Annual Financial Report (Part

RNS Number : 0683Q

Standard Life plc

07 April 2009

 



Standard Life plc

Annual Report

and Accounts

2008

PART 6 OF 6

Independent auditors' report to the Directors of Standard Life plc on the supplementary financial statements

We have audited the supplementary financial statements of Standard Life plc for the year ended 31 December 2008 that comprise the European Embedded Value (EEV) consolidated income statement, the EEV consolidated balance sheet, the EEV consolidated statement of recognised income and expense and the relevant notes 1 to 16 which have been prepared in accordance with the EEV basis set out on pages 247 to 248 and on pages 272 to 277 and which should be read in conjunction with the audited consolidated financial statements prepared on an International Financial Reporting Standards (IFRS) basis.

Respective responsibilities of Directors and auditors 

The Directors are responsible for preparing the supplementary financial statements on the EEV basis in accordance with the EEV basis set out in notes 1 and 16. Our responsibilities as independent auditors in relation to the supplementary financial statements are as set out in our letter of engagement dated 21 July 2008, to report to you our opinion as to whether the supplementary financial statements have been properly prepared, in all material respects, in accordance with the EEV basis. We also report to you if we have not received all the information and explanations we require for our audit of the supplementary financial statements. This report, including the opinion, has been prepared for and only for the Company's Directors as a body in accordance with our letter of engagement dated 21 July 2008, and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or in to whose hands it may come save where expressly agreed by our prior consent in writing.

Basis of opinion 

We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. Our audit included examination, on a test basis, of evidence relevant to the amounts and disclosures in the supplementary financial statements. This evidence included an assessment of the significant estimates and judgments made by the Directors in the preparation of the supplementary financial statements, and of whether the accounting policies are appropriate to the Group's circumstances, consistently applied and adequately disclosed. 

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the supplementary financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion, we also evaluated the overall adequacy of the presentation of information in the supplementary financial statements. 

Opinion 

In our opinion, the supplementary financial statements for the year ended 31 December 2008 have been properly prepared in all material respects in accordance with the EEV basis set out on pages 247 to 248 and on pages 272 to 277.

PricewaterhouseCoopers LLP

Chartered Accountants

Edinburgh

12 March 2009 

-	The maintenance and integrity of the Standard Life website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the supplementary financial statements since they were initially presented on the website.
-	Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

EEV consolidated income statement

For the year ended 31 December 2008

		2008	2007
	Notes	£m	£m
Covered business
UK		657	606
Canada		215	178
Europe		69	26
Asia Pacific		(35)	(12)
HWPF TVOG		11	42
Covered business operating profit	2(a)	917	840
Investment management1	6(b)	48	48
Banking		26	32
Healthcare		11	13
Group Corporate Centre costs		(50)	(57)
Other	6(c)	(19)	5
Non-covered business operating profit		16	41
Operating profit before tax		933	881
Non-operating items
Long-term investment return and tax variances		(849)	(17)
Effect of economic assumption changes		48	27
Restructuring and corporate transaction expenses2		(72)	(31)
Volatility arising on different asset and liability valuation bases		(109)	(39)
Other non-operating items		(51)	17
Consolidation adjustment for different accounting bases3		(58)	-
(Loss)/profit before tax		(158)	838
Attributed tax		24	(251)
(Loss)/profit after tax		(134)	587

1 Investment management operating profit before tax is stated after excluding profits of £45m (2007: £35m) which have been generated by life and pensions business. 

2  Refer to IFRS financial information Note 8 - Restructuring and corporate transaction expenses. 

3  This adjustment reflects the removal of accounting differences for the Canadian subordinated liability as explained in Note 1 - Basis of preparation. 

EEV earnings per share (EPS)

For the year ended 31 December 2008

		2008	2007
EEV operating profit after tax attributable to equity holders of Standard Life plc (£m)1		649	617
Basic EPS (pence)		29.8	28.9
Weighted average number of ordinary shares in issue (millions)		2,176	2,138
Diluted EPS (pence)		29.8	28.3
Weighted average number of ordinary shares on a diluted basis (millions)2		2,180	2,177

1 EEV operating profit before tax of £933m (2007: £881m) less attributed tax on operating profit of £284m (2007: £264m).

2 Includes the full dilutive effect of bonus shares committed to at the time of the demutualisation of The Standard Life Assurance Company (SLAC) and the flotation of Standard Life plc and share awards and share options.

EEV consolidated statement of recognised income and expense 

For the year ended 31 December 2008

		2008	2007
	Notes	£m	£m
Fair value losses on cash flow hedges1		(38)	(6)
Actuarial gains/(losses) on defined benefit pension schemes1		161	(3)
Exchange differences on translating foreign operations2		323	191
Aggregate tax effect of items not recognised in income statement1		(42)	(1)
Net investment hedge1		(17)	-
Other		(3)	6
Net income not recognised in income statement		384	187
(Loss)/profit after tax		(134)	587
Total recognised income for the period attributable to equity holders	7	250	774

1 Consistent with the IFRS consolidated statement of recognised income and expenses for the year ended 31 December 2008.

2 Exchange differences primarily relate to Canada: £154m and Europe: £110m.

EEV consolidated balance sheet

As at 31 December 2008

		31 December 2008	31 December 2007
	Notes	£m	£m
Covered business
Free surplus		1,235	1,237
Required capital		844	680
Net worth		2,079	1,917
Present value of in-force		3,345	3,639
Cost of required capital		(292)	(312)
Total embedded value of covered business	2(c)	5,132	5,244
Non-covered business
Investment management		143	142
Banking		211	303
Healthcare		100	95
Group Corporate Centre		417	513
Other		307	49
UK pension scheme deficit		(23)	(135)
Total net assets of non-covered business	6(a)	1,155	967
Consolidation adjustment for different accounting bases2		(42)	-
Total Group embedded value	7	6,245	6,211
Equity
Share capital		218	217
Share premium reserve		792	792
Other reserves		1,623	1,497
Retained earnings on an IFRS basis		774	776
Additional retained earnings on an EEV basis		2,838	2,929
Total equity1		6,245	6,211

1 Embedded value equity per share is 286p as at 31 December 2008 compared to 285p as at 31 December 2007 based on diluted share totals of 2,180m as at 31 December 2008 and 2,177m as at 31 December 2007.

2 This adjustment reflects the removal of accounting differences for the Canadian subordinated liability as explained in Note 1 - Basis of preparation. 

Approved on behalf of the Board of Directors on 12 March 2009 by the following Directors:

Gerry Grimstone, Chairman                    David Nish, Group Finance Director

Notes to the EEV financial information

1.    Basis of preparation

The European Embedded Value (EEV) basis results have been prepared in accordance with the EEV Principles and Guidance issued in May 2004 by the CFO Forum of European Insurance Companies and the Additional Guidance issued in October 2005. EEV reports the value of business in-force based on a set of best estimate assumptions, allowing for the impact of uncertainty inherent in future assumptions, the cost of holding required capital and the value of free surplus. The total profit recognised over the lifetime of a policy is the same as under International Financial Reporting Standards (IFRS), but the timing of recognition of profits is different.

EEV includes the net assets of the businesses that are owned by equity holders of Standard Life plc plus the present value of future profits expected to arise from in-force long-term insurance policies (PVIF) where these future profits are attributable to equity holders under the Scheme of Demutualisation (the Scheme) or from sales of new business since 10 July 2006.

The opening and closing EEV numbers, and therefore the profit arising in the period, for the covered business are determined on an after tax basis. The tax assumptions are based upon the best estimate of the actual tax expected to arise. Profit before tax is derived by grossing up profit after tax at the long-term rate of corporation tax appropriate to each territory. While for some territories this rate does not equate to the actual effective rate of tax used in the calculation of after tax profits, it provides a consistent grossing up basis upon which to compare results from one year to another and is in line with the Group's expectation of the rate of tax applicable to business sold after demutualisation.

A detailed description of EEV methodology is provided in Note 16. There have been no significant changes to EEV methodology from that adopted in the previous reporting period except as noted below.

Covered business

A detailed description of EEV covered business is provided within the EEV methodology in Note 16.  

Covered business in the 2007 published results was expanded to include certain mutual funds sold in the UK and Canada and are therefore reflected in the comparative results. Covered business has been further expanded in 2008 to include all Sigma mutual funds, previously sold and administered by our Investments business.  

The inclusion of this Sigma mutual funds business within covered business is reflected in the EEV results with an opening adjustment of £32m (£32m for covered business and £nil for non-covered business), capturing the PVIF as at 1 January 2008 within covered business and removing any related intangibles, e.g. deferred acquisition costs, from the opening net assets of non-covered business. The movement in the EEV of those mutual funds is reflected in the covered business EEV movement with changes in net worth transferred back to non-covered business for inclusion in their closing net asset position. No covered business movement for Sigma mutual funds has been included within the comparative results for the 12 months to 31 December 2007. 

Non-covered business

EEV operating profit for the 12 months to 31 December 2008 is defined as IFRS normalised underlying profit.1,2 In 2007 EEV operating profit was defined as IFRS underlying profit.1  For the 12 months to 31 December 2007, IFRS underlying profit and IFRS normalised underlying profit for non-covered business were the same.

Continuous Improvement Programme (CIP)

In March 2007, we announced our aim to reduce underlying costs by a further £100m by 2009.  This cost efficiency target has now been achieved one year early. In 2008, £45m (2007: £9m) of costs associated with progressing this initiative have been incurred in restructuring and corporate transactions.

1 As adjusted for Standard Life Investments look through profits and the return on certain mutual funds which are recognised in covered business.

2 The only difference between IFRS normalised underlying profit and IFRS underlying profit arises within investment management, as described in Note 6(b).

UK annuity reinsurance

On 14 February 2008, Standard Life Assurance Limited entered into a reinsurance treaty with Canada Life International Re in respect of part of its UK immediate annuity liabilities. As a result of this transaction, EEV operating profit before tax increased by £119m. An analysis of this profit is shown in Note 2(a).

Pension Sterling Fund

On 11 February 2009, we announced that we would make immediate payments for the benefit of all customers who invested in the Pension Sterling Fund and had been affected by the 4.8% fall in unit price arising from the valuation adjustment. The effect of the immediate cash injection into the fund has been reflected in the EEV results for the year to 31 December 2008, and results in a pre-tax charge of £108m against EEV operating profit before tax.  

Group EEV consolidation assumptions in respect of Canadian subordinated debt 

Subordinated liabilities within EEV covered business are based on the market value of the debt. The free surplus of covered business shown in Note 2(c) is net of these liabilities.

The market value of the subordinated liability in Canada has reduced over 2008 as a result of significant increases in credit spreads, offset in part from foreign exchange movements. This has produced a covered business pre-tax profit of £58m within the 2008 effect of economic assumption changes shown in Note 2(a) for Canada. This subordinated debt is owned by a non-covered subsidiary of the Group, where the asset is valued on an amortised cost basis. No profit has arisen within the year within non-covered business from changes in the value of this asset. Group EEV profit has been adjusted by £58m pre-tax, £42m post-tax to remove this profit from different accounting bases, as shown on the EEV consolidated income statement.

Total closing Group EEV has also been adjusted to exclude the £42m difference between the market value and the amortised cost value of the Canadian subordinated liability, as shown in the EEV consolidated balance sheet.

There is no restatement of the results for the 12 months to 31 December 2007.

2.    Segmental analysis - covered business

(a)    Segmental EEV income statement

		UK	Canada	Europe	Asia Pacific	HWPF TVOG	Total
12 months to 31 December 2008	Notes	£m	£m	£m	£m	£m	£m
Contribution from new business	3	212	34	18	-	-	264
Contribution from in-force business:
Expected return on existing business		290	109	32	-	-	431
Experience variances	4	13	47	4	-	-	64
Operating assumption changes	5	142	24	18	-	11	195
Development expenses		(33)	(3)	(6)	-	-	(42)
Expected return on free surplus		33	4	3	(35)	-	5
Operating profit/(loss) before tax		657	215	69	(35)	11	917
Investment return and tax variances		(491)	(173)	(55)	-	(130)	(849)
Effect of economic assumption changes		(69)	236	11	-	(130)	48
Restructuring expenses		(34)	(1)	(3)	-	-	(38)
Profit/(loss) before tax		63	277	22	(35)	(249)	78
Attributed tax		(18)	(75)	(7)	1	70	(29)
Profit/(loss) after tax		45	202	15	(34)	(179)	49

	Notes	UK	Canada	Europe	Asia Pacific	HWPF TVOG	Total
12 months to 31 December 2007		£m	£m	£m	£m	£m	£m
Contribution from new business	3	282	37	26	-	-	345
Contribution from in-force business:
Expected return on existing business		288	88	25	-	-	401
Experience variances	4	(116)	31	(5)	-	42	(48)
Operating assumption changes	5	139	21	(12)	-	-	148
Development expenses		(11)	(2)	(9)	-	-	(22)
Expected return on free surplus		24	3	1	(12)	-	16
Operating profit/(loss) before tax		606	178	26	(12)	42	840
Investment return and tax variances		(105)	80	(10)	-	18	(17)
Effect of economic assumption changes		(56)	71	-	-	12	27
Restructuring expenses		(6)	-	-	-	-	(6)
Profit/(loss) before tax		439	329	16	(12)	72	844
Attributed tax		(123)	(92)	(5)	1	(21)	(240)
Profit/(loss) after tax		316	237	11	(11)	51	604

An analysis of profit after tax by territory is provided in Note 9.

Operating profit before tax for covered business is calculated using the expected long-term investment return. Investment variances, the effect of economic assumption changes and other non-operating items are excluded from the operating profit for the period and are reported as part of the total EEV profit.

HWPF TVOG represents the time value of financial options and guarantees (TVOG) arising from the Heritage With Profits Fund (HWPF). Although this fund includes business written by the UK, Germany and Ireland, it is managed at a combined level by the UK financial services business and is shown separately in this analysis. The results for Canada include the cost of the Canadian TVOG, and the results for Europe include the cost of TVOG arising on business written outside of the HWPF in Germany.

The principal effect of determining the pre-tax results using the long-term rate of tax compared to the actual effective rate is to decrease the effect of economic assumption changes by £71m - UK: £69m, Europe: £2m (2007: £67m - UK: £65m, Europe: £2m), arising from the impact of investment related changes in the value of the tax effects that have been assumed to arise as a result of funding HWPF transfers out of unallocated surplus.

The reinsurance of part of the UK immediate annuity liabilities as described in Note 1 has led to an operating profit before tax of £119m. This is included in the segmental EEV income statement within operating assumption changes. The major source of this profit arises from a reduction in the risk of adverse changes in future annuitant mortality experience which was reflected in the UK and Europe HWPF non-market risk margins within the risk discount rates, as described in Note 12. This produced an operating profit before tax of £129m (£117m in UK, £12m in Europe). In addition, a profit of £11m arose from the consequential reduction in HWPF TVOG due to the reduction in the allowance for credit risk and the change in the HWPF working capital. The impact on future margins and solvency costs in the UK was negative £30m, with other UK benefits from the transaction generating £9m of profit.

The increase in the expected return on existing business has been due in part to favourable exchange rate movements, arising from the use of average exchange rates for the reporting period. This accounts for £13m of the £21m increase in Canada, and for £3m of the total £7m increase in Europe.

Effect of economic assumption changes include the effect of changes to risk discount rates of £277m (2007: (£132m)), which are explained in Note 12, and a gain of £22m in 2008 from the impact of changes to the assumed long-term tax rate in Canada. Further comments on the movement in the market value of subordinated liabilities are provided in Note 11. Investment return and tax variances for the UK includes a loss of £73m arising from losses in the contract between UK life and pensions and Standard Life Investments arising from the restructuring of Standard Life Investments (Global Liquidity Funds) plc.

HWPF TVOG shows separate movements in investment variances and economic assumptions whereas in practice economic assumption changes are highly dependent on the same factors that give rise to investment variances, for example market yields. Therefore, the key consideration is the net effect of the two items rather than the individual items themselves. Further comments on the movement in TVOG are provided in Note 10.

Restructuring expenses primarily represent the covered business costs associated with the CIP as described in Note 1.

(b)    Segmental analysis of movements in EEV

		UK	Canada	Europe	Asia Pacific	HWPF TVOG	Total
12 months to 31 December 2008		£m	£m	£m	£m	£m	£m
Opening EEV		3,588	1,276	335	86	(41)	5,244
Opening adjustments		32	-	-	-	-	32
Opening adjusted EEV		3,620	1,276	335	86	(41)	5,276
Profit/(loss) after tax		45	202	15	(34)	(179)	49
Internal capital transfers		(470)	(40)	13	20	-	(477)
Transfer back of surplus to Standard Life Investments		(28)	(3)	(2)	-	-	(33)
Transfer back of mutual funds net worth		17	(1)	-	-	-	16
Actuarial gains on defined benefit pension schemes		-	12	(10)	-	-	2
Foreign exchange differences		-	154	110	36	-	300
Aggregate tax effect of items not recognised in income statement		-	(3)	-	-	-	(3)
Other		(10)	-	-	12	-	2
Closing EEV		3,174	1,597	461	120	(220)	5,132

Internal capital transfers mainly reflect dividend transfers to Standard Life plc.  

Opening adjustments in the UK, for the 12 months to 31 December 2008, reflect the inclusion of Sigma UKFS mutual funds in covered business for the first time. These funds were previously included in non-covered business and are in addition to the UK and Canada mutual funds included in covered business for the first time in the 2007 published results. This adjustment is explained in more detail in Note 1 - Basis of preparation.

		UK	Canada	Europe	Asia Pacific	HWPF TVOG	Total
12 months to 31 December 2007		£m	£m	£m	£m	£m	£m
Opening EEV		3,370	901	271	49	(92)	4,499
Opening adjustments		-	32	-	-	-	32
Opening adjusted EEV		3,370	933	271	49	(92)	4,531
Profit/(loss) after tax		316	237	11	(11)	51	604
Internal capital transfers		(93)	(63)	21	46	-	(89)
Transfer back of surplus to Standard Life Investments		(23)	(2)	-	-	-	(25)
Transfer back of mutual funds net worth		15	(4)	-	-	-	11
Actuarial gains on defined benefit pension schemes		-	14	5	-	-	19
Foreign exchange differences		-	164	26	3	-	193
Aggregate tax effect of items not recognised in income statement		-	(3)	-	-	-	(3)
Other		3	-	1	(1)	-	3
Closing EEV		3,588	1,276	335	86	(41)	5,244

Internal capital transfers mainly reflect dividend transfers to Standard Life plc.  

Opening adjustments in the UK and Canada reflect the inclusion of certain mutual funds in covered business as explained in Note 1 - Basis of preparation.

  2.    Segmental analysis - covered business continued

(c)    Segmental analysis of opening and closing EEV

		UK	Canada	Europe	Asia Pacific	HWPF TVOG	Total
12 months to 31 December 2008		£m	£m	£m	£m	£m	£m
Analysis of EEV
Free surplus		970	168	13	86	-	1,237
PVIF		2,621	765	326	-	(41)	3,671
Required capital		63	611	6	-	-	680
Cost of capital		(34)	(268)	(10)	-	-	(312)
Opening adjusted EEV		3,620	1,276	335	86	(41)	5,276
Analysis of EEV
Free surplus		909	154	52	120	-	1,235
PVIF		2,208	939	418	-	(220)	3,345
Required capital		95	737	12	-	-	844
Cost of capital		(38)	(233)	(21)	-	-	(292)
Closing EEV		3,174	1,597	461	120	(220)	5,132

		UK	Canada	Europe	Asia Pacific	HWPF TVOG	Total
12 months to 31 December 2007		£m	£m	£m	£m	£m	£m
Analysis of EEV
Free surplus		656	24	(9)	49	-	720
PVIF		2,693	633	278	-	(92)	3,512
Required capital		32	526	4	-	-	562
Cost of capital		(11)	(250)	(2)	-	-	(263)
Opening adjusted EEV		3,370	933	271	49	(92)	4,531
Analysis of EEV
Free surplus		970	168	13	86	-	1,237
PVIF		2,589	765	326	-	(41)	3,639
Required capital		63	611	6	-	-	680
Cost of capital		(34)	(268)	(10)	-	-	(312)
Closing EEV		3,588	1,276	335	86	(41)	5,244

3.    Analysis of new business contribution

The following table sets out the premium volumes and contribution from new business written by the life and related businesses, consistent with the definition of new business set out in Note 16.

New business contribution (NBC) and the present value of new business premium (PVNBP) margins are shown after the effect of required capital. 

	NBC	Single premiums	Annualised regular premiums	PVNBP1	PVNBP multiplier3	PVNBP margin2
12 months to 31 December 2008	£m	£m	£m	£m		%
Individual pensions	56	3,939	103	4,334	3.8	1.3
Group pensions	55	992	437	2,600	3.7	2.1
Institutional pensions	20	1,667	67	1,826	2.4	1.1
Savings and investments4	6	2,619	10	2,690	7.1	0.2
Annuities	74	471	-	471	-	15.8
Protection	1	-	2	7	3.5	8.2
UK	212	9,688	619	11,928	3.6	1.8
Canada	34	1,154	79	2,240	13.7	1.5
Europe	18	385	67	1,016	9.4	1.8
Asia Pacific	-	90	110	495	3.7	-
Total covered business	264	11,317	875	15,679	5.0	1.7

	NBC5	Single premiums	Annualised regular premiums	PVNBP	PVNBP multiplier3	PVNBP margin2
12 months to 31 December 2007	£m	£m	£m	£m		%
Individual pensions	123	4,803	108	5,302	4.6	2.3
Group pensions	60	975	447	2,891	4.1	2.1
Institutional pensions	17	2,015	-	1,941	-	0.8
Savings and investments4	34	2,724	14	2,788	4.6	1.3
Annuities	54	494	-	494	-	11.0
Protection	(6)	-	4	24	-	(23.7)
UK	282	11,011	573	13,440	4.2	2.1
Canada	37	977	59	1,654	11.5	2.3
Europe	26	436	81	1,179	9.2	2.2
Asia Pacific	-	64	42	266	4.8	-
Total covered business	345	12,488	755	16,539	5.4	2.1

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

2 PVNBP margins are calculated as the ratio of the value of new business to the present value of new business premiums and are based on the underlying unrounded numbers. 

3 The PVNBP multiplier is calculated as the total of PVNBP less single premiums divided by annualised regular premiums. 

4 Single premiums and PVNBP for UK savings and investments for the 12 months to 31 December 2008 include £88m attributable to the inclusion of Sigma mutual funds. Single premiums and PVNBP for UK savings and investments for 2007 have been restated to include £116m for Sigma mutual funds.

5 2007 NBC does not include any contribution from Sigma mutual funds.

4.    Experience variances 

	UK	Canada	Europe	HWPF TVOG	Total
12 months to 31 December 2008	£m	£m	£m	£m	£m
Lapses	18	-	4	-	22
Maintenance expenses	(10)	3	-	-	(7)
Mortality and morbidity	2	-	-	-	2
Tax	36	38	-	-	74
Other	(33)	6	-	-	(27)
Total	13	47	4	-	64

Lapse variances in the UK of £18m include the impact of favourable experience of onshore bonds compared to the short-term provision established at the end of 2007. 

Lapse variances in Europe mainly arise from favourable experience in pension business in Ireland.

The adverse expense variance in the UK relates to certain newer products where product volumes are expected to grow rapidly. Expense overrun provisions have been set up as explained in Note 5 - Operating assumption changes. 

UK tax variances reflect the benefit of ongoing tax management plus favourable tax variances from the further release of deferred annuity provisions.

Tax variances in Canada mainly arise from previously unclaimed tax assets.

'Other' UK variances include the benefit from the release of the provision held on the deferred annuity book, and the impact of the cash injection into the Pension Sterling Fund. The deferred annuity release has produced an EEV operating profit before tax of £96m, consisting of an increase to free surplus due to reserve releases of £98m, and PVIF and cost of capital decreases of £2m. The cash injection into the Pension Sterling Fund has resulted in an EEV operating loss of £108m (equivalent to a post-tax EEV operating loss of £78m), which reflects the cost of the cash injection plus associated tax impacts. 

	UK	Canada	Europe	HWPF TVOG	Total
12 months to 31 December 2007	£m	£m	£m	£m	£m
Lapses	(28)	-	(2)	-	(30)
Maintenance expenses	8	2	(1)	-	9
Mortality and morbidity	5	-	-	-	5
Tax	9	25	(4)	-	30
Other	(110)	4	2	42	(62)
Total	(116)	31	(5)	42	(48)

5.    Operating assumption changes 

	UK	Canada	Europe	HWPF TVOG	Total
12 months to 31 December 2008	£m	£m	£m	£m	£m
Lapses	(35)	(25)	(1)	-	(61)
Maintenance expenses	36	28	7	-	71
Mortality and morbidity	47	4	2	-	53
Tax	2	-	-	-	2
Other	92	17	10	11	130
Total	142	24	18	11	195

The UK lapse assumption change of (£35m) was primarily due to a strengthening of paid up assumptions across the pensions book, including the anticipated impact of customers postponing payments into their pension schemes during current volatile market conditions.

Lapse assumption changes in Canada were increased to prudently safeguard against overall deteriorating economic conditions.

All territories have made significant profits from expense assumption changes, reflecting the impact of expense savings related to CIP and other initiatives. UK and Europe expenses include productivity gains which have been anticipated and include expense overruns of £16m for UK and £4m for Europe to reflect expected growth in volume of certain newer products.

UK gains from mortality and morbidity assumption changes arise from the adoption of updated assumptions for assurance and annuity business. 

£119m of the 'Other' operating assumption changes, consisting of £96m in the UK, £12m in Europe and £11m in HWPF TVOG, arise from the impact of the UK annuity reassurance, as described in Note 2(a).

Most of the 'Other' assumption changes in Canada relate to modelling and assumption changes for group insurance business.

	UK	Canada	Europe	HWPF TVOG	Total
12 months to 31 December 2007	£m	£m	£m	£m	£m
Lapses	(249)	52	(22)	-	(219)
Maintenance expenses	69	23	8	-	100
Mortality and morbidity	(52)	(48)	-	-	(100)
Tax	26	-	-	-	26
Other	345	(6)	2	-	341
Total	139	21	(12)	-	148

6.    Non-covered business

Non-covered business EEV operating profit is represented by IFRS normalised underlying profit as adjusted for Standard Life Investments look through profits and the return on mutual funds which are recognised in covered business.

(a)     Segmental analysis - non-covered business

		Investment management	Banking	Healthcare	Other including Group Corporate Centre	UK pension scheme deficit	Total non-covered business
12 months to 31 December 2008		£m	£m	£m	£m	£m	£m
Opening EEV net assets		142	303	95	562	(135)	967
Opening adjustments		-	-	-	-	-	-
Opening adjusted EEV		142	303	95	562	(135)	967
(Loss)/profit after tax		(35)	(49)	5	(43)	(19)	(141)
Transfer back of net worth from covered business		33	-	-	(16)	-	17
Foreign exchange differences		2	-	-	21	-	23
Internal capital transfers		-	(15)	-	472	20	477
Distributions to equity holders		-	-	-	(257)	-	(257)
Other		1	(28)	-	(15)	111	69
Closing EEV net assets		143	211	100	724	(23)	1,155

The Group's defined benefit pension scheme is included within non-covered business on an IFRS basis and is accounted for under IAS 19. IFRIC 14, IAS 19 The limit on a defined benefit asset, minimum funding requirements and their interaction provides guidance on the interpretation of the requirements contained in IAS 19. Under this guidance, the Group has restricted the recognition of the pension surplus as at 31 December 2008. This is reflected in the total Group embedded value. The (£23m) under UK pension scheme deficit represents the deferred tax liability on the restricted pension surplus. This compares to (£135m) which reflects the pension deficit net of tax as at 31 December 2007.

		Investment management	Banking	Healthcare	Other including Group Corporate Centre	UK pension scheme  deficit	Total non-covered business
12 months to 31 December 2007		£m	£m	£m	£m	£m	£m
Opening EEV net assets		150	355	118	626	(140)	1,109
Opening adjustments		-	-	-	(13)	-	(13)
Opening adjusted EEV		150	355	118	613	(140)	1,096
(Loss)/profit after tax		49	(8)	5	(70)	7	(17)
Transfer back of net worth from covered business		25	-	-	(11)	-	14
Foreign exchange differences		-	-	-	(2)	-	(2)
Internal capital transfers		(82)	(40)	(28)	219	20	89
Distributions to equity holders		-	-	-	(197)	-	(197)
Other		-	(4)	-	10	(22)	(16)
Closing EEV net assets		142	303	95	562	(135)	967

Opening adjustments relate to the elimination of £13m of opening deferred acquisition costs in respect of those UK financial services (UKFS) and Canada mutual funds transferred to covered business in 2007.

(b)    Investment management EEV profits before tax

Investment management profits are included in EEV on a look through basis. This means that the profits from investment management generated from the life and pensions business are allocated to covered business. However, the excluded life and pension profits include £20m (12 months to 31 December 2007: £13m) of profits relating to products which are actively marketed and sold to third parties through investment management distribution channels. If these profits are added to the third party profits disclosed for non-covered business there are £68m (12 months to 31 December 2007: £61m) of third party related profits for investment management.

		12 months to  31 December 2008	12 months to  31 December 2007
		£m	£m
Life and pensions look through profits before tax1		45	35
Third party related life and pensions losses before tax		(20)	(13)
Life and pensions look through profits before tax excluding third party profits		25	22
Third party related life and pensions profits before tax		20	13
Third party related profits before tax		48	48
Total third party related profits before tax		68	61
Total EEV operating profit before tax		93	83
Non-operating items2		(93)	17
Total EEV profit before tax		-	100

1 Included within life and pensions look through profits before tax is £14m of profits in relation to some Sigma mutual funds business, which is now sold and administered through our UKFS Standard Life Savings business and which has been included for the first time as covered business within the 2008 UK life and pensions EEV. Previously, this Sigma mutual funds business was non-covered business and was sold and administered through our Investment business.  

2 The £93m non-operating loss item for the 12 months to 31 December 2008 includes a loss of £90m from the restructuring of a sub-fund of Standard Life Investments (Global Liquidity Funds) plc as described in Note 8 of the IFRS financial information. This consists of a loss of £51m, relating to the fair value movements of assets brought directly on to the balance sheet, which is included within IFRS underlying profit but which has been excluded from IFRS normalised underlying profit, and a loss of £39m which has been excluded from IFRS underlying profit. £3m relates to CIP.

(c)     Other EEV operating profits before tax

		12 months to  31 December 2008	12 months to  31 December 2007
		£m	£m
Canada non-life subsidiaries		2	4
Mutual funds transferred to covered business		(2)	(4)
Canada non-life subsidiaries excluding transfers to covered business		-	-
Standard Life Savings Limited		(41)	(50)
Mutual funds transferred to covered business		24	25
Standard Life Savings excluding transfers to covered business		(17)	(25)
Standard Life plc income		8	33
Other		(10)	(3)
Other non-covered business EEV operating (loss)/profit before tax		(19)	5

All figures shown are IFRS underlying profits.

Standard Life Savings Limited is the company that writes the UK mutual funds business included within covered business.

The covered business results for the 12 months to 31 December 2008 include some Sigma mutual fund business sold by the UK financial services business, which was previously sold and administered through our Investment business. There is no restatement of the results for the 12 months to 31 December 2007 and this adjustment is explained in more detail in Note 1 - Basis of preparation. A detailed description of EEV covered business is provided within the EEV methodology in Note 16.

'Other' primarily represents the operating loss related to the UK pension scheme.

7.    EEV - reconciliation of movements in consolidated balance sheet

		12 months to  31 December 2008	12 months to  31 December 2007
		£m	£m
Opening EEV		6,211	5,608
Opening adjustments		32	19
Opening adjusted EEV		6,243	5,627
Total recognised income for the period		250	774
Distributions to equity holders		(257)	(197)
Issue of share capital other than in cash		1	7
Capitalisation of share premium account		-	(7)
Reserves credit for employee share-based payment schemes		10	12
Vested employee share-based payment schemes		(2)	(5)
Closing EEV		6,245	6,211

Opening adjustments relate to the transfer of mutual funds from non-covered to covered business. These adjustments impacted the opening PVIF in covered business by £32m (2007: £32m) and the opening net assets in non-covered business by £nil (2007: (£13m)).

8.    Reconciliation of EEV net assets to IFRS net assets

	31 December 2008	31 December 2007
	£m	£m
Net assets on an EEV basis	6,245	6,211
Present value of in-force life and pensions business net of cost of capital	(3,053)	(3,327)
EEV net worth	3,192	2,884
Adjustment of long-term debt to market value	(434)	(4)
Canadian marked-to-market	58	112
Deferred acquisition costs net of deferred income reserve	354	245
Consolidation adjustment for different accounting basis1	42	-
Other	195	45
Net assets on an IFRS basis	3,407	3,282

1  This adjustment reflects the removal of accounting differences for the Canadian subordinated liability as explained in Note 1 - Basis of preparation. 

Reconciling items are shown net of tax where appropriate.

'Other' predominantly relates to deferred tax differences of £180m and the capitalisation of software development costs of £19m. 

9.    Analysis of covered business EEV PVIF and net worth movements (net of tax) 

(a)      Total

	Free surplus	Required capital	Net worth	PVIF net of cost of capital	Total
12 months to 31 December 2008	£m	£m	£m	£m	£m
Opening EEV	1,237	680	1,917	3,327	5,244
Opening adjustments	-	-	-	32	32
Opening adjusted EEV	1,237	680	1,917	3,359	5,276
Contribution from new business	(266)	42	(224)	413	189
Contribution from in-force business:
Expected return on existing business	(1)	33	32	280	312
Expected return transfer to net worth	552	(33)	519	(519)	-
Experience variances	28	(11)	17	30	47
Operating assumption changes	102	15	117	22	139
Development expenses	(30)	-	(30)	-	(30)
Expected return on free surplus	(5)	-	(5)	-	(5)
Operating profit after tax	380	46	426	226	652
Investment return and tax variances	22	74	96	(708)	(612)
Effect of economic assumption changes	54	(30)	24	12	36
Restructuring expenses	(27)	-	(27)	-	(27)
Profit/(loss) after tax	429	90	519	(470)	49
Internal capital transfers	(477)	-	(477)	-	(477)
Transfer back of surplus to Standard Life Investments	(33)	-	(33)	-	(33)
Transfer back of mutual funds net worth	16	-	16	-	16
Actuarial gains on defined benefit pension schemes	2	-	2	-	2
Foreign exchange differences	62	74	136	164	300
Aggregate tax effect of items not recognised in income statement	(3)	-	(3)	-	(3)
Other	2	-	2	-	2
Closing EEV	1,235	844	2,079	3,053	5,132

Asia Pacific is included within covered business on an IFRS basis, with the IFRS opening and closing net assets for this business included within the opening and closing EEV free surplus, and the IFRS underlying loss after tax included within Expected return on free surplus. 

	Free surplus	Required capital	Net worth	PVIF net of cost of capital	Total
12 months to 31 December 2007	£m	£m	£m	£m	£m
Opening EEV	720	562	1,282	3,217	4,499
Opening adjustments	-	-	-	32	32
Opening adjusted EEV	720	562	1,282	3,249	4,531
Contribution from new business	(272)	47	(225)	473	248
Contribution from in-force business:
Expected return on existing business	-	26	26	262	288
Expected return transfer to net worth	552	(38)	514	(514)	-
Experience variances	6	3	9	(44)	(35)
Operating assumption changes	226	4	230	(123)	107
Development expenses	(16)	-	(16)	-	(16)
Expected return on free surplus	9	-	9	-	9
Operating profit after tax	505	42	547	54	601
Investment return and tax variances	7	3	10	(22)	(12)
Effect of economic assumption changes	75	(11)	64	(45)	19
Restructuring expenses	(4)	-	(4)	-	(4)
Profit/(loss) after tax	583	34	617	(13)	604
Internal capital transfers	(89)	-	(89)	-	(89)
Transfer back of surplus to Standard Life Investments	(25)	-	(25)	-	(25)
Transfer back of mutual funds net worth	11	-	11	-	11
Actuarial gains on defined benefit pension schemes	19	-	19	-	19
Foreign exchange differences	18	84	102	91	193
Aggregate tax effect of items not recognised in income statement	(3)	-	(3)	-	(3)
Other	3	-	3	-	3
Closing EEV	1,237	680	1,917	3,327	5,244

(b)      UK and HWPF TVOG

	Free surplus	Required capital	Net worth	PVIF net of cost of capital	Total
12 months to 31 December 2008	£m	£m	£m	£m	£m
Opening EEV	970	63	1,033	2,514	3,547
Opening adjustments	-	-	-	32	32
Opening adjusted EEV	970	63	1,033	2,546	3,579
Contribution from new business	(188)	23	(165)	317	152
Contribution from in-force business:
Expected return on existing business	(1)	3	2	207	209
Expected return transfer to net worth	383	(1)	382	(382)	-
Experience variances	(10)	(5)	(15)	25	10
Operating assumption changes	94	16	110	-	110
Development expenses	(24)	-	(24)	-	(24)
Expected return on free surplus	24	-	24	-	24
Operating profit after tax	278	36	314	167	481
Investment return and tax variances	178	(4)	174	(620)	(446)
Effect of economic assumption changes	(1)	-	(1)	(143)	(144)
Restructuring expenses	(25)	-	(25)	-	(25)
(Loss)/profit after tax	430	32	462	(596)	(134)
Internal capital transfers	(470)	-	(470)	-	(470)
Transfer back of surplus to Standard Life Investments	(28)	-	(28)	-	(28)
Transfer back of mutual funds net worth	17	-	17	-	17
Actuarial gains on defined benefit pension schemes	-	-	-	-	-
Foreign exchange differences	-	-	-	-	-
Aggregate tax effect of items not recognised in income statement	-	-	-	-	-
Other	(10)	-	(10)	-	(10)
Closing EEV	909	95	1,004	1,950	2,954

	Free surplus	Required capital	Net worth	PVIF net of cost of capital	Total
12 months to 31 December 2007	£m	£m	£m	£m	£m
Opening EEV	656	32	688	2,590	3,278
Opening adjustments	-	-	-	-	-
Opening adjusted EEV	656	32	688	2,590	3,278
Contribution from new business	(197)	27	(170)	373	203
Contribution from in-force business:
Expected return on existing business	-	1	1	206	207
Expected return transfer to net worth	392	(1)	391	(391)	-
Experience variances	(1)	(2)	(3)	(51)	(54)
Operating assumption changes	264	4	268	(168)	100
Development expenses	(8)	-	(8)	-	(8)
Expected return on free surplus	18	-	18	-	18
Operating profit/(loss) after tax	468	29	497	(31)	466
Investment return and tax variances	(43)	1	(42)	(21)	(63)
Effect of economic assumption changes	(9)	1	(8)	(24)	(32)
Restructuring expenses	(4)	-	(4)	-	(4)
Profit/(loss) after tax	412	31	443	(76)	367
Internal capital transfers	(93)	-	(93)	-	(93)
Transfer back of surplus to Standard Life Investments	(23)	-	(23)	-	(23)
Transfer back of mutual funds net worth	15	-	15	-	15
Actuarial gains on defined benefit pension schemes	-	-	-	-	-
Foreign exchange differences	-	-	-	-	-
Aggregate tax effect of items not recognised in income statement	-	-	-	-	-
Other	3	-	3	-	3
Closing EEV	970	63	1,033	2,514	3,547

(c)          Canada

	Free surplus	Required capital	Net worth	PVIF net of cost of capital	Total
12 months to 31 December 2008	£m	£m	£m	£m	£m
Opening EEV	168	611	779	497	1,276
Opening adjustments	-	-	-	-	-
Opening adjusted EEV	168	611	779	497	1,276
Contribution from new business	(20)	16	(4)	28	24
Contribution from in-force business:
Expected return on existing business	-	30	30	50	80
Expected return transfer to net worth	98	(33)	65	(65)	-
Experience variances	36	(6)	30	5	35
Operating assumption changes	(5)	(1)	(6)	23	17
Development expenses	(2)	-	(2)	-	(2)
Expected return on free surplus	3	-	3	-	3
Operating profit after tax	110	6	116	41	157
Investment return and tax variances	(156)	79	(77)	(49)	(126)
Effect of economic assumption changes	52	(30)	22	150	172
Restructuring expenses	(1)	-	(1)	-	(1)
Profit after tax	5	55	60	142	202
Internal capital transfers	(40)	-	(40)	-	(40)
Transfer back of surplus to Standard Life Investments	(3)	-	(3)	-	(3)
Transfer back of mutual funds net worth	(1)	-	(1)	-	(1)
Actuarial gains on defined benefit pension schemes	12	-	12	-	12
Foreign exchange differences	16	71	87	67	154
Aggregate tax effect of items not recognised in income statement	(3)	-	(3)	-	(3)
Other	-	-	-	-	-
Closing EEV	154	737	891	706	1,597

	Free surplus	Required capital	Net worth	PVIF net of cost of capital	Total
12 months to 31 December 2007	£m	£m	£m	£m	£m
Opening EEV	24	526	550	351	901
Opening adjustments	-	-	-	32	32
Opening adjusted EEV	24	526	550	383	933
Contribution from new business	(13)	17	4	23	27
Contribution from in-force business:
Expected return on existing business	-	25	25	38	63
Expected return transfer to net worth	93	(35)	58	(58)	-
Experience variances	16	4	20	2	22
Operating assumption changes	(43)	-	(43)	58	15
Development expenses	(1)	-	(1)	-	(1)
Expected return on free surplus	2	-	2	-	2
Operating profit after tax	54	11	65	63	128
Investment return and tax variances	51	2	53	5	58
Effect of economic assumption changes	82	(12)	70	(19)	51
Restructuring expenses	-	-	-	-	-
Profit after tax	187	1	188	49	237
Internal capital transfers	(63)	-	(63)	-	(63)
Transfer back of surplus to Standard Life Investments	(2)	-	(2)	-	(2)
Transfer back of mutual funds net worth	(4)	-	(4)	-	(4)
Actuarial gains on defined benefit pension schemes	14	-	14	-	14
Foreign exchange differences	15	84	99	65	164
Aggregate tax effect of items not recognised in income statement	(3)	-	(3)	-	(3)
Other	-	-	-	-	-
Closing EEV	168	611	779	497	1,276

  (d)      Europe and Asia Pacific

	Free surplus	Required capital	Net worth	PVIF net of cost of capital	Total
12 months to 31 December 2008	£m	£m	£m	£m	£m
Opening EEV	99	6	105	316	421
Opening adjustments	-	-	-	-	-
Opening adjusted EEV	99	6	105	316	421
Contribution from new business	(58)	3	(55)	68	13
Contribution from in-force business:
Expected return on existing business	-	-	-	23	23
Expected return transfer to net worth	71	1	72	(72)	-
Experience variances	2	-	2	-	2
Operating assumption changes	13	-	13	(1)	12
Development expenses	(4)	-	(4)	-	(4)
Expected return on free surplus	(32)	-	(32)	-	(32)
Operating profit/(loss) after tax	(8)	4	(4)	18	14
Investment return and tax variances	-	(1)	(1)	(39)	(40)
Effect of economic assumption changes	3	-	3	5	8
Restructuring expenses	(1)	-	(1)	-	(1)
(Loss)/profit after tax	(6)	3	(3)	(16)	(19)
Internal capital transfers	33	-	33	-	33
Transfer back of surplus to Standard Life Investments	(2)	-	(2)	-	(2)
Transfer back of mutual funds net worth	-	-	-	-	-
Actuarial losses on defined benefit pension schemes	(10)	-	(10)	-	(10)
Foreign exchange differences	46	3	49	97	146
Aggregate tax effect of items not recognised in income statement	-	-	-	-	-
Other	12	-	12	-	12
Closing EEV	172	12	184	397	581

Asia Pacific is included within covered business on an IFRS basis, with the IFRS opening and closing net assets for this business included within the opening and closing EEV free surplus, and the IFRS underlying loss after tax included within Expected return on free surplus.

	Free surplus	Required capital	Net worth	PVIF net of cost of capital	Total
12 months to 31 December 2007	£m	£m	£m	£m	£m
Opening EEV	40	4	44	276	320
Opening adjustments	-	-	-	-	-
Opening adjusted EEV	40	4	44	276	320
Contribution from new business	(62)	3	(59)	77	18
Contribution from in-force business:
Expected return on existing business	-	-	-	18	18
Expected return transfer to net worth	67	(2)	65	(65)	-
Experience variances	(9)	1	(8)	5	(3)
Operating assumption changes	5	-	5	(13)	(8)
Development expenses	(7)	-	(7)	-	(7)
Expected return on free surplus	(11)	-	(11)	-	(11)
Operating profit/(loss) after tax	(17)	2	(15)	22	7
Investment return and tax variances	(1)	-	(1)	(6)	(7)
Effect of economic assumption changes	2	-	2	(2)	-
Restructuring expenses	-	-	-	-	-
Profit/(loss) after tax	(16)	2	(14)	14	-
Internal capital transfers	67	-	67	-	67
Transfer back of surplus to Standard Life Investments	-	-	-	-	-
Transfer back of mutual funds net worth	-	-	-	-	-
Actuarial gains on defined benefit pension schemes	5	-	5	-	5
Foreign exchange differences	3	-	3	26	29
Aggregate tax effect of items not recognised in income statement	-	-	-	-	-
Other	-	-	-	-	-
Closing EEV	99	6	105	316	421

10.    Time value of options and guarantees (TVOG)

	31 December  2008	31 December  2007
	£m	£m
UK and Europe HWPF	(220)	(41)
Canada	(30)	(13)
Europe - other	(7)	(2)
Total	(257)	(56)

The UK and Europe HWPF TVOG reflects the value of shareholder exposure to the policyholder guarantees within the HWPF. This has increased significantly during 2008, primarily due to adverse market movements. This has arisen from both the significantly lower than expected investment returns earned during 2008, and the impact of changes to long-term investment assumptions, in particular from the use of lower risk free rates and higher implied volatilities.

Adverse investment experience and changes in economic assumptions have also resulted in increases to TVOG in Canada and Europe. 

11.    Market value of subordinated liabilities within covered business

	31 December 2008	31 December  2007
	£m	£m
UK	(1,375)	(1,643)
Canada	(183)	(207)
Total	(1,558)	(1,850)

Subordinated liabilities within EEV covered business are based on the market value of the debt. The free surplus shown in Note 2(c) is net of these liabilities.

The market value of the subordinated liabilities in the UK and Canada has reduced over 2008 as a result of significant increases in credit spreads, offset in part from foreign exchange movements.

The fall in the market value of the Canadian subordinated liability has produced a pre-tax profit of £58m within the 2008 effect of economic assumption changes shown in Note 2(a). This has been offset by the Group EEV consolidation adjustment in respect of Canadian subordinated liability, as shown in the EEV consolidated income statement.

12.    Principal economic assumptions - deterministic calculations - covered business

(a)     Gross investment returns and expense inflation

	UK	Canada	Europe
At 31 December 2008	%	%	%
Gross investment returns
Risk free	3.42	3.07	2.95
Corporate bonds	5.093	1	n/a
Equities	6.42	8.60	5.95
Property	5.42	8.60	4.95
Other
Expense inflation:	2.57	2
Germany			1.27
Ireland			2.18

1 Current holdings are assumed to yield in future years the earned rate for the year preceding the valuation. Future reinvestments are assumed to be in government bonds.

2 0.94% in 2008. The rate in subsequent years is based on a moving 30 year bond yield less a variable deduction.

3 Excludes corporate bond returns on annuities. For annuities in UK equity holder funds, the overall investment return, after allowing for assumed defaults, is 6.44% for annuities that are level or subject to fixed escalations and 3.42% for annuities where escalations are linked to a price index.

	UK	Canada	Europe
At 31 December 2007	%	%	%
Gross investment returns
Risk free	4.58	4.04	4.33
Corporate bonds	5.563	1	n/a
Equities	7.58	8.60	7.33
Property	6.58	8.60	6.33
Other
Expense inflation:	4.07	2
Germany			2.69
Ireland			3.80

1 Current holdings are assumed to yield in future years the earned rate for the year preceding the valuation. Future reinvestments are assumed to be in government bonds.

2  1.64% in 2007. The rate in subsequent years is based on a moving 30 year bond yield less a variable deduction.

3 Excludes corporate bond returns on annuities. For annuities in UK equity holder funds, the overall investment return, after allowing for assumed defaults, is 5.53% for annuities that are level or subject to fixed escalations and 4.58% for annuities where escalations are linked to a price index.

(b)     Risk discount rates - in-force business

	UK  HWPF	UK equity holder owned funds	Canada	Europe HWPF	Europe equity holder owned funds
At 31 December 2008	%	%	%	%	%
Risk margin - in-force business
Risk margin before cost of capital adjustment:
Market risk	2.00	1.70	2.80	2.00	1.70
Non-market risk	1.60	1.50	2.40	1.60	1.50
Total	3.60	3.20	5.20	3.60	3.20
Cost of capital adjustment	-	(0.30)	(1.70)	-	(0.30)
Risk margin after cost of capital adjustment	3.60	2.90	3.50	3.60	2.90
Risk discount rates - in-force business
Risk free	3.42	3.42	3.07	2.95	2.95
Risk margin1	3.60	2.90	3.50	3.60	2.90
Risk discount rate	7.02	6.32	6.57	6.55	5.85

1 Using the value of in-force business as weights, the weighted average risk margins for the UK and Europe were 3.4% and 3.2% respectively.

	UK  HWPF	UK equity holder owned funds	Canada	Europe HWPF	Europe equity holder owned funds
At 31 December 2007	%	%	%	%	%
Risk margin - in-force business
Risk margin before cost of capital adjustment:
Market risk	2.00	2.00	2.10	2.00	2.00
Non-market risk	1.60	1.20	2.20	1.60	1.20
Total	3.60	3.20	4.30	3.60	3.20
Cost of capital adjustment	-	(0.30)	(1.40)	-	(0.30)
Risk margin after cost of capital adjustment	3.60	2.90	2.90	3.60	2.90
Risk discount rates - in-force business
Risk free	4.58	4.58	4.04	4.33	4.33
Risk margin1	3.60	2.90	2.90	3.60	2.90
Risk discount rate	8.18	7.48	6.94	7.93	7.23

1 Using the value of in-force business as weights, the weighted average risk margins for the UK and Europe were 3.5% and 3.3% respectively.

Changes in market risk margins generally arise from changes in asset allocation, product mix and reserving changes.

The UK and Europe HWPF non-market risk margin has remained at 1.60%. However, this consists of two separate movements. As reported in the Interim Results for 2008, the reinsurance of the UK annuity liabilities led to a 0.70% reduction in the non-market risk margin. The impact of this reduction in the risk discount rate was a profit of £129m which is reported through UK and Europe 'Other' operating assumption changes, as described in Notes 2(a) and 5, reflecting the EEV benefit of the reduced non-market risk that has arisen from this transaction. As part of the year end calibration, the UK and Europe HWPF non-market risk margin increased by 0.70% due to changes in persistency risk assumptions and also from changes in business mix. The impact of this 0.70% increase in the risk discount rate is included within the effect of economic assumption changes, as shown in Note 2(a).

The increases in the non-market risk margin for UK and Europe equity holder owned funds mainly arise from changes in persistency risk assumptions, whilst the 0.20% increase in Canada arises from changes in business mix.

Apart from the reduction arising from the reinsurance of UK annuity liabilities, the impact of the other changes in risk discount rates has been included in the effect of economic assumption changes shown in Note 2(a). The amounts within these totals that relate to the changes in risk discount rates are for UK: profit £172m, for Europe: profit £31m and for Canada: profit £74m.

12.    Principal economic assumptions - deterministic calculations - covered business continued

(c)     Risk discount rates - new business

	UK  HWPF	UK equity holder owned funds	Canada	Europe HWPF	Europe equity holder owned funds
12 months to 31 December 2008	%	%	%	%	%
Risk margin - new business
Risk margin before cost of capital adjustment:
Market risk	2.10	1.80	1.50	2.10	1.80
Non-market risk	0.40	1.50	1.90	0.40	1.50
Total	2.50	3.30	3.40	2.50	3.30
Cost of capital adjustment	-	(0.40)	(0.50)	-	(0.40)
Risk margin after cost of capital adjustment	2.50	2.90	2.90	2.50	2.90
Risk discount rates - new business
Risk free1	4.58	4.58	4.04	4.33	4.33
Risk margin2	2.50	2.90	2.90	2.50	2.90
Risk discount rate	7.08	7.48	6.94	6.83	7.23

1  As the new business contribution is calculated using start of period economic assumptions, the risk free rates shown here represent market yields at 31 December 2007.

2  Using the value of in-force business as weights, the weighted average risk margins for the UK and Europe were 2.8% and 2.9% respectively.

	UK  HWPF	UK equity holder owned funds	Canada	Europe HWPF	Europe equity holder owned funds
12 months to 31 December 2007	%	%	%	%	%
Risk margin - new business
Risk margin before cost of capital adjustment:
Market risk	2.10	2.00	1.80	2.10	2.00
Non-market risk	0.40	1.20	2.20	0.40	1.20
Total	2.50	3.20	4.00	2.50	3.20
Cost of capital adjustment	-	(0.30)	(1.10)	-	(0.30)
Risk margin after cost of capital adjustment	2.50	2.90	2.90	2.50	2.90
Risk discount rates - new business
Risk free1	4.83	4.83	4.11	3.95	3.95
Risk margin2	2.50	2.90	2.90	2.50	2.90
Risk discount rate	7.33	7.73	7.01	6.45	6.85

1  As the new business contribution is calculated using start of period economic assumptions, the risk free rates shown here represent market yields at 31 December 2006.

2 Using the value of in-force business as weights, the weighted average risk margins for the UK and Europe were 2.8% and 2.9% respectively.

13.    Principal economic assumptions - stochastic calculations

The level of the TVOG is generally calculated by an economic scenario generator (ESG) which projects the relevant fund under a large number of different future economic scenarios. A detailed description of the methodology applied in the relevant funds is provided in Note 16.

Characteristics of ESG used for HWPF TVOG calculations - UK and Europe 

The ESG simulates future economic environments in a market consistent manner. The outputs of the ESG include:

• Cash returns

• Bond returns

• Inflation

• Equity returns

• Property returns

• Dividend yields

• Rental yields

The ESG allows option-pricing techniques to be used to value the TVOG.

Parameters used in ESG

Cash and bond returns 

These variables are calibrated using the following instruments:

• Conventional government bond yields adjusted to allow for any 'convenience premium' associated with  government bond prices

• A range of swaption prices

Inflation

This variable is calibrated using the yields obtained on inflation swaps.

Equity returns

The volatility of equity returns is calibrated to the market prices of a range of FTSE 100 and Dow Jones Euro Stoxx options.

Property returns

As there is no liquid property option market, a best estimate of property return volatility is used. The property volatility is estimated from adjusted Investment Property Databank UK data.

Dividend and rental yields

As market consistent estimates for dividend and rental yields cannot be derived from liquid market instruments, best estimates are used.

Correlations

The principal correlations in the ESG are between equity, bond and property returns. These correlations are targeted to be of the following order:

• Equity/property = 0.2

• Equity/bonds = 0.2

• Property/bonds = 0.1

14.    Foreign exchange

A description of the approach to the currency translation for foreign entities is provided in Note 16.

The principal exchange rates applied are:

Local currency: £	Closing  31 December  2008	Average to  31 December  2008	Closing  31 December  2007	Average to  31 December  2007
Canada	1.775	1.957	1.965	2.148
Ireland	1.034	1.259	1.362	1.459
Germany	1.034	1.259	1.362	1.459
India	70.049	80.063	78.460	82.831
China	9.810	12.896	14.540	15.214
Hong Kong	11.143	14.418	15.521	15.616

15.    Sensitivity analysis - economic and non-economic assumptions

The tables below show the sensitivity of the embedded value and the NBC to different scenarios.

The sensitivities tested were:

• 1% increase and decrease in the risk discount rates

• Interest rates 1% higher and lower than base case, with consequential changes in fixed interest asset values, reserving assumptions, risk discount rates and investment returns on equities and properties

• 10% fall in market value of equity and property assets (not applicable for new business contribution)

• 10% decrease in maintenance expenses (a 10% sensitivity on a base expense assumption of £10 p.a. would represent an expense assumption of £9 p.a.). Where there is a look through into service company expenses, the fee charged by the service company is unchanged while the underlying expense decreases

• 10% decrease in lapse rates (a 10% sensitivity on a base assumption of 5% p.a. would represent a lapse rate of 4.5% p.a.)

• 5% decrease in both mortality and morbidity rates for annuitant and non-annuitant policies

• EEV results assuming only prescribed minimum capital (where economic capital has been used in the EEV calculations)

Embedded value:

	UK	Canada	Europe	Asia Pacific	HWPF TVOG	Total
31 December 2008	£m	£m	£m	£m	£m	£m
Embedded value	3,174	1,597	461	120	(220)	5,132
Risk discount rate +1%	(151)	(151)	(26)	-	-	(328)
Risk discount rate -1%	173	190	31	-	-	394
Interest returns +1%	72	45	(2)	-	41	156
Interest returns -1%	(80)	(78)	(2)	-	(138)	(298)
Fall in equity/property market values by 10%	(112)	(92)	(13)	-	(8)	(225)
Maintenance expenses -10%	95	90	13	-	6	204
Lapse rates -10%	98	86	5	-	(20)	169
Annuitant mortality -5%	(44)	(41)	(5)	-	-	(90)
Non-annuitant mortality -5%	9	34	1	-	1	45
Prescribed minimum capital	-	70	-	-	-	70

As explained in Note 16, Asia Pacific is not reported on an embedded value basis. Since the embedded value has been included at the IFRS value, no embedded value sensitivities are produced.

As a result of the UK annuity reinsurance transaction, the exposure of our UK business to changes in annuitant mortality is significantly reduced. Therefore, the impact of a 5% decrease in mortality for annuitant policies is reduced from (£100m) as reported in our 2007 Annual Report and Accounts to (£44m).

The sensitivity of the Canada embedded value as shown above includes the effect of changes in the market value of the subordinated liability. Whilst Group EEV is adjusted for the different subordinated debt valuation bases used for covered and non-covered business as explained in Note 1, the impact of these sensitivities on the Group EEV consolidation adjustment is not included in this sensitivity analysis.

New business contribution:

	UK	Canada	Europe	HWPF TVOG	Total
12 months to 31 December 2008	£m	£m	£m	£m	£m
New business contribution	212	34	18	-	264
Risk discount rate +1%	(24)	(6)	(5)	-	(35)
Risk discount rate -1%	28	7	6	-	41
Interest returns +1%	34	(2)	(1)	-	31
Interest returns -1%	(42)	2	-	-	(40)
Maintenance expenses -10%	13	9	2	-	24
Lapse rates -10%	11	7	1	-	19
Annuitant mortality -5%	(3)	-	-	-	(3)
Non-annuitant mortality -5%	-	6	-	-	6
Prescribed minimum capital	-	1	-	-	1

Sensitivities to higher and lower assumed equity and property risk premiums in future investment earnings have not been calculated, as the effect of the risk premium is removed in setting the market risk margin in the risk discount rate.

The demographics sensitivities shown above represent a standard change to the assumptions for all products. Different products will be more or less sensitive to the change, and impacts may partially offset one another.

16.    EEV methodology

Covered business

For the purposes of EEV reporting, a distinction is drawn between covered business to which EEV methodology is applied and non-covered business where results and balances are based on those determined under IFRS and included in the IFRS financial statements shown in the Annual Report and Accounts, unless otherwise stated. 

The Group's covered business is its life assurance and pensions businesses in the UK, Canada, Europe (Germany including Austria, and Ireland) and Asia Pacific, as well as the current and future profits and losses from Standard Life Investments arising on its management of funds relating to the life and pensions businesses.  As Asia Pacific is not material in the context of both the Group embedded value and the Group EEV operating profit, EEV Principles and Guidance do not require them to be reported on an embedded value basis. They have therefore been included at their IFRS value which is consistent with the IFRS primary statements. This IFRS value should not be interpreted as a proxy for their embedded value.

UK covered business also includes:

• Non-insured self invested personal pension (SIPP) business

• Those elements of Wrap business that are contained within a long-term product wrapper i.e. Bonds, SIPPs and mutual funds

• Mutual funds sold by UK financial services business

Canada covered business also includes mutual funds.

Cash flows emerging in the period on covered business that do not reside within a life and pensions company on a statutory basis are transferred back to the relevant non-covered entity for disclosure within their closing net assets. This treatment is applied to both the return from investment management and the return on certain mutual funds included in covered business.

Asia Pacific covered business consists of:

• The Group's share of results in the joint venture, HDFC Standard Life Insurance Company Limited (during 2008: 26%; 2007: started the year at 17.4% and ended the year at 26% shareholding)

• The Group's share of results in the joint venture, Heng An Standard Life Insurance Company Limited (during 2008: 50%; during 2007: 50% shareholding)

• The results of the Group's business in Hong Kong (Standard Life Asia), along with an allocation of costs attributable to the Asia Pacific Development head office

The Group's non-covered business mainly includes the business of Standard Life Bank, Standard Life Healthcare, Standard Life plc, the third party investment management business of Standard Life Investments, the non-covered business of Standard Life Savings and other non-life and pensions entities.  

Value of in-force covered business

The value of future equity holders' cash flows is calculated for each material business unit on an after-tax basis, projected using best estimate future assumptions as described below.

Allowance is made for external reinsurance and reinsurance within the Group. The cash flows include the profits and losses arising in Group companies providing investment management and other services where these relate to covered business.  This is referred to as the 'look through' into service company expenses.

The projected cash flows are discounted to the valuation date using a risk discount rate which is intended to make sufficient allowance for the risks associated with the emergence of these cash flows, other than those risks allowed for elsewhere in the EEV calculations. In particular, a deduction is made from the present value of the best estimate cash flows to reflect the risks associated with the existence of financial options and guarantees, this deduction being assessed using stochastic techniques as described below.

Free surplus

The free surplus is the market value of any assets allocated to, but not required to support, the in-force covered business at the valuation date. In the UK, this comprises the market value of the assets in the equity holders' fund, plus the value of the equity holders' interests in the surplus of the long-term fund, after appropriate allowance for tax, less the required capital supporting the covered business. 

For some assets and liabilities where market value is not the normal basis for accounting, as in Canada, the free surplus is restated to market value, adjusted as required to allow for the present value of any tax which would become payable if the assets were realised.

Allowance for risk

Under the EEV Principles and Guidance, risks within the covered business are allowed for in the following ways:

•    Application of risk discount rates to projected cash flows, which are derived by adding a risk margin to a risk free rate

•     Holding of required capital for the covered business, determined by reference to both regulatory requirements and internal economic capital assessments

•     Allowing for TVOG

Risk discount rates

Under the EEV methodology, a risk discount rate is required to calculate the present value of expected future distributable profits as a single value at a particular date. The risk discount rate comprises a risk free rate which reflects the time value of money and a risk margin allowing for the risk that experience in future years may differ from that assumed. In particular, a risk margin is added to allow for the risk that expected additional returns on certain asset classes are not achieved. 

Risk discount rates have been determined as the risk free government bond yield plus a risk margin. The risk margins have been determined for market risk and non-market risk separately. For market risk, we have opted for an approach whereby the risk margin is determined such that the PVIF, excluding the allowance for the TVOG, calculated using expected 'real world' asset returns equates with the PVIF calculated using 'risk neutral' investment returns and discount rates. In this way, the benefits of assuming higher than risk free returns on future cash flows are offset by using a higher discount rate. However, when returns above the risk free rate arise from the additional returns available from investing in illiquid assets, namely corporate bonds and mortgages, where they are matched to appropriate liabilities, these are not offset in determining the discount rate. Allowance has then been made for non-market risk by applying stress tests to the PVIF using our internal capital model, and quantifying an additional risk margin based on the results of the stress tests.  

The main elements of non-market risk which are stress tested are lapse, mortality, expense and credit risk assumptions. Benefits of diversification between risk types are allowed for in deriving the risk margins in line with our internal capital model. 

Separate risk discount rates have been calculated for in-force and new business and for the principal geographic segments (UK, Europe and Canada). Within the UK and Europe, separate risk margins are calculated for profits emerging on policies inside the HWPF (regardless of whether these profits emerge directly from the HWPF or by reassurance into other Group entities) and on policies that are in equity holder owned funds. For HWPF policies, there is a significant inter-Group reassurance agreement in respect of mortality surpluses on annuities, which are reassured out of the HWPF. The HWPF risk margin anticipates diversification benefits including the annuity mortality risk, since the overall capital structure also benefits from this diversification.  

The risk margins are also reduced to allow for any cost of required capital (excluding double taxation cost) which is already reflected within the EEV.

Market risk margins are reviewed at each valuation date, allowing for changes in risk profile arising from movements in asset mix. Non-market risk margins are reviewed in detail once a year.

The values of the risk discount rates used for this reporting period are provided in Note 12.

Required capital

Required capital represents the amount of assets over and above those required to back the liabilities in respect of the covered business whose distribution to equity holders is restricted. As a minimum, this will represent the capital requirement of the local regulator.

We have set required capital to be the higher of regulatory capital and our own internally assessed risk-based capital requirement. In determining the required capital for purposes of assessing EEV, we exclude any required capital which is provided by the existing surplus in the HWPF, as this capital is provided by policyholders. Any required capital in excess of that provided by the existing surplus in the HWPF would need to be provided by assets in the equity holders' fund. Projections show that the surplus in the HWPF is expected, on best estimate assumptions, to cover this level of required capital at the valuation date and in future years.  

16.    EEV methodology continued

The levels of required capital in the current EEV calculations are therefore as follows:

• UK and Europe (business in HWPF) - no capital requirement in excess of statutory reserves or asset shares is valued in the EEV

• UK and Europe (business in equity holder owned funds) - 100% of EU minimum regulatory capital, which is higher in aggregate than Standard Life's internal risk-based capital requirement

• Canada - the level of required capital is taken as 150% of minimum continuing capital and surplus requirements (MCCSR)

The cost of required capital has been calculated using assumptions consistent with those used in the value of in-force (VIF) calculations.

Time value of financial options and guarantees (TVOG)

The TVOG represents the potential additional cost to equity holders where a financial option exists which affects policyholder benefits and is exercisable at the option of the policyholder.  

UK and Europe - HWPF

The main source of TVOG in the Group EEV arises from the HWPF. Under the terms of the Scheme, equity holder cash flows from the HWPF are held back if required to cover HWPF liabilities on the Financial Services Authority realistic or regulatory basis. This option for the UK, Germany and Ireland results in the loss of cash flows when the HWPF has insufficient assets to pay guaranteed policy benefits. The main options and guarantees within the HWPF in respect of UK and European business relate to with profits business and include minimum guaranteed rates of return.

The value of the TVOG arising from the HWPF at any point in time will be sensitive to:

• The level of the residual estate (working capital in the HWPF)

• Investment conditions in terms of bond yields, equity and property values, and implied market volatility

• The investment profile of the assets backing the applicable policies, the residual estate and non profit business in the fund at the time the TVOG is calculated

The level of the TVOG has been calculated by a model which projects the HWPF under a large number of different future economic scenarios. Particular features of this calculation are:

• The projected economic scenarios and the methodology used to discount equity holder cash flows are based on market consistent assumptions

• The total cost includes an allowance for non-market risk

• Changes in policyholder behaviour are allowed for according to the particular economic scenario

• Changes in management actions, including the dynamic guarantee deductions, are allowed for according to the particular economic scenario, such actions being expected to be consistent with the way that the HWPF will be managed in future as described in the Scheme and in the Principles and Practices of Financial Management (PPFM)

• Each projection allows for the gradual release of the residual estate over time to policyholders where there are sufficient funds to do so

UK and Europe

Most with profits business written post demutualisation is managed in a number of new with profits funds. For the present reporting period, the only significant volumes of this type of new business have arisen in Germany. These policies have guarantees relating to benefits available on the policy maturity date. These guarantees increase each year with the addition of bonuses.  

Equity holder assets are at risk if the resources of these with profits funds are insufficient to pay the guaranteed benefits. The level of the TVOG has been calculated using stochastic techniques. The TVOG has reduced both the NBC as well as the closing PVIF for Europe.

Canada

The main options and guarantees within the Canadian business are in respect of minimum investment returns, guaranteed maturity and death benefits, and vested bonuses, which apply to certain investment and insurance contracts.

Other economic assumptions

The assumed investment returns reflect our estimates of expected returns on principal asset classes, and are, in general, based on market conditions at the date of calculation of the EEV. 

The inflation rates assumed are, in general, based on the market implied long-term price inflation plus a margin to allow for salary inflation.

Details of the assumptions used for this reporting period are provided in Note 12.

Non-economic assumption changes

Non-economic assumptions for the main classes of business, including most expense assumptions, are reviewed on an annual basis.

Expense assumptions

Expense assumptions on a per policy basis have been derived based on an analysis of management expenses performed by each business, and are split between acquisition and maintenance assumptions.  

In determining future expenses in relation to covered business, no allowance has been made in the EEV or the NBC for any allocation of Group Corporate Centre costs.

Development expenses represent specific expenses incurred which are considered temporary in nature and are not expected to occur again.

Costs related to restructuring have been excluded from the EEV results where it has been agreed that these costs are to be met by the HWPF and therefore would not form part of the surplus cash flows.

Investment management expenses are also allowed for, and the assumptions for these reflect the actual investment expenses of Standard Life Investments in providing investment management services to the life and pensions business rather than the investment fees actually charged.

Restructuring expenses for covered and non-covered business include the current year cost of the Continuous Improvement Programme (CIP) and any additional restructuring expenses consistent with those identified in the IFRS underlying profit adjustments. The total restructuring expenses are included together with the cost of any corporate activity in restructuring and corporate transaction expenses.

Expenses - pension scheme deficits

Pension scheme deficits have been included in accordance with International Accounting Standard (IAS) 19 Employee Benefits. IFRIC 14, IAS 19 The limit on a defined benefit asset, minimum funding requirements and their interaction was adopted by the Group from 1 January 2008. The interpretation provides guidance on assessing the limit in IAS 19, Employee benefits on the amount of the surplus that can be recognised as an asset and explains how the pension asset or liability may be affected by a statutory or contractual minimum funding requirement.  The interpretation has been taken into consideration in determining the treatment of the surplus arising in respect of the UK defined benefit plan.  

Other non-economic experience assumptions

Assumptions are made in respect of future levels of mortality, morbidity, premium terminations, option take-up, surrenders and withdrawals. The assumptions reflect our best estimates of the likely future experience, and are based on recent experience and relevant industry data, where available.  

Annuitant mortality assumptions use a combination of base mortality rates, which are generally set by reference to recent experience, and expected future changes in mortality. The latter uses data provided by the Continuous Mortality Investigation Bureau in the UK and the Canadian Institute of Actuaries in Canada along with other company specific considerations.

Assumptions regarding option take-up, surrenders and withdrawals are assumed to vary, where appropriate, according to the investment scenario under consideration when deriving the TVOG, to reflect our best estimate of how policyholder behaviour may vary in such circumstances. 

New business

Definition of new business

New business includes new policies written during the period and some increments to existing policies.

For the UK, classification as new or existing business is determined as follows (using the approach used for the published new business figures):

• New recurrent single premium business is classified as new regular premium business to the extent that it is deemed likely to renew

• Department of Work and Pensions (DWP) rebates are deemed to be new single premiums

• Pensions vesting into annuity contracts under existing group defined benefits contracts are not included as new business

• Pensions vesting under other group contracts and individual pensions are included as new business

• Products substituted due to the exercise of standard contract terms are not deemed to be new business

• All increments and indexations to existing policies, including new members, and increments and indexations paid by existing members of group schemes, are deemed to be new business

For Germany, new business comprises new contracts written into the equity holder owned funds during the period. 

The new business contribution for Germany is calculated assuming a specific level of future premium indexation. Similarly, it is assumed that premiums on 'Low Start' policies increase at the end of the low start period.

For Ireland, new business comprises:

• New contracts written during the period

• New premiums on recurrent single premium contracts

• Pensions vesting into annuity contracts under existing group defined benefits contracts are not included as new business

• Pensions vesting under other group contracts and individual pensions are included as new business

• All increments and indexations to existing policies, including new members, and increments and indexations paid by existing members of group schemes, are deemed to be new business

For Canada, business is deemed to be 'new business' if a contract has been issued during the reporting period. The new business contribution also includes the value of renewal premiums for a new contract, where the renewal premiums are (i) contractual, (ii) non-contractual but reasonably predictable, or (iii) recurrent single premiums that are pre-defined and reasonably predictable. The present value of future net income attributable to renewal premiums on existing group pension and savings contracts, including those from new members, is not included as new business. Since all deposits (new and renewal) in individual segregated funds business attract a new business/first year commission, this business is treated as new business for EEV purposes.

New business contribution (NBC)

The contribution generated by new business written during the period is the present value of the projected stream of after-tax distributable profit from that business. NBC before tax is calculated by grossing up the contribution after tax at the full corporation tax rate for UK business and at other equivalent rates of tax for other countries. NBC is calculated as at the end of the reporting period.

The economic assumptions used are those at the start of the reporting period, and the non-economic assumptions are those at the end of the reporting period. An exception to this policy is annuity business in the UK and Ireland where, to ensure consistency between the economic assumptions used in the NBC and those used in pricing the business and in the calculation of mathematical reserves, the economic assumptions used are the average rates for each quarter during the reporting period, and the asset allocations are those used in the pricing basis.

Present value of new business premiums (PVNBP)

New business sales are expressed as the PVNBP. The PVNBP calculation is equal to total single premium sales received in the period plus the discounted value of regular premiums expected to be received over the term of the new contracts, and is expressed at the point of sale. The premium volumes and projection assumptions used to calculate the present value of regular premiums for each product are the same as those used to calculate NBC, except that the PVNBP is discounted using the relevant opening risk free rate rather than the risk discount rate.  

Tax

The opening and closing EEV numbers for the covered business are determined on an after tax basis. The tax assumptions used are based upon the best estimate of the actual tax expected to arise. Attributable tax and profit before tax are derived by grossing up profit after tax at the long-term rate of corporation tax appropriate to each territory. While for some territories this rate does not equate to the actual effective rate of tax used in the calculation of after tax profits, it provides a consistent grossing up basis upon which to compare results from one year to another and is in line with the Group's expectation of the rate of tax applicable to new business. 

Transfers to equity holders from the HWPF will, in the first instance, be funded from unallocated surplus. The profit after tax result is stated after allowing for this and takes into account the risk of markets moving adversely in the future which would reduce the amount that can be transferred to equity holders from the unallocated surplus. These transfers can be made without equity holder tax arising for a number of years. Over time the actual effective tax rate on these transfers will move toward the standard rate of corporation tax.

For non-covered business, attributed tax is consistent with the IFRS financial statements, unless otherwise stated.

Subordinated liabilities

The liabilities in respect of the UK subordinated guaranteed bonds and Mutual Assurance Capital Securities plus the subordinated debt issued by the Canadian companies form part of covered business and have been deducted at market value within the EEV. The Canadian subordinated liability is owned by a non-covered subsidiary of the Group, where the asset is valued on an amortised cost basis. Total Group EEV has been adjusted to exclude the difference between the market value and the amortised cost value of the Canada subordinated liability.

For non-covered business, no adjustment is made to the IFRS valuation of debt.

Foreign exchange

Embedded value and other balance sheet items denominated in foreign currencies have been translated to sterling using the appropriate closing exchange rates. NBC and other profit and loss account items have been translated using average exchange rates. Gains and losses arising from foreign exchange differences on consolidation are presented separately within the EEV consolidated statement of recognised income and expense.

Details of the exchange rates applied are provided in Note 14.

Glossary

Annuity

A periodic payment made for an agreed period of time (usually up to the death of the recipient) in return for a cash sum. The cash sum can be paid as one amount or as a series of premiums. If the annuity commences immediately after the payment of the sum it is termed an immediate annuity. If it commences at some future date it is termed a deferred annuity.

Annual premium equivalent (APE)

An industry measure of new business. The total of new annualised regular premiums plus 10% of single premiums written during the applicable period.

Assumptions

Variables applied to data used to project expected outcomes.

Acquisition costs 

Expenses related to the procurement and processing of new business written including a share of overheads.

Back book management

We choose to analyse our EEV operating profit before tax in the three components which reflect the focus of our business effort - core, efficiency and back book management. Back book management includes all non-expense related operating variances and assumption changes for covered business plus those development costs directly related to back book management initiatives and, for non-covered business, specific costs attributed to back book management.  

Board

The board of Directors of the Company.

CFO Forum

A high-level discussion group formed and attended by the Chief Financial Officers of major European listed, and some non-listed, insurance companies.

Company

Standard Life plc.

Core

We choose to analyse our EEV operating profit before tax in the three components which reflect the focus of our business effort - core, efficiency and back book management. Core includes new business contribution, expected return and development costs for covered business excluding those development costs directly related to back book management initiatives and, for non-covered business, IFRS underlying profit excluding specific costs attributable to back book management.

Cost income ratio

The ratio of total costs to total income for the year expressed as a percentage. This KPI indicates how much of total income is being employed to meet the cost base and measures the strategic driver of cost effectiveness in the banking business within UK financial services (UKFS).

Covered business

The business covered by the EEV methodology. This should include any contracts that are regarded by local insurance supervisors as long-term or life insurance business and may cover other long-term life insurance, short-term life insurance such as group risk business and long-term accident and health business. Where short-term healthcare is regarded as part of or ancillary to a company's long-term life insurance business, then it may be regarded as long-term business.

Deferred acquisition costs (DAC)

The method of accounting whereby acquisition costs on long-term business are deferred in the balance sheet as an asset and amortised over the life of those contracts. This leads to a smoothed recognition of up front expenses instead of the full cost in the year of sale.  

Deferred income reserve (DIR)

The method of accounting whereby front end fees that relate to services to be provided in future periods are deferred in the balance sheet as a liability and amortised over the life of those contracts. This leads to a smoothed recognition of up front income instead of the full income in the year of sale.  

Demutualisation

The process by which a mutual organisation owned by its members, such as a building society or insurance company, converts to a public limited company owned by its equity holders. The Standard Life Assurance Company demutualised and shares of Standard Life plc, the new holding company for the Standard Life Group, were listed on the London Stock Exchange on 10 July 2006.    

Development costs 

Costs that are considered to be non-recurring and are reported separately from other expenses in the EEV movement analysis.

Director

A director of the Company.

Discounted pay back period

A measure of capital efficiency that measures the time at which the value of expected cash flows (after tax) is sufficient to recover the capital invested to support the writing of new business. Cash flows are discounted at the appropriate risk discount rate.

Discounting 

The reduction to present value at a given date of a future cash transaction at an assumed rate, using a discount factor reflecting the time value of money. The choice of a discount rate will usually greatly influence the value of insurance provisions, and may give indications on the conservatism of provisioning methods.  

Dividend cover

This is a measure of how easily a company can pay its dividend from profit. It is calculated as IFRS underlying profit after tax and minority interest divided by the total dividend for that financial year. The dividend for the financial year is the current year interim dividend plus the proposed final dividend.    

Earnings before interest and tax (EBIT)

EBIT is defined as earnings before interest, taxation, foreign exchange gains and losses, profit on partial disposal of investment in associate, divergence on financial guarantee costs, movement on contract for differences and restructuring costs. This KPI measures directly the underlying operating profitability.

EBIT margin

This is an industry measure of performance for investment management companies. It is calculated as EBIT divided by total revenue. 

Economic assumptions

Assumptions in relation to future interest rates, investment returns, inflation and tax. These assumptions and variances in relation to these assumptions are treated as non-operating profits/(losses) under EEV.

Efficiency

We choose to analyse our EEV operating profit before tax in the three components which reflect the focus of our business effort - core, efficiency and back book management. Efficiency includes covered business maintenance expense variances and assumption changes.

European Embedded Value (EEV)

The value to equity shareholders of the net assets plus the expected future profits on in-force business from a life assurance and pensions business. Prepared in accordance with the EEV Principles and Guidance issued in May 2004 by the CFO Forum and the Additional Guidance issued in October 2005. EEV reports the value of business in-force based on a set of best estimate assumptions, allowing for the impact of uncertainty inherent in future assumptions, the costs of holding required capital, the value of free surplus and TVOG.  

EEV operating profit - covered business

Profit generated from new business sales and the in-force book of business, based on closing non-economic and opening economic assumptions.  

EEV operating profit capital and cash generation

This is a measure of the underlying shareholder capital and cash flow of the Group and is measured as the EEV operating profit net worth (free surplus and required capital) on an after tax basis.

Expected return on EEV

Anticipated results based on applying opening assumptions to the opening EEV.

Experience variances

Current period differences between the actual experience incurred over the period and the assumptions used in the calculation of the embedded value excluding new business non-economic experience variances which are captured in new business contribution.

Financial options and guarantees

Terms relating to covered business conferring potentially valuable guarantees underlying, or options to change, the level and nature of policyholder benefits and exercisable at the discretion of the policyholder, whose potential value is impacted by the behaviour of financial variables.

Free surplus

The amount of capital and any surplus allocated to, but not required to support, the in-force business covered by the EEV.

Group assets under administration (AUA)

A measure of the total assets that the Group administers on behalf of customers and institutional clients, it includes those assets for which the Group provides investment management services, as well as those assets that the Group administers where the customer has made a choice to select an external third party investment manager. Assets under administration reflect the value of the IFRS gross assets of the Group adjusted, where appropriate, for consolidation adjustments, inter-company assets and intangible assets. In addition, the definition includes third party assets administered by the Group which are not included in the consolidated balance sheet.

Group capital surplus

This is a regulatory measure of our financial strength and compares the Group's capital resources to its capital resource requirements in accordance with the Financial Groups Directive.

Group, Standard Life Group or Standard Life

Prior to demutualisation on 10 July 2006, SLAC and its subsidiaries and, from demutualisation on 10 July 2006, the Company and its subsidiaries.

Heritage With Profits Fund (HWPF)

The Heritage With Profits Fund contains all existing business - both with profits and non profit - written before demutualisation in the UK, Irish or German branches, with the exception of the classes of business which the Scheme of Demutualisation allocated to the Proprietary Business Fund. This HWPF also contains increments to existing business.  

Individual Capital Assessment (ICA)

The process by which the Financial Services Authority (FSA) requires insurance companies to make an assessment of the regulated company's own capital requirements, which is then reviewed and agreed by the FSA.

In-force 

Long-term business which has been written before the period end and which has not terminated before the period end.

Interest margin 

Net interest income for the year as a percentage of average total assets during the year disclosed in basis points (1/100th of 1%). This is a measure of how much margin the Group is making on its banking assets and measures the driver of income generation for this business.

Internal rate of return (IRR)

A measure of rate of return on an investment and so an indicator of capital efficiency. The IRR is equivalent to the discount rate at which the present value of the after tax cash flows expected to be earned over the lifetime of new business written is equal to the capital invested to support the writing of the business.

Key performance indicator (KPI)

These are measures by reference to which the development, performance or position of the business can be measured effectively. 

Maintenance expenses

Expenses related to the servicing of the in-force book of business (including investment and termination expenses and a share of overheads).

Market Consistent Embedded Value (MCEV)

The MCEV Principles were issued by the CFO Forum on 4 June 2008 to replace the current EEV Principles and Additional Guidance and were designed to improve the transparency and comparability of embedded value reporting. On 19 December 2008, the CFO Forum announced that it would be reviewing the MCEV Principles in light of the current turbulent economic conditions.

Mutual fund

A collective investment vehicle enabling investors to pool their money, which is then invested in a diverse portfolio of stocks or bonds, enabling investors to achieve a more diversified portfolio than they otherwise might have done by making an individual investment.  

Net flows

Life and pensions net flows represents gross inflows less redemptions. Gross inflows are premiums and deposits recognised in the period on a regulatory basis (excluding any switches between funds). Redemptions are claims and annuity payments (excluding any reinsurance transactions and switches between funds).

Net worth

The market value of equity holders' funds and the shareholders' interest in the surplus held in the non profit component of the long-term business funds, determined on a statutory solvency basis and adjusted to add back any non-admissible assets per regulatory returns.

New business contribution (NBC)

The expected present value of all future cash flows attributable to the equity holder from new business, as included within EEV operating profit.

New business strain (NBS)

Costs involved in acquiring new business (such as commission payments to intermediaries, expenses, reserves) affecting the insurance company's financial position at that point and where all of the income from that new business (including premiums and investment income) has not yet been received and will not be received until a point in the future. To begin with, therefore, a strain may be created where cash outflows exceed inflows.

NBS margin 

New business strain as a percentage of PVNBP sales (see PVNBP below).  

Non-covered business

Mainly includes third party investment management, banking, healthcare and other businesses not associated with the life assurance and pensions business. Non-covered business is excluded from the EEV methodology and is included within the Group EEV on an IFRS basis.

Non profit policy

A policy, including a unit linked policy, which is not a with profits policy.

Personal pension plan

An individual pension arrangement with particular tax advantages whereby individuals who are self-employed or those who are not members of employer-sponsored pension scheme arrangements can make provision for retirement or provide benefits for their dependents in a tax efficient manner. 

Present value of in-force business (PVIF)

The present value of the projected future distributable profits after tax attributable to equity holders from the covered business in force at the valuation date, adjusted where appropriate, to take account of TVOG.

Present value of new business premiums (PVNBP)

The industry measure of insurance new business sales under the EEV methodology. It is calculated as 100% of single premiums plus the expected present value of new regular premiums.  

Pro forma profit

Pre-demutualisation IFRS and EEV mutual figures adjusted to calculate a profit figure for the Group as if the holding company, Standard Life plc, had been listed at the beginning of that period. This information, where included, is unaudited and is prepared for illustrative purposes only.  

Proprietary Business Fund

The Proprietary Business Fund in SLAL contains, among other things, certain classes of business - pension contribution insurance policies, income protection plan policies and a number of SIPP policies written before demutualisation, as well as most new insurance business written after demutualisation in the UK, Ireland and Germany.

PVNBP margin

PVNBP margin is NBC expressed as a percentage of PVNBP. This measures whether new business written is adding value or eroding value.  

Recourse cash flow (RCF)

Certain cash flows arising in the HWPF on specified blocks of UK and Irish business, which are transferred out of the fund on a monthly basis and accrue to the ultimate benefit of equity holders, as determined by the Scheme of Demutualisation. 

Regular premium

A regular premium contract (as opposed to a single premium contract), is one where the policyholder agrees at inception to make regular payments throughout the term of the contract.

Required capital 

The amount of assets, over and above the value placed on liabilities in respect of covered business, whose distribution to equity holders is restricted. 

Return on EEV (RoEV)

The annualised post-tax operating profit on an EEV basis expressed as a percentage of the opening embedded value, adjusted for dividends paid to equity holders. 

Return on equity (RoE)

Calculated as IFRS underlying profit after tax divided by opening net assets.

Scheme of Demutualisation (the Scheme)

The scheme pursuant to Part VII of, and Schedule 12 to, the Financial Services and Markets Act 2000, under which substantially all of the long-term business of SLAC was transferred to Standard Life Assurance Limited on 10 July 2006.

Single premium

A single premium contract (as opposed to a regular premium contract (see above)), involves the payment of one premium at inception with no obligation for the policyholder to make subsequent additional payments.

SIPP

A self invested personal pension which provides the policyholder with greater choice and flexibility as to the range of investments made, how those investments are managed, the administration of those assets and how retirement benefits are taken.

SLAC

The Standard Life Assurance Company (renamed The Standard Life Assurance Company 2006 on 10 July 2006).

Time value of options and guarantees (TVOG)

Represents the potential additional cost to equity holders where a financial option or guarantee exists which affects policyholder benefits and is exercisable at the option of the policyholder.

Total shareholder return

This is a measure of the overall return to shareholders and includes the movement in the share price and any dividends paid and reinvested.

Underlying profit

An IFRS profit measure the Group uses to provide a more meaningful analysis of the underlying business performance. Underlying profit is calculated by adjusting profit attributable to equity holders before tax for items such as volatility arising from accounting mismatches, impairment of intangibles and certain restructuring expenses.

Unit linked policy

A policy where the benefits are determined by reference to the investment performance of a specified pool of assets referred to as the unit linked fund.

With profits policy

A policy where, in addition to guaranteed benefits specified in the policy, additional bonuses may be payable from relevant surplus. The declaration of such bonuses (usually annually) reflects, amongst other things, the overall investment performance of the fund of which the policy forms part. Also known as a 'participating policy'.  

Wrap platform

An investment platform which is essentially a trading platform enabling investment funds, pensions, direct equity holdings and some life assurance contracts to be held in the same administrative account rather than as separate holdings.

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