Final Results - Part 2 of 5

RNS Number : 2068Z

Standard Life plc

13 March 2012

Standard Life plc

Preliminary Results 2011

Part 2 of 5

Standard Life plc

Preliminary Results

2011

Section	Contents	Page
1	Business review	15
1.1	Chief Executive's overview	17
1.2	Group performance	23
1.3	Chief Financial Officer's overview	24
1.4	Business segment performance	32
	1.4.1 UK	34
	1.4.2 Global investment management	38
	1.4.3 Canada	40
	1.4.4 International	42
1.5	Risk management	44
1.6	Our customers	46
1.7	Our people	49
1.8	Basis of preparation	50
2	International Financial Reporting Standards (IFRS)	51
	IFRS primary statements	52
	IFRS notes	58
3	European Embedded Value (EEV)	77
	EEV primary statements	78
	EEV notes	81
4	Supplementary information	113
4.1	Analysis of Group operating profit by segment	114
4.2	EEV and EEV operating profit	115
4.3	Reconciliation of operating profit to EEV capital and cash generation	116
4.4	Group assets under administration and net flows	117
4.5	Analysis of new business	123
4.6	Exposure to investment property and financial assets	128
4.7	Fair value hierarchy of financial instruments	131
4.8	Total expenses and operating cost base	132
4.9	Investment for transformation and growth	133

The Preliminary Results 2011 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 Chief Executive's overview

"Our results in 2011 again demonstrate that we are well on track to transform the operational and financial performance of Standard Life. We have delivered increased operating profits and cash flow while investing to strengthen our market positions. We have developed innovative propositions to respond to the changing needs of our customers and their advisers, ensuring we are well positioned to benefit from market changes and the new regulatory environment."

David Nish, Chief Executive

Driving a sustainable business

We made significant progress in building a strong platform for sustainable, profitable growth and are seeing the benefits of the investment we have made in our business. We have launched a number of innovative propositions to respond to the changing needs of our customers and their advisers. I'm very grateful to our employees for their hard work, against challenging conditions, to deliver in the past year.

Growing our business

We've increased the pace and agility with which we are delivering on our strategy. There is more to do but we are in a good place to make that happen.

We set our key strategic priorities in March 2010 with the aim of transforming the business over the three years to 2012. This required an increased level of investment in order to grow our business. As we move into the final year of our transformation we are well on track to achieve an ongoing improvement in profitability and performance. Some highlights are:

Delivering performance across the Group

· In the UK, there has been continued momentum in our fee based propositions with technology and scalability of platforms driving efficiency

· Global investment management continued its excellent record of strong and profitable growth in 2011

· In Canada, our fee based propositions are growing and we continue to drive value from our existing spread/risk business

· In International, we are rapidly growing the Hong Kong and offshore businesses and will expand into new markets

Building on our market-leading propositions that benefit advisers, customers and Standard Life

· Transformed our Adviserzone service in February 2011, introducing new market-leading features

· Launched a new online stocks and shares ISA which has helped simplify investment options for our customers

· Increased use of guided architecture which provides simple and easy investment choices to meet the needs of customers and advisers

· UK corporate sales momentum continued with 167 new schemes (2010: 182 new schemes), while 66,000 new employees joined schemes implemented in 2011 (2010: 46,000 employees)

· Standard Life Wealth continues to build a strong presence in the IFA market with the launch of the Managed Portfolio Service, and now has over £1bn of assets under administration (AUA)

· Enhanced our distribution in Canada through an agreement with Qtrade Financial Group, an online brokerage and investment dealer

Expanding the global reach of our investment management business

· Assets in our Global Absolute Returns Strategies (GARS) fund now total over £13bn and it has outperformed its LIBOR benchmark over all key time periods since inception

· Our agreement with John Hancock Financial gives the GARS fund access to the United States market and allows us to work with a leading distributor

· Our strategic alliance with Chuo Mitsui Asset Trust and Banking Company, one of the largest trust banks in Japan, provides our customers with direct access to expertise in the management of Japanese equity funds

Maximising the value from our joint venture relationships in Asia

· Performance across our joint venture businesses in Asia has been strong in 2011, with net flows increasing by 8%

· HDFC Life performed well, increasing market share and securing second place in the Indian private sector overall

· HDFC Asset Management, in which we have a 40% share, is the largest mutual fund company in India

· In China, Heng An has a new management team in place and a revamped strategy focused on driving business performance

Transforming our business

The second year of our transformation in 2011 saw us deliver more of the changes required to prepare our business for 2012 and beyond. These changes are already delivering benefits, making our business more agile, adaptable and efficient. We remain focused on maximising the generation of cash profit to support our progressive dividend policy and to create the capacity to reinvest in growing our business.

1.1 Chief Executive's overview continued

Objectives and strategy

Our strategic objectives and our performance against them are illustrated below. Find out more on how our businesses performed in Section 1.4 - Business segment performance. Our strategic objectives and ultimately our ability to generate value for our shareholders may be subject to financial and non-financial risks. Principal risks and our risk management approach are discussed in more detail in Section 1.5 - Risk management.

Our strategic objectives

Building on our strengths in our pension savings and corporate benefits markets

Focusing on the savings and investments needs of customers in our chosen retail segments

We are a leading corporate pensions provider in the UK and Canada, with a strong brand and competitive positioning in these markets. We remain confident that these markets provide a significant growth opportunity for us.

We see many opportunities in our retail markets, where we are focusing on the savings and investments needs of individual customers in our chosen segments. We continue to build on our track record for innovation and strength in distribution.

Our performance

in 2011

· In the UK, we grew our share of the corporate benefits market to 19.1% (2010: 17.0%)

· Our UK business also won 167 new corporate schemes

(2010: 182 new schemes) and enquiries more than doubled during 2011

· In Canada, group savings and retirement product enhancements enabled us to win 204 new defined contribution accounts, increasing members to 561,000

(2010: 537,000 members)

· We continued to build on the success of our Wrap platform with approximately 1,000 firms using our platform. We delivered enhanced functionality which focused on reducing risk and costs in adviser businesses.

· We launched new propositions such as an online stocks and shares ISA and online mutual funds

· Our retail IFA market share in 2011 was 14.9% (2010: 14.6%)

Our strategic objectives

Expanding the global reach of our investment management business

Maximising value from the joint venture relationships in Asia

The strength of the Group is enhanced by the excellent investment performance record of Standard Life Investments. Our focus remains on sustaining that level of performance and on building an investment platform that can support our growth ambitions.

We manage these businesses with a view to maximising their long-term value. The operations in China and India give us the opportunity to participate in sizeable markets with major growth potential.

Our performance

in 2011

· Our global investment management business continued its excellent record of strong and profitable growth

· Our GARS fund has outperformed its LIBOR benchmark over all key time periods since inception and assets in the fund now exceed £13bn

· We have entered into an agreement with John Hancock Financial giving the GARS fund access to the United States market and allowing us to work with a leading distributor to help deliver potential for our global clients

· The Indian joint venture has improved its market positioning and grown market share

· In China, we have a new management team in place under the leadership of a new general manager. A revamped strategic plan is currently being implemented and we will continue to extend our distribution network and enhance business quality and effectiveness.

Competitive advantages Where we will create and leverage distinctive capabilities	Brand	Our new repositioned brand was launched across the Group in 2011. The brand is more than just a new look - it's about the way we work and the experiences we create for our customers. It's also about the unique combination of capabilities we have, including the strong distributor relationships that differentiates us strongly from competitors.
	Technology	Investment in technology is delivering improved digital experiences and service for our customers. We will continue to leverage technology to deliver efficient, scalable and robust operations.
	Customer and distributor insight	Putting customers at the heart of our business means we need to keep listening to them, developing our understanding of their needs and challenges. We also continue to ensure that we maintain high levels of customer service and distributor support.
	Investment performance	We continue to deliver robust long-term investment performance. Standard Life Investments is well positioned across a diversified range of asset classes.

1.1 Chief Executive's overview continued

Market overview

Market conditions have been tough during 2011, however we remain confident that our future growth will be driven by our customers' demand for our propositions and the underlying demographic and regulatory trends in our key markets. In the short term, volatile conditions in global financial markets and economic uncertainty mean that operating conditions will continue to be challenging.

Continued volatility in global financial markets

The financial markets in which we operate are being impacted by factors including:

· The risk of sovereign debt default within the European Union member states

· The downgrade of the credit ratings of a number of countries as a result of the European sovereign debt crisis

· Stagnated global growth and the downward revisions to growth forecasts in a number of major economies

· A shift towards lower-risk assets as investors try to reduce their exposure to volatile equity markets both in the UK and abroad. To illustrate this volatility, the FTSE All-Share Index closed at a high of 3,161 points and a low of 2,558 points during 2011, a significant trading range.

An uncertain economic backdrop

Other economic factors are also impacting the markets in which we operate. Some of the factors impacting our markets include:

· High inflation in the UK, fuelled by increases in both the standard rate of VAT to 20% and energy prices, is putting a squeeze on households' real incomes

· Wage inflation remains subdued and the low level of global economic growth has led to stagnation in employment markets

· Sustained levels of low interest rates and the potential for further quantitative easing

· Austerity measures to reduce high levels of government borrowing raise the possibility of further erosion of pension tax breaks

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 the rich and poor; and lower long-term birth rates.

In the UK market, the structure of the population is changing as life expectancy rapidly increases. In 2011, 17% of the population were aged 65 and over and this is expected to increase to 23% by 2033. This emphasises the need for individuals to ensure that they have adequate pension provision to fund their retirement.

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 Canadian Government is expected to introduce the Pooled Registered Pension Plans, opening a new market to pension providers. We are one of the largest defined contribution pension providers in Canada and are developing our plans for this new market.

Contributing to market insight

We regularly publish new insight and support to policy makers and industry stakeholders to help stimulate long-term savings. In October 2011, we published the results of a research project undertaken with the assistance of experts in behavioural economics. The aim of Keep on nudging - making the most of auto enrolment was to identify how we can maximise the potential of workplace savings to help those on low-to-moderate incomes save for retirement.

The current economic climate presents many challenges. Yet our research found that the majority of people are still keen to prioritise saving, particularly when they are helped to understand what it means to them, both now and in the future. We believe that, working together, employers, the long-term savings industry and the government can realise the full potential of auto enrolment.

Government legislation and industry regulation

There are currently a number of legislative and regulatory changes that will affect financial services companies. 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 in the UK. The regulations from the RDR come into effect at the start of 2013. This affects distribution of both retail investment products and corporate pensions, in areas such as advice provision, professionalism, adviser charging and platform rules.

Our strategy is specifically focused on the post-RDR world, both in ensuring that we comply with the regulation and more so in capturing the long-term strategic advantage. We provide high value fee based propositions and investment solutions for our customers and intermediaries and therefore we do not rely on paying commission to promote our propositions.

The ban on commission that will come as part of the RDR will significantly increase the size of our accessible corporate market in the UK.

Auto enrolment and National Employment Savings Trust

Auto enrolment will become mandatory from October 2012 and will require all eligible workers to be automatically enrolled into a qualifying pension scheme. At the same time, the UK Government is putting in place the National Employment Savings Trust (NEST). This is an entry-level company sponsored defined contribution pension scheme and will require a minimum level of contributions.

These combined changes are expected to bring an extra seven million adults into pension savings for the first time, with an estimated £6bn of additional annual contributions.

As a provider of quality corporate pension schemes, we welcome the introduction of auto enrolment in 2012. 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.

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 pension business.

Pooled Registered Pension Plans

The Canadian Government is expected to introduce Pooled Registered Pension Plans (PRPP), since only around 40% of Canadians have a private corporate pension arrangement. The PRPP is the Canadian version of a government-sponsored auto enrolment plan.

We are one of the largest defined contribution (DC) pension providers in Canada and are already developing our plans for this new and potentially very large market.

Solvency 2

Solvency 2 is a major European regulatory change initiative that brings consistency to how EU insurers manage capital and risk with the aim of protecting consumers. We expect the new rules to 'go live' on 1 January 2014 for firms, although this is still subject to some uncertainty.

All firms will have to calculate their capital requirements based on the risks they manage and disclose this to regulators and the market. Taking on risk enables insurance companies to offer valuable customer propositions and deliver good shareholder returns.

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 set up our Solvency 2 Programme in January 2010 to help us manage the transition. The Programme is making good progress and we are well prepared for the implementation of Solvency 2.

UK life insurance tax regime

The 2011 Budget announced significant changes to the UK life insurance tax regime.

From 1 January 2013, the basis of the regime will move from the FSA regulatory return to the statutory accounts. The draft Finance Bill 2012 was issued by HMRC on 6 December 2011 for consultation and is expected to be enacted during the summer of 2012.

We are actively engaged in the ongoing consultation process with HMRC. There is still uncertainty regarding the final detail of the new regime provisions, including the impact of the transition to the new tax regime. Therefore, we consider that it is too early in the consultation process to be certain about the impact.

Gender differentiation

From 21 December 2012, a European Court of Justice ruling will take effect that prevents using gender as a factor in determining premiums and benefits in insurance contracts.

We currently use gender as a risk factor in calculating premiums and benefits for a number of our products.

We are working to ensure that we implement the appropriate changes so that our business complies with the ruling. We do not currently anticipate a significant impact on our results.

1.1 Chief Executive's overview continued

Serving our customers

Our customers are at the very core of everything we do, so we'll continue to concentrate on bringing our transformation to life for them and giving them the services and support they need to make it easier to deal with us.

New technologies play an increasingly important role in the way we operate and grow our business. We're continuing to invest in our technology to ensure we deliver a competitive advantage through a scalable model that lowers the cost of attracting and serving customers. We have recently developed a new online ISA and re-launched our Adviserzone platform to give our customers more control over their finances.

Our repositioned brand and visual identity will continue to enhance the way that we communicate with our customers. They are also a major part of delivering even clearer communications to our customers so that they can plan for their financial future with confidence and optimism. The feedback from our customers and the industry has been very positive.

Developing our people

A number of key appointments have been made to further strengthen our senior management team. This includes the promotion of Paul Matthews to Chief Executive of the UK business in June 2011 and Charles Guay joined us in February 2012 as the new Chief Executive of our business in Canada.

We can achieve our goals more efficiently by making sure we keep attracting new talent and developing our own people. Our investment in developing talent, in particular in leadership development, is key to our continued success. The next phase of our talent management programme will continue to develop our current leaders and help tomorrow's leaders grow.

Investing in our people helps guarantee our continued success. We encourage and reward high performance right across the Group. We are expanding this further, strengthening the link between individual performance and reward, so our people become more accountable for the contribution they make to our success.

Better and more efficient communication has helped us increase our understanding of what we can do to help our people develop themselves. Our staff engagement survey, InterAction, provided a huge amount of insight and from it we have identified areas to focus our attention. These areas of focus are centred around our people, to help them grow and further their careers at Standard Life.

Looking forward

Our confidence in our ability to deliver sustainable growth is underpinned by the results we have delivered in 2011. We also remain confident that the underlying demographic and regulatory trends in our key markets, and our customers' demand for our propositions, will drive our future growth.

We continue to drive down unit costs having delivered £79m of efficiency savings towards our £100m margin improvement target which we are on track to achieve in the first half of 2012.

In the UK, we are entering a period of unprecedented change and potential for growth of our business. With the RDR less than a year away, our retail business has scale and momentum and is ideally positioned to continue to drive asset growth through our leading platform propositions. The quality of our corporate pension offerings together with the opportunities created by the RDR and pensions reform for increased individual savings will provide us with an increased flow of new business over the medium to long term.

Our business in Canada is well positioned to benefit from the ongoing shift from defined benefit to defined contribution pension provision. Our International business will continue to benefit from the strength of our offshore bond proposition and ongoing progress in our joint ventures but may continue to be affected by the impact of economic uncertainty in Europe.

The prospects for Standard Life Investments remain strong. The business is well positioned across a diversified range of asset classes and provides the investment solutions expertise which continues to allow the Group to capture a greater proportion of the platform value chain and third party assets.

The uncertain economic backdrop and its effect on consumer confidence have impacted new business volumes since the start of 2012 against a strong start to 2011. However, we see significant opportunities in all our chosen markets and are confident that the investments we are making will lead to continued strong growth in assets together with further improvements in efficiency and we expect to continue to drive an ongoing improvement in financial performance.

David Nish, Chief Executive

1.2 Group performance

Key financial performance indicators

Group operating profit before tax

Group operating profit demonstrates our ability to deliver returns for our shareholders and provides an indication of our long-term dividend paying capability.

· Group operating profit before tax increased by 28% to £544m

· Fee based revenue increased by 8% to £1,223m

· Operating profit in 2011 included the remaining £64m benefit following the change in the basis of future pension increases in the UK staff pension scheme. The initial benefit recognised in 2010 was £59m.

· Acquisition expenses expressed as a proportion of sales and maintenance expenses as a proportion of average AUA improved to 140bps and 41bps respectively, demonstrating the scalability of our business

EEV operating profit before tax

EEV operating profitability measures our ability to effectively manage our existing book of business and to write profitable new business.

· EEV operating profit before tax rose by 26% to £989m

· This included a 16% increase in core EEV operating profit, which was due to increased new business profitability and expected returns on existing business. There was also higher profits from global investment management.

· New business contribution up 9% to £335m due to higher sales volumes in the UK and increased margins in our businesses in the UK and Canada

EEV operating capital and cash generation

EEV operating capital and cash generation reflects our ability to generate capital and cash from our business. This enables further investment in the business and the payment of dividends to our shareholders.

· EEV operating capital and cash generation increased by 53% to £438m

· This increase in 2011 was mainly due to higher capital and cash from increased non-covered profits and activities to manage our existing book, particularly in Canada

Assets under administration and net flows

As a long-term savings and investments business, AUA and net flows are key drivers of shareholder value. We aim to grow AUA by focusing on our customers and meeting their needs with innovative propositions.

· Total Group AUA increased by 1% to £198.4bn driven by good, although lower, flows into our newer fee based products. This was partially offset by the external transfer of our UK money market funds of approximately £4bn.

· Net flows reduced to £5.4bn, impacted by difficult market conditions across the Group and higher outflows in older style propositions in the UK

· Launched in October 2010, our MyFolio fund range is growing rapidly and now has assets of approximately £1bn

Find out more about these measures in Section 1.3 - Chief Financial Officer's overview and also Section 1.8 - Basis of preparation

1.3 Chief Financial Officer's overview

"We operate a simple business model which focuses on increasing assets, maximising revenue, lowering unit costs and optimising the balance sheet. In 2011, we continued to invest in the future, increase the quantity and quality of the assets we administer on behalf of our customers as well as managing down our costs. This will help us to meet our strategic objectives of driving sustainable, high quality returns for our shareholders. I believe we are well placed to deliver increased profits and cash flow in the future."

Jackie Hunt, Chief Financial Officer

IFRS - Group
	2011	2010	Movement
Group operating profit before tax from continuing operations^1,2	£544m	£425m	28%
IFRS profit after tax attributable to equity holders of Standard Life plc	£298m	£432m	(31%)
Group operating return on equity	11.9%	10.0%	1.9% points

IFRS profit

IFRS profit for the year was £346m (2010: £493m). This comprised profit after tax attributable to equity holders of £298m (2010: £432m) and profit attributable to non-controlling interests of £48m (2010: £61m). The IFRS result included a 28% increase in operating profit before tax from continuing operations from £425m to £544m. Non-operating losses were £214m (2010: profit £85m).

Group operating profit before tax from continuing operations

	2011	2010
	£m	£m
Fee based revenue	1,223	1,131
Spread/risk margin	356	370
Total income	1,579	1,501
Acquisition expenses	(270)	(267)
Maintenance expenses	(723)	(673)
Investment for transformation and growth	(137)	(149)
Group corporate centre costs	(45)	(50)
Capital management	74	27
India and China JV businesses	2	(23)
Other	64	59
Group operating profit before tax from continuing operations	544	425

Group operating profit before tax increased to £544m. The key highlights are:

· Fee based revenue, which mainly relates to asset management charges, increased by 8% to £1,223m. This was due to the strong level of net inflows, higher average asset values and the shift to higher margin products in our global investment management business.

· Spread/risk margin mainly relates to the margin on our UK annuity business and the annuity and universal life business in Canada. Overall spread/risk margin reduced by £14m, impacted by losses from operating assumptions and one-off reserving changes of £70m (2010: profit £17m). This was partially offset by management actions in Canada of £88m (2010: £32m).

· Acquisition expenses are the costs we incur in writing new business. Acquisition expenses were broadly maintained at £270m despite the strong growth in sales volumes. Acquisition expenses expressed as a proportion of sales improved to 140bps (2010: 149bps).

¹Continuing operations exclude Standard Life Healthcare Limited, which was sold on 31 July 2010.

²Operating profit is IFRS profit before tax adjusted to remove the impact of short-term market driven fluctuations in investment return and economic assumptions, restructuring costs (including the Solvency 2 programme), impairment of intangible assets, amortisation of intangible assets acquired in business combinations, profit or loss on the disposal of a subsidiary, joint venture or associate and other significant one-off items outside the control of management.

· Maintenance expenses mainly relate to the ongoing costs that we incur to service and administer customer policies. Maintenance expenses increased to £723m in 2011 due to further development of the business and expressed as a proportion of average AUA improved to 41bps

(2010: 42bps).

· Investment for transformation and growth costs included in operating profit before tax decreased in 2011 to £137m. We have continued to invest for future growth in the business with a number of customer propositions launched during the year.

· Total group corporate centre costs including investment for transformation and growth decreased to £50m (2010: £54m). Investment for transformation and growth was £5m (2010: £4m).

· Capital management increased to £74m due to the investment of shareholders' funds in higher yielding assets and the improved funding position of our UK staff pension scheme

· The joint ventures in Asia contributed an operating profit before tax of £2m (2010: loss £23m) to the Group, which reflects their positive progression and our ongoing investment to support their development

· Other relates to the remaining £64m benefit following the change in the basis of future pension increases in the UK staff pension scheme. The initial benefit recognised in 2010 was £59m.

The improvement in both acquisition and maintenance expense trends demonstrates the scalability of our business. We continue to lower unit costs both by growing assets and improving existing propositions and processes to make better use of automation and self servicing.

We previously said that we were targeting £100m of annual margin improvement by 2012 to be achieved through greater efficiency, improved asset mix and increasing flows to our global investment management business. In 2011, we achieved further cost efficiencies of £45m. We have now achieved total efficiency savings of £79m in relation to this 2012 target and also increased revenues from our fee based products resulting from strong flows into higher margin propositions in global investment management. Further efforts to reduce costs continue to be implemented and we expect additional efficiency savings to be delivered in 2012.

Investment for transformation and growth

Investment for transformation and growth	2011	2010
	£m	£m
Investment in operating cost base	137	149
Investment capitalised	36	36
Additional investment in joint venture businesses	23	16
Total investment for transformation and growth	196	201

We have continued to invest to transform and grow the business:

· Investment spend included in Group operating profit before tax decreased to £137m in 2011

· A number of customer propositions were launched or enhanced during the period and continued investment was made to improve operational effectiveness

· The total amount invested in 2011 was £196m (2010: £201m). This includes additional investment in the India and China joint venture businesses and also capitalised investment spend that does not impact profitability in 2011.

Group operating return on equity

A key component of our business model is to optimise the use of our balance sheet. We are now including return on equity as a financial metric that measures our success in generating profitability relative to our shareholder capital. Group operating return on equity increased to 11.9% (2010: 10.0%) benefiting from the growth in operating profit. This measures Group operating profit after tax expressed as a percentage of the opening IFRS equity, adjusted for cash dividends paid. We will continue to manage our capital position to ensure that we generate sustainable returns for our shareholders.

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

Group non-operating (loss)/profit before tax from continuing operations	2011	2010
	£m	£m
Short-term fluctuations in investment return and economic assumption changes	(139)	157
Restructuring and corporate transaction expenses	(70)	(71)
Other operating profit adjustments	(5)	(1)
Group non-operating (loss)/profit before tax from continuing operations	(214)	85

Group non-operating loss was £214m compared with a profit of £85m in 2010. Short-term fluctuations in investment return and economic assumptions produced non-operating losses of £139m in 2011 compared with gains of £157m in 2010. Losses in 2011 of £139m were mainly due to the widening of credit spreads which impacted the annuity business in the UK and losses in Canada due to adverse movements in the Canadian Government bond yield curve. This was partially offset by investment returns on shareholder assets in the UK and Canada. Non-operating restructuring and corporate transaction expenses of £70m (2010: £71m) relate to a number of restructuring programmes including Solvency 2.

Find out more about the IFRS results in Section 1.4 - Business segment performance and Section 1.8 - Basis of preparation

1.3 Chief Financial Officer's overview continued

Assets under administration and new business - Group
	2011	2010	Movement
Assets under administration	£198.4bn	£196.8bn	1%
Net flows	£5.4bn	£7.2bn	(25%)
Present value of new business premiums	£19,738m	£18,483m	7%
New business contribution	£335m	£308m	9%

Assets under administration and net flows

There was a good level of demand for our innovative products and services. However, market conditions were volatile and net inflows decreased to £5.4bn. Our relatively resilient asset mix partly mitigated the impact of volatile market conditions on assets under administration (AUA).

There was a 1% increase in AUA to £198.4bn:

· The increase in AUA was driven by continuing strong flows, particularly into our newer fee based propositions and our third party investment management business. This was offset by the external transfer of approximately £4bn of our UK money market funds following our decision to exit this sector of the industry.

· Of the total AUA, 82% (2010: 83%) related to fee business

· Fee business AUA was maintained at £163.3bn (2010: £163.4bn¹) with net flows of £6.1bn (2010: £7.9bn) partially offset by the UK money market funds transfer

· Spread/risk business AUA increased by 5% to £24.7bn due to positive market movements, offsetting the £1.0bn (2010: £1.0bn) of net outflows

New business PVNBP £m			New business contribution £m		PVNBP margin %		IRR %		Undiscounted payback (years)
	2011	2010	2011	2010	2011	2010	2011	2010	2011	2010
UK	14,035	12,956	204	173	1.5	1.3	18	18	6	6
Canada	2,928	3,048	73	68	2.5	2.2	16	24	7	6
International	2,775	2,479	58	67	2.1	2.7	11	14	8	6
Total	19,738	18,483	335	308	1.7	1.7	15	17	7	6

¹Opening Fee AUA includes an adjustment to include all Standard Life Wealth AUA for the first time.

· Improved new business profitability was due to higher sales volumes in the UK and increased margins in our UK and Canada businesses

· Present value of new business premiums (PVNBP) for the Group totalled £19,738m and was 7% higher than in 2010

· Total internal rate of return (IRR) for the Group of 15% (2010: 17%) was adversely impacted by capital and legislative changes in Canada and reduced margins in International

Find out more about AUA and new business for each of our businesses in Section 1.4 - Business segment performance

EEV - Group
	2011	2010	Movement
EEV per share	317p	322p	(2%)
EEV operating profit before tax from continuing operations	£989m	£787m¹	26%
EEV profit before tax	£526m	£1,152m	(54%)
Return on embedded value from continuing operations	10.4%	8.7%¹	1.7% points

¹Continuing operations exclude Standard Life Healthcare Limited, which was sold on 31 July 2010.

Group embedded value

Group embedded value increased to £7,428m (2010: £7,321m) representing an EEV per share of 317p. EEV per share has increased by 8p before dividend distributions, including EEV operating profit from continuing operations after tax of £724m (31p per share). This resulted in a return on embedded value (RoEV) of 10.4%. EEV non-operating loss from continuing operations after tax was £355m (loss of 15p per share). The next page provides more detail on the EEV operating and non-operating results on a before tax basis. The 8p reduction in EEV per share from other and non-trading items is mainly due to negative foreign exchange movements of £69m and £61m of after tax actuarial losses on the Group's pension schemes.

The closing EEV of £7,428m consists of:

· £3,588m of net worth or shareholder net assets

· £3,840m from the present value of in-force business (PVIF) net of the cost of required capital

The increase in total EEV of £107m consists of:

· Movement in net worth of positive £105m

· Movement in the PVIF of positive £2m

The 1% increase in EEV was more than offset by a 3% increase in the diluted closing number of ordinary shares, resulting in the overall EEV per share falling by 5p.

EEV profit

EEV profit before tax of £526m (2010: £1,152m) includes:

· EEV operating profit from continuing operations of £989m (2010: £787m)

· EEV non-operating loss from continuing operations of £463m (2010: profit £348m). EEV profit from discontinued operations was £nil before tax (2010: profit £17m).

EEV operating profit before tax from continuing operations

	EEV operating profit before tax		RoEV
	2011	2010	2011	2010
	£m	£m	%	%
Core	731	629	7.6	7.2
Efficiency	88	132	1.0	1.6
Back book management	170	26	1.8	(0.1)
Total	989	787	10.4	8.7

EEV operating profit from continuing operations increased by 26%:

· Core profits increased by 16% to £731m due to the new business we sold, an improved expected return from our existing business and higher profits from global investment management. This also drove an increase in our core RoEV from 7.2% to 7.6%. New business contribution increased by 9% to £335m (2010: £308m). Expected return on our existing business increased by 4% to £440m (2010: £422m).

· Core non-covered business produced an EEV operating profit of £13m (2010: loss £37m). This increase was mainly due tohigher profit from global investment management.

· Profit from efficiency gains primarily related to £40m in positive expense assumption changes in Canada and £50m from management actions to reduce current and future investment expenses in the UK. The positive expense assumptions reflect the reduction in the ongoing expenses of managing our covered business and the growth in business volumes.

· EEV operating profit from back book management of £170m included the remaining operating profit gain of £64m from the change in the UK pension scheme, in addition to the initial £59m benefit recognised in 2010. Tax variances and management actions in Canada to enhance investment yields on assets have also increased back book EEV operating profits in 2011.

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

Total EEV non-operating loss before tax from continuing operations of £463m (2010: profit £348m) included losses caused by increased burnthrough costs totalling £272m in the HWPF and the new German with profits funds. Other losses arose from lower than expected investment returns earned in 2011 for UK unitised business which generated a loss of £237m. Reductions in risk free rates led to losses from lower projected investment returns, partly offset by gains from lower discount rates.

Restructuring costs of £73m (2010: £71m) primarily represent costs incurred relating to a number of restructuring programmes including Solvency 2. Volatility arising from adjustments for different accounting bases resulted in a gain of £58m (2010: £51m).

Capital and cash generation - Group
	2011	2010	Movement
EEV operating capital and cash generation from continuing operations	£438m	£287m¹	53%
Group capital surplus²	£3.1bn	£3.8bn	(18%)
EEV	£7,428m	£7,321m	1%
IFRS equity attributable to equity holders of Standard Life plc	£3,961m	£3,903m	1%

¹Continuing operations exclude Standard Life Healthcare Limited, which was sold on 31 July 2010.

² 2011 based on estimated regulatory returns. 2010 based on final regulatory returns.

1.3 Chief Financial Officer's overview continued

Group EEV capital and cash generation

Capital and cash generation enables the Group to invest in new business and profitable growth opportunities. Gross EEV operating capital and cash generation before investment in new business and investment for transformation and growth spend was £749m (2010: £596m).

	2011	2010
	£m	£m
UK	364	372
Canada	188	128
International	114	97
Non-covered	83	(1)
Gross EEV operating capital and cash generation from continuing operations	749	596
New business strain	(226)	(220)
Investment for transformation and growth	(85)	(89)
EEV operating capital and cash generation from continuing operations	438	287

Dividend declared (£m)	323	295
Coverage of gross EEV operating capital and cash to new business strain	3.3	2.7
Coverage of EEV operating capital and cash to dividend declared	1.4	1.0

Coverage of EEV operating capital and cash to dividend was 1.4 compared to 1.0 for 2010.

		2011			2010
	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	688	(45)	643	626	(22)	604
New business strain	(290)	64	(226)	(265)	45	(220)
Covered business capital and cash generation from new business and expected return	398	19	417	361	23	384
Covered business development expenses	(50)	-	(50)	(48)	-	(48)
Non-covered business core capital and cash generation	(5)	-	(5)	(47)	-	(47)
Core	343	19	362	266	23	289
Efficiency	(6)	-	(6)	(12)	-	(12)
Back book management	78	4	82	66	(56)	10
EEV operating capital and cash generation from continuing operations	415	23	438	320	(33)	287
Capital and cash generation from non-operating items	(372)	258	(114)	93	41	134
Total EEV capital and cash generation from continuing operations	43	281	324	413	8	421
EEV capital and cash generation from discontinued operations	-	-	-	20	-	20
Total EEV capital and cash generation	43	281	324	433	8	441

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.

Total capital and cash generation was £324m (2010: £441m). The reduction mainly reflects negative non-operating items in 2011.

In overall terms, our EEV operating capital and cash generation from continuing operations has increased to £438m:

· Capital and cash generation from existing business increased by £39m reflecting the higher opening in-force business values

· Non-covered business core capital and cash generation was £42m higher compared to 2010 mainly due to increased profit from our global investment management business

· Back book management contributed an additional £72m in 2011, including the benefits from post tax profits on the UK pension scheme and tax variances and management actions to enhance investment yields in Canada

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

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

· £7m negative impact from the difference in the treatment of assets and actuarial reserves

· £12m negative impact from the difference in the treatment of deferred acquisition costs (DAC)/deferred income recognition (DIR), intangibles, tax and other. Other includes the impact of different methodologies in respect of expected income. In EEV operating profit this income is included on an expected return basis but the actual fees are included in Group operating profit.

Holding company capital and cash flows

Holding company capital and cash flows	2011	2010
	£m	£m
Opening capital 1 January	665	602
Dividends received from subsidiaries	498	286
Additional investments in subsidiaries	(91)	(75)
Group corporate centre costs	(50)	(54)
Cash dividends paid to shareholders	(162)	(186)
Other	12	92
Closing capital 31 December	872	665

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.

Dividends

During the year, we paid the final dividend for 2010 of 8.65p per share, amounting to £197m and the 2011 interim dividend amounting to £106m. The Scrip dividend scheme reduced the cash required to pay the 2010 final dividend from £197m to £105m and the 2011 interim dividend from £106m to £57m. We propose a final dividend of 9.20p per share, making a total of 13.80p (2010: 13.00p). This represents an increase of 6.2%, reflecting the solid progress made during the year. Following the removal of the scrip dividend option, a dividend reinvestment plan (DRIP) scheme has been made available for the final 2011 dividend. We will continue to apply our existing progressive dividend policy taking account of market conditions and our financial performance.

Capital management

Capital management is the ongoing process of determining and maintaining the quantity and quality of capital appropriate for the Group and ensuring capital is deployed so that the risk/return is optimised in a manner consistent with the expectations of our stakeholders. This requires a clear understanding of the drivers of capital requirements and therefore capital management is a critical component in the strategic planning process and the ongoing running of the business.

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

Capital is measured and managed on both regulatory capital metrics and on internal economic capital metrics. Risk appetites are set on an economic basis and the potential impact of business decisions on positions versus these appetites forms a key part of the decision making process.

Credit ratings

External credit rating 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. There were no changes to these ratings in 2011. The Standard Life Assurance Company of Canada has a separate rating from Standard & Poor's and was upgraded in June 2011 from A/Stable to A+/Stable.

1.3 Chief Financial Officer's overview continued

Group capital surplus

Group capital surplus and solvency cover	2011	2010
	£bn	£bn
Shareholders' capital resources	3.1	3.0
Capital resources arising from subordinated debt	1.1	1.8
SLAL long-term business funds	3.1	2.6
Group capital resources	7.3	7.4
Group capital resource requirement	(4.2)	(3.6)
Group capital surplus	3.1	3.8
Group solvency cover	173%	205%

2011 figures above based on estimated regulatory returns. 2010 based on final regulatory returns.

The Group capital surplus decreased by £0.7bn to £3.1bn. This is mainly due to the successful tender undertaken in September 2011 in respect of £0.6bn of Euro denominated lower tier 2 subordinated debt. Our capital surplus has remained robust despite the volatility in equity and debt markets. The quality of our capital resources remains strong with £7.0bn (2010: £6.4bn) of core tier 1 capital.

Group capital resources include the capital resources within the long-term business funds but the Insurance Groups Directive (IGD) limits the amount that can be recognised to the level of the capital resources requirement for that fund. This resulted in a restriction of £1.0bn

(2010: £1.4bn) and a net zero contribution to the Group capital surplus from the long-term business funds.

The IGD surplus remains largely insensitive to a further 30% fall in equities from the 31 December 2011 position, with the surplus estimated to reduce by approximately £0.2bn. A 100bps rise in yields is estimated to reduce the surplus by approximately £0.2bn.

Liquidity management

Liquidity management is the ongoing process of determining the correct asset mix for each business through balancing the interconnected needs of matching the liability profile with appropriate assets, maintaining sufficient cash resources to meet unexpected demands and achieving an appropriate yield on assets.

The Group's liquidity and capital management policy governs the level of liquidity that each business unit holds and the objective is to ensure that sufficient liquidity exists across the business to withstand extreme stresses.

In addition to the substantial cash and readily realisable resources held within each business unit, the ultimate holding company, Standard Life plc, held £0.6bn of cash and short-term debt securities as at 31 December 2011, an increase of £0.2bn from the 2010 year end. The stress testing undertaken during 2011 shows that Standard Life maintains a strong liquidity position.

We undertake specific liquidity stress testing to ensure that we can withstand a scenario of significant falls in asset values combined with unprecedented levels of surrenders and claims. The stress testing methodology has been updated for recent events in the Eurozone.

We also maintain contingency funding plans across the business to ensure that each business unit is prepared for a liquidity issue. As part of this contingency planning, Standard Life plc has a £0.5bn revolving credit facility with a maturity date of 31 December 2013 and this was undrawn as at 31 December 2011.

Reconciliation of key capital measures

The following diagram illustrates the key differences between regulatory, IFRS and EEV capital measures at 31 December 2011:

Diagram removed for the purposes of this announcement. However it can be viewed in full in the pdf document.

Looking forward

We delivered increased operating profitability and cash in 2011. Our investment programme and transformation are on track and the successful implementation of our strategy is starting to show in an improved financial performance. We are well placed for a post-RDR, auto enrolment and Solvency 2 environment, and we expect to continue to drive an ongoing improvement in financial performance.

Jackie Hunt, Chief Financial Officer

1.4 Business segment performance

Business segment overview

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

Global investment management

Strategy

We believe that the UK is an exciting market with great potential for our business. Our strong market position provides significant opportunities for us to drive profitable growth within long-term savings and investments.

We will continue to expand our capability in order to deliver a wide range of solutions for clients that help diversify our revenue and profitability. Changes in the market environment will continue to provide many new opportunities.

AUA and flows

· Total AUA grew by £2.8bn to £122.0bn in 2011

· Core retail fee business net inflows grew by 19% to £839m

· Core corporate pension net inflows increased by 46% to £2,024m reflecting strong growth

· MyFolio is growing rapidly and now has assets of approximately £1bn

· Standard Life Wealth continues to grow with assets of approximately £1bn

· We achieved third party net inflows of £4.3bn, continuing our unbroken record of positive inflows over the last eight years

· A notable number of new institutional clients were won in the UK and Europe during the year

· The external transfer of the money market funds of approximately £4bn is included within market/other movements

· Third party AUM increased to a year end record of £71.8bn

Operating profit

	2011	2010
	£m	£m
Fee based revenue	625	593
Spread/risk margin	75	148
Total income	700	741
Acquisition expenses	(169)	(172)
Maintenance expenses	(332)	(312)
Investment for transformation and growth	(53)	(61)
Capital management	10	(21)
Other	64	59
Operating profit before tax	220	234

· Fee based revenue increased by 5% due to strong growth in AUA

· Spread/risk margin fell in 2011 to £75m with 2010 benefiting from a reserve release of £30m

· Maintenance expenses increased mainly due to the impact of recently acquired businesses, but as a percentage of AUA improved to 33bps

· Other comprises the remaining £64m

(2010: £59m) benefit following the change in the basis of future pension increases in the UK staff pension scheme

	2011	2010
	£m	£m
Fee based revenue	383	331
Maintenance expenses	(227)	(194)
Investment for transformation and growth	(31)	(34)
Operating profit before tax	125	103
Interest and exchange rate movements	1	3
Earnings before interest and tax (EBIT)	126	106

· Operating profit before tax up to £125m

· Revenue rose by 16% driven by strong third party new business flows mainly into higher margin products, such as GARS and UK mutual funds

· Average fee revenue yield from third party business increased to 37bps from 35bps

· Maintenance expenses increased mainly due to higher employee numbers to support growth. Compared to total average AUM maintenance expenses were controlled at 15bps (2010: 13bps).

Canada

International

Strategy

We will continue to differentiate our business by providing innovative retirement and investment solutions combined with a world-class customer experience. We continue to actively promote ourselves as a long-term savings and investments business in our chosen markets.

Our strategy is to deliver profitable growth by expanding our operations in attractive international and offshore wealth management markets. We will also continue to maximise the value in our existing wholly owned businesses and to develop the joint venture businesses.

AUA and flows

· Fee based AUA increased by £0.3bn due to strong net flows despite negative market movements

· Fee business accounts for 55% of total AUA

· Group savings and retirement net inflows improved to £0.3bn

· Spread/risk net outflows improved from £0.4bn to £0.3bn due to higher annuity sales and lower redemptions

· AUA in the wholly owned businesses grew by £1.2bn driven by high net inflows despite weak markets

· In the offshore business in Ireland, net flows were up 26% due to high retail inflows

· Hong Kong net flows were up 87% in constant currency

· Strong net flows in the Ireland domestic business and Germany but lower than prior year due to difficult economic conditions

Operating profit

	2011	2010
	£m	£m
Fee based revenue	166	150
Spread/risk margin	281	222
Total income	447	372
Acquisition expenses	(61)	(64)
Maintenance expenses	(201)	(193)
Investment for transformation and growth	(36)	(35)
Capital management	38	30
Operating profit before tax	187	110

· Fee based revenue benefited from an increase in management charge income from higher AUA

· Spread/risk margin increased to £281m due to the impact of specific management actions designed to enhance the investment yields on assets

· Decrease in acquisition costs primarily due to lower commission charges

· Increase in maintenance expenses to £201m mainly due to the rise in AUA

	2011	2010
	£m	£m
Fee based revenue	221	212
Acquisition expenses	(40)	(31)
Maintenance expenses	(132)	(129)
Investment for transformation and growth	(12)	(15)
Capital management	1	1
Total wholly owned	38	38
India and China JV businesses	2	(23)
Operating profit before tax	40	15

· Operating profit before tax increased from £15m to £40m driven by the progress of the JV businesses

· Operating profit before tax of the wholly owned businesses was maintained at £38m

· Fee based revenue increased by 4% to £221m from the growing asset base

· Acquisition expenses increased to £40m in line with new business growth and market initiatives

1.4 Business segment performance continued

1.4.1 UK

"We are a major provider of long-term savings and investment solutions in the UK market. Our 2011 performance shows continued momentum in all our market segments. The enhancements to our market-leading platforms, propositions and investment solutions allied to the forthcoming pensions reform and Retail Distribution Review brings unprecedented opportunities for us to grow our business, strengthening our relationships with customers and advisers whilst also driving efficiency."

Paul Matthews, UK Chief Executive

Financial highlights

	2011	2010	Movement
Operating profit before tax from continuing operations	£220m	£234m¹	(6%)
Operating return on equity	15.5%	17.4%	(1.9% points)
Assets under administration	£122.0bn	£119.2bn	2%
Net flows	£2,125m	£2,997m	(29%)
EEV covered business operating profit before tax	£461m	£428m	8%
EEV non-covered business operating profit before tax from continuing operations	£67m	£28m¹	139%

¹Continuing operations exclude Standard Life Healthcare Limited, which was sold on 31 July 2010.

Market update

The UK market is in a period of unprecedented change, driven by customer demand as well as economic, regulatory and technological trends which are creating exciting opportunities and challenges for both change and growth.

2011 saw economic uncertainty and volatility return to the forefront of UK financial markets, resulting in a more cautious sentiment amongst our customers and the industry. We demonstrated our continued momentum and resilience by retaining our number one position in both our retail and corporate markets as customers, advisers and employers continued to rely on a brand that they can trust.

Our regulatory environment is changing. The RDR and pensions reform will completely transform the nature, scale and profitability of our marketplace. These changes will significantly increase the market available to Standard Life by stopping payment of commission on new sales and by increasing the number of employees investing in pensions through auto enrolment. These changes are causing customers, financial advisers and employers to seek holistic solutions to manage their risk whilst reducing their administrative burden. Our suite of investment solutions and market-leading platform propositions means we are well placed to support our retail and corporate customers, advisers and intermediaries through this industry transition.

Our customer campaigns, including our retirement roadshows and customer mailings, together with government and media focus on pensions and saving for retirement, is driving increased consumer awareness. The growth and usage of the internet and technology has increased usage of our sites by consumers, driving engagement and efficiency. The UK has an ageing population with people now seeking more flexible retirement solutions. We are well placed to benefit from these changes through the continued development of our investment solutions and platform innovations.

Profitability

Operating profit before tax	2011	2010
	£m	£m
Fee based revenue	625	593
Spread/risk margin	75	148
Total income	700	741
Acquisition expenses	(169)	(172)
Maintenance expenses	(332)	(312)
Investment for transformation and growth	(53)	(61)
Capital management	10	(21)
Other	64	59
UK operating profit before tax from continuing operations	220	234

UK operating profit before tax was £220m. The key movements from 2010 are:

· Fee based revenue increased by 5% due mainly to higher AUA, with Wrap assets alone up 36% since 2010 as a result of strong growth in net inflows and the impact of recently acquired companies. The average revenue yield on fee business decreased to 73bps (2010: 77bps) mainly due to business mix.

· Spread/risk margin reduced by £73m as a result of annuity reserve strengthening in 2011. 2010 benefited from investment strategy changes, partially offset by a mortality assumption change which together contributed £30m to the result. 2010 annuity volumes also benefited from a change in retirement age legislation.

· Acquisition expenses of £169m are 2% lowerthan 2010, despite new business levels increasing by 8%. As a percentage of PVNBP, acquisition expenses improved significantly to 120bps (2010: 133bps).

· Maintenance expenses increased mainly because of the impact of recently acquired businesses including Focus Solutions. We are continuing to see the benefits of our scalable business model, with maintenance expenses expressed as a proportion of average AUA falling to 33bps (2010: 34bps).

· Investment for transformation and growth decreased to £53m as a number of key customer propositions launched during the year including our direct channel's online stocks and shares ISA and our corporate Wrap portal, Lifelens

· Capital management improved from a loss of £21m in 2010 to a profit of £10m due to the investment of shareholders' funds in higher yielding assets and the improved funding position of our UK staff pension scheme

· Other reflects the remaining £64m benefit following the change in the basis of future pension increases in the UK staff pension scheme. The initial benefit recognised in 2010 was £59m.

UK EEV operating profit, including HWPF time value of options and guarantees and non-covered business, increased by 16% to £528m (2010: £456m).

Operating return on equity

UK operating return on equity reduced to 15.5%. Although operating profit after tax of £204m was 3% higher than 2010, return on equity fell by 1.9% points as a result of the combined effects of the asset position of our UK staff pension scheme and the impact of higher market values of investments at the start of 2011.

Assets under administration and net flows

AUA grew by £2.8bn to £122.0bn in 2011. Fee based business, which accounts for 82% of AUA, increased by 2% to £100.6bn due to strong net inflows, offset by negative market movements. As at 31 December 2011, 61% of total fee based AUA related to retail business (2010: 63%) and 39% to corporate business (2010: 37%). Spread/risk business AUA increased by 7% to £14.4bn with net outflows being offset by positive market and other movements.

Total UK net inflows for the year were £2,125m. Core retail and corporate fee based business net inflows which drive UK profits, increased 37% to £2,863m.

The growth in our core business was offset by net outflows of £87m, reflecting institutional pensions net inflows of £1,414m (2010: £2,440m) and conventional with profits (CWP) net outflows of £1,501m (2010: £923m).

CWP does not contribute to UK profits.

Core retail net inflows (excluding CWP) increased by 19% to £839m. This reflects a 7% increase in mutual funds net inflows which was driven by new business sales demonstrating our success in this market.

Core corporate net inflows (excluding institutional pensions and CWP) increased by 46% to £2,024m. This reflects very strong growth in our corporate pensions, driven by new scheme wins.

Spread/risk net outflows have increased by 6% due to lower new business sales compared to 2010 as a result of the legislative change in retirement age.

Net flows	2011	2010
	£m	£m
Retail - core	839	704
Corporate - core	2,024	1,390
Fee based business - core	2,863	2,094
Fee based business - institutional pensions and CWP	(87)	1,517
Total UK fee based net inflows	2,776	3,611
Spread/risk business net inflows	(651)	(614)
Total UK net inflows	2,125	2,997

New business performance

Despite the challenging trading environment, our PVNBP sales increased by 8% to £14,035m (2010: £12,956m).

In our retail business, sales increased by 3% to £6,400m (2010: £6,197m). Individual pensions, which includes individual SIPP, rose by 2% to £3,936m (2010: £3,858m). Sales of savings and investments products increased by 8% to £2,151m (2010: £1,997m). This includes a 10% increase in mutual fund sales to £1,972m (2010: £1,795m) reflecting the significant growth in sales through our Wrap platform. Our savings and investments sales have performed strongly in 2011, with our net flows growing by 7% within the overall mutual fund market that saw a decline of 39% on 2010 levels according to the Institute of Money Advisers figures.

In our corporate business, we have grown new business volumes strongly while maintaining stable margins. Corporate pension sales have increased by 40% driven by our success in winning new schemes. In addition, our enhanced trust-based pension proposition has been successful in attracting both new and existing schemes and contributed over £725m to sales in 2011.

1.4 Business segment performance continued

1.4.1 UK continued

Delivering on our strategy

Our ambition is to be the leading long-term savings and investments business, delivering competitive retail and corporate propositions. This is underpinned by our brand values of being an easy, predictable, responsible and beneficial organisation to do business with.

In each of our core markets we ended the year in a strong position, with our 2011 retail IFA market share improving to 14.9% (2010: 14.6%) and our equivalent corporate market share improving to 19.1% (2010: 17.0%). Our market-leading positions in each market have been achieved through the introduction of our investment solutions and our focus on managing our underlying cost base through technology advances increasing our scalability.

We have put in significant work and investment over the last year, positioning ourselves more fully across the value chain to provide market-leading solutions that benefit our advisers and customers. This places us in a unique position to support retail and corporate markets, for both advised and non-advised customers, from the start of their investment journey to the end.

Our business model

Increasing assets

In the retail market our focus continues to be on embedding our wealth management platform into progressive RDR-ready advisory firms. We grow our assets by deepening and broadening our relationships with our target advisers through embedding our solutions, helping to remove complexity and risk from their businesses, allowing them time to focus on their clients. The RDR is causing significant change to many advisers' business models. Through adopting our wealth management platform, we have partnered with a significant proportion of new model advisers who have moved to fee charging ahead of the new regulations.

We continued to build on the success of our Wrap platform in 2011 and now have approximately 1,000 firms using our platform. We delivered enhanced functionality which focused on reducing risk and costs in adviser businesses. These enhancements include improved client reporting, upgraded back office integration and the introduction of the Managed Portfolio Services - delivering a leading retail proposition and contributing to the increase of 37% in assets and 47% in customer numbers. Sales of tax wrappers remained resilient despite the tough economic conditions.

Through refreshing our adviser and customer digital propositions, including launching an online stocks and shares ISA and online mutual funds, we have seen Adviserzone user sessions increase by 14% and the number of page hits double from 4 million to 8 million.

In the corporate market our focus has been to attract large scheme employers to adopt our workplace solutions and leverage our existing employer relationships. In 2011, we added 167 new schemes (2010: 182 new schemes) and we have seen enquiries more than double over this period. The number of new members joining our existing schemes has increased by 12% over 2010 - a total of 25,067 new customers.

We will continue to support our intermediary advisers through the regulatory changes in the market. The RDR will remove commission from product selection and will force advisers to set charges in agreement with their clients. Post-RDR we are well positioned to capitalise on these changes as we are already the leading provider in the nil commission market and have an established model for those advisers who are already operating a charging model. From the end of 2012 employers will have to automatically enrol all qualifying employees into a pension scheme, presenting a significant opportunity for Standard Life as we help our corporate clients to comply with their new duties.

Our Lifelens proposition is key to our success in this corporate market for a selected number of schemes and we believe that the combined strengths of this and our Vebnet propositions will enable us to take full advantage of current and future market opportunities.

Maximising revenue

We have strategically positioned ourselves across the value chain to maximise revenues from fees, platform and tax wrapper charges and overall investment charges.

During 2011, we made significant progress with our high margin investment propositions. Our three most popular solutions, Standard Life Wealth, MyFolio Managed Funds and MyFolio Multi-Manager Funds, secured total new assets in excess of £1bn in 2011.

The RDR and pensions reform have driven demand for risk based packaged investment solutions that fit the financial advice process, whilst uncertain markets have also encouraged more investors to look for managed solutions offering lower volatility.

Our current investment solutions range comprises a full private client discretionary service from Standard Life Wealth, the Managed Portfolio Service, and the MyFolio fund range - the most comprehensive range of risk based funds available in the market.

Our success is underpinned by our understanding of the UK corporate and retail markets and the end-to-end investment process. Our propositions benefited from the in-house investment expertise of Standard Life Investments and have demonstrated their ability to deliver for our customers. Standard Life Wealth, our flagship discretionary investment service, demonstrated the strength of its investment process by delivering positive returns in its core portfolio strategy for 2011, when all of the key Private Client Indices provided by Asset Risk Consultants for competitor benchmark indices were negative.

In January 2011 we acquired Focus Solutions. Combining their leading point of sale and back office expertise with the leading compliance services provided by threesixty allows us the capability to support our target advisers across the value chain.

Lowering costs

We are continuing to see the benefits of our scalable business model with maintenance expenses bps compared to average AUA falling to 33bps (2010: 34bps). Acquisition expenses as a percentage of PVNBP reduced significantly to 120bps (2010: 133bps).

Our overall strategy seeks to lower costs through technology advances, increased scalability and reduced commissions. We have in place a flexible and efficient IT change model, leveraging our investment in technology to deliver exceptional digital experience and service. We are also re-using core components across various channels creating scalable and low-cost operations.

We are meeting the changing shape of demand and improving our customers' experience through active promotion of our online technology - making us easy to do business with. At the same time, and demonstrating the scalability of our operating model, we have significantly improved customer service efficiency, with a reduction in full-time equivalent employees of 15% since the end of 2009 despite an increase in our AUA of 16% over the same period.

We will continue to develop our IT and change infrastructure through improving our enterprise architecture and re-engineering our IT change processes. We will also look for strategic sourcing agreements to lower cost, improve capability and provide increased flexibility in a rapidly changing environment.

1.4 Business segment performance continued

1.4.2 Global investment management

"Standard Life Investments is a premier asset manager with an expanding global reach. Our wide range of investment solutions is backed by our distinctive 'focus on change' investment philosophy, disciplined risk management and shared commitment to a culture of investment excellence. This has proved itself to be robust and repeatable in both good and bad market conditions. We have an unbroken record of positive annual net flows over the last eight years and have delivered a strong track record of profitable organic growth. Earnings before interest and tax have a compound annual growth rate over the last five years of 14%."

Keith Skeoch, Standard Life Investments Chief Executive Officer

Financial highlights

	2011	2010	Movement
Operating profit before tax	£125m	£103m	21%
Operating return on equity	42.7%	41.0%	1.7% points
Earnings before interest and tax (EBIT)¹	£126m	£106m	19%
EBIT margin¹	34%	33%	1% point
Third party assets under management (AUM)	£71.8bn	£71.6bn	-
Total assets under management	£154.9bn	£156.9bn	(1%)
Third party net inflows	£4,280m	£6,200m	(31%)

¹EBIT and EBIT margin are key performance metrics for the investment management industry.

Standard Life Investments continued to deliver robust long-term investment performance in 2011, despite volatile markets. Third party AUM increased to a year end record of £71.8bn (2010: £71.6bn). Third party net inflows of institutional and wholesale business were £4.3bn (2010: £6.2bn) in what have been very challenging market conditions. These underlying new business flows underpinned strong revenue growth of 16%, driving EBIT up 19% to £126m and delivering EBIT margin of 34%. We continue to focus on serving existing clients and winning new clients through strong investment performance, product innovation, global distribution and high levels of customer service.

Standard Life Investments takes our responsibility as a long-term investor seriously. A cornerstone of our investment process is our belief that stewardship and environmental, social and governance (ESG) factors have a fundamental impact on long-term investment returns. Systematic consideration of stewardship and ESG factors at company level is firmly integrated into our investment process using proprietary indicators in the analysis. In addition, as responsible long-term investors, we engage regularly with investee companies to hold them to account and to promote high standards.

Market update

2011 was a difficult year for both financial markets and the fund management industry. The effects of the European sovereign debt crisis, downgrade of the United States debt ratings by Standard & Poor's and historic low returns in the safe haven sovereign bond market were further compounded by downward revisions to growth forecasts in a number of major economies. Market sentiment deteriorated during the second half of the year resulting in increased volatility across a range of markets. Equity markets in the UK and abroad fell sharply as investors tried to reduce their exposure to higher risk assets. The volatile markets had a significant impact on investor sentiment and resulted in a significant reduction in demand for mutual funds and a substantial fall in the turnover of institutional mandates. Average market values were slightly higher than in 2010, despite increased volatility in global financial markets. The average daily FTSE All-Share Index rose by 5% between 2010 and 2011.

Profitability

Operating profit before tax	2011	2010
	£m	£m
Fee based revenue	383	331
Maintenance expenses	(227)	(194)
Investment for transformation and growth	(31)	(34)
Global investment management operating profit before tax	125	103
Interest and exchange rate movements	1	3
Earnings before interest and tax (EBIT)	126 1	106

Operating profit before tax increased by 21% to £125m (2010: £103m). Revenue rose by 16% as a result of third party new business flows into higher margin products, such as GARS and UK mutual funds, and the fee received following the external transfer of the money market funds. This raised the average revenue yield on third party AUM to 37bps² (2010: 35bps).

² Excludes the fee received following the external transfer of the money market funds.

Cost growth is the result of utilising opportunities in the market to accelerate the expansion of our business in our chosen markets. Lower interest expense, coupled with foreign exchange gains also contributed to the increased operating profit. A £15m subordinated loan was repaid at the end of 2010, leaving the business with no gearing. EBIT increased by 19% to £126m (2010: £106m) and resulted in an EBIT margin of 34% (2010: 33%).

Operating return on equity

Operating return on equity has increased to 42.7% (2010: 41.0%) reflecting the shift in sales towards higher margin products.

Investment performance

We continued to deliver a robust investment performance over the longer term with 49% of funds over one year, and 82% of funds over three year time periods outperforming their benchmark. Our GARS fund has outperformed its LIBOR benchmark over all key time periods since inception and our mutual fund strength is shown by the proportion of eligible and actively managed funds (22 out of 29) rated A or above by Standard & Poor's in the UK. The pipeline for institutional business is strong with fixed income and GARS products attracting a lot of interest, increasingly from outside the UK. There is also positive demand for our mutual funds in the UK and for our SICAV funds in continental Europe.

Assets under management and net flows

We achieved third party net inflows of £4,280m (2010: £6,200m). This represents 6% of opening third party AUM, excluding money market funds. This continued Standard Life Investments' unbroken record of positive annual net flows over the last eight years. UK mutual funds net inflows of £1,643m (2010: £2,221m) were robust despite volatile market conditions. A significant number of new institutional clients were won in the UK and Europe during the period, increasing the institutional client base in these markets by 13% despite a substantial slow down in the number of institutional mandates across the market as a whole. Our high overall retention rates are reflected in redemptions being only 14% of opening AUM, which is in the top quartile in the industry. Inflows throughout 2011 have reflected the increasingly diverse nature of our product offering and the increasingly international character of our clients and distribution channels.

Third party AUM increased to a year end record of £71.8bn (2010: £71.6bn). The transfer of approximately £4bn of money market fund assets was offset by underlying new business flows. Third party AUM continues to represent 46% of total AUM (2010: 46%). In-house AUM decreased to £83.1bn (2010: £85.3bn) with favourable market movements offsetting outflows from the with profits business. As a result, total assets managed by Standard Life Investments stood at £154.9bn (2010: £156.9bn).

Delivering on our strategy

During 2011, Standard Life Investments successfully launched its refreshed visual identity and brand positioning. This builds on our commitment to increase the international nature of our business, as well as broaden the asset classes in which we excel, and helps to ensure that we present ourselves in a way that reflects our ambition, strengths and increasingly diversified business.

The refreshed brand identity will ensure communications are more consistent, with greater clarity in information provided to our clients, resulting in increased investor confidence. The refresh is supported by a major advertising campaign under the theme of 'Potential. Delivered'. This reflects our ongoing commitment to exceed our clients' expectations.

We have entered into an agreement with John Hancock Financial giving the GARS fund access to the United States market and allowing us to work with a leading distributor to help deliver potential for our global clients. We also continue to develop our strategic alliance with Chuo Mitsui Asset Trust and Banking Company, one of the largest trust banks in Japan, for reciprocal asset management services. The alliance sees Standard Life Investments provide advice on Chuo Mitsui's Global Equity Funds and Chuo Mitsui manage and advise on Standard Life Investments' Japanese Equity funds. We are also able to market each other's investment strategies through our respective distribution networks.

Our business model

Increasing assets

We have achieved third party net flows of £4,280m, increasing third party assets under management to £71.8bn. We continue to grow our share of the wholesale market in the UK, with UK mutual funds AUM now exceeding £10bn. We also continue to develop our GARS product range, with assets now over £13bn, and are strengthening our alternative capabilities in areas such as private equity and real estate. We also continue to enhance our multi-manager offerings. MyFolio has proved successful since its launch, providing new business flows into Standard Life Investments' actively managed funds and now has assets of approximately £1bn. Our pipeline of new investment initiatives is strong and we are confident that we will continue to meet the ever-changing demands of our clients through new and innovative solutions.

Maximising revenue

The majority of 2011 sales were into high margin products including UK wholesale and the GARS asset class. We continue to diversify our sources of revenue both geographically and by asset class. Geographically, we received net flows from Europe, US and Canada in 2011. The diversity of our asset class offering is evidenced by net flows in GARS, fixed income, real estate and overseas equities. EBIT has grown strongly with a compound annual growth rate over the last five years of 14%.

Lowering costs

The increasing volume of business in 2011 resulted in a rise in maintenance expenses from £194m to £227m. Opportunities in the market were utilised to accelerate the expansion of our business in our chosen markets. Maintenance expenses compared to total average AUM were controlled at 15bps (2010: 13bps).

1.4 Business segment performance continued

1.4.3 Canada

"We have delivered many new propositions to our corporate and retail customers, addressing their retirement needs. We are poised to take advantage of market opportunities in the group pensions space and have a fast-growing retail segregated fund offering. Our business model focused on cost and capital efficiency has enabled us to generate continued growth and increased operating profit levels, despite the challenging economic conditions. We are excited about the growth prospects in our key markets."

Charles Guay, Canada Chief Executive

Financial highlights

	2011	2010	Movement
Operating profit before tax	£187m	£110m	70%
Operating return on equity	14.6%	8.9%	5.7% points
Assets under administration	£26.1bn	£25.3bn	3%
Net flows	£253m	£63m	302%
EEV operating profit before tax	£324m	£250m	30%

Market update

Changing demographics including an ageing population, extensive personal debt and falling birth rates, emphasises the need for individuals to ensure that they have adequate pension provision. The Canadian Government is expected to introduce Pooled Registered Pension Plans, opening a new market to pension providers. We are one of the largest defined contribution (DC) pension providers in Canada and are developing our plans for this new market. We are also seeing acceleration in the conversion of defined benefit plans (DB) to DC plans, which will generate a significant opportunity for us to grow our AUA over the next few years.

Profitability

Operating profit before tax	2011	2010
	£m	£m
Fee based revenue	166	150
Spread/risk margin	281	222
Total income	447	372
Acquisition expenses	(61)	(64)
Maintenance expenses	(201)	(193)
Investment for transformation and growth	(36)	(35)
Capital management	38	30
Canada operating profit before tax from continuing operations	187	110

Operating profit before tax increased to £187m (2010: £110m). The key highlights are:

· Fee based revenue benefited from an increase in management charge income from higher AUA

· Spread/risk margin increased mainly due to the impact of specific management actions which led to a gain of £88m in 2011 (2010: £32m). Specific management actions in 2011 included the sale of a property which realised a significant gain of £42m and were designed to enhance the investment yields on assets. One-off reserving changes increased policyholder liabilities by £57m (2010: increase £13m). In 2011, one-off reserving changes were adversely impacted by strengthened mortality assumptions which were partly offset by revised investment allocations in line with the long-term asset strategy.

· The decrease in acquisition expenses of £3m was primarily due to lower commission charges

· The increase in maintenance expenses of £8m was mainly due to the rise in AUA and the associated costs incurred to service and administer these assets

· We continued to invest in growing our business and delivering enhancements to our client propositions with expenditure during the period of £36m

· The increase in capital management of £8m was mainly due to an increased investment return on shareholder assets

EEV operating profit before tax increased by 28% in constant currency to £324m (2010: £250m). Back book results increased from management actions designed to enhance the investment yields on assets and higher investment returns, but this was offset by adverse changes in mortality assumptions.

Operating return on equity

Operating return on equity increased to 14.6% (2010: 8.9%) benefiting from the growth in operating profitability. We will continue to manage our capital position to ensure that we generate sustainable returns for our shareholders.

Assets under administration and net flows

AUA increased by £0.8bn during the year. Our fee business accounts for 55% (2010: 55%) of total AUA and has increased by 3% in constant currency to £14.3bn. The rise in fee business AUA has been driven by net inflows, partly offset by negative market movements. Spread/risk AUA increased to £10.3bn (2010: £10.1bn).

Net inflows increased by 305% in constant currency to £253m (2010: £63m). Gross inflows in our fee business were ahead of 2010. Strong sales in retail segregated funds and renewal premiums in group segregated funds were partly offset by a fall in mutual funds sales.

Mutual funds net outflows of £111m (2010: £39m) were impacted by lower sales levels. This was partially offset by lower redemptions.

In our spread/risk business, retail net outflows improved from £328m to £245m, mainly due to higher sales of annuities and lower annuities and term funds redemptions. Group savings and retirement net outflows slightly improved to £206m (2010: £227m). A large part of group insurance sales consisted of future renewal premiums which had a marginal impact on this year's inflows, which increased by 6% in constant currency to £442m (2010: £411m).

New business performance

PVNBP sales decreased by 5% in constant currency to £2,928m (2010: £3,048m). Excluding large wins in 2010 for group savings and retirement, total sales increased by 12% in constant currency.

Strong sales in our retail segregated funds, which increased by 22% in constant currency, led to an increased market share and drove our retail line sales. Individual insurance, savings and retirement increased by 17% in constant currency. Mutual funds sales decreased to £218m (2010: £313m).

Group savings and retirement sales decreased by 26% in constant currency. Excluding large wins in 2010, sales in this product line increased by 8% in constant currency and our core defined contribution sales increased by 16%. Group insurance and disability management business was successful, with strong growth in market share.

Delivering on our strategy

Our strategy is to differentiate our business by providing innovative retirement and investment solutions combined with a world-class customer experience.

Our business model

Increasing assets

In our group savings and retirement line, we delivered the second phase of the member statement project that allows for significant member customisation. The trust application addition to our SLX platform enabled us to secure key accounts. We added several investment managers and new funds to our Quality and Choice Investment Programme and we have launched our simplified Ideal Term Funds and new Socially Responsible Investment option. In our retail line, we expanded our successful segregated funds range with the launch of the Ideal Income Series. We launched new Socially Responsible Investment segregated funds and introduced four new mutual funds. We enhanced our distribution through an agreement with Qtrade Financial Group, an online brokerage and investment dealer.

In our group savings and retirement line, product enhancements enabled us to win 204 new defined contribution accounts, increasing members to 561,000 (2010: 537,000), with defined contribution AUA increasing by 3% in constant currency to £9.4bn. The strength of our retail sales force and investment fund offering led to strong sales and increased asset share in our retail segregated funds, where we were one of the fastest growing companies in 2011¹.

Maximising revenue

The average revenue yield on our fee business decreased slightly to 117bps (2010: 118bps), reflecting pricing conditions prevailing in our markets. Our spread/risk margin reflects several actions taken during the year to maximisecash flows on assets and enhance investment yields. On 1 January 2012 we ceased selling individual life insurance products in order to sharpen our focus on long-term savings and investments.

Lowering costs

We continue to see the benefits of our scalable business model with maintenance expenses compared to average AUA falling to 85bps (2010: 86ps).

¹ As measured by net flows as a percentage of opening AUA.

1.4 Business segment performance continued

1.4.4 International

"Our International business operates in markets and market segments which offer significant growth potential. The propositions we offer are centred on flexible investment solutions, innovative life assurance wrappers and digital capabilities. This approach proved successful in 2011, delivering growth despite difficult market conditions."

Nathan Parnaby, International Chief Executive

Financial highlights - wholly owned

	2011	2010	Movement
Operating profit before tax	£38m	£38m	-
Operating return on equity	9.9%	10.2%	(0.3% points)
Assets under administration	£12.3bn	£11.1bn	11%
Net flows	£1,448m	£1,412m	3%
EEV covered business operating profit before tax	£99m	£90m	10%
EEV non-covered business operating loss before tax	(£8m)	(£7m)	(14%)

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

	2011	2010	Movement
Operating profit/(loss) before tax	£2m	(£23m)	109%
Operating return on equity	2.8%	(24.5%)	27.3% points
Assets under administration	£1.2bn	£1.2bn	-
Net flows	£275m	£254m	8%
EEV covered business operating profit before tax	£5m	£3m	67%

Market update

Overall customer sentiment was impacted by market uncertainties caused by the Eurozone crisis and volatile investment markets. International operates in a number of territories and these are subject to different market dynamics. In Germany, the economy continued to grow in 2011 and our successful repositioning saw us increasing our market share, particularly in the second half of 2011. The domestic market in Ireland was dominated by customers' reactions to the economy and austerity measures. Our businesses in Ireland performed well in these difficult conditions and increased our market share to all time high levels in our chosen market segments. Economies in Asia continued to grow strongly and we are well placed to expand our operations in our chosen markets. Changes to product regulation in India impacted sales levels in this market in the short term. However, the India joint venture has performed well despite the challenging regulatory environment and has improved both positioning in the market and market share.

Profitability

Operating profit before tax	2011	2010
	£m	£m
Fee based revenue	221	212
Acquisition expenses	(40)	(31)
Maintenance expenses	(132)	(129)
Investment for transformation and growth	(12)	(15)
Capital management	1	1
Total wholly owned	38 19	38
India and China JV businesses	2	(23)
International operating profit before tax	40 19	15

Operating profit before tax increased to £40m from £15m. The key highlights are:

· Fee based revenue increased by 4% to £221m (2010: £212m) driven by the increase in AUA

· Acquisition expenses increased to £40m (2010: £31m) in line with the higher new business and market initiatives

· Maintenance expenses were broadly stable reflecting the scalable business model. The increase to £132m (2010: £129m) was driven by commission paid on existing business and higher investment fees in line with the growing AUA and back book

· Operating profit before tax of the wholly owned businesses was maintained at £38m, despite difficult market conditions

· The joint ventures contributed an operating profit before tax of £2m (2010: loss £23m) to the Group, which reflects their positive progression and our ongoing investment to support their development

Total EEV operating profit increased to £96m from £86m. EEV operating profit before tax of the wholly owned businesses, including non-covered business, increased to £91m (2010: £83m) predominantly from improved back book profitability in Ireland and Germany. EEV covered business operating profit before tax for the joint ventures was up to £5m (2010: £3m) with improved back book profitability partially offset by lower new business contribution.

Operating return on equity

Operating return on equity for total International increased to 8.2% (2010: 1.7%) driven by the strong improvement in operating profits, predominantly from the joint ventures. The total International operating return on equity consists of 9.9% for the wholly owned businesses and 2.8% for the joint ventures.

Assets under administration and net flows

AUA in the wholly owned businesses grew by £1.2bn to £12.3bn (2010: £11.1bn) due to high net inflows in the year. Net flows of the wholly owned businesses increased by 3% to £1,448m (2010: £1,412m). This was mainly due to strong retail business inflows into our offshore bonds where net flows increased to £627m (2010: £496m). Net flows in Hong Kong rose to £63m (2010: £35m) due to new business sales and regular premium flows. In Ireland domestic business, net inflows fell to £194m (2010: £215m) with outflows driven by the economic situation and austerity measures. Net flows in the joint ventures increased by 8% to £275m (2010: £254m) with AUA of £1.2bn at the year end.

New business performance

PVNBP sales in the wholly owned businesses increased by 18% in constant currency to £2,275m (2010: £1,929m). Ireland offshore bonds sales were 26% higher due to an improved proposition and better positioning in the wealth market. In Ireland domestic business, sales increased by 7% in constant currency. This was due to our strong investment proposition and high sales in the first half of the year as a reaction to legislative changes. In Germany, sales of £424m (2010: £337m) were 25% higher in constant currency driven by the launch of new propositions to revitalise our market presence. Hong Kong performed very well with sales of £320m (2010: £294m), up 13% in constant currency and leading to an increased market share. In India, sales were £414m (2010: £444m), down 1% in constant currency due to regulatory changes which have impacted the whole industry. Effective management of the recent market changes in India helped to increase our market share in the private market to 15% (2010: 12%). In China, sales decreased by 20% in constant currency to £86m (2010: £106m) due to refocusing the business on more profitable market segments and distribution channels.

Delivering on our strategy

Our strategy is to deliver profitable growth, expanding our businesses in attractive international and offshore wealth management markets (offshore bonds, Hong Kong and new markets), developing the joint venture businesses whilst maximising the value of our existing domestic businesses. 2011 saw us making good progress with strong growth in offshore bonds and Hong Kong from new proposition launches together with the development of our international offshore business. In Germany, we have introduced new propositions and are developing new product lines to reduce the reliance on with profits products. In China, we have a new management team in place under the leadership of a new general manager. We have produced a strategic plan to develop the business and are working closely with our joint venture partner to implement this.

Our business model

Increasing assets

We have undertaken significant proposition development work in both our domestic and international offshore businesses to generate higher inflows.

Market share in Hong Kong grew with targeted sales and marketing activity and market-leading propositions, like Harvest Supreme and the launch of new propositions such as Aspire. In Germany, a series of propositions were launched to refresh our market presence and emphasise our expertise in the unit linked market. We are actively targeting to diversify away from with profits business and emphasise our investment expertise. Ireland saw a focus on our digital propositions and the offshore business launched a recurring single premium variant of the offshore bond which was rated 'Best Regular Premium Investment Product' by the monthly publication, International Adviser.

These market initiatives and our strong customer relationship model contributed to the 14% increase of wholly owned gross inflows in 2011 leading to an 11% increase in wholly owned AUA to £12.3bn.

Maximising revenue

The average revenue yield on fee based business decreased to 186bps (2010: 212bps) reflecting the change in asset mix across the International territories and also the charging structure of legacy business. Our market development activity remains focused on driving growth in attractive markets, offering high value propositions and promoting high value Standard Life Investment propositions such as GARS.

Lowering costs

Maintenance expenses expressed as a proportion of average AUA fell from 129bps to 111bps in 2011 with continued efforts to drive efficiencies across all territories.

1.5 Risk management

"We are focused on delivering a strong framework that enables the risks of the Group to be identified, assessed, controlled and monitored consistently, objectively and holistically. This helps provide resilience and financial strength in the face of extreme conditions and a strong support for future growth and development."

Colin Ledlie, Chief Risk Officer

	Market risk	Credit 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.	The risk of exposure to loss if a counterparty fails to perform its financial obligation, 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 no appetite for market risk exposures except where they arise as a consequence of core strategic activity. Business units are expected to limit market risk exposures by matching the features of liabilities to features of assets. Exposures may be incurred where there is an overriding business need and specific appetites will be established as necessary.	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 maintains robust risk limits which Group companies must adhere to.
Main sources of risk	Equity and property risk · Changes in the value of future profits earned on unit linked funds and collective investment schemes where the funds are invested in equities and property · Burnthrough from the Heritage With Profits Fund (HWPF) and German With Profits Fund · Guarantees on segregated fund business in Canada Fixed interest risk · Changes in the value of future profits earned on unit linked funds and collective investment schemes where the underlying funds are invested in fixed interest assets · Burnthrough from the HWPF and German With Profits Fund · Insufficient long-dated fixed income assets to match the longest dated liabilities in Canada Currency risk · Exchange rate movements that reduce the value of overseas operations and profits generated by them · Changes in the value of future profits on unit linked funds and collective investment schemes where the underlying funds are invested in overseas assets	The Group is exposed to credit risk through: · Changes in the value of future profits earned on unit linked funds and collective investment schemes where the underlying funds are invested in corporate bonds · Burnthrough from the HWPF Credit risk also results from holding the following assets: · Corporate bonds held to back annuities written by SLAL post-demutualisation · Assets held to back the subordinated debt in SLAL, a proportion of which are asset backed securities that are held for historical reasons · Corporate bonds and commercial mortgages held in Canada to back annuities Other holdings of cash and cash equivalents, debt securities and the reinsurance of certain insurance liabilities to reinsurance counterparties also results in credit risk.
2011 summary	The economic crisis in the Eurozone has resulted in increased volatility in the equity and bond markets with UK, German and Canadian fixed interest yields falling. In response to this we have: · Increased hedging to reduce the impact of falling Euro yields · Implemented dynamic hedging of guarantees provided for Canadian Segregated Funds · Maintained hedging arrangements in respect of the currency risk arising from our overseas operations · Monitored the level of equity and property held within the HWPF We have also reviewed our portfolios to consider both the direct and indirect consequences that could arise from one or more countries ceasing to use the Euro.	The economic crisis in the Eurozone has resulted in the value of debt securities issued by certain sovereign states and banking counterparties falling in value. We have responded to the Eurozone crisis by: · Proactively managing the benchmarks of our fixed interest portfolios, in particular to remove exposures to peripheral sovereign debt · Restricting our holdings of cash and cash equivalents to banks that we assess to be of appropriate credit standing, taking into consideration both direct and indirect factors such as the potential impact of contagion risk on these banks We have also reduced our securities lending activity during the year which has reduced our counterparty exposures.

	Demographic and expense risk	Liquidity 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. This includes liabilities of insurance and investment contracts.	The risk that the Group is 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 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 has no appetite to fail to meet its liabilities as they fall due.
Main sources of risk	Persistency · Changes in the value of future profits earned on unit linked funds and collective investment schemes in the UK and future recourse cash flow payments from the HWPF · Changes in the value of future profits earned in respect of Standard Life Investment's third party AUM and segregated fund business Longevity · Annuity contracts written by the UK and Canada where the current experience differs from that expected, more volatility of experience than expected, or the rate of improvement in mortality is greater than anticipated Expense · Changes in the value of future expected expenses · Shareholder is directly exposed to risk of expenses being above expectation	The Group is exposed to liquidity risk from the following sources: · The type of business that is written, the assets and liabilities arising from that business and how the assets are managed to meet those liabilities · Operational aspects of the business, for example the management of cash as it flows into our business as premiums and out of our business as claims and the payment of corporate cash flows including dividends, coupons and debt repayment · Potential liquidity issues in unit linked funds due to the underlying asset classes · The collateralisation of derivatives which results in cash volatility as the value of the derivative changes
2011 summary	We are actively engaging with advisers in the market to minimise the potential adverse impacts resulting from advisers seeking to move schemes in advance of the RDR being implemented in 2013. A key commercial focus over the year has been to develop propositions to increase the retention of funds when insurance and savings contracts reach maturity. We have continued to monitor emerging research into longevity, for example from the Office for National Statistics and the industry-wide Continuous Mortality Investigation, in order to inform our in-house view of likely future improvements in life expectancy.	The economic crisis in the Eurozone has reduced the liquidity for certain asset classes. Through our monitoring of market conditions we have sought to anticipate potential issues. During the year we have continued to: § Centrally co-ordinate strategic planning and funding requirements. This helped support our decision to repurchase some of our subordinated debt during the year. § Maintain a portfolio of (currently undrawn) committed bank facilities In 2011 we also established a Euro Medium Term Note Programme. The Group has not invoked any deferral terms on unit linked contracts during the year and there are no funds subject to deferral at 31 December 2011.

	Operational and strategic risks
Definition	Operational risk is the risk of adverse consequences for the Group's business, resulting from inadequate or failed internal processes, people or systems, or external events. Strategic risk is the risk associated with the robustness of the planning process and threats to achieving the strategy.
Appetite	The Group has an appetite for operational risks where exposures arise due to core strategic activity. However, 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.
Main sources of risk	The key operational and strategic themes affecting the Group are: · Management of existing processes · Management of information security · Management of third party providers · Project and programmes - managing change and the execution of projects · People - succession planning, skilling and resource levels · Delivering the strategic plan
2011 summary	The final judgement of the European Court of Justice in the Test-Achats case requires insurance contracts to be gender neutral in terms of pricing and benefits from 2012. Our UK and International businesses are well placed to meet the requirements. We have continued to work on implementing appropriate processes and controls to prepare for regulatory changes. The Eurozone crisis has presented additional pressures on various operating processes and systems during the year however the controls embedded within the Group have ensured we have been able to avoid any serious losses or adverse consequences.

1.6 Our customers

"We serve a wide variety of customers - individuals, financial advisers, corporate customers and large institutions. Our role is to help all of our customers look forward to their financial future with confidence and optimism. We continue to drive our transformation by putting customers at the heart of everything we do." Bruce Kelsall, Group Marketing Director

Listening to customers

Putting customers at the heart of our business means we need to keep listening to them and developing our understanding of their needs and challenges.

We do this in a number of ways. On a day-to-day basis there are numerous conversations between our customer service and relationship management teams. We collect more structured feedback from our customers on our performance through detailed customer questionnaires. These include the new deeper insight programmes to analyse client needs in Standard Life Investments and the real time customer feedback techniques used in our customer service operations. We undertake detailed research to understand how our customers are preparing for major events such as pensions reform and the RDR and how we develop areas of our propositions.

However, we also employ more innovative techniques. Our online customer community has now grown to almost 1,500 members with 390 active members providing regular feedback on a number of issues such as our literature, our use of social media, and the role of the adviser in advance of the RDR. Customer closeness events between our senior leaders and customers have continued during 2011, with 17 being held across the UK. These sessions allow the senior team to hear first hand customers' views and opinions.

Developing our Brand

In 2011, we took another important step on our transformation journey when we launched our new repositioned brand across the Group. The repositioning was accompanied by investing in new propositions and capability. In the UK we relaunched our brand via an enhanced Adviserzone platform for advisers, a new www.standardlife.co.uk website and through the corporate proposition of Lifelens. New customer propositions and digital services accompanied the rollout of the new brand in Germany, Ireland and Hong Kong.In May, the Standard Life Investments brand was re-launched with a new messaging platform for institutional and wholesale clients. The results of a recent Standard Life Investments client survey indicate sustained brand loyalty and high levels of pride in association with 78% of clients stating that they would like to still be doing business with Standard Life Investments in 10 years' time.

The new brand positioning was accompanied by a new visual identity but the brand is more than just a new look - it's about the way we work and the experiences we create for our customers. And it is about the unique combination of capabilities we have that differentiates us strongly from competitors. We are a long-term savings and investments business that helps customers look forward to their financial future with confidence and optimism. This is summed up in our new endline, The Way Forward.

Underpinning our brand are four pillars that recognise the core needs of customers:

· Working to ensure that we offer products that are easy to understand and access, and that Standard Life is easy to deal with

· Being consistent in the service experiences we offer and transparent about how our products work and how we charge

· Acting responsibly in terms of how we operate as a business, helping our customers make informed choices and recognising our broader role in the societies we serve

· Helping customers handle their finances effectively. Our core purpose is to help customers take better care of their money.

Technology now plays an important role in the lives of all our customers and is also an important component of our brand. The way that we help our customers think and plan for the future, purchase our products and manage their finances, has been evolving to meet these dramatic digital changes. Our business with advisers is increasingly written through our award-winning technology platforms. Consumers can now purchase an ISA and pension online and manage their products through our online servicing capability. In 2011, we launched Facebook, LinkedIn, YouTube and Twitter feeds across our consumer and adviser channels, which are enabling us to engage in a different form of dialogue around long-term savings and investments. In Hong Kong, over 5,000 customers have downloaded the Asian iPhone and iPad app that enables them to view and transact against their portfolio.

Treating Customers Fairly

We are committed to building a customer-centric organisation. We have embedded the Financial Service Authority's Treating Customers Fairly (TCF) principles across the business and continue to have a strong management focus on how we deliver against the six TCF outcomes. However, we seek to deliver over and above these principles and we have significantly enhanced our complaint management process to give customers a more consistent and fair experience. In addition, we continue to invest in and improve the customer experience.

Supporting consumers

A key theme from our customers is the importance of clear communication and helping them to better understand the issues and choices they have in planning for their financial future. Responding to this has been a major theme in 2011.

Our www.standardlife.co.uk website has been extensively redeveloped. 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

· Lets customers purchase ISAs and mutual funds online

Consumer-focused websites in our international markets have all been redeveloped in a similar manner and we have substantially rewritten many of our brochures and standard letters to try to ensure that we communicate in a straightforward and accessible manner.

We also piloted our programme of Customer Retirement Roadshows in 2011 and are rolling them out throughout the UK in 2012. The roadshows are designed to help our customers prepare for their retirement by informing them about their retirement options and helping our customers to understand those options.

Supporting financial advisers

In 2011, we continued broadening and deepening our relationship with advisers, offering hands-on support in the run up to the RDR 2013 deadline. We aligned our propositions and technology to support advisers with end-to-end client solutions covering tax and retirement planning and investments. In addition in the UK, threesixty has continued to provide independent consulting and business support services, plus specific help with regulatory compliance.

Another key focus for 2011 has been to enhance our technology offering. We've continued to invest in the development of our market-leading Wrap platform, which is now being used by approximately 1,000 adviser firms. Further support is provided through Focus Solutions with their unrivalled point-of-sale and integration capabilities. Standard Life Investments launched Learning Gateway, a free online training portal to support advisers through the RDR transition and beyond, with over 2,800 advisers registered.

Based on adviser feedback, we launched our new Adviserzone.com in February 2011 to deliver more efficient new business processing and client servicing, with enhanced functionality and upgraded online tools. The objective is to enable IFAs to offer better value to their clients whilst reducing time spent on processing and administration. Later in 2011, we launched our dedicated tax planning hub on Adviserzone which offers tax planning solutions built around advisers' clients whatever their need or income level.

In Hong Kong, we enhanced the online servicing proposition for IFAs enabling them to initiate bulk fund switching on behalf of their clients electronically. 7,500 transactions of this nature are processed every month.

Corporate customers

In early 2011, we launched the employee benefits platform, Lifelens. This cutting-edge technology allows employers to 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. Lifelens has been well received by the market and after successfully streamlining our approach to its implementation, we expect the next wave of clients to transition during 2012.

We have been designing a pensions reform solution to help companies to meet the requirements and also minimise the disruption and cost of complying with the new regulations in the market. An example of this is by helping fully automate the auto enrolment process.

We launched a new 'Master Trust' proposition for employers wishing to move away from defined benefit or own trust solutions but wanting the reassurance of governance and modern investment choices for their employees.

In line with our theme of better communication for consumers, we have also significantly improved the information companies use to explain their pension schemes to employees, designing new websites and joining guides.

Throughout 2011, we delivered a number of thought leadership white papers and events debating some of the issues facing employers and intermediaries in the corporate market. These have included the implications of regulation, pensions scheme restructures and the importance of the design of default funds.

Expanding our investment offering to customers

We continued to develop and improve our investment solutions throughout 2011. The MyFolio range of governed, risk-managed funds, has been extended with additional variations launched catering for customers with an income investment preference and for the corporate pension market. Standard Life Wealth also launched a Managed Portfolio Service which brings its unique investment approach to a wider range of potential customers.

Satisfied customers

We keep close tabs on our customers' thoughts and views of the service we give, a key measure being 'real-time customer feedback' - gaining feedback on our service levels straight after a service interaction. Our average rating for 2011 for customer satisfaction is 4.85 out of 5 (2010: 4.83) and for intermediary satisfaction it's 4.74 out of 5 (2010: 4.70).

1.6 Our customers continued

In 2011 our UK business was recognised with awards, including:

· 'Life and pensions five star provider award' at the Financial Adviser Service Awards

· Five awards from the Finance and Technology Research Centre (FTRC). Our Group SIPP; Group Personal Pension; Group Contracted-in Money Purchase; and Wrap platform all received the top 'eee' rating. We were also awarded SIPP and SIPP specialist 'eee' rating for the third consecutive year.

· 'Best Website for IFAs' at the Professional Adviser Awards

· 'Bundled/Full Service Defined Contribution Provider of the Year' at the UK Pensions Awards

· 'SIPP and/or SSAS Provider of the Year' and 'Best Income Drawdown Provider' at the Financial Adviser Life & Pensions Awards

· At the Aberdeen UK Platform Awards we were awarded 'Wrap Platform of the Year'

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 2011 including:

· Standard Life Investments' UK Smaller Companies Trust won 'Best Shareholder Value' category at the Investment Trust of the Year Awards. The Trust also won, for the third year out of the past four years, the 'UK Smaller Companies' category.

· 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

· 'Most Innovative Asset Manager' at the Engaged Investor Trustee Awards

· Standard Life Investments' UK Equity Unconstrained Fund was 'Highly Commended' in the 'UK All Companies' category at the 2011 Moneywise Fund Awards

· 'Investment Manager of the Year' and 'DC Investment Only Provider of the Year' at the UK Pensions Awards 2011

· At the 2011 Eurofonds - Fund Class Awards, Standard Life Investments won a special award as 'Best Asset Manager in Europe over 7 years' in the asset managers category with between 26 and 40 funds rated, including both OEICs and SICAVs

· Five awards at the prestigious Lipper Fund Awards 2011. The funds recognised were the European Smaller Companies SICAV, the China Equities SICAV, the UK Smaller Companies Fund and the Managed Fund (two awards).

· Standard Life UK Smaller Companies Fund named 'Best UK Small-Cap Equity Fund' at the 2011 Morning Star UK Fund Awards

· Standard Life Investments' Global Absolute Return Strategies Fund won 'Best Absolute Return Fund' at the Professional Adviser Awards 2011

Canada

High quality customer service is the basis of our growth strategy. We focus on building retention and strong customer relationships. In 2011, our client retention level based on internal methodology was 93.2% (2010: 94.4%). We are 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:

· 'Outstanding Integrated Ad Campaign' award from the Web Marketing Association, recognising our multimedia campaign 'To make a long story short', promoting our revamped member statement

· Eight Insurance and Financial Communicators Association awards, recognising excellence in marketing and communications creativity, design and writing in the North American insurance and financial services industry

· Environics Adviser Perception Study ranked Standard Life Canada second in advisor perception of overall company and segregated funds division, and ranked first amongst top-selling advisers

· The Standard Life Corporate Bond Fund won a Lipper Fund Award in the Canadian Fixed Income category over a three-year period, recognising the talent, discipline and management style of our portfolio manager, Standard Life Investments

International

One of our core values is to deliver exceptional customer service and always put our customers at the heart of our thinking. In 2011, we actively managed our customer relationships which led to very good customer retention in our offshore bond business 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 2011 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' in 2011

· The offshore bond business also received 'Best Regular Premium Investment Contract' award for our recurrent single premium contract from the monthly publication, International Adviser

· In India, HDFC Life won the 'Best Product Innovation Award 2011 - Life Insurance' for the HDFC SL Crest product

1.7 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 2011, we focused on getting great employee insight and using this to help strengthen the relationship that each individual employee has with our business. During 2012 we will continue to focus on increasing leadership capability, ensuring our leaders are equipped to help our people grow and fulfil their potential."

Sandy Begbie, Group People and Operations Director

Employee engagement

In April 2011 we introduced a new approach to measuring employee satisfaction with the launch of the 'InterAction' survey. 'InterAction' measures how engaged employees are and how enabled employees feel to do their job to the best of their ability. 86% of our employees worldwide participated and we used this insight to develop clear action plans at both Group and business unit levels to address the key themes identified.

We have embarked on a group-wide programme of activity to bring to life what we stand for as an organisation. By June 2011 over 600 employees across Standard Life Group had come together at sessions in all locations to share their 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. We have used our understanding of what we stand for as an organisation to help define what underpins how we do things in Standard Life; 'We Care, We Do The Right Thing, We Come Together, We Get On With It and We Celebrate'.

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 2011 we made further progress in moving towards these objectives by including more people and more roles than ever before in our talent review. We have continued to increase the ratio of internal appointments into senior roles as a result of previous investment in building talent pipelines.

All our executives have completed 360 degree feedback against our leadership framework and have established individual development plans to 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.

In 2010, we invested in the development of our leaders with the introduction of three new leadership development programmes, tailored to the needs of team, area and senior leaders. By the end of 2011, nearly 700 leaders across the Group completed these programmes which focus on their development as leaders.

We continue to invest in building the strength and depth of our talent up through the organisation. During 2011 we completed a review of talent across the Group, increasing the breadth and depth of succession cover for key roles. We have selected our fourth intake into our award-winning Accelerated Development Support programme, our process to support the development of senior leaders with high potential, taking the total numbers involved to 72. In addition, we partnered with a leading business school to strengthen our equivalent programme for emerging leaders and selected a second intake of 31 participants to begin in 2012.

We are continuing to attract and recruit high calibre graduate entrants across the range of our programmes, with 19 new graduates and 10 interns joining us in 2011.

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.

Our overall approach to leadership diversity has, and continues to be, to appoint on the basis of talent to all our positions. We know, however, that we need to do more to attract a diversity of talent at all levels and support all of our talent to progress, with the outcome of ensuring we have strong talent pipelines growing through the organisation which reflect our desired workforce and customer demographic. We are therefore taking actions to further improve, extend and embed our talent management processes, to review talent data and processes through a diversity lens and to address any specific identified issues or barriers to progression.

Organisational capabilities

We have undertaken a group-wide review to identify the key strategic organisational capabilities we require now and in the future. This insight is being used to create development and resourcing plans which will ensure we have the right skills and knowledge to deliver our strategy.

1.8 Basis of preparation

Overview

Our Business review for the year to 31 December 2011 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 - Chief Executive's overview. Principal risks are detailed in Section 1.5 - 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, 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 operating profit, European Embedded Value (EEV) operating profit and EEV operating capital and cash generation. 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 Group financial statements section of this report.

Going concern statement

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

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 statements section of this report have been prepared on the basis of the IFRS accounting policies in the Group's Annual Report and Accounts 2011. 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 1.2 of the Business review and in the EEV financial information section of this report have been prepared in accordance with the EEV methodology applied by the Group in Note 17 of the EEV financial information section of this report for 2011, and in the relevant EEV methodology notes included in the Annual Report and Accounts 2010 in respect of the comparative period.

Group operating profit and EEV operating profit

The 2011 reconciliation of consolidated operating profit to IFRS profit for the year, presented on page 54 of this report, presents profit before tax attributable to equity holders adjusted for non-operating items. Further details on the calculation of Group operating profit is presented in the accounting policies section - Note 2.1 (a) Basis of preparation. The 2011 EEV consolidated income statement on page 78, presents EEV profit showing both operating and non-operating items. By presenting our results in this way, the Directors believe they are presenting a more meaningful indication of the underlying business performance of the Group.

Forward-looking statements

This document may contain 'forward-looking statements' about certain of the Standard Life Group's current plans, goals and expectations relating to future financial conditions, performance, results, strategy and objectives. Statements containing the words: 'believes', 'intends', 'targets', 'estimates', 'expects', 'plans', 'seeks' and 'anticipates' and any other words of similar meaning are forward-looking. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances which may be beyond the Group's control. As a result, the Group's actual financial condition, performance and results may differ materially from the plans, goals and expectations set out in the forward-looking statements, and persons receiving this document should not place undue reliance on forward-looking statements. The Standard Life Group undertakes no obligation to update any of the forward-looking statements in this document or any other forward-looking statements it may make.

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