Final Results - Part 5 of 8

RNS Number : 0469B

Standard Life plc

27 February 2014

 



Standard Life plc

Full Year Results 2013

Part 5 of 8

30.  Retained earnings

		2013	2012 restated1
	Notes	£m	£m
At 1 January		1,441	1,034
Profit for the year attributable to equity holders		466	665
Dividends and appropriations		(636)	(331)
Transfer from equity compensation reserve for vested employee share-based payments	31	33	25
Remeasurement gains/(losses) on defined benefit pension plans	37	101	(37)
Shares distributed by employee trusts		(12)	(17)
Share of other comprehensive income of joint ventures	17	(3)	-
Aggregate tax items recognised in equity		9	-
Aggregate tax items recognised in other comprehensive income	11	(8)	102
At 31 December		1,391	1,441

¹    Comparatives for the year ended 31 December 2012 have been restated to reflect retrospective application of changes to accounting policies as a result of an amendment to IAS 19 - Employee Benefits. Refer to Group accounting policies - (a) Basis of preparation.

31.  Reconciliation of movements in other reserves

		Revaluation of owner occupied property	Cash flow hedges	Foreign currency translation	Net investment hedge	Available-for-sale financial assets	Merger reserve	Equity compensation reserve	Special reserve	Reserve arising on Group reconstruction	Total
2013	Notes	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
At 1 January		10	-	269	(24)	-	3,108	55	261	(2,100)	1,579
Fair value gains/(losses) on cash flow hedges		-	-	-	-	-	-	-	-	-	-
Net investment hedge	23	-	-	-	63	-	-	-	-	-	63
Fair value gains/(losses) on available-for-sale financial assets		-	-	-	-	(32)	-	-	-	-	(32)
Revaluation of owner occupied property	19	68	-	-	-	-	-	-	-	-	68
Exchange differences on translating foreign operations		-	-	(120)	-	-	-	-	-	-	(120)
Reserves credit for employee share-based payment schemes		-	-	-	-	-	-	32	-	-	32
Vested employee share-based payments	30	-	-	-	-	-	-	(33)	-	-	(33)
Dividends and distributions		-	-	-	-	-	-	-	(20)	-	(20)
With profits funds: associated UDS movement recognised in equity	33	(48)	-	4	-	-	-	-	-	-	(44)
Aggregate tax effect of items recognised directly in equity	20	-	-	-	-	-	-	(1)	-	-	(1)
Aggregate tax effect of items recognised in other comprehensive income		(5)	-	-	-	7	-	-	-	-	2
At 31 December		25	-	153	39	(25)	3,108	53	241	(2,100)	1,494
Balance at 31 December 2013 comprises:
Total reserve before with profit fund adjustment		67	-	373	39	(25)	3,108	53	241	(2,100)	1,756
Total with profit fund adjustment		(42)	-	(220)	-	-	-	-	-	-	(262)
At 31 December		25	-	153	39	(25)	3,108	53	241	(2,100)	1,494

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

31.  Reconciliation of movements in other reserves continued

Merger Reserve: On demutualisation of The Standard Life Assurance Company (SLAC), the demutualisation shares issued by the Company qualified for merger relief under section 131 of the Companies Act 1985 (which has now been superseded by section 612 of the Companies Act 2006). Merger relief permits, where shares are issued at a premium, the difference between the issue value and nominal value of the shares issued to be transferred to a reserve other than the share premium account. The difference between the issue value and nominal value of the demutualisation shares was transferred to the merger reserve. Following the dividend in specie, £1,872m of merger reserves attached to the demutualisation shares was replaced with merger relief on the ordinary shares of the operating subsidiaries acquired by the Company. On disposal of Standard Life Bank plc and Standard Life Healthcare Limited during 2010, £86m of the merger relief was realised and transferred from the merger reserve to retained earnings.

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

Special reserve: On 21 July 2006 the Court of Session confirmed a £500m reduction in the share premium account of the Company. Following the reduction, a special reserve was created for the same amount. The special reserve forms part of the Company's distributable profits for the purpose of section 830 of the Companies Act 2006. The total amount of dividends paid during the year was £656m (2012: £331m), of which £20m (2012: £nil) has been treated as a deduction from the special reserve.

		Revaluation of owner occupied property	Cash flow hedges	Foreign currency translation	Net investment hedge	Merger reserve	Equity compensation reserve	Special reserve	Reserve arising on Group reconstruction	Total
2012	Notes	£m	£m	£m	£m	£m	£m	£m	£m	£m
At 1 January		7	1	320	(41)	3,108	49	261	(2,100)	1,605
Fair value losses on cash flow hedges		-	(1)	-	-	-	-	-	-	(1)
Fair value gains transferred to income statement on cash flow hedges		-	-	-	-	-	-	-	-	-
Net investment hedge		-	-	-	18	-	-	-	-	18
Revaluation of owner occupied property	19	5	-	-	-	-	-	-	-	5
Exchange differences on translating foreign operations		-	-	(65)	-	-	-	-	-	(65)
Reserves credit for employee share-based payment schemes		-	-	-	-	-	25	-	-	25
Vested employee share-based payments	30	-	-	-	-	-	(25)	-	-	(25)
With profits funds: associated UDS movement recognised in equity	33	(2)	-	13	-	-	-	-	-	11
Aggregate tax effect of items recognised directly in equity	20	-	-	-	-	-	6	-	-	6
Aggregate tax effect of items recognised in other comprehensive income		-	-	1	(1)	-	-	-	-	-
At 31 December		10	-	269	(24)	3,108	55	261	(2,100)	1,579
Balance at 31 December 2012 comprises:
Total reserve before with profit fund adjustment		4	-	493	(24)	3,108	55	261	(2,100)	1,797
Total with profit fund adjustment		6	-	(224)	-	-	-	-	-	(218)
At 31 December		10	-	269	(24)	3,108	55	261	(2,100)	1,579

32.  Non-controlling interests and third party interest in consolidated funds

The movement in non-controlling interests during the year was:

		2013	2012
		£m	£m
At 1 January		341	358
Foreign exchange differences on translating foreign operations		2	(6)
Change in net assets attributable to non-controlling interests		30	29
Net contributions		(14)	(31)
Distributions		(26)	(9)
At 31 December		333	341

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

		2013	2012
	Notes	£m	£m
At 1 January		12,037	8,428
Foreign exchange differences on translating foreign operations		(72)	(98)
Change in liability for third party interest in consolidated funds		865	782
Net contributions and movements between classifications of investments		(858)	3,055
Distributions		(169)	(130)
At 31 December	34	11,803	12,037

33.  Insurance contracts, investment contracts and reinsurance contracts

		2013	2012
	Notes	£m	£m
Non-participating insurance contract liabilities	33(a)	28,312	29,050
Non-participating investment contract liabilities	33(b)	97,659	84,201
Non-participating contract liabilities		125,971	113,251
Participating insurance contract liabilities	33(a)	15,060	15,919
Participating investment contract liabilities	33(a)	14,707	14,993
Unallocated divisible surplus	33(d)	680	706
Participating contract liabilities		30,447	31,618

33.  Insurance contracts, investment contracts and reinsurance contracts continued

(a)     Insurance contracts, participating investment contracts and reinsurance contracts

(a)(i)   Change in liabilities and reinsurance contracts

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

	Participating insurance contract liabilities	Non-participating insurance contract liabilities	Participating investment contract liabilities	Total  insurance and participating contracts	Reinsurance contracts	Net
2013	£m	£m	£m	£m	£m	£m
At 1 January	15,919	29,050	14,993	59,962	(6,531)	53,431
Expected change	(1,585)	(952)	(880)	(3,417)	475	(2,942)
Methodology/modelling changes	(51)	68	(21)	(4)	-	(4)
Effect of changes in:
Economic assumptions	14	(598)	(145)	(729)	216	(513)
Non-economic assumptions	24	(89)	(59)	(124)	31	(93)
Effect of:
Economic experience	491	164	666	1,321	(5)	1,316
Non-economic experience	107	(711)	111	(493)	(26)	(519)
New business	28	2,078	20	2,126	(8)	2,118
Total change in contract liabilities	(972)	(40)	(308)	(1,320)	683	(637)
Contract reclassification	-	6	-	6	-	6
Foreign exchange adjustment	113	(704)	22	(569)	(9)	(578)
At 31 December	15,060	28,312	14,707	58,079	(5,857)	52,222
Reinsurance assets					(6,173)
Reinsurance liabilities					316
					(5,857)

Due to changes in economic and non-economic factors, certain assumptions used in estimating insurance and investment contract liabilities have been revised. Therefore, the change in liabilities reflects actual performance over the year, changes in assumptions and, to a limited extent, improvements in modelling techniques.

Non-economic assumptions decrease of £93m (net of reinsurance) includes a decrease of £34m (net of reinsurance) in respect of participating business which is primarily in respect of the best estimate non-economic assumptions used in calculating the value of future transfers to equity holders in respect of participating business in the HWPF. Non-economic assumptions also includes a decrease of £50m (net of reinsurance) in respect of changes to mortality assumptions on non-participating business.

Economic assumptions reflect changes in fixed income yields, leading to higher valuation rates on non-participating business, and other market movements.

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

	Participating insurance contract liabilities	Non-participating insurance contract liabilities	Participating investment contract liabilities	Total  insurance and participating contracts	Reinsurance contracts	Net
2012	£m	£m	£m	£m	£m	£m
At 1 January	16,509	25,051	15,319	56,879	(6,573)	50,306
Expected change	(1,331)	(762)	(897)	(2,990)	310	(2,680)
Methodology/modelling changes	(18)	(165)	64	(119)	110	(9)
Effect of changes in:
Economic assumptions	(49)	1,075	(105)	921	(451)	470
Non-economic assumptions	(7)	(100)	(38)	(145)	73	(72)
Effect of:
Economic experience	928	548	644	2,120	(1)	2,119
Non-economic experience	56	(662)	(46)	(652)	3	(649)
New business	26	2,102	76	2,204	-	2,204
Total change in contract liabilities	(395)	2,036	(302)	1,339	44	1,383
Contract reclassification	-	2,182	-	2,182	-	2,182
Foreign exchange adjustment	(195)	(219)	(24)	(438)	(2)	(440)
At 31 December	15,919	29,050	14,993	59,962	(6,531)	53,431
Reinsurance assets					(6,912)
Reinsurance liabilities					381
					(6,531)

(a)(ii) Non-participating insurance contracts - principal assumptions

UK and Europe

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

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

Valuation interest rates

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

For equity assets, the current dividends and earnings are considered and, if necessary, a deduction is made to reflect sustainability. Similarly, a deduction to the yields on property assets is made where necessary, to reflect sustainability and also to allow for the possibility of rental defaults. For corporate bonds, a deduction is made for the risk of default which varies by the quality of asset and the credit spread at the valuation date. The yield for each category of asset is taken as the average adjusted yield weighted by the market value of each asset in that category except for UK annuity business within the PBF where the internal rate of return of the assets backing the liabilities is used.

33.   Insurance contracts, investment contracts and reinsurance contracts continued

(a)      Insurance contracts, participating investment contracts and reinsurance contracts continued

(a)(ii)   Non-participating insurance contracts - principal assumptions continued 

The valuation interest rates used are:

Non-participating	2013	2012
1. Business held within the PBF
Annuities
Individual/group:
Life	3.75%	3.30%
Pensions	3.75%	3.30%
Linked to RPI	(0.15%)	(0.10%)
2. Business held within the HWPF
Annuities
Individual/group:
Non-linked:
Life	3.35%	2.80%
Pensions: reinsured externally	3.05%	2.60%
Pensions: not reinsured externally	3.60%	3.30%
Deferred annuities	3.60%	3.20%
Linked to RPI:
Linked to RPI: reinsured externally	(0.30%)	(0.60%)
Linked to RPI: not reinsured externally	(0.50%)	(0.55%)
Deferred annuities linked to RPI	(0.50%)	(0.55%)

Mortality rates

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

Mortality tables used	2013	2012
Annuities
Individual and group in deferment	Males: 73.7% AMC00	Males: 75.6% AMC00
	Females: 73.4% AFC00	Females: 76.4% AFC00
Individual after vesting (business written after 10 July 2006)	Males: 88.8% RMC00	Males: 88.7% RMC00
	Females: 96.0% RFC00	Females: 94.1% RFC00
Individual after vesting (business written prior to 10 July 2006)	Males: 97.5% RMC00	Males: 97.5% RMC00
	Females: 105.5% RFC00	Females: 103.4% RFC00
Group after vesting (business written after 10 July 2006)	Males: 111.3% RMV00	Males: 102.6% RMV00
	Females: 118.3% WA00	Females: 109.3% WA00
Group after vesting (business written prior to 10 July 2006)	Males: 111.1% RMV00	Males: 112.8% RMV00
	Females: 118.5% WA00	Females: 120.1% WA00

In the valuation of the liabilities in respect of annuities and deferred annuities issued in the UK, allowance is made for future improvements in the rates of mortality. For 2013 this is based on the Standard Life Assurance Limited (SLAL) parameterisation of the CMI_2013 model with long-term improvement rates of 1.9% for males and 1.6% for females. The Continuous Mortality Investigation Bureau (CMI) is a body funded by the UK insurance and reinsurance industry that produce industry standard mortality tables and projection bases for mortality improvements. CMI_2013 is a model that was published towards the end of 2013.

For 2012, this was based on the Standard Life Assurance Limited (SLAL) parameterisation of the CMI_2009 model with long-term improvement rates of 1.9% for males and 1.6% for females. CMI_2009 is a model that was published towards the end of 2009.

The SLAL parameterisation of the CMI_2013 and CMI_2009 models make the following changes relative to the 'core' model:

·   blends period improvements between ages 60 to 80 to the long term improvement rate over a 15 year period (compared with a 20 year period in the core CMI model)

·   assumes that cohort improvements dissipate over a 30 year period, or by age 90 if earlier (compared with a 40 year period, or by age 100 if earlier, in the core CMI model).

For contingent spouses' benefits an assumption is also made with regard to the proportions married, based on SLAL's historic experience.

Expenses

The assumptions for future policy expense levels are determined from the Group's recent expense analyses. No allowance has been made for potential expense improvement and the costs of projects to improve expense efficiency have been ignored. The assumed future expense levels incorporate an annual inflation rate allowance of 4.00% (2012: 3.39%) for UK business derived from the expected RPI implied by current investment yields and an additional allowance for earnings inflation.

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

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

Withdrawals

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

Ireland

The assumptions for business in Ireland are derived in a similar manner to those above.

Canada

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

Yield curve - by duration	2013	2012
6 months	0.94%	1.00%
1 year	0.97%	1.09%
2 years	1.11%	1.13%
3 years	1.37%	1.23%
5 years	2.04%	1.37%
7 years	2.41%	1.62%
10 years	2.87%	1.89%
20 years	3.15%	2.32%
30 years	3.23%	2.35%

The following table shows other key investment returns used in the asset and liability projections under Canadian Asset Liability Method (CALM):

Investment returns	2013	2012
Equity securities	6.94%	6.93%
Property	6.72%	6.83%

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

33.   Insurance contracts, investment contracts and reinsurance contracts continued

(a)      Insurance contracts, participating investment contracts and reinsurance contracts continued

(a)(ii)   Non-participating insurance contracts - principal assumptions continued 

Mortality tables used	2013	2012
1. Assurances
Perspecta Universal Life and Term Life	65%-121% of base table (where base table is 71-75% of CIA 97-04) internally developed projection scale CAN1921-2004 M/F (2014)	65%-120% of base table (where base table is 73-74% of CIA 97-04) internally developed projection scale CAN1921-2004 M/F (2013)
Participating and non-participating life, closed to new business	72%-99% of CIA 97-04	73%-102% of CIA 97-04
	internally developed projection scale CAN1921-2004 M/F (2014)	internally developed projection scale CAN1921-2004 M/F (2013)
2. Annuities
Individual after vesting	20%-101% of IAM83M/IAM83F	16%-96% of IAM83M/IAM83F
	internally developed projection scale CAN1921-2004 M/F (2014)	internally developed projection scale CAN1921-2004 M/F (2012)
Group after vesting	82%-100% of GAM94M/GAM94F	83%-103% of GAM94M/GAM94F
	internally developed projection scale CAN1921-2004 M/F (2014)	internally developed projection scale CAN1921-2004 M/F (2012)

Mortality assumptions are derived from studies performed during 2013, with data to 2012, using a blend of industry and The Standard Life Assurance Company of Canada's (SLCC) experience. The rates are expressed as a percentage per the tables shown. For assurance business, the percentages vary depending on the underwriting classification and the duration of the contracts. For annuity business, the percentages vary depending on the gender of the annuitant.

(a)(iii) Present value of future profits on non-participating contracts in the Heritage With Profits Fund

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

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

		2013	2012
		£m	£m
Participating contract liabilities before apportionment		29,660	30,624
Apportionment of non-participating PVFP		107	288
		29,767	30,912
Participating insurance contracts		15,060	15,919
Participating investment contracts		14,707	14,993
Participating contract liabilities after apportionment		29,767	30,912
Unallocated divisible surplus before apportionment		1,776	1,679
Apportionment of non-participating PVFP		(1,096)	(973)
Unallocated divisible surplus after apportionment		680	706

Assumptions used in the calculation of the present value of future profits on non-participating insurance and investment contracts were as follows:

Economic assumptions

	2013	2012
Risk discount rate	4.21% - 4.38%	3.54% - 4.14%
Investment returns
Equity securities	3.01%	1.84%
Property	3.01%	1.84%
Fixed interest - annuity/protection	3.18%	2.44%
Fixed interest - other business	3.01%	1.84%
Expense inflation	4.00%	3.39%

The table above shows the changes in the basis between 2012 and 2013. The risk discount rates are calculated on a market consistent basis and are set equal to the risk free rate plus a margin to allow for the non-market risks inherent in the cash flows being discounted.

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

Non-economic assumptions

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

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

(b)     Non-participating investment contracts

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

		2013	2012
	Notes	£m	£m
At 1 January		84,201	77,507
Contributions		13,740	11,027
Initial charges and reduced allocations		(4)	(6)
Account balances paid on surrender and other terminations in the year		(10,498)	(9,062)
Change in non-participating investment contracts recognised in the consolidated income statement		11,892	7,718
Foreign exchange adjustment		(1,243)	(406)
Contract reclassification		(6)	(2,182)
Recurring management charges		(423)	(395)
At 31 December	34	97,659	84,201

(c)     Expected settlement and recovery 

An indication of the term to contracted maturity/repricing date for insurance and investment contract liabilities is given in Note 41 - Risk management. Reinsurance contracts are generally structured to match liabilities on a class of business basis. This has a mixture of terms. The reinsurance assets are therefore broadly expected to be realised in line with the settlement of liabilities (as per the terms of the particular treaty) within a reinsured class of business.

33.  Insurance contracts, investment contracts and reinsurance contracts continued

(d)     Movement in components of unallocated divisible surplus (UDS)

The movement in UDS was as follows:

		2013	2012
	Notes	£m	£m
At 1 January		706	725
Change in UDS recognised in the income statement		(40)	(39)
Change in UDS not recognised in the income statement	31	44	(11)
Foreign exchange adjustment		(30)	31
At 31 December		680	706

34.  Financial liabilities

		Designated at fair value through profit or loss	Held for  trading	Financial liabilities measured at amortised cost	Total
2013	Notes	£m	£m	£m	£m
Non-participating investment contract liabilities	41	95,267	-	2,392	97,659
Deposits received from reinsurers	41	-	-	5,589	5,589
Third party interest in consolidated funds	41	11,803	-	-	11,803
Borrowings	35	-	-	95	95
Subordinated liabilities	36	-	-	1,861	1,861
Derivative financial liabilities	23	-	795	-	795
Other financial liabilities	39	15	-	2,352	2,367
Total		107,085	795	12,289	120,169

		Designated at fair value through profit or loss	Held for trading	Financial liabilities measured at amortised cost	Total
2012	Notes	£m	£m	£m	£m
Non-participating investment contract liabilities	41	81,601	-	2,600	84,201
Deposits received from reinsurers	41	-	-	6,136	6,136
Third party interest in consolidated funds	41	12,037	-	-	12,037
Borrowings	35	-	-	108	108
Subordinated liabilities	36	-	-	1,868	1,868
Derivative financial liabilities	23	-	853	-	853
Other financial liabilities	39	-	-	2,323	2,323
Total		93,638	853	13,035	107,526

35.  Borrowings

		2013	2012
	Notes	£m	£m
Bank overdrafts	27	69	44
Other		26	64
Borrowings		95	108

The amount of borrowings expected to be settled after more than 12 months is £23m (2012: £61m). Included within bank overdrafts of £69m (2012: £44m) is £26m (2012: £21m) relating to unpresented cheques.

36.  Subordinated liabilities

	2013		2012
	Principal	Carrying value	Principal	Carrying value
	amount	£m	amount	£m
Subordinated notes:
5.5% Sterling fixed rate due 4 December 2042	£500,000,000	499	£500,000,000	498
3.938% Canadian dollar fixed/floating rate due 21 September 2022	CA$400,000,000	229	CA$400,000,000	246
Subordinated guaranteed bonds:
6.75% Sterling fixed rate perpetual	£500,000,000	502	£500,000,000	502
Mutual Assurance Capital Securities:
6.546% Sterling fixed rate perpetual	£300,000,000	316	£300,000,000	316
5.314% Euro fixed/floating rate perpetual	€360,000,000	315	€360,000,000	306
Subordinated liabilities		1,861		1,868

The difference between the fair value and carrying value of the subordinated liabilities is presented in Note 42(e).

Subordinated liabilities are considered current if the contractual repricing or maturity dates are within one year. The principal amount of subordinated liabilities is expected to be settled after more than 12 months. The accrued interest on subordinated liabilities of £56m (2012: £55m) is expected to be settled within 12 months.

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

Subordinated notes

The Sterling subordinated notes were issued by the Company on 4 December 2012 pursuant to its EUR3,000,000,000 Euro Medium Term Note Programme dated 10 May 2012. The maturity date of the notes is 4 December 2042. Interest is payable each six months in arrears. The Company has the option to redeem the notes at par on 4 December 2022 and on every interest payment date thereafter until maturity. If the notes are not redeemed the interest rate payable will be reset on 4 December 2022 and on each fifth anniversary thereafter to 4.85% over the five year gilt rate. The notes are direct, unsecured obligations of the Company that rank subordinate to all senior creditors of the Company.

The Canadian dollar subordinated debenture notes were issued by The Standard Life Assurance Company of Canada (SLCC) on 21 September 2012. The maturity date of the notes is 21 September 2022. SLCC has the option to redeem the notes at par on or after 21 September 2017. If the notes are not redeemed the interest rate payable will be reset each quarter to 2.1% over the three month Canadian Dealer Offered Rate (CDOR) rate payable quarterly in arrears. Interest is payable each six months in arrears up to 21 September 2017. The notes are direct, unsecured obligations of SLCC that rank subordinate to all policyholder liabilities and senior creditors of SLCC.

Subordinated guaranteed bonds

The subordinated guaranteed bonds were issued on 12 July 2002. The payment of principal and interest in respect of the bonds has been irrevocably and unconditionally guaranteed by SLAL. The claims of the bondholders to payment under the guarantee will rank below the claims of all senior creditors of SLAL including policyholders.

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

Mutual Assurance Capital Securities (MACS)

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

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

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

36.  Subordinated liabilities continued

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

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

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

Internal subordinated loan note

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

37.  Pension and other post-retirement benefit provisions

The Group operates post-retirement defined benefit and defined contribution plans for staff employed by the Group.

	Defined benefit	Defined contribution
UK	The Group's largest defined benefit plan is for employees in the UK and has been closed to new entrants since November 2004. Prior to 2008 the plan provided final salary benefits. From 2008 plan benefits have been accrued on a revalued career average salary (RCAS) basis. A minority of members elected to retain the link to final salary in respect of their pension plan accrued to 31 December 2007 with future accrual from 1 January 2008 on a defined contribution basis. The plan is governed by a trustee board which comprises both employer and employee nominated trustees and an independent trustee. The plan is subject to the statutory funding objective requirements set up by the Pensions Act 2004. The objective requires a defined benefit pension plan to be funded to at least the level of its technical provisions (which are an actuarial estimate of the assets needed to provide for benefits already accrued under the plan at that time) and regular valuations must be obtained by the trustees to check whether the statutory funding objective is met. After consulting with the employer, the trustees prepare statements of funding and investment principles and, based on the funding valuation, set out future contributions in a schedule of contributions including a recovery plan if one is needed to restore funding to the level of the technical provisions (no recovery plan is currently required). At the last actuarial valuation effective 31 December 2010 the plan was 102% funded on the Trustees' technical provisions basis. The estimated funding position as at 30 September 2013 was 114%. The plan is currently undergoing a triennial valuation with an effective date 31 December 2013. The administration expenses of this plan are met by the Group rather than from the plan assets.	The Group contributes 9% of members' pensionable salaries to a group flexible retirement plan.  Separate arrangements exist for those in the executive job family. The Group has no further payment obligation once the contributions are paid.
Canada	The defined benefit pension plan for employees in Canada closed to new entrants on 31 December 2013 but remains open to future accrual, providing a pension based on final average earnings and years of service. The last actuarial valuation of the plan was effective 31 December 2012, at which time the plan was 102% funded on an ongoing basis. The plan is currently undergoing a valuation with an effective date of 31 December 2013. Additional unfunded pension and post-retirement medical benefits are also provided to senior employees.	The Group pays contributions based on a member's age and years of service to privately administered plans.  The Group has no further payment obligation once the contributions are paid.
Other	The defined benefit plan for employees in Ireland has been closed to new entrants from 31 December 2009, with future accrual from that point on a career average revalued earnings (CARE) basis. At the last actuarial valuation effective 1 January 2013 the plan was 99% funded on an on-going basis. The effective date of the next valuation is 1 January 2016. The Group also operates a small unfunded defined benefit plan for employees in Germany.	The Group contributes 9% of members' pensionable salaries to a group flexible retirement plan.  The Group has no further payment obligation once the contributions are paid.

Plan regulations

The plans are administered according to local regulations in each country. Responsibility for the governance of the plans rests with the relevant trustee boards (or equivalent). Trustee boards comprise a mixture of company nominated, member nominated and independent representatives.

Contributions to plans

	Defined benefit		Defined contribution
	2013	2012	2013	2012
	£m	£m	£m	£m
UK	39	38	10	9
Canada	10	8	4	4
Other	2	1	1	-

Expected contributions to the plans in 2014 are as follows:

	Defined benefit	Defined contribution
	2014	2014
	£m	£m
UK	37	10
Canada	12	4
Other	1	1

Impact of amendment to IAS 19

An amendment to IAS 19 Employee Benefits effective for the current period has resulted in a revision to the calculation of the charge to the consolidated income statement in respect of defined benefit plans. This amendment has been applied retrospectively. The expected return on plan assets and unwind of the discount rate on the defined benefit obligation are no longer recognised in profit or loss separately. Instead, the interest on the net defined benefit asset is now recognised in profit or loss. This is calculated as the net defined benefit asset multiplied by the discount rate used to measure the defined benefit obligation.

The amendment also removed the ability for entities to defer unvested past service costs and recognise them over the future vesting period. Past service costs are now recognised immediately in profit or loss.

The impact on the consolidated statement of financial position as a result of the retrospective application of the IAS 19 amendment is a decrease in deferred tax assets of £1m (2012: £1m) and a decrease in the pension and other post-retirement benefits liability of £4m (2012: £5m) with a corresponding change in retained earnings.

The impact of the amendment on the consolidated income statement is an increase in other administrative expenses of £35m for the year (2012: £33m). There was a corresponding change in remeasurement gains/losses on defined benefit pension plans in other comprehensive income so that the overall impact on total comprehensive income was nil for each reporting period.

(a)     Analysis of amounts recognised in the consolidated income statement

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

		2013	2012 restated
	Notes	£m	£m
Current service cost		(70)	(64)
Interest income1		14	11
Past service cost and losses on settlements		-	(1)
Charge recognised in the consolidated income statement	8	(56)	(54)

¹    Interest income has been calculated based on the fair value plan assets at 1st January 2013 which includes the effects of IFRS 13 valuation methodology changes.

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

37.  Pension and other post-retirement benefit provisions continued

(b)     Analysis of amounts recognised in the consolidated statement of financial position

	2013				2012 (restated)
	UK	Canada	Other	Total	UK	Canada	Other	Total
	£m	£m	£m	£m	£m	£m	£m	£m
Present value of funded obligation	(2,327)	(209)	(76)	(2,612)	(2,121)	(233)	(69)	(2,423)
Present value of unfunded obligation	-	(64)	(7)	(71)	-	(70)	(7)	(77)
Fair value of plan assets	2,992	192	60	3,244	2,642	188	61	2,891
Effect of limit on plan surplus	(233)	-	-	(233)	(182)	-	-	(182)
Net asset/(liability) in the consolidated statement of financial position	432	(81)	(23)	328	339	(115)	(15)	209

The UK plan surplus is considered to be recoverable as a right to a refund exists. Accordingly the surplus has been reduced by 35% to reflect the authorised surplus payments charge that would arise on a refund.

(c)     Movement in the net defined benefit asset

	Present value of obligation	Fair value of plan assets	Total	Effect of limit on plan surpluses	Total
2013	£m	£m	£m	£m	£m
At 1 January 2013	(2,500)	2,891	391	(182)	209
Current service cost	(55)	-	(55)	-	(55)
Interest (expense)/income1	(110)	124	14	-	14
Amounts recognised in consolidated income statement	(165)	124	(41)	-	(41)
Remeasurements:
Return on plan assets, excluding amounts included in interest income	-	248	248	-	248
Gain from change in demographic assumptions	(25)	-	(25)	-	(25)
Gain from change in financial assumptions	(70)	-	(70)	-	(70)
Experience gains	(1)	-	(1)	-	(1)
Change in effect of limit on plan surplus	-	-	-	(51)	(51)
Remeasurement gains/(losses) recognised in other comprehensive income	(96)	248	152	(51)	101
Exchange differences	21	(15)	6	-	6
Employer contributions	-	51	51	-	51
Benefit payments	57	(55)	2	-	2
At 31 December 2013	(2,683)	3,244	561	(233)	328

¹    Interest (expense)/income has been calculated based on the fair value plan assets at 1st January 2013 which includes the effects of IFRS 13 valuation methodology changes.

The following table shows the restated movement in the defined benefit asset for the year ended 31 December 2012:

	Present value of obligation	Fair value of plan assets	Total	Effect of limit on plan surpluses	Total
2012 (restated)	£m	£m	£m	£m	£m
At 1 January 2012	(2,315)	2,756	441	(209)	232
Current service cost	(51)	-	(51)	-	(51)
Interest (expense)/income	(106)	117	11	-	11
Past service cost and losses on settlements	(1)	-	(1)	-	(1)
Amounts recognised in consolidated income statement	(158)	117	(41)	-	(41)
Remeasurements:
Return on plan assets, excluding amounts included in interest expense	-	19	19	-	19
Gain from change in demographic assumptions	(37)	-	(37)	-	(37)
Gain from change in financial assumptions	(6)	-	(6)	-	(6)
Experience gains	(40)	-	(40)	-	(40)
Change in effect of limit on plan surplus	-	-	-	27	27
Remeasurement gains/(losses) recognised in other comprehensive income	(83)	19	(64)	27	(37)
Exchange differences	10	(4)	6	-	6
Employer contributions	-	47	47	-	47
Benefit payments	46	(44)	2	-	2
At 31 December 2012	(2,500)	2,891	391	(182)	209

(d)     Plan assets

Investment strategy is directed by the relevant trustee boards, who pursue different strategies according to the characteristics and maturity profile of each plan.  To provide more information on the approach used to determine and measure the fair value of the plan assets, the fair value hierarchy has been used as defined in Note 42 - Fair value of assets and liabilities. Those assets which cannot be classified as level 1 have been presented together as level 2 or 3.

The distribution of the fair value of the assets of the Group's funded plans at 31 December 2013 is as follows:

	UK		Canada		Other		Total
	2013	2012	2013	2012	2013	2012	2013	2012
	£m	£m	£m	£m	£m	£m	£m	£m
Assets measured at fair value based on level 1 inputs
Derivatives	3	8	-	-	-	-	3	8
Equity securities	417	378	92	93	-	-	509	471
Pooled investment vehicles	988	1,083	42	36	51	45	1,081	1,164
Debt securities	442	382	-	-	-	-	442	382
Total assets measured at fair value based on level 1 inputs	1,850	1,851	134	129	51	45	2,035	2,025
Assets measured at fair value based on level 2 or 3 inputs
Derivatives	321	161	-	-	9	16	330	177
Equity securities	1	-	-	-	-	-	1	-
Pooled investment vehicles	53	47	-	-	-	-	53	47
Debt securities	275	382	51	57	-	-	326	439
Qualifying insurance policies	5	-	-	-	-	-	5	-
Total assets measured at fair value based on level 2 or 3 inputs	655	590	51	57	9	16	715	663
Cash and cash equivalents	487	201	7	2	-	-	494	203
Total	2,992	2,642	192	188	60	61	3,244	2,891

37.  Pension and other post-retirement benefit provisions continued

(d)     Plan assets continued

Derivative financial instruments are used to modify the profile of the assets of the plans to better match the plans' liabilities and to execute specific strategies as defined within the plans' investment guidelines. Derivative holdings may lead to increased or decreased exposures to the physical asset categories disclosed above.

Defined benefit plans also use pooled investment vehicles to access a variety of asset classes in an efficient way. The underlying assets of the pooled investment vehicles include, but are not limited to, equity securities, property, debt securities and absolute return portfolios.

(e)     Principal assumptions

The principal economic assumptions for the plans are shown below:

	2013		2012
	UK	Canada	UK	Canada
	%	%	%	%
Discount rate	4.60	4.80	4.50	4.00
Rates of inflation:
Consumer Price Index (CPI)	2.90	2.00	2.70	2.00
Retail Price Index (RPI) (UK only)	3.70	-	3.30	-
Salary inflation (Canada only)	-	3.50	-	3.50

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

			Normal Retirement Age (NRA)	Expectation of life from NRA
				Male, age today		Female, age today
2013	Table	Improvements		NRA	40	NRA	40
UK	Plan specific basis (calibrated by Club Vita) reflecting membership demographics	Long cohort projections issued by the CMI in December 2002 with the cohort effect delayed by 10 years, scaling factors of 85% males/75% females and a minimum underpin of 1.5%p.a. males/1.0%p.a. females which tapers to 0% between ages 90 and 120	60	31	32	30	32
Canada	RPP 2014 Public Sector Mortality Table  (CPM-RPP2014Publ) with generational projection without any size adjustment factors due to pension income level	CPM Improvement Scale A (CPM-A)	65	23	24	25	25

			Normal Retirement Age (NRA)	Expectation of life from NRA
				Male, age today		Female,  age today
2012	Table	Improvements		NRA	40	NRA	40
UK	Plan specific basis (calibrated by Club Vita) reflecting membership demographics	Long cohort projections issued by the CMI in December 2002 with the cohort effect delayed by 10 years, scaling factors of 85% males/75% females and a minimum underpin of 1.5%p.a. males/1.0%p.a. females which tapers to 0% between ages 90 and 120	60	31	32	30	32
Canada	UP94 projected to 2015	Scale AA	63	23	23	25	25

(f)      Risk

(f)(i)   Risks and mitigating actions

The Group's consolidated statement of financial position is exposed to movements in the defined benefit plans' net asset.  In particular, the consolidated statement of financial position could be materially sensitive to reasonably likely movements in the principal assumptions for the UK and Canadian plans. By offering post-retirement defined benefit pension plans the Group is exposed to a number of risks.  A discussion of the key risks and mitigating actions in place is below.

Asset volatility

Failure of the asset strategy to keep pace with changes in plan liabilities would expose the plan to the risk of a deficit developing, which could increase funding requirements for the Group.

Yields/ discount rate

Falls in yields would in isolation be expected to increase the cost of future benefit accrual and plan liabilities.

The UK plan (the Group's dominant post-retirement defined benefit plan) uses both bonds and derivatives to hedge out yield risks on the plan's funding basis, rather than the IAS 19 basis, which is expected to minimise Group support for the plan.

Inflation

Rises in inflation expectations would in isolation be expected to increase the cost of future benefit accrual and plan liabilities.

The UK plan (the Group's dominant post-retirement defined benefit plan) uses both bonds and derivatives to hedge out inflation risks on the plan's funding basis, rather than the IAS 19 basis, which is expected to minimise Group support for the plan.

In the UK plan pensions in payment are generally linked to CPI, however inflationary risks are hedged using RPI instruments due to lack of availability of CPI linked instruments. Therefore, the plan is exposed to movements in the actual and expected long term gap between the two indices.

Life expectancy

Increases in life expectancy beyond those currently assumed will lead to an increase in plan liabilities.

Regular reviews of mortality experience are performed to ensure assumptions remain appropriate.

(f)(ii)    Sensitivity to principal assumptions

The sensitivity of the defined benefit plans' net assets to the principal assumptions is disclosed below.

			2013		2012
	Change in assumption		(Increase)/ decrease in present value of obligation	Increase/ (decrease) in fair value of plan assets	(Increase)/ decrease in present value of obligation	Increase/ (decrease) in fair value of plan assets
			£m	£m	£m	£m
Yield/ discount rate	Decrease by 1%	UK	(642)	853	(598)	792
		Canada	(52)	11	(60)	14
	Increase by 1%	UK	474	(618)	433	(580)
		Canada	41	(9)	46	(10)
Rates of inflation	Decrease by 1%	UK	462	(538)	424	(489)
		Canada	31	(1)	36	(1)
	Increase by 1%	UK	(582)	752	(550)	679
		Canada	(38)	2	(43)	1
Life expectancy	Decrease by 1 year	UK	51	-	45	-
		Canada	7	-	10	-
	Increase by 1 year	UK	(51)	-	(45)	-
		Canada	(7)	-	(10)	-

Canada - post-retirement medical benefits

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

	One percentage point increase	One percentage point increase	One percentage point decrease	One percentage point decrease
	2013	2012	2013	2012
	£m	£m	£m	£m
(Increase)/decrease on defined benefit obligation	(4)	(4)	3	3

(f)(iii)   Duration of defined benefit obligation

	2013		2012
	UK	Canada	UK	Canada
	years	years	years	years
Pensioner	15	10	14	10
Non pensioner	26	21	27	22

38.  Deferred income

		2013	2012
	Notes	£m	£m
At 1 January		352	388
Additions during the year	5	36	61
Amortised to the consolidated income statement as fee income	5	(73)	(70)
Release of deferred income1	5	-	(26)
Foreign exchange adjustment		1	(1)
At 31 December		316	352

¹    A reclassification of certain non-participating investment contracts to non-participating insurance contracts resulted in a release of deferred income during the year to 31 December 2012. Refer to Note 5 - Fee and commission income.

The amount of deferred income expected to be settled after more than 12 months is £252m (2012: £290m).

39.  Other financial liabilities

		2013	2012
	Notes	£m	£m
Contingent commissions		73	72
Amounts payable on direct insurance business		336	307
Amounts payable on reinsurance contracts		23	24
Outstanding purchases of investment securities		191	131
Accruals		346	339
Creation of units awaiting settlement		106	91
Cash collateral held in respect of derivative contracts	41	711	811
Property related liabilities		190	170
Contingent consideration	42	15	-
Other		376	378
Other financial liabilities		2,367	2,323

The amount of other financial liabilities expected to be settled after more than 12 months is £180m (2012: £181m).

40.  Other liabilities

	2013	20121
	£m	£m
Provisions	19	17
Other	129	133
At 31 December 2013	148	150

¹    There has been a reallocation of £6m from provisions to other in 2012 to correct a misclassification.

The amount of other liabilities expected to be settled after more than 12 months is £13m (2012: £7m).

	Legal provisions	Other provisions	Total provisions
2013	£m	£m	£m
At 1 January 2013	7	10	17
Charged/(credited) to the consolidated income statement:
Additional provisions	-	11	11
Release of unused provision	(3)	(3)	(6)
Used during the year	(3)	-	(3)
At 31 December 2013	1	18	19

	Legal provisions	Other provisions	Total provisions
2012	£m	£m	£m
At 1 January 2012	4	7	11
Charged/(credited) to the consolidated income statement:
Additional provisions	101	6	107
Release of unused provisions	(98)	-	(98)
Used during the year	-	(3)	(3)
At 31 December 2012	7	10	17

Legal provisions

A judgment handed down on 1 February 2012 in the Commercial Court in London found in favour of Standard Life Assurance Limited (SLAL) in its claim against the insurers of its 2008/2009 professional indemnity policy in relation to the Standard Life Pension Sterling Fund. During the year ended 31 December 2012 SLAL received a cash receipt of £98m including interest and reimbursement of legal fees.

An appeal was subsequently made by the insurers. Given that the judgment was under appeal a risk existed that SLAL would be required to return the cash received or a portion of the cash received to the insurer and therefore, a provision was recognised by the Group in respect of the cash received.

On 18 December 2012, the Court of Appeal handed down a judgment upholding the decision of the Commercial Court, dismissing the insurers' appeal and finding in favour of SLAL. In addition, SLAL was awarded its costs in the appeal. In January 2013 SLAL received notification from the lawyers acting for the insurers that they would not seek leave to appeal to the Supreme Court.

The Group released the provision in the consolidated financial statements for the year ended 31 December 2012.

Other provisions

Other provisions comprise obligations in respect of compensation, staff entitlements and reorganisations.

Of the total provisions of £19m (2012: £17m), £10m (2012: £6m) is expected to be settled after more than 12 months after the reporting date.

41.  Risk management

(a)     Overview

(a)(i)   Application of the risk management framework

The Group's risk management activities support the creation of long-term value by ensuring well-informed risk-reward decisions are taken in pursuit of the Group's business plan. This includes defining and observing qualitative risk appetite statements for the different risks faced by the Group where these statements clearly articulate the aggregate level and types of uncertainty that the Group is willing to accept in order to achieve the business plan. For certain specific exposures, these statements are supported by quantitative risk limits to ensure that the Group's risk profile remains balanced and within target ranges.

The risk management framework used by the Group in 2013 to identify, assess, control and monitor risks is set out in the Corporate governance report. This includes information on the use of qualitative risk appetite statements and quantitative risk limits in order to manage the Group's risks.

The risk metrics used by the Group in managing the business allows the Group to monitor how exposure to different types of risks impacts the shareholder. In pursuing the Group's business plan, the Group is exposed to the following key risks:

Risk	Definition
Market	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.
Credit	The risk of exposure to loss if a counterparty fails to perform its financial obligations, including failure to perform those obligations in a timely manner. It also includes the risk of a reduction in the value of assets due to a widening of mortgage, bond and swap spreads.
Demographic	The risk that arises from the inherent uncertainties as to the occurrence, amount and timing of future cash flows due to demographic experience differing from that expected. This class of risk includes risks that meet the definition of insurance risk under IFRS 4 Insurance Contracts and other financial risks.
Expense	The risk that expense levels are higher than planned or revenue falls below that necessary to cover actual expenses.
Liquidity	The risk that the Group is unable to realise investments and other assets in order to settle its financial obligations when they fall due, or can do so only at excessive cost.
Operational	The risk of adverse consequences for the Group's business resulting from inadequate or failed internal processes, people or systems, or from external events. This includes conduct risk as defined below.
Conduct	The risk that through our culture, strategies, decision-making and behaviours we do not deliver good outcomes for our customers.
Strategic	The risk associated with the robustness of the planning process and threats to achieving the Group's strategy.

The Group's appetite for each of the risks is set out in Section 1.5 - Risk management of the Strategic report. This section of the Strategic report also outlines the main sources of these risks for the Group and specific actions taken to manage the Group's exposure to each risk during the year.

The assets and liabilities on the Group's consolidated statement of financial position can be split into four categories (risk segments) which give the shareholder different exposures to the risks listed previously. These categories are:

Shareholder business

Shareholder business refers to the assets and liabilities to which the shareholder is directly exposed. For the purposes of this Note, the shareholder refers to the equity holders of the Company.

Participating business

Participating business refers to the assets and liabilities of the participating funds of the life operations of the Group. It includes the liabilities for insurance features and financial guarantees contained within contracts held in the HWPF that invest in unit linked funds. It does not include the liabilities for insurance features contained in contracts invested in the GWPF or GSMWPF. Such liabilities are included in shareholder business. 

Unit linked and segregated funds

Unit linked and segregated funds refers to the assets and liabilities of the unit linked and segregated funds of the life operations of the Group. It does not include the cash flows (such as asset management charges or investment expenses) arising from the unit linked or segregated fund contracts or the liabilities for insurance features or financial guarantees contained within the unit linked or segregated fund contracts. Such cash flows and liabilities are included in shareholder business or participating business.

Third party interest in consolidated funds and non-controlling interests

Third party interest in consolidated funds and non-controlling interests refers to the assets and liabilities recorded on the Group's consolidated statement of financial position which belong to third parties. The Group controls the entities which own the assets and liabilities but the Group does not own 100% of the equity or units of the relevant entities.

The following table sets out the link between the reportable segments set out in Notes 2 and 3 and the risk segments.

	Risk segment
Reportable segment	Shareholder business	Participating business	Unit linked and segregated funds1
UK and Europe	SLAL - SHF SLAL - PBF (excluding unit linked funds and Canadian branch) SLS SLCM Vebnet Group SLIL (excluding unit linked funds)2 SLW	SLAL - HWPF SLAL - GWPF SLAL - GSMWPF SLAL - UKSMWPF	SLAL - PBF unit linked funds SLIL unit linked funds2
Standard Life Investments	SLIH and all its subsidiaries	n/a	n/a
Canada	SLCC (excluding segregated funds and participating fund) SLAL - PBF Canadian branch	SLCC participating fund	SLCC segregated funds
Asia and Emerging Markets	SLIL (excluding unit linked funds)3 SLA (excluding unit linked funds) Interests in Indian and Chinese JVs	n/a	SLIL unit linked funds3 SLA unit linked funds
Other	Company	n/a	n/a
SLAL = Standard Life Assurance Limited SLIH = Standard Life Investments (Holdings) Limited SLCC = The Standard Life Assurance Company of Canada SLIL = Standard Life International Limited SLA = Standard Life (Asia) Limited SLW = Standard Life Wealth Limited SLS = Standard Life Savings Limited SLCM = Standard Life Client Management Limited		HWPF = Heritage With Profits Fund PBF = Proprietary Business Fund GWPF = German With Profits Fund GSMWPF = German Smoothed Managed With Profits Fund SHF = Shareholder Fund UKSMWPF = UK Smoothed Managed With Profits Fund

¹    As discussed in Note 3 and above, unit linked and segregated funds does not include cash flows arising from unit linked or segregated fund contracts or the liabilities for insurance features or financial guarantees contained within the unit linked or segregated fund contracts. Such cash flows and liabilities are included in shareholder or participating business.

²    Related to SLIL's International Bond business.

³    Related to SLIL's business excluding International Bond business.

SLW will be managed as part of the Standard Life Investments reportable segment from 1 January 2014. For the years ending 31 December 2013 and 2012 SLW was managed as part of the UK and Europe reportable segment.

41.  Risk management continued

(a)     Overview continued

(a)(i)   Application of the risk management framework continued

The table below sets out how the shareholder is exposed to market, credit, demographic, expense and liquidity risk at the reporting date, arising from the assets and liabilities of the four risk segments:

Risk	Shareholder business	Participating business	Unit linked and segregated funds	Third party interest in consolidated funds and non-controlling interests (TPICF & NCI)
Market	The shareholder is directly exposed to the impact of movements in equity and property prices, interest rates and foreign exchange rates on the value of assets held by the shareholder business and the associated movements in the value of liabilities.	The shareholder is exposed to the market risk that the assets of the with profits funds are not sufficient to meet their obligations. If this situation occurred the shareholder would be exposed to the full shortfall in the funds.	Assets are managed in accordance with the mandates of the particular funds and the financial risks associated with the assets are borne by the policyholder. The shareholder's exposure arises from the changes in the value of future profits earned on unit linked and segregated funds due to market movements. Further information on this exposure is provided in the EEV financial statements.	The shareholder is not exposed to the market risk from assets in respect of TPICF & NCI since the financial risks of the assets are borne by third parties.
Credit	The shareholder is directly exposed to credit risk from holding cash, debt securities, loans, derivative financial instruments and reinsurance assets and the associated movement in the value of liabilities.	The shareholder is exposed to the credit risk on the assets which could cause the with profits funds to have insufficient resources to meet its obligations. If this situation occurred the shareholder would be exposed to the full shortfall in the funds.	Assets are managed in accordance with the mandates of the particular funds and the financial risks associated with the assets are expected to be borne by the policyholder. The shareholder's exposure is limited to changes in the value of future profits earned on unit linked and segregated funds due to market movements. Further information on this exposure is provided in the EEV financial statements.	The shareholder is not exposed to the credit risk from assets in respect of TPICF & NCI since the financial risks of the assets are borne by third parties.

Risk	Shareholder business	Participating business	Unit linked and segregated funds	Third party interest in consolidated funds and non-controlling interests (TPICF & NCI)
Demographic and expense	The shareholder is exposed to longevity and mortality risk on annuity contracts and universal life contracts held by UK and Europe and Canada, and mortality risk on contracts held in non-participating funds by UK and Europe, Canada and Asia and Emerging Markets including those containing insurance features that are invested in unit linked or segregated funds or in the GWPF or GSMWPF. The shareholder is also exposed to expenses and persistency being different from expectation on these contracts.	The shareholder receives recourse cash flows and certain other defined payments in accordance with the Scheme of Demutualisation and other relevant agreements. The recourse cash flows are based on several different components of which some are sensitive to demographic and expense risk.	The shareholder is exposed to demographic and expense risk arising on components of a unit linked or segregated fund contract, but it is not the assets or liabilities of the fund which gives rise to this exposure.	TPICF & NCI are not exposed to demographic and expense risk.
Liquidity	The shareholder is directly exposed to the liquidity risk from the shareholder business.	With profits funds are normally expected to meet their obligations through liquidating assets held in the respective with profits fund. If a with profits fund cannot meet its obligations as they fall due, the shareholder will be required to provide liquidity to meet the policyholder claims and benefits as they fall due.	Unit linked and segregated funds are normally expected to meet their obligations through liquidating the underlying assets in which they are invested. If a unit linked or segregated fund cannot meet its obligations in this way, the shareholder may be required to meet the obligations to the policyholder.	The shareholder is not exposed to the liquidity risk from these liabilities, since the financial risks of the obligations are borne by third parties.

The shareholder is exposed to operational and strategic risk arising across the four risk segments and any losses incurred are typically borne by the shareholder.

The shareholder is also exposed to certain risks relating to defined benefit pension plans operated by the Group. These include:

·   Market risks through the potential impact of market movements on the value of assets held in the defined benefit pension plans

·   Credit risks through the potential impact of widening credit spreads or credit losses on the assets held in the defined benefit pension plans

·   Longevity risk through the risk that members of the defined benefit pension plans live longer than expected.

(a)(ii)  Consolidated financial position by risk segment

In previous reporting periods, the Standard Life SICAV funds managed by Standard Life Investments, which held assets of £9.8bn at 31 December 2012, were consolidated in accordance with the Group's accounting policies.  During the year to 31 December 2013, the Group's holding in these funds fell below 50% and therefore the funds are not consolidated at 31 December 2013. All assets and liabilities of these funds were previously included on a line-by-line basis.  The Group's holdings in the SICAV funds are now reflected in equity securities and interests in pooled investment funds.  The statement of financial position categories materially impacted by the change are debt securities, equity securities and interests in pooled investment funds, cash and cash equivalents and third party interest in consolidated funds.

The table that follows provides an analysis of the consolidated statement of financial position showing the Group's assets and liabilities by risk segment. This categorisation has been used to present the information in this note.

41.  Risk management continued

(a)     Overview continued

(a)(ii)  Consolidated financial position by risk segment continued

	Shareholder  business		Participating business		Unit linked and segregated funds		Third party interest in consolidated funds and non-controlling interests		Total
	2013	2012 restated1	2013	2012	2013	2012	2013	2012	2013	2012 restated1
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Intangible assets	298	210	2	4	-	-	-	-	300	214
Deferred acquisition costs	842	829	63	75	-	-	-	-	905	904
Investments in associates and joint ventures	328	324	-	-	-	3	-	1	328	328
Investment property	431	521	1,995	2,048	4,829	4,701	1,290	1,295	8,545	8,565
Property, plant and equipment	93	77	126	79	-	-	-	-	219	156
Pension and other post-retirement benefit assets	432	339	-	-	-	-	-	-	432	339
Deferred tax assets	121	192	-	(64)	-	49	-	-	121	177
Reinsurance assets	182	175	5,991	6,737	-	-	-	-	6,173	6,912
Loans	2,549	2,855	199	226	176	218	-	-	2,924	3,299
Derivative financial assets	111	63	652	1,106	739	681	265	300	1,767	2,150
Equity securities and interests in pooled investment funds at FVTPL	195	197	14,692	9,079	69,955	53,019	5,474	3,517	90,316	65,812
Debt securities:
At FVTPL	11,133	12,049	23,578	30,005	22,944	24,823	3,701	6,050	61,356	72,927
At available-for-sale	683	374	-	-	-	-	-	-	683	374
Receivables and other financial assets	469	515	94	496	415	550	64	156	1,042	1,717
Other assets	89	86	41	43	128	146	11	9	269	284
Assets held for sale	29	-	-	-	59	-	33	-	121	-
Cash and cash equivalents	953	1,537	1,028	1,494	5,467	5,461	1,656	1,450	9,104	9,942
Total assets	18,938	20,343	48,461	51,328	104,712	89,651	12,494	12,778	184,605	174,100
Non-participating insurance contract liabilities	9,172	10,107	11,124	12,233	8,016	6,710	-	-	28,312	29,050
Non-participating investment contract liabilities	2,392	2,600	-	-	95,267	81,601	-	-	97,659	84,201
Participating insurance contract liabilities	-	-	15,060	15,919	-	-	-	-	15,060	15,919
Participating investment contract liabilities	-	-	14,707	14,993	-	-	-	-	14,707	14,993
Unallocated divisible surplus	-	-	680	706	-	-	-	-	680	706
Reinsurance liabilities	316	381	-	-	-	-	-	-	316	381
Deposits received from reinsurers	-	-	5,589	6,136	-	-	-	-	5,589	6,136
Third party interest in consolidated funds	-	-	-	-	-	-	11,803	12,037	11,803	12,037
Borrowings	58	29	9	9	27	44	1	26	95	108
Subordinated liabilities	1,861	1,868	-	-	-	-	-	-	1,861	1,868
Pension and other post-retirement benefit provisions	104	130	-	-	-	-	-	-	104	130
Deferred income	244	268	72	84	-	-	-	-	316	352
Deferred tax liabilities	50	43	77	-	51	-	-	-	178	43
Current tax liabilities	7	87	(5)	6	47	50	6	7	55	150
Derivative financial liabilities	41	23	129	48	463	548	162	234	795	853
Other financial liabilities	914	855	693	912	611	445	149	111	2,367	2,323
Other liabilities	86	86	21	33	27	14	14	17	148	150
Total liabilities	15,245	16,477	48,156	51,079	104,509	89,412	12,135	12,432	180,045	169,400
Net inter-segment assets/(liabilities)	534	493	(305)	(249)	(203)	(239)	(26)	(5)	-	-
Net assets	4,227	4,359	-	-	-	-	333	341	4,560	4,700

¹    Comparatives for the year ended 31 December 2012 have been restated to reflect retrospective application of changes to accounting policies as a result of an amendment to IAS 19 - Employee Benefits. Refer to Group accounting policies - (a) Basis of preparation.

(b)      Market risk

As described in the table on pages 178 to 179, the shareholder is exposed to market risk from the shareholder and participating businesses and as a result the following quantitative market risk disclosures are provided in respect of the financial assets of the shareholder and participating businesses.

Quantitative market risk disclosures are not provided in respect of the assets of the unit linked and segregated funds since the shareholder is not exposed to market risks from these assets. The shareholder's exposure to market risk on these assets is limited to variations in the value of future profits earned on the contracts as fees are based on a percentage of the fund value. The sensitivity to market risk analysis includes the impact on those statement of financial position items which are affected by changes in future profits due to the market stresses changing the value of assets held by the unit linked and segregated funds. The shareholder is also not exposed to the market risk from the assets held by third parties in consolidated funds and non-controlling interests and therefore they have been excluded from the following quantitative disclosures.

The Group manages market risks through the use of a number of controls and techniques including:

·   Defined lists of permitted securities and/or application of investment constraints and portfolio limits

·   Clearly defined investment benchmarks for policyholder and shareholder funds

·   Stochastic and deterministic asset/liability modelling

·   Active use of derivatives to improve the matching characteristics of assets and liabilities.

The specific controls and techniques used to manage the market risks in the shareholder and participating businesses are discussed below:

Shareholder business

Assets in the shareholder business are managed against benchmarks that ensure they are diversified across a range of asset classes, instruments and geographies that are appropriate to the liabilities or are held to match the cash flows anticipated to arise in the business. A combination of limits by name, sector and credit rating are used where relevant to reduce concentration risk among the assets held.

Participating business

The assets of the participating business are principally managed to support the liabilities of those funds and are appropriately diversified by both asset class and geography.

The key considerations in the asset and liability management of the participating business are:

·   The economic liability and how this varies with market conditions

·   The need to invest the assets in a manner consistent with participating policyholders' reasonable expectations and, where appropriate, the Scheme of Demutualisation and the Principles and Practices of Financial Management (PPFM)

·   The need to ensure that regulatory and capital requirements are met.

In practice, an element of market risk arises as a consequence of the need to balance these considerations, for example, in certain instances participating policyholders may expect that equity market risk will be taken on their behalf and derivative instruments may be used to manage these risks.

(b)(i)    Elements of market risk

The main elements of market risk to which the Group is exposed are equity and property risk, interest rate risk and foreign currency risk, which are discussed on the following pages.

As a result of the diversity of the products offered by the Group and the different regulatory environments in which it operates, the Group employs different methods of asset and liability management across its business units.

Information on the methods used to determine fair values for each major category of financial instrument and investment property measured at fair value is presented in Note 42 - Fair value of assets and liabilities and Note 18 - Investment property.

(b)(i)(i)   Group exposure to equity risk

The Group is subject to equity price risk due to daily changes in the market values and returns on the holdings in its equity securities portfolio. The Group's shareholders are exposed to the following sources of equity risk:

·   Direct equity shareholdings in the shareholder business and the Group defined benefit pension funds

·   Burnthrough from the with profits funds where adverse movements in the market values and returns on holdings in the equity portfolios of these funds mean the assets of the with profits funds are not sufficient to meet their obligations

·   The indirect impact from changes in the value of equities held in funds from which management charges are taken.

41.    Risk managementcontinued

(b)      Market risk continued

(b)(i)    Elements of market risk continued

Exposures to equity securities are primarily controlled through the use of investment mandates including constraints based on appropriate equity indices.

The table below shows the shareholder and participating businesses' exposure to equity markets. Equity securities are analysed by country based on the ultimate parent country of risk.

	Shareholder business		Participating business		Total
	2013	2012	2013	2012	2013	2012
	£m	£m	£m	£m	£m	£m
UK	16	19	5,042	4,553	5,058	4,572
Canada	134	105	224	204	358	309
Australia	-	1	31	32	31	33
Austria	-	-	4	11	4	11
Belgium	-	-	127	96	127	96
Denmark	-	1	115	102	115	103
Finland	-	-	67	30	67	30
France	1	2	654	500	655	502
Germany	1	1	450	395	451	396
Greece	-	-	6	1	6	1
Ireland	-	1	132	102	132	103
Italy	-	-	85	104	85	104
Japan	1	3	124	77	125	80
Mexico	-	-	6	5	6	5
Netherlands	1	1	412	336	413	337
Norway	-	-	77	53	77	53
Portugal	-	-	21	30	21	30
Spain	-	-	200	89	200	89
Sweden	-	1	289	221	289	222
Switzerland	1	1	605	391	606	392
US	25	30	1,977	1,525	2,002	1,555
Other	1	25	247	217	248	242
Total	181	191	10,895	9,074	11,076	9,265

In addition to the equity securities analysed above, the shareholder business has interests in pooled investment funds of £14m (2012: £6m) and amounts seeded into funds of £29m (2012: £nil). The participating business has interests in pooled investment funds of £3,797m (2012: £5m).

(b)(i)(ii)  Group exposure to property risk

The Group is subject to property price risk due to changes in the value and return on holdings in investment property. This risk arises from:

·   Direct property holdings in the shareholder business and the Group defined benefit pension funds

·   Burnthrough from the with profits funds where adverse movements in the market values and returns on investment property in these funds mean the assets of the with profits funds are not sufficient to meet their obligations

·   The indirect impact from changes in the value of property held in funds from which management charges are taken.

Exposures to property holdings are primarily controlled through the use of portfolio limits which specify the proportion of the value of the total property portfolio represented by:

·   Any one property or group of properties

·   Geographic area

·   Property type

·   Development property under construction.

The tables below show the shareholder and participating businesses' direct exposure to investment property analysed by country and sector.

Shareholder business

	Office		Industrial		Retail		Other		Total
	2013	2012	2013	2012	2013	2012	2013	2012	2013	2012
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Canada	348	392	45	57	-	-	38	72	431	521
Total	348	392	45	57	-	-	38	72	431	521

Participating business

	Office		Industrial		Retail		Other		Total
	2013	2012	2013	2012	2013	2012	2013	2012	2013	2012
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
UK	550	560	266	264	946	962	-	-	1,762	1,786
Canada	49	50	19	20	4	5	14	13	86	88
Belgium	14	14	-	-	-	-	-	-	14	14
France	-	2	4	27	-	-	2	2	6	31
Spain	127	129	-	-	-	-	-	-	127	129
Total	740	755	289	311	950	967	16	15	1,995	2,048

There is no exposure to residential property in the shareholder and participating businesses.

(b)(i)(iii) Group exposure to interest rate risk

Interest rate risk is the risk that arises from exposures to changes in the shape and level of yield curves which could result in the value of financial assets and liabilities, or the cash flows relating to these, fluctuating by different amounts.

The main financial assets held by the Group which give rise to interest rate risk are debt securities, loans and cash and cash equivalents. The main financial liabilities giving rise to interest rate risk principally comprise non-unit linked insurance, participating and non-participating investment contract liabilities and subordinated liabilities. Derivative financial instruments held by the Group also give rise to interest rate risk.

Shareholder business

Under the Group's risk management framework, Group companies are required to manage their interest rate exposures in line with the Group's qualitative risk appetite statements and quantitative risk limits. Group companies typically use a combination of cash flow and duration matching techniques to manage their interest rate risk at an entity level. Hedging is used to mitigate the risk that burnthrough may arise from the with profits funds under certain circumstances where adverse interest rate movements could mean the assets of the with profits funds are not sufficient to meet the obligations of the with profits funds.

Participating business

Duration matching is used to minimise the interest rate risk that arises from mismatches between participating contract liabilities and the assets backing those liabilities. Cash flow matching is used to minimise the interest rate risk that arises in the participating business from mismatches between non-participating insurance contract liabilities and the assets backing those liabilities. A combination of debt securities and derivative financial instruments are held to assist in the management of interest rate sensitivity arising in respect of the cost of guarantees.

The sensitivity of profit after tax to changes in interest rates for both the shareholder business and the participating business is included in the Profit after tax sensitivity to market risk table, shown in section (b)(ii) below.

41.    Risk managementcontinued

(b)       Market risk continued

(b)(i)(iv) Foreign currency risk

The Group's financial assets are generally held in the local currency of its operational geographic locations, principally to assist with the matching of liabilities. However, foreign currency risk arises where financial assets are held in other currencies, for example to meet the expectations of particular groups of policyholders or to improve the risk profile through diversification. The Group manages this risk through the use of limits on the amount of foreign currency risk that is permitted.

The tables below summarise the shareholder and participating businesses' exposure to foreign currency risks in Sterling. The tables exclude inter-segment assets and liabilities.

Shareholder business

	UK Sterling		Euro		Canada Dollar		Hong Kong Dollar		US Dollar		Other		Total
	2013	2012	2013	2012	2013	2012 restated1	2013	2012	2013	2012	2013	2012	2013	2012 restated1
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Total assets	7,585	7,589	1,275	1,201	9,591	11,124	86	87	106	110	295	232	18,938	20,343
Total liabilities	(6,019)	(5,970)	(655)	(601)	(8,483)	(9,778)	(44)	(37)	(36)	(86)	(8)	(5)	(15,245)	(16,477)
Net investment hedges	883	755	-	-	(870)	(743)	(13)	(12)	-	-	-	-	-	-
	2,449	2,374	620	600	238	603	29	38	70	24	287	227	3,693	3,866

¹    Comparatives for the year ended 31 December 2012 have been restated to reflect retrospective application of changes to accounting policies as a result of an amendment to IAS 19 - Employee Benefits. Refer to Group accounting policies - (a) Basis of preparation.

Other includes assets of £55m (2012: £19m) and liabilities of £nil (2012: £5m) in relation to derivatives used to manage currency risk exposures. The principal source of foreign currency risk for shareholders arises from the Group's investments in overseas subsidiaries and joint ventures. The most significant of these exposures relates to the Group's Canadian subsidiaries. Derivative financial instruments are used to reduce this exposure in line with the Group's strategy for managing foreign exchange risks.

During 2013 the Group reaffirmed its strategy for hedging foreign currency risks in the shareholder business. The purpose of this strategy is to provide a consistent approach to managing foreign exchange risks in the shareholder business. This includes, within certain parameters, minimising currency volatility within the regulatory surplus and reducing the currency risk relating to dividend receipts from overseas operations. The Group does not separately hedge translation of reported earnings from overseas operations in the consolidated financial statements.

Participating business

	UK Sterling		Euro		Canada Dollar		Hong Kong Dollar		US Dollar		Other		Total
	2013	2012	2013	2012	2013	2012	2013	2012	2013	2012	2013	2012	2013	2012
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Total assets	34,617	38,106	9,811	9,618	818	889	41	28	2,049	1,571	1,125	1,116	48,461	51,328
Total liabilities	(39,237)	(42,746)	(8,105)	(7,377)	(813)	(895)	-	-	-	(7)	(1)	(54)	(48,156)	(51,079)
	(4,620)	(4,640)	1,706	2,241	5	(6)	41	28	2,049	1,564	1,124	1,062	305	249

There are no net investment hedges in the participating business. Other includes assets of £9m (2012: £23m) and liabilities of £1m (2012: £11m) in relation to derivatives used to manage currency risk exposures.

The foreign currency exposures shown above largely reflect the impact of financial assets being denominated in currencies other than the local currency of the operational geographic location. These exposures arise as a result of asset allocation decisions that are intended to meet the expectations of particular groups of policyholders or to improve the risk profile through diversification. The investment mandates used to manage the participating business contain limits to restrict the extent of foreign currency risk that can be taken and currency derivatives are held to provide economic hedges of some of the above exposures. These are typically short dated forward foreign exchange contracts, however the investment mandates do not normally require these contracts to be replaced on maturity providing the foreign currency risk is within limits.

(b)(ii)  Sensitivity to market risk analysis

The Group's profit after tax and equity are sensitive to variations in respect of the Group's market risk exposures and a sensitivity analysis is presented on the following pages. The analysis has been performed by calculating the sensitivity of profit after tax and equity to changes in equity security and property prices and to changes in interest rates as at the reporting date. For each sensitivity 'test', the impact of a reasonably possible change in a single sensitivity factor is presented, while the other sensitivity factors remain unchanged. Correlations between the different risks and/or other factors may mean that experience would differ from that expected if more than one risk event occurred simultaneously.

Changes in equity security and property prices and/or fluctuations in interest rates will affect non-participating unit linked liabilities and the associated assets by the same amount. Therefore, whilst the profit impact on unit linked and segregated funds is included in the sensitivity analysis where there is an impact on the value of other statement of financial position items, the change in unit linked liabilities and the corresponding asset movement has not been presented. This is also true of the other with profits funds with the exception of the German With Profits Fund (GWPF). As at 31 December 2013 there is no direct impact of market risk on the sensitivity of GWPF. However, there is an indirect impact on the PBF due to a realistic Capital Support Arrangement (CSA) that was introduced during 2011 for the GWPF. This provides support by reducing the liability to transfer future annual management charges to the PBF hence increasing the assets on the statement of financial position to the extent necessary to avoid a realistic deficit (if possible). There is no impact on GWPF participating liabilities. If support is provided under the realistic CSA, there is an increase in expense reserves in the PBF. Further realistic support would be required for the decrease in interest rate sensitivity and this is included within the non-participating insurance contract liabilities in the table below.  

Earnings over a period may be reduced as a consequence of the impact of market movements on charges levied on unit linked business, segregated fund business and other with profits fund business. For example, if the tests had been applied as at 1 January, the profit during the year would have varied due to the different level of funds under management. In illustrating the impact of equity/property risk, the assumption has been made, where relevant, that expectations of corporate earnings and rents remain unchanged and thus yields change accordingly. The sensitivities take into account the likely impact on individual Group companies of local regulatory standards under such a scenario.

The recourse cash flows have been determined in accordance with the Scheme and consider the extent to which shareholders participate in the investment returns and surpluses of the HWPF. The Scheme, and in particular the Capital Support Mechanism, requires the financial state of the HWPF to be considered before recourse cash flows are transferred to the Shareholder Fund and, under certain circumstances, the payment of recourse cash flow can be withheld to support the financial strength of the HWPF. Therefore, the HWPF has been treated as a whole for the purpose of this sensitivity analysis.

Limitations

The sensitivity analysis is non-linear and larger or smaller impacts should not be derived from these results. The sensitivity analysis represents the impact on profit at the year end that the changes in market conditions can have. The sensitivity will vary with time, both due to changes in market conditions and changes in the actual asset mix, and this mix is being actively managed. The results of the sensitivity analysis may also have been different from those illustrated had the sensitivity factors been applied at a date other than the reporting date.

For the participating business, in particular the HWPF and the GWPF, the risk to shareholders is that the assets of the fund are insufficient to meet the obligations to policyholders.

For the HWPF, whilst shareholders are only entitled to the recourse cash flows in respect of this business, there can be potential exposure to the full impact of any shortfall if the assets of the fund are insufficient to meet policyholder obligations. The sensitivities presented in the table are not sufficiently severe to have restricted recourse cash flows in 2013 and 2012.

When assessing the impact of the sensitivity tests on the recourse cash flows, and in particular the risk that the assets of the HWPF may be insufficient to meet the obligations to policyholders, dynamic management actions have been assumed in a manner consistent with the relevant Principles and Practices of Financial Management (PPFM).

41.  Risk managementcontinued

(b)     Market risk continued 

(b)(ii)  Sensitivity to market risk analysis continued

Profit after tax sensitivity to market risk

	Equity markets				Property markets				Interest rates
2013	+10%	-10%	+20%	-20%	+10%	-10%	+20%	-20%	+1%	-1%
Increase/(decrease) in profit after tax	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Shareholder business
UK and Europe:
Deferred acquisition costs	-	-	-	(4)	-	-	-	-	-	-
Assets backing non-participating liabilities	-	-	-	-	-	-	-	-	(436)	530
Non-participating insurance contract liabilities	-	-	-	-	-	-	-	-	420	(510)
Non-participating investment contract liabilities	-	-	-	-	-	-	-	-	-	-
Other assets and liabilities	-	-	-	-	-	-	-	-	(23)	27
	-	-	-	(4)	-	-	-	-	(39)	47
Canada:
Assets backing non-participating insurance contract liabilities	27	(27)	54	(54)	30	(30)	61	(61)	(394)	511
Assets backing non-participating investment contract liabilities	-	-	-	-	-	-	-	-	(7)	9
Non-participating insurance contract liabilities	2	(5)	6	(14)	22	(25)	37	(48)	397	(536)
Non-participating investment contract liabilities	-	-	-	-	-	-	-	-	-	-
Other assets and liabilities	(5)	7	(9)	16	20	(20)	40	(40)	(38)	45
	24	(25)	51	(52)	72	(75)	138	(149)	(42)	29
Standard Life Investments	3	(3)	5	(5)	-	-	-	-	-	-
Asia and Emerging Markets:
Deferred acquisition costs	2	(2)	3	(3)	-	-	-	-	(3)	3
Assets backing non-participating insurance contract liabilities	-	-	-	-	-	-	-	-	-	-
Assets backing non-participating investment contract liabilities	-	-	-	-	-	-	-	-	-	-
Non-participating insurance contract liabilities	-	-	-	-	-	-	-	-	-	-
Non-participating investment contract liabilities	-	-	-	-	-	-	-	-	-	-
Other assets and liabilities	-	-	-	-	-	-	-	-	-	-
	2	(2)	3	(3)	-	-	-	-	(3)	3
Other	1	(1)	2	(2)	-	-	-	-	2	(2)
Total shareholder business	30	(31)	61	(66)	72	(75)	138	(149)	(82)	77
Participating business
UK and Europe:
Recourse cash flow	-	-	-	-	-	-	-	-	-	-
	-	-	-	-	-	-	-	-	-	-
Canada:
Assets backing participating insurance contract liabilities	16	(16)	31	(31)	8	(8)	16	(16)	(31)	37
Participating insurance contract liabilities	(16)	16	(31)	31	(8)	8	(16)	16	31	(37)
	-	-	-	-	-	-	-	-	-	-
Total participating business	-	-	-	-	-	-	-	-	-	-
Total	30	(31)	61	(66)	72	(75)	138	(149)	(82)	77

¹    The amounts in the table above are presented net of tax.

²    A positive number represents a credit to the consolidated income statement.

For Canada's non-participating investment business, the liability does not change in the circumstances considered, as it is measured on an amortised cost basis. Given that some of the backing assets are measured at fair value through profit or loss (FVTPL), their value is sensitive to the circumstances considered. The mismatch in measurement bases is reflected in the sensitivity analysis reported in respect of Canada.

The Company within Other shareholder business and the shareholder business in Canada classify certain debt securities which back subordinated debt liabilities as assets available-for-sale (AFS). The shareholder business in Canada also classifies certain debt securities which back non-participating investment contract liabilities as AFS. This reduces the impact of the mismatch between the measurement bases used for these assets and the liabilities they are backing. The Group's sensitivity of profit after tax to changes in interest rates does not include the impact of changes in interest rates for these AFS assets.

Canada's non-participating insurance contract liabilities are valued using CALM, which seeks to find asset cash flows that match the expected future liability cash flows. The value placed on the actuarial liabilities is the value of the assets that provide the matching cash flows.

The Appointed Actuary's assumption for future cash flows from equity securities and property is not based on current dividend or rental yields, but is a long-term assumption based on historic average yields. In the event of a one-off fall in equity security and property values, the Appointed Actuary would not necessarily increase the assumed yields, and the assumed future cash flows from these assets would fall. Therefore additional assets would be required to cover the expected future liability cash flows.

	Equity markets				Property markets				Interest rates
2012	+10%	-10%	+20%	-20%	+10%	-10%	+20%	-20%	+1%	-1%
Increase/(decrease) in profit after tax	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Shareholder business
UK and Europe:
Deferred acquisition costs	-	-	-	(6)	-	-	-	-	-	-
Assets backing non-participating liabilities	-	-	-	-	-	-	-	-	(424)	496
Non-participating insurance contract liabilities	-	-	-	-	-	-	-	-	421	(484)
Non-participating investment contract liabilities	-	-	-	-	-	-	-	-	-	-
Other assets and liabilities	-	-	-	-	-	-	-	-	(38)	27
	-	-	-	(6)	-	-	-	-	(41)	39
Canada:
Assets backing non-participating insurance contract liabilities	26	(26)	52	(52)	32	(32)	65	(65)	(514)	670
Assets backing non-participating investment contract liabilities	-	-	-	-	-	-	-	-	(5)	5
Non-participating insurance contract liabilities	2	(11)	10	(26)	36	(39)	62	(78)	519	(792)
Non-participating investment contract liabilities	-	-	-	-	-	-	-	-	-	-
Other assets and liabilities	(5)	7	(8)	18	29	(29)	58	(58)	(50)	61
	23	(30)	54	(60)	97	(100)	185	(201)	(50)	(56)
Standard Life Investments	1	(1)	2	(2)	-	-	-	-	2	(2)
Asia and Emerging Markets:
Deferred acquisition costs	1	(1)	2	(2)	-	-	-	-	2	(2)
Assets backing non-participating insurance contract liabilities	-	-	-	-	-	-	-	-	-	-
Assets backing non-participating investment contract liabilities	-	-	-	-	-	-	-	-	-	-
Non-participating insurance contract liabilities	-	-	-	-	-	-	-	-	-	-
Non-participating investment contract liabilities	-	-	-	-	-	-	-	-	-	-
Other assets and liabilities	-	-	-	-	-	-	-	-	(1)	1
	1	(1)	2	(2)	-	-	-	-	1	(1)
Other	-	-	1	(1)	-	-	-	-	6	(6)
Total shareholder business	25	(32)	59	(71)	97	(100)	185	(201)	(82)	(26)
Participating business
UK and Europe:
Recourse cash flow	-	-	-	-	-	-	-	-	-	-
	-	-	-	-	-	-	-	-	-	-
Canada:
Assets backing participating insurance contract liabilities	14	(14)	29	(29)	8	(8)	16	(16)	(26)	32
Participating insurance contract liabilities	(14)	14	(29)	29	(8)	8	(16)	16	26	(32)
	-	-	-	-	-	-	-	-	-	-
Total participating business	-	-	-	-	-	-	-	-	-	-
Total	25	(32)	59	(71)	97	(100)	185	(201)	(82)	(26)

¹    The amounts in the table above are presented net of tax.

²    A positive number represents a credit to the consolidated income statement.

41.  Risk managementcontinued

(b)     Market risk continued 

(b)(ii)  Sensitivity to market risk analysis continued

Equity sensitivity to market risk

The shareholder business in Canada classifies certain debt securities which back non-participating investment contract liabilities and subordinated debt liabilities as AFS. The shareholder business in the Other reportable segment also classifies certain debt securities which back subordinated debt liabilities issued by the Company as AFS. These debt securities are measured at fair value. Interest is calculated using the effective interest method and recognised in the consolidated income statement. Other changes in fair value and the related tax are recognised in other comprehensive income. As a result, the sensitivity of the Group's equity to variations in interest rate risk exposures differs from the sensitivity of the Group's profit after tax to variations in interest rate risk exposures.

Canada's equity sensitivity to a 1% increase in interest rates is (£61m) (2012: (£72m)) and to a 1% decrease in interest rates is £51m (2012: (£31m)). Other's equity sensitivity to a 1% increase in interest rates is (£16m) (2012: £6m) and to a 1% decrease in interest rates is £16m (2012: (£6m)). The sensitivity of the Group's total equity to a 1% increase in interest rates is (£119m) (2012: (£104m)) and a 1% decrease in interest rates is £117m (2012: £1m).

The sensitivity of the Group's total equity to variations in equity and property markets in respect of each of the scenarios shown in the preceding tables is the same as the sensitivity of the Group's profit after tax.

(c)     Credit risk

As described in the table on pages 178 to 179, the shareholder is exposed to credit risk from the shareholder and participating businesses and as a result the following quantitative credit risk disclosures are provided in respect of the financial assets of these categories.

Quantitative credit risk disclosures are not provided in respect of the assets of the unit linked and segregated funds since the shareholder is not directly exposed to credit risks from these assets. The unit linked business includes £4,412m (2012: £4,790m) of assets that are held as reinsured external funds links. Under certain circumstances the shareholder may be exposed to losses relating to the default of the insured external fund links. These exposures are actively monitored and managed by the Group and the Group considers the circumstances under which losses may arise to be very remote.

The shareholder is also not exposed to the credit risk from the assets held by third parties in consolidated funds and non-controlling interests and therefore these have been excluded from the following quantitative disclosures.

The Group's credit risk exposure mainly arises from its investments in its financial instruments. Concentrations of credit risk are managed by setting maximum exposure limits to types of financial instruments and counterparties. The limits are established using the following controls:

Financial instrument with credit risk exposure	Control
Cash and cash equivalents	Maximum counterparty exposure limits are set with reference to internal credit assessments.
Derivative financial instruments	Maximum counterparty exposure limits, net of collateral, are set with reference to internal credit assessments. The forms of collateral that may be accepted are also specified and minimum transfer amounts in respect of collateral transfers are documented. Refer to (c)(iii) for further details on collateral.
Debt securities	The Group's policy is to set exposure limits by name of issuer, sector and credit rating.
Loans	Portfolio limits are set by individual business units. These limits specify the proportion of the value of the total portfolio of mortgage loans and mortgage bonds that are represented by a single, or group of related counterparties, geographic area, employment status or economic sector, risk rating and loan to value percentage.
Reinsurance assets	The Group's policy is to place reinsurance only with highly rated counterparties. The policy restricts the Group from assuming concentrations of risk with few individual reinsurers by specifying certain limits on ceding and the minimum conditions for acceptance and retention of reinsurers.
Other financial instruments	Appropriate limits are set for other financial instruments to which the Group may have exposure at certain times, for example commission terms paid to intermediaries.

Individual business units are responsible for implementing processes to ensure that credit exposures are managed within any limits that have been established and for the reporting of exposures and any limit breaches to the Group Credit Risk Committee.

The tables that follow provide an analysis of the quality of financial assets that are neither past due nor impaired at the reporting date and are exposed to credit risk. For those financial assets with credit ratings assigned by external rating agencies, classification is within the range of AAA to BBB. AAA is the highest possible rating and rated financial assets that fall outside the range of AAA to BBB have been classified as below BBB with rules followed for determining the credit rating to be disclosed when different credit ratings are assigned by different external rating agencies. For those financial assets that do not have credit ratings assigned by external rating agencies but where the Group has assigned internal ratings for use in managing and monitoring credit risk, the assets have been classified in the analysis that follows as 'internally rated', with the exception of Canada's loans secured by mortgages. These mortgages have been analysed in the table based on the internal ratings assigned to them. If a financial asset is neither rated by an external agency nor 'internally rated', it is classified as 'not rated'. The total amounts presented represent the Group's maximum exposure to credit risk at the reporting date without taking into account any collateral held. The analysis also provides information on the concentration of credit risk.

(c)(i)    Credit exposure

Assets are deemed to be past due when a counterparty has failed to make a payment when contractually due.

The objective evidence that is taken into account in determining whether any impairment of debt securities has occurred includes:

·   A default against the terms of the instrument has occurred

·   The issuer is subject to bankruptcy proceedings or is seeking protection from creditors through bankruptcy, individual voluntary arrangements or similar process.

For Canada, the objective evidence that is taken into account in determining whether any impairment of loans has occurred includes:

·   Loans to customers that are contractually 90 days in arrears with uncertainty as to collectability or asset not well secured

·   Reasonable doubt as to collectability of full amount of principal and interest

·   A significant decline in the value of a security underlying a mortgage unless reasonably assumed that mortgage terms and conditions will be met.

The tables below show the shareholder and participating businesses' exposure to credit risk from financial assets analysed by credit rating and country.

Shareholder business

An analysis of financial assets by credit rating is as follows:

	Loans to associates and joint ventures		Reinsurance assets		Loans		Derivative financial assets		Debt Securities		Receivables and other  financial assets		Cash and cash equivalents		Total
	2013	2012	2013	2012	2013	2012	2013	2012	2013	2012	2013	2012	2013	2012	2013	2012
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Neither past due nor impaired:
AAA	-	-	-	-	1,867	1,950	-	-	1,139	1,867	-	-	31	78	3,037	3,895
AA	-	-	25	7	568	690	16	27	2,707	2,627	-	-	307	438	3,623	3,789
A	-	-	155	144	33	137	80	36	6,219	6,318	-	-	554	1,017	7,041	7,652
BBB	-	-	-	-	-	20	14	-	1,282	1,055	-	-	49	4	1,345	1,079
Below BBB	-	-	-	-	41	11	-	-	20	89	-	-	-	-	61	100
Not rated	17	16	-	19	21	23	1	-	93	164	453	496	12	-	597	718
Internally rated	-	-	2	5	-	-	-	-	356	303	-	-	-	-	358	308
Past due	-	-	-	-	-	-	-	-	-	-	16	19	-	-	16	19
Impaired	-	-	-	-	19	24	-	-	-	-	-	-	-	-	19	24
Total	17	16	182	175	2,549	2,855	111	63	11,816	12,423	469	515	953	1,537	16,097	17,584

At 31 December 2013, receivables and other financial assets of £16m (2012: £19m) were past due by less than three months.

Shareholder exposure to loans of £2,549m (2012: £2,855m) primarily comprises the Canadian non-segregated funds commercial mortgage book. This mortgage book is deemed to be of very high quality. The Canadian mortgage book has an average loan to value of 39% (2012: 39%).

41.  Risk management continued

(c)     Credit risk continued 

(c)(i)    Credit exposure continued

An analysis of debt securities by country is as follows:

	Government, Provincial and Municipal1		Banks		Other financial institutions		Other corporate		Other2		Total
	2013	2012	2013	2012	2013	2012	2013	2012	2013	2012	2013	2012
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
UK	360	302	507	607	889	844	955	743	69	74	2,780	2,570
Canada	2,463	3,441	354	179	265	290	1,929	2,211	-	-	5,011	6,121
Australia	-	-	108	85	17	6	4	9	-	-	129	100
Austria	20	-	-	-	-	-	-	-	-	-	20	-
Belgium	-	-	27	53	-	-	10	1	-	-	37	54
Denmark	-	-	4	5	-	-	15	6	-	-	19	11
Finland	-	-	45	-	-	-	-	1	-	-	45	1
France	22	-	236	228	-	4	432	402	-	-	690	634
Germany	302	315	84	114	1	22	328	208	-	-	715	659
Greece	-	-	-	-	-	-	-	-	-	-	-	-
Ireland	-	-	-	-	3	10	-	2	-	-	3	12
Italy	-	-	34	33	-	2	71	52	-	-	105	87
Japan	-	2	110	70	30	18	29	21	-	-	169	111
Mexico	-	1	-	-	-	-	82	77	-	-	82	78
Netherlands	-	-	398	286	-	1	14	154	-	-	412	441
Norway	-	1	-	21	-	-	37	39	-	-	37	61
Portugal	-	-	-	-	-	-	-	-	-	-	-	-
Spain	-	-	9	9	-	-	39	39	-	-	48	48
Sweden	-	1	26	58	1	-	59	60	-	-	86	119
Switzerland	-	-	54	78	-	11	22	13	-	-	76	102
US	12	12	229	173	456	424	314	364	-	-	1,011	973
Other	-	7	125	43	5	2	10	26	201	163	341	241
Total	3,179	4,082	2,350	2,042	1,667	1,634	4,350	4,428	270	237	11,816	12,423

¹    Government, Provincial and Municipal includes debt securities which are issued by or explicitly guaranteed by the national government. For Canada, this includes debt securities which are issued by or explicitly guaranteed by the Crown Corporations of the Government of Canada.

²    This balance primarily consists of securities held in supranationals. 

The shareholder exposure to Canadian debt securities predominately reflects assets held in the shareholder business in Canada.

Participating business

An analysis of financial assets by credit rating is as follows:

	Reinsurance assets		Loans		Derivative financial assets		Debt Securities		Receivables and other financial assets		Cash and cash equivalents		Total
	2013	2012	2013	2012	2013	2012	2013	2012	2013	2012	2013	2012	2013	2012
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Neither past due              nor impaired:
AAA	-	-	-	-	-	-	2,655	18,601	-	-	18	-	2,673	18,601
AA	5,895	6,665	-	-	96	16	14,466	3,945	-	-	261	498	20,718	11,124
A	88	60	-	-	341	683	3,966	4,701	-	-	715	989	5,110	6,433
BBB	-	-	-	-	25	-	1,605	1,528	-	-	33	-	1,663	1,528
Below BBB	-	-	-	-	-	-	473	693	-	-	-	-	473	693
Not rated	-	-	199	226	190	407	297	346	80	481	1	7	767	1,467
Internally rated	8	12	-	-	-	-	110	183	-	-	-	-	118	195
Past due	-	-	-	-	-	-	-	-	14	15	-	-	14	15
Impaired	-	-	-	-	-	-	6	8	-	-	-	-	6	8
Total	5,991	6,737	199	226	652	1,106	23,578	30,005	94	496	1,028	1,494	31,542	40,064

At 31 December 2013, based on the credit ratings assigned by two major external rating agencies, holdings in UK government debt have been classified as AA. These holdings were previously classified as AAA.

At 31 December 2013, receivables and other financial assets of £14m (2012: £15m) were past due by less than three months.

Not rated loans of £199m (2012: £226m) relate to very high quality mortgages in UK and Europe and Canada.

The shareholders' exposure to credit risk arising from investments held in the HWPF and other with profits funds is similar in principle to that described for market risk exposures in Section (b). As at 31 December 2013, the financial assets of the HWPF include £5,589m (2012: £6,136m) of assets (primarily debt securities) deposited back under the terms of an external annuity reinsurance transaction, the transaction having been structured in this manner specifically to mitigate credit risks associated with default of the reinsurer. Any credit losses and defaults within the portfolio of assets are borne by the external reinsurer.

An analysis of debt securities by country is as follows:

	Government, Provincial and Municipal1		Banks		Other financial institutions		Other corporate		Other2		Total
	2013	2012	2013	2012	2013	2012	2013	2012	2013	2012	2013	2012
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
UK	11,721	13,401	938	1,167	2,252	3,149	1,644	1,082	1	-	16,556	18,799
Canada	321	396	80	23	50	49	58	59	-	-	509	527
Australia	-	1	160	180	62	95	19	21	-	-	241	297
Austria	-	364	27	27	-	-	-	3	-	-	27	394
Belgium	1	286	15	24	-	68	21	21	-	-	37	399
Denmark	-	6	17	33	-	-	30	58	-	-	47	97
Finland	-	203	103	45	25	25	6	13	-	-	134	286
France	300	1,287	260	324	150	257	314	435	-	-	1,024	2,303
Germany	1,484	1,988	275	356	153	126	202	221	-	-	2,114	2,691
Greece	-	-	-	-	-	-	-	4	-	-	-	4
Ireland	-	-	10	5	11	56	15	13	-	-	36	74
Italy	4	2	17	74	69	42	128	89	-	-	218	207
Japan	11	33	210	32	-	1	11	-	-	-	232	66
Mexico	-	-	-	-	-	-	56	61	-	-	56	61
Netherlands	-	474	212	398	40	223	29	42	-	-	281	1,137
Norway	-	142	67	133	12	14	58	63	-	-	137	352
Portugal	-	-	-	-	-	-	-	1	-	-	-	1
Spain	-	5	24	24	-	6	82	82	-	-	106	117
Sweden	4	68	125	189	16	11	18	31	-	-	163	299
Switzerland	-	-	10	19	47	29	52	12	-	-	109	60
US	-	5	326	318	283	437	355	310	-	-	964	1,070
Other	26	-	74	62	171	252	73	206	243	244	587	764
Total	13,872	18,661	2,950	3,433	3,341	4,840	3,171	2,827	244	244	23,578	30,005

¹    Government, Provincial and Municipal includes debt securities which are issued by or explicitly guaranteed by the national government. For Canada, this includes debt securities which are issued by or explicitly guaranteed by the Crown Corporations of the Government of Canada.

²    This balance primarily consists of securities held in supranationals. 

(c)(ii)   Credit spreads

As at 31 December 2013, it is expected that an adverse movement in credit spreads of 50 basis points, with no change to default allowance, would result in a reduction to profit for the year of £28m (2012: £22m). A further reduction of £56m (2012: £61m) would arise as a result of a change in assumed default rates of 12.5 basis points per annum (25% of the spread change).

41.    Risk management continued

(c)       Credit risk continued

(c)(iii)   Collateral accepted and pledged in respect of financial instruments

Collateral in respect of derivative financial instruments is accepted from and provided to certain market counterparties to mitigate counterparty risk in the event of default. The use of collateral in respect of derivative financial instruments is governed by formal bilateral agreements between the parties. The amount of collateral required by either party is calculated daily, based on the value of derivative transactions in accordance with these agreements and collateral is moved on a daily basis to ensure there is full collateralisation. Any collateral moved under the terms of these agreements is transferred outright. With regard to either collateral pledged or accepted, the Group may request the return of, or be required to return, collateral to the extent it differs from that required under the daily margin calculations. Furthermore, alternative collateral such as securities may be provided if acceptable to both parties.

Where there is an event of default under the terms of the agreements, any collateral balances will be included in the close-out calculation of net counterparty exposure. At 2013, the Group had pledged £28m (2012: £8m) of cash and £21m (2012: £110m) of securities as collateral for derivative financial liabilities. At 31 December 2013, the Group had accepted £711m (2012: £811m) of cash and £189m (2012: £504m) of securities as collateral. None of the securities were sold or repledged at the year end.  

(c)(iv)   Offsetting financial assets and liabilities

The Group does not offset financial assets and liabilities on the consolidated statement of financial position, as there are no unconditional rights to set off. Consequently, the gross amount of financial instruments presented on the consolidated statement of financial position is the net amount. The Group's over-the-counter (OTC) derivatives are all subject to an International Swaps and Derivative Association (ISDA) master agreement, which provide a right of set off that is enforceable only in the event of default, insolvency, or bankruptcy. An ISDA master agreement is considered a master netting agreement.

As noted in section (f), the Group also enters into securities lending arrangements. These arrangements are governed by an enforceable Securities Lending Agency Agreement which is considered to be a similar arrangement to a master netting agreement.

The Group does not hold any other financial instruments which are subject to master netting agreements or similar arrangements. The following table presents the effect of master netting agreements and similar arrangements.

		Related amounts not offset on the consolidated statement of financial position
	Gross amounts of financial instruments as presented on the consolidated statement of financial position	Financial instruments	Financial collateral pledged (received)	Net position
As at 31 December 2013	£m	£m	£m	£m
Financial assets
Derivatives1	1,226	(397)	(736)	93
Securities lending	146	-	(146)	-
Total financial assets	1,372	(397)	(882)	93
Financial liabilities
Derivatives1	(428)	397	29	(2)
Total financial liabilities	(428)	397	29	(2)

¹    Only OTC derivatives subject to master netting agreements have been included above.

		Related amounts not offset on the consolidated statement of financial position
	Gross amounts of financial instruments as presented on the consolidated statement of financial position	Financial instruments	Financial collateral pledged (received)	Net position
As at 31 December 2012	£m	£m	£m	£m
Financial assets
Derivatives1	1,537	(646)	(866)	25
Securities lending	400	-	(400)	-
Total financial assets	1,937	(646)	(1,266)	25
Financial liabilities
Derivatives1	(726)	646	58	(22)
Total financial liabilities	(726)	646	58	(22)

¹    Only OTC derivatives subject to master netting agreements have been included above.

(c)(v)   Credit risk on loans and receivables and financial liabilities designated as at fair value through profit or loss

(c)(v)(i) Loans and receivables

The Group holds a portfolio of financial instruments which meet the definition of loans and receivables under IAS 39 Financial Instruments: Recognition and Measurement and on initial recognition were designated as at FVTPL. These instruments are included in debt securities on the consolidated statement of financial position. The Group's exposure to such financial instruments at 31 December 2013 was £193m (2012: £214m) of which £144m related to participating business (2012: £159m) and £49m related to shareholder business (2012: £55m). The fair value of these loans and receivables is calculated using a valuation technique which refers to the current fair value of other similar financial instruments in addition to other unobservable market data. During the year, fair value gains of £11m (2012: £8m) in relation to these loans and receivables were recognised in the consolidated income statement. The amount of this movement that is attributable to changes in the credit risk of these instruments was a gain of £8m (2012: £7m).

As described in Section (b), the Group risk management framework defines market risk as the risk that arises from the Group's exposure to market movements, which could result in the income, or value of financial assets and liabilities, or the cash flows relating to these, fluctuating by differing amounts. The movement in the fair value of loans and receivables incorporates both movements arising from credit risk and resulting from changes in market conditions. 

(c)(v)(ii)  Financial liabilities designated at FVTPL

The Group has designated unit linked non-participating investment contract liabilities as at FVTPL. As the fair value of the liability is based on the value of the underlying portfolio of assets, the movement, during the period and cumulatively, in the fair value of the unit linked non-participating investment contract liabilities, is only attributable to market risk.

(d)      Demographic and expense risk

As described in the table on pages 178 to 179, the shareholder is directly exposed to demographic and expense risk from shareholder business and participating business and, as a result, quantitative demographic and expense risk disclosures are provided in respect of these categories.

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

·   Historic experience of relevant demographic and expense risks

·   The potential for future experience to differ from that expected or observed historically

·   The financial impact of variances in expectations

·   Other factors relevant to their specific markets, for example obligations to treat customers fairly.

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

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

The main elements of demographic and expense risk that give rise to the exposure are discussed below.

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

Longevity

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

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

Morbidity

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

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

Mortality

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

41.    Risk management continued

(d)      Demographic and expense risk continued

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

(d)(i)(ii)  Other financial risks

Persistency - withdrawals and lapse rates

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

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

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

Expenses

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

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

(d)(ii)   Sensitivity to demographic and expenses risk analysis

Recognition of profit after tax and the measurement of equity are dependent on the methodology and key assumptions used to determine the Group's insurance and investment contract liabilities, as described in Note 3.

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

(Decrease)/increase in profit after tax and equity	Longevity		Expenses		Persistency		Morbidity/ mortality
	+5%	-5%	+10%	-10%	+10%	-10%	+5%	-5%
2013	£m	£m	£m	£m	£m	£m	£m	£m
Shareholder business
UK and Europe
Reinsurance assets	-	-	-	-	-	-	1	(1)
Non-participating insurance contract liabilities	(99)	93	(7)	8	-	-	(1)	1
Canada
Non-participating insurance contract liabilities	(45)	41	(13)	13	12	(11)	(17)	18
Non-participating investment contract liabilities	-	-	-	-	-	-	-	-
Asia and Emerging Markets
Deferred acquisition costs	-	-	-	-	(3)	3	-	-
Non-participating insurance contract liabilities	-	-	-	-	-	-	-	-
Non-participating investment contract liabilities	-	-	-	-	-	-	-	-
Total shareholder business	(144)	134	(20)	21	9	(8)	(17)	18
Participating business
UK and Europe
Recourse cash flows	(16)	15	(5)	4	1	(1)	(4)	4
Total participating business	(16)	15	(5)	4	1	(1)	(4)	4
Total	(160)	149	(25)	25	10	(9)	(21)	22

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

(Decrease)/increase in profit after tax and equity	Longevity		Expenses		Persistency		Morbidity/ mortality
	+5%	-5%	+10%	-10%	+10%	-10%	+5%	-5%
2012	£m	£m	£m	£m	£m	£m	£m	£m
Shareholder business
UK and Europe
Reinsurance assets	-	-	-	-	-	-	1	(1)
Non-participating insurance contract liabilities	(100)	94	(6)	6	-	-	-	-
Canada
Non-participating insurance contract liabilities	(55)	51	(13)	13	15	(14)	(2)	2
Non-participating investment contract liabilities	-	-	-	-	-	-	-	-
Asia and Emerging Markets
Deferred acquisitions costs	-	-	-	-	-	-	-	-
Non-participating insurance contract liabilities	-	-	-	-	-	-	-	-
Non-participating investment contract liabilities	-	-	-	-	(2)	2	-	-
Total shareholder business	(155)	145	(19)	19	13	(12)	(1)	1
Participating business
UK and Europe
Recourse cash flows	(19)	18	(10)	9	2	(2)	(5)	5
Total participating business	(19)	18	(10)	9	2	(2)	(5)	5
Total	(174)	163	(29)	28	15	(14)	(6)	6

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

For the participating business, the tables above illustrate the impact of demographic and expense risk on the recourse cash flows from the HWPF, which have been determined in accordance with the Scheme and take into account the need to consider the impact of risk on the financial position of the HWPF before any recourse cash flows can be transferred to the SHF. The terms of the Scheme provide for the retention of recourse cash flows under certain circumstances to support the financial position of the HWPF. Refer to Section (b)(ii).

The shareholder business of UK and Europe currently bears longevity risk both on contracts written in the PBF and on contracts written in the HWPF for which the longevity risk has been transferred to the PBF.

Limitations

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

41.  Risk managementcontinued

(e)     Liquidity risk

As described in the table on pages 178 to 179, the shareholder is exposed to liquidity risk from shareholder business, participating business and unit linked and segregated funds and, as a result, the following quantitative liquidity risk disclosures are provided in respect of the financial liabilities of these categories.

The shareholder is not exposed to the liquidity risk from the assets held by third parties in consolidated funds and non-controlling interests and therefore these have been excluded from the following quantitative disclosures.

Business units employ risk management techniques relevant to their product types with the objective of mitigating exposures to liquidity risk. For annuity, with profits, and unit linked business, liquidity risk is primarily managed by holding a range of diversified instruments which are assessed against estimated cash flow and funding requirements.

For annuity contracts, assets are held which are specifically chosen with the intention of matching the expected timing of annuity payments. Business units actively manage and monitor the performance of these assets against liability benchmarks and liquidity risk is minimised through the process of planned asset and liability matching. The Group's assets are analysed in Section (b)(i) and Section (c)(i) of this Note. For UK and Europe, the reinsurance treaty between the Group and Canada Life International Re provides for the cash settlement of amounts owed by Canada Life International Re.

For with profits contracts, a portfolio of assets is maintained in the relevant funds appropriate to the nature and term of the expected pattern of payments of liabilities. Within that portfolio, liquidity is provided by substantial holdings of cash and highly liquid assets (principally government bonds).

Where it is necessary to sell less liquid assets within the relevant portfolios, then any incurred losses are generally passed onto policyholders in accordance with policyholders' reasonable expectations. Such losses are managed and mitigated through actively anticipating net disinvestment based on policyholder behaviour and seeking to execute sales of underlying assets in such a way that the cost to policyholders is minimised.

For non-participating unit linked contracts, a core portfolio of assets is maintained and invested in accordance with the mandates of the relevant unit linked funds. Policyholder behaviour and the trading position of asset classes are actively monitored. The unit price and value of any associated contracts would reflect the proceeds of any sales of assets. If considered necessary, deferral terms within the policy conditions applying to the majority of the Group's contracts are invoked. As at 31 December 2013 and 31 December 2012, none of the funds under management were subject to deferral.

Business units undertake periodic investigations into liquidity requirements, which include consideration of cash flows in normal conditions, as well as investigation of scenarios where cash flows differ markedly from those expected (primarily due to extreme policyholder behaviour).

All business units are required to monitor, assess, manage and control liquidity risk in accordance with the relevant principles within the Group's policy framework. Oversight is provided both at a Group level and within the business unit. In addition, all business units benefit from membership of a larger Group to the extent that, centrally, the Group:

·   coordinates strategic planning and funding requirements

·   monitors, assesses and oversees the investment of assets within the Group

·   monitors and manages risk, capital requirements and available capital on a group-wide basis

·   maintains a portfolio of committed bank facilities

·   maintains a Euro Medium Term Note Programme.

The Group's committed bank facilities are currently undrawn and there is no outstanding senior debt issued under the Euro Medium Term Note Programme.

Each business unit is responsible for the definition and management of its contingency funding plan.

Liquidity risk is managed by each business unit in consultation with the Group Capital Management function, which incorporates treasury management.

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

(e)(i)   Maturity analysis

The tables that follow present the expected timing of the cash flows payable on the amounts recognised on the consolidated statement of financial position for the participating and non-participating contract liabilities of the Group as at the reporting date. To align with the risk management approach towards liquidity risk and existing management projections, the analysis that follows facilitates consideration of the settlement obligations of both insurance and investment contracts.

	Within 1 year	2-5 years	6-10 years	11-15 years	16-20 years	Greater than 20 years	No defined maturity	Total
2013	£m	£m	£m	£m	£m	£m	£m	£m
Shareholder business
Non-participating insurance contract liabilities	550	1,629	1,651	1,274	959	3,109	-	9,172
Non-participating investment contract liabilities	696	1,185	283	74	52	102	-	2,392
Reinsurance liabilities	-	(1)	3	9	13	292	-	316
Total shareholder business	1,246	2,813	1,937	1,357	1,024	3,503	-	11,880
Participating business
Non-participating insurance contract liabilities	811	2,852	2,754	1,908	1,197	1,602	-	11,124
Participating insurance contract liabilities	1,713	5,715	2,538	1,531	1,409	2,154	-	15,060
Participating investment contract liabilities	559	2,344	3,077	3,110	2,547	3,070	-	14,707
Unallocated divisible surplus	-	-	-	-	-	-	680	680
Total participating business	3,083	10,911	8,369	6,549	5,153	6,826	680	41,571
Unit linked and segregated funds
Non-participating insurance contract liabilities	4,161	1,573	1,284	535	226	237	-	8,016
Non-participating investment contract liabilities	7,958	26,518	23,871	15,638	9,500	11,782	-	95,267
Total unit linked and segregated funds	12,119	28,091	25,155	16,173	9,726	12,019	-	103,283
Total	16,448	41,815	35,461	24,079	15,903	22,348	680	156,734

	Within 1 year	2-5 years	6-10 years	11-15 years	16-20 years	Greater than 20 years	No defined maturity	Total
2012	£m	£m	£m	£m	£m	£m	£m	£m
Shareholder business
Non-participating insurance contract liabilities	507	1,681	1,697	1,316	1,020	3,886	-	10,107
Non-participating investment contract liabilities	633	1,479	304	74	45	65	-	2,600
Reinsurance liabilities	(1)	(2)	2	7	14	361	-	381
Total shareholder business	1,139	3,158	2,003	1,397	1,079	4,312	-	13,088
Participating business
Non-participating insurance contract liabilities	833	2,965	2,961	2,144	1,398	1,932	-	12,233
Participating insurance contract liabilities	2,282	6,020	2,602	1,481	1,304	2,230	-	15,919
Participating investment contract liabilities	536	2,315	3,148	3,185	2,569	3,240	-	14,993
Unallocated divisible surplus	-	-	-	-	-	-	706	706
Total participating business	3,651	11,300	8,711	6,810	5,271	7,402	706	43,851
Unit linked and segregated funds
Non-participating insurance contract liabilities	3,463	1,387	1,112	443	163	142	-	6,710
Non-participating investment contract liabilities	7,022	22,422	20,164	13,267	8,152	10,574	-	81,601
Total unit linked and segregated funds	10,485	23,809	21,276	13,710	8,315	10,716	-	88,311
Total	15,275	38,267	31,990	21,917	14,665	22,430	706	145,250

41.  Risk managementcontinued

(e)     Liquidity risk continued

(e)(i)   Maturity analysis continued

The analysis that follows presents the undiscounted cash flows payable by remaining contractual maturity at the reporting date for all financial liabilities, including non-participating investment contract liabilities. Given that policyholders can usually choose to surrender, in part or in full, their unit linked contracts at any time, the non-participating investment contract unit linked liabilities of UK and Europe life and pensions business and segregated funds business in Canada presented in the table below have been designated as payable within one year. Such surrenders would be matched in practice, if necessary, by sales of underlying assets. The Group can delay settling liabilities to unit linked policyholders to ensure fairness between those remaining in the fund and those leaving the fund. The length of any such delay is dependent on the underlying financial assets. In this analysis, the maturity within one year includes liabilities that are repayable on demand.

	Within 1 year		2-5 years		6-10 years		11-15 years		16-20 years		Greater than 20 years		Total
	2013	2012	2013	2012	2013	2012	2013	2012	2013	2012	2013	2012	2013	2012
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Shareholder business
Non-participating investment contract liabilities	1,666	1,654	482	710	291	341	87	84	62	52	117	74	2,705	2,915
Subordinated liabilities	106	106	397	408	685	712	408	401	278	288	757	785	2,631	2,700
Borrowings	47	18	11	13	-	-	-	-	-	-	-	-	58	31
Other financial liabilities	781	702	34	68	25	18	17	10	12	7	23	34	892	839
Total shareholder business	2,600	2,480	924	1,199	1,001	1,071	512	495	352	347	897	893	6,286	6,485
Participating business
Borrowings	10	9	-	-	-	-	-	-	-	-	-	-	10	9
Other financial liabilities	625	836	7	13	7	13	7	7	7	6	121	102	774	977
Total participating business	635	845	7	13	7	13	7	7	7	6	121	102	784	986
Unit linked and segregated funds
Non-participating investment contract liabilities	95,267	81,601	-	-	-	-	-	-	-	-	-	-	95,267	81,601
Borrowings	16	17	9	21	3	6	-	-	-	-	-	-	28	44
Other financial liabilities	558	368	13	24	17	24	6	11	6	11	74	182	674	620
Total unit linked and segregated funds	95,841	81,986	22	45	20	30	6	11	6	11	74	182	95,969	82,265
Total	99,076	85,311	953	1,257	1,028	1,114	525	513	365	364	1,092	1,177	103,039	89,736

The principal amounts of financial liabilities where the counterparty has no right to repayment are excluded from the above analysis along with interest payments on such instruments after 20 years. Also excluded are deposits received from reinsurers.

Deposits received from reinsurers reflect the liability to repay the deposit received from an external reinsurer under the reinsurance transaction referred to in Section (c). The timing and amount of the payment of the cash flows under this liability are defined by the terms of the treaty, under which there is no defined contractual maturity date to repay the deposit as at 31 December 2013 or 31 December 2012.

Refer to Note 23 for the maturity profile of undiscounted cash flows of derivative financial instruments.

The Group also had unrecognised commitments in respect of financial instruments as at 31 December 2013 of £377m and £nil with a contractual maturity of within one year and between one and five years respectively (2012: £317m and £1m).

(f)      Securities lending arrangements

The Group enters into securities lending arrangements as part of normal operating activities. Assets are pledged by third parties as collateral to support this activity. Collateral held by the Group in respect of securities lending agreements at the reporting date was £153m (2012: £420m) of securities. The fair value of the loaned securities is monitored on a daily basis with additional collateral obtained or refunded as the fair value fluctuates. The Group does not have the right to sell or repledge the collateral.

The loaned securities continue to be recognised on the consolidated statement of financial position and valued in accordance with the relevant Group accounting policy. All rights to income and gains or losses in respect of these assets remain with the Group.

Assets on loan are as follows:

	2013	2012
	£m	£m
Domestic government	146	399
International fixed income	-	1
Total assets on loan	146	400

(g)     Operational risk

The Group defines operational risk as the risk of loss, or adverse consequences for the Group's business, resulting from inadequate or failed internal processes, people or systems, or from external events. This includes conduct risk which is defined asthe risk that through our culture, strategies, decision-making and behaviours we do not deliver good outcomes for our customers.

The policy framework, which includes the Group operational risk policy and the Group conduct risk policy, is used to support the management of operational and conduct risks. Business units adopt the relevant minimum standards and limits contained within these policies and are required to manage risk in accordance with the policies, taking mitigating action as appropriate to operate within appetites.

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

·   Fraud or irregularities

·   Regulatory or legal

·   Customer treatment

·   Business interruption

·   Supplier failure

·   Planning

·   Process execution

·   People.

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

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

·   The potential cause and impact of the risk

·   The likelihood of the risk being realised in the absence of any controls

·   The ease with which the risk could be insured against

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

·   Operational risk appetite.

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

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

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

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

Strategic risk

The Group defines strategic risk as the risk associated with the robustness of the strategic planning process and the threats to the achievement of the strategy. Strategic risks are considered across the Group through the business planning process. The strategic risks to which the Group is exposed are quantified in terms of profitability and severity and are reviewed on a regular basis. 

42.  Fair value of assets and liabilities

(a)     Determination of fair value hierarchy

To provide further information on the approach used to determine and measure the fair value of certain assets and liabilities, the following fair value hierarchy categorisation has been used:

Level 1   Fair values measured using quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2   Fair values measured using inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

Level 3   Fair values measured using inputs that are not based on observable market data (unobservable inputs).

(b)     Financial investments and financial liabilities

An analysis of the Group's financial investments and financial liabilities in accordance with the categories of financial instrument set out in IAS 39 Financial Instruments: Recognition and Measurement is presented in Notes 21 and 34 and includes those financial assets and liabilities held at fair value.

(c)     Non-financial investments

An analysis of the Group's investment property and owner occupied property within property, plant and equipment in accordance with IAS 40 - Investment property and IAS 16 - Property, plant and equipment is presented in Notes 18 and 19 respectively and includes those assets held at fair value.

(d)     Methods and assumptions used to determine fair value of assets and liabilities

Information on the methods and assumptions used to determine fair values for each major category of instrument measured at fair value is given below.

Investment property - 2013:£8,545m (2012: £8,565m), Investment property held for sale - 2013:£92m (2012: £nil) and owner occupied property - 2013:£172m (2012: £112m),

The fair value of investment property and all owner occupied property is valued by external property valuation experts. The current use is considered the best indicator of the highest and best use of the Group's property from a market participants' perspective. No adjustment has been made for vacant possession for the Group's owner occupied property at 31 December 2013.

In UK and Europe valuations are completed in accordance with the Royal Institution of Chartered Surveyors (RICS) valuation standards and predominantly an income capitalisation method is used. In Canada all valuations are completed in accordance with International Valuation Standards (IVS) and predominantly a discounted cash flow method is used. Both valuation techniques are income approaches as they consider the income that an asset will generate over its useful life and estimate fair value through a capitalisation process. Capitalisation involves the conversion of income into a capital sum through the application of an appropriate discount rate.

The determination of the fair value of investment property and all owner occupied property requires the use of estimates such as future cash flows from the assets for example, future rental income and discount rates applicable to those assets.

Where it is not possible to use an income approach a market approach will be used whereby comparisons are made to recent transactions with similar characteristics and locations to those of the Group's assets. Where appropriate, adjustments will be made by the valuer to reflect any differences.

Where an income approach, or a market approach with significant unobservable adjustments, has been used, valuations are predominantly based on unobservable inputs and accordingly these assets are categorised as level 3 within the fair value hierarchy. Where a market approach valuation does not include significant unobservable adjustments, these assets are categorised as level 2.

Derivative financial assets - 2013: £1,767m (2012: £2,150m) and derivative financial liabilities - 2013: £795m (2012: £853m)

The majority of the Group's derivatives are over-the-counter (OTC) derivatives which are fair valued using valuation techniques based on observable market data and are therefore categorised as level 2 investments within the fair value hierarchy.

Exchange traded derivatives are valued using prices sourced from the relevant exchange. They are considered to be instruments quoted in an active market and are therefore categorised as level 1 instruments within the fair value hierarchy.

Non-performance risk arising from the credit risk of each counterparty has been considered on a net exposure basis in line with the Group's risk management policies. At 31 December 2013 the residual credit risk is considered immaterial and therefore no credit risk adjustment has been made.

Equity securities and interests in pooled investment funds - 2013: £90,316m (2012: £65,812m) and amounts seeded into funds - 2013: £29m (2012:£nil)

Equity instruments listed on a recognised exchange are valued using prices sourced from the primary exchange on which they are listed. These instruments are generally considered to be quoted in an active market and are therefore categorised as level 1 instruments within the fair value hierarchy.

Unlisted equities are valued using an adjusted net asset value. The Group's exposure to unlisted equity securities primarily relates to private equity investments. The majority of the Group's private equity investments are carried out through European fund of funds structures, where the Group receives valuations from the investment managers of the underlying funds.

The valuations received from investment managers of the underlying funds are reviewed and where appropriate adjustments are made to reflect the impact of changes in market conditions between the date of the valuation and the end of the reporting period. The valuation of these securities is largely based on inputs that are not based on observable market data, and accordingly these instruments are categorised as level 3 instruments within the fair value hierarchy. Where appropriate, reference is made to observable market data.

Where pooled investment funds have been seeded and the investments in the fund have been classified as held for sale, the costs to sell are assumed to be negligible. The fair value of pooled investment funds held for sale is calculated as equal to the observable unit price.

Debt securities - 2013: £62,039m (2012: £73,301m)

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

·   Government, including provincial and municipal, and supranational institution bonds
These instruments are valued using prices received from external pricing providers who generally base the price on quotes received from a number of market participants. They are categorised as level 1 or level 2 instruments within the fair value hierarchy depending upon the nature of the underlying pricing information used for valuation purposes.

·   Corporate bonds listed or quoted in an established over-the-counter market including asset backed securities
These instruments are generally valued using prices received from external pricing providers who generally consolidate quotes received from a panel of banks into a composite price. As the market becomes less active the quotes provided by some banks may be based on modelled prices rather than on actual transactions. These sources are based largely on observable market data, and therefore these instruments are categorised as level 2 instruments within the fair value hierarchy. When prices received from external pricing providers are based on a single broker indicative quote the instruments are categorised as level 3 instruments.

For instruments for which prices are either not available from external pricing providers or the prices provided are considered to be stale, the Group performs its own assessment of the fair value of these instruments. This assessment is largely based on inputs that are not based on observable market data, principally single broker indicative quotes, and accordingly these instruments are categorised as level 3 instruments within the fair value hierarchy.

·   Other corporate bonds including unquoted bonds, commercial paper and certificates of deposit
These instruments are valued using models. For unquoted bonds the model uses inputs from comparable bonds and includes credit spreads which are obtained from brokers or estimated internally. Commercial paper and certificates of deposit are valued using standard valuation formulas. The categorisation of these instruments within the fair value hierarchy will be either level 2 or 3 depending upon the nature of the underlying pricing information used for valuation purposes.

Non-participating investment contract liabilities - 2013: £95,267m (2012; £81,601m)

The fair value of the non-participating investment contract liabilities is calculated equal to the fair value of the underlying assets and liabilities in the funds. Thus, the value of these liabilities is dependent on the methods and assumptions set out above in relation to the underlying assets and liabilities in which these funds are invested. The underlying assets and liabilities are predominately categorised as level 1 or 2 and as such, the inputs into the valuation of the liabilities are observable. Therefore, the liabilities are categorised within level 2 of the fair value hierarchy.

Liabilities in respect of third party interest in consolidated funds - 2013: £11,803m (2012: £12,037m)

The fair value of liabilities in respect of third party interest in consolidated funds is calculated equal to the fair value of the underlying assets and liabilities in the funds. Thus, the value of these liabilities is dependent on the methods and assumptions set out above in relation to the underlying assets in which these funds are invested. When the underlying assets and liabilities are valued using readily available market information the liabilities in respect of third party interest in consolidated funds are treated as level 2. Where the underlying assets and liabilities are not valued using readily available market information the liabilities in respect of third party interest in consolidated funds are treated as level 3.

Contingent consideration - 2013: £15m (2012: £nil)

Contingent consideration has been recognised as a result of business combinations in the year as discussed in Note 1 - Business combinations, and has been valued using a valuation model. The inputs into the model include unobservable inputs due to assumptions made regarding expected movements in assets under management and therefore the liability is classified as level 3 in the fair value hierarchy.

42.  Fair value of assets and liabilities continued

(d)     Methods and assumptions used to determine fair value of assets and liabilities continued 

(d)(i)   Fair value hierarchy for assets measured at fair value in the statement of financial position

The table below presents the Group's assets measured at fair value by level of the fair value hierarchy.

	Level 1		Level 2			Level 3		Total
	2013	2012		2013	2012	2013	2012		2013	2012
	£m	£m		£m	£m	£m	£m		£m	£m
Investment property	-	-		14	47	8,531	8,518		8,545	8,565
Owner occupied property	-	-		1	1	171	111		172	112
Derivative financial assets	541	613		1,226	1,537	-	-		1,767	2,150
Equity securities and interests in pooled investment vehicles	89,241	64,653		2	3	1,073	1,156		90,316	65,812
Debt securities	19,305	25,277		41,454	46,621	1,280	1,403		62,039	73,301
Assets held for sale	29	-		-	-	92	-		121	-
Total assets at fair value	109,116	90,543		42,697	48,209	11,147	11,188		162,960	149,940

There were no transfers between levels 1 and 2 during the year (2012: none). Refer to 42(d)(iii) for details of movements in level 3.

The table that follows presents an analysis of the Group's assets measured at fair value by level of the fair value hierarchy for each risk segment as set out in Note 41 - Risk management.

	Fair value hierarchy
	Level 1		Level 2		Level 3		Total
	2013	2012	2013	2012	2013	2012	2013	2012
	£m	£m	£m	£m	£m	£m	£m	£m
Shareholder business
Investment property	-	-	14	47	417	474	431	521
Owner occupied property	-	-	1	1	45	32	46	33
Derivative financial assets	1	-	110	63	-	-	111	63
Equity securities and interests in pooled investment vehicles	175	182	2	3	18	12	195	197
Debt securities	904	834	9,980	10,606	932	983	11,816	12,423
Assets held for sale	29	-	-	-	-	-	29	-
Total shareholder business	1,109	1,016	10,107	10,720	1,412	1,501	12,628	13,237
Participating business
Investment property	-	-	-	-	1,995	2,048	1,995	2,048
Owner occupied property	-	-	-	-	126	79	126	79
Derivative financial assets	206	415	446	691	-	-	652	1,106
Equity securities and interests in pooled investment vehicles	14,021	8,380	-	-	671	699	14,692	9,079
Debt securities	13,735	17,701	9,668	12,085	175	219	23,578	30,005
Assets held for sale	-	-	-	-	-	-	-	-
Total participating business	27,962	26,496	10,114	12,776	2,967	3,045	41,043	42,317
Unit linked and segregated funds
Investment property	-	-	-	-	4,829	4,701	4,829	4,701
Owner occupied property	-	-	-	-	-	-	-	-
Derivative financial assets	246	135	493	546	-	-	739	681
Equity securities and interests in pooled investment vehicles	69,904	52,942	-	-	51	77	69,955	53,019
Debt securities	4,498	6,062	18,288	18,567	158	194	22,944	24,823
Assets held for sale	-	-	-	-	59	-	59	-
Total unit linked and segregated funds	74,648	59,139	18,781	19,113	5,097	4,972	98,526	83,224
Third party interest in consolidated funds and non-controlling interests
Investment property	-	-	-	-	1,290	1,295	1,290	1,295
Owner occupied property	-	-	-	-	-	-	-	-
Derivative financial assets	88	63	177	237	-	-	265	300
Equity securities and interests in pooled investment vehicles	5,141	3,149	-	-	333	368	5,474	3,517
Debt securities	168	680	3,518	5,363	15	7	3,701	6,050
Assets held for sale	-	-	-	-	33	-	33	-
Third party interest in consolidated funds and non-controlling interests	5,397	3,892	3,695	5,600	1,671	1,670	10,763	11,162
Total	109,116	90,543	42,697	48,209	11,147	11,188	162,960	149,940

(d)(ii)  Fair value hierarchy for liabilities measured at fair value in the statement of financial position

The table below presents the Group's liabilities measured at fair value by level of the fair value hierarchy.

	Level 1		Level 2		Level 3		Total
	2013	2012	2013	2012	2013	2012	2013	2012
	£m	£m	£m	£m	£m	£m	£m	£m
Non-participating investment contract liabilities	-	-	95,267	81,601	-	-	95,267	81,601
Liabilities in respect of third party interest in consolidated funds1	-	-	10,557	10,832	1,246	1,205	11,803	12,037
Derivative financial liabilities	367	127	428	726	-	-	795	853
Contingent consideration	-	-	-	-	15	-	15	-
Total liabilities at fair value	367	127	106,252	93,159	1,261	1,205	107,880	94,491

¹      The comparative information has been restated to reflect the categorisation of third party interest in consolidated funds at level 3 rather than level 2.

There were no transfers between levels 1 and 2 during the period (2012: none). Refer to 42(d)(iii) for details of movements in level 3.

The table that follows presents an analysis of the Group's liabilities measured at fair value by level of the fair value hierarchy for each risk segment as set out in Note 41 - Risk management.

	Fair value hierarchy
	Level 1		Level 2		Level 3		Total
	2013	2012	2013	2012	2013	2012	2013	2012
	£m	£m	£m	£m	£m	£m	£m	£m
Shareholder business
Derivative financial liabilities	5	2	36	21	-	-	41	23
Contingent consideration	-	-	-	-	15	-	15	-
Total shareholder business	5	2	36	21	15	-	56	23
Participating business
Derivative financial liabilities	48	7	81	41	-	-	129	48
Total participating business	48	7	81	41	-	-	129	48
Unit linked and segregated funds
Non-participating investment contract liabilities	-	-	95,267	81,601	-	-	95,267	81,601
Derivative financial liabilities	231	82	232	466	-	-	463	548
Total unit linked and segregated funds	231	82	95,499	82,067	-	-	95,730	82,149
Third party interest in consolidated funds and non-controlling interests
Liabilities in respect of third party interest in consolidated funds	-	-	10,557	10,832	1,246	1,205	11,803	12,037
Derivative financial liabilities	83	36	79	198	-	-	162	234
Third party interest in consolidated funds and non-controlling interests	83	36	10,636	11,030	1,246	1,205	11,965	12,271
Total	367	127	106,252	93,159	1,261	1,205	107,880	94,491

42.   Fair value of assets and liabilities continued

(d)      Methods and assumptions used to determine fair value of assets and liabilities continued 

(d)(iii)  Reconciliation of movements in level 3 instruments

The movements during the year of level 3 assets and liabilities held at fair value are analysed below.

	Investment property1		Owner occupied property		Equity securities and interests in pooled investment funds		Debt securities		Liabilities in respect of third party interest in consolidated funds
	2013	2012	2013	2012	2013	2012	2013	2012	2013	2012
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
At 1 January	8,518	8,695	111	114	1,156	1,245	1,403	1,382	(1,205)	(1,205)
Total gains/(losses) recognised in the consolidated income statement	323	31	(3)	(7)	64	92	(78)	43	(45)	12
Purchases	666	670	-	1	94	82	369	414	7	6
Settlement	-	-	-	-	-	-	-	-	(3)	(18)
Sales	(773)	(827)	-	-	(254)	(239)	(224)	(265)	-	-
Transfers in to level 3	-	-	-	-	15	-	194	27	-	-
Transfers out of level 3	-	-	-	-	(9)	-	(304)	(175)	-	-
Foreign exchange adjustment	(102)	(47)	(5)	(2)	7	(24)	(80)	(23)	-	-
Total gains recognised in revaluation of owner occupied property within other comprehensive income	-	-	68	5	-	-	-	-	-	-
Other	(9)	(4)	-	-	-	-	-	-	-	-
At 31 December	8,623	8,518	171	111	1,073	1,156	1,280	1,403	(1,246)	(1,205)

¹      Includes investment property held for sale of £92m. Investment property held for sale at 31 December 2013 had an opening fair value at 1 January 2013 of £76m. There was no investment property held for sale at 31 December 2012.

Additionally, the Group incurred a contingent consideration liability during the year to 31 December 2013 of £15m as a result of a business combination. There were no significant movements in this liability between the acquisition date and 31 December 2013.  

As at 31 December 2013, £142m of total gains (2012: losses £29m) were recognised in the consolidated income statement in respect of assets and liabilities held at fair value classified as level 3 at the year end. Of this amount £187m gains (2012: losses £41m) were recognised in investment return and £45m of losses (2012: gains of £12m) was recognised in change in liability for liabilities in respect of third party interest in consolidated funds in the consolidated income statement.

Transfers of equity securities and interests in pooled investment funds and debt securities into level 3 generally arise when external pricing providers stop providing a price or where the price provided is considered stale. Transfers of equity securities and interests in pooled investment funds and debt securities out of level 3 arise when acceptable prices become available from external pricing providers.

(d)(iv)  Sensitivity of level 3 instruments measured as at fair value on the statement of financial position to changes in key assumptions

Effect of changes of significant unobservable assumptions to reasonable possible alternative assumptions

For the majority of level 3 investments, the Group does not use internal models to value the investments but rather obtains valuations from external parties. The Group reviews the appropriateness of these valuations on the following basis:

·   For investment property and owner occupied property (including property that is classified as held for sale), the valuations are obtained from external valuers and are assessed on an individual property basis. The principle assumptions will differ depending on the valuation technique employed and sensitivities are determined by flexing the key inputs listed in the table below using knowledge of the investment property market.

·   Private equity fund valuations are provided by the respective managers of the underlying funds and are assessed on an individual investment basis, with an adjustment made for significant movements between the date of the valuation and the end of the reporting period. Sensitivities are determined by comparison to the private equity market.

·   Corporate bonds are predominantly valued using single broker indicative quotes obtained from third party pricing. Sensitivities are determined by flexing the single quoted prices provided using a sensitivity to yield movements.

·   The contingent consideration due to Newton Management Limited has been valued using an internally developed model. The principle assumptions relate to the expected asset retention at the settlement date and sensitivities have been determined by flexing this assumption.

The shareholder is directly exposed to movements in the value of level 3 investments held by the shareholder business (to the extent they are not offset by opposite movements in investment and insurance contract liabilities) however movements in level 3 securities held by the other risk segments are offset by an opposite movement in investment and insurance contract liabilities and therefore not included below. The sensitivities presented below are not sufficiently severe to cause the assets of the participating business to be insufficient to meet the obligations to policyholders.

Changes in the assumptions to reasonably possible alternative assumptions would have the following impact on shareholder profit after tax or shareholder total assets or liabilities:

·   For level 3 private equity investments a 10% increase or decrease in the value of the underlying funds at 31 December 2013 would not have a significant impact on profit after tax or total assets or liabilities

·   For level 3 corporate bonds, increasing assumed yields at 31 December 2013 by 100bps would result in a decrease in profit after tax of £7m and a decrease in fair value of the corporate bonds of £85m. Decreasing assumed yields at 31 December 2013 by 100bps would result in an increase in profit after tax of £7m and an increase in fair value of the corporate bonds of £100m. As these assets back investment and insurance contract liabilities there would be a corresponding offset in profit after tax arising from the change in liability value

·   For the contingent consideration a 10% increase or decrease in the asset retention rate at 31 December 2013 would not have a significant impact on profit after tax or total assets or liabilities

The table below presents quantitative information about the significant unobservable inputs for level 3 instruments:

	Fair value
2013	£m	Valuation technique	Unobservable input	Range (weighted average)
Investment property and owner occupied property	7,450	Income capitalisation	Equivalent yield Estimated rental value  by Square metre	4.1% to 13.5% (6.1%) £11 to £9,100 (£503)
Investment property and owner occupied property	1,264	Discounted cash flow	Internal rate of return Terminal capitalisation rate	6.0% to 10.8% (7.4%) 5.7% to 9.3% (6.6%)
Investment property and owner occupied property	80	Market comparison	Estimated value per square metre	£2 to £10,000 (£2,139)
Equity securities and interests in pooled investment funds (private equity investments)	1,073	Adjusted net asset value	Adjustment to net asset value1	N/A
Debt securities (corporate bonds)	1,280	Single broker	Single broker indicative price2	N/A

¹    A Group level adjustment is made for significant movements in private equity values.

²      Debt securities which are valued using single broker indicative quotes are disclosed in level 3 in the fair value hierarchy. No adjustment is made to these prices.

In addition, a valuation model has been used to determine the fair value of the contingent consideration. It has been assumed that 100% of the assets held at 31 December 2013 will be retained at the settlement date.

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

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

		2013	2012	2013	2012
		Carrying value	Carrying value	Fair value	Fair value
	Notes	£m	£m	£m	£m
Assets
Loans secured by mortgages	22	2,705	3,014	2,779	3,119
Liabilities
Non-participating investment contract liabilities	33	2,392	2,600	2,545	2,697
Subordinated notes	36	728	744	795	790
Subordinated guaranteed bonds	36	502	502	571	553
Mutual Assurance Capital Securities	36	631	622	674	654

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

42.  Fair value of assets and liabilities continued

(e)     Fair value of assets and liabilities measured at amortised cost continued 

It is not possible to reliably calculate the fair value of participating investment contract liabilities. The assumptions and methods used in the calculation of these liabilities are set out in the accounting policies and Note 33. The carrying value of participating investment contract liabilities at 31 December 2013 was £14,707m (2012: £14,993m).

The carrying value of all other financial assets and liabilities measured at amortised cost approximates their fair value.

The table below presents the instruments as detailed above measured at fair value by level of the fair value hierarchy.

	Level 1		Level 2		Level 3		Total
	2013	2012	2013	2012	2013	2012	2013	2012
	£m	£m	£m	£m	£m	£m	£m	£m
Assets
Loans secured by mortgages	-	-	2,779	3,119	-	-	2,779	3,119
Liabilities
Non-participating investment contract liabilities	-	-	-	-	2,545	2,697	2,545	2,697
Subordinated notes	-	-	795	790	-	-	795	790
Subordinated guaranteed bonds	-	-	571	553	-	-	571	553
Mutual Assurance Capital Securities	-	-	674	654	-	-	674	654

43.  Statement of cash flows

The tables below provide further analysis of the balances in the statement of cash flows.

(a)     Change in operating assets

	2013	2012
	£m	£m
Investment property	(93)	126
Equity securities and interests in pooled investment funds	(22,179)	(7,606)
Debt securities	7,918	(6,629)
Derivative financial instruments	400	(173)
Reinsurance assets	726	(99)
Investments in associates and joint ventures	15	50
Receivables and other financial assets and other assets	204	159
Deferred acquisition costs	(8)	3
Loans	146	(150)
Assets held for sale	(121)	-
Change in operating assets	(12,992)	(14,319)

(b)     Change in operating liabilities

	2013	2012
	£m	£m
Other financial liabilities and other liabilities	60	(85)
Deposits received from reinsurers	(548)	100
Pension and other post-retirement benefit provisions	(12)	(11)
Deferred income	(37)	(35)
Insurance contract liabilities	(1,019)	3,826
Investment contract liabilities	14,401	6,798
Change in liability for third party interest in consolidated funds	(2,907)	782
Change in operating liabilities	9,938	11,375

(c)     Non-cash items relating to investing and financing activities

		2013	2012
	Notes	£m	£m
Loss on disposal of property, plant and equipment		-	2
Depreciation of property, plant and equipment	7	14	16
Amortisation of intangible assets	7	30	24
Impairment losses on property, plant and equipment	7	5	7
Impairment losses reversed on property, plant and equipment	7	(2)	-
Other interest cost		4	6
Finance costs		108	77
Share of profit from associates and joint ventures	17	(25)	(48)
Non-cash and other items		134	84

44.  Contingent liabilities, indemnities and guarantees

(a)     Legal proceedings and regulations

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

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

(b)     Issued share capital

The Scheme of Demutualisation sets a 10-year time limit, ending in 2016, for those eligible members of The Standard Life Assurance Company who were not allocated shares at the date of demutualisation to claim their entitlements. As future issues of these shares are dependent upon the actions of eligible members, it is not practical to estimate the financial effect of this potential obligation.

(c)     Other

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

45.  Commitments

(a)     Capital commitments

As at 31 December 2013, capital expenditure that was authorised and contracted for, but not provided and incurred, was £383m (2012: £215m) in respect of investment property. Of this amount, £332m (2012: £185m) and £51m (2012: £30m) relates to the contractual obligations to purchase, construct, or develop investment property and repair, maintain or enhance investment property respectively.  

(b)     Unrecognised financial instruments

The Group has committed the following unrecognised financial instruments to customers and third parties.

	2013	2012
	£m	£m
Commitments to extend credit with an original term to maturity of one year or less	66	43
Other commitments	326	289

Included in other commitments is £284m (2012: £258m) committed by certain subsidiaries which are not fully owned by the Group. These commitments are funded through contractually agreed additional investments in the subsidiary by the Group and the non-controlling interests. The levels of funding are not necessarily in line with the relevant percentage holdings.

45.  Commitments continued

(c)     Operating lease commitments

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

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

	2013	2012
	£m	£m
Not later than one year	31	33
Later than one year and no later than five years	58	84
Later than five years	69	80
Total operating lease commitments	158	197

46.  Employee share-based payments

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

Share options

(i)       Long-term incentive plans

The Group operates the following long-term incentive plans.

Plan	Recipients	Conditions which must be met prior to vesting
Long-term incentive plan (LTIP)	Executives and senior management	Service and performance conditions as set out in the Directors' remuneration report
Standard Life Investments long-term incentive plan (SLI LTIP)	Executives and senior management of Standard Life Investments	Service and performance conditions as set out in the Directors' remuneration report
Restricted stock plan (RSP)	Executives (other than Directors) and senior management	Service, or service and performance conditions. These are tailored to the individual award

All of the awards are equity-settled other than awards made under the SLI LTIP in respect of employees in the US, France and Asia which are cash-settled.

(ii)      Short-term incentive plan (annual bonus deferred shares)

The majority of the members of the executive and senior management including executive Directors participate in the Group annual bonus. Under the terms of the 2013 and 2012 annual bonus, half of any bonus earned by executive Directors and members of the executive team above 25% of salary will be settled in nil-cost options which are deferred for a period of two years, subject to the deferred amount being worth 10% or more of salary. Further details of the annual bonus are set out in the Directors' remuneration report.

Employees may forfeit some or all of awards made under any of the above share-based payment schemes if they leave the Group prior to the end of the awards vesting period.

(iii)     Sharesave (Save-as-you-earn)

The Group operates Save-as-you-earn (SAYE) plans, which allow eligible employees in the UK and Ireland the opportunity to save a monthly amount from their salaries, over either a three or five year period, which can be used to purchase shares in the Company. The shares can be purchased at the end of the savings period at a predetermined price. Employees are granted a predetermined number of options based on the monthly savings amount and duration of their contract. The conditions attached to the options are that the employee remains in employment for three years after the grant date of the options and that the employee satisfies the monthly savings requirement. Settlement will be made in the form of shares.

Share awards

(iv)     Share incentive plan

The Group operates a share incentive plan, allowing employees the opportunity to buy shares from their salary each month. The maximum purchase that an employee can make in any year is £1,500. The Group offers to match the number of shares bought up to a value of £25 each month. The matching shares awarded under the share incentive plan are granted at the end of each month. The matching shares are generally subject to a three year service period.

(a)     Options granted

The number, weighted average exercise price and weighted average remaining contractual life for options outstanding during the year are as follows:

	2013					2012
	Long-term incentive plans (excluding RSP)	RSP	Short-term incentive plan	Sharesave	Weighted average exercise price for Sharesave	Long-term incentive plans (excluding RSP)	RSP	Short- term incentive plan	Sharesave	Weighted average exercise price for Sharesave
Outstanding at 1 January	50,973,643	1,037,583	1,329,142	7,898,340	165p	56,694,804	680,328	1,615,174	7,421,611	157p
Granted	7,633,734	2,423,381	414,117	1,516,288	271p	11,129,463	665,764	524,021	976,531	221p
Forfeited	(7,339,754)	(222,202)	(206,088)	(473,957)	164p	(3,546,930)	(53,723)	(46,312)	(464,880)	157p
Exercised	(15,222,137)	(558,609)	(851,163)	(185,589)	158p	(13,284,740)	(254,786)	(763,741)	(34,922)	157p
Expired	-	-	-	(6,784)	171p	(18,954)	-	-	-	-
Cancelled	-	-	-	(61,941)	196p	-	-	-	-	-
Outstanding at 31 December	36,045,486	2,680,153	686,008	8,686,357	184p	50,973,643	1,037,583	1,329,142	7,898,340	165p
Exercisable at 31 December	34,407	63,320	-	2,950	167p	-	-	-	-	-
Weighted average remaining contractual life of options outstanding (years)	1.41	2.62	1.21	2.58	-	1.65	1.46	1.14	3.31	-

The exercise price for options granted under long-term and short-term incentive schemes is nil. Fair value of options granted under the Group's incentive schemes is determined using a relevant valuation technique, such as the Black Scholes option pricing model.

The following table shows the weighted average assumptions that were considered in determining the fair value of options granted during the year and the share price at exercise of options exercised during the year.

	Long-term incentive plans (excluding RSP)	RSP	Short-term incentive plans	Sharesave
Options granted during the year
Grant date	25 March 2013	Throughout the year	28 March 2013	14 October 2013
Share price at grant date	367p	344p	365p	356p
Fair value at grant date	367p	344p	365p	79p
Exercise price	Nil	Nil	Nil	272p (322¢)
Dividends	The plans include the entitlement to the receipt of dividends in respect of awards that ultimately vest between the date of grant and the vesting date	The plans include the entitlement to the receipt of dividends in respect of awards that ultimately vest between the date of grant and the vesting date	The plan includes the entitlement to the receipt of dividends in respect of awards that ultimately vest between the date of grant and the vesting date	No dividend entitlement
Option term (years)	3.23	1.51	3.24	3.58
Options exercised during the year
Share price at time of exercise	350p	358p	360p	350p

No departures from share option schemes are expected at grant date, with any leavers being accounted for on departure. In determining the fair value of options granted under the Sharesave scheme the historic volatility of the share price over a period of up to five years and a risk free rate determined by reference to swap rates was also considered.

46.  Employee share-based payments continued

(a)     Options granted continued

The following table shows the range of exercise prices of options outstanding at 31 December 2013. All options are exercisable for a period of six months after the vesting date.

	2013	2012
	Number of options outstanding	Number of options outstanding
Long-term incentive plans
£nil	38,725,639	52,011,226
Short-term incentive plan
£nil	686,008	1,329,142
Sharesave
157p	6,281,020	6,923,107
221p-234p	894,547	975,233
261p-272p	1,510,790	-
Outstanding at 31 December	48,098,004	61,238,708

(b)     Share incentive plans

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

	2013	2012
Number of instruments granted1	349,865	525,956
Share price at date of grant	361p	248p
Fair value per granted instrument at grant date	361p	248p

¹    Included in the number of instruments granted are 58,657 (2012: 84,439; 2011: 112,121) rights to shares granted to eligible employees in Canada, Germany and Austria.

The fair value of instruments granted under the share incentive plan is calculated by reference to the share price at grant date. The plan includes the entitlement to the receipt of dividends in respect of awards that ultimately vest between the date of grant and the vesting date. At the grant date all awards are expected to vest. No departures are expected at the grant date, with leavers being accounted for on departure. 

(c)     Employee share-based payment expense

The amounts recognised as an expense in Note 8 for equity-settled share-based payment transactions with employees are as follows:

	2013	2012
	£m	£m
Share options granted under long-term incentive plans	29	21
Share options granted under Sharesave	1	1
Share options granted under short-term incentive plans	1	2
Matching shares granted under share incentive plans	1	1
	32	25

Additionally, the Group incurred an expense for cash-settled share-based payment schemes of £4m in 2013 (2012: £3m). The liability for cash-settled share-based payments outstanding at 31 December 2013 is £5m (2012: £7m).

47.  Related party transactions

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

In the normal course of business, the Group enters into transactions with related parties that relate to insurance and investment management business. 

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

	2013	2012
	£m	£m
Sale to:
Associates	16	13
Joint ventures	18	77
Other related parties	85	91
	119	181
Purchase from:
Joint ventures	24	21
	24	21

Sales to and amounts due from other related parties include management fees received/receivable from non-consolidated investment vehicles managed by Standard Life Investments.

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

	2013	2012
	£m	£m
Due from related parties:
Joint ventures	22	26
Other related parties	8	2
	30	28

In addition to the amounts shown above, the Group's defined benefit pension plans have assets of £782m (2012: £845m) invested in investment vehicles managed by the Group.

(b)     Compensation of key management personnel

Key management personnel comprise 19 people (2012: 20 people) within the Group, including all Directors, both executive and non-executive and the direct reports of the position of Chief Executive. Detailed disclosures of Directors' remuneration for the year and transactions in which the Directors are interested are contained within the audited section of the Directors' remuneration report.

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

	2013	2012
	£m	£m
Salaries and other short-term employee benefits	8	10
Post-employment benefits	1	1
Share-based payments	6	6
Termination benefits	1	-
Total compensation of key management personnel	16	17

(c)     Transactions with key management personnel and their close family members

All transactions between key management and their close family members, and the Group during the year are on terms which are equivalent to those available to all employees of the Group.

During the year to 31 December 2013, key management personnel and their close family members contributed £3.0m (2012: £1.2m) to products sold by the Group.

48.  Capital statement

Capital management policies and risk management objectives

Capital can be measured on a number of different bases, which are set out in the Strategic report Section 1.3 - Group financial overview. The capital statement shows capital based on definitions used for regulatory reporting purposes.

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

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

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

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

The formal procedures for identifying and assessing risks that could affect the capital position of the Group are described in the risk management policies set out in Note 41 - Risk management.

Regulatory capital

The Group operates in a number of geographical regions, and local regulators, primarily the PRA, specify rules and guidance for the minimum level of capital required to meet local requirements. 

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

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

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

Capital structure

The Group is classified as an insurance group by the PRA. The largest regulated entity within the Group is Standard Life Assurance Limited (SLAL), which undertakes life assurance and pension business principally in the UK, Ireland and Germany.

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

Business written after demutualisation is written in the other long-term business funds, principally the Proprietary Business Fund (PBF). 

The HWPF's capital resources of £4,700m at 31 December 2013 (2012: £3,968m) and future surplus arising can be used to provide support for the HWPF, enhance payments to with profits policyholders or, in relation to the recourse cash flows (as explained in accounting policy (v)), transfer defined amounts out of the fund to accrue to the benefit of equity holders. Additional restrictions are placed on the HWPF by the Scheme of Demutualisation (the Scheme), which provides that the recourse cash flows will be subject to a solvency test which restricts transfers of the recourse cash flows if, as a result of the transfer, the HWPF would have a realistic deficit or would have a regulatory surplus below the level which the board of SLAL considers necessary to declare bonuses, in accordance with reasonable benefit expectations of with profits policyholders, without creating a regulatory deficit. 

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

The regulatory results of SLAL have the most significant impact on the Group capital position. The other significant components are insurance entities in Canada and Asia and non-insurance entities, including Standard Life Investments Limited and Standard Life plc.

The Group's capital position is analysed between UK regulated life business, overseas life operations and other activities. The UK regulated life business is analysed by the nature of the underlying funds and includes German and Irish business written by branches of UK regulated companies. Other activities mainly comprise investment management and group corporate centre. The Group's capital position, based on draft regulatory returns, is set out below:

	UK regulated life business
	Heritage With Profits Fund1	Proprietary Business Fund	Life business equity holders' funds	Total UK regulated life business	Overseas life operations	Total life business	Other activities	Group total
2013	£m	£m	£m	£m	£m	£m	£m	£m
Available capital resources
Equity holders' funds
Held outside life assurance funds	-	-	883	883	1,457	2,340	777	3,117
Held within life assurance funds	-	1,110	-	1,110	-	1,110	-	1,110
Equity attributable to ordinary equity holders of Standard Life plc	-	1,110	883	1,993	1,457	3,450	777	4,227
Unallocated divisible surplus	680	-	-	680	-	680	-	680
Other sources of capital
Subordinated liabilities	-	-	-	-	229	229	1,632	1,861
Internal subordinated liabilities	-	-	1,133	1,133	-	1,133	(1,133)	-
	-	-	1,133	1,133	229	1,362	499	1,861
Adjustments onto regulatory basis
Changes to the valuation of contract liabilities	4,159	(39)	-	4,120	-	4,120	-	4,120
Exclusion of deferred acquisition costs and other inadmissible assets	(58)	(576)	(72)	(706)	(243)	(949)	(228)	(1,177)
Exclusion of deferred income	72	233	-	305	1	306	-	306
Changes to the valuation of other assets and liabilities	(38)	(524)	(181)	(743)	94	(649)	251	(398)
	4,135	(906)	(253)	2,976	(148)	2,828	23	2,851
Total available capital resources to meet regulatory requirement	4,815	204	1,763	6,782	1,538	8,320	1,299	9,619
Analysed as follows:
Capital not subject to constraints	-	-	1,750	1,750	672	2,422	1,195	3,617
Capital subject to constraints	4,815	204	13	5,032	866	5,898	104	6,002
Total available capital resources	4,815	204	1,763	6,782	1,538	8,320	1,299	9,619
Restricted assets within the long-term business fund								(1,225)
Regulatory capital resources								8,394
Regulatory capital resources requirement				3,846	701	4,547	45	4,592
Regulatory capital surplus								3,802
Analysis of contract liabilities
Participating
Insurance contracts	14,393	-	-	14,393	667	15,060	-	15,060
Investment contracts	14,704	-	-	14,704	3	14,707	-	14,707
Total participating contract liabilities	29,097	-	-	29,097	670	29,767	-	29,767
Unit linked
Insurance contracts	-	4,910	-	4,910	3,106	8,016	-	8,016
Investment contracts	1,548	80,951	-	82,499	12,768	95,267	-	95,267
Total unit linked liabilities	1,548	85,861	-	87,409	15,874	103,283	-	103,283
Other non-participating
Insurance contracts	11,027	4,557	-	15,584	4,709	20,293	3	20,296
Investment contracts	-	293	-	293	2,099	2,392	-	2,392
Total other non-participating liabilities	11,027	4,850	-	15,877	6,808	22,685	3	22,688
Total contract liabilities	41,672	90,711	-	132,383	23,352	155,735	3	155,738

¹    Capital resources amounting to £115m in respect of other with profits funds are disclosed within the Heritage With Profits Fund column. Participating contract liabilities amounting to £1,078m relating to the new with profits funds created at demutualisation are disclosed within the Heritage With Profits Fund column.

48.  Capital statement continued

	UK regulated life business
	Heritage With Profits Fund2	Proprietary Business Fund	Life business equity holders' funds	Total UK regulated life business	Overseas life operations	Total life business	Other activities	Group total
2012 (restated)1	£m	£m	£m	£m	£m	£m	£m	£m
Available capital resources
Equity holders' funds
Held outside life assurance funds	-	-	794	794	1,679	2,473	783	3,256
Held within life assurance funds	-	1,103	-	1,103	-	1,103	-	1,103
Equity attributable to ordinary equity holders of Standard Life plc	-	1,103	794	1,897	1,679	3,576	783	4,359
Unallocated divisible surplus	706	-	-	706	-	706	-	706
Other sources of capital
Subordinated liabilities	-	-	-	-	246	246	1,622	1,868
Internal subordinated liabilities	-	-	1,124	1,124	-	1,124	(1,124)	-
	-	-	1,124	1,124	246	1,370	498	1,868
Adjustments onto regulatory basis
Changes to the valuation of contract liabilities	3,288	(11)	-	3,277	-	3,277	-	3,277
Exclusion of deferred acquisition costs and other inadmissible assets	(71)	(666)	(59)	(796)	(173)	(969)	(132)	(1,101)
Exclusion of deferred income	84	255	-	339	(1)	338	-	338
Changes to the valuation of other assets and liabilities	-	(553)	(38)	(591)	85	(506)	259	(247)
	3,301	(975)	(97)	2,229	(89)	2,140	127	2,267
Total available capital resources to meet regulatory requirement	4,007	128	1,821	5,956	1,836	7,792	1,408	9,200
Analysed as follows:
Capital not subject to constraints	-	-	1,785	1,785	863	2,648	1,320	3,968
Capital subject to constraints	4,007	128	36	4,171	973	5,144	88	5,232
Total available capital resources	4,007	128	1,821	5,956	1,836	7,792	1,408	9,200
Restricted assets within the long-term business fund								(1,210)
Regulatory capital resources								7,990
Regulatory capital resources requirement				3,092	786	3,878	41	3,919
Regulatory capital surplus								4,071
Analysis of contract liabilities
Participating
Insurance contracts	15,203	-	-	15,203	716	15,919	-	15,919
Investment contracts	14,989	-	-	14,989	4	14,993	-	14,993
Total participating contract liabilities	30,192	-	-	30,192	720	30,912	-	30,912
Unit linked
Insurance contracts	-	4,196	-	4,196	2,514	6,710	-	6,710
Investment contracts	1,296	68,434	-	69,730	11,871	81,601	-	81,601
Total unit linked liabilities	1,296	72,630	-	73,926	14,385	88,311	-	88,311
Other non-participating
Insurance contracts	12,114	4,564	-	16,678	5,659	22,337	3	22,340
Investment contracts	-	301	-	301	2,299	2,600	-	2,600
Total other non-participating liabilities	12,114	4,865	-	16,979	7,958	24,937	3	24,940
Total contract liabilities	43,602	77,495	-	121,097	23,063	144,160	3	144,163

¹    Comparatives for the year ended 31 December 2012 have been restated to reflect retrospective application of changes to accounting policies as a result of an amendment to IAS 19 - Employee Benefits. Refer to Group accounting policies - (a) Basis of preparation.

²    Capital resources amounting to £39m in respect of other with profits funds are disclosed within the Heritage With Profits Fund column. Participating contract liabilities amounting to £872m relating to the new with profits funds created at demutualisation are disclosed within the Heritage With Profits Fund column.

Movements in capital

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

	UK regulated life business
	Heritage With Profits Fund	Proprietary Business Fund	Life business equity holders funds	Total UK regulated life business	Overseas life operations	Total life business	Other activities	Group total
2013	£m	£m	£m	£m	£m	£m	£m	£m
At 1 January	4,007	128	1,821	5,956	1,836	7,792	1,408	9,200
Methodology/modelling changes	(79)	20	-	(59)	-	(59)	-	(59)
Change in assumptions used to measure life assurance contract liabilities and experience differences	23	60	-	83	1	84	-	84
New business	(8)	(111)	-	(119)	(22)	(141)	-	(141)
Investment surplus	1,484	95	(29)	1,550	(22)	1,528	-	1,528
Equity holder/inter-fund transfers	(213)	(19)	232	-	19	19	(19)	-
Dividend transfers	-	-	(262)	(262)	(281)	(543)	(113)	(656)
Other factors	(399)	31	1	(367)	7	(360)	23	(337)
At 31 December	4,815	204	1,763	6,782	1,538	8,320	1,299	9,619

Equity holder/inter-fund transfers of £213m (2012: £55m) includes the transfer from the HWPF to the PBF and additional expenses charged on German unitised with profits business.

	UK regulated life business
	Heritage With Profits Fund	Proprietary Business Fund	Life business equity holders funds	Total UK regulated life business	Overseas life operations	Total life business	Other activities	Group total
2012 (restated)1	£m	£m	£m	£m	£m	£m	£m	£m
At 1 January	4,121	189	1,687	5,997	1,394	7,391	933	8,324
Methodology/modelling changes	520	12	-	532	8	540	-	540
Change in assumptions used to measure life assurance contract liabilities and experience differences	(24)	2	-	(22)	7	(15)	-	(15)
New business	(13)	(95)	-	(108)	(23)	(131)	-	(131)
Investment surplus	37	16	47	100	192	292	-	292
Equity holder/inter-fund transfers	(55)	(153)	208	-	147	147	(147)	-
Dividend transfers	-	-	(249)	(249)	(143)	(392)	61	(331)
Issue of external subordinated liabilities	-	-	-	-	246	246	498	744
Other factors	(579)	157	128	(294)	8	(286)	63	(223)
At 31 December	4,007	128	1,821	5,956	1,836	7,792	1,408	9,200

¹    Comparatives for the year ended 31 December 2012 have been restated to reflect retrospective application of changes to accounting policies as a result of an amendment to IAS 19 - Employee Benefits. Refer to Group accounting policies - (a) Basis of preparation.

As outlined in Note 36 - Subordinated liabilities, the Company issued £500m fixed rate subordinated notes on 4 December 2012. The subordinated notes are unguaranteed and have a legal final maturity in December 2042 with the first call date on 4 December 2022. The Standard Life Assurance Company of Canada (SLCC), a wholly owned subsidiary of the Company, issued CA$400m subordinated debenture notes on 21 September 2012 with a redemption date of 21 September 2022.

UK regulated life business

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

Based on draft regulatory returns at 31 December 2013, SLAL had available capital resources of £6,782m (2012: £5,956m) and a CRR of £3,846m (2012: £3,092m). The capital resources shown in the capital statement are based on the value of assets and liabilities valued on a regulatory basis. However, the CRR reflects the higher value required as a result of the application of the realistic peak.

Capital subject to constraints for the UK regulated life business of £5,032m at 31 December 2013 (2012: £4,171m) represents capital resources held within long-term business funds, or in relation to other regulated entities, the amount of the CRR.

Overseas life operations

Capital resources of £1,538m (2012: £1,836m), which relate mainly to operations in Canada, also include operations in Asia. The Canadian regulator sets the minimum required capital for the Canadian regulated entities. It also requires certain assets to be held in trust to increase policyholder protection (vested assets). As a result of the combination of the capital requirement and vested assets, the overseas life capital subject to constraints amounted to £866m at 31 December 2013 (2012: £973m). 

48.  Capital statement continued 

Other activities

At 31 December 2013, capital resources of £1,299m (2012: £1,408m) and capital subject to constraints of £104m (2012: £88m) relate to the Group's investment management businesses and group corporate centre activities. 

Intra-group transactions

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

SLAL has issued subordinated loans to the Company, which SLAL treats as capital for regulatory purposes. At Group level only subordinated liabilities issued to external parties are included in the Group's capital resources.

Group capital requirement

The Group must also calculate a group regulatory capital position under the Insurance Groups Directive (IGD). The IGD calculation is a prudent aggregate value for the Group's capital resources. The capital held within the long-term business funds of approximately £5,019m (2012: £4,135m) is restricted to the level of the CRR of those funds of £3,846m (2012: £3,092m). Therefore, the Group recognises no net surplus in respect of capital within the long-term business funds.

On an IGD basis, the estimated regulatory capital position at 31 December 2013 is a surplus of £3,802m (2012: £4,071m). The decrease in the estimated regulatory capital surplus is as a result of the £302m special dividend payment and the acquisition of the private client division of Newton Management Limited.

In respect of Group IGD regulatory reporting there were no breaches of regulatory capital requirements at any time during the year.

Contract liabilities

The process used to determine the assumptions that have the greatest effect on the measurement of contract liabilities (including options and guarantees), the quantified disclosure of those assumptions, and the terms and conditions of options and guarantees relating to life assurance contracts that could in aggregate have a material effect on future cash flows are disclosed in Note 3 - Business written in the Group's insurance entities and Note 33 - Insurance contracts, investment contracts and reinsurance contracts.

The sensitivity of contract liabilities to changes in market conditions, key assumptions and other variables, and assumptions about management actions in response to changes in market conditions, are disclosed in Note 41 - Risk management.

49.  Investments in subsidiaries

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

Name of subsidiary	Country of incorporation or residence	% of interest held1	Nature of business
Standard Life Assurance Limited	Scotland	100	Life assurance
Standard Life Investments (Holdings) Limited	Scotland	100	Holding company
Standard Life Investments Limited	Scotland	100	Investment management
Standard Life (Mauritius Holdings) 2006 Limited	Mauritius	100	Holding company
Standard Life Oversea Holdings Limited	Scotland	100	Holding company
Standard Life Employee Services Limited	Scotland	100	Support services
Standard Life Pension Funds Limited	Scotland	100	Life assurance
Standard Life Savings Limited	Scotland	100	Investment management
Standard Life European Private Equity Trust PLC2, 3	Scotland	52	Investment trust
Standard Life International Limited	Ireland	100	Life assurance
The Standard Life Assurance Company of Canada	Canada	100	Life assurance
Standard Life Mutual Funds Ltd	Canada	100	Collective investment products
Standard Life Investments (Mutual Funds) Limited	Scotland	100	Collective investment products
Standard Life Investments (Corporate Funds) Limited	Scotland	100	Collective investment products
SLTM Limited	Scotland	100	Collective investment products
Standard Life Client Management Limited	Scotland	100	Direct sales
Standard Life Wealth Limited	Scotland	100	Investment management
Standard Life (Asia) Limited	Hong Kong	100	Life assurance
Vebnet (Holdings) Limited	England	100	Holding company

¹      All issued share capital of the Company's principal subsidiaries is classified as ordinary.

²      Indicates listed entity.

³      Indicates the entity has had a different reporting date to the Group but has been consolidated consistently at 31 December 2013.

A complete list of the Company's subsidiaries is available as an attachment to the Company's Annual Return.

 

END

 

 

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