Final Results - Part 2 of 4

RNS Number : 6630C
Standard Life plc
10 March 2011
 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Standard Life plc

Preliminary Results

2010

 

Part 2 of 4

 


Section

Contents

Page

1

Business review

13

1.1

Group overview

14

1.2

IFRS - Group

17

1.3

EEV - Group

20

1.4

Business segment performance

22


1.4.1   UK

22


1.4.2   Canada

25


1.4.3   International

27


1.4.4   Global investment management

29

1.5

Capital and cash generation

31

1.6

Risk management

35

1.7

Our customers

38

1.8

Our people

41

1.9

Basis of preparation

42

2

International Financial Reporting Standards (IFRS)

43


IFRS primary statements

44


IFRS notes

50

3

European Embedded Value (EEV)

71


EEV primary statements

72


EEV notes

75

4

Supplementary information

109

4.1

Analysis of IFRS profit by segment

110

4.2

EEV and EEV operating profit

111

4.3

Reconciliation of IFRS operating profit to EEV capital and cash generation

112

4.4

Group assets under administration and net flows

113

4.5

Analysis of new business

119

4.6

Exposure to investment property and financial assets

124

4.7

Fair value hierarchy of financial instruments

127

4.8

Total expenses and operating cost base

128

4.9

Growth investment spend

129

 

 

 

 

The Preliminary Results 2010 are published on the Group's website at www.standardlife.com

 

The Directors are responsible for the maintenance and integrity of the financial information published on the website in accordance with UK legislation governing the dissemination of financial statements.

 

Access to the website is available outside the UK, where comparable information may be different

 


 

 

 

 

 

 

1  Business review


1.1 Group overview

There are exciting opportunities for Standard Life in our key markets. External market forces affect our results and can influence the Group's performance. We assess our ability to achieve our strategic objectives by monitoring a range of key performance indicators.

Industry overview

We have performed strongly during 2010 and are well placed to benefit from future regulatory and demographic changes in all our markets. We believe that changing customer behaviours, the Retail Distribution Review, auto enrolment and the continuing pensions savings gap will create opportunities for our business.

Higher market levels

Although the financial crisis continued to weigh heavily on the global economy in 2010, average market values were substantially higher than in 2009. For example, the average daily FTSE All-Share Index rose by 21% between 2009 and 2010. Combined with similar rises in other major world markets, this contributed to a 16% increase in our fee based revenue to £1,131m. Higher market levels have a positive impact on our business as a significant proportion of our revenue is based on a percentage fee applied to assets under administration.

Pension reform

The UK Government has recently announced pension reform measures that retain an annual allowance for pension contributions qualifying for tax relief. There will also be a rise in the state pension age for men and women to age 66 by 2020. We welcome the simple and straightforward nature of the pension tax relief rules as these remove much of the administrative burden that the previous proposals of tiered removal of tax relief based on income would have created. The new three year carry forward rule will also allow high earners, restricted by the current interim rules, to make larger contributions from 6 April 2011. Simplification of pension tax relief rules makes it easier for advisers and individuals to plan effectively for their retirement. This is more important than ever given the size of the pension savings gap. The Government also announced the end of compulsory annuitisation from April 2011. The move is intended to provide individuals with more flexibility over the use of their pension savings and may encourage more people to save for the long term.

In Canada, the Federal Government announced its intention to create the legal environment for a new type of pension plan called the Pooled Registered Pension Plan (PRPP). This aims to make it easier and more affordable for small employers to offer pension plans and for self-employed individuals to participate. This new plan would be administered by the private sector and is expected to be in place in 2012 at the earliest. However, for this to happen, there will need to be provincial legislative changes. This initiative could increase the size of the pension plan market by improving accessibility to pension plans.

Changing demographics

Changing demographics continue to impact our key markets. The changes include: an ageing population, with people living longer whilst managing more extensive debt; diminishing state and employer pension provision; an increasing wealth gap between rich and poor; and lower long-term birth rates. In the UK, the structure of the population is changing as life expectancy rapidly increases. In 2009 there were 1.4 million people aged 85 and over in the UK and this is expected to increase to around 3.5 million by 2034. This emphasises the need for individuals to ensure that they have adequate pension provision to fund their retirement.

The UK currently has a significant pension savings gap. This gap is the difference between the income an individual needs for a comfortable retirement and the actual pension that they are on target to receive. The UK Government is making changes to increase the proportion of the population saving for retirement, including auto enrolment and the introduction of the National Employment Savings Trust (NEST). We believe that these steps will increase contributions to private pensions and that we are well placed to benefit from these changes.

The changes above, combined with improved technology and automation, are altering the way customers approach their finances. Our customers are increasingly self-reliant and willing to take a greater role in managing their savings. We have increased our growth investment in the business over 2010, including a significant investment in technology. Together with our recent acquisition of Focus Solutions, this will allow us to capitalise on the growing consumer demand for technology-enabled long-term savings and investment solutions.


 

Government legislation and regulatory environment

There are currently a number of legislative and regulatory initiatives under discussion. The key initiatives and their potential impact on Standard Life are set out below:

Description

Potential impact on Standard Life

Retail Distribution Review

 

The Retail Distribution Review (RDR) is designed to increase transparency in retail financial services and to raise professional standards. The RDR is due to be implemented by the end of 2012. The review has significant implications for those providing retail financial advice and involves new qualification standards for all advisers. The objectives of the RDR are to:

·   Improve the clarity with which firms describe their services and fees to consumers

·   Address the potential for adviser remuneration to distort consumer outcomes

·   Increase the professional standards of investment advisers

 

The RDR will bring a major change to the distribution landscape in the UK. While every significant change brings some inherent disruption and uncertainty, we believe that our customer-centric, capital-efficient approach means that we are particularly well placed to meet the proposed changes to the market in terms of removal of commission, increased transparency and professionalism.

We have focused on building relationships with the new model advisers, who do not rely on commission to fund their business model and have the level of professionalism needed for a post-RDR world. We do not rely on paying commission to promote our propositions. Therefore, the ban on commission that will come as part of the RDR will effectively double the size of our accessible market.

Our customer service, brand and technology enable us to win significant levels of business without paying commission. This will position us strongly once the playing field has been levelled through the RDR.

Auto enrolment

 

From October 2012 all employers will be required to automatically enrol eligible employees into a qualifying pension scheme and make combined employer and employee contributions of 8%. Not all employees are eligible for auto enrolment and employees have the right to opt out of the pension scheme if they wish.

However, it is believed that the shift from 'opting in' to 'opting out' will increase the level of participation in corporate schemes from 50% to 80%.

As a provider of quality corporate pensions schemes, we welcome the introduction of auto enrolment in 2012. Millions of people in the UK are not saving enough to provide adequately for their retirement. Auto enrolment is an important step in improving the situation.

We expect to benefit from auto enrolment from both more scheme wins as employers look to offer their employees a tailored solution, and also through increased participation in our current schemes as employees decide not to opt out.

National Employment Savings Trust

Employers who do not want to set up their own pension scheme or join an existing commercial scheme have the option to enrol their employees into a low-cost pension scheme called National Employment Savings Trust (NEST). Individuals will however, still have the choice of opting out. Implementation will be phased in over four years from 2012. Larger employers will have their duties imposed first, smaller employers last.

This scheme aims to solve the problems of low portability and high charges. It is intended to operate as a large, multi-employer occupational pension scheme and extend the benefits of employer schemes to those who currently don't have access to them - typically those on

low-to-moderate incomes.

 

NEST is targeted at employers with employees on

low-to-moderate incomes. Many employers will be looking for greater flexibility when setting up a pension scheme, so we do not consider NEST to be a major threat to our corporate pensions business. Our position has been strengthened further with the introduction in February 2011 of our combined pension and flexible benefits proposition called Lifelens. This allows employers to offer even more flexibility and accessibility to their employees.

There is some market belief that NEST will lead to generally lower margins. However, although marketed as a low cost option, NEST will have an initial charge of 1.8% with an annual management fee of 30 basis points. This is broadly comparable with many of the commercial options in the market at the moment. Therefore, we do not see a significant pressure on revenue margins after NEST is introduced.

 

1.1 Group overview continued

 

Description

Potential impact on Standard Life

Solvency 2

 

Solvency 2 is a major European regulatory change initiative which is currently due to be implemented on 1 January 2013, although firms will be required to be ready well in advance of this date.

The Omnibus 2 Directive, published in January 2011, will amend the Solvency 2 Directive and is included in our implementation plans.

Solvency 2 will affect risk and capital management, external reporting, supervision and business strategies of the European insurance industry.

We have been following the development of the new regime for many years and are actively involved in industry and regulatory discussions within the UK and Europe.

We took part in the recent QIS5 exercise and have a formal development programme in place to ensure Standard Life is well prepared for the implementation of the new framework.

IFRS 4 Phase II

 

The International Accounting Standards Board (IASB) has published an exposure draft setting out draft proposals for a new accounting standard for insurance contracts (IFRS 4 Phase II).

We have actively contributed to industry responses to the proposals outlined in the exposure draft. The proposals will have a significant impact on reported earnings and business systems within the industry.

Gender differentiation

On 1 March 2011, the European Court of Justice ruled that the use of gender as a factor in determining premiums and benefits in insurance contracts will no longer be permitted. This change will take effect from 21 December 2012.

We currently use gender as a risk factor in calculating premiums and benefits for a number of our products. Following this ruling, we will not be making any immediate change to gender based rates used in our products. Looking ahead, we will ensure that the appropriate changes are implemented in accordance with the ruling but do not currently anticipate a significant impact on our results.

 

Transforming our business

We've made significant progress in transforming how we operate to deliver our strategic priorities. In corporate, we recently launched the employee benefits platform, Lifelens. Lifelens is the only proposition in the market that offers a single, fully flexible savings and benefit solution for employers and employees. The strength of this proposition allows us to work across the Group to look at opportunities to distribute Lifelens internationally. We have also recently developed a new online ISA and re-launched our Adviserzone platform.

In retail, our flexible UK Active Money Personal Pension provides an entry-level retirement savings proposition. Our new strategic alliance with Chuo Mitsui Asset Trust and Banking Company assists us in expanding the global reach of our investment management business. The joint venture businesses in Asia continue to develop.

We continue to invest in our technology to ensure that our propositions deliver a competitive advantage through a model that lowers the cost to acquire and serve customers. By building more automation into our processes we will remove barriers to growth and give our customers more control over their finances. New technologies will play an increasingly important role in the way we operate.

In June 2010, 'Take to Market' divisions were created in all our businesses. This brought sales, marketing and distribution closer together, increasing our speed to market. Standard Life Investments and the UK Take to Market business are jointly developing investment solutions for customers. This includes the launch of MyFolio, a proposition designed to help customers find the right investment solution for them. Since its launch in September 2010, MyFolio has already secured over £100m of assets under management, with higher than expected investment into actively managed funds at Standard Life Investments.

In September 2010, we announced changes to our organisational structure to support our transformation. This included reducing the size and cost of our group corporate centre. We confirmed that we would remove up to 600 jobs across the business and create up to 100 new jobs to support delivery of our strategy.

In February 2011, we took another important step on our transformation journey when we launched our brand repositioning and new visual identity. A key part of our brand repositioning is to deliver even clearer communications to our customers to help them plan for their financial future.

We are also driving an increased focus on performance throughout the Group. This includes aligning management and staff incentives to improve performance and increase Group IFRS operating profits. More details on our management incentives are included in Section 1.8 and the Directors' remuneration report in the Annual Report and Accounts 2010.

These changes will make our business more efficient, faster to market and improve our customers' experiences. We believe this will make us more profitable and generate more cash.


1.2 IFRS - Group

The IFRS results demonstrate our ability to deliver high quality returns for shareholders and the ongoing dividend paying capability of the Group. We will continue to streamline operational processes and enhance efficiency to reduce costs.

IFRS highlights

2010

2009

Movement

IFRS operating profit before tax from continuing operations1

£425m

£399m

7%

IFRS profit after tax attributable to equity holders of Standard Life plc

£432m

£213m

103%

Assets under administration

£196.8bn

£170.1bn

16%

1    Profit from continuing operations excludes Standard Life Bank plc and Standard Life Healthcare Limited, which were sold on 1 January 2010 and 31 July 2010 respectively.

IFRS profit

IFRS profit for the year was £493m (2009: £180m). This comprised profit after tax attributable to equity holders of £432m (2009: £213m) and profit attributable to non-controlling interests of £61m (2009: loss £33m). The IFRS result included a 7% increase in operating profit before tax from continuing operations from £399m to £425m. Non-operating profits were £85m (2009: loss £255m).

IFRS operating profit before tax from continuing operations

2010

2009


£m

£m

Fee based revenue

1,131

972

Spread/risk margin

370

461

Total income

1,501

1,433

Acquisition expenses

(267)

(240)

Maintenance expenses

(673)

(628)

Growth investment spend

(149)

(106)

Joint venture businesses

(23)

(27)

Group corporate centre costs

(50)

(50)

Capital management

27

17

Other

59

-

Group IFRS operating profit before tax from continuing operations

425

399

The key movements in IFRS operating profit before tax from continuing operations were:

·   Increased fee revenue of £159m from higher asset levels and the strong level of net inflows

·   Reduced spread/risk margin of £91m, impacted by reduced annuity volumes and the £5m (2009: £63m) deferred annuity reserves release

·   Increased growth investment spend in the business of £43m

·   Other expenses increased by £72m due to the less than proportionate rise in the cost of writing new business and higher costs associated with maintaining a larger book of business. Acquisition expenses expressed as a proportion of sales fell from 171bps in 2009 to 149bps and maintenance expenses as a proportion of average customer assets reduced from 47bps in 2009 to 42bps

·   Other relates to a change in the basis of future pension increases in the UK staff pension scheme which contributed £59m in 2010

Further explanations for the movements in IFRS operating profit before tax are provided below:

Group IFRS operating profit before tax increased to £425m. Fee business revenue, which mainly relates to asset management charges, increased by 16% to £1,131m. This was due to higher asset values following positive market movements and the strong growth in net inflows.

Spread/risk margin includes net earned premiums, claims and benefits paid, net investment return using long-term assumptions and reserving changes. Spread/risk margin reduced due to lower annuity volumes resulting from changes in our pricing due to market conditions and changes in operating assumptions in the UK. The 2010 result also included a £5m (2009: £63m) release of reserves following the review of UK deferred annuity data.

We have continued to invest for future growth in the business. This led to growth investment spend included in IFRS operating profit before tax increasing in 2010 to £149m, with a number of customer propositions launched during the year. The total amount invested in 2010 was £201m (2009: £128m). This includes additional investment in our joint ventures in Asia and also capitalised investment spend that does not impact profitability in 2010.

1.2 IFRS - Group continued

Acquisition expenses are the costs we incur in writing new business. Acquisition expenses increased to £267m reflecting the strong growth in sales volumes. Acquisition expenses expressed as a proportion of sales improved to 149bps (2009: 171bps).

Maintenance expenses mainly relate to the ongoing costs that we incur to service and administer customer policies. These costs increased to £673m. Maintenance expenses expressed as a proportion of average AUA improved to 42bps (2009: 47bps).

The improvement in both of the expense trends demonstrates the scalability of our business. Growth in new business and customer assets has led to greater levels of efficiency.

In 2010 we achieved a margin improvement of £61m. This includes £34m in the second half of the year relating to our 2012 target. We are on track to meet our target of a further £100m margin improvement by 2012. The previous target of £75m was achieved six months earlier than our original target.

Segmental analysis of IFRS operating profit

UK

UK IFRS operating profit before tax from continuing operations increased to £234m. The average revenue yield on fee business increased to 77bps (2009: 75bps). The average revenue yield is a measure of fee business revenue expressed as a proportion of average fee based AUA in the year. Profitability was boosted by an increase in revenue from our existing fee based business and a £59m benefit from the change in the UK pension scheme.

 

This was partly offset by a reduction in spread/risk margin. The 2010 results included a £5m (2009: £63m) release of reserves following the review of our deferred annuity data.

The 2008 result included several one-off items that contributed £101m to profitability.

Canada

Canada recorded an operating profit before tax of £110m. 2010 results benefited from an increase in fee based revenue, as well as a release of reserves due to a review of annuity policy data and changes to reinsurance arrangements. The average revenue yield on fee business increased slightly to 118bps (2009: 116bps). 2009 results benefited from management actions to improve asset and liability matching, which decreased policyholder liabilities.

International

IFRS operating profit before tax of the wholly owned International businesses decreased to £38m (2009: £50m). This was mainly due to the decreasing transfer of profit to shareholders from the Heritage With Profits Fund (HWPF) in Germany. The average revenue yield on fee business was lower at 212bps (2009: 248bps), reflecting the continued shift away from premium based charges in Germany. This contributed to a fall in profitability in Germany to £42m (2009: £55m).

The joint ventures in India and China contributed an IFRS operating loss before tax of £23m (2009: loss £27m) to the Group, reflecting the continuing investment in developing the operations in these markets.

Global investment management

Global investment management IFRS operating profit before tax increased to £103m. This was mainly due to a rise in revenue of 29% as a result of higher average market values and increased third party new business flows. Third party average revenue yield on fee business increased to 35bps (2009: 34bps) with strong sales in higher margin products including GARS.


Other

Group corporate centre costs increased to £54m (2009: £50m) due to increased investment in the business, including growth investment spend of £4m. Other income remained broadly unchanged at £17m (2009: £18m).

Find out more about the IFRS operating results of our businesses in Section 1.4 - Business segment performance.

IFRS non-operating profit/(loss) before tax from continuing operations

IFRS non-operating profit was £85m compared with a loss of £255m in 2009. The increase primarily relates to short-term fluctuations in investment return and economic assumptions which produced non-operating gains of £127m in 2010 compared with losses of £214m in 2009. Non-operating restructuring and corporate transaction expenses increased to £71m (2009: £52m).

Assets under administration and net flows

Demand for our innovative products and services remained strong and led to good growth in net inflows which increased by 11% to £7.2bn. Supported by positive market movements, this led to a 16% increase in assets under administration (AUA) to £196.8bn. Of the total AUA, 83% (2009: 82%) related to fee business. The overall increase in AUA was driven by a significant increase in fee business AUA in the long-term savings and third party investment management businesses. Fee business AUA rose by 17% to £163.1bn (2009: £138.9bn). This increase was driven by a 14% growth in net flows to £7.9bn (2009: £6.9bn). Spread/risk business AUA increased by 5% to £23.5bn. This was due to positive market movements offsetting the £1.0bn (2009: £0.6bn) of net outflows.Find out more about the AUA and net flows of our businesses in Section 1.4 - Business segment performance.


1.3 EEV - Group

EEV measures shareholders' value of net assets and expected future profits on the existing book of business. The EEV results reflect our continuing focus on building a leading long-term savings and investments business by managing our existing book of business effectively and writing profitable new business.

EEV highlights

 

2010

2009

Movement

EEV per share

322p

288p

12%

EEV operating profit before tax from continuing operations1

£787m

£844m

(7%)

EEV profit before tax

£1,152m

£474m

143%

Return on embedded value from continuing operations1

8.7%

9.9%

(1.2% points)

1      Continuing operations exclude Standard Life Bank plc and Standard Life Healthcare Limited, which were sold on 1 January 2010 and 31 July 2010 respectively.

Group embedded value

Group embedded value increased to £7,321m (2009: £6,435m) representing an EEV per share of 322p. EEV per share has increased by 46p before dividend distributions, representing a return of 16% on the opening EEV per share.

This movement included operating profit from continuing operations of £538m after tax (24p per share). This resulted in a return on embedded value (RoEV) of 8.7%. Non-operating profit from continuing operations was £258m after tax (12p per share). See below for more detail on the operating and non-operating results on a before tax basis.

Non-trading foreign exchange movements were positive £152m. Actuarial gains of £125m after tax largely reflect the £149m after tax increase in the surplus of the UK pension scheme.

The closing EEV of £7,321m consists of £3,483m of net worth or shareholder net assets and £3,838m from the present value of in-force business (PVIF). The increase in total EEV of £886m consists of a movement in net worth of positive £432m and a movement in the PVIF of positive £454m.

Find out more in Section 1.5 - Capital and cash generation on the movements in EEV shareholder net assets (net worth).

EEV profit

EEV profit before tax of £1,152m (2009: £474m) includes an operating profit from continuing operations of £787m (2009: £844m) and a non-operating profit from continuing operations of £348m (2009: loss £463m). EEV profit from discontinued operations was £17m before tax (2009: £93m).

There's more detail about EEV operating profit and non-operating profits in the following sections.

EEV operating profit before tax from continuing operations 

   EEV operating profit before tax

      RoEV


2010

2009

2010

2009


£m

£m

%

%

Core

629

509

7.2

6.1

Efficiency

132

(14)

1.6

(0.2)

Back book management

26

349

(0.1)

4.0

Total

787

844

8.7

9.9

 

EEV operating profit from continuing operations decreased by 7%. Whilst core profits increased by £120m and efficiency profits rose by £146m, back book profits fell by £323m reflecting the large one-off profits we made in 2009.

 

Core profits increased by 24% to £629m due to the new business we sold and an improved expected return from our existing business. This also drove an increase in our core RoEV from 6.1% to 7.2%. New business contribution (NBC) increased by 45% - find out more about this under New business profitability. Expected return on our existing business increased by 13% to £422m (2009: £375m).


Our core non-covered business (predominantly our investment management business and other businesses that support our long-term savings businesses) produced an operating loss of £37m (2009: loss £22m). This was mainly due to higher spend on growth investment.

The total increase in growth investment spend across our business reduced EEV operating profit, but this will help us take advantage of opportunities for profitable growth in the future.

Profit from efficiency gains was mainly due to £130m in positive expense assumption changes across all of our long-term savings businesses, but particularly in Canada and the UK. These positive expense assumptions mainly reflect the reduction in the ongoing expenses of managing our covered business and the growth in business volumes. 

Operating profit from back book management of £26m included a £59m one-off operating profit from the change in the UK pension scheme. We made significant profits last year from one-off activities to reduce market risk associated with the HWPF. This was the main contributor to the overall decrease in EEV operating profit in 2010.

New business profitability

 

                                                  PVNBP £m

 

       NBC £m

 

      PVNBP

       margin %

 

        IRR %

        Undiscounted

       payback

         (years)1


2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

UK

12,956

10,180

173

139

1.3

1.4

18

16

6

6

Canada

3,048

2,460

68

46

2.2

1.9

24

14

6

7

International

2,479

1,908

67

28

2.7

1.5

14

10

6

8

Total

18,483

14,548

308

213

1.7

1.5

17

14

6

7

1      2010 payback period is calculated on an undiscounted basis. Prior to this, the calculation was on a discounted basis. The 2009 comparative has been restated. 

Improved new business profitability was due to higher sales volumes across the Group and increased margins in our overseas businesses. The present value of new business premiums (PVNBP) for the Group totalled £18,483m and was 27% greater than sales volumes in 2009. The total internal rate of return (IRR) for the Group was 17% (2009: 14%) and the undiscounted payback period shortened to 6 years (2009: 7 years).

Find out more on new business profitability for each of our businesses in Section 1.4 - Business segment performance.

EEV non-operating profit/(loss) before tax from continuing operations

Total EEV non-operating profit before tax from continuing operations of £348m (2009: loss £463m) was mainly due to a positive investment variance of £578m (2009: £70m). This primarily reflects higher investment returns than had been anticipated. The loss from economic assumption changes was £209m (2009: loss £539m). This mainly arose from the use of lower projected investment returns.

Restructuring and corporate transaction costs of £71m (2009: £52m) primarily represent costs incurred as part of our Group Transformation and Solvency 2 Programmes. Volatility arising from adjustments for different accounting bases resulted in a gain of £51m (2009: £67m).



1.4 Business segment performance

1.4.1     UK

We are one of the largest providers in the long-term savings and investments business in the UK, offering solutions to both the retail and corporate markets. We offer a wide range of insurance and investment wrappers. In 2010, we began transforming our operations, investing in new customer-centric propositions and increasing our speed to market. On 31 July 2010 the sale of Standard Life Healthcare Limited was completed.

Financial highlights

2010

2009

Movement

IFRS operating profit before tax from continuing operations1

£234m

£222m

5%

Assets under administration

£119.2bn

£105.6bn

13%

Net flows

£2,997m

£1,214m

147%

EEV covered business operating profit before tax

£428m

£649m

(34%)

EEV non-covered business operating profit/(loss) before tax from continuing operations1

£28m

(£18m)

256%

1      Continuing operations exclude Standard Life Bank plc and Standard Life Healthcare Limited, which were sold on 1 January 2010 and 31 July 2010 respectively.

IFRS operating profit before tax


2010

2009


£m

£m

Fee based revenue

593

498

Spread/risk margin

148

240

Total income

741

738

Acquisition expenses

(172)

(166)

Maintenance expenses

(312)

(291)

Growth investment spend

(61)

(31)

Capital management

(21)

(28)

Other

59

-

UK IFRS operating profit before tax from continuing operations

 

234

 

222

UK long-term savings and investments IFRS operating profit before tax was £234m (2009: £222m). Fee based revenue increased due to higher annual management charge income. This was driven by higher average AUA, due to both strong growth in new inflows and positive market movements during the year. The average revenue yield on fee business increased slightly to 77bps (2009: 75bps).

The spread/risk margin reduced due to changes in operating assumptions and lower annuity volumes that resulted from market-led changes in our pricing. The spread/risk margin result in 2010 benefited from investment strategy changes, partially offset by a mortality assumption change which together contributed £30m to the result. The 2010 result also included a £5m (2009: £63m) release of reserves following the review of our deferred annuity data.

 

Initiatives to significantly increase our AUA were tightly controlled. As a result, acquisition expenses were only slightly higher than last year. Maintenance expenses increased, mainly because of Vebnet and Standard Life Wealth forming part of the UK business in 2010.

We have continued to invest in growing our business. Growth investment spend increased to £61m, with a number of customer propositions launched during the year.

Other relates to a £59m benefit from the change in the UK pension scheme in 2010.

The 2008 result included several one-off items that contributed £101m to profitability.

Assets under administration and net flows

Assets under administration (AUA) grew by £13.6bn to £119.2bn. Fee based business, which accounts for the majority of total AUA, increased by 15% to £98.6bn (2009: £85.5bn) due to strong net inflows and positive market movements. Spread/risk business AUA has increased by £0.3bn to £13.4bn due to positive market movements. As at 31 December 2010, 63% of total fee based AUA related to retail business (2009: 65%) and 37% to corporate business (2009: 35%).


Total UK net inflows for the year increased by 147% to £2,997m. Within this, fee based business net inflows more than doubled to £3,611m (2009: £1,698m), while net outflows for spread/risk business were £614m (2009: £484m). At a product level, retail net outflows of £833m were £1,009m lower than 2009. This reflected strong self invested personal pension (SIPP) and mutual funds inflows. However, this was partly offset by increased outflows across all pension products as customers took retirement benefits before the minimum age changed from 50 to 55 in April 2010. Outflows decreased across our pension products after the age change came into effect.

The reduction in savings and investments net outflows was mainly due to lower investment bonds net outflows of £807m. Outflows were higher in 2009 due to our decision not to renew bulk investment bond deals, which contributed £581m to net outflows. We also experienced lower legacy life net outflows of £988m in 2010.

Corporate net inflows of £3,830m (2009: £3,056m) increased by 25% due to the success in winning new institutional pension mandates. There were significant inflows into GARS and fixed income funds offered through Standard Life Investments. This was slightly offset by corporate pension net inflows of £1,390m (2009: £1,509m) being 8% lower than last year. An increase in outflows, mainly due to the 50 to 55 age change were partially offset by higher inflows from strong sales levels.

  

 

New business performance

 

           PVNBP £m1

 

        NBC £m

 

          IRR %

  Undiscounted payback (years)


2010

2009

2010

2009

2010

2009

2010

2009

Individual pensions2 (F)

3,858

3,388

19

7

9

7

8

10

Savings and investments (F)

1,997

1,406

7

(3)

9

5

8

12

Annuities (S/R)

341

448

56

76

Infinite

Infinite

Immediate

Immediate

UK retail

6,197

5,244

82

80

18

18

6

6

Corporate pensions2 (F)

3,287

2,640

45

34

11

10

10

10

Institutional pensions (F)

3,472

2,296

46

25

>40

>40

<3

<3

UK corporate

6,759

4,936

91

59

18

15

6

7

UK total

12,956

10,180

173

139

18

16

6

6

Split of total









Fee business (F)

12,614

9,730

117

63

13

10

7

9

Spread/risk business (S/R)

342

450

56

76

Infinite

Infinite

Immediate

Immediate

 

1    UK retail and UK total PVNBP includes protection of £1m (2009: £2m) which is classed as spread/risk business.

2    Retail Trustee Investment Plan has been reclassified from corporate pensions to individual pensions in 2010. The impact of this was PVNBP £25m (2009: £22m). There was no impact on NBC, IRR and undiscounted payback.

PVNBP sales increased by 27% to £12,956m. In our retail business, PVNBP increased by 18% to £6,197m. Individual pensions, which includes individual SIPP, rose by 14% to £3,858m. Within this, individual SIPP sales were up by 18% to £3,461m. This was driven by strong growth in new customer accounts, increased activity around the tax year end and higher average market values boosting incoming transfer values. Savings and investment sales grew by 42% to £1,997m with mutual fund sales increasing by 53% to £1,795m, reflecting significant growth in sales through our Wrap platform. This was partly offset by investment bonds sales which fell by 14% to £202m.

Corporate sales grew by 37% to £6,759m. Within this, corporate pensions increased by 25% to £3,287m. This rise was due to our success in winning new schemes with a higher average value compared to 2009, combined with an increase in the number of new members and increments into existing schemes. Also, our enhanced trustee-based pension proposition was successful in attracting both new and existing schemes and contributed £319m to sales. Institutional pension sales increased by 51% to £3,472m, reflecting strong growth in new customers.

New business contribution (NBC) increased to £173m, while the PVNBP margin fell to 1.3% (2009: 1.4%). The internaI rate of return (IRR) increased to 18% and the payback period was maintained at 6 years.


1.4 Business segment performance continued

1.4.1     UK continued

EEV operating profit before tax

UK EEV operating profit, including HWPF time value of options and guarantees and non-covered business, decreased to £456m (2009: £631m) largely due to a decrease in operating profit from back book management activities. This was partially offset by a £34m increase in NBC. In addition, the return on the present value of in-force business was higher due to both a higher opening embedded value and a higher risk discount rate. Development spend increased to £30m (2009: £18m), reflecting our further investment in developing our corporate and retail propositions and our brand. Reducing the ongoing expenses of managing our business contributed to an efficiency profit of £44m (2009: loss £26m).

Delivering our strategy

In our corporate business, we successfully launched our trustee-based pension proposition and our employee benefits platform, Lifelens. This offers a compelling proposition for both employees and employers because it combines corporate savings and benefits, education and communication in one place. This innovative offering has attracted significant interest from new and existing customers, with the first customers moving onto the platform in 2011.

We also continued to offer our customers innovative solutions, as demonstrated by the Logica scheme win. With a tailored savings and benefits package, this makes the most of Vebnet's experience in the employee benefits market. We believe the flexibility and sustainability of our corporate offering, combined with the innovative, customer-centric propositions that we are developing, will allow us to build on our strong position in the UK corporate market.

Our retail business successfully launched the Active Money Personal Pension in February 2010. This extends our reach in the individual pensions market, with a product which adapts to the changing needs of each customer. We also continued to see strong growth in our individual SIPP customer base during the year. The total number of customer accounts increased by 28% to 107,100 (2009: 83,900). Responding to adviser feedback, we continued to enhance our Active Money SIPP. New developments included offering customers the option of using their own solicitor and widening the panel of lenders for property transactions. These updates will help to ensure that our SIPP remains innovative, competitive and market-leading.

AUA on our Wrap platform continued to grow significantly and was up 69% to £6.1bn as at 31 December 2010 (2009: £3.6bn). This was partly due to a significant increase in the number of advisers using the platform. 820 adviser firms now use the platform compared to 583 at 31 December 2009. This contributed to an 80% increase in customer numbers to 57,000 as at 31 December 2010 (2009: 31,600). We made a number of enhancements to the platform based on adviser feedback. This included introducing model portfolios and continuing to develop back-office integration functionality for advisers. We believe this customer-centric approach to introducing enhancements is one of the reasons our Wrap platform has been awarded the highest possible 'eee' rating by the Finance and Technology Research Centre (FTRC) for five consecutive years.

 

In March 2010, we announced our intention to transform how we operate by investing significantly in our propositions and increasing our speed to market, making us more nimble and allowing us to respond quickly to customer growth opportunities. We have already made significant progress. During 2010, we restructured the UK business, which included the creation of a new Take to Market function and established an Operations Transformation Programme. The new operating model will enhance customers' experience and deliver increased value and efficiencies by increasing automation and making it easier for customers to self-serve.

Also in March 2010, we announced the purchase of the remaining 75% stake in the intermediary support services business, threesixty, having held a 25% stake since May 2007. This acquisition adds further depth to our propositions in the intermediary market and supports our long-term distribution capability. We have already begun work with threesixty to develop the business for the benefit of our independent financial adviser client firms.

In June 2010, we established a team to focus on the direct-to-customer market. As a result we have rebuilt our customer website, making more products available to buy online and launched the MyFolio fund range.

In January 2011, we announced the completion of the acquisition of Focus Solutions for £48m. This will enhance and accelerate delivery of our market-leading solutions and services for intermediaries and other distribution channels. This acquisition is relevant to our core intermediary market and will help us to grow our retail bank and direct-to-customer distribution.


1.4.2     Canada

Our long-term savings and investments business in Canada offers a range of savings, retirement and insurance products. With a strong focus on the needs of our 1.4 million Canadian retail and corporate customers, we continue to build client and distributor relationships, while also introducing innovative solutions to protect clients' assets.

Financial highlights

2010

2009

Movement

IFRS operating profit before tax

£110m

£113m

(3%)

Assets under administration

£25.3bn

£21.3bn

19%

Net flows

£63m

£361m

(83%)

EEV operating profit before tax

£250m

£192m

30%

IFRS operating profit before tax


2010

2009


£m

£m

Fee based revenue

150

109

Spread/risk margin

222

221

Total income

372

330

Acquisition expenses

(64)

(60)

Maintenance expenses

(193)

(156)

Growth investment spend

(35)

(30)

Capital management

30

29

Canada IFRS operating profit before tax

110

113

Operating profit before tax fell slightly to £110m (2009: £113m). Fee based revenue benefited from an increase in management charge income and surplus income from higher AUA. The average revenue yield on fee business was 118bps (2009: 116bps). This reflected changes in the product mix, including an increase in retail funds.

Spread/risk margin remained broadly in line with 2009. The 2010 result was impacted by policyholder liabilities increasing by £13m (2009: £34m) and included management actions to improve asset and liability matching and reduce future volatility. One-off changes also included a release of reserves due to a review of annuity policy data, modelling changes and changes to reinsurance arrangements.

Maintenance expenses included a charge of £14m following an assessment of the methodology and amortisation period for deferred acquisition costs. The rise in AUA also impacts maintenance expenses due to the increased ongoing costs to service and administer these assets.

The business maintained its strong credit profile, with a mortgage portfolio average loan to value ratio of 45% (2009: 46%). No credit losses were experienced during the period.

Assets under administration and net flows

AUA increased by £4.0bn during the year driven by positive market movements and stable net inflows into fee business. In particular, individual savings and retirement experienced strong net flows. Our fee business grew strongly and now accounts for 55% (2009: 53%) of total AUA. Spread/risk AUA increased to £10.1bn (2009: £9.2bn), also driven by positive market movements. This was partially offset by scheduled annuity payments.

Net flows decreased by 84% in constant currency to £63m, due to lower inflows within the spread/risk business and higher claims and withdrawals. These more than offset the strong growth in gross inflows achieved across our fee business. In our retail fee business, which includes individual segregated funds and mutual funds, net inflows increased to £119m (2009: £81m). This reflects the strength of our savings and investments propositions, our well-positioned offering and strong adviser relationships. The recovery in equity markets during 2010 improved customer sentiment and this also increased net flows.


1.4 Business segment performance continued 

1.4.2     Canada continued

In our retail spread/risk business, net outflows increased from £72m to £328m, mainly due to lower term funds sales and maturing term deposits sold in 2009 when product demand was very high. Total group savings and retirement net inflows decreased by 39% in constant currency to £193m (2009: £287m). This was despite strong sales and an increase in market share. Large mandates won during the year only provided marginal inflows, consisting mostly of future annually recurring premiums. Group insurance net inflows increased by 10% in constant currency to £79m (2009: £65m), as the strength of our innovative disability offering helped us make gains in a contracting market. Total net inflows, excluding scheduled payments relating to non-core legacy annuity products decreased by 38% in constant currency to £584m (2009: £844m).

New business performance

PVNBP sales increased by 12% in constant currency to £3,048m (2009: £2,460m). Sales in our retail line, which includes individual insurance, savings and retirement and mutual funds, increased by 4% in constant currency to £975m (2009: £848m). Group savings and retirement sales increased by 35% in constant currency to £1,466m (2009: £981m) with close to two-thirds of sales comprising of recurring annual premiums. Excluding large wins in both years, sales have increased by 22% in constant currency. Group insurance sales decreased by 13% in constant currency to £607m (2009: £631m), reflecting a contracted business environment.

New business contribution increased by 34% in constant currency to £68m (2009: £46m) and PVNBP margin improved to 2.2% (2009: 1.9%). This was the result of a more profitable sales mix, with higher sales of individual segregated funds and mutual funds. Internal rate of return increased to 24% (2009: 14%). This was mainly due to the change in sales mix. The undiscounted payback period shortened to 6 years (2009: 7 years).

EEV operating profit before tax

EEV operating profit before tax increased by 18% in constant currency to £250m (2009: £192m). This was mainly due to efficiency gains and higher new business contribution. Expense experience gains and assumption changes resulted in a profit of £73m (2009: loss £8m). Back book management delivered a loss of £41m (2009: gain £23m), largely due to a reduction in expected fee income in our group savings and retirement line. This was partly offset by favourable experience following a review of annuity policy data.

Delivering our strategy

In line with our strategy, we have continued to focus on increasing our visibility in the market. In 2010, we launched the second phase of our award-winning advertising campaign, which included online marketing and social media. A new organisational structure has also been adopted to allow our business to react more quickly to new business opportunities.

In our group savings and retirement line, we have focused on expanding in the large case segments and continued to build our core propositions. In the small market segment, we continue to evolve our Express product by launching web tools to support our advisers in their sales process. We also revamped our Plan for Life statements, highlighting the important information members need to make informed decisions about their retirement income planning. The update was well received by clients and intermediaries.

In the first quarter of 2011, we will launch a trust application platform. This will enable us to deliver a combined offering of stock plans and stock options within our regular defined contribution proposition.

The progress we have made in improving our retail sales function and building solid distribution relationships was acknowledged by an industry survey. Our retail sales team received a top ranking from retail advisers for the second year in a row, recognising the strength of our business consultancy model and the strong relationships that we have built with our advisers. We also launched our new Corporate Class Mutual Fund series featuring tax-efficient funds. This allows non-registered investors to enjoy all the benefits of our traditional range of funds with an added layer of tax efficiency. At the beginning of 2011, we launched a new Distributor Relationship Management system as part of our continuous effort to deliver propositions that meet the evolving needs of our customers. The system provides an overview of our adviser relationships and will help to extend our distribution reach.

In our group insurance line, we continue to provide additional support to customers and improve our product offering. Our new flexible benefit administration and enrolment tool was instrumental in delivering key new accounts. We are also actively promoting our disability management expertise as part of our comprehensive benefit offering and as a stand-alone offer.

 


1.4.3     International

Our International business is made up of four wholly owned businesses and two joint ventures. Our wholly owned businesses are Standard Life International Limited (offshore bonds business based in Dublin), Standard Life Ireland (Ireland domestic business), Standard Life Germany (operating in Germany and Austria) and Standard Life Asia (based in Hong Kong). The joint ventures are based in China and India. International offers long-term savings and investments products.

Financial highlights - wholly owned

2010

2009

Movement

IFRS operating profit before tax

£38m

£50m

(24%)

Assets under administration

£11.1bn

£9.1bn

22%

Net flows

£1,412m

£881m

60%

EEV covered business operating profit before tax

£90m

£30m

200%

EEV non-covered business operating loss before tax

(£7m)

(£6m)

(17%)

Financial highlights - joint ventures (Standard Life's share)

2010

2009

Movement

IFRS operating loss before tax

(£23m)

(£27m)

15%

Assets under administration

£1.2bn

£0.8bn

50%

Net flows

£254m

£211m

20%

EEV covered business operating profit/(loss) before tax

£3m

(£1m)

400%

IFRS operating profit before tax


2010

2009


£m

£m

Fee based revenue

212

208

Acquisition expenses

(31)

(14)

Maintenance expenses

(129)

(127)

Growth investment spend

(15)

(17)

Capital management

1

-

Total wholly owned

38

50

Joint venture businesses

(23)

(27)

International IFRS operating profit before tax

15

23

IFRS operating profit before tax of the wholly owned businesses decreased by 24% to £38m (2009: £50m). Profitability in Germany fell to £42m (2009: £55m) and in Ireland domestic business remained broadly stable at £8m (2009: £9m). The offshore bonds business recorded a loss of £9m (2009: loss £10m). In Germany, the fall in profitability wasmainly due to the reducing transfer of profit to shareholders from the HWPF in accordance with the Scheme of Demutualisation. This was partly offset by rising profits from the post-demutualisation business. Most revenue in Germany is from premium based charges. During 2010 fee business revenue bps fell to 310bps (2009: 413bps) because of the reduction in charges from pre-demutualisation business. Profitability in Ireland benefited from increased management charge income and lower operating costs. This led to a rise in the average revenue yield on fee business to 81bps (2009: 74bps). Hong Kong recorded a profit of £4m (2009: £2m) due to strong sales and margins growth. The International result also includes central costs relating to business development.

Assets under administration and net flows

AUA in the wholly owned businesses grew by £2.0bn to £11.1bn (2009: £9.1bn) due to high net inflows in the year. In Ireland, AUA increased to £4.2bn (2009: £3.7bn) for the domestic business and to £1.8bn (2009: £1.2bn) for offshore bonds. AUA in Germany rose by 24% in constant currency to £5.0bn (2009: £4.2bn).

Net flows of the wholly owned businesses increased by 60% to £1,412m. This was mainly due to strong growth in sales in Ireland.

Ireland domestic business net inflows of £215m (2009: £11m) were higher due to strong sales growth and lower claims. Net flows of offshore bonds increased to £496m (2009: £157m) due to higher inflows from new business, particularly from our Wrap platform.


1.4 Business segment performance continued 

1.4.3     International continued

Net flows in Germany were £666m (2009: £701m), a 1% decrease in constant currency. The market remained challenging for the whole industry, especially the IFA segment, leading to a fall in new business levels.

Our Hong Kong operation continues to deliver strong growth, with net flows up 185% in constant currency to £35m (2009: £12m).

New business performance

PVNBP sales in the wholly owned businesses increased by 35% to £1,929m (2009: £1,430m). In Ireland domestic business, sales increased by 22% in constant currency to £598m (2009: £512m) due to our strong investment proposition and the launch of a new pensions product. We benefited as customers moved towards financial institutions they perceived as being more secure. Offshore bonds sales were 89% higher at £700m (2009: £370m) due to an improved proposition and better market conditions. In Germany, sales of £337m (2009: £407m) were 14% lower than 2009 in constant currency.

Hong Kong performed very well and increased its market share. PVNBP sales of £294m (2009: £141m) were up 108% in constant currency. This was mainly due to the distribution of the core unit linked savings product and the launch of a new product in quarter four offering 300 funds on an open architecture, targeting the established affluent and high net worth customer segments.

NBC in the wholly owned businesses increased to £44m (2009: £17m). This was mainly due to cost efficiencies and higher sales levels in Ireland and Hong Kong.

EEV operating profit before tax

EEV operating profit before tax of the wholly owned businesses, including non-covered business, increased to £83m (2009: £24m). This increase was mainly due to increased profits from new business and the positive persistency in Ireland and Germany. The NBC for Ireland and Hong Kong increased due to higher sales levels. PVNBP margin was 2.3%.

Delivering our strategy

International operates as a customer-centric long-term savings and investments business. The Europe and Asia divisions were combined into one International business at the start of 2010. This will enable synergies, make it easier to share ideas and improve efficiency. The streamlined structure will position International to grow profitability and provide new solutions for customers and distributors.

We have improved our product investment range by adding the GARS products, which generated sales across Germany, Austria and Ireland. In Germany we started to strengthen our corporate propositions and will continue with this in 2011. In Ireland domestic business, we carried out a customer insight and market segmentation exercise to help us keep improving the way we deal with our customers and IFAs. In the offshore bonds business, we strengthened our propositions with the addition of a number of discretionary fund managers. We widened our distribution route through strategic deals and by increasing engagement with the UK sales force.

Standard Life Asia is now recognised as a leading provider of long-term savings and investments products through intermediaries in the Hong Kong market. The business grew its market share significantly with targeted sales and marketing activity and superior market-leading propositions, like the newly launched Harvest Supreme proposition.

These initiatives maintained and strengthened our market presence in the countries where International operates and have contributed to higher new business levels and strong net flows.

Joint Ventures - India and China

In China and India our focus is on increasing long-term shareholder value by delivering products that meet our customers' needs.

The joint ventures contributed an IFRS operating loss before tax of £23m (2009: loss £27m) to the Group, reflecting the continued progression of the business and our commitment to invest in the region.

In India, PVNBP was £444m (2009: £362m), up 15% in constant currency. In China, sales fell by 10% in constant currency to £106m (2009: £116m). This reflects a greater focus on profitability by increasing the proportion of regular premium business.

Net flows in the joint ventures increased by 14% in constant currency to £254m (2009: £211m), mainly driven by India where strong growth and market share gains reflected success in the bancassurance channel.

EEV covered business operating profit before tax for the joint ventures was £3m (2009: loss £1m). Sales increased by 9% in constant currency and led to a strong rise in NBC to £23m (2009: £11m). This resulted in a PVNBP margin of 4.3%.

In India, regulatory changes that affect unit linked business were implemented from 1 September 2010 and will have a severe negative impact on sales and margins across the industry in the short term. However, effective initial management of the changes helped increase our market share in the private market to 12% in 2010 (2009: 8%). We remain confident about our future competitive positioning, with our individual business emerging as the leading private player during the fourth quarter of 2010.

In China, the outcome of negotiations with Bank of China over a possible deal was not as we would have hoped. We are now focused on developing our joint venture partnership to deliver a successful business that meets customer needs in this growth market.

1.4.4     Global investment management

Our focus at Standard Life Investments is on delivering superior investment performance, supported by exceptional client service. Standard Life Investments operates as a global team, with an investment process underpinned by its 'focus on change' philosophy. This has proved itself to be robust and repeatable in both good and bad market conditions. Over the 12 years since its inception, Standard Life Investments has delivered a strong track record of profitable organic growth, a trend which continued during 2010.

Financial highlights

2010

2009

Movement

IFRS operating profit before tax

£103m

£73m

41%

Earnings before interest and tax (EBIT)

£106m

£80m

33%

EBIT margin

33%

32%

1% point

Third party assets under management (AUM)

£71.6bn

£56.9bn

26%

Total assets under management

£156.9bn

£138.7bn

13%

Third party net inflows (excluding money market funds)1

£7,269m

£4,848m

50%

1    Total third party net inflows in 2010 were £6,200m (2009: £5,674m).

Standard Life Investments performed strongly in 2010, despite volatile and subdued markets. The sales growth of past periods was maintained with strong inflows of institutional and wholesale business of £6.2bn. After removing the structural outflows of money market assets, the underlying net inflow was £7.3bn. These flows increased third party AUM to a record level of £71.6bn (2009: £56.9bn). The increase in new business flows and a rise in average market values resulted in strong revenue growth of 29%, driving EBIT up 33% to £106m (2009: £80m) and EBIT margin to 33% (2009: 32%). Our continued focus on serving existing clients and winning new clients through strong investment performance, product innovation, global distribution and high levels of customer service has paid off. The economic recovery remains subdued and fragile but this robust performance shows that Standard Life Investments can prosper in difficult conditions and is in good shape to benefit from a future return to stability.

Profitability

IFRS operating profit before tax increased by 41% to £103m.

Revenue rose by 29% because of increased third party new business flows, many of which were into higher margin products, such as GARS and UK mutual funds, and stronger market conditions. This raised the average revenue yield on third party AUM to 35bps (2009: 34bps).

Operating costs were tightly controlled while allowing for continued investment in the business to maintain our longer term growth. These measures resulted in an increased EBIT of 33% to £106m and an EBIT margin of 33% (2009: 32%).

Lower interest expense also contributed to the increased IFRS operating profit. A subordinated loan of £30m was repaid at the end of 2009 and a further £15m subordinated loan was repaid at the end of 2010, leaving the business with no gearing.

Financial market overview

Despite the financial crisis continuing to weigh heavily on the global economy in 2010, average market values in 2010 were substantially higher than in 2009. The average daily FTSE All-Share Index, for example, rose 21% between the two years. Combined with rises in other major world markets, this led to an increase in asset management revenues. We continue to maintain strong third party sales across institutional, wholesale and customer segments.

Investment performance

Investment performance was strong during 2010 and we continued to deliver a robust investment performance over the longer term. The money-weighted average active investment performance over all time periods - one, three, five and ten years - continues to be above median for our third party business. Our mutual fund and unit trust range strength is shown by the proportion of eligible and actively managed funds (23 out of 28) rated A or above by Standard & Poor's in the UK.

The pipeline for institutional business is still encouraging with fixed income and GARS products attracting a lot of interest, increasingly from outside the UK. There is also very positive demand for our mutual funds in the UK and for our SICAV funds in continental Europe.



1.5 Capital and cash generation continued 

In overall terms, our EEV operating capital and cash generation from continuing operations has decreased to £287m. This was mainly due to a fall in capital and cash generation from back book management activities which generated £10m capital and cash in 2010. In 2009, back book management activities generated £71m which included the benefit of a release of UK deferred annuity reserves.

Capital and cash generation from existing business after new business sales of £384m was the main contributor to our operating capital and cash generation. There was negative capital and cash contribution from our growth investment activities. This is reflected in our core covered business development expenses of £48m (2009: £32m) and it also contributed to the increased losses from our core non-covered businesses from £19m to £47m.



2010



2009



Free surplus movement

Required capital movement

Net worth

movement

Free surplus movement

Required capital movement

Net worth movement

£m

£m

£m

£m

£m

£m

Capital and cash generation from existing business

626

(22)

604

567

(21)

546

New business strain

(265)

45

(220)

(252)

64

(188)

Covered business capital and cash generation

from new business and expected return

361

23

384

315

43

358

Covered business development expenses

(48)

-

(48)

(32)

-

(32)

Non-covered business core capital and cash generation

(47)

-

(47)

(19)

-

(19)

Core

266

23

289

264

43

307

Efficiency

(12)

-

(12)

(8)

1

(7)

Back book management

66

(56)

10

65

6

71

EEV operating capital and cash generation from continuing operations

320

(33)

287

321

50

371

Capital and cash generation from non-operating items

93

41

134

(394)

12

(382)

Total EEV capital and cash generation from continuing operations

413

8

421

(73)

62

(11)

Capital and cash generation from discontinued operations

20

-

20

 

49

 

-

 

49

Total EEV capital and cash generation

433

8

441

(24)

62

38

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

Non-operating capital and cash generation from continuing operations was £134m (2009: negative £382m). This increase was mainly due to higher than expected market returns over the period.

Reconciliation of IFRS operating profit to EEV operating capital and cash generation

As with EEV operating capital and cash generation, IFRS operating profit removes the impact of short-term economic volatility. Whilst there is clear alignment between IFRS operating profit and EEV operating capital and cash generation, there are differences which include:

·   £14m from the difference in the treatment of assets and liabilities. EEV capital and cash is more consistent with local statutory valuation bases, which for some territories and certain classes of investment liabilities are measured differently for IFRS reporting. This difference primarily reflects a higher increase in reserves in the UK EEV capital and cash compared to IFRS operating profit.

·   £35m from the difference in the treatment of deferred acquisition costs/deferred income recognition, intangibles, tax and other. The impact of different methodologies in respect of expected income is the main reason for the movement. In EEV operating profit this income is included on an expected return basis, but the actual fees are included in IFRS operating profit.



Holding company capital and cash flows

In addition to the movement in capital and cash on an EEV basis, the following summary provides an analysis of holding company cash flows and capital in relation to the Group's ultimate holding company, Standard Life plc, and its overseas holding company, Standard Life Oversea Holdings Limited. The capital position is based on these companies' net assets, excluding investments in operating subsidiaries.

2010

2009


£m

£m

Opening capital 1 January

602

623

  Dividends received from subsidiaries

286

190

  Additional investments in subsidiaries

(75)

(20)

  Group corporate centre costs

(54)

(50)

  Cash dividends paid to shareholders

(186)

(158)

  Other

92

17

Closing capital 31 December

665

602

Dividends

During the year, we paid the final dividend for 2009 of 8.09p per share, amounting to £180m and the 2010 interim dividend amounting to £98m. In 2009, the previous dividend reinvestment plan (DRIP) was discontinued and a new Scrip dividend scheme introduced. This reduced the cash required to pay the 2009 final dividend from £180m to £134m and the 2010 interim dividend from £98m to £52m. We propose a final dividend of 8.65p per share, making a total of 13.00p (2009: 12.24p). This represents an increase of 6.2%, reflecting the solid progress made during the year. We will continue to apply our existing progressive dividend policy, taking account of market conditions and our financial performance.

Capital management

Objectives and measures of Group capital

The Group's processes of capital and risk management are aligned to support our strategic objective of driving sustainable, high quality returns for our shareholders. The different measures of capital reflect the regulatory environment we operate in and the bases that we consider effective for managing the business.

Capital management policy

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

Credit ratings

External credit ratings agencies perform independent assessments of the financial strength of companies. The current insurer financial strength ratings for Standard Life Assurance Limited (SLAL) are A1/Stable and A+/Stable from Moody's and Standard & Poor's respectively. These ratings are unchanged from those reported in the Half Year Results 2010.

Group capital surplus

2010

2009


£bn

£bn

Shareholders' capital resources

3.0

2.7

Capital resources arising from subordinated debt

1.8

2.1

SLAL long-term business funds

2.6

1.6

Group capital resources

7.4

6.4

Group capital resource requirement

(3.6)

(2.8)

Group capital surplus

3.8

3.6

Group solvency cover

205%

230%

2010 figures above based on estimated regulatory returns. 2009 based on final regulatory returns. The 2010 figures have been prepared on an Insurance Groups Directive (IGD) basis; previous periods on a Financial Groups Directive (FGD) basis.

Following the sale of Standard Life Bank plc on 1 January 2010 we are now classified as an 'insurance group' as defined by the IGD. In 2010, our capital surplus remained robust, increasing by £0.2bn to £3.8bn. Capital resources increased to £7.4bn, largely due to higher market levels. The quality of our capital remains strong, with only £0.5bn (2009: £0.8bn) and £0.7bn (2009: £0.7bn) of total Group capital resources classified as upper tier 2 and lower tier 2 respectively. Lower tier 2 capital contributes only 18% (2009: 19%) to the Group capital surplus and further illustrates the strength of our capital position.

The IGD surplus remains largely insensitive to a further 40% fall in equities from the 31 December 2010 position, with the surplus estimated to reduce by approximately £0.2bn. A 100bps rise in yields is estimated to reduce the surplus by approximately £0.1bn.


1.5 Capital and cash generation continued 

Reconciliation of key capital measures

The following diagram illustrates the key differences between regulatory, IFRS and EEV capital measures at 31 December 2010: Diagram removed for the purposes of this announcement.  However, it can be viewed on page 34 of the pdf document.

   


1.6 Risk management

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

Risk management framework

We have developed and embedded an Enterprise Risk Management (ERM) framework that enables the risks of the Group to be identified, assessed, controlled and monitored consistently, objectively and holistically.

During 2010, we established a Group Board level Risk and Capital Committee in line with the Walker Review recommendations. The Committee serves to oversee, challenge and advise the Group Board on:

·   The Group's current risk appetite, tolerance and strategy, material risk exposures and future risk strategy and their impact on capital

·   The structure of the Group's Enterprise Risk Management Framework and its suitability to react to forward-looking issues and the changing nature of risks

·   The risk aspects of major investments, major product developments and other corporate transactions

·   Material actuarial matters affecting the Group

·   Material risk and capital matters affecting the Heritage With Profits Fund

Key risks facing the Group

Market risk

Definition

The risk that arises from the Group's exposure to market movements which could result in the value of income, or the value of financial assets and liabilities, or the cash flows relating to these, fluctuating by differing amounts.

Appetite

The Group has no appetite for market risk exposures except where they arise as a consequence of core strategic activity, principally as a consequence of revenue streams being exposed to market risks.

Equity and property risk

Equity and property risk for the Group mainly relates to the risk that the value of future fund charges on unit linked funds, collective investment schemes, segregated funds and future recourse cash flow payments from the HWPF will fall (or that burnthrough costs to the shareholder arise) if the value of assets under management falls due to adverse market conditions.

There is currently no restriction on cash flows due from the HWPF. The key existing mitigants to reduce the risk of burnthrough from the HWPF include the actively managed investment policy for asset shares, the dynamic guarantee deduction framework and hedging of the cost of guarantees for certain contracts. The fund remains well capitalised and market risk mitigants continue to perform in line with expectations.

Canada has exposure to equity and property risks as a consequence of direct holdings in such assets. These holdings have been acquired for a number of reasons, including an expectation that such assets would increase returns to shareholders. A hedge was put in place during the year that reduces the risk arising from the limited policyholder guarantees on segregated fund business.

The Group is also exposed to equity and property risk through the potential impact of market movements on the value of assets held in defined benefit pension schemes operated by the Group.

Fixed interest risk

Shareholder exposure to fixed interest risk arises from a number of sources, but is mainly attributable to asset liability mismatches in certain portfolios of liabilities. The extent of such mismatches has been reduced over the course of the year, most notably through improvements in cash flow matching of annuities written in the UK. Mismatches in Canada arise mainly as a consequence of the difficulty in obtaining long-dated fixed income assets to match the long-term liability cash flow which gives rise to reinvestment risk.

Risk also arises as a consequence of burnthrough from the HWPF. However, as noted above, this fund remains well capitalised, so burnthrough cost is low and there is currently no restriction on transfers.

The Group is also exposed to fixed interest risk through the potential impact of yield curve movements on the value of assets held in defined benefit pension schemes operated by the Group.

Currency risk

Foreign exchange risk is the risk that the value of overseas operations and profits generated by them falls in Sterling terms when Sterling appreciates against the local currency.

The principal sources of currency risk arise from the Group's investments in overseas subsidiaries and joint ventures, primarily Canada and Asia (including HDFC Life and Heng An Standard Life). Hedges exist to limit the size of the exposure relating to Canada.

The UK business also has Euro exposure as a consequence of branch business undertaken in Ireland and Germany and its investment in Standard Life International Limited. Other exposures arise largely as a consequence of holdings in overseas assets within business units and variances in charges taken from unit linked funds and collective investment schemes.


1.6 Risk management continued 

Similar to equity and property risk, the Group is also exposed to currency risk through the potential impact of market movements on the value of assets held in defined benefit pension schemes operated by the Group.

Credit risk

Definition

The risk of exposure to loss if a counterparty fails to perform its financial obligations, including failure to perform those obligations in a timely manner. It also includes the risk of a reduction in the value of assets due to a widening of mortgage, bond and swap spreads.

Appetite

The Group has an appetite for credit risk to the extent that acceptance of this risk optimises the Group risk adjusted return. However, the Group has limited appetite for significant losses arising from counterparty failures and will therefore establish robust risk limits which Group companies must adhere to.

Shareholder exposure to credit risk arises from a number of sources. In the UK business, the principal exposures are in respect of the corporate bonds held to back annuities written post-demutualisation and the assets held to back the subordinated debt liability. In Canada, the main component of credit risk arises from the use of corporate bonds and commercial mortgages to back annuities.

Credit risk also arises as a consequence of burnthrough from the HWPF, though as noted above, this fund remains well capitalised, burnthrough cost is low and there is currently no restriction on transfers. Further credit risk exposure arises from variations in the value of future fund charges on unit linked funds and collective investment schemes that are invested in corporate bonds.

The previously disclosed 'Contract for Differences' between Standard Life Assurance Limited and Standard Life Investments was closed out during the year and the Group's exposure to credit risk arising from asset backed securities has been reduced. The credit risk associated with swap spread widening has also been reduced over the course of the year following the implementation of cash flow matching of annuities written in the UK business post-demutualisation.

In addition, credit risk arises from holding cash and cash equivalents, debt securities and the reinsurance of certain insurance liabilities to various counterparties.

The Group is also exposed to credit risk through the potential impact of widening credit spreads or credit losses on the value of assets held in defined benefit pension schemes operated by the Group.

All credit portfolios are subject to strict limits on permissible counterparty exposures and continue to perform well despite adverse economic conditions. Where appropriate, collateralisation is used to reduce credit risk.

Demographic and expense risk

Definition

The risk that arises from the inherent uncertainties as to the occurrence, amount and timing of future cash flows due to demographic and expense experience differing from that expected. For the purpose of risk management this includes liabilities of insurance and investment contracts.

Appetite

The Group has an appetite for such risks since we expect acceptance of the risk to be value additive. Appetites will be established to reflect planned business activities in line with the Group's overall strategic objectives.

The Group's principal exposures are to persistency and longevity risk, arising as a consequence of normal business activity.

Persistency

Persistency within the UK business arises mainly as a consequence of variances in the value of future fund charges on unit linked funds and future recourse cash flow payments from the HWPF. Generally the value of such charges will fall if withdrawals are higher than expected.

This risk is controlled through business retention activities and regular monitoring of persistency experience, as well as through product design.

Similar risks exist in respect of Standard Life Investment's third party assets under management and segregated funds business written by Canada.

Longevity

Longevity risk reflects the risk that annuitants live longer than expected. The principal risk to the Group arises in respect of annuity contracts written by the UK business and Canada.

The Group continues to write annuity contracts and to acquire additional risk as a consequence as we believe the business to be sufficiently profitable to justify the risks of doing so.

This risk is controlled through regular monitoring of the size of the exposure, longevity experience and control of business volumes.

The Group is also exposed to the risk that members of the defined benefit pension schemes operated by the Group live longer than expected.

 


Liquidity risk

Definition

The risk that businesses are unable to realise investments and other assets in order to settle their financial obligations when they fall due, or can do so only at excessive cost.

Appetite

The Group has no appetite to fail to meet its liabilities as they fall due.

The Group manages and mitigates liquidity risk by employing a variety of techniques as appropriate, including:

·   Maintaining portfolios of assets that match the expected timing of payments of liabilities

·   Close monitoring and active anticipation of the level of withdrawals based on expected customer behaviour

·   Central co-ordination and management of group-wide contingency funding plans

·   Central co-ordination of strategic planning and funding requirements

·   Central monitoring, assessment and oversight of the investment of assets within the Group

·   Maintaining a portfolio (currently undrawn) of committed bank facilities

The Group also has the ability to invoke deferral terms on the majority of unit linked contracts. As at 31 December 2010 there were no funds subject to deferral.

As a result of the policies and processes established with the objective of managing exposure to liquidity risk, the Group considers the extent of liquidity risk arising from its activities to be de-minimis.

Operational and strategic risks

Definition

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

Strategic risk is the risk associated with the robustness of the strategic planning process and threats to achieving the strategy.

Appetite

The Group has an appetite for operational risks where exposures arise as a consequence of core strategic activity. However, the Group has limited appetite for large operational losses due to the likely related reputational damage and opportunity costs. The Group will seek to put effective controls in place to reduce operational risk exposures, except where the costs of such controls exceed the expected benefits.

Operational and strategic risk exposures are actively managed with action planning and progress monitoring in place. The operational risk processes and systems have been extensively revised and enhanced, together with a substantial programme of education and skill improvements within the business. During 2010 the overall risk structure was revised with the creation of Chief Risk Officers within the UK business, Standard Life Investments and the International business.

Operational risk is identified, assessed, managed and reported in a consistent and coherent way across the Group and is recorded on a single global system. The assessment of operational risk is linked to the objectives of each business, function or department. Assessment considers financial impact, reputational impact, customer impact and strategic impact. We measure impact of risk both before the application of controls/mitigation and post application. This ensures we are aware of control/mitigation dependencies. Where risk is considered outwith appetite, or where the control environment is considered in need of improvement, then action plans are created, maintained and delivered. These have visibility at a Group level and are actively managed.

Key operational and strategic risk themes include:

·   Management of existing processes including the identification and implementation of control improvements

·   Management of information security: control enhancement and control performance monitoring

·   Management of third party providers: identification of exposures, collaborative control enhancement and robust performance indicators

·   Projects and programmes: managing change and execution of projects through effective control and embedding business as usual controls as part of the design of future processes

·   People: identification and management of the people risks (succession planning, skilling and resource levels)

·   Delivering the strategic plan: ensuring that the risks associated with the delivery of our strategic plan are identified, assessed, understood and mitigated

Reputational risk

Appetite

The Group has an extremely low appetite for significant reputational damage or regulatory censure. This appetite statement is embedded in our Group's risk culture and is reflected in our Group's values, mission and vision.


1.7 Our customers

We serve a wide variety of customers - individuals, financial advisers, corporate customers and large institutions. Making sure we give our customers exactly what they need, in the way they need it, is central to our success. We continue to drive our transformation by putting customers at the heart of everything we do.

We believe it's our responsibility to help customers get to grips with their finances. So even in these uncertain times, they can look forward to the future with confidence and optimism. At the same time, they're reassured by the knowledge that we're secure and that we'll invest their money responsibly.

Putting customers at the heart of our work means we've got to keep listening, responding and developing our understanding of their needs and challenges. We know that customers want us to treat their money responsibly. We believe it's our job to look after their money better than they could themselves.

Our approach

Our approach to putting customers first has four main pillars:

·   Making sure we offer products that are easy to access, understand and have tangible long-term benefits

·   Being transparent about how our products work and what charges are involved

·   Helping customers handle their finances effectively, empowering them so they can make informed choices

·   Making sure that Standard Life is easy to deal with and that we respond to customer needs

Building even better relationships

In 2010, we spoke to 8,500 customers and 7,500 potential customers. We asked them about our service and communications and how helpful or otherwise they found them. We ran 16 sessions across the UK where our senior team, including David Nish and our non-executive Directors met up with groups of customers to hear their views and opinions. We now have approximately 900 members in our online community, with 200 regular, active users who give us frequent feedback on topics like our literature, products, new propositions and the effects of the first budget of the new government.

New us, new look

In February 2011 we took another important step on our transformation journey when we launched our new brand and visual identity. It's a clear signal that our focus is very sharply on the customer. Our brand is more than just a new look - it's about the way we work and it underpins the experiences we create. It strengthens our relationships with customers and differentiates us strongly from competitors. We're an organisation that helps customers look forward to their financial future with confidence and optimism. This is summed up in our new strapline, The Way Forward.

The results

In 2010, this resulted in a number of initiatives with customers at their heart including:

Active Money Personal Pension

Our research showed us that 28-40 year olds in the UK needed a different kind of pension product. They needed different ways of interacting with us, as well as high levels of flexibility. We developed the Active Money Personal Pension for them. After testing its content and application process, we got hugely positive feedback, with customers describing their experience as modern, straightforward, informative, friendly, easy, sensible, flexible, professional, clear and personal. In November, we launched the option for customers to apply directly online.

www.standardlife.co.uk relaunches

We listened to what our customers told us and we redeveloped our website to meet their needs more closely. This meant improving the structure and design, and simplifying the content.

Our website now:

·   Engages customers with clear, interactive and open content designed to help them get to grips with their finances

·   Lets customers apply for the Active Money Personal Pension online

·   Has tools to help customers become more confident in making financial decisions

Supporting financial advisers

We're also broadening and deepening our relationship with advisers. Last year we launched a campaign to get advisers' feedback on the technology we offer. We asked them what would make a difference to them, and ultimately, their customers. This is our core focus. Based on feedback, we widened our pension proposition to cover both personal pensions and the specialist SIPP market. This now lets our IFA partners offer more choice to customers.

We are very focused on supporting advisers through the changes that will occur once the requirements of the Retail Distribution Review are implemented. A key development will be an enhanced retail investment platform. This solution will allow advisers to access all of their customers' assets and trade on all of their customers' assets on a single platform. In February 2011 we launched the first phase of this solution via our award-winning Adviserzone, with additional enhancements being made throughout the year. We want to go beyond the traditional product provider relationship with advisers. A good example of this was our acquisition of threesixty and Focus Solutions - businesses who offer specialist support to advisers. We also took steps to help advisers manage their investment process by launching a new investment proposition. To make it easier for them to manage risk effectively, we made a number of improvements to our platform, including introducing bulk re-balancing.

Corporate customers

We redesigned the pack employees receive when they join their corporate pension scheme. We worked with employees throughout the redesign to make sure our ideas were working. The new pack gives them the information they want in a format they like. In 2010, more than 400,000 employees managed their flexible benefit options through our technology.

In February 2011, we launched the employee benefits platform, Lifelens. This cutting-edge technology lets employers offer and showcase all employee benefits and rewards through one single application. It means all members of corporate savings schemes get an easily accessible, personalised, single view of their benefits package. It directly promotes financial wellbeing by giving customers greater ownership of their benefits package.

Treating Customers Fairly

We have embedded the Financial Service Authority's Treating Customers Fairly (TCF) principles across the business. In 2010 we carried out a review to make sure that TCF is linked to and supports our strategy of putting customers at the heart of our business. The review showed that TCF is still embedded and highlighted opportunities to enhance our approach. We're implementing this throughout 2011.

Satisfied customers

UK

We're keeping close tabs on our customers' thoughts and views of the service we give. We do a survey twice a year with customers who have been in touch with us recently. It shows the long-term trend is very positive. In 2010, 69% of customers we surveyed said they'd be likely or very likely to recommend Standard Life to family or friends. We've also introduced a new way for people to give us feedback on our service levels straight after they've talked to us on the phone.

In 2010 our UK business was recognised with awards, including:

·   Financial Adviser Service Awards:

- Life and pensions five star provider award

·   Finance and Technology Research Centre (FTRC):

- Group SIPP received the top 'eee' rating for four consecutive years

- Group Personal Pension 'eee' rating for five consecutive years

- Group Contracted-in Money Purchase 'eee' rating for four consecutive years

- SIPP and SIPP specialist 'eee' rating for three consecutive years

- Wrap platform 'eee' rating

·   UK Pensions Awards:

- Bundled/Full Service Defined Contribution Provider of the Year

·   Financial Adviser Life & Pensions Awards:

- SIPP and/or SSAS Provider of the Year for five consecutive years

- Best Income Drawdown Provider for four consecutive years

·   Aberdeen UK Platform Awards:

- Wrap Platform of the Year

·   Professional Adviser Awards:

- Best Website for IFAs

Canada

High quality customer service is the basis of our growth strategy. We focus on building retention and strong customer relationships. In 2010, our client retention level based on internal methodology was 94.4%. We're constantly investing in technology, training and processes to help us provide the level of service our customers need and expect. This includes continuing to enhance web-based functionality across our group lines. This makes it easier for both sponsors and participants to administer our products.

Our customer focus has earned us a number of awards throughout the year, including:

·   Best Financial Services Integrated Advertising for our 'One key, countless possibilities' multimedia campaign, highlighting our success in connecting with our customers

·   Insurance and Financial Communicators Association Awards:

- Award of Excellence: Group Savings and Retirement - 'Welcome kits'

- Award of Excellence: Group Savings and Retirement Summary of Pension Legislation in Canada

·   Environics Adviser Perception Study:

- Ranked first in seven out of nine criteria measuring the quality of the wholesaler

·      Excellent rating in the DALBAR Trends and Best Practices in Defined Contribution Pension Plan Statements report


1.7 Our customers continued

International

One of our core values is to deliver exceptional customer service and always put our customers at the heart of our thinking. In 2010, we actively managed our customer relationships which led to very good customer retention in Ireland and Germany. In Hong Kong we developed additional web-enabled services which will add further customer value to our propositions.

All International operations are committed to maintaining the highest level of customer service. This commitment to customer service was acknowledged during 2010 by various awards received by our operations including:

·   The German business won two awards for outstanding service and broker support

·   The offshore bonds business received an International Adviser Award for 'Best Adviser Support and Customer Service - UK Offshore'

·   The offshore bond business also received two significant awards at the International Fund and Product Awards 2010, which recognises achievement in the offshore financial services industry: one for the Best International Life Product (UK) for our International Bond and one for the Best Service Initiative for our online trading

·   In India, HDFC Life's YoungStar Super plan was voted Product of the Year 2010 in the insurance category by a consumer survey on product innovation

Global investment management

Our business is underpinned by strong investment performance achieved by rigorously applying our 'focus on change' investment philosophy. High quality support by our client service teams - combined with this strong investment performance - won us a number of awards in 2010 including:

·   Best Investment Service Provider 1993 to 2010 from Financial Adviser in recognition of our long-term commitment to the IFA community over the last 18 years

·   Investment Provider 5-Star Award at the Financial Adviser Service Awards. Standard Life Investments has secured success in the 5-Star category in 14 of the last 15 years

·   The Scottish Financial Services Award in recognition of its role in promoting stewardship and for excellent performance

·   The Standard Life UK Smaller Companies Trust Plc has, for the fourth year running, won the UK Smaller Companies category at the Moneywise Investment Trust Awards

·   Best Fund - Equity Global High UK category at the Lipper Awards for the performance of its Managed Fund over a three and five year period


1.8 Our people

To become a more customer-focused business we need to develop and harness the talents of our people, working closely with them to make change happen. We believe that highly engaged people are more productive and have a positive effect on profit and shareholder value. So, in 2010, we began transforming our performance, talent and leadership practices to help strengthen the relationship that each individual employee has with our business. During 2011 we will continue to focus on increasing leadership capability, ensuring our leaders are equipped to help our people grow and fulfil their potential.

Employee engagement

Building on our previous annual surveys of employee engagement, in quarter 2 2010 we launched the Transformation Tracker as a mechanism by which we could capture our people's views and attitudes towards our transformational journey. Their feedback was then utilised to help shape our activities and ensure that communications were fit for purpose, relevant and effective.

The second Transformation Tracker ran in November 2010, with the results we expected following a period of significant change. We will use these results to build on our successes this year, and to inform how we do things in 2011.

In 2011 we will be launching our refreshed approach to monitoring, measuring and tracking employee engagement within Standard Life. We're working with the Hay Group on a new survey that will give us a more complete view of what influences each employee's relationship with Standard Life.

We have embarked on a group-wide programme of activity to bring to life what we stand for as an organisation when we are at our best. A wide cross-section of our people have been coming together to share stories of what it looks and feels like when we do the right thing for our customers, collaborate with each other and care about our stakeholders in all of our geographies and communities. The richness of these stories contributes to strengthening the environment we work in, and in delivery of our core business objectives.

Leadership and talent

A priority is to ensure that we have the depth and flexibility of talent we need for the future, as well as powerful and consistent leadership at all levels of the business. In 2010 we made good progress in moving towards these objectives. We made significant changes at senior levels, with 40% of executives leaving during the year and many others moving to new roles that will support our transformation and new organisation design. At the same time we increased the ratio of internal appointments into this level as a result of previous investment in building talent pipelines.

All our executives are in the process of completing 360 degree feedback against our leadership framework and establishing individual development plans. In the autumn we ran a series of 'leadership conversations' across different parts of the Group for people leaders, to deepen their understanding of their role in leading our transformation and support their development as leaders. Through these sessions, and other activities across the Group, all people leaders are expected to establish a development plan to build and develop their leadership and support delivery of personal objectives.

During the year we also introduced three new leadership development programmes, tailored to the needs of team, area and senior leaders. Pilots have been run successfully across the Group in 2010. The roll out timetable in Canada is well under way. Places are available for 480 UK and European leaders in 2011.

We continue to invest in building the strength and depth of our talent up through the organisation. A group-wide organisational review created the opportunity to make a number of key appointments at senior levels and to move and reposition our talent for the future. We have begun our third intake into ADS (Accelerated Development Support), our process to support the development of senior leaders with high potential, taking the total numbers involved to 60. In addition, we launched a similar process for emerging leaders and will extend this further in 2011. The quality and effectiveness of our talent processes was recognised through ADS being awarded the Talent Management Programme of the Year by Hr NETWORK (Scotland).

We continue to attract and recruit high calibre graduate entrants across the range of our programmes, with just under 40 new people joining Standard Life in 2010, along with a number of interns.

As a consequence of these and other activities, the strength of our internal talent pipelines and depth of succession coverage is steadily improving. We will also continue to strengthen our senior leadership and executive populations as required.

Senior management incentivisation

Our senior management are incentivised with a remuneration package which comprises a fixed salary, an annual bonus and a Long-Term Incentive Plan (LTIP), designed to deliver our long-term strategy.

The annual bonus measures performance against clear financial and non-financial (customer, people and strategic) targets set out in personal scorecards for both Group and personal outcomes.

The 2010 and 2011 LTIP targets are entirely focused on IFRS operating profit before tax (excluding joint ventures) designed to deliver our three year strategic plan. Full details of the LTIP targets will be included in the Directors' remuneration report in the Annual Report and Accounts 2010.

1.9 Basis of preparation

Overview

Our Business review for the year to 31 December 2010 has been prepared in line with the Companies Act 2006 and the Disclosure and Transparency Rules (DTR) issued by the Financial Services Authority (FSA). Under section 417 of the Companies Act 2006, DTR 4.1.8 and DTR 4.1.9, the Group is required to provide a fair review of the business and a description of the principal risks and uncertainties facing the Group. Principal uncertainties are detailed in Section 1.1 - Group overview. Principal risks are detailed in Section 1.6 - Risk management. To provide clear and helpful information, we have also considered the voluntary best practice principles of the Reporting statement: Operating and Financial Review (OFR) issued by the Accounting Standards Board (ASB).

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

The most important non-GAAP measures in the Business review include IFRS operating profit and European Embedded Value (EEV) information. All non-GAAP measures should be read together with the Group's IFRS summary consolidated income statement, summary consolidated statement of financial position and summary consolidated statement of cash flows, which are presented in the IFRS consolidated financial statements in Section 2 of this report.

IFRS and EEV reporting

The financial results are prepared on both an IFRS basis and an EEV basis. All EU-listed companies are required to prepare consolidated financial statements using IFRS issued by the International Accounting Standards Board (IASB) as endorsed by the EU. EEV measures the net assets of the business plus the present value of future profits expected to arise from in-force long-term life assurance and pensions policies. The IFRS financial results in Section 1.2 of the Business review and in the IFRS financial information section of this report have been prepared on the basis of the IFRS accounting policies applied by the Group in the IFRS financial information section of this report. The EEV basis has been determined in accordance with the EEV Principles and Guidance issued in May 2004 and October 2005 by the Chief Financial Officers (CFO) Forum. The CFO Forum represents the chief financial officers of major European insurers, including Standard Life. EEV methodology has been applied to covered business, which mainly comprises the Group's long-term savings business. Non-covered business is reported on an IFRS basis. The EEV financial results in Section 1.3 of the Business review and in the EEV financial statements section of this report have been prepared in accordance with the EEV methodology applied by the Group in Note 3.17 to the EEV financial information in this report for 2010, and in the relevant EEV methodology notes included in the Annual Report and Accounts 2009 in respect of the comparative period.

IFRS and EEV operating profit

The 2010 IFRS reconciliation of consolidated operating profit to profit for the year, presented on page 46 of this report, presents profit before tax attributable to equity holders adjusted for non-operating items. The 2010 EEV consolidated income statement on page 72, presents EEV profit showing both operating and non-operating items. By presenting IFRS and EEV results in this way, the Directors believe they are presenting a more meaningful indication of the underlying business performance of the Group.

Key differences between the IFRS and EEV bases

IFRS

EEV

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

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

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

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

 


 

 

 

2  International Financial Reporting

   Standards (IFRS)


IFRS summary consolidated income statement

For the year ended 31 December 2010


2010

Restated

2009*


Notes

£m

£m

Revenue




Gross earned premium


3,244

3,296

Premium ceded to reinsurers


(94)

(95)

Net earned premium


3,150

3,201

Net investment return


14,570

13,171

Fee and commission income


752

666

Other income


97

129

Total net revenue


18,569

17,167




Expenses




Claims and benefits paid


5,513

5,821

Claim recoveries from reinsurers


(619)

(623)

Net insurance benefits and claims


4,894

5,198

Change in policyholder liabilities


9,899

9,985

Change in reinsurance assets


97

(942)

Expenses under arrangements with reinsurers


569

563

Administrative expenses

2.3

1,607

1,486

Change in liability for third party interest in consolidated funds


443

323

Finance costs


113

115

Total expenses


17,622

16,728




Share of profit/(loss) from associates and joint ventures


24

(29)





Profit before tax


971

410




Tax expense attributable to policyholders' returns

2.4

400

299





Profit before tax attributable to equity holders' profits


571

111




Total tax expense

2.4

498

279

Less: Tax attributable to policyholders' returns

2.4

(400)

(299)

Tax expense/(credit) attributable to equity holders' profits

2.4

98

(20)




Profit for the year from continuing operations


473

131




Profit for the year from discontinued operations

2.5

20

49

Profit for the year


493

180




Attributable to:




Equity holders of Standard Life plc


432

213

Non-controlling interests


61

(33)



493

180

Earnings per share from continuing operations




Basic (pence per share)

2.6

18.4

7.5

Diluted (pence per share)

2.6

18.3

7.5

*    The Group's healthcare business, Standard Life Healthcare Limited, was sold on 31 July 2010 and has therefore been classified as a discontinued operation. The presentation of the 2009 comparatives in certain primary statements and in the corresponding notes has been reclassified accordingly, as indicated. The Group's banking business, Standard Life Bank plc, was sold on 1 January 2010 and was classified as a discontinued operation for the year ended 31 December 2009.

IFRS consolidated statement of comprehensive income

For the year ended 31 December 2010


2010

Restated

2009


Notes

£m

£m

Profit for the year


493

180

Less: Profit from discontinued operations

2.5

(20)

(49)

Profit from continuing operations


473

131

Fair value (losses)/gains on cash flow hedges


(2)

1

Actuarial gains/(losses) on defined benefit pension schemes


184

(77)

Revaluation of land and buildings


(14)

(16)

Net investment hedge


(39)

(12)

Exchange differences on translating foreign operations


122

(65)

Equity movements transferred to unallocated divisible surplus


(2)

104

Aggregate equity holder tax effect of items recognised in comprehensive income


(60)

28

Other comprehensive income/(expense) for the year from continuing operations


189

(37)

Total comprehensive income for the year from continuing operations


662

94





Profit from discontinued operations

2.5

20

49

Other comprehensive income from discontinued operations

2.5

24

8

Total comprehensive income for the year from discontinued operations


44

57





Total comprehensive income for the year


706

151





Attributable to:




Equity holders of Standard Life plc




From continuing operations


601

127

From discontinued operations


44

57

Non-controlling interests




From continuing operations


61

(33)



706

151


IFRS pro forma reconciliation of consolidated operating profit to profit for the year

For the year ended 31 December 2010


2010*

2009*


Notes

£m

£m

Operating profit before tax from continuing operations




UK


234

222

Canada


110

113

International


15

23

Global investment management


103

73

Other


(37)

(32)

Operating profit before tax from continuing operations

2.1(a)

425

399

Adjusted for the following items:




Short-term fluctuations in investment return and economic assumption changes

2.7(a)

127

(214)

Restructuring and corporate transaction expenses

2.3

(71)

(52)

Impairment of intangible assets


-

(2)

Impairment of investments in associates


(1)

-

Other operating profit adjustments

2.7(b)

30

13

Non-operating profit/(loss) before tax from continuing operations


85

(255)

Profit/(loss) attributable to non-controlling interests


61

(33)

Profit before tax attributable to equity holders' profits


571

111

Tax (expense)/credit attributable to:




Operating profit


(89)

(34)

Adjusted items


(9)

54

Total tax (expense)/credit attributable to equity holders' profits


(98)

20

Profit for the year from continuing operations


473

131

Profit for the year from discontinued operations

2.5

20

49

Profit for the year


493

180

*    The Group's healthcare business, Standard Life Healthcare Limited, was sold on 31 July 2010 and the Group's banking business, Standard Life Bank plc, was sold on 1 January 2010. Both businesses have been classified as discontinued operations. The analysis of operating profit presented for the years ended 31 December 2010 and 31 December 2009 include continuing operations only.

Operating profit excludes impacts arising from short-term fluctuations in investment return and economic assumption changes. It is calculated based on expected returns on investments backing equity holder funds, with consistent allowance for the corresponding expected movements in equity holder liabilities. Impacts arising from the difference between the expected return and actual return on investments, and the corresponding impact on equity holder liabilities, are excluded from operating profit and are presented within profit before tax. The impact of certain changes in economic assumptions is also excluded from operating profit and is presented within profit before tax.

Adjustment is made for restructuring costs and significant corporate transaction expenses. Operating profit is also adjusted for impairment of intangible assets and profit or loss arising on the disposal of a subsidiary, joint venture or associate.  Other operating profit adjustments include volatility arising from changes in insurance and investment contract liabilities driven by corresponding changes in tax provisions, and items which are one-off in nature and outside the control of management and which, due to their size or nature, are not indicative of the long-term operating performance of the Group.

The Directors believe that, by eliminating this volatility from equity holder profit, they are presenting a more meaningful indication of the long-term operating performance of the Group.

IFRS summary consolidated statement of financial position

As at 31 December 2010


2010

2009


Notes

£m

£m

Assets




Intangible assets


135

106

Deferred acquisition costs


881

872

Investments in associates and joint ventures


3,087

2,169

Investment property


8,410

7,111

Property, plant and equipment


164

161

Reinsurance assets


6,962

7,032

Loans


3,136

2,769

Derivative financial assets


1,343

1,229

Investment securities


120,042

106,181

Other assets


2,522

2,152

Cash and cash equivalents


7,434

7,436

Assets of operations classified as held for sale

2.5

-

9,395

Total assets


154,116

146,613





Equity




Share capital

2.9(a)

228

224

Shares held by trusts

2.9(b)

(21)

-

Share premium reserve


976

888

Retained earnings


1,094

685

Other reserves


1,626

1,660

Equity attributable to equity holders of Standard Life plc


3,903

3,457

Non-controlling interests


335

296

Total equity


4,238

3,753





Liabilities




Non-participating contract liabilities

2.10

99,164

85,892

Participating contract liabilities

2.10

33,474

32,352

Deposits received from reinsurers


6,021

6,104

Third party interest in consolidated funds


5,454

3,004

Borrowings

2.11

245

227

Subordinated liabilities


1,799

1,832

Deferred income


382

371

Income and deferred tax liabilities


401

214

Derivative financial liabilities


924

797

Other liabilities


2,014

2,924

Liabilities of operations classified as held for sale

2.5

-

9,143

Total liabilities


149,878

142,860





Total equity and liabilities


154,116

146,613


IFRS consolidated statement of changes in equity

For the year ended 31 December 2010

Share capital

Shares held by trusts

Share premium reserve

Retained earnings

Other reserves

Total equity attributable to equity holders of Standard

Life plc

Non-controlling interests

Total equity

2010

£m

£m

£m

£m

£m

£m

£m

£m

1 January

224

-

888

685

1,660

3,457

296

3,753

Profit for the year

-

-

-

432

-

432

61

493

Other comprehensive income for the year

-

-

-

124

89

213

-

213

Total comprehensive income for the year

-

-

-

556

89

645

61

706

Distributions to equity holders

-

-

-

(273)

(5)

(278)

-

(278)

Issue of share capital other than in cash

4

-

88

-

-

92

-

92

Reserves credit for employee share-based payment schemes

-

-

-

-

18

18

-

18

Transfer to retained earnings for vested employee
share-based payment schemes

-

-

-

5

(5)

-

-

-

Shares acquired by employee trusts

-

(35)

-

-

-

(35)

-

(35)

Shares distributed by employee trusts

-

10

-

-

(10)

-

-

-

Transfer between reserves on disposal of subsidiaries

-

-

-

121

(121)

-

-

-

Shares gifted to charity

-

4

-

-

-

4

-

4

Other movements in non-controlling interests in the year

-

-

-

-

-

-

(22)

(22)

31 December

228

(21)

976

1,094

1,626

3,903

335

4,238

 

Share capital

Shares held by trusts

Share premium reserve

Retained earnings

Other reserves

Total equity attributable to equity holders of Standard Life plc

Non-controlling interests

Total equity

2009

£m

£m

£m

£m

£m

£m

£m

£m

1 January

218

-

792

774

1,623

3,407

334

3,741

Profit/(loss) for the year

-

-

-

213

-

213

(33)

180

Other comprehensive (expense)/income for the year

-

-

-

(50)

21

(29)

-

(29)

Total comprehensive income/(expense) for the year

-

-

-

163

21

184

(33)

151

Distributions to equity holders

-

-

-

(260)

-

(260)

-

(260)

Issue of share capital other than in cash

6

-

96

-

-

102

-

102

Reserves credit for employee share-based payment schemes

-

-

-

-

24

24

-

24

Transfer to retained earnings for vested employee
share-based payment schemes

-

-

-

8

(8)

-

-

-

Other movements in non-controlling interests in the year

-

-

-

-

-

-

(5)

(5)

31 December

224

-

888

685

1,660

3,457

296

3,753


IFRS summary consolidated statement of cash flows

For the year ended 31 December 2010

2010

Restated

2009


£m

£m

Cash flows from operating activities



Profit before tax from continuing operations

971

410

Profit before tax from discontinued operations

17

93


988

503

Change in operating assets

(15,726)

(11,074)

Change in operating liabilities

12,457

8,859

Non-cash and other items

240

235

Taxation paid

(262)

(239)

Net cash flows from operating activities

(2,303)

(1,716)

                       



Cash flows from investing activities



Net (acquisition)/disposal of property, plant and equipment

(16)

41

Disposal of subsidiaries net of cash disposed

(1,272)

-

Investments in associates and joint ventures

(16)

(6)

Other

(64)

(16)

Net cash flows from investing activities

(1,368)

19




Cash flows from financing activities



Proceeds from other borrowings

33

11

Repayment of other borrowings

(33)

(19)

Capital flows from non-controlling interests and third party interest in consolidated funds

2,553

960

Distributions paid to non-controlling interests

(56)

(35)

Shares acquired by trusts

(35)

-

Interest paid

(117)

(131)

Ordinary dividends paid

(186)

(158)

Net cash flows from financing activities

2,159

628




Net decrease in cash and cash equivalents

(1,512)

(1,069)

Cash and cash equivalents at the beginning of the year

8,840

9,951

Effects of exchange rate changes on cash and cash equivalents

2

(42)

Cash and cash equivalents at the end of the year      

7,330

8,840




Supplemental disclosures on cash flows from operating activities



Interest paid

-

275

Interest received

2,663

3,003

Dividends received

1,329

1,266

Rental income received on investment properties

605

599

 

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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