Final Results - Part 5 of 8

RNS Number : 4082F

Standard Life plc

20 February 2015

 



Standard Life plc

Full Year Results 2014

Part 5 of 8

31.  Retained earnings

The following table shows movements in retained earnings during the year. The movements are aggregated for both continuing and discontinued operations.

		2014	2013
	Notes	£m	£m
At 1 January		1,391	1,441
Recognised in comprehensive income
Recognised in profit for the year attributable to equity holders		503	466
Recognised in other comprehensive income
Remeasurement gains on defined benefit pension plans		272	101
Share of other comprehensive income of joint ventures		4	(3)
Aggregate tax items recognised in other comprehensive income		5	(8)
Total items recognised in comprehensive income		784	556
Recognised directly in equity
Dividends and appropriations		(386)	(636)
Transfer from equity compensation reserve for vested employee share-based payments	32	27	33
Transfer to retained earnings on sale of owner occupied property	32	4	-
Shares distributed by employee trusts		(10)	(12)
Aggregate tax items recognised in equity		6	9
Total items recognised directly in equity		(359)	(606)
At 31 December		1,816	1,391

32.  Movements in other reserves

The following table shows the movements in other reserves during the year. The movements are aggregated for both continuing and discontinued operations.

	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
2014	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
At 1 January	25	-	153	39	(25)	3,108	53	241	(2,100)	1,494
Recognised in other comprehensive income
Fair value gains on cash flow hedges	-	3	-	-	-	-	-	-	-	3
Net investment hedge	-	-	-	15	-	-	-	-	-	15
Fair value gains on available-for-sale financial assets	-	-	-	-	49	-	-	-	-	49
Revaluation of owner occupied property	3	-	-	-	-	-	-	-	-	3
Exchange differences on translating foreign operations	-	-	(49)	-	-	-	-	-	-	(49)
With profits funds: associated UDS movement recognised in equity	(4)	-	6	-	-	-	-	-	-	2
Aggregate tax effect of items recognised in other comprehensive income	-	-	-	-	(11)	-	-	-	-	(11)
Total items recognised in other comprehensive income	(1)	3	(43)	15	38	-	-	-	-	12
Recognised directly in equity
Transfer to retained earnings on sale of owner occupied property	(4)	-	-	-	-	-	-	-	-	(4)
Reserves credit for employee share-based payment schemes	-	-	-	-	-	-	27	-	-	27
Vested employee share-based payments	-	-	-	-	-	-	(27)	-	-	(27)
Dividends and distributions	-	-	-	-	-	-	-	-	-	-
Aggregate tax effect of items recognised directly in equity	-	-	-	-	-	-	(1)	-	-	(1)
Total items recognised directly within equity	(4)	-	-	-	-	-	(1)	-	-	(5)
At 31 December	20	3	110	54	13	3,108	52	241	(2,100)	1,501
Balance at 31 December 2014 comprises:
Total reserve before with profit fund adjustment	66	3	324	54	13	3,108	52	241	(2,100)	1,761
Total with profit fund adjustment	(46)	-	(214)	-	-	-	-	-	-	(260)
At 31 December	20	3	110	54	13	3,108	52	241	(2,100)	1,501

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.

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). 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 Healthcare Limited during 2010, £86m of the merger relief was realised and transferred from the merger reserve to retained earnings.

32.  Movements in other reserves continued

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 adjusted for amounts that have been released to retained earnings on the disposal of entities since that date.

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 £386m (2013: £656m), of which £nil (2013: £20m) has been treated as a deduction from the special reserve.

	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	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
At 1 January	10	-	269	(24))	-	3,108	55	261	(2,100)	1,579
Recognised in other comprehensive income
Fair value gains on cash flow hedges	-	-	-	-	-	-	-	-	-	-
Net investment hedge	-	-	-	63	-	-	-	-	-	63
Fair value losses on available-for-sale financial assets	-	-	-	-	(32)	-	-	-	-	(32)
Revaluation of owner occupied property	68	-	-	-	-	-	-	-	-	68
Exchange differences on translating foreign operations	-	-	(120)	-	-	-	-	-	-	(120)
With profits funds: associated UDS movement recognised in equity	(48)	-	4	-	-	-	-	-	-	(44)
Aggregate tax effect of items recognised in other comprehensive income	(5)	-	-	-	7	-	-	-	-	2
Total items recognised in other comprehensive income	15	-	(116)	63	(25)	-	-	-	-	(63)
Recognised directly in equity
Transfer to retained earnings on sale of owner occupied property	-	-	-	-	-	-	-	-	-	-
Reserves credit for employee share-based payment schemes	-	-	-	-	-	-	32	-	-	32
Vested employee share-based payments	-	-	-	-	-	-	(33)	-	-	(33)
Dividends and distributions	-	-	-	-	-	-	-	(20)	-	(20)
Aggregate tax effect of items recognised directly in equity	-	-	-	-	-	-	(1)	-	-	(1)
Total items recognised directly within equity	-	-	-	-	-	-	(2)	(20)	-	(22)
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

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

(a)     Non-controlling interests

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

		2014	2013
		£m	£m
At 1 January		333	341
Foreign exchange differences on translating foreign operations		(4)	2
Change in net assets attributable to non-controlling interests		4	30
Net contributions		(15)	(14)
Distributions		(40)	(26)
At 31 December		278	333

Included in non-controlling interests of £278m (2013: £333m) is £190m (2013: £201m) of non-controlling interests of Standard Life European Private Equity Trust plc (SLEPET) which is considered material to the Group. Non-controlling interests own 46% (2013: 48%) of the voting rights of SLEPET. The profit allocated to non-controlling interests of SLEPET for the year ended 31 December 2014 is £2m (2013: £16m). Dividends paid to non-controlling interests of SLEPET during the year ended 31 December 2014 were £4m (2013: £2m).

Summarised financial information for SLEPET prior to intercompany eliminations is provided in the following table. The summarised financial information is for the years ended 30 September 2014 and 2013 which is SLEPET's financial reporting date and is considered indicative of the interest that non-controlling interests of SLEPET have in the Group's activities and cash flows. The financial statements of SLEPET for the years ended 30 September 2014 and 2013 have been adjusted for market movements and any other significant events or transactions for the three months to 31 December for the purposes of consolidation into the Group's consolidated financial statements for the years ended 31 December 2014 and 2013 respectively.

	2014	2013
SLEPET 30 September	£m	£m
Statement of financial position:
Total assets	410	401
Total liabilities	1	-
Income statement:
Revenue	33	39
Profit after tax	28	34
Total comprehensive income	28	34
Cash flows:
Cash flows from operating activities	8	8
Cash flows from investing activities	(6)	36
Cash flows from financing activities	(21)	(4)
Net (decrease)/increase in cash equivalents	(19)	40

There are no protective rights of non-controlling interests which significantly restrict the Group's ability to access or use the assets and settle the liabilities of the Group.

(b)     Third party interests in consolidated funds

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

		2014	2013 restated1
		£m	£m
At 1 January		16,058	9,906
Reclassified as held for sale during the year		(965)	-
Foreign exchange differences on translating foreign operations		(137)	(75)
Change in liability for third party interest in consolidated funds2		758	960
Net contributions and movements between classifications of investments		328	5,459
Distributions		(237)	(192)
At 31 December		15,805	16,058

¹    Comparative periods presented have been restated to reflect retrospective application of changes to accounting policies as a result of new IFRSs adopted in the period. Refer to Group accounting policies - (a) Basis of preparation.

²    Change in liability for third party interest in consolidated funds for the year ended 31 December 2013 includes £131m in respect of discontinued operations.

34.  Insurance contracts, investment contracts and reinsurance contracts

		2014	2013
	Notes	£m	£m
Non-participating insurance contract liabilities		31,266	28,312
Less: Non-participating insurance contract liabilities classified as held for sale	27	(9,425)	-
	34(a)	21,841	28,312
Non-participating investment contract liabilities		104,059	97,659
Less: Non-participating investment contract liabilities classified as held for sale	27	(15,852)	-
	34(b)	88,207	97,659
Non-participating contract liabilities		135,325	125,971
Less: Non-participating contract liabilities classified as held for sale		(25,277)	-
		110,048	125,971

		2014	2013
	Notes	£m	£m
Participating insurance contract liabilities		16,099	15,060
Less: Participating insurance contract liabilities classified as held for sale		(702)	-
	34(a)	15,397	15,060
Participating investment contract liabilities		15,193	14,707
Less: Participating investment contract liabilities classified as held for sale		(2)	-
	34(a)	15,191	14,707
Unallocated divisible surplus		688	680
Less : Unallocated divisible surplus classified as held for sale		-	-
	34(d)	688	680
Participating contract liabilities		31,980	30,447
Less: Participating contract liabilities classified as held for sale	27	(704)	-
		31,276	30,447

(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
2014	£m	£m	£m	£m	£m	£m
At 1 January	15,060	28,312	14,707	58,079	(5,857)	52,222
Reclassified as held for sale during the year	(667)	(8,135)	(3)	(8,805)	(123)	(8,928)
	14,393	20,177	14,704	49,274	(5,980)	43,294
Expected change	(1,014)	(717)	(701)	(2,432)	350	(2,082)
Methodology/modelling changes	(3)	(81)	44	(40)	-	(40)
Effect of changes in
Economic assumptions	356	1,625	(344)	1,637	(410)	1,227
Non-economic assumptions	37	(65)	(52)	(80)	7	(73)
Effect of
Economic experience	2,092	207	1,319	3,618	6	3,624
Non-economic experience	79	(264)	252	67	(1)	66
New business	42	1,000	22	1,064	(12)	1,052
Total change in contract liabilities	1,589	1,705	540	3,834	(60)	3,774
Foreign exchange adjustment	(585)	(41)	(53)	(679)	4	(675)
At 31 December	15,397	21,841	15,191	52,429	(6,036)	46,393
Reinsurance assets					(6,036)
Reinsurance liabilities					-
					(6,036)

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 of £73m net of reinsurance includes decreases of £30m in respect of changes to mortality assumptions and £35m in respect of changes to expense assumptions.

Economic assumptions reflect changes in fixed income yields, leading to lower 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
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 liabilities1	(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)

¹    Total change in contract liabilities for the year ended 31 December 2013 includes £175m in respect of total insurance and participating contracts for discontinuing operations and (£58m) in respect of reinsurance contracts discontinuing operations.

(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 and Irish annuity business and German non-participating insurance business within the PBF where the internal rate of return of the assets backing the liabilities is used.

34.  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	2014	2013
1. Business held within the PBF
Annuities
Individual/group
Life	2.69%	3.75%
Pensions	2.69%	3.75%
Linked to RPI	(0.72%)	(0.15%)
2. Business held within the HWPF
Annuities
Individual/group:
Non-linked
Life	2.20%	3.35%
Pensions: reinsured externally	2.15%	3.05%
Pensions: not reinsured externally	2.55%	3.60%
Deferred annuities	2.55%	3.60%
Linked to RPI
Linked to RPI: reinsured externally	(0.80%)	(0.30%)
Linked to RPI: not reinsured externally	(0.90%)	(0.50%)
Deferred annuities linked to RPI	(1.95%)	(0.50%)

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	2014	2013
Annuities
Individual and group in deferment	Males: 71.5% AMC00	Males: 73.7% AMC00
	Females: 70.8% AFC00	Females: 73.4% AFC00
Individual after vesting (business written after 10 July 2006)	Males: 92.2% RMC00	Males: 88.8% RMC00
	Females: 99.5% RFC00	Females: 96.0% RFC00
Individual after vesting (business written prior to 10 July 2006)	Males: 96.7% RMC00	Males: 97.5% RMC00
	Females: 103.7% RFC00	Females: 105.5% RFC00
Group after vesting (business written after 10 July 2006)	Males: 111.1% RMV00	Males: 111.3% RMV00
	Females: 115.0% WA00	Females: 118.3% WA00
Group after vesting (business written prior to 10 July 2006)	Males: 110.7% RMV00	Males: 111.1% RMV00
	Females: 115.8% WA00	Females: 118.5% 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. This is based on the Standard Life Assurance Limited (SLAL) parameterisation of the CMI_2013 model with long-term improvement rates of 1.8% for males and 1.5% for females in 2014 (1.9% for males and 1.6% for females in 2013). 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.

The SLAL parameterisation of the CMI_2013 model makes 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 3.61% (2013: 4.00%) 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 liabilities of the Canadian business have been classified as held for sale at 31 December 2014. 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	2014	2013
6 months	0.88%	0.94%
1 year	0.93%	0.97%
2 years	0.91%	1.11%
3 years	1.00%	1.37%
5 years	1.29%	2.04%
7 years	1.41%	2.41%
10 years	1.74%	2.87%
20 years	2.16%	3.15%
30 years	2.29%	3.23%

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

Investment returns	2014	2013
Equity securities	7.05%	6.94%
Property	6.93%	6.72%

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 20% 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.

34.  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	2014	2013
1. Assurances
Perspecta Universal Life and Term Life	65%-121% of base table (where base table is 67-72% of CIA 97-04) internally developed projection scale CAN1921-2004 M/F (2015)	65%-121% of base table (where base table is 71-75% of CIA 97-04) internally developed projection scale CAN1921-2004 M/F (2014)
Participating and non-participating life, closed to new business	66%-94% of CIA 97-04	72%-99% of CIA 97-04
	internally developed projection scale CAN1921-2004 M/F (2015)	internally developed projection scale CAN1921-2004 M/F (2014)
2. Annuities
Individual after vesting	16%-100% of IAM83M/IAM83F	20%-101% of IAM83M/IAM83F
	internally developed projection scale CAN1921-2004 M/F (2015)	internally developed projection scale CAN1921-2004 M/F (2014)
Group after vesting	80%-100% of GAM94M/GAM94F	82%-100% of GAM94M/GAM94F
	internally developed projection scale CAN1921-2004 M/F (2015)	internally developed projection scale CAN1921-2004 M/F (2014)

Mortality assumptions are derived from studies performed during 2014, with data to 2013, 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:

		2014	2013
		£m	£m
Participating contract liabilities before apportionment		31,216	29,660
Apportionment of non-participating PVFP		76	107
		31,292	29,767
Participating insurance contracts		16,099	15,060
Participating investment contracts		15,193	14,707
Participating contract liabilities after apportionment		31,292	29,767
Unallocated divisible surplus before apportionment		1,712	1,776
Apportionment of non-participating PVFP		(1,024)	(1,096)
Unallocated divisible surplus after apportionment		688	680

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

Economic assumptions

	2014	2013
Risk discount rate	3.06% - 3.27%	4.21% - 4.38%
Investment returns
Equity securities	1.86%	3.01%
Property	1.86%	3.01%
Fixed interest - annuity/protection	2.07%	3.18%
Fixed interest - other business	1.86%	3.01%
Expense inflation	3.61%	4.00%

The table above shows the changes in the basis between 2013 and 2014. 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:

		2014	2013
	Notes	£m	£m
At 1 January		97,659	84,201
Reclassified as held for sale during the year		(15,097)	-
Contributions		11,261	13,740
Initial charges and reduced allocations		(3)	(4)
Account balances paid on surrender and other terminations in the year		(10,230)	(10,498)
Change in non-participating investment contracts recognised in the consolidated income statement		5,362	11,892
Foreign exchange adjustment		(306)	(1,243)
Contract reclassification		-	(6)
Recurring management charges		(439)	(423)
At 31 December	35	88,207	97,659

¹    Change in non-participating investment contracts recognised in the consolidated income statement includes £1,845m in respect of discontinued operations.

(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 42 - 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.

34.  Insurance contracts, investment contracts and reinsurance contracts continued 

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

The movement in UDS was as follows:

		2014	2013
		£m	£m
At 1 January		680	706
Change in UDS recognised in the consolidated income statement		(71)	(40)
Change in UDS not recognised in the consolidated income statement		(2)	44
Foreign exchange adjustment		81	(30)
At 31 December		688	680

35.  Financial liabilities

		Designated as at fair value through profit or loss	Held for  trading	Net investment hedge	Financial liabilities measured at amortised cost	Total
2014	Notes	£m	£m	£m	£m	£m
Non-participating investment contract liabilities	42	88,203	-	-	4	88,207
Deposits received from reinsurers	42	-	-	-	5,642	5,642
Third party interest in consolidated funds	42	15,805	-	-	-	15,805
Borrowings	36	-	-	-	44	44
Subordinated liabilities	37	-	-	-	1,612	1,612
Derivative financial liabilities	24	-	1,681	12	-	1,693
Other financial liabilities	40	3	-	-	3,687	3,690
Total		104,011	1,681	12	10,989	116,693

		Designated as at fair value through profit or loss	Held for trading	Net investment hedge	Financial liabilities measured at amortised cost	Total
2013 (restated)1	Notes	£m	£m	£m	£m	£m
Non-participating investment contract liabilities	42	95,267	-	-	2,392	97,659
Deposits received from reinsurers	42	-	-	-	5,589	5,589
Third party interest in consolidated funds	42	16,058	-	-	-	16,058
Borrowings	36	-	-	-	95	95
Subordinated liabilities	37	-	-	-	1,861	1,861
Derivative financial liabilities	24	-	932	-	-	932
Other financial liabilities	40	15	-	-	2,495	2,510
Total		111,340	932	-	12,432	124,704

¹    Comparative periods presented have been restated to reflect retrospective application of changes to accounting policies as a result of new IFRSs adopted in the period. Refer to Group accounting policies - (a) Basis of preparation.

36.  Borrowings

		2014	2013
	Notes	£m	£m
Bank overdrafts	28	33	69
Other		11	26
Borrowings	42	44	95

The amount of borrowings expected to be settled after more than 12 months is £8m (2013: £23m). Included within bank overdrafts of £33m (2013: £69m) is £nil (2013: £26m) relating to unpresented cheques.

37.  Subordinated liabilities

		2014		2013
		Principal amount	Carrying value	Principal amount	Carrying value
	Notes		£m		£m
Subordinated notes
5.5% Sterling fixed rate due 4 December 2042		£500,000,000	499	£500,000,000	499
3.938% Canadian dollar fixed/floating rate due 21 September 2022		CA$400,000,000	223	CA$400,000,000	229
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	317	£300,000,000	316
5.314% Euro fixed/floating rate perpetual		€360,000,000	294	€360,000,000	315
Subordinated liabilities			1,835		1,861
Less: Subordinated liabilities classified as held for sale
3.938% Canadian dollar fixed/floating rate due 21 September 2022	27	CA$400,000,000	(223)	-	-
Total subordinated liabilities	42		1,612		1,861

The difference between the fair value and carrying value of the subordinated liabilities is presented in Note 44 - Fair value of assets and liabilities.

Subordinated liabilities are considered current if the contractual repricing or maturity dates are within one year. On 6 January 2015 the Company redeemed in full the 5.314% Euro fixed/floating rate perpetual Mutual Assurance Capital Securities at their outstanding principal amount of €360,000,000. Accrued interest of £15m relating to these securities was also settled. The principal amount of all other subordinated liabilities is expected to be settled after more than 12 months. The accrued interest on the remaining subordinated liabilities, which are not classified as held for sale, of £37m (2013: £56m) 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 and have been classified as held for sale at 31 December 2014. 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

37.  Subordinated liabilities continued

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. 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.

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.

38.  Pension and other post-retirement benefit provisions

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

As a result of the agreement announced by the Group on 3 September 2014 to sell its Canadian business, the Group will no longer operate a defined benefit and defined contribution plan for employees in Canada. All assets and liabilities relating to the defined benefit plan have been included in the sale and reclassified as held for sale for the year ended 31 December 2014.

In December 2014, following a consultation with employees, the Group announced that the UK staff defined benefit pension plan would be closed to future accrual effective April 2016. From April 2016, all UK employees will accrue a pension through an enhanced defined contribution plan.

The Trustees of the UK defined benefit plan set the investment strategy to protect the funding ratio of the Trustees' funding position. The funding position is a Trustee measure that reflects the amount of assets required to pay future benefits and it is this position that determines contributions that the Group pays into the plan. Whilst the IAS 19 surplus of the UK scheme has increased significantly over 2014 the funding ratio has remained comparatively stable.

	Defined benefit	Defined contribution
UK	The Group's largest defined benefit plan is for employees in the UK. It closed to new entrants in November 2004 and changed from a final salary basis to a revalued career average salary basis in 2008. Employees will stop accruing further defined benefit pension under the plan from April 2016. 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 of the Pensions Act 2004. The objective requires that the plan is funded to at least the level of its technical provisions (an actuarial estimate of the assets needed to provide for benefits already built-up under the plan). The Trustees perform regular valuations to check that the statutory funding objective continues to be met. The trustees, after consulting with the employer, 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 needed, to restore funding to the level of the technical provisions. No recovery plan is currently required. At the 31 December 2010 triennial actuarial valuation the plan was 102% funded on the Trustees' technical provisions basis. The 31 December 2013 triennial valuation is ongoing and is expected to conclude in early 2015. The 2014 administration expenses of this plan were met by the Group.	The Group currently contributes 9% of pensionable salary to each employee's plan. In December 2014 the Group announced that the contribution rate will be increased in April 2016 to 12% plus a further employer contribution (matching employee contributions) of up to 4%. Separate arrangements exist for some employees e.g. those in the executive job family. All UK employees will be offered membership of the plan from April 2016 - including those currently in the defined benefit plan. The Group has no further payment obligation once the contributions are paid.

	Defined benefit	Defined contribution
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 ongoing 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.
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 2013, at which time the plan was 113% funded on an ongoing basis. 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.

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
	2014	2013	2014	2013
	£m	£m	£m	£m
UK	37	39	14	10
Other	1	2	1	1
Canada	9	10	3	4

Expected contributions to the plans in 2015 are as follows:

	Defined benefit	Defined contribution
	2015	2015
	£m	£m
UK	3	22
Other	1	1

(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:

		2014	2013 restated1
	Notes	£m	£m
Current service cost		(60)	(55)
Interest income		21	19
Past service cost and losses on settlements		-	-
Expense recognised in the consolidated income statement	8	(39)	(36)

¹    Comparative periods presented have been restated to reflect classification in the current year of the Group's Canadian business as discontinued operations. Refer to Note 12 - Discontinued operations.

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

38.  Pension and other post-retirement benefit provisions continued 

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

	2014				2013
	UK	Other	Total	Canada1	UK	Other	Canada	Total
	£m	£m	£m	£m	£m	£m	£m	£m
Present value of funded obligation	(2,816)	(98)	(2,914)	(242)	(2,327)	(76)	(209)	(2,612)
Present value of unfunded obligation	-	(8)	(8)	(73)	-	(7)	(64)	(71)
Fair value of plan assets	3,990	62	4,052	214	2,992	60	192	3,244
Effect of limit on plan surplus	(414)	-	(414)	-	(233)	-	-	(233)
Net asset/(liability)	760	(44)	716	(101)	432	(23)	(81)	328

¹    The net liability for the Canada plan has been classified as held for sale at 31 December 2014.

The UK plan surplus is considered to be recoverable as a right to a refund exists. The surplus has been reduced by 35% to reflect an authorised surplus payments charge that would arise on a refund and an additional small deferred tax adjustment.

(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
2014	£m	£m	£m	£m	£m
At 1 January	(2,683)	3,244	561	(233)	328
Reclassified as held for sale	273	(192)	81	-	81
Total expense
Current service cost	(45)	-	(45)	-	(45)
Interest (expense)/income	(108)	129	21	-	21
Total expense recognised in consolidated income statement	(153)	129	(24)	-	(24)
Remeasurements
Return on plan assets, excluding amounts included in interest income	-	896	896	-	896
Gain from change in demographic assumptions	(56)	-	(56)	-	(56)
Gain from change in financial assumptions	(375)	-	(375)	-	(375)
Experience gains	8	-	8	-	8
Change in effect of limit on plan surplus	-	-	-	(181)	(181)
Remeasurement (losses)/gains recognised in other comprehensive income	(423)	896	473	(181)	292
Exchange differences	5	(4)	1	-	1
Employer contributions	-	38	38	-	38
Benefit payments	59	(59)	-	-	-
At 31 December	(2,922)	4,052	1,130	(414)	716

The following table shows the movement in the defined benefit asset for the year ended 31 December 2013:

	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	(2,500)	2,891	391	(182)	209
Current service cost	(55)	-	(55)	-	(55)
Interest (expense)/income	(110)	124	14	-	14
Total expense recognised in consolidated income statement1	(165)	124	(41)	-	(41)
Remeasurements
Return on plan assets, excluding amounts included in interest expense	-	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 (losses)/gains recognised in other comprehensive income2	(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	(2,683)	3,244	561	(233)	328

¹    Total expense includes £16m for the year ended 31 December 2013 in respect of discontinued operations.

²    Remeasurement (losses)/gains includes £31m for the year ended 31 December 2013 in respect of discontinued operations.

(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's liabilities. 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 44 - 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 2014 is as follows:

	UK		Other		Canada		Total
	2014	2013	2014	2013	2014	2013	2014	2013
	£m	£m	£m	£m	£m	£m	£m	£m
Assets measured at fair value based on level 1 inputs
Derivatives	38	3	-	-	-	-	38	3
Equity securities and interests in pooled investment funds	1,220	1,405	49	51	146	134	1,415	1,590
Debt securities	1,239	442	-	-	-	-	1,239	442
Total assets measured at fair value based on level 1 inputs	2,497	1,850	49	51	146	134	2,692	2,035
Assets measured at fair value based on level 2 or 3 inputs
Derivatives	827	321	13	9	-	-	840	330
Equity securities and interests in pooled investment funds	92	54	-	-	-	-	92	54
Debt securities	325	275	-	-	59	51	384	326
Qualifying insurance policies	4	5	-	-	-	-	4	5
Total assets measured at fair value based on level 2 or 3 inputs	1,248	655	13	9	59	51	1,320	715
Cash and cash equivalents	245	487	-	-	9	7	254	494
Total	3,990	2,992	62	60	214	192	4,266	3,244

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.

38.  Pension and other post-retirement benefit provisions continued

(e)     Principal assumptions

The principal economic assumptions for the plans are shown below:

	2014		2013
	UK	Canada	UK	Canada
	%	%	%	%
Discount rate	3.60	4.00	4.60	4.80
Rates of inflation
Consumer Price Index (CPI)	2.45	2.00	2.90	2.00
Retail Price Index (RPI) (UK only)	3.35	-	3.70	-
Salary inflation (Canada only)	-	3.50	-	3.50

The most significant non-economic assumption is post-retirement longevity. The assumptions (along with sample expectations of life) are illustrated below:

			Normal Retirement Age (NRA)	Expectation of life from NRA
				Male, age today		Female, age today
2014	Table	Improvements		NRA	40	NRA	40
UK	Plan specific basis (calibrated by Club Vita) reflecting membership demographics	Advanced parameterisation of CMI 2011 mortality improvements model - adjusted to assume that improvements continue to increase in the short-term before declining toward an ultimate long-term rate of 1.375%	60	29	32	31	34

			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

Duration of defined benefit obligation

	2014		2013
	UK	Canada	UK	Canada
	years	years	years	years
Pensioner	16	11	15	10
Non pensioner	28	22	26	21

(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. By offering post-retirement defined benefit pension plans the Group is exposed to a number of risks. An explanation of the key risks and mitigating actions in place is given 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 defined benefit plan liabilities and the cost of defined benefit accrual.

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 the plan's need to rely on support from the Group.

Inflation

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

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 the plan's need to rely on support from the Group.

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 RPI and CPI.

Life expectancy

Increases in life expectancy beyond those currently assumed will lead to an increase in plan liabilities. Regular reviews of longevity assumptions are performed to ensure assumptions remain appropriate.

(f)(ii)   Sensitivity to principal assumptions

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

			2014		2013
	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%		(837)	1,262	(642)	853
	Increase by 1%		596	(900)	474	(618)
Rates of inflation	Decrease by 1%		539	(780)	462	(538)
	Increase by 1%		(827)	1,111	(582)	752
Life expectancy	Decrease by 1 year		62	-	51	-
	Increase by 1 year		(62)	-	(51)	-

39.  Deferred income     

		2014	2013
	Notes	£m	£m
At 1 January		316	352
Reclassified as held for sale		(1)	-
Additions during the year1	5	35	36
Amortised to the consolidated income statement as fee income 2	5	(66)	(73)
Release of deferred income	5	(5)	-
Foreign exchange adjustment		(3)	1
At 31 December		276	316

¹    Additions during the year to 31 December 2013 includes £nil in respect of discontinued operations.

²    Amortised to the consolidated income statement as fee income for the year to 31 December 2013 includes £nil in respect of discontinued operations.

The amount of deferred income expected to be settled after more than 12 months is £216m (2013: £252m).

40.    Other financial liabilities

		2014	2013 restated1
	Notes	£m	£m
Contingent commissions		-	73
Amounts payable on direct insurance business		310	336
Amounts payable on reinsurance contracts		5	24
Outstanding purchases of investment securities		369	229
Accruals		406	346
Creation of units awaiting settlement		196	112
Cash collateral held in respect of derivative contracts	42	1,847	778
Property related liabilities		191	190
Contingent consideration liability	44	3	15
Other		363	407
Other financial liabilities		3,690	2,510

¹    Comparative periods presented have been restated to reflect retrospective application of changes to accounting policies as a result of new IFRSs adopted in the period. Refer to Group accounting policies - (a) Basis of preparation.

The amount of other financial liabilities expected to be settled after more than 12 months is £57m (2013: £196m).

41.  Other liabilities

	2014	2013
	£m	£m
Provisions	20	19
Other	80	129
At 31 December	100	148

The amount of other liabilities expected to be settled after more than 12 months is £15m (2013: £13m).

	Legal provisions	Other provisions	Total provisions
2014	£m	£m	£m
At 1 January	1	18	19
Charged/(credited) to the consolidated income statement
Additional provisions	1	8	9
Release of unused provision	-	(4)	(4)
Used during the year	(1)	(3)	(4)
At 31 December	1	19	20

	Legal provisions	Other provisions	Total provisions
2013	£m	£m	£m
At 1 January	7	10	17
Charged/(credited) to the consolidated income statement1
Additional provisions	-	11	11
Release of unused provisions	(3)	(3)	(6)
Used during the year	(3)	-	(3)
At 31 December	1	18	19

¹    Charged/(credited) to the consolidated income statement for the year ended 31 December 2013 includes £nil of additional provisions and £nil of release of unused provisions in respect of discontinued operations.

Other provisions

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

The amount of total provisions expected to be settled after more than 12 months is £10m (2013: £10m).

42.  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 objectives and by ensuring capital is delivered to areas where most value can be created for the risks taken.

The risk management framework used by the Group in 2014 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.

For the purposes of managing risks to the Group's financial assets and financial liabilities, the Group considers the following categories:

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 will be higher than assumed. This can arise from an increase in the unit costs of the company or an increase in expense inflation, either company 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 reflect an increase in liabilities or a reduction in expected future profits.
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 fair outcomes for our customers.
Strategic	The risk associated with the robustness of the strategic planning process and the threats to the achievement of the Group's strategy.

There are a range of sources of risk affecting these risk categories and the principal risks and uncertainties that affect the business model are set out in detail in Section 1.5 of the Strategic report.

Risk segments

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. 

42.  Risk management continued

(a)     Overview continued

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

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	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 (excluding SLI Inc.)	n/a	n/a
Asia and Emerging Markets4	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
Discontinued operations4	SLCC (excluding segregated funds and participating fund) SLAL - PBF Canadian branch SLI Inc.	SLCC participating fund	SLCC segregated funds
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 SLI Inc. = Standard Life Investments Inc.   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.

⁴    For the purposes of this table, Dubai business is included in Asia and Emerging Markets and not Discontinued operations as it does not meet the definition of a discontinued operation under IFRS 5 nor are its assets and liabilities classified as held for sale at 31 December 2014.

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 fee based revenue 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 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 expected to be borne by the policyholder. The shareholder's exposure is limited to changes in the value of future fee based revenue 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.

42.  Risk management continued

(a)     Overview continued

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

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 held by UK and Europe, and mortality risk on contracts held in non-participating funds by UK and Europe 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

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.

As noted in Group accounting policies (a) Basis of preparation, the consolidated financial statements for the year ended 31 December 2013 have been restated to reflect retrospective application of changes to accounting policies as a result of new IFRSs adopted in the year. The tables throughout this note have been restated to reflect this.

Standard Life Financial Inc. and Standard Life Investments Inc. collectively were sold on 30 January - refer to Note 51 - Events after the reporting date. Comparatives for the year ended 31 December 2013 have not been restated to reflect the sale. The transaction does not impact the classification of the Group's assets and liabilities within the risk segments.

The assets and liabilities of the Canadian business have been reclassified as held for sale in the Group's consolidated statement of financial position for the year ended 31 December 2014 as detailed in Note 27 - Assets and liabilities held for sale, and the split of these assets and liabilities into risk segments is shown in (f).

	Shareholder  business		Participating business		Unit linked and segregated funds			Third party interest in consolidated funds and non-controlling interests			Total
	2014	2013	2014	2013	2014		2013	2014	2013		2014	2013 restated
	£m	£m	£m	£m	£m		£m	£m	£m		£m	£m
Intangible assets	565	298	-	2	-		-	-	-		565	300
Deferred acquisition costs	717	842	54	63	-		-	-	-		771	905
Investments in associates and joint ventures	260	288	535	354	3,568		1,089	145	53		4,508	1,784
Investment property	-	491	2,090	1,995	5,223		4,830	1,728	1,290		9,041	8,606
Property, plant and equipment	50	93	136	126	-		-	-	-		186	219
Pension and other post-retirement benefit assets	760	432	-	-	-		-	-	-		760	432
Deferred tax assets	33	121	-	-	-		-	-	-		33	121
Reinsurance assets	47	182	5,989	5,991	-		-	-	-		6,036	6,173
Loans	4	2,549	194	199	166		176	36	-		400	2,924
Derivative financial assets	18	111	1,649	661	1,711		832	643	387		4,021	1,991
Equity securities and interests in pooled investment funds at FVTPL	31	172	9,658	10,952	55,471		66,475	6,167	7,055		71,327	84,654
Debt securities
At FVTPL	6,879	11,133	27,785	26,939	23,597		24,775	5,824	5,679		64,085	68,526
At available-for-sale	356	683	-	-	-		-	-	-		356	683
Receivables and other financial assets	468	471	98	97	534		441	148	98		1,248	1,107
Other assets	79	90	40	42	176		129	12	11		307	272
Assets held for sale	9,837	29	857	-	17,679		59	965	33		29,338	121
Cash and cash equivalents	976	959	1,778	1,049	5,751		6,032	2,112	2,282		10,617	10,322
Total assets	21,080	18,944	50,863	48,470	113,876		104,838	17,780	16,888		203,599	189,140
Non-participating insurance contract liabilities	5,276	9,172	10,753	11,124	5,812		8,016	-	-		21,841	28,312
Non-participating investment contract liabilities	4	2,392	-	-	88,203		95,267	-	-		88,207	97,659
Participating insurance contract liabilities	-	-	15,397	15,060	-		-	-	-		15,397	15,060
Participating investment contract liabilities	-	-	15,191	14,707	-		-	-	-		15,191	14,707
Unallocated divisible surplus	-	-	688	680	-		-	-	-		688	680
Reinsurance liabilities	-	316	-	-	-		-	-	-		-	316
Deposits received from reinsurers	-	-	5,642	5,589	-		-	-	-		5,642	5,589
Third party interest in consolidated funds	-	-	-	-	-		-	15,805	16,058		15,805	16,058
Borrowings	-	58	7	9	30		27	7	1		44	95
Subordinated liabilities	1,612	1,861	-	-	-		-	-	-		1,612	1,861
Pension and other post-retirement benefit provisions	44	104	-	-	-		-	-	-		44	104
Deferred income	216	244	60	72	-		-	-	-		276	316
Deferred tax liabilities	86	50	79	77		49	51	-	-	214		178
Current tax liabilities	38	7	73	(5)	56		47	5	6		172	55
Derivative financial liabilities	17	41	80	134	1,187		519	409	238		1,693	932
Other financial liabilities	966	921	1,541	696	898		662	285	231		3,690	2,510
Other liabilities	52	86	17	21	16		27	15	14		100	148
Liabilities of operations held for sale	8,725	-	858	-	17,492		-	958	-		28,033	-
Total liabilities	17,036	15,252	50,386	48,164	113,743		104,616	17,484	16,548		198,649	184,580
Net inter-segment assets/(liabilities)	628	535	(477)	(306)	(133)		(222)	(18)	(7)		-	-
Net assets	4,672	4,227	-	-	-		-	278	333		4,950	4,560

42.    Risk management continued 

(b)      Market risk

As described in the table on pages 195 to 196, 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 fee based revenue 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 fee based revenue 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 a range of 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 44 - Fair value of assets and liabilities and Note 19 - 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.

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
	2014	2013	2014	2013	2014	2013
	£m	£m	£m	£m	£m	£m
UK	-	-	4,060	5,055	4,060	5,055
Canada	-	134	42	224	42	358
Australia	1	-	53	31	54	31
Austria	-	-	-	4	-	4
Belgium	-	-	73	131	73	131
Denmark	-	-	165	117	165	117
Finland	-	-	48	67	48	67
France	1	-	453	659	454	659
Germany	1	-	523	457	524	457
Greece	-	-	12	6	12	6
Ireland	-	-	137	135	137	135
Italy	-	-	100	85	100	85
Japan	1	1	114	124	115	125
Mexico	-	-	1	6	1	6
Netherlands	1	-	364	414	365	414
Norway	-	-	44	78	44	78
Portugal	-	-	19	22	19	22
Russia	-	-	4	5	4	5
Spain	-	-	161	205	161	205
Sweden	-	-	236	294	236	294
Switzerland	-	-	669	608	669	608
US	-	24	1,977	1,977	1,977	2,001
Other	7	13	311	243	318	256
Total	12	172	9,566	10,947	9,578	11,119

In addition to the equity securities analysed above, the shareholder business has interests in pooled investment funds of £19m (2013: £nil) and investments in associates at FVTPL of £16m (2013: £19m). The participating business has interests in pooled investment funds of £92m (2013: £5m), and investments in associates at FVTPL of £535m (2013: £354m).

The shareholder and participating business exposure to equity markets in Canada has been significantly reduced by the sale of the Group's Canadian business on 30 January 2015. Information on the shareholder and participating business' exposure to equity markets due to the assets and liabilities of the Canadian business being reclassified as held for sale has been presented in section (f).

(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.

42.    Risk management continued

(b)       Market risk continued

(b)(i)     Elements of market risk continued

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
	2014	2013	2014	2013	2014	2013	2014	2013	2014	2013
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Canada	-	359	-	45	-	-	-	87	-	491
Total	-	359	-	45	-	-	-	87	-	491

Participating business

	Office		Industrial		Retail		Other		Total
	2014	2013	2014	2013	2014	2013	2014	2013	2014	2013
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
UK	608	550	237	266	1,051	946	6	-	1,902	1,762
Canada	-	49	-	19	-	4	-	14	-	86
Ireland	-	-	-	-	-	-	26	-	26	-
Belgium	14	14	-	-	-	-	-	-	14	14
France	-	-	3	4	-	-	2	2	5	6
Netherlands	-	-	14	-	-	-	-	-	14	-
Spain	129	127	-	-	-	-	-	-	129	127
Total	751	740	254	289	1,051	950	34	16	2,090	1,995

The shareholder and participating business exposure to investment property in Canada has been significantly reduced by the sale of the Group's Canadian business on 30 January 2015. Information on the shareholder and participating business' exposure to property markets due to the assets and liabilities of the Canadian business being reclassified as held for sale has been presented in section (f).

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).

(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 currencies		Total
	2014	2013	2014	2013	2014	2013	2014	2013	2014	2013	2014	2013	2014	2013
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Total assets	9,566	7,588	1,194	1,269	9,741	9,598	92	91	153	106	334	292	21,080	18,944
Total liabilities	(7,511)	(6,021)	(702)	(660)	(8,728)	(8,490)	(39)	(44)	(26)	(27)	(30)	(10)	(17,036)	(15,252)
Net investment hedges	1,107	883	-	-	(1,085)	(870)	(22)	(13)	-	-	-	-	-	-
Cash flow hedges	1,100	(20)	18	20	(1,118)	-	-	-	-	-	-	-	-	-
Non designated derivatives	433	404	(427)	(402)	-	(38)	(1)	-	15	37	(20)	(1)	-	-
	4,695	2,834	83	227	(1,190)	200	30	34	142	116	284	281	4,044	3,692

Other currencies includes assets of £15m (2013: £55m) and liabilities of £16m (2013: £nil) in relation to the fair value of derivatives used to manage currency risk. The principal source of foreign currency risk for shareholders arises from the Group's investments in overseas subsidiaries and joint ventures.

The shareholder's exposure arising from cash flow hedges of Canadian dollars relates to foreign exchange forward contracts transacted to hedge Canadian dollars due to be received from the sale of the Canadian business.

Non designated derivatives relate to foreign exchange forward contracts that are not designated as cash flow hedges or net investment hedges.

During 2014 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 currencies		Total
	2014	2013	2014	2013	2014	2013	2014	2013	2014	2013	2014	2013	2014	2013
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Total assets	34,323	34,635	11,654	9,550	883	820	42	41	2,744	1,960	1,217	1,464	50,863	48,470
Total liabilities	(40,341)	(39,256)	(9,142)	(8,091)	(858)	(813)	-	-	(26)	(3)	(19)	(1)	(50,386)	(48,164)
Non designated derivatives	1,471	1,237	(1,109)	(1,076)	-	-	-	-	(329)	12	(33)	(173)	-	-
	(4,547)	(3,384)	1,403	383	25	7	42	41	2,389	1,969	1,165	1,290	477	306

There are no net investment hedges or cash flow hedges in the participating business. Other currencies includes assets of £29m (2013: £9m) and liabilities of £14m (2013: £1m) in relation to the fair value of 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.

42.   Risk management continued

(b)      Market risk continued

(b)(ii)   Sensitivity to market risk analysis

The Group's profit after tax and equity from continuing operations 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 from continuing operations and equity to changes in equity security and property prices and to changes in interest rates as at the reporting date applied to assets and liabilities other than those classified as held for sale. 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 2014 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. At 31 December 2014 support is provided under the realistic CSA and 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 of the Group's profit after tax and equity from continuing operations 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 2014 and 2013.

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).

Profit after tax of continuing operations sensitivity to market risk

	Equity markets				Property markets				Interest rates
2014	+10%	-10%	+20%	-20%	+10%	-10%	+20%	-20%	+1%	-1%
Increase/(decrease) in profit after tax of continuing operations	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Shareholder business
UK and Europe:
Deferred acquisition costs	-	-	-	(4)	-	-	-	-	-	-
Assets backing non-participating liabilities	-	-	-	-	-	-	-	-	(595)	721
Non-participating insurance contract liabilities	-	-	-	-	-	-	-	-	567	(702)
Non-participating investment contract liabilities	-	-	-	-	-	-	-	-	-	-
Other assets and liabilities	-	-	-	-	-	-	-	-	(10)	11
	-	-	-	(4)	-	-	-	-	(38)	30
Standard Life Investments	3	(3)	7	(7)	-	-	-	-	-	-
Asia and Emerging Markets:
Deferred acquisition costs	-	-	-	(1)	-	-	-	-	-	-
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)	-	-	-	-	-	-
Other	1	(1)	2	(2)	-	-	-	-	1	(1)
Total shareholder business	4	(4)	9	(14)	-	-	-	-	(37)	29
Participating business
UK and Europe:
Recourse cash flow	-	-	-	-	-	-	-	-	-	-
	-	-	-	-	-	-	-	-	-	-
Total participating business	-	-	-	-	-	-	-	-	-	-
Total	4	(4)	9	(14)	-	-	-	-	(37)	29

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

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

³    The interest rate sensitivity is a parallel shift subject to a floor of nil.

The Company within other shareholder business classifies certain debt securities which back subordinated debt liabilities as assets available-for-sale (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 of continuing operations to changes in interest rates does not include the impact of changes in interest rates for these AFS assets.

42.  Risk management continued

(b)     Market risk continued

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

	Equity markets				Property markets				Interest rates
2013	+10%	-10%	+20%	-20%	+10%	-10%	+20%	-20%	+1%	-1%
Increase/(decrease) in profit after tax of continuing operations	£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
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	6	(6)	10	(14)	-	-	-	-	(40)	48
Participating business
UK and Europe:
Recourse cash flow	-	-	-	-	-	-	-	-	-	-
	-	-	-	-	-	-	-	-	-	-
Total participating business	-	-	-	-	-	-	-	-	-	-
Total	6	(6)	10	(14)	-	-	-	-	(40)	48

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

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

Equity sensitivity to market risk on assets and liabilities other than those classified as held for sale

The shareholder business in the other reportable segment 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 from continuing operations to variations in interest rate risk exposures.

Other's equity sensitivity to a 1% increase in interest rates is (£15m) (2013: (£16m)) and to a 1% decrease in interest rates is £15m (2013: £16m). The sensitivity of the Group's total equity from continuing operations to a 1% increase in interest rates is (£53m) (2013: (£58m)) and a 1% decrease in interest rates is £45m (2013: £66m).

The sensitivity of the Group's total equity to variations in equity and property prices for assets and liabilities other than those classified as held for sale 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 195 to 196, 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 £3,523m (2013: £4,412m) 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.

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

42.  Risk management continued

(c)     Credit risk continued

(c)(i)   Credit exposure continued

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
	2014	2013	2014	2013	2014	2013	2014	2013	2014	2013	2014	2013	2014	2013	2014	2013
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Neither past due nor impaired:
AAA	-	-	-	-	-	1,867	-	-	524	1,139	-	-	-	31	524	3,037
AA	-	-	34	25	-	568	1	16	1,517	2,707	-	-	228	308	1,780	3,624
A	-	-	10	155	4	33	6	80	3,293	6,219	-	-	718	559	4,031	7,046
BBB	-	-	-	-	-	-	9	14	1,105	1,282	-	-	30	49	1,144	1,345
Below BBB	-	-	-	-	-	41	-	-	31	20	-	-	-	-	31	61
Not rated	2	2	-	-	-	21	2	1	1	93	448	455	-	12	453	584
Internally rated	-	-	3	2	-	-	-	-	764	356	-	-	-	-	767	358
Past due	-	-	-	-	-	-	-	-	-	-	20	16	-	-	20	16
Impaired	-	-	-	-	-	19	-	-	-	-	-	-	-	-	-	19
Total	2	2	47	182	4	2,549	18	111	7,235	11,816	468	471	976	959	8,750	16,090

At 31 December 2014, receivables and other financial assets of £17m (2013: £16m) were past due by less than three months and £3m (2013: £nil) were past due by three to six months.

The shareholder business' exposure to credit risk from financial assets has been significantly reduced by the sale of the Group's Canadian business on 30 January 2015. Information on the shareholder business' exposure to credit risk due to assets and liabilities of the Canadian business being reclassified as held for sale has been presented in section (f).

An analysis of debt securities by country is as follows:

	Government, Provincial and Municipal1		Banks		Other financial institutions		Other corporate		Other2		Total
	2014	2013	2014	2013	2014	2013	2014	2013	2014	2013	2014	2013
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
UK	565	360	377	507	1,286	889	1,330	955	-	69	3,558	2,780
Canada	3	2,463	25	354	-	265	1	1,929	-	-	29	5,011
Australia	-	-	72	108	6	17	10	4	-	-	88	129
Austria	25	20	-	-	-	-	-	-	-	-	25	20
Belgium	-	-	25	27	-	-	11	10	-	-	36	37
Denmark	-	-	41	4	-	-	16	15	-	-	57	19
Finland	-	-	25	45	-	-	-	-	-	-	25	45
France	209	22	228	236	-	-	347	432	-	-	784	690
Germany	87	302	115	84	1	1	300	328	-	-	503	715
Greece	-	-	-	-	-	-	-	-	-	-	-	-
Ireland	-	-	-	-	3	3	-	-	-	-	3	3
Italy	-	-	36	34	-	-	86	71	-	-	122	105
Japan	-	-	119	110	10	30	32	29	-	-	161	169
Mexico	1	-	-	-	-	-	112	82	-	-	113	82
Netherlands	-	-	313	398	-	-	24	14	-	-	337	412
Norway	-	-	-	-	-	-	40	37	-	-	40	37
Portugal	-	-	-	-	-	-	-	-	-	-	-	-
Spain	-	-	37	9	-	-	52	39	-	-	89	48
Sweden	-	-	38	26	1	1	66	59	-	-	105	86
Switzerland	-	-	87	54	-	-	7	22	-	-	94	76
US	-	12	302	229	133	456	283	314	-	-	718	1,011
Other	48	-	61	125	2	5	11	10	226	201	348	341
Total	938	3,179	1,901	2,350	1,442	1,667	2,728	4,350	226	270	7,235	11,816

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. 

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
	2014	2013	2014	2013	2014	2013	2014	2013	2014	2013	2014	2013	2014	2013
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Neither past due nor impaired:
AAA	-	-	-	-	-	-	4,842	4,054	-	-	-	18	4,842	4,072
AA	5,962	5,895	84	-	55	96	15,608	16,407	-	-	275	263	21,984	22,661
A	20	88	-	-	1,262	350	4,902	3,979	-	-	1,502	734	7,686	5,151
BBB	-	-	-	-	-	25	1,578	1,611	-	-	-	33	1,578	1,669
Below BBB	-	-	-	-	-	-	481	473	-	-	-	-	481	473
Not rated	-	-	110	199	332	190	33	298	83	83	1	1	559	771
Internally rated	7	8	-	-	-	-	335	111	-	-	-	-	342	119
Past due	-	-	-	-	-	-	-	-	15	14	-	-	15	14
Impaired	-	-	-	-	-	-	6	6	-	-	-	-	6	6
Total	5,989	5,991	194	199	1,649	661	27,785	26,939	98	97	1,778	1,049	37,493	34,936

At 31 December 2014, receivables and other financial assets of £15m (2013: £14m) were past due by less than three months.

Not rated loans of £110m (2013: £199m) relate to very high quality mortgages.

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 2014, the financial assets of the HWPF include £5,642m (2013: £5,589m) 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.

42.   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
	2014	2013	2014	2013	2014	2013	2014	2013	2014	2013	2014	2013
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
UK	11,030	11,725	926	938	2,050	2,252	1,966	1,644	-	1	15,972	16,560
Canada	35	322	77	80	10	50	1	58	-	-	123	510
Australia	-	-	199	160	39	62	42	19	-	-	280	241
Austria	240	212	8	27	-	-	-	-	-	-	248	239
Belgium	381	590	16	15	-	-	16	21	-	-	413	626
Denmark	5	6	10	17	-	-	32	30	-	-	47	53
Finland	83	77	57	102	-	25	5	6	-	-	145	210
France	1,641	1,645	473	260	19	150	375	314	-	-	2,508	2,369
Germany	2,996	2,244	440	298	114	153	214	202	-	-	3,764	2,897
Greece	-	-	-	-	-	-	-	-	-	-	-	-
Ireland	1	1	6	10	10	11	13	15	-	-	30	37
Italy	3	6	31	17	13	69	138	128	-	-	185	220
Japan	20	22	295	210	-	-	10	11	-	-	325	243
Mexico	-	-	-	-	-	-	64	56	-	-	64	56
Netherlands	358	255	228	212	46	40	31	29	-	-	663	536
Norway	18	66	16	67	-	12	72	58	-	-	106	203
Portugal	-	-	-	-	-	-	3	-	-	-	3	-
Russia	-	-	-	-	-	-	7	8	-	-	7	8
Spain	8	4	8	24	-	-	62	82	-	-	78	110
Sweden	1	4	261	125	8	16	20	18	-	-	290	163
Switzerland	-	-	182	10	35	47	56	52	-	-	273	109
US	434	2	383	327	254	283	408	355	-	-	1,479	967
Other	92	27	161	75	92	171	146	66	291	243	782	582
Total	17,346	17,208	3,777	2,974	2,690	3,341	3,681	3,172	291	244	27,785	26,939

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 2014, 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 on continuing operations of £24m (2013: £16m). A further reduction of £39m (2013: £35m) would arise as a result of a change in assumed default rates of 12.5 basis points per annum (25% of the spread change).

(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 31 December 2014, the Group had pledged £202m (2013: £29m) of cash and £58m (2013: £26m) of securities as collateral for derivative financial liabilities. At 31 December 2014, the Group had accepted £1,847m (2013: £778m) of cash and £16m (2013: £191m) 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 (g), the Canadian business 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 2014	£m	£m	£m	£m
Financial assets
Derivatives1	3,051	(1,057)	(1,863)	131
Securities lending	-	-	-	-
Total financial assets	3,051	(1,057)	(1,863)	131
Financial liabilities
Derivatives1	(1,260)	1,057	194	(9)
Total financial liabilities	(1,260)	1,057	194	(9)

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 2013	£m	£m	£m	£m
Financial assets
Derivatives1	1,367	(451)	(812)	104
Securities lending	146	-	(146)	-
Total financial assets	1,513	(451)	(958)	104
Financial liabilities
Derivatives1	(496)	451	43	(2)
Total financial liabilities	(496)	451	43	(2)

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 2014 was £442m (2013: £193m) of which £237m related to participating business (2013: £144m) and £205m related to shareholder business (2013: £49m). 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 £22m (2013: £11m) 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 loss of £3m (2013: £8m gain).

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.

42.    Risk management continued 

(d)      Demographic and expense risk

As described in the table on pages 195 to 196, 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 incurred at a higher than expected rate or, in the case of income benefits, 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.

(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 reflect an increase in liabilities or a reduction in expected future profits.

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 - Business written in the Group's insurance entities.

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%
2014	£m	£m	£m	£m	£m	£m	£m	£m
Shareholder business
UK and Europe
Reinsurance assets	-	-	-	-	-	-	1	(1)
Non-participating insurance contract liabilities	(117)	110	(7)	6	1	(1)	(1)	1
Asia and Emerging Markets
Deferred acquisition costs	-	-	-	-	-	-	-	-
Non-participating insurance contract liabilities	-	-	-	-	-	-	-	-
Non-participating investment contract liabilities	-	-	-	-	-	-	-	-
Total shareholder business	(117)	110	(7)	6	1	(1)	-	-
Participating business
UK and Europe
Recourse cash flows	(13)	12	(3)	3	-	-	(3)	3
Total participating business	(13)	12	(3)	3	-	-	(3)	3
Total	(130)	122	(10)	9	1	(1)	(3)	3

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%
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
Asia and Emerging Markets
Deferred acquisitions costs	-	-	-	-	(3)	3	-	-
Non-participating insurance contract liabilities	-	-	-	-	-	-	-	-
Non-participating investment contract liabilities	-	-	-	-	-	-	-	-
Total shareholder business	(99)	93	(7)	8	(3)	3	-	-
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	(115)	108	(12)	12	(2)	2	(4)	4

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

42.   Risk management continued 

(d)      Demographic and expense risk continued

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

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.

(e)      Liquidity risk

As described in the table on pages 195 to 196, 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 2014 and 31 December 2013, 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
2014	£m	£m	£m	£m	£m	£m	£m	£m
Shareholder business
Non-participating insurance contract liabilities	319	1,044	1,143	948	737	1,085	-	5,276
Non-participating investment contract liabilities	-	1	1	1	-	1	-	4
Reinsurance liabilities	-	-	-	-	-	-	-	-
Total shareholder business	319	1,045	1,144	949	737	1,086	-	5,280
Participating business
Non-participating insurance contract liabilities	723	2,597	2,597	1,852	1,194	1,790	-	10,753
Participating insurance contract liabilities	1,532	5,139	2,715	1,740	1,865	2,406	-	15,397
Participating investment contract liabilities	634	2,634	3,414	3,300	2,533	2,676	-	15,191
Unallocated divisible surplus	-	-	-	-	-	-	688	688
Total participating business	2,889	10,370	8,726	6,892	5,592	6,872	688	42,029
Unit linked and segregated funds
Non-participating insurance contract liabilities	4,628	644	378	84	38	40	-	5,812
Non-participating investment contract liabilities	8,060	26,779	23,034	14,152	8,271	7,907	-	88,203
Total unit linked and segregated funds	12,688	27,423	23,412	14,236	8,309	7,947	-	94,015
Total	15,896	38,838	33,282	22,077	14,638	15,905	688	141,324

	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

42.  Risk management continued 

(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
	2014	2013	2014	2013	2014	2013	2014	2013	2014	2013	2014	2013	2014	2013
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Shareholder business
Non-participating investment contract liabilities	4	1,666	-	482	-	291	-	87	-	62	-	117	4	2,705
Subordinated liabilities	390	106	324	397	375	685	341	408	206	278	449	757	2,085	2,631
Borrowings	-	47	-	11	-	-	-	-	-	-	-	-	-	58
Other financial liabilities	907	750	25	35	2	27	-	19	-	13	-	45	934	889
Total shareholder business	1,301	2,569	349	925	377	1,003	341	514	206	353	449	919	3,023	6,283
Participating business
Borrowings	7	10	-	-	-	-	-	-	-	-	-	-	7	10
Other financial liabilities	1,455	629	12	7	19	7	11	7	11	7	242	121	1,750	778
Total participating business	1,462	639	12	7	19	7	11	7	11	7	242	121	1,757	788
Unit linked and segregated funds
Non-participating investment contract liabilities	88,203	95,267	-	-	-	-	-	-	-	-	-	-	88,203	95,267
Borrowings	21	16	7	9	2	3	-	-	-	-	-	-	30	28
Other financial liabilities	839	621	7	13	7	17	7	6	7	6	99	74	966	737
Total unit linked and segregated funds	89,063	95,904	14	22	9	20	7	6	7	6	99	74	89,199	96,032
Total	91,826	99,112	375	954	405	1,030	359	527	224	366	790	1,114	93,979		103,103

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 2014 or 31 December 2013.

Refer to Note 24 - Derivative financial instruments, 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 2014 of £312m and £nil with a contractual maturity of within one year and between one and five years respectively (2013: £377m and £nil).

(f)      Financial assets and liabilities of Canadian operations held for sale

As described in Note 27 - Assets and liabilities held for sale, the Group has reclassified the assets and liabilities of its Canadian business as held for sale. These held for sale financial assets and liabilities continue to be recognised on the consolidated statement of financial position and valued in accordance with the relevant accounting policy.

The table that follows provides an analysis of the Group's financial assets and liabilities held for sale by risk segment:

	Notes	Shareholder business	Participating business	Unit linked business	TPICF & NCI	Total
31 December 2014		£m	£m	£m	£m	£m
Investment property		520	86	811	-	1,417
Derivative financial assets		44	-	-	-	44
Equity securities and interests in pooled investment funds		176	232	11,909	644	12,961
Debt securities
At FVTPL		5,569	418	4,420	287	10,694
At available-for-sale		365	-	-	-	365
Receivables and other financial assets		111	4	93	6	214
Other assets of operations held for sale		2,992	118	428	21	3,559
Assets of operations held for sale	27	9,777	858	17,661	958	29,254
Non-participating insurance contract liabilities		5,671	114	3,640	-	9,425
Non-participating investment contract liabilities		2,118	-	13,734	-	15,852
Derivative financial liabilities		23	-	2	1	26
Other financial liabilities		238	26	101	3	368
Other liabilities of operations held for sale		675	718	15	954	2,362
Liabilities of operations held for sale	27	8,725	858	17,492	958	28,033
Net intersegment assets/(liabilities)		169	-	(169)	-	-
Net assets		1,221	-	-	-	1,221

The shareholder and participating business exposure to market, credit, demographic expense and liquidity risk has been significantly reduced by the sale of the Group's Canadian business on 30 January 2015. The financial assets and liabilities of the Canadian business have been reclassified as held for sale at 31 December 2014 as the carrying amounts will be rewarded principally through sale rather than through continuing use.

The Group's risk management activities in relation to these assets and liabilities have been adapted as a result of the exposure to the credit risk of the purchaser.

(g)     Securities lending arrangements

The Group's Canadian business enters into securities lending arrangements as part of its normal operating activities. The assets and liabilities of the Canadian business were classified as held for sale at 31 December 2014. Assets are pledged by third parties as collateral to support this activity. Collateral held by the Canadian business in respect of securities lending agreements at 31 December 2013 was £153m 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 Canadian business does not have the right to sell or repledge the collateral.

The loaned securities were 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 remained with the Canadian business. Assets on loan at 31 December 2013 consisted of £146m of domestic government securities.

42.  Risk management continued 

(h)     Operational and conduct 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 fair 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. 

43.  Structured entities

A structured entity is defined as an entity where control is not necessarily held through voting rights linked to ownership stake but rather through rights arising from contractual agreements that give power to direct the relevant activities. The Group's interests in structured entities is comprised of investments in a range of investment vehicles. The principal types of structured entities in which the Group has an interest include:

·   Pooled investment funds managed internally and externally, including OEICs, SICAV, unit trusts and limited partnerships

·   Debt securitisation vehicles which issue asset-backed securities.

(a)   Consolidated structured entities

The Group consolidates structured entities which it controls. As at 31 December 2014, the Group has not provided any non-contractual financial or other support to any consolidated structured entity and there are no current intentions to do so.

(b)   Unconsolidated structured entities

The Group has both investments in and other interests in unconsolidated structured entities. The Group has not provided any non-contractual financial or other support to any unconsolidated structured entities and there are no current intentions to do so.

(b)(i) Investments in unconsolidated structured entities

The following table shows the carrying value of the Group's investments in unconsolidated structured entities by line items in the consolidated statement of financial position and by risk segment as defined in Note 42 - Risk management.

	Shareholder business	Participating business	Unit linked and segregated funds	Third party interest in consolidated funds and non-controlling interests	Total
2014	£m	£m	£m	£m	£m
Investment in associates	16	535	3,568	145	4,264
Equity securities and interests in pooled investment funds	19	92	15,845	1,199	17,155
Debt securities	358	793	851	79	2,081
Total	393	1,420	20,264	1,423	23,500

The asset value of these unconsolidated structured entities including the portion in which the Group has no interest is as follows:

	2014
	£m
Investment in associates	28,266
Equity securities and interests in pooled investment funds	433,879
Debt securities	31,046
Total	493,191

The Group's maximum exposure to loss in respect of the interests presented above is the carrying value of the Group's investment. As noted in Note 42 - Risk management, the shareholder is not exposed to market or credit risk in respect of investments held in the unit linked and segregated funds, and third party interests in consolidated funds and non-controlling interests risk segments.

Additional information on how the Group manages its exposure to risk can be found in Note 42 - Risk management.

(b)(ii) Other interests in unconsolidated structured entities

The Group also has interests in structured entities through asset management fees and other fees received. For those structured entities which the Group receives asset management or other fees from but has no direct investment, the maximum exposure to loss is loss of future fees.

Total assets under management of structured entities in which the Group has no direct investments but has other interests in are £13,153m at 31 December 2014. The fees received in respect of these assets under management during the year to 31 December 2014 were £65m.

44.  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. An active market exists where transactions take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

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).

As noted in Group accounting policies (a) Basis of preparation, the consolidated financial statements for the year ended 31 December 2013 have been restated to reflect retrospective application of changes to accounting policies as a result of new IFRSs adopted in the year. The tables throughout this note have been restated to reflect this.

(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 22 and 35 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 19 and 20 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. These methods and assumptions include those used to fair value assets and liabilities held for sale, including the individual assets and liabilities of operations held for sale.

Investments in associates at FVTPL, equity securities and interests in pooled investment funds, and amounts seeded into funds classified as held for sale

Investments in associates at FVTPL are valued in the same manner as the Group's equity securities and interests in pooled investment funds.

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.

Investment property and owner occupied property

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.

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 and derivative financial liabilities

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 2014 and 31 December 2013 the residual credit risk is considered immaterial and therefore no credit risk adjustment has been made.

Debt securities
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.

·   Commercial mortgages
These instruments are valued using models. The models use a discount rate adjustment technique which is an income approach. The key inputs for the valuation models are contractual future cash flows, which are discounted using a discount rate that is determined by adding a spread to the current base rate. The spread is derived from a pricing matrix which incorporates data on current spreads for similar assets and which may include an internal underwriting rating. These inputs are generally observable with the exception of the spread adjustment arising from the internal underwriting rating. The classification of these instruments within the fair value hierarchy will be either level 2 or 3 depending on whether the spread is adjusted by an internal underwriting rating.

Contingent consideration asset and contingent consideration liability
A contingent consideration asset was recognised during the year in respect of a purchase price adjustment mechanism relating to the acquisition of Ignis as discussed in Note 1 - Group structure (b) Acquisitions. The fair value of the asset has been calculated using a binominal tree model. The main inputs are management fee income and expected probabilities of payouts. These are considered unobservable and as a result the asset is classified as level 3 in the fair value hierarchy. A contingent consideration liability was also recognised as a result of business combinations in the year to 31 December 2013, and was valued using a valuation model. The inputs into the model included unobservable inputs due to assumptions made regarding expected movements in assets under management and therefore the liability was classified as level 3 in the fair value hierarchy.

44.  Fair value of assets and liabilities continued

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

Non-participating investment contract liabilities

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

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.

(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.

							Fair value hierarchy
	As recognised in the consolidated statement of financial position line item		Classified as held for sale		Total		Level 1		Level 2		Level 3
	2014	2013	2014	2013	2014	2013	2014	2013	2014	2013	2014	2013
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Investments in associates at FVTPL	4,264	1,515	33	10	4,297	1,525	4,214	1,525	-	-	83	-
Investment property	9,041	8,606	1,427	92	10,468	8,698	-	-	105	64	10,363	8,634
Owner occupied property	138	172	26	-	164	172	-	-	1	1	163	171
Derivative financial assets	4,021	1,991	44	-	4,065	1,991	971	624	3,094	1,367	-	-
Equity securities and interests in pooled investment vehicles	71,327	84,654	13,035	19	84,362	84,673	83,521	83,607	1	-	840	1,066
Debt securities	64,441	69,209	11,059	-	75,500	69,209	23,780	22,199	50,077	45,711	1,643	1,299
Contingent consideration asset	20	-	-	-	20	-	-	-	-	-	20	-
Total assets at fair value	153,252	166,147	25,624	121	178,876	166,268	112,486	107,955	53,278	47,143	13,112	11,170

There were no transfers between levels 1 and 2 during the year (2013: none). Refer to 44(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 42 - Risk management.

							Fair value hierarchy
	As recognised in the consolidated statement of financial position line item		Classified as held for sale		Total		Level 1		Level 2		Level 3
	2014	2013	2014	2013	2014	2013	2014	2013	2014	2013	2014	2013
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Shareholder business
Investments in associates at FVTPL	16	19	14	10	30	29	30	29	-	-	-	-
Investment property	-	491	520	-	520	491	-	-	105	64	415	427
Owner occupied property	3	46	26	-	29	46	-	-	1	1	28	45
Derivative financial assets	18	111	44	-	62	111	-	1	62	110	-	-
Equity securities and interests in pooled investment vehicles	31	172	250	19	281	191	254	183	-	-	27	8
Debt securities	7,235	11,816	5,934	-	13,169	11,816	981	904	10,952	9,980	1,236	932
Contingent consideration asset	20	-	-	-	20	-	-	-	-	-	20	-
Total shareholder business	7,323	12,655	6,788	29	14,111	12,684	1,265	1,117	11,120	10,155	1,726	1,412
Participating business
Investments in associates at FVTPL	535	354	-	-	535	354	452	354	-	-	83	-
Investment property	2,090	1,995	86	-	2,176	1,995	-	-	-	-	2,176	1,995
Owner occupied property	135	126	-	-	135	126	-	-	-	-	135	126
Derivative financial assets	1,649	661	-	-	1,649	661	332	213	1,317	448	-	-
Equity securities and interests in pooled investment vehicles	9,658	10,952	232	-	9,890	10,952	9,526	10,281	-	-	364	671
Debt securities	27,785	26,939	418	-	28,203	26,939	17,036	16,405	10,991	10,359	176	175
Total participating business	41,852	41,027	736	-	42,588	41,027	27,346	27,253	12,308	10,807	2,934	2,967
Unit linked and segregated funds
Investments in associates at FVTPL	3,568	1,089	19	-	3,587	1,089	3,587	1,089	-	-	-	-
Investment property	5,223	4,830	816	59	6,039	4,889	-	-	-	-	6,039	4,889
Owner occupied property	-	-	-	-	-	-	-	-	-	-	-	-
Derivative financial assets	1,711	832	-	-	1,711	832	458	276	1,253	556	-	-
Equity securities and interests in pooled investment vehicles	55,471	66,475	11,909	-	67,380	66,475	67,200	66,421	1	-	179	54
Debt securities	23,597	24,775	4,420	-	28,017	24,775	5,536	4,634	22,273	19,976	208	165
Total unit linked and segregated funds	89,570	98,001	17,164	59	106,734	98,060	76,781	72,420	23,527	20,532	6,426	5,108
Third party interest in consolidated funds and non-controlling interests
Investments in associates at FVTPL	145	53	-	-	145	53	145	53	-	-	-	-
Investment property	1,728	1,290	5	33	1,733	1,323	-	-	-	-	1,733	1,323
Owner occupied property	-	-	-	-	-	-	-	-	-	-	-	-
Derivative financial assets	643	387	-	-	643	387	181	134	462	253	-	-
Equity securities and interests in pooled investment vehicles	6,167	7,055	644	-	6,811	7,055	6,541	6,722	-	-	270	333
Debt securities	5,824	5,679	287	-	6,111	5,679	227	256	5,861	5,396	23	27
Third party interest in consolidated funds and non-controlling interests	14,507	14,464	936	33	15,443	14,497	7,094	7,165	6,323	5,649	2,026	1,683
Total	153,252	166,147	25,624	121	178,876	166,268	112,486	107,955	53,278	47,143	13,112	11,170

44.  Fair value of assets and liabilities continued

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

(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.

							Fair value hierarchy
	As recognised in the consolidated statement of financial position line item		Classified as held for sale		Total		Level 1		Level 2			Level 3
	2014	2013	2014	2013	2014	2013	2014	2013	2014	2013	2014		2013
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m		£m
Non-participating investment contract liabilities	88,203	95,267	13,734	-	101,937	95,267	-	-	101,937	95,267	-		-
Liabilities in respect of third party interest in consolidated funds	15,805	16,058	953	-	16,758	16,058	-	-	15,419	14,812	1,339		1,246
Derivative financial liabilities	1,693	932	26	-	1,719	932	441	436	1,278	496	-		-
Contingent consideration liability	3	15	-	-	3	15	-	-	-	-	3		15
Total liabilities at fair value	105,704	112,272	14,713	-	120,417	112,272	441	436	118,634	110,575	1,342		1,261

There were no transfers between levels 1 and 2 during the period (2013: none). Refer to 44(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 42 - Risk management.

							Fair value hierarchy
	As recognised in the consolidated statement of financial position line item		Classified as held for sale		Total		Level 1		Level 2		Level 3
	2014	2013	2014	2013	2014	2013	2014	2013	2014	2013	2014	2013
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Shareholder business
Derivative financial liabilities	17	41	23	-	40	41	8	5	32	36	-	-
Contingent consideration liability	3	15	-	-	3	15	-	-	-	-	3	15
Total shareholder business	20	56	23	-	43	56	8	5	32	36	3	15
Participating business
Derivative financial liabilities	80	134	-	-	80	134	26	53	54	81	-	-
Total participating business	80	134	-	-	80	134	26	53	54	81	-	-
Unit linked and segregated funds
Non-participating investment contract liabilities	88,203	95,267	13,734	-	101,937	95,267	-	-	101,937	95,267	-	-
Derivative financial liabilities	1,187	519	2	-	1,189	519	319	256	870	263	-	-
Total unit linked and segregated funds	89,390	95,786	13,736	-	103,126	95,786	319	256	102,807	95,530	-	-
Third party interest in consolidated funds and non-controlling interests
Liabilities in respect of third party interest in consolidated funds	15,805	16,058	953	-	16,758	16,058	-	-	15,419	14,812	1,339	1,246
Derivative financial liabilities	409	238	1	-	410	238	88	122	322	116	-	-
Third party interest in consolidated funds and non-controlling interests	16,214	16,296	954	-	17,168	16,296	88	122	15,741	14,928	1,339	1,246
Total	105,704	112,272	14,713	-	120,417	112,272	441	436	118,634	110,575	1,342	1,261

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

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

	Investments in associates at FVTPL		Investment property		Owner occupied property		Equity securities and interests in pooled investment funds		Debt securities		Liabilities in respect of third party interest in consolidated funds
	2014	2013	2014	2013	2014	2013	2014	2013	2014	2013	2014	2013
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
At 1 January	-	-	8,542	8,530	171	111	1,066	1,118	1,299	1,402	(1,246)	(1,205)
Reclassified as held for sale	-	-	(1,233)	(92)	(42)	-	(1)	-	(945)	-	-	-
Total gains/(losses) recognised in the consolidated income statement	2	-	825	315	4	(3)	(31)	89	38	(77)	(124)	(45)
Purchases	101	-	1,033	615	-	-	112	93	439	402	35	7
Settlement	-	-	-	-	-	-	-	-	-	-	(3)	(3)
Sales	(20)	-	(128)	(712)	-	-	(306)	(244)	(87)	(227)	-	-
Transfers in to level 3	-	-	-	-	-	-	1	15	436	194	-	-
Transfers out of level 3	-	-	-	-	-	-	(1)	(9)	(659)	(312)	-	-
Foreign exchange adjustment	-	-	(14)	(103)	-	(5)	(4)	5	(2)	(83)	-	-
Total gains recognised in revaluation of owner occupied property within other comprehensive income1	-	-	-	-	5	68	-	-	-	-	-	-
Other	-	-	16	(11)	-	-	-	(1)	-	-	-	-
At 31 December	83	-	9,041	8,542	138	171	836	1,066	519	1,299	(1,338)	(1,246)

¹    Movements recognised in the income statement and other comprehensive income for the year ended 31 December 2013 includes discontinued operations.

The Group recognised a contingent consideration asset during the year of £20m, in respect of the acquisition of Ignis. The fair value remained at £20m at 31 December 2014. There were no settlements during the year.

In addition, the Group carried a contingent consideration liability with a fair value of £15m at 31 December 2013. The liability was settled in full during the year for £15m. Movements in fair value of contingent consideration assets and contingent consideration liabilities are recognised in the consolidated income statement.

As at 31 December 2014, £625m of total gains from continuing operations (2013: £149m) 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 £749m gains (2013: £194m) were recognised in investment return from continuing operations and £124m losses (2013: £45m) were recognised in change in liability for liabilities in respect of third party interest in consolidated funds from continuing operations 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 following table 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.

·   Contingent consideration asset valuation is provided by an external valuer using a binominal tree option pricing model. Sensitivities are determined through adjusting probabilities applied to expected payout patterns.

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). Movements in level 3 securities

44.   Fair value of assets and liabilities continued

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

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

held by the other risk segments are offset by an opposite movement in investment and insurance contract liabilities and therefore the shareholder is not directly exposed to such movements unless they are sufficiently severe to cause the assets of the participating business to be insufficient to meet the obligations to policyholders.

Changing unobservable inputs in the measurement of the fair value of level 3 financial assets to reasonably possible alternative assumptions would not have a significant impact on profit for the year or total assets.

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

	Fair value
2014	£m	Valuation technique	Unobservable input	Range (weighted average)
Investment property and owner occupied property	8,753	Income capitalisation	Equivalent yield Estimated rental value  by Square metre	3.8% to 12.9% (5.5%) £11 to £2,422 (£345)
Investment property (hotels)	312	Income capitalisation	Equivalent Yield Estimated rental value per room	4.6% to 7.3% (6.2%) £215 to £43,143 (£8,918)
Investment property and owner occupied property	1,337	Discounted cash flow	Internal rate of return Terminal capitalisation rate	6.0% to 10.5% (7.3%) 5.3% to 9.5% (6.6%)
Investment property and owner occupied property	124	Market comparison	Estimated value per square metre	£2 to £10,764 (£2,591)
Equity securities and interests in pooled investment funds and investments in associates at FVTPL  (private equity investments)	923	Adjusted net asset value	Adjustment to net asset value1	N/A
Debt securities (corporate bonds)	1,369	Single broker	Single broker indicative price2	N/A
Debt securities (commercial mortgages)	274	Discounted cash flow	Internal underwriting rating	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.

	Fair value
2013	£m	Valuation technique	Unobservable input	Range (weighted average)
Investment property and owner occupied property	7,174	Income capitalisation	Equivalent yield Estimated rental value  by square metre	4.1% to 13.5% (6.1%) £11 to £3,229 (£389)
Investment property (hotels)	276	Income capitalisation	Equivalent yield Estimated rental value  per room	5.5% to 8.1% (6.5%) £105 to £9,100 (£3,452)
Investment property and owner occupied property	1,275	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 and investments in associates at FVTPL (private equity investments)	1,066	Adjusted net asset value	Adjustment to net asset value1	N/A
Debt securities (corporate bonds)	1,232	Single broker	Single broker indicative price2	N/A
Debt securities (commercial mortgages)	67	Discounted cash flow	Internal underwriting rating	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.

(e)     Assets and liabilities not carried at fair value

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.

		As recognised in the consolidated statement of financial position line item		Classified as held for sale		Total carrying value		Fair value
		2014	2013	2014	2013	2014	2013	2014	2013
	Notes	£m	£m	£m	£m	£m	£m	£m	£m
Assets
Loans secured by mortgages	23	107	2,705	2,230	-	2,337	2,705	2,426	2,779
Liabilities					-
Non-participating investment contract liabilities	35,27	4	2,392	2,118	-	2,122	2,392	2,285	2,545
Subordinated notes	37,27	499	728	223	-	722	728	800	795
Subordinated guaranteed bonds	37	502	502	-	-	502	502	580	571
Mutual Assurance Capital Securities	37	611	631	-	-	611	631	643	674

Loans measured at amortised cost primarily include commercial mortgages within the Group's commercial mortgage portfolio. The fair value of these loans is estimated using a discount rate adjustment technique which is an income approach. The key inputs for the valuation model are contractual future cash flows, which are then discounted using a discount rate that is determined by adding a spread to the current risk free rate from government bonds with terms that match the mortgage loans' terms. The spread is derived from market information available on current mortgage rates which is considered to be observable.

The estimated fair values for subordinated liabilities are based on the quoted market offer price.

It is not possible to reliably calculate the fair value of participating investment contract liabilities. The assumptions and methods used in the calculation of these liabilities are set out in Note 34 - Insurance contracts, investment contracts and reinsurance contracts. The carrying value of participating investment contract liabilities at 31 December 2014 was £15,193m including those classified as held for sale (31 December 2013: £14,707m).

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
	2014	2013	2014	2013	2014	2013	2014	2013
	£m	£m	£m	£m	£m	£m	£m	£m
Assets
Loans secured by mortgages	-	-	2,426	2,779	-	-	2,426	2,779
Liabilities
Non-participating investment contract liabilities	-	-	-	-	2,285	2,545	2,285	2,545
Subordinated notes	-	-	800	795	-	-	800	795
Subordinated guaranteed bonds	-	-	580	571	-	-	580	571
Mutual Assurance Capital Securities	-	-	643	674	-	-	643	674

45.  Statement of cash flows

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

(a)     Change in operating assets

	2014	2013 restated1
	£m	£m
Investment property	(1,633)	(98)
Equity securities and interests in pooled investment funds	3,190	(20,970)
Debt securities	(7,716)	2,986
Derivative financial instruments	(1,270)	315
Reinsurance assets	(60)	726
Investments in associates and joint ventures	(2,697)	(254)
Receivables and other financial assets and other assets	(333)	(245)
Deferred acquisition costs	7	(8)
Loans	(165)	146
Assets held for sale	(2,778)	(121)
Change in operating assets	(13,455)	(17,523)

¹    Comparative periods presented have been restated to reflect retrospective application of changes to accounting policies as a result of new IFRSs adopted in the period. Refer to Group accounting policies - (a) Basis of preparation.

(b)     Change in operating liabilities

	2014	2013 restated1
	£m	£m
Other financial liabilities and other liabilities	1,617	189
Deposits received from reinsurers	53	(548)
Pension and other post-retirement benefit provisions	(12)	(12)
Deferred income	(36)	(37)
Insurance contract liabilities	3,294	(1,019)
Investment contract liabilities	6,491	14,401
Change in liability for third party interest in consolidated funds	(2,458)	893
Liabilities held for sale	2,751	-
Change in operating liabilities	11,700	13,867

¹    Comparative periods presented have been restated to reflect retrospective application of changes to accounting policies as a result of new IFRSs adopted in the period. Refer to Group accounting policies - (a) Basis of preparation.

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

		2014	2013 restated1
		£m	£m
Depreciation of property, plant and equipment		16	14
Amortisation of intangible assets		41	30
Impairment losses on intangible assets		47	-
Impairment losses on property, plant and equipment		-	5
Impairment losses reversed on property, plant and equipment		(5)	(2)
Impairment losses on deferred acquisition costs		9	-
Other interest cost		6	4
Finance costs		107	108
Share of profit from associates and joint ventures		(32)	(25)
Non-cash and other items		189	134

¹    Comparative periods presented have been restated to reflect retrospective application of changes to accounting policies as a result of new IFRSs adopted in the period. Refer to Group accounting policies - (a) Basis of preparation.

46.  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. 

47.  Commitments

(a)     Capital commitments

As at 31 December 2014, capital expenditure that was authorised and contracted for, but not provided and incurred, was £332m (2013: £383m) in respect of investment property. Of this amount, £287m (2013: £332m) and £36m (2013: £51m) 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.

	2014	2013
	£m	£m
Commitments to extend credit with an original term to maturity of one year or less	1	66
Other commitments	300	326

Included in other commitments is £300m (2013: £284m) 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.

(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 from continuing operations are as follows:

	2014	2013 restated1
	£m	£m
Not later than one year	36	29
Later than one year and no later than five years	61	51
Later than five years	63	69
Total operating lease commitments	160	149

¹    Comparative periods presented have been restated to reflect classification in the current year of the Group's Canadian business as discontinued operations. Refer to Note 12 - Discontinued operations.

48.  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 (Standard Life Investments 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 executive 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 Standard Life Investments 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 2014 and 2013 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

(i)       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 £1,800 (the maximum limit increased from £1,500 from 1 September 2014). 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:

	2014					2013
	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	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
Granted	9,268,993	1,547,881	270,053	2,855,756	296p	7,633,734	2,423,381	414,117	1,516,288	271p
Forfeited	(8,294,265)	(596,595)	(36,876)	(280,728)	185p	(7,339,754)	(222,202)	(206,088)	(473,957)	164p
Exercised	(11,888,693)	(899,078)	(361,884)	(2,948,049)	157p	(15,222,137)	(558,609)	(851,163)	(185,589)	158p
Expired	-	-	-	(15,763)	165p	-	-	-	(6,784)	171p
Cancelled	-	-	-	(61,695)	254p	-	-	-	(61,941)	196p
Outstanding at 31 December	25,131,521	2,732,361	557,301	8,235,878	228p	36,045,486	2,680,153	686,008	8,686,357	184p
Exercisable at 31 December	10,365	9,931	-	227,318	157p	34,407	63,320	-	2,950	167p
Weighted average remaining contractual life of options outstanding (years)	2.40	1.81	1.19	2.76	-	1.41	2.62	1.21	2.58	-

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	28 March 2014 and 20 May 2014	Throughout	28 March 2014	6 October 2014
Share price at grant date	383p	383p	380p	403p
Fair value at grant date	383p	383p	380p	89p
Exercise price	Nil	Nil	Nil	287p-308p
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)	3.56	2.84	3.24	3.43
Options exercised during the year
Share price at time of exercise	387p	391p	395p	390p

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.

48.  Employee share-based payments continued

(a)     Options granted continued

The following table shows the range of exercise prices of options outstanding at 31 December 2014. All options are exercisable for a period of six months after the vesting date.

	2014	2013
	Number of options outstanding	Number of options outstanding
Long-term incentive plans
£nil	27,863,882	38,725,639
Short-term incentive plan
£nil	557,301	686,008
Sharesave
157p	3,129,728	6,281,020
218p-234p	823,405	894,547
250p-272p	1,465,743	1,510,790
287p-308p	2,817,002	-
Outstanding at 31 December	36,657,061	48,098,004

(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.

	2014	2013
Number of instruments granted1	318,208	349,865
Share price at date of grant	389p	361p
Fair value per granted instrument at grant date	389p	361p

¹    Included in the number of instruments granted are 53,598 (2013: 58,657) 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:

	2014	2013 restated1
	£m	£m
Share options granted under long-term incentive plans	22	26
Share options granted under Sharesave	1	1
Share options granted under short-term incentive plans	1	1
Matching shares granted under share incentive plans	1	1
Expense from continuing operations	25	29
Expense from discontinued operations	2	3
	27	32

¹    Comparative periods presented have been restated to reflect classification in the current year of the Group's Canadian business as discontinued operations. Refer to Note 12 - Discontinued operations.

Additionally, the Group incurred an expense for cash-settled share-based payment schemes from continuing operations of £2m in 2014 (2013: £3m) and £nil (2013: £1m) from discontinued operations. The liability for cash-settled share-based payments outstanding at 31 December 2014 is £6m (2013: £5m).

49.  Related party transactions

(a)     Transactions and balances with 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:

	2014	2013 restated1
	£m	£m
Sale to
Associates	451	717
Joint ventures	1	13
Other related parties	94	31
	546	761
Purchase from
Associates	816	663
Joint ventures	14	24
	830	687

¹    Comparatives for the year ended 31 December 2013 have been restated to reflect retrospective application of changes to accounting policies as a result of new IFRSs adopted in the period and the classification in the current year of the Group's Canadian business as discontinued operations. Refer to Group accounting policies - (a) Basis of preparation and Note 12 - Discontinued operations.

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:

	2014	2013
	£m	£m
Due from related parties
Associates	16	16
Joint ventures	2	3
	18	19

In addition to the amounts shown above, the Group's defined benefit pension plans have assets of £1,553m (2013: £782m) invested in investment vehicles managed by the Group.

(b)     Compensation of key management personnel

Key management personnel comprise 19 people (2013: 19 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:

	2014	2013 restated1
	£m	£m
Salaries and other short-term employee benefits	9	8
Post-employment benefits	1	1
Share-based payments	4	5
Termination benefits	-	1
Total compensation of key management personnel	14	15

¹    Comparative periods presented have been restated to reflect classification in the current year of the Group's Canadian business as discontinued operations. Refer to Note 12 - Discontinued operations.

(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 2014, key management personnel and their close family members contributed £1m (2013: £3m) to products sold by the Group.

50.    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 - Chief Financial Officer's 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 Financial Officer. 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 42 - 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 £4,317m at 31 December 2014 (2013: £4,700m) 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 the held for sale insurance entities in Canada and insurance entities in 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 in the following table. This includes the capital position and contract liabilities of the Canadian business classified as held for sale in the consolidated statement of financial position.

50.    Capital statement continued

	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
2014	£m	£m	£m	£m	£m	£m	£m	£m
Available capital resources
Equity holders' funds
Held outside life assurance funds	-	-	884	884	1,418	2,302	931	3,233
Held within life assurance funds	-	1,439	-	1,439	-	1,439	-	1,439
Equity attributable to ordinary equity holders of Standard Life plc	-	1,439	884	2,323	1,418	3,741	931	4,672
Unallocated divisible surplus	688	-	-	688	-	688	-	688
Other sources of capital
Subordinated liabilities	-	-	-	-	223	223	1,318	1,541
Internal subordinated liabilities	-	-	819	819	-	819	(819)	-
	-	-	819	819	223	1,042	499	1,541
Adjustments onto regulatory basis
Changes to the valuation of contract liabilities	3,593	(67)	-	3,526	-	3,526	-	3,526
Exclusion of deferred acquisition costs and other inadmissible assets	(47)	(572)	(287)	(906)	(271)	(1,177)	(475)	(1,652)
Exclusion of deferred income	60	211	-	271	1	272	-	272
Changes to the valuation of other assets and liabilities	206	(797)	(268)	(859)	84	(775)	269	(506)
	3,812	(1,225)	(555)	2,032	(186)	1,846	(206)	1,640
Total available capital resources to meet regulatory requirement	4,500	214	1,148	5,862	1,455	7,317	1,224	8,541
Analysed as follows:
Capital not subject to constraints	-	-	1,132	1,132	538	1,670	1,039	2,709
Capital subject to constraints	4,500	214	16	4,730	917	5,647	185	5,832
Total available capital resources	4,500	214	1,148	5,862	1,455	7,317	1,224	8,541
Restricted assets within the long-term business fund								(1,172)
Regulatory capital resources								7,369
Regulatory capital resources requirement				3,637	747	4,384	73	4,457
Regulatory capital surplus								2,912
Analysis of contract liabilities2
Participating
Insurance contracts	15,397	-	-	15,397	702	16,099	-	16,099
Investment contracts	15,191	-	-	15,191	2	15,193	-	15,193
Total participating contract liabilities	30,588	-	-	30,588	704	31,292	-	31,292
Unit linked
Insurance contracts	-	5,512	-	5,512	3,936	9,448	-	9,448
Investment contracts	-	88,151	-	88,151	13,794	101,945	-	101,945
Total unit linked liabilities	-	93,663	-	93,663	17,730	111,393	-	111,393
Other non-participating
Insurance contracts	10,760	5,877	-	16,637	5,178	21,815	3	21,818
Investment contracts	-	295	-	295	1,819	2,114	-	2,114
Total other non-participating liabilities	10,760	6,172	-	16,932	6,997	23,929	3	23,932
Total contract liabilities	41,348	99,835	-	141,183	25,431	166,614	3	166,617

¹    Capital resources amounting to £183m in respect of other with profits funds are disclosed within the Heritage With Profits Fund column. Participating contract liabilities amounting to £1,533m relating to the new with profits funds created at demutualisation are disclosed within the Heritage With Profits Fund column.

²      Contract liabilities include the contract liabilities of the Canadian business classified as held for sale. Refer to Note 27 - Assets and liabilities held for sale.

	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.

50.  Capital statement continued

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
2014	£m	£m	£m	£m	£m	£m	£m	£m
At 1 January	4,815	204	1,763	6,782	1,538	8,320	1,299	9,619
Methodology/modelling changes	351	(2)	-	349	15	364	-	364
Change in assumptions used to measure life assurance contract liabilities and experience differences	26	55	-	81	10	91	-	91
New business	(11)	(157)	-	(168)	(8)	(176)	-	(176)
Investment surplus	(225)	53	47	(125)	126	1	-	1
Equity holder/inter-fund transfers	(37)	22	40	25	14	39	(39)	-
Dividend transfers	-	-	(296)	(296)	(191)	(487)	101	(386)
Redemption of subordinated liabilities	-	-	(294)	(294)	-	(294)	-	(294)
Other factors	(419)	39	(112)	(492)	(49)	(541)	(137)	(678)
At 31 December	4,500	214	1,148	5,862	1,455	7,317	1,224	8,541

Equity holder/inter-fund transfers of £37m (2013: £213m) includes the transfer from the HWPF to the PBF and support provided to the German With Profits Fund.

In November 2014, the Company notified the PRA of its intention to call the Euro denominated 5.314% fixed/floating rate Mutual Assurance Capital Securities (MACS) prior to 31 December 2014. At this time these MACS became excluded from regulatory capital resources. As noted in Note 51 - Events after the reporting date, the MACS were redeemed in full on 6 January 2015.

	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

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 2014, SLAL had available capital resources of £5,862m (2013: £6,782m) and a CRR of £3,637m (2013: £3,846m). 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 £4,730m at 31 December 2014 (2013: £5,032m) 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 £1,455m (2013: £1,538m), which relate mainly to operations in Canada classified as held for sale at 31 December 2014, 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 £917m at 31 December 2014 (2013: £866m). 

Other activities

At 31 December 2014, capital resources of £1,224m (2013: £1,299m) and capital subject to constraints of £185m (2013: £104m) 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 and Singapore. 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 £4,714m (2013: £5,019m) is restricted to the level of the CRR of those funds of £3,637m (2013: £3,846m). 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 2014 is a surplus of £2,912m (2013: £3,802m). The decrease in the estimated regulatory capital surplus is as a result of the acquisition of Ignis Asset Management Limited and the call of the Euro denominated 5.314% fixed/floating rate perpetual MACS.

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 34 - 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 42 - Risk management.

51.  Events after the reporting date

On 3 September 2014 the Group announced its intention to sell its Canadian business to The Manufacturers Life Insurance Company (MLC), a subsidiary of Manulife Financial Corporation (Manulife). The sale of the Group's Canadian long-term savings and retirement, individual and group insurance business (Standard Life Financial Inc.) and Canadian investment management business (Standard Life Investments Inc.) completed on 30 January 2015 for a fixed consideration of CA$4bn (£2.1bn). A further £0.1bn was received from the settlement of related hedging derivative contracts.

The Group expects to recognise a gain on sale of approximately £1.1bn which has been estimated based on book values as at 31 December 2014 (the actual gain on sale will be based on book values as at 30 January 2015 when the sale completed). The gain on sale is expected to be exempt from tax under UK and Canadian tax legislation and therefore no tax charge is expected to arise.

Following the sale the Group proposes to return to shareholders 73 pence per Ordinary Share (approximately £1.75bn). This will be through an issue of B Shares and/or C Shares which is intended to enable the majority of shareholders to receive their cash proceeds as capital, income or a combination of the two. In conjunction with the return of value, the Company will undertake a share consolidation.

On 6 January 2015 the Company redeemed in full the Euro denominated 5.314% fixed/floating rate perpetual Mutual Assurance Capital Securities at their outstanding principal amount of €360,000,000. 

 

END

 

 

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