasonable to do so. The various provisions of the Scheme of Demutualisation (the Scheme) must also be taken in to account when considering losses attributable to the Heritage With Profits Fund (HWPF).

Consequently, within this Note, quantitative information has been grouped and summarised to highlight both the degree of risk borne by the Group's principal business units and by policyholders and equity holders. Information is classified as follows:

UK and Europe life and pensions

Subdivided and summarised (where appropriate) to highlight risks borne by each long-term business fund (including the HWPF) and subsidiaries. The effect of risk on the recourse cash flows arising in the HWPF, which are described in Note 1(i), is also highlighted where appropriate.

Canada

Subdivided and summarised to highlight the risks of both the insurance and segregated fund business.

Standard Life Bank

Consists of the activities of Standard Life Bank plc.

Other

Including the activities of Standard Life plc, Standard Life Investments Limited (Standard Life Investments), Standard Life Healthcare and other operations.

Amounts and values are, where appropriate, reconciled to the consolidated balance sheet in Section (j).

The Group classifies the risks to which it is exposed as follows:

Demographic and expense risk
Market risk
Credit risk
Liquidity risk
Operational risk

Each of these classifications is defined (in a manner consistent with that used with the ERM framework) and described in the following sections.

Concentrations of risk are monitored using various complementary measures, including the consideration of the impact of risk on European Embedded Value (EEV), profit after tax and underlying cash flows, as well as relevant regulatory assessments.

The sensitivity factors used in the analysis on International Financial Reporting Standards (IFRS) profit after tax and equity in Sections (d) and (e) are consistent with those applied in the EEV Sensitivity analysis, which is shown in Note 15 of the Supplementary financial information.

(d) Demographic and expense risk

The Group defines demographic and expense risk as 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. This class of risk includes both risks that meet the definition of insurance risk under IFRS 4 Insurance Contracts and other financial risks.

Demographic and expense risk is managed by assessing certain characteristics based on experience and statistical data and by making certain assumptions on the risks associated with the policy during the period that it is in-force. Assumptions that are deemed to be financially significant are reviewed at least annually for pricing and reporting purposes. In analysing demographic and expense risk exposures, the Group considers:

The historic experience of relevant demographic and expense risks
The potential for future experience to differ from that expected or observed historically
The financial impact of variance in expectations, and

Other factors relevant to their specific markets, for instance, obligations to treat customers fairly

Reinsurance and other risk transfer mechanisms are used to manage risk exposures and are taken into account in the Group's assessment of demographic and expense risk exposures.

The main elements of demographic and expense risk that give rise to the exposure are discussed in Section (d)(i). Due to the types of products sold by UK and Europe life and pensions and Canadian operations, the Group has exposure to improving annuitant mortality and to unexpected variances in persistency in the respective jurisdictions.

(d)(i) Elements of demographic and expense risk

(d)(i)(i) Components of insurance risk as defined by IFRS 4

Longevity

The Group defines longevity risk as the risk that the policyholder lives longer than expected and therefore gives rise to a loss. This risk is relevant for contracts where payments are made until the death of the policyholder, for example annuities. This may arise from current experience differing from that expected, more volatility of experience than expected, or the rate of improvement in mortality being greater than anticipated.

Experience can vary as a result of statistical uncertainty or as a consequence of systemic (and previously unexpected) changes in the life expectancy of the insured portfolio. The profitability of such business will reduce should policyholders live longer than the Group's expectations and reported profits will be impacted as and when such variances are recognised in liabilities.

Morbidity

The Group defines morbidity risk as the risk that paid claims dependent on the state of health of a policyholder are either higher, more volatile, continue for a longer duration or start earlier than those assumed. This risk will be present on disability income, healthcare and critical illness contracts. This includes the risk of anti-selection that results in a requirement to pay claims that the Group had not expected (for example due to non-disclosure).

Income protection contracts have the risk that claim duration may be longer than anticipated.

Mortality

The Group defines mortality risk as the risk that paid death claims are at a higher rate or are more volatile than assumed. This risk will exist on any contracts where the payment on death is greater than the reserve held. This includes the risk of anti-selection that results in a requirement to pay claims that the Group had not expected (for example due to non-disclosure).

(d)(i)(ii) Other financial risks

Persistency - withdrawals and lapse rates

The Group defines persistency risk as the risk that business lapses or becomes paid-up at a different rate than assumed. This risk may arise if persistency rates are greater or less than assumed or if policyholders selectively lapse when it is beneficial for them. If the benefits payable on lapse or being paid-up are greater than the reserve held then the risk will be of a worsening of persistency and if benefits are paid out that are lower than the reserve then the risk will be that fewer policyholders will lapse or become paid-up.

Persistency risk also reflects the risk of a reduction in expected future profits, and risks arising from early retirements, surrenders (partial or in full) and similar policyholder options.

Variances in persistency will affect equity holder profits to the extent that charges levied against policies are dependent upon the number of policies in force and/or the average size of those policies. The policies primarily relate to unit linked, unitised with profits and the Canadian operations' segregated fund business. Profits may also be at risk if is considered necessary, or prudent, to increase liabilities on certain lines of business.

Expenses

The Group defines expense risk as the risk that expense levels will be higher than assumed. This can arise from an increase in the unit costs of the Group or its business units or an increase in expense inflation, either Group specific or relating to economic conditions. This risk will be present on contracts where the Group cannot or will not pass the increased costs onto the customer. Expense risk can reflect an increase in liabilities or a reduction in expected future profits.

Equity holder profits are directly exposed to the risk of expenses being higher than otherwise expected. They can further be affected if it is considered necessary or prudent to increase provisions to reflect increased expectations of future costs of policy administration.

(d)(ii) Sensitivity analysis - demographic and expense risk

Recognition of profits after tax and the measurement of equity are dependent on the methodology and key assumptions used to determine the Group's insurance and investment contract liabilities, as described in Note 29.

The following table illustrates the sensitivity of profit after tax and equity to variations in the key assumptions made in relation to the Group's most significant demographic and expense risk exposures, including exposure to persistency risk. The values have, in all cases, been determined by varying the relevant assumption as at the balance sheet date and considering the consequential impacts assuming other assumptions remain unchanged.

	Longevity		Expenses		Persistency		Morbidity / mortality
2008	+5%	-5%	+10%	-10%	+10%	-10%	+5%	-5%
Increase/(decrease) on profit after tax and equity	£m	£m	£m	£m	£m	£m	£m	£m
UK and Europe life and pensions
Heritage With Profits Fund
Recourse cash flows	(18)	17	(8)	7	(1)	1	(5)	5

Proprietary Business Fund
Non-participating insurance contract liabilities	-	-	-	-	-	-	-	-

Standard Life Investment Funds
Non-participating insurance contract liabilities	(60)	57	(1)	1	-	-	-	-
Deferred acquisition costs	-	-	(2)	-	(4)	-	-	-

Canada
Non-participating insurance contract liabilties	(32)	30	(10)	9	10	(10)	(7)	6
Non-participating investment contract liabilities	-	-	(1)	1	-	-	-	-

Total

(110)

104

(22)

(9)

(12)

2007
Increase/(decrease) on profit after tax and equity
UK and Europe life and pensions
Heritage With Profits Fund
Recourse cash flows	(15)	15	(13)	11	(1)	1	(4)	4

Proprietary Business Fund
Non-participating insurance contract liabilities	-	-	-	-	-	-	-	-

Standard Life Investment Funds
Non-participating insurance contract liabilities	(146)	137	(1)	1	-	-	-	-

Canada
Non-participating insurance contract liabilties	(30)	28	(10)	9	9	(9)	(6)	6
Non-participating investment contract liabilities	-	-	(1)	1	-	-	-	-
Total	(191)	180	(25)	22	8	(8)	(10)	10

When the sensitivities presented in the table above are applied to other with profits funds, there are no significant impacts on net liabilities after reinsurance, equity or profits for either investment or insurance contracts.
Amounts in the table above are presented net of tax.

For the HWPF these tables illustrate the impact of demographic and expense risk on the recourse cash flows (the principal means by which surplus arising within the HWPF is transferred to equity holders). The recourse cash flows:

Have been determined in accordance with the Scheme and the HWPF's Principles and Practices of Financial Management (PPFM), and

Take into account the need to consider the impact of risk on the financial position of the HWPF before any recourse cash flows can be transferred to the Shareholder Fund of Standard Life Assurance Limited (SLAL)

The terms of the Scheme provide for the retention of recourse cash flows under certain circumstances to support the financial position of the HWPF. The equity holder is also exposed to the market risk that the assets of the HWPF may be insufficient in total to meet obligations. Should such a situation arise, the equity holder would be exposed to the full potential cost of any shortfall. The assumption changes illustrated are not sufficiently severe for such an event to occur.

Standard Life Investment Funds (SLIF) currently bears longevity risk, as a consequence of the reinsurance arrangement that exists between its long-term business fund and the HWPF, where the longevity risk arising on immediate annuity business acquired prior to demutualisation falls on SLIF. However, following a comprehensive review of the options to mange longevity exposure within the annuity book, in the context of the Group's overall risk profile, it was concluded that the best return to equity holders and with profits policyholders would be achieved by reinsuring a major block of the pre demutualisation business to Canada Life International Re (refer to Section (f) in Note 29). Therefore, on 14 February 2008 SLAL recaptured from SLIF its obligations in respect of these annuity contracts which were then reinsured to Canada Life International Re. The sensitivity of the Group's IFRS profits to longevity risk has been significantly reduced as a result of this transaction. (For more information on this reinsurance transaction refer to Note 31).

SLIF also bears longevity risk in respect of its reinsurance arrangement with the SLAL Proprietary Business Fund (PBF), where all the UK and Irish annuity business written post demutualisation is reinsured to SLIF. Under certain conditions (more severe than those illustrated) part or all of the longevity risk of SLIF would be passed back to the PBF.

The sensitivities shown for Canada reflect the diverse nature of the business. The changes principally reflect currency movements and alterations in business mix.

Limitations

The financial impact of certain risks is non-linear and consequently the sensitivity of other events may differ from expectations based on those shown in the table. Correlations between the different risks and/or other factors may mean that experience would differ from that expected if more than one risk event occurred simultaneously. The analysis has been assessed as at the balance sheet date. The results of the sensitivity analysis may vary as a consequence of the passage of time or as a consequence of changes in underlying market or financial conditions. The sensitivity analysis in respect of longevity risk has been performed on the relevant annuity business and presents, for a +5% longevity test, the impact of a 5% reduction in the underlying mortality rates (and vice versa). It has also been based on instantaneous change in the mortality assumption at all ages, rather than considering gradual changes in mortality rates.