Annual Financial Report (Part

RNS Number : 0672Q

Standard Life plc

07 April 2009

Standard Life plc

Annual Report

and Accounts

2008

PART 5 OF 6

39. Risk management continued

(h) Securities lending and repurchase arrangements

The Group enters into securities lending arrangements and repurchase agreements as part of normal operating activities. Assets are pledged by third parties as collateral to support these activities. Collateral held by the Group in respect of securities lending agreements at the year end was £5,231m (2007: £7,447m) of securities and £2,928m (2007: £3,657m) of cash.

The securities lending arrangements in place as at 31 December 2008 and 31 December 2007 are under a number of agreements, including the Global master repurchase agreements, Gilt edged stock lending agreements, Master equity and fixed interest stock lending agreement (1996) and Overseas securities lender's agreements. The loaned securities remain on balance sheet and continue to be valued in accordance with the relevant Group accounting policy. All rights to dividends and market gains or losses in respect of these assets remain with the Group. Assets on loan are as follows:

	2008 £m	2007 £m
Domestic government	6,181	9,519
Domestic corporate	982	112
Domestic equity	-	310
International fixed income	1	113
International equity	44	518
Total	7,208	10,572

(i) Reconciliation by category of financial instruments

The following tables reconcile the Group's financial instruments by IAS 39 Financial Instruments: Recognition and Measurement categories to the line items presented in the consolidated balance sheet.

Financial assets are analysed by category as follows:

	At fair value through profit or loss
2008	Held for trading £m	Designated on initial recognition £m	Held to maturity £m	Loans and receivables £m	Insurance assets £m	Cash and cash equivalents £m	Total £m
Reinsurance assets	-	-	-	-	6,076	-	6,076
Loans and receivables	-	-	-	12,069	-	-	12,069
Derivative financial assets	2,800	-	-	-	-	-	2,800
Investment securities	-	90,716	-	-	-	-	90,716
Other assets (excluding non-financial assets)	-	629	-	1,323	-	-	1,952
Cash and cash equivalents	-	-	-	-	-	10,052	10,052
Total financial assets	2,800	91,345	-	13,392	6,076	10,052	123,665
Non-financial assets							13,315
Total assets							136,980

2007
Reinsurance assets	-	-	-	-	476	-	476
Loans and receivables	-	-	-	13,056	-	-	13,056
Derivative financial assets	491	29	-	-	-	-	520
Investment securities	-	102,304	-	-	-	-	102,304
Other assets (excluding non-financial assets)	-	1,569	-	-	-	-	1,569
Cash and cash equivalents	-	-	-	-	-	9,335	9,335
Total financial assets	491	103,902	-	13,056	476	9,335	127,260
Non-financial assets							16,720
Total assets							143,980

Financial liabilities are analysed by category as follows:

	At fair value through profit or loss
2008	Held for trading £m	Designated on initial recognition £m	Financial liabilities at amortised cost £m	Insurance and participating investment contract liabilities £m	Cash and cash equivalents £m	Total £m
Non-participating contract liabilities	-	43,147	9,126	19,635	-	71,908
Participating contract liabilities	-	-	-	34,163	-	34,163
Deposits received from reinsurers	-	-	5,968	-	-	5,968
Third party interest in consolidated funds	-	1,603	-	-	-	1,603
Borrowings	-	-	3,126	-	101	3,227
Subordinated liabilities	-	-	2,204	-	-	2,204
Customer accounts related to banking activities and deposits by banks	-	-	6,991	-	-	6,991
Derivative financial liabilities	1,348	-	-	-	-	1,348
Other liabilities (excluding non-financial liabilities)	-	-	5,044	-	-	5,044
Total financial liabilities	1,348	44,750	32,459	53,798	101	132,456
Non-financial liabilities						783
Total liabilities						133,239

2007
Non-participating contract liabilities	-	49,435	9,327	20,980	-	79,742
Participating contract liabilities	-	-	-	37,888	-	37,888
Deposits received from reinsurers	-	-	53	-	-	53
Third party interest in consolidated funds	-	1,501	-	-	-	1,501
Borrowings	-	-	5,903	-	215	6,118
Subordinated liabilities	-	-	1,908	-	-	1,908
Customer accounts related to banking activities and deposits by banks	-	-	6,080	-	-	6,080
Derivative financial liabilities	633	9	-	-	-	642
Other liabilities (excluding non-financial liabilities)	-	-	4,985	-	-	4,985
Total financial liabilities	633	50,945	28,256	58,868	215	138,917
Non-financial liabilities						1,390
Total liabilities						140,307

(j) Balance sheet reconciliation

The following tables reconcile the classes of financial instruments used for the risk management analysis to balance sheet line items. Financial assets are analysed below:

	Reinsurance assets	Loans and receivables	Derivative financial assets	Investment securities	Other assets	Cash and cash equivalents	Total
2008	£m	£m	£m	£m	£m	£m	£m
UK and Europe life and pensions Heritage With Profits Fund:
Equity securities	-	-	-	7,703	-	-	7,703
Debt securities	-	-	-	29,136	-	-	29,136
Loans and receivables	-	250	-	-	-	-	250
Cash and cash equivalents	-	-	-	-	-	3,148	3,148
Derivative financial assets	-	-	1,643	-	-	-	1,643
Reinsurance assets - external	5,732	-	-	-	-	-	5,732
Other assets	-	-	-	-	517	-	517
Proprietary Business Fund:
Equity securities	-	-	-	13	-	-	13
Debt securities	-	-	-	106	-	-	106
Cash and cash equivalents	-	-	-	-	-	111	111
Derivative financial assets	-	-	3	-	-	-	3
Reinsurance assets - external	4	-	-	-	-	-	4
Other assets	-	-	-	-	213	-	213
Standard Life Investment Funds:
Equity securities	-	-	-	2	-	-	2
Debt securities	-	-	-	1,464	-	-	1,464
Cash and cash equivalents	-	-	-	-	-	577	577
Derivative financial assets	-	-	96	-	-	-	96
Other assets	-	-	-	-	52	-	52
Other with profits funds:
Equity securities	-	-	-	103	-	-	103
Debt securities	-	-	-	130	-	-	130
Cash and cash equivalents	-	-	-	-	-	25	25
Derivative financial assets	-	-	14	-	-	-	14
Other assets	-	-	-	-	13	-	13
Shareholder Fund:
Debt securities	-	-	-	544	-	-	544
Cash and cash equivalents	-	-	-	-	-	835	835
Derivative financial assets	-	-	386	-	-	-	386
Other assets	-	-	-	-	262	-	262
Unit linked business:
Equity securities	-	-	-	24,026	-	-	24,026
Debt securities	-	-	-	11,244	-	-	11,244
Loans and receivables	-	114	-	-	-	-	114
Cash and cash equivalents	-	-	-	-	-	2,441	2,441
Interests in pooled investment funds	-	-	-	987	-	-	987
Derivative financial assets	-	-	336	-	-	-	336
Other assets	-	-	-	-	469	-	469
Canada - non-segregated funds
Equity securities	-	-	-	347	-	-	347
Debt securities	-	-	-	5,420	-	-	5,420
Loans and advances	-	2,137	-	-	-	-	2,137
Cash and cash equivalents	-	-	-	-	-	23	23
Reinsurance assets	337	-	-	-	-	-	337
Other assets	-	-	-	-	98	-	98
Canada - segregated funds
Equity securities	-	-	-	5,231	-	-	5,231
Debt securities	-	-	-	2,198	-	-	2,198
Loans and advances	-	35	-	-	-	-	35
Cash and cash equivalents	-	-	-	-	-	133	133
Other assets	-	-	-	-	37	-	37

	Reinsurance assets	Loans and receivables	Derivative financial assets	Investment securities	Other assets	Cash and cash equivalents	Total
2008	£m	£m	£m	£m	£m	£m	£m
Standard Life Bank
Treasury bills	-	-	-	-	-	60	60
Loans and advances to customers	-	9,517	-	-	-	-	9,517
Loans and advances to banks	-	-	-	-	-	273	273
Certificates of deposit	-	-	-	-	-	584	584
Floating rate notes	-	-	-	59	-	-	59
Derivative financial assets	-	-	297	-	-	-	297
Cash and cash equivalents	-	-	-	-	-	553	553
Other assets	-	-	-	-	79	-	79
Other
Equity securities	-	-	-	259	-	-	259
Debt securities	-	-	-	291	-	-	291
Cash and cash equivalents	-	-	-	-	-	1,149	1,149
Derivative financial assets	-	-	2	-	-	-	2
Reinsurance assets	3	-	-	-	-	-	3
Other assets	-	16	-	-	149	-	165

Financial assets	6,076	12,069	2,777	89,263	1,889	9,912	121,986

Minority interest and third party interest in consolidated funds	-	-	23	1,453	63	140	1,679

Total financial assets	6,076	12,069	2,800	90,716	1,952	10,052	123,665

Non-financial assets
Other assets							307
Intangible assets							112
Deferred acquisition costs							892
Investments in associates and joint ventures							3,098
Investment property							7,738
Property, plant and equipment							740
Deferred tax assets							428

Total non-financial assets							13,315

Total assets							136,980

39. Risk management continued

(j) Balance sheet reconciliation continued

Financial liabilities are analysed below:

	Non-participating contract liabilities	Participating contract liabilities	Deposits received from reinsurers	Borrowings	Subordinated liabilities	Customer accounts and deposits by banks	Derivative financial liabilities	Other liabilities	Total
2008	£m	£m	£m	£m	£m	£m	£m	£m	£m
UK and Europe life and pensions Heritage With Profits Funds:
Non-participating insurance contract liabilities - annuities	10,155	-	-	-	-	-	-	-	10,155
Non-participating insurance contract liabilities - other (excl. unit linked)	229	-	-	-	-	-	-	-	229
Non-participating investment contract liabilities (excl. unit linked)	19	-	-	-	-	-	-	-	19
Participating insurance contract liabilities	-	16,857	-	-	-	-	-	-	16,857
Participating investment contract liabilities	-	15,661	-	-	-	-	-	-	15,661
Participating contract liabilities - unallocated divisible surplus	-	863	-	-	-	-	-	-	863
Deposits received from reinsurers	-	-	5,968	-	-	-	-	-	5,968
Derivative financial liabilities	-	-	-	-	-	-	588	-	588
Other liabilities	-	-	-	79	-	-	-	3,366	3,445
Proprietary Business Fund:
Non-participating insurance contract liabilities - other (excl. unit linked)	21	-	-	-	-	-	-	-	21
Non-participating insurance contract liabilities - unit linked	22	-	-	-	-	-	-	-	22
Derivative financial liabilities	-	-	-	-	-	-	16	-	16
Other financial liabilities	-	-	-	4	-	-	-	274	278
Standard Life Investment Funds:
Non-participating insurance contract liabilities - annuities	1,554	-	-	-	-	-	-	-	1,554
Non-participating investment contract liabilities (excl. unit linked)	2	-	-	-	-	-	-	-	2
Non-participating insurance contract liabilities - unit linked	1,140	-	-	-	-	-	-	-	1,140
Non-participating investment contract liabilities - unit linked (excl. SLPF)	41,331	-	-	-	-	-	-	-	41,331
Non-participating investment contract liabilities - unit linked (SLPF)	875	-	-	-	-	-	-	-	875
Derivative financial liabilities	-	-	-	-	-	-	44	-	44
Other financial liabilities	-	-	-	2	-	-	-	369	371
Other with profits funds:
Participating insurance contract liabilities	-	230	-	-	-	-	-	-	230
Participating investment contract liabilities	-	8	-	-	-	-	-	-	8
Derivative financial liabilities	-	-	-	-	-	-	1	-	1
Other financial liabilities	-	-	-	1	-	-	-	2	3
Shareholder Fund:
Derivative financial liabilities	-	-	-	-	-	-	3	-	3
Other financial liabilities	-	-	-	-	-	-	-	200	200
Unit linked business:
Derivative financial liabilities	-	-	-	-	-	-	462	-	462
Other liabilities	-	-	-	54	-	-	-	230	284

	Non-participating contract liabilities	Participating contract liabilities	Deposits received from reinsurers	Borrowings	Subordinated liabilities	Customer accounts and deposits by banks	Derivative financial liabilities	Other liabilities	Total
2008	£m	£m	£m	£m	£m	£m	£m	£m	£m
Canada - non-segregated funds
Non-participating insurance contract liabilities	5,234	-	-	-	-	-	-	-	5,234
Non-participating investment contract liabilities	2,451	-	-	-	-	-	-	-	2,451
Participating insurance contract liabilities	-	538	-	-	-	-	-	-	538
Participating investment contract liabilities	-	5	-	-	-	-	-	-	5
Unallocated divisible surplus	-	1	-	-	-	-	-	-	1
Borrowings	-	-	-	41	-	-	-	-	41
Other liabilities	-	-	-	-	-	-	-	170	170
Canada - segregated funds
Non-participating insurance contract liabilities	1,113	-	-	-	-	-	-	-	1,113
Non-participating investment contract liabilities	6,662	-	-	-	-	-	-	-	6,662
Borrowings	-	-	-	2	-	-	-	-	2
Other liabilities	-	-	-	-	-	-	-	39	39
Standard Life Bank
Derivative financial liabilities	-	-	-	-	-	-	141	-	141
Customer accounts	-	-	-	-	-	5,000	-	-	5,000
Deposits by banks	-	-	-	-	-	1,991	-	-	1,991
Securitised notes in issue	-	-	-	2,411	-	-	-	-	2,411
Certificates of deposit	-	-	-	228	-	-	-	-	228
Commercial paper	-	-	-	228	-	-	-	-	228
Medium term notes	-	-	-	117	-	-	-	-	117
Subordinated liabilities	-	-	-	-	285	-	-	-	285
Other liabilities	-	-	-	-	-	-	-	23	23
Other
Derivative financial liabilities	-	-	-	-	-	-	26	-	26
General insurance contract liabilities	167	-	-	-	-	-	-	-	167
Other liabilities	933	-	-	5	1,919	-	-	345	3,202
Financial liabilities	71,908	34,163	5,968	3,172	2,204	6,991	1,281	5,018	130,705

Minority interest and third party interest in consolidated funds	-	-	-	55	-	-	67	26	148

Total financial liabilities	71,908	34,163	5,968	3,227	2,204	6,991	1,348	5,044	130,853

Non-financial liabilities
Pension and other post retirement benefits									42
Deferred income									382
Deferred tax liabilities									93
Current tax liabilities									174
Other liabilities									92

Total non-financial liabilities									783

Third party interest in consolidated funds									1,603

Total liabilities									133,239

39. Risk management continued

(j) Balance sheet reconciliation continued

Financial assets are analysed below:

	Reinsurance assets	Loans and receivables	Derivative financial assets	Investment securities	Other assets	Cash and cash equivalents	Total
2007	£m	£m	£m	£m	£m	£m	£m
UK and Europe life and pensions Heritage With Profits Fund:
Equity securities	-	-	-	12,869	-	-	12,869
Debt securities	-	-	-	28,652	-	-	28,652
Loans and receivables	-	295	-	-	-	-	295
Cash and cash equivalents	-	-	-	-	-	4,527	4,527
Derivative financial assets	-	-	257	-	-	-	257
Reinsurance assets - external	202	-	-	-	-	-	202
Other assets	-	-	-	-	(94)	-	(94)
Proprietary Business Fund:
Equity securities	-	-	-	8	-	-	8
Debt securities	-	-	-	91	-	-	91
Cash and cash equivalents	-	-	-	-	-	181	181
Reinsurance assets - external	15	-	-	-	-	-	15
Other assets	-	-	-	-	104	-	104
Standard Life Investment Funds:
Equity securities	-	-	-	1	-	-	1
Debt securities	-	-	-	982	-	-	982
Cash and cash equivalents	-	-	-	-	-	235	235
Derivative financial assets	-	-	6	-	-	-	6
Other assets	-	-	-	-	25	-	25
Other with profits funds:
Equity securities	-	-	-	65	-	-	65
Debt securities	-	-	-	100	-	-	100
Cash and cash equivalents	-	-	-	-	-	23	23
Other assets	-	-	-	-	17	-	17
Shareholder Fund:
Debt securities	-	-	-	1,272	-	-	1,272
Cash and cash equivalents	-	-	-	-	-	259	259
Derivative financial assets	-	-	79	-	-	-	79
Other assets	-	-	-	-	686	-	686
Unit linked business:
Equity securities	-	-	-	33,041	-	-	33,041
Debt securities	-	-	-	9,132	-	-	9,132
Loans and receivables	-	3	-	-	-	-	3
Cash and cash equivalents	-	-	-	-	-	1,545	1,545
Interests in pooled investment funds	-	-	-	858	-	-	858
Derivative financial assets	-	-	41	-	-	-	41
Other assets	-	-	-	-	410	-	410
Canada - non-segregated funds
Equity securities	-	-	-	596	-	-	596
Debt securities	-	-	-	5,305	-	-	5,305
Loans and advances	-	1,610	-	-	-	-	1,610
Cash and cash equivalents	-	-	-	-	-	131	131
Reinsurance assets	255	-	-	-	-	-	255
Other assets	-	-	-	-	118	-	118
Canada - segregated funds
Equity securities	-	-	-	5,705	-	-	5,705
Debt securities	-	-	-	1,834	-	-	1,834
Loans and advances	-	28	-	-	-	-	28
Cash and cash equivalents	-	-	-	-	-	133	133
Other assets	-	-	-	-	47	-	47

	Reinsurance assets	Loans and receivables	Derivative financial assets	Investment securities	Other assets	Cash and cash equivalents	Total
2007	£m	£m	£m	£m	£m	£m	£m
Standard Life Bank
Treasury bills	-	-	-	-	-	158	158
Loans and advances to customers	-	11,105	-	-	-	-	11,105
Loans and advances to banks	-	-	-	-	-	998	998
Certificates of deposit	-	-	-	97	-	18	115
Floating rate notes	-	-	-	110	-	-	110
Derivative financial assets	-	-	133	-	-	-	133
Cash and cash equivalents	-	-	-	-	-	546	546
Other assets	-	-	-	-	42	-	42
Other
Equity securities	-	-	-	181	-	-	181
Debt securities	-	-	-	130	-	-	130
Cash and cash equivalents	-	-	-	-	-	481	481
Derivative financial assets	-	-	1	-	-	-	1
Reinsurance assets	4	-	-	-	-	-	4
Other assets	-	15	-	-	195	-	210

Financial assets	476	13,056	517	101,029	1,550	9,235	125,863

Minority interest and third party interest in consolidated funds	-	-	3	1,275	19	100	1,397

Total financial assets	476	13,056	520	102,304	1,569	9,335	127,260

Non-financial assets
Other assets							185
Intangible assets							69
Deferred acquisition costs							693
Investments in associates and joint ventures							4,146
Investment property							10,646
Property, plant and equipment							870
Deferred tax assets							111

Total non-financial assets							16,720

Total assets							143,980

Financial liabilities are analysed below:

	Non-participating contract liabilities	Participating contract liabilities	Borrowings	Subordinated liabilities	Customer accounts and deposits by banks	Derivative financial liabilities	Other liabilities	Total
2007	£m	£m	£m	£m	£m	£m	£m	£m
UK and Europe life and pensions Heritage With Profits Funds:
Non-participating insurance contract liabilities - annuities	11,722	-	-	-	-	-	-	11,722
Non-participating insurance contract liabilities - other (excl. unit linked)	291	-	-	-	-	-	-	291
Non-participating investment contract liabilities (excl. unit linked)	52	-	-	-	-	-	-	52
Participating insurance contract liabilities	-	18,809	-	-	-	-	-	18,809
Participating investment contract liabilities	-	17,482	-	-	-	-	-	17,482
Participating contract liabilities - unallocated divisible surplus	-	950	-	-	-	-	-	950
Derivative financial liabilities	-	-	-	-	-	405	-	405
Other liabilities	-	-	62	-	-	-	3,801	3,863
Proprietary Business Fund:
Non-participating insurance contract liabilities - other (excl. unit linked)	33	-	-	-	-	-	-	33
Non-participating investment contract liabilities	19	-	-	-	-	-	-	19
Non-participating insurance contract liabilities - unit linked	14	-	-	-	-	-	-	14
Derivative financial liabilities	-	-	-	-	-	4	-	4
Other financial liabilities	-	-	18	-	-	-	213	231
Standard Life Investment Funds:
Non-participating insurance contract liabilities - annuities	1,204	-	-	-	-	-	-	1,204
Non-participating investment contract liabilities (excl. unit linked)	5	-	-	-	-	-	-	5
Non-participating insurance contract liabilities - unit linked	1,522	-	-	-	-	-	-	1,522
Non-participating investment contract liabilities - unit linked (excl. SLPF)	48,383	-	-	-	-	-	-	48,383
Non-participating investment contract liabilities - unit linked (SLPF)	1,050	-	-	-	-	-	-	1,050
Derivative financial liabilities	-	-	-	-	-	12	-	12
Other financial liabilities	-	-	2	-	-	-	173	175

	Non-participating contract liabilities	Participating contract liabilities	Borrowings	Subordinated liabilities	Customer accounts and deposits by banks	Derivative financial liabilities	Other liabilities	Total
2007	£m	£m	£m	£m	£m	£m	£m	£m
Other with profits funds:
Participating insurance contract liabilities	-	110	-	-	-	-	-	110
Participating investment contract liabilities	-	5	-	-	-	-	-	5
Derivative financial liabilities	-	-	-	-	-	1	-	1
Other financial liabilities	-	-	1	-	-	-	15	16
Shareholder Fund:
Derivative financial liabilities	-	-	-	-	-	21	-	21
Unit linked business:
Derivative financial liabilities	-	-	-	-	-	92	-	92
Other liabilities	-	-	127	-	-	-	259	386
Canada - non-segregated funds
Non-participating insurance contract liabilities	4,704	-	-	-	-	-	-	4,704
Non-participating investment contract liabilities	2,193	-	-	-	-	-	-	2,193
Participating insurance contract liabilities	-	526	-	-	-	-	-	526
Participating investment contract liabilities	-	5	-	-	-	-	-	5
Unallocated divisible surplus	-	1	-	-	-	-	-	1
Borrowings	-	-	45	-	-	-	-	45
Other liabilities	-	-	-	-	-	-	223	223
Canada - segregated funds
Non-participating insurance contract liabilities	1,314	-	-	-	-	-	-	1,314
Non-participating investment contract liabilities	6,714	-	-	-	-	-	-	6,714
Borrowings	-	-	3	-	-	-	-	3
Other liabilities	-	-	-	-	-	-	32	32
Standard Life Bank
Derivative financial liabilities	-	-	-	-	-	81	-	81
Customer accounts	-	-	-	-	4,631	-	-	4,631
Deposits by banks	-	-	-	-	1,449	-	-	1,449
Securitised notes in issue	-	-	3,983	-	-	-	-	3,983
Certificates of deposit	-	-	1,049	-	-	-	-	1,049
Commercial paper	-	-	692	-	-	-	-	692
Medium term notes	-	-	102	-	-	-	-	102
Subordinated liabilities	-	-	-	257	-	-	-	257
Other liabilities	-	-	-	-	-	-	45	45
Other
Derivative financial liabilities	-	-	-	-	-	9	-	9
General insurance contract liabilities	177	-	-	-	-	-	-	177
Other liabilities	345	-	8	1,651	-	-	260	2,264
Financial liabilities	79,742	37,888	6,092	1,908	6,080	625	5,021	137,356

Minority interest and third party interest in consolidated funds	-	-	26	-	-	17	17	60

Total financial liabilities	79,742	37,888	6,118	1,908	6,080	642	5,038	137,416

Non-financial liabilities
Pension and other post retirement benefits								203
Deferred income								340
Deferred tax liabilities								480
Current tax liabilities								252
Other liabilities								115

Total non-financial liabilities								1,390

Third party interest in consolidated funds								1,501

Total liabilities								140,307

39. Risk management continued

(k) Operational risk

The Group defines operational risk as the risk of loss, or adverse consequences for the Group's business, resulting from inadequate or failed internal processes, people or systems, or from external events.

Appetites for operational risk are managed through the Group Operational Risk Policy. Business units adopt the relevant minimum standards and limits contained within the Group policy. Business units are required to manage risk in accordance with the policy and to take mitigating action as appropriate to operate within appetites.

The types of operational risk that the Group is exposed to are identified using the following operational risk categories:

Fraud or irregularities
Regulatory or legal
Customer treatment
Business interruption
Supplier failure
Planning
Process execution
People

Activities undertaken to ensure the practical operation of controls over financial risks, that is, market, credit, liquidity and demographic and expense risk, are treated as an operational risk.

Operational risk exposures are controlled using one or a combination of the following: modifying operations such that there is no exposure to the risk; accepting exposure to the risk and choosing not to control the risk; or accepting exposure to the risk and controlling the exposure by risk transfer or risk treatment. The factors on which the level of control and nature of the controls implemented are based include:

The potential cause and impact of the risk
The likelihood of the risk being realised in the absence of any controls
The ease with which the risk could be insured against

The cost of implementing controls to reduce the likelihood of the risk being realised

Operational risk appetite

Control Self Assessment (CSA) is a monitoring activity where business managers assess the operation of the controls for which they are responsible and the adequacy of these controls to manage key operational risks and associated business processes. The assessment completed by business managers is validated and challenged by the risk function in its role of 'second line of defence'. Independent assurance as to the effectiveness of the CSA process is provided by Group Internal Audit in its role of 'third line of defence'. The results of CSA are reported through the risk governance structure. The CSA certification process provides evidence to support disclosures in the Annual Report and Accounts.

The assessment of operational risk exposures is performed on a qualitative basis using a combination of impact and likelihood, and on a quantitative basis using objective and verifiable measures. The maximum amount of operational risk the Group is willing to retain is defined using both quantitative limits, for example financial impact, and also qualitative statements of principle that articulate the event, or effect, that needs to be limited.

The operational risks faced by each business unit and its exposure to these risks forms its operational risk profile. Each business unit is required to understand and review its profile based on a combination of the estimated impact and likelihood of risk events occurring in the future, the results of CSA and a review of risk exposures relative to approved limits.

The impact of a new product, a significant change, or any one-off transaction on the operational risk profile of each business unit is assessed and managed in accordance with established guidelines or standards.

Strategic risk

The Group defines strategic risk as the risks or threats to the achievement of the Group's corporate objectives. Strategic risks are considered across the Group's global and local businesses as well as at Group level through the Group's planning process. The strategic risks to which the Group is exposed are quantified in terms of profitability and severity and are reviewed on a regular basis.

40. Net decrease in operating assets and liabilities

	2008	2007
	£m	£m
Decrease/(increase) in operating assets:
Investment property	3,276	1,045
Investment securities	17,476	(2,585)
Derivative net assets/(liabilities)	(1,541)	15
Reinsurance assets	(5,563)	309
Investment in associates*	124	(288)
Other assets	(285)	461
Prepayments and accrued income	(5)	-
Deferred acquisition costs	(306)	(365)
Loans and receivables	1,210	(804)
	14,386	(2,212)

(Decrease)/increase in operating liabilities:
Customer accounts related to banking activities	899	1,008
Other liabilities	(175)	112
Deposits received from reinsurers	5,968	-
Pension and other post retirement benefit provisions	(7)	(28)
Deferred income	35	82
Insurance contract liabilities	(4,918)	(1,171)
Investment contract liabilities	(9,808)	5,389
Certificate of deposits, commercial paper, medium term notes and securitisations	(2,816)	(371)
Change in liability for third party interest in consolidated funds	(598)	(78)
	(11,420)	4,943

Net decrease in operating assets and liabilities	2,966	2,731

* Investment in Standard Life Investments (Global Liquidity Funds) plc and certain unit trusts have been classified as operating activities due to the nature of the underlying transactions.

41. Contingencies

(a) Legal proceedings and regulations

The Group, like other financial organisations, is subject to legal proceedings and complaints in the normal course of its business. While it is not practicable to forecast or determine the final results of all pending or threatened legal proceedings, the Directors do not believe that such proceedings (including litigations) will have a material effect on the results and financial position of the Group.

The Group is subject to insurance solvency regulations in all the territories in which it issues insurance and investment contracts, and it has complied with all the local solvency and other regulations. Therefore, there are no contingencies in respect of these regulations.

(b) Joint ventures and associates

The Group has entered into agreements to share in the assets and liabilities of joint venture and associate investments. The Directors do not anticipate any material losses from such investments, and the operations of such investments are not material in relation to the operations of the Group.

The Group's share of contingent liabilities of the joint ventures and associates is not significant in relation to the operations of the Group.

The Scheme of Demutualisation sets a ten-year time limit for those eligible members of The Standard Life Assurance Company who were not allocated shares at the date of demutualisation to claim their entitlements. As future issues of these shares are dependent upon the actions of eligible members, it is not practical to estimate the financial effect of this potential obligation.

(d) Guarantees

During the year ended 31 December 2007 the Company issued a guarantee to Standard Life Investments (Global Liquidity Funds) plc to cover the difference between amortised cost and marked-to-market value of the underlying assets of two sub-funds, should there be a need to sell assets below amortised cost to meet investor withdrawals. The guarantee was for a maximum of £60m. During the year ended 31 December 2008, one sub-fund was restructured as referred to in Note 8 and this guarantee was replaced by a revised agreement with a maximum guarantee amount of £5m in respect of the other sub-fund.

(e) Other

(i) In the ordinary course of business, Standard Life Trust Company enters into agreements, which contain guarantee provisions for clearing system arrangements related to investment activities. Under such arrangements, the company, together with other participants in the clearing systems, may be required to guarantee certain obligations of a defaulting member. The guarantee provisions and amounts vary based upon the agreement. The company cannot estimate the amount, if any, that may be payable upon default. To facilitate its participation in the clearing system Standard Life Trust Company has provided as security a bank credit facility to a maximum of Canadian $84m.

(ii) Under the Financial Services Compensation Scheme (FSCS), which covers business conducted by firms authorised by the Financial Services Authority, consumers can claim compensation where a firm is unable to pay claims against it. These costs are levied on the industry by the FSCS with each firm's contribution calculated based on the tariff base of the relevant sub class of financial activities it undertakes. Each sub class meets the claims in their class up to an annual threshold. During 2008, FSCS involvement was triggered to protect deposits in several firms and maintain market confidence. At 31 December 2008, a provision is recognised in respect of Standard life Bank (refer to Note 38) in relation to potential compensation levies due under the FSCS based on FSA guidance issued to the British Bankers Association on 31 December 2008 and subsequently updated on 4 February 2009. This provision is intended to cover the management expense levies for 2008/09 and 2009/10 in relation to interest and other costs incurred on the loans taken out by the FSCS to recompense savers with banks which defaulted during 2008. Uncertainty exists over the total market FSCS levies and therefore the Standard Life Bank proportion to provide for, which will be dependent on the period of recovery, FSCS funding costs and potential capital write-offs.

A contingent liability also exists in relation to future FSCS levies, including the actual compensation costs due in relation to the banks which defaulted during 2008. As this liability cannot be reliably calculated and is dependent on a determination at some point in the future, the Group has not attempted to quantify this amount. The Group will continue to monitor this position and a provision will be made if and when a determinable outflow becomes probable in relation to this liability.

42. Commitments

(a) Capital commitments

The Group's capital commitments as at the year end are:

	2008	2007
	£m	£m
Authorised and contracted for but not provided and incurred:
Investment properties	127	75
Property, plant and equipment	357	462
Funding of associates	1	-

£115m (2007: £61m) and £12m (2007: £14m) relates to the contractual obligations to purchase, construct, or develop investment property and repair, maintain, or enhance investment property respectively.

(b) Off balance sheet instruments

The following indicates the contractual amounts of the Group's off balance sheet financial instruments that commit it to customers and third parties, as at the year end:

	2008	2007
	£m	£m
Guarantees and stand by letter of credit	4	7
Commitments to extend credit:
Original term to maturity of one year or less	83	55
Original term to maturity of more than one year	2,165	2,237
Other commitments	964	773

Guarantees and letters of credit include guarantees in relation to the Group's Canadian operations. These guarantees are considered to be financial guarantee contracts under IAS 39 Financial Instruments: Recognition and Measurement.

Included in 'Other commitments' is £942m (2007: £752m) committed by certain subsidiaries which are not fully owned by the Group. These commitments are funded through (contractually agreed) additional investments in the subsidiary by the Group and the minority interest. The levels of funding are not necessarily in line with the relevant percentage holdings.

The Group has entered into commercial non-cancellable leases on certain property, plant and equipment where it is not in the best interest of the Group to purchase these assets. Such leases have varying terms, escalation clauses and renewal rights.

The future aggregate minimum lease payments under non-cancellable operating leases are as follows:

	2008	2007
	£m	£m
Not later than one year	17	12
Later than one year and no later than five years	26	7
Later than five years	29	6
Total operating lease commitments	72	25

43. Employee share-based payments

The Group has established a number of share-based payment schemes for employees. Details of these arrangements are as follows:

(i) Long-Term Incentive Plan (LTIP)

Details of the LTIP are set out in the Directors' remuneration report on pages x to x. Under the terms of the plan, share options are awarded to executives and senior management based on performance results of the Group over a three year period. The performance target is based on the Group's return on capital which is a combination of underlying profit for the non-life businesses of the Group and the return on European Embedded Value for the life businesses of the Group. At the grant date the participants are advised of the range of options that will be awarded. The actual number of options that ultimately vest is determined at the end of the three year performance period. In addition, in respect of the 2008 plan, the number of options that ultimately vest is also subject to a Total Shareholder Return multiplier. The terms and conditions of the LTIP listed below assume the maximum number of options available to vest.

The three year performance period for the 2008 plan commenced on 1 January 2008. The grant date for the plan was 21 April 2008 with additional grants being made during the year to individuals who joined the plan after 21 April 2008.

The three year performance period for the 2007 plan commenced on 1 January 2007. The grant date for the plan was 1 May 2007 with additional grants being made during the year to individuals who joined the plan after 1 May 2007.

(ii) Share incentive plans

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 year is £1,500. The Group offers to match the first £25 of shares bought each month. The matching shares awarded under the Share Incentive Plan are granted at the end of each month. The matching shares are generally subject to a three-year service period and an employee may forfeit some or all of the matching shares if they leave the Group prior to completing three years of service from date of grant.

(iii) Performance shares

All eligible employees may be awarded free performance shares if certain Group profit targets are met. On 19 February 2008, each eligible employee was awarded 110 shares in respect of their services for the year ended 31 December 2007.

(iv) Annual bonus deferred shares

Details of the annual bonus are set out in the Directors' remuneration report on pages xx to xx. Most members of the Executive Job family including executive Directors participate in the Group annual bonus. Under the terms of the 2008 annual bonus, half of the bonus for above target performance is settled in shares which are deferred for a period of two years. The value of any dividends paid on those shares over the two year deferral period will be added to the value of the deferred bonus. Should an employee resign during the two year deferral period, some or all of the deferred shares will be forfeited. No deferred shares were granted in respect of the year to 31 December 2008.

(a) Long-Term Incentive Plan (LTIP)

The terms and conditions attaching to each of the ongoing arrangements are set out in the table below. The assumptions disclosed are based on the weighted average number of awards.

	2008	2007	2005/2006
Nature of arrangement	Grant of share options	Grant of share options	Grant of share options
Date of Grant	21 April 2008 1 May 2008 5 May 2008 2 June 2008 7 October 2008 15 October 2008 6 November 2008 17 November 2008 24 November 2008	1 May 2007 28 May 2007 18 June 2007 11 September 2007 1 November 2007	4 August 2006 1 November 2006
Number of instruments granted	4,755,073 33,797 51,482 41,118 60,836 37,450 239,762 10,964 50,849	3,170,676 21,758 28,824 161,002 30,190	7,285,761 118,729
Exercise price	nil	nil	nil
Share price at date of grant	249.50p 252.75p 261.50p 252.50p 255.00p 235.50p 237.25p 229.00p 266.50p	330.75p 340.75p 345.00p 292.25p 278.50p	258.75p 284.5p
Contractual life (years)	3.5 years	3.5 years	3.75 years
Vesting conditions	3 year service period; specified Group performance; total shareholder return	3 year service period; specified Group performance	3 year service period; specified Group performance
Settlement	Shares	Shares	Shares
Expected option life at grant date (years)	3.5 years	3.5 years	2.19 years
Risk free interest rate	n/a	5.83%	4.92%
Expected dividend (dividend yield)	n/a	3.41%	2.67%
Expected departures (grant date)	None at grant date. Leavers accounted for on departure	None at grant date. Leavers accounted for on departure	None at grant date. Leavers accounted for on departure
Expected outcome of meeting performance criteria (at the grant date)	50%	50%	75%
Fair value per granted instrument determined at the grant date	217p	297p	244p

The 'Black-Scholes' option pricing model is used to value the options granted under the LTIP. For the 2008 plan the 'Black-Scholes' option pricing model has been supplemented by a statistical model in order to factor into the valuation the Total Shareholder Return performance condition introduced in 2008.

The risk free interest rate was based on yields attaching to UK government bonds at the date of grant. These had a similar pattern to the expected life of the options at the date of grant.

The 2008 plan includes the entitlement to the receipt of dividends between the date of grant and the vesting date in respect of awards that ultimately vest. Accordingly, the valuation of the awards in respect of the 2008 plan has not been discounted for this factor.

43. Employee share-based payments continued

(a) Long-Term Incentive Plan (LTIP) continued

The information in the tables that follow applies to options outstanding at the end of each period.

2008
Range of exercise prices	Weighted average exercise price	Number of options	Weighted average remaining life
			Expected	Contractual
Nil	Nil	11,326,541	1.51	2.01

2007
Range of exercise prices	Weighted average exercise price	Number of options	Weighted average remaining life
			Expected	Contractual
Nil	Nil	9,976,747	1.28	1.78

A reconciliation of movements in the number of share options granted to executives and senior management is set out in the table below.

	2008
		Number of options	Weighted average exercise price
Outstanding at start of year		9,976,747	-
Granted		5,281,331	-
Forfeited		(722,049)	-
Exercised		(3,209,488)	-
Outstanding at end of year		11,326,541	-

The options exercised during the year relate to the 2005 portion of the 2005/2006 plan. The weighted average share price at the time of exercise of the options was 245p.

	2007
	Number of options	Weighted average exercise price
Outstanding at start of year	6,900,828	-
Granted	3,412,450	-
Forfeited	(336,531)	-
Exercised	-	-
Outstanding at end of year	9,976,747	-

(b) Share incentive plans and performance shares

The terms and conditions attaching to each of the ongoing arrangements are set out in the table below and are based on the weighted average number of awards.

Arrangement	Share incentive plans 2008	Share incentive plans 2007	Share incentive plans 2006	Performance shares 2008	Performance shares 2007
Nature of arrangement	Grant of shares	Grant of Shares	Grant of Shares	-	Grant of shares
Date of Grant	Monthly	Monthly	Monthly	-	19 February 2008
Number of instruments granted	685,909*	521,837*	126,383*	-	1,082,950
Share price at date of grant	230p	296p	291p	-	209p
Vesting conditions	3 year service period	3 year service period	3 year service period	-	-
Settlement	Shares	Shares	Shares	-	Shares
Expected departures (grant date)	None at grant date. Leavers accounted for on departure	None at grant date. Leavers accounted for on departure	None at grant date. Leavers accounted for on departure	-	-
Expected outcome of meeting performance criteria (at the grant date)	At grant date all awards expected to vest	At grant date all awards expected to vest	At grant date all awards expected to vest	-	-
Fair value per granted instrument determined at the grant date	230p	296p	291p	-	209p

*Included in the number of instruments granted are 94,910 (2007: 65,770; 2006: 13,880) rights to shares granted to eligible employees in Canada, Germany and Austria.

The amounts recognised as an expense in Note 6 for share-based payment transactions with employees are as follows:

	2008	2007
	£m	£m
Share options granted under long-term incentive plans	7	7
Matching shares granted under share incentive plans	1	-
Shares granted as annual performance awards	-	2
	8	9

44. Related party transactions

(a) Transactions with/from and balances from/(to) related parties

In the normal course of business, the Group enters into transactions with related parties that relate to insurance, banking and investment management business. Such related party transactions are at arms length.

Transactions with related parties carried out by the Group during the year were as follows:

	2008	2007
	£m	£m
Sale to:
Associates	17,022	11,233
Joint ventures	3	96
	17,025	11,329
Purchase from:
Associates	17,095	11,764
Joint ventures	62	158
	17,157	11,922

Transactions with associates shown above relate primarily to the sales and purchase of holdings in investment funds managed by the Group.

The year end balances with related parties arising from transactions carried out by the Group with related parties are as follows:

	2008	2007
	£m	£m
Due from related parties:
Associates	2	-
Joint ventures	88	77
	90	77

In addition to the amounts shown above, the Group's defined benefit pension schemes have assets of £340m (2007: £192m) invested in investment vehicles managed by the Group.

(b) Compensation of key management personnel

Key management personnel, comprising 19 people (2007: 18 people) within the Group, including all Directors, both executive and non-executive and the direct reports of the position of Group Chief Executive. Detailed disclosures of Directors' remuneration for the year and transactions in which the Directors are interested are contained within the audited section of the Directors' remuneration report on pages x to x.

The summary of compensation of key management personnel is as follows:

	2008	2007
	£m	£m
Salaries and other short-term employee benefits	8	8
Post-employment benefits	2	1
Other long-term benefits	-	1
Termination benefits	1	1
Share-based payments	3	2
Total compensation of key management personnel	14	13

The detailed disclosures of transactions incurred by the Group with key management personnel during the year and year end balances arising from such transactions are contained within the audited section of the Directors' remuneration report on pages x to x.

All transactions between the key management and the Group during the year are on commercial terms which are equivalent to those available to all employees of the Group.

During the year to 31 December 2008, the key management personnel contributed £0.5m (2007: £1.2m) to products sold by the Group.

45. Fair value of financial assets and liabilities

(a) Methods used to determine fair value

The dislocation in the global financial markets during 2008 has had a significant impact on the value of the Group's assets shown by the investment losses recognised during the year (see Note 2) and corresponding impact on the liabilities (see Note 30).

The accounting policies in relation to the Group's financial assets and liabilities measured at fair value are set out in accounting policies (l) and (q)(i). Further information on the methods used to determine fair values for each major category of financial instrument measured at fair value and for properties is given below.

Investment securities

Listed equity securities - 2008: £38,360m (2007: £53,149m)

Equity instruments listed on a recognised exchange are generally considered to be quoted in an active market. These instruments are valued using prices sourced from the primary exchange on which they are listed.

Unlisted equity securities - 2008: £1,389m (2007: £1,348m)

A valuation technique is used for these instruments. The Group's exposure to unlisted equity securities primarily relates to private equity investments. The majority of the Group's private equity investments are carried out through European fund of funds structures, where the Group receives valuations from the investment managers of the underlying funds. The valuation of these investments is based on European Venture Capital Association Guidelines, including price/earnings ratio based valuations. These valuations are reviewed and where appropriate adjustments are made to reflect the impact of changes in market conditions between the date of the valuation and the end of the reporting period. The valuation of these securities is largely based on unobservable market data. Where appropriate, reference is made to observable market data.

Debt securities - 2008: £50,967m (2007: £47,807m)

For debt securities the Group has determined a hierarchy of pricing sources. The hierarchy consists of reputable third party pricing providers who use observable market data. If prices are not available from these providers or are considered to be stale, the Group has established procedures to arrive at an internal assessment of the fair value. A further analysis by category of debt security is given below. These procedures are based largely on unobservable market data.

Government and supranational institution bonds

These instruments are generally considered to be quoted in an active market. The prices received from third party pricing providers are considered to represent actual and regularly occurring market transactions.

Corporate bonds (listed or in an established Over The Counter (OTC) market including asset backed securities)

Prices received from third party pricing providers generally consolidate quotes received from a panel of banks into a composite price. As the market becomes less active the quotes provided by some banks may be based on modelled prices rather than on actual transactions. These sources are based largely on observable market data.

For instruments for which prices are either not available from third party pricing providers or the prices provided are considered to be stale, the Group performs its own assessment of the fair value of these instruments. This assessment is largely based on unobservable market data.

Other corporate bonds (unquoted bonds, commercial paper (CP), certificates of deposit (CDs))

These instruments are valued using models. For CP and CDs the model inputs comprise observable market data (such as yield curves). For unquoted bonds the model includes credit spreads which are obtained from brokers or estimated internally.

Derivative instruments

Derivative financial assets - 2008: £2,800m (2007: £520m) and derivative financial liabilities - 2008 £1,348m (2007: £642m)

Exchange traded futures and options are considered to be instruments quoted in an active market. They are valued using prices sourced from the relevant exchange.

The majority of the Group's derivatives are valued using valuation techniques based on observable market data. The measurement of credit default swaps requires the estimation of recovery rates on any defaulted bond.

Properties

Investment properties - 2008: £7,738m (2007: £10,646m), owner occupied property and property under development - 2008: £700m (2007: £837m)

For properties located in the UK and Europe all property valuations are provided by independent qualified professional valuers at 31 December or as at a date that is not more than three months before 31 December. The valuations are prepared in accordance with Royal Institution of Chartered Surveyors valuation standards. The valuation techniques used rely in large part on comparable market transactions. However, in the current difficult market conditions, many valuers are of the opinion that abnormal market conditions currently prevail and there is likely to be a greater than usual degree of uncertainty in respect of property valuations reported at 31 December 2008. Until the number and consistency of comparable transactions increases, this situation is likely to continue. Where valuations have been undertaken at dates prior to the end of the reporting period adjustments are made where appropriate to reflect the impact of changes in market conditions between the date of these valuations and the end of the reporting period.

Properties in Canada are independently valued once each year with 25% of the portfolio (by value) being independently valued each quarter. The 75% not independently valued at 31 December are reviewed internally by asset managers. An independent valuation is commissioned for any properties whose value is estimated to have changed by more than a specified limit.

The sensitivity of the value of assets to changes in key assumptions is shown in the market risk sensitivity tables in Note 39 e(iii).

The change in fair value recognised in profit or loss in relation to equity instruments where the fair value has been determined using valuation techniques which are not based on observable market data was a loss of £107m (2007: gain £307m) and that in relation to unquoted bonds is shown in Note 39 f(iv)(i).

(b) Fair value of financial assets and liabilities measured at amortised cost

The table below presents estimated fair values of financial assets and liabilities whose carrying value does not approximate fair value. Fair values of financial assets and financial liabilities are based on market prices where available, or are estimated using other valuation techniques.

		2008	2008
		Carrying value	Fair value
	Notes	£m	£m
Financial assets
Loans secured by mortgages	19	9,012	9,336
Loans secured by mortgages subject to securitisation	19	2,823	2,874

Financial liabilities
Loan notes backing securitisations	33	2,411	2,171
Subordinated guaranteed bonds	34	1,243	960
Subordinated notes	34	285	191
Mutual Assurance Capital Securities	34	676	415
Non-linked investment contracts		9,126	9,418

		2007	2007
		Carrying value	Fair value
	Notes	£m	£m
Financial assets
Loans secured by mortgages	19	7,414	7,532
Loans secured by mortgages subject to securitisation	19	5,515	5,528

Financial liabilities
Loan notes backing securitisations	33	3,983	3,897
Subordinated guaranteed bonds	34	1,063	1,080
Subordinated notes	34	257	257
Mutual Assurance Capital Securities	34	588	563
Non-linked investment contracts		8,907	9,045

The estimated fair values are calculated by discounting the expected future cash flows at current market rates with the exception of subordinated liabilities, which are based on the quoted market offer price.

It is not possible to reliably calculate the fair value of participating investment contract liabilities. The assumptions and methods used in the calculation of these liabilities are set out in the accounting policies and Note 29. The carrying value of investment contract liabilities at 31 December 2008 was £67,947m (2007: £76,253m).

The estimated fair value of deposits with no stated maturity, which includes non-interest bearing deposits, is the amount repayable on demand. The estimated fair value of fixed interest bearing deposits and other borrowing without quoted market price is based on discounted cash flows using interest rates for new debts with similar remaining maturity.

The carrying value of all other financial assets and liabilities approximates their fair value.

46. Capital statement

Capital management policies and risk management objectives

Capital can be measured on a number of different bases, which are set out in the Business Review Section 1.7 - Capital and cash generation. The capital statement shows capital based on definitions used for regulatory reporting purposes.

Managing capital is the ongoing process of determining and maintaining the quantity and quality of capital appropriate for the Group, and ensuring capital is deployed in a manner consistent with the expectations of our stakeholders. For these purposes, the Board considers our key stakeholders to be the providers of capital (our equity holders, policyholders and holders of our subordinated liabilities) and the Financial Services Authority (FSA).

There are two primary objectives of capital management within the Group. The first objective is to ensure that capital is, and will continue to be, adequate to maintain the required level of safety and stability of the Group and hence to provide an appropriate degree of security to our stakeholders - this aspect is measured by the Group's regulatory solvency position. The second objective is to create shareholder value by driving profit attributable to equity holders, principally measured by the Group's European Embedded Value.

The capital management policy forms one pillar of the Group's overall management framework. Most notably, it operates alongside, and complements, the strategic investment policy and the Group risk policy. By integrating policies in this way, the Group is working towards a capital management framework that robustly links the process of capital allocation, value creation and risk management.

The capital requirements of each business unit are routinely forecast on a periodic basis, and the requirements are assessed against both forecast available capital and local regulatory capital requirements. In addition, internal rates of return achieved on capital invested are assessed against hurdle rates, which are intended to represent the minimum acceptable return given the risks associated with each investment. The capital planning process is the responsibility of the Group Finance Director. Capital plans are ultimately subject to approval by the Board.

The formal procedures for identifying and assessing risks that could affect the capital position of the Group are described in the risk management policies set out in Note 39.

Regulatory capital

The Group operates in a number of geographical regions, and local regulators, primarily the FSA, specify rules and guidance for the minimum level of capital required to meet local requirements. The Group has not breached any regulatory capital requirements at any time during the year.

The FSA requires all insurance companies and financial conglomerates to maintain capital resources in excess of their capital resources requirement (CRR). Capital resources include the assets in excess of liabilities, valued on a regulatory basis, and certain other components of capital. Certain items that are classified as liabilities under IAS 32 Financial Instruments: Disclosure and Presentation are treated as capital under the regulatory basis. For the Group this applies to its subordinated guaranteed bonds, subordinated notes and mutual assurance capital securities. The CRR represents the total of the individual capital resources requirements (ICRR) of each regulated company in the Group.

In addition to the requirement to maintain capital resources in excess of its CRR, the FSA requires that each regulated company in the Group identifies the major risks it faces and, if appropriate, quantifies the amount and type of capital it believes is appropriate to mitigate those risks. This individual capital assessment (ICA) reflects each company's view of the adequacy of its capital resources.

There are many factors which affect the Group's capital resources. The determination of the liabilities includes various assumptions including potential changes in market conditions and the actions management might take as a result of those changes. Changes in market conditions and other variables have the potential to significantly affect the capital position. Poor investment returns could depress capital resources, but this could be mitigated by changing the asset portfolio and by the level of bonuses declared. Future annuitant mortality could be significantly different from that assumed in the calculation of the liabilities. European Union developments on solvency requirements could also have a significant impact on the future capital position.

Capital structure

The Group is classified as a financial conglomerate by the FSA by virtue of its significant regulated activities including insurance, investment management and banking operations. The largest regulated entity within the Group is Standard Life Assurance Limited (SLAL), which undertakes life assurance and pension business principally in the UK, Ireland and Germany.

The majority of life assurance and pensions business undertaken by UK regulated entities is written within long-term business funds within each regulated company. These long-term business funds are distinct from the equity holders' funds. Business written prior to demutualisation, and the increments to that business, are written in the Heritage With Profits Fund (HWPF). Business written after demutualisation is written in the other long-term business funds, principally the Proprietary Business Funds (PBF).

The HWPF's capital resources of £2,974m at 31 December 2008 (2007: £6,157m) and future surplus arising can be used to provide support for the HWPF, enhance payments to with profits policyholders or, in relation to the recourse cash flows (as explained in accounting policy (v)), transfer defined amounts out of the fund to accrue to the benefit of equity holders. Additional restrictions are placed on the HWPF by the Scheme of Demutualisation (the Scheme), which provides that the recourse cash flows will be subject to a solvency test which prevents transfers of the recourse cash flows if, as a result of the transfer, the HWPF would have a realistic deficit or would have a regulatory surplus below the level which the board of SLAL considers necessary to declare bonuses, in accordance with reasonable benefit expectations of with profits policyholders, without creating a regulatory deficit.

Any surplus within the PBF is attributable to equity holders. Capital within the PBF may be made available to meet requirements elsewhere in the Group subject to meeting the regulatory requirements of the fund and any further restrictions imposed by the Scheme.

Capital statement

The Group's capital position is analysed between UK regulated life business, overseas life operations and other activities. The UK regulated life business is analysed by the nature of the underlying funds and includes German and Irish business written by branches of UK regulated companies. Other activities comprise investment management, general insurance and Group Corporate Centre. Standard Life Bank plc is a subsidiary of SLAL and therefore its capital resources are included within life business shareholders' funds. The Group's capital position, based on draft regulatory returns, is set out below:

	UK regulated life business
	Heritage With Profits Fund*	Proprietary business funds	Life business shareholders' funds	Total UK regulated life business	Overseas life operations	Total life business	Other activities	Group total
2008	£m	£m	£m	£m	£m	£m	£m	£m
Available capital resources

Shareholders' funds
Held outside life assurance funds	-	-	1,034	1,034	1,075	2,109	652	2,761
Held within life assurance funds	-	646	-	646	-	646	-	646

Equity attributable to ordinary equity holders of Standard Life plc	-	646	1,034	1,680	1,075	2,755	652	3,407

Unallocated divisible surplus	864	-	-	864	-	864	-	864

Other qualifying capital
Subordinated liabilities	-	-	266	266	-	266	1,938	2,204
Internal subordinated liabilities	-	-	2,000	2,000	225	2,225	(2,225)	-
	-	-	2,266	2,266	225	2,491	(287)	2,204

Adjustments onto regulatory basis
Changes to the valuation of contract liabilities	2,198	19	-	2,217	15	2,232	-	2,232
Exclusion of deferred acquisition costs and other inadmissible assets	(162)	(511)	(517)	(1,190)	(52)	(1,242)	(64)	(1,306)
Exclusion of deferred income	154	199	-	353	2	355	-	355
Changes to the valuation of other assets and liabilities	(78)	(86)	(27)	(191)	(77)	(268)	257	(11)
	2,112	(379)	(544)	1,189	(112)	1,077	193	1,270

Total available capital resources to meet regulatory requirement	2,976	267	2,756	5,999	1,188	7,187	558	7,745

Analysed as follows:
Capital not subject to constraints	-	-	2,380	2,380	436	2,816	424	3,240
Capital subject to constraints	2,976	267	376	3,619	752	4,371	134	4,505

Total available capital resources	2,976	267	2,756	5,999	1,188	7,187	558	7,745

Regulatory capital requirement				2,186	685	2,871	83	2,954

Analysis of contract liabilities

Participating
Insurance contracts	17,087	-	-	17,087	538	17,625	-	17,625
Investment contracts	15,669	-	-	15,669	5	15,674	-	15,674

Total participating contract liabilities	32,756	-	-	32,756	543	33,299	-	33,299

Unit linked
Insurance contracts	1,141	22	-	1,163	1,142	2,305	-	2,305
Investment contracts	29,784	13,335	-	43,119	6,684	49,803	-	49,803

Total unit linked liabilities	30,925	13,357	-	44,282	7,826	52,108	-	52,108

Other non-participating
Insurance contracts	10,549	1,725	-	12,274	4,893	17,167	163	17,330
Investment contracts	19	290	-	309	2,161	2,470	-	2,470

Total other non-participating liabilities	10,568	2,015	-	12,583	7,054	19,637	163	19,800

Total contract liabilities	74,249	15,372	-	89,621	15,423	105,044	163	105,207

* Capital resources amounting to £2m (2007: £1m) in respect of other with profits funds are disclosed within the Heritage With Profits Fund column shown above.

Participating contract liabilities amounting to £238m (2007: £115m) relating to the new with profits funds created at demutualisation are disclosed within the Heritage With Profits Fund column.

	UK regulated life business
	Heritage With Profits Fund*	Proprietary business funds	Life business shareholders' funds	Total UK regulated life business	Overseas life operations	Total life business	Other activities	Group total
2007	£m	£m	£m	£m	£m	£m	£m	£m
Available capital resources

Shareholders' funds
Held outside life assurance funds	-	-	1,479	1,479	1,017	2,496	555	3,051
Held within life assurance funds	-	231	-	231	-	231	-	231

Equity attributable to ordinary equity holders of Standard Life plc	-	231	1,479	1,710	1,017	2,727	555	3,282

Unallocated divisible surplus	951	-	-	951	-	951	-	951

Other qualifying capital
Subordinated liabilities	-	-	265	265	-	265	1,643	1,908
Internal subordinated liabilities	-	-	1,651	1,651	204	1,855	(1,855)	-
	-	-	1,916	1,916	204	2,120	(212)	1,908

Adjustments onto regulatory basis
Changes to the valuation of contract liabilities	5,228	39	-	5,267	(99)	5,168	-	5,168
Exclusion of deferred acquisition costs and other inadmissible assets	(180)	(432)	(275)	(887)	(56)	(943)	(21)	(964)
Exclusion of deferred income	173	140	-	313	-	313	-	313
Changes to the valuation of other assets and liabilities	(14)	76	(73)	(11)	83	72	233	305
	5,207	(177)	(348)	4,682	(72)	4,610	212	4,822

Total available capital resources to meet regulatory requirement	6,158	54	3,047	9,259	1,149	10,408	555	10,963

Analysed as follows:
Capital not subject to constraints	-	-	2,670	2,670	579	3,249	439	3,688
Capital subject to constraints	6,158	54	377	6,589	570	7,159	116	7,275

Total available capital resources	6,158	54	3,047	9,259	1,149	10,408	555	10,963

Regulatory capital requirement				4,872	580	5,452	82	5,534

Analysis of contract liabilities

Participating
Insurance contracts	18,919	-	-	18,919	527	19,446	-	19,446
Investment contracts	17,486	-	-	17,486	5	17,491	-	17,491

Total participating contract liabilities	36,405	-	-	36,405	532	36,937	-	36,937

Unit linked
Insurance contracts	1,522	15	-	1,537	1,352	2,889	-	2,889
Investment contracts	38,636	11,125	-	49,761	6,732	56,493	-	56,493

Total unit linked liabilities	40,158	11,140	-	51,298	8,084	59,382	-	59,382

Other non-participating
Insurance contracts	12,302	1,266	-	13,568	4,349	17,917	174	18,091
Investment contracts	51	289	-	340	1,929	2,269	-	2,269

Total other non-participating liabilities	12,353	1,555	-	13,908	6,278	20,186	174	20,360

Total contract liabilities	88,916	12,695	-	101,611	14,894	116,505	174	116,679

Capital resources amounting to £2m (2007: £1m) in respect of other with profits funds are disclosed within the Heritage With Profits Fund column shown above.

Participating contract liabilities amounting to £238m (2007: £115m) relating to the new with profits funds created at demutualisation are disclosed within the Heritage With Profits Fund column.

46. Capital statement continued

UK regulated life business

SLAL's regulatory solvency position is determined using the FSA's 'twin peaks' approach, which requires liabilities to be valued on both a realistic and a regulatory basis. The realistic basis removes some of the margins for prudence included in calculations under the regulatory basis. However, it requires discretionary benefits that are not considered under the regulatory basis, such as final bonuses, to be valued. The extent to which the realistic peak is more onerous than the regulatory peak, increases the amount of the CRR.

Based on draft regulatory returns at 31 December 2008, SLAL had available capital resources of £6.0bn (2007: £9.3bn) and a CRR of £2.2bn (2007: £4.9bn). The capital resources shown in the capital statement are based on the value of assets and liabilities valued on a regulatory basis, however, the CRR reflects the higher value required as a result of the application of the realistic peak.

Capital subject to constraints for the UK regulated life business of £3.6bn at 31 December 2008 (2007: £6.6bn) represents capital resources held within long-term business funds, or, in relation to other regulated entities, the amount of the CRR.

Standard Life Bank is owned by SLAL and therefore its capital resources are included within life business shareholders' funds. Standard Life Bank's capital resources of £541m (2007: £489m) exceed its CRR of £358m (2007: £363m) by £183m (2007: £126m), and the excess can therefore be used to meet the requirements of the life assurance business.

Overseas life operations

Capital resources of £1,188m (2007: £1,149m) which relate mainly to operations in Canada, also include operations in the Asia Pacific region. The capital resources of the Canadian operations are based on local Generally Accepted Accounting Principles (GAAP) financial statements adjusted where necessary to reflect the fair value of assets with a corresponding adjustment to liabilities. The Canadian regulator sets the minimum required capital. It also requires certain assets to be held in trust to increase policyholder protection (vested assets). As a result of the combination of the capital requirement and vested assets, the overseas life capital subject to constraints amounted to £752m at 31 December 2008 (2007: £570m).

Other activities

At 31 December 2008, capital resources of £558m (2007: £555m) and capital subject to constraints of £134m (2007: £116m) relate to the Group's healthcare, investment management businesses and Group Corporate Centre activities.

Intra-group transactions

The Group, through subsidiaries and joint ventures, provides insurance and other financial services in the UK, Canada, India and China and also through branches, provides such services in Ireland and Germany. With the exception of the requirements of the Scheme and the intra-group subordinated debt referred to below and the capital support mechanisms, there are no formal arrangements to provide capital to particular funds or business units. Any allocations of capital would need to be approved on a case-by-case basis by the Board.

SLAL has issued subordinated loans to the Company, which SLAL treats as capital for regulatory purposes. The Standard Life Assurance Company of Canada and Standard Life Investments Limited have issued subordinated debt of £225m (2007: £204m) and £45m (2007: £15m) respectively, to the Company. These amounts of subordinated debt are included within the capital resources of those businesses, but at Group level only subordinated debt issued to external parties is included in the Group's capital resources.

Group capital requirement

The Group must also calculate a group solvency position under the Financial Groups Directive (FGD). The FGD calculation is a very prudent aggregate value for the Group's capital resources, because capital held within the long-term business funds of approximately £3.2bn (2007: £6.2bn) is restricted to the level of the CRR of those funds of approximately £1.7bn (2007: £4.4bn). Therefore, the Group recognises no net surplus in respect of capital within the long-term business funds.

The estimated FGD position at 31 December 2008 is shown in the Business review Section 1.7 - Capital and cash generation.

Contract liabilities

The process used to determine the assumptions that have the greatest effect on the measurement of contract liabilities (including options and guarantees), the quantified disclosure of those assumptions, and the terms and conditions of options and guarantees relating to life assurance contracts that could in aggregate have a material effect on future cash flows are disclosed in Note 29 and Note 30.

The sensitivity of contract liabilities to changes in market conditions, key assumptions and other variables, and assumptions about management actions in response to changes in market conditions, are disclosed in Note 39.

Movements in capital

The movements in the total capital resources shown in the capital statement are set out below.

	UK regulated life business
	Heritage With Profits Fund	Proprietary business funds	Life business shareholders' funds	Total UK regulated life business	Overseas life operations	Total life business	Other activities	Group total
2008	£m	£m	£m	£m	£m	£m	£m	£m
At 1 January 2008	6,158	54	3,047	9,259	1,149	10,408	555	10,963

Annuity reinsurance impact	108	105	-	213	-	213	-	213
Methodology/modelling changes	120	18	-	138	15	153	-	153
Change in assumptions used to measure life assurance contract liabilities and experience differences	81	26	-	107	(55)	52	-	52
Change in regulatory requirements	-	-	-	-	15	15	-	15
New business	(46)	(182)	-	(228)	(9)	(237)	-	(237)
Investment surplus	(2,374)	74	(165)	(2,465)	43	(2,422)	-	(2,422)
Shareholder/inter-fund transfers	(406)	377	29	-	26	26	(26)	-
Dividend transfers	-	-	(400)	(400)	(40)	(440)	183	(257)
Other factors	(665)	(205)	245	(625)	44	(581)	(154)	(735)

At 31 December 2008	2,976	267	2,756	5,999	1,188	7,187	558	7,745

	UK regulated life business
	Heritage With Profits Fund	Proprietary business funds	Life business shareholders' funds	Total UK regulated life business	Overseas life operations	Total life business	Other activities	Group total
2007	£m	£m	£m	£m	£m	£m	£m	£m
At 1 January 2007	5,881	99	2,825	8,805	780	9,585	658	10,243

Methodology/modelling changes	137	(6)	-	131	111	242	-	242
Change in assumptions used to measure life assurance contract liabilities and experience differences	331	(88)	-	243	2	245	-	245
Change in regulatory requirements	138	5	-	143	-	143	-	143
New business	(47)	(224)	-	(271)	(46)	(317)	-	(317)
Investment surplus	848	50	(93)	805	44	849	-	849
Shareholder/inter-fund transfers	(733)	268	465	-	74	74	(74)	-
Dividend transfers	-	-	(100)	(100)	(63)	(163)	(34)	(197)
Other factors	(397)	(50)	(50)	(497)	247	(250)	5	(245)

At 31 December 2007	6,158	54	3,047	9,259	1,149	10,408	555	10,963

The investment surplus arises from changes in market conditions, and reflects the total returns earned on the assets compared with the valuation interest rates previously assumed. It also reflects the consequent change in liabilities as a result of the change in the yield currently available on the assets and therefore the current valuation interest rates.

Changes in assumptions used to measure contract liabilities have not had a significant impact on capital resources.

Shareholder/inter-fund transfers include the transfer of £367m (2007: £674m) from the HWPF to the Shareholder Fund in respect of the recourse cash flows for UK and Ireland and £39m (2007: £59m) to the PBF in relation to additional expenses charged on German unitised with profits business. In addition, £338m (2007: £209m) was transferred from the Shareholder Fund to the PBF.

47. Business combinations

On 10 October 2008 the Group made an unconditional offer to acquire 100% of the issued share capital of Vebnet (Holdings) plc (Vebnet). Vebnet is a well established provider of technology and managed services related to reward and flexible benefit programmes.

Vebnet contributed revenues of £2m and net profit of £nil to the Group for the period from 10 October 2008 to 31 December 2008. If the acquisition had occurred on 1 January 2008, Vebnet would have contributed £6m to revenues and £1m to net profit of the Group for the year to 31 December 2008. These amounts have been calculated using the Group's accounting policies.

		2008
		£m
Purchase consideration
Cash paid		26
Direct costs relating to the acquisition		1
Total purchase consideration		27
Fair value of net assets acquired		(8)
Goodwill		19

Details of the net assets acquired and goodwill were as follows:

The goodwill is attributable to the workforce of the acquired business, its growth prospects as well as the significant synergies expected to arise as a result of the acquisition.

	Fair value	Vebnet's carrying amount
	£m	£m
Assets
Intangible assets	7	1
Other assets	2	2
Cash and cash equivalents	3	3
	12	6
Liabilities
Other creditors	2	2
Deferred tax liabilities	2	-
	4	2

Net assets acquired	8	4

Purchase consideration settled in cash		27
Cash and cash equivalents in subsidiary acquired		(3)
Cash outflow on acquisition		24

The assets and liabilities as of 10 October 2008 were as follows:

There were no acquisitions in the year ended 31 December 2007.

48. Investments in subsidiaries

The following are particulars of the Company's principal subsidiaries which are unlisted entities except where indicated:

Name of subsidiary	Country of incorporation or residence	% of interest held	Nature of business
Standard Life Assurance Limited	Scotland	100	Life assurance
Standard Life Investment Funds Limited	Scotland	100	Life assurance
Standard Life Bank plc	Scotland	100	Banking
Standard Life Healthcare Limited	England	100	Health insurance
Standard Life Investment Holdings Limited	Scotland	100	Holding company
Standard Life Investments Limited	Scotland	100	Investment management
Standard Life (Mauritius Holdings) 2006 Limited	Mauritius	100	Holding company
Standard Life Oversea Holdings Limited	Scotland	100	Holding company
Standard Life Employee Services Limited	Scotland	100	Employee support services
Standard Life Lifetime Mortgages Limited	Scotland	100	Mortgage finance
Standard Life Pension Funds Limited	Scotland	100	Life assurance
Standard Life Savings Limited	Scotland	100	Investment management
Standard Life European Private Equity Trust PLC *	Scotland	51	Investment trust
The Standard Life Assurance Company 2006* ***	Scotland	100	Life assurance
Standard Life International Limited	Ireland	100	Life assurance
The Standard Life Assurance Company of Canada	Canada	100	Life assurance
Standard Life Client Management Limited	Scotland	100	Direct sales
Standard Life Wealth Limited	Scotland	100	Investment management
Vebnet (Holdings) plc***	England	100	Holding company

*The Standard Life Assurance Company 2006 (formerly named The Standard Life Assurance Company) is a sole member company with Standard Life Assurance Limited being the sole member.

**Indicates listed entity.

***Indicates the entity has had a different reporting date to the Group but has been consolidated consistently at 31 December.

In certain circumstances, the Group sponsors the formation of special purpose entities primarily for the purpose of securitisation of assets for raising finance. The Group consolidates special purpose entities when the substance of the relationship is that it controls or has the power to control the entity. In assessing and determining of the Group controls such special purpose entities, judgement is made about the Group's exposure to the risks, benefits and ability to control the operating and financial decisions of the entity.

49. Event after the balance sheet date

On 13 October 2008 the UK Government announced the details of the 2008 Credit Guarantee Scheme for UK incorporated banks and building societies debt issuance. The Credit Guarantee Scheme forms part of the Government's measures to ensure the stability of the financial system. The Credit Guarantee Scheme provides for HM Treasury to guarantee specific bank and building society debt instruments issued during the period beginning from the announcement of the Credit Guarantee Scheme and ending on 31 December 2009. Debt instruments which are guaranteed under the Credit Guarantee Scheme are required to have a maturity not exceeding three years. Standard Life Bank has applied and become an eligible institution under the Credit Guarantee Scheme. On 11 February 2009 Standard Life Bank launched its Euro Medium Term Note programme under which it can issue debt, including debt covered by the Credit Guarantee Scheme. On 18 February 2009 the Group issued £500m of debt under the Credit Guarantee Scheme, maturing on 25 February 2011, for use in ongoing funding and liquidity management.