TIDMSL.

RNS Number : 7411X

Standard Life plc

24 February 2017

Standard Life plc

Full Year Results 2016

Part 2 of 8

Strategic Report

Highlights

Financial highlights

 
Assets under 
 administration 
 (AUA)                            Operating profit 
--------------------              ------------------- 
GBP357.1bn                        GBP723m 
 2015: GBP307.4bn                  2015: GBP665m 
 
                                  Underlying cash 
Net flows                          generation 
--------------------              ------------------- 
GBP2.6bn outflow                  GBP502m 
 2015: GBP6.3bn                    2015: GBP459m(1) 
 inflow 
 
Operating return 
 on equity                        Cost/income ratio 
--------------------              ------------------- 
15.2%                             62% 
 2015: 14.2%(2)                    2015: 63% 
 
Full year dividend 
 per share 
-------------------- 
19.82p 
 2015: 18.36p 
 
We include measures here which 
 have not been determined to 
 be KPIs but we believe are integral 
 to the Group's performance. 
IFRS profit after 
 tax attributable                 Basic earnings 
 to equity holders                 per share 
--------------------              ------------------- 
GBP368m                           18.7p 
 2015: GBP276m                     2015: 13.5p 
2015 comparatives are in relation 
 to continuing operations unless 
 otherwise stated. 
 (1) Comparative has been restated. 
 See Chief Financial Officer's 
 overview. 
 (2) Comparative includes discontinued 
 operations. 
 Non-financial highlights 
 
 
Movement in Standard 
 Life brand net                   Employee engagement 
 promoter score                    survey Engagement 
--------------------              ------------------- 
Down 11                           65% 
 2015: Up 5                        2015: 63% 
                                   Enablement 
                                  ------------------- 
                                  62% 
                                   2015: 64% 
 

Key performance indicators (KPIs) are defined as the measures by which the development, performance or position of the business can be measured effectively.

The Strategic report and financial highlights 2016 contains extracts from the Group's Annual report and accounts 2016. For further information and a fuller understanding of the results and the state of affairs of the Group, please refer to the full Annual report and accounts 2016 which can be found on our website at www.standardlife.com/annualreport

The auditors' report on the full accounts for the year ended 31 December 2016 was unqualified, and their statement under section 496 of the Companies Act 2006 (whether the Strategic Report and the Directors' Report are consistent with the accounts) was unqualified.

Who we are

We were established in Edinburgh in 1825. Today we're an investment company employing 6,300 people - through operations in the UK, Europe, North America, Asia and Australia.

Our purpose is to invest for a better future. We do it to make a difference. For our customers and clients, our people and our shareholders. This takes the combined skills, expertise and collaboration of a team of people who are committed to excellence in all they do.

Our simple business model is designed to help us generate value over the long term. We manage, administer and advise on assets for customers and clients and our businesses are focused on meeting their investment needs.

Our business today

Growing our business...

Where we operate

We have offices in many of the world's financial centres and market locations. Operating this way lets us understand where and how markets and trends are developing and also how best we can respond to them.

Our head office is in Edinburgh with key operations in London, Dublin and Frankfurt. We also have regional hubs in Boston and Hong Kong for asset management.

Our associate businesses in India, HDFC Life and HDFC Asset Management, are based in Mumbai. Our joint venture in China, Heng An Standard Life, operates out of Tianjin.

Expanding our reach

We are building on the strong foundation of our business in the UK, with acquisitions during 2016 that have strengthened our position in the advice and adviser platform markets. We continued to expand internationally too, including a new office in Tokyo and commencing a strategic partnership with Challenger, a leading retirement income group in Australia.

 
...to meet customer and client needs 
 Our businesses 
             Standard Life                 Pensions and                 India and China 
              Investments                   Savings 
--------- 
Overview     Standard Life                 Our Pensions                 Through a combination 
              Investments specialises       and Savings business         of associate 
              in active asset               is a leading                 and joint venture 
              management. Our               provider of long-term        life businesses, 
              key markets are               savings and investment       we have extensive 
              in the UK, Europe,            propositions.                reach in the 
              North America                 We are primarily             key savings markets 
              and Asia. We                  based in the                 in India and 
              offer a wide                  UK, with operations          China. We also 
              range of investment           in Ireland and               have a wholly 
              solutions and                 Germany and serve            owned business 
              funds, all supported          around 4.5 million           in Hong Kong. 
              by a distinctive              customers and                Across these 
              investment philosophy         clients. Our                 businesses, we 
              -Focus on Change.             main aim is to               help to look 
                                            help people manage           after the life 
                                            their money today            insurance needs 
                                            and save for                 of over 25 million 
                                            their future.                customers. 
---------    --------------------------    -------------------------    ----------------------- 
How we       Our investment                In the UK, through           HDFC Life, our 
 operate      funds and solutions           our Workplace                associate business 
              are available                 channel, we offer            in India, sells 
              to clients through            pensions, savings            individual and 
              two distribution              and flexible                 group life insurance 
              channels.                     benefits schemes             policies via 
              Our Institutional             to employees                 a network of 
              channel manages               through their                around 400 branches 
              assets for a                  employers.                   as well as through 
              wide range of                 Our Retail channel           a number of key 
              institutions,                 is a mix of intermediary     bancassurance 
              such as pension               relationships                relationships. 
              fund clients,                 (financial advisers),        Heng An Standard 
              government authorities,       direct customer              Life (HASL), 
              corporates, charities         relationships                our joint venture 
              and insurance                 and our own financial        business in China 
              companies.                    planning business            has 82 offices 
              Our Wholesale                 (1825).                      offering life 
              channel provides              Our valuable                 and health insurance 
              funds and solutions           mature book includes         products on both 
              to retail investors           UK mature Retail             a group and individual 
              through wholesale             as well as spread/risk       basis. Sales 
              distributors                  products, such               are predominantly 
              and platforms.                as annuities                 made direct to 
              We also provide               and protection.              customers and 
              active asset                  In Ireland and               clients. HASL 
              management services           Germany, we offer            also maintains 
              for life insurance            savings and investment       relationships 
              books to the                  products to a                with bank and 
              wider Standard                variety of customers         insurance brokers. 
              Life Group and                and clients.                 We operate as 
              to strategic                                               Standard Life 
              partners such                                              in Hong Kong, 
              as the Phoenix                                             selling insurance 
              Group.                                                     and savings products 
              Our associate                                              via insurance 
              business, HDFC                                             brokers. 
              Asset Management, 
              is a leading 
              manager of mutual 
              funds in India. 
---------    --------------------------    -------------------------    ----------------------- 
Operating    GBP383m                       GBP362m                      GBP36m 
 profit       (2015: GBP342m)               (2015: GBP357m)              (2015: GBP27m) 
---------    --------------------------    -------------------------    ----------------------- 
Outlook      We expect the                 We believe the               Following the 
              low interest                  demand for financial         announcement 
              rate and compressed           advice will continue         in August 2016, 
              return climate                to grow. To meet             the aim is to 
              in financial                  that demand,                 complete the 
              markets to continue.          we aim to continue           proposed combination 
              We will continue              growing our platform         of the life insurance 
              to develop innovative         business and                 businesses of 
              investment solutions          to pursue further            HDFC Life and 
              and global distribution       opportunities                Max Life within 
              to further diversify          to build scale               the next 12 months, 
              our business.                 in our 1825 financial        subject to necessary 
              This includes                 advice business.             approvals being 
              expanding our                 Our Workplace                obtained. 
              liability aware               business is expected         We are well positioned 
              offering and                  to continue to               for expected 
              range of multi-asset          benefit from                 future growth 
              investment solutions.         ongoing implementations      in the life insurance 
              We are also strengthening     from auto enrolment,         markets in India 
              our private markets           securing a steady            and China. We 
              capabilities.                 flow of regular              continue to develop 
              We will continue              contributions                our future business 
              to expand our                 into our pension             strategy in mainland 
              geographic reach              products.                    China and Hong 
              through developing            We will respond              Kong. 
              our own distribution          to European Union            In China, HASL 
              and building                  developments                 continues to 
              strong relationships          in a way that                work towards 
              with strategic                takes into account           gaining a pensions 
              partners.                     the best interests           licence from 
                                            of customers,                the China Insurance 
                                            clients and our              Regulatory Commission. 
                                            business. 
 

Message from the Chairman

An unpredictable and changing world

2016 was not a good year for experts and much happened that was unpredicted and unexpected. In the UK we have had a change of leadership in Government and a great shift in terms of the future direction for the nation as a result of the decision to leave the European Union. In the US there is a new President, clearly different from his predecessor. It has been a time of great and significant change and it will be some years for the long-term effects to become apparent. The good news is that our business has had, in its 191-year history, a very good track record of being able to navigate times of internal, economic, and societal change, all whilst keeping its customers and clients absolutely at the heart of what it does. Change brings comparative advantage for well-run businesses, provided they anticipate and adapt.

Across the world, markets continued to feel the effects of short-term peaks and troughs and this has affected our investment performance in certain asset classes. However, we have a very fine investment management business and a good many excellent investment professionals and I'm confident that our robust processes will continue to deliver strong performance over the longer term.

The major developments in our business in 2016 have been aimed at increasing the depth and reach of what we do. Increased scale is allowing us to improve our operational efficiency and to widen the services we can provide to our customers and clients around the world.

Our dividend

Together with our focus to deliver against our established strategy, we have again generated another solid set of financial results. We continued to make good profits, continued to invest in our operations for the future, and continued to manage our balance sheet effectively.

I am very pleased to confirm, as a result of our strong performance, another year of increased dividend payments to our shareholders. Our final dividend for 2016 is 13.35p per share (up 8.2% on 2015) and gives a total 2016 dividend of 19.82p per share (up 8.0% on 2015). If our shareholders approve the final dividend at our Annual General Meeting in May this year, it will be paid out on 23 May 2017.

Business overview

During 2016, we made several key announcements, designed to further our ambitions. We made a significant strategic investment in the adviser platform market by acquiring Elevate. Together with our own Wrap platform, this gives us a much bigger footprint in the UK marketplace. The demand for platforms and also for professional financial advice has grown as more people are empowered to take control of their long-term savings plan. We also acquired three independent advice businesses as part of our growth strategy for our 1825 brand.

Our investment expertise in both public and private markets continued to develop and our global investment activities further expanded both geographically and in the range of clients we serve. We are closely monitoring potential changes both in regulation and customer behaviour in asset management and we are determined to maintain our position as a successful global investment company of significant expertise and scale.

We have very substantial investments in India through our partner HDFC -- one of the leading players in both asset management and life insurance. A change in legislation gave us the opportunity to increase our investment in HDFC Life, which has continued to expand in the Indian life and pensions market, as well as geographically too into the Gulf region. HDFC Life is also working towards combining its life insurance business with that of Max Life, which will give it significantly increased scale and opportunity.

European Union

The decision of the people of the UK to leave the European Union after over 40 years is one of profound importance which is bound to impact our business. For example, we use 'passporting' to service our 500,000 customers in Ireland, Germany and Austria through branches of our UK business, and to allow our Ireland business to service those UK customers invested in our International Bond. Whatever the outcome of the negotiations that will shortly start between the UK and the EU, our intention is to maintain current levels of service for all our customers.

It is no secret that, prior to the referendum, I publicly advocated the advantages that membership of the single market gives to the financial services industry in the UK, and to Standard Life, our customers and clients. It's now clear that many of these advantages will no longer be available. The people have spoken, the politicians are preparing for the Article 50 negotiations and we, as a responsible business, will do everything we can to make a success of the UK's new position in the world.

We intend to play our full part in influencing the negotiations and helping to build a solution that is right for the UK. We believe that this will benefit our customers, our shareholders, our employees and, ultimately, our country.

Culture and governance

Our company's culture is built on a set of strong values, including customer focus and trust. We embody these values in everything that we do. Governance and conduct are the measures we put in place, in part, to ensure we are continuing to follow our values consistently. I have always been very vocal in championing effective governance at board level. In 2016, we continued to look at how best we can serve the needs of our business, our customers and clients and, of course, our shareholders.

Against this background, it was particularly disappointing that the outcome of the Financial Conduct Authority's thematic review into the sale of non-advised annuities showed that a portion of annuity sales that we made since July 2008 did not adequately explain to customers that they may have been eligible for an enhanced annuity. We are continuing the work to ensure we put things right and have made a provision in our accounts for the costs that we may incur in relation to this.

We have strengthened the governance and oversight of our principal insurance company, Standard Life Assurance Limited, by appointing an independent Chairman, Lynne Peacock, who already sits on the plc Board, and an additional three very experienced non-executives, Amanda Bowe, Richard Houghton and David Marock. This in turn will allow the plc Board to devote more time to its strategic oversight of the whole of Standard Life.

In other Board changes, we said goodbye to Crawford Gillies and Isabel Hudson, and I was very pleased to welcome John Devine as a non-Executive Director. John previously chaired Standard Life Investments and is a highly experienced operational practitioner and independent director, with previous roles at Threadneedle Asset Management Limited and Merrill Lynch.

In January 2017 we announced that Paul Matthews would be stepping down from the Board as Chief Executive of Pensions and Savings on 1 March 2017, prior to his retirement on 31 August 2017. His successor, Barry O'Dwyer, joins the Board from 1 March, bringing with him a great deal of customer insight experience from his role as CEO of Standard Life Assurance Limited.

Sustainability

As you would expect for a business that has been around for 191 years, operating in a sustainable way is central to what we do. I am very pleased that, once again, our people's hard work and dedication to making your business efficient, effective and responsible, was recognised in our best-ever achievements in both the Dow Jones and FTSE4Good sustainability rankings. We also received a 'Silver Class' award from independent experts RobecoSam for our corporate sustainability work. You can read more about our corporate and social responsibility activities in the Sustainability section of this report.

Standard Life Foundation

I announced the launch of the Standard Life Foundation at our AGM in May 2016. This independent charity carries on the spirit of the former Standard Life Charitable Trust, but with a new and enhanced focus. I also announced that a substantial endowment would be gifted to the Foundation too. This endowment, in the region of GBP80 million, represents the vast majority of the proceeds of the disposal of unclaimed demutualisation shares and related dividends.

Lord Darling, the former Chancellor of the Exchequer, is chair of the Foundation, supported by a team of very experienced trustees. The Foundation will focus on independent research to strengthen financial well-being and resilience in the UK. I expect it to become highly-regarded and a very influential force in commissioning and disseminating research, both on its own account and working alongside other like-minded organisations too.

Finally...

Businesses only succeed if they hold true to their values and constantly try to do the right thing. In a business like ours, customers and clients need to trust us and this trust is hard-earned.

Our achievements during 2016 are down to our dedicated employees. Tremendous people work for Standard Life and I'm very grateful to all of them for their hard work and talent. I'd also like to thank our shareholders for your continued support.

Over recent years we have fundamentally reshaped Standard Life and, very importantly, have created substantial value for shareholders. Standard Life has the potential to achieve much more and your company is in good shape to continue creating value for you in this increasingly complex and ever-changing world.

Sir Gerry Grimstone

Chairman

Standard Life plc

Chief Executive's overview

Creating a world-class investment company

Q&A with Keith Skeoch, Chief Executive

Q: How would you describe Standard Life's performance in 2016?

A: Overall, we performed well. Our results show a picture of a business that is playing to its strengths and growing in times of profound political change and market volatility. We improved our financial discipline to increase profits, maintain our financial strength and grow dividends. We also saw our targeted investments in diversification help increase our assets and revenues.

We continued to attract new assets from customers and clients with GBP42bn of gross inflows across our business. One of the hallmarks of 2016 was the industry wide retreat from parts of the investment market, which saw the most challenging conditions for the UK mutual funds industry in over 20 years.

However, we experienced modest net outflows of GBP2.6bn, less than 1% of assets at the start of 2016. This included outflows from our mature books which are in long-term run-off. Against these headwinds fee based revenue grew by 5% which, combined with careful cost control, helped us deliver a 9% increase in operating profit. Our strategy to build a well-diversified business helps our company to cope with significant change. What was encouraging was the GBP4.1bn of net inflows into the areas we regard as the long-term drivers of Standard Life's growth.

Q: What are Standard Life's ambitions?

A: Our ambition is to create a world-class investment company: a global business which competes in our home markets and against the leading companies across the world.

To do this we will have to bring together the best from our successful active asset management, wealth management and pension and savings businesses to meet the changing shape of saver and investor needs.

We will build on our asset management skills, the quality of our advice to customers, the strength of the propositions that sit on our distribution platforms and the administration skills that lie behind them. This combination has allowed us to attract a highly diversified customer and client base which we want to continue growing.

Q: You talk about world-class - what does this mean?

A: I believe to be world-class will mean our business is truly valued by savers, admired by the market and a source of pride for our people.

Our simple and consistent business model has been the foundation for our success for over a decade now and this continues to serve us well. However, to meet our ambitions we need to increase the pace of change and delivery in the business over the next year.

Building on the work undertaken in 2016, we will continue to broaden and deepen our investment capabilities through new product innovation and identifying investment opportunities. This will allow us to both strengthen our relationships with our customers and, ultimately, give them the investment outcomes they expect.

We'll continue to look for new opportunities to run our business more efficiently to drive real long-term value for all of our stakeholders. And we'll continue to focus on attracting the best talent from around the world to make our ambitions a reality.

Q: You have been in the role for 18 months now, what changes have you introduced to make the business operate more effectively?

A: My role is to ensure the business continues to evolve and progress. In my view the best way of doing this is to build a well-diversified global investment company where we work effectively together to drive value for customers, clients, and shareholders.

Since I took on the role of Chief Executive I've focused on improving our financial discipline and on ensuring we continue with targeted investments in diversification to generate growth. Delivering long-term value is not just about growing the business but also bringing it closer together and building a strong culture focused on delivering for shareholders and customers. It is a culture based on collaboration, diversity, respect and inclusion.

A culture is not developed overnight. It takes time to win the hearts and minds of those involved and is only evidenced through actions and behaviours. One key indicator of how we are progressing is our employee survey scores. Against the backdrop of change, it was pleasing that our employee engagement score increased slightly compared to the previous year.

So we are making good progress and we are already seeing the benefits of working more closely together, delivering a number of initiatives in the last year across the business.

We delivered new investment propositions across an increasingly broad range of asset classes and geographies to meet the emerging needs of our Institutional, Wholesale, Retail and Workplace customers and clients. Our very successful MyFolio suite of funds was also launched in Germany.

We opened a Tokyo office to further our reach in Japan and began a new strategic collaboration with Bosera International - one of China's leading asset managers. In North America and Asia, we continued to develop strategic partnerships with global names like John Hancock and Sumitomo Mitsui.

In the UK our financial adviser platform proposition grew following the acquisition of Elevate, building on our already successful platform business, and ensuring we now work with a broader adviser population. Our own UK-wide financial planning brand, 1825, continued to develop through the acquisition of three financial planning businesses.

We also announced a very exciting development for our associate business in India, with the proposed combination of the life insurance businesses of HDFC Life and Max Life.

Q: How does the leadership team you have in place play its part in delivering Standard Life's strategy?

A: My executive team brings together leadership skills and expertise from across the business. It's responsible for developing a single strategic plan that identifies our targeted investments in diversification and capitalises on the opportunities open to our asset management and pension and savings businesses, and those created by our various partnerships around the world. We also have a diverse, experienced and strong leadership population supporting the executive team in implementing our single strategy.

A key element of our strategy is recognising the importance of effective succession planning within that leadership population. We actively demonstrated this following the recent announcement that Paul Matthews is to retire this year. Barry O'Dwyer, a key member of the Pension and Savings management team, will take on Paul's responsibilities and replace him on the plc Board. I think this is a great example of the strength of talent we have at Standard Life and the importance we place on effective succession planning.

Q: What's next for the business?

A: For me it's simple, we need to continue to deliver steady progress in becoming the world-class business that I've described.

The external environment may be challenging at the moment but I believe we need to continue to look to the long term. As a business we'll be celebrating our 200th birthday in 2025 and we are proud of our heritage. Our longevity has been built on holding true to our values, understanding the evolving needs of our customers and clients and continuously rising to meet the demands of the world around us.

Our purpose in everything that we do is to invest for a better future. We will continue to do this with the aim of making a real difference to the lives of our stakeholders.

Keith Skeoch

Chief Executive

Standard Life plc

Our business model

Our scalable businesses are well positioned to manage, administer and advise on assets to meet a range of customer and client needs, and to create value for our stakeholders.

Our simple business model...

 
Increasing      Growing revenue            Lowering unit                Driving profit 
 assets          We aim to grow             costs                        Increasing 
                 revenue by                 We aim to reduce             assets, growing 
                 providing propositions     our unit costs               revenue and 
                 which customers            by controlling               lowering unit 
                 and clients                expenses and                 costs enables 
                 value because              investing carefully          us to drive 
                 of the quality             to improve                   our profit 
                 of our service             both the scalability         and further 
                 and the long-term          and efficiency               invest in growing 
                 investment                 of our business.             our business. 
                 returns we                                              Cash generation 
                 deliver. Most                                           is closely 
                 of the fees                                             aligned with 
                 we charge are                                           profit. 
                 based on the 
                 level of assets 
                 managed or 
                 administered. 
------------    -----------------------    ---------------------        ------------------ 
Optimising      We ensure that we have the appropriate 
 the balance     level of capital to support our operations 
 sheet           and provide protection for our policyholders, 
                 while continuing to focus on growing our 
                 capital-efficient fee business. We balance 
                 investing for business growth with continuing 
                 to pay growing dividends to shareholders. 
------------    -------------------------------------------------------------------------- 
 

...is designed to be sustainable and resilient over the long term...

We are well positioned to take advantage of four trends that continue to shape the global savings and investment landscape.

Democratisation of financial risk

Customers and clients are having to take more responsibility for their and their families' financial futures - driving the need for financial guidance, advice and simpler products and services.

Rebuilding trust in financial services

The global financial crisis damaged trust in financial services organisations. We will play our part in helping to rebuild this trust - by demonstrating we are committed to doing the right thing, being transparent in the way we operate and, through our products and services, offering value to our customers and clients.

Innovation, technology and digitalisation

We aim to develop innovative products and services - helping us to work more efficiently while improving the ways customers and clients can access, invest and keep track of their assets.

Slow growth, low inflation, compressed return environment

In these market conditions, customers and clients are looking for simple and transparent products, with clear outcomes that will meet their investment needs.

...to create value for our stakeholders

We aim to create value for our stakeholders by:

-- Providing investment growth and excellent service for our customers and clients

-- Using our influence as an investor to encourage responsible thinking and practices in other organisations

-- Providing employment and opportunities for career growth to our people

-- Delivering increased profits and dividends to grow shareholder value

...with a strategy to achieve our world-class ambitions

Our strategy is designed to help us make the most of our market opportunities and support our world-class ambitions.

Delivering our strategic objectives

Building a world-class investment company means providing real value for our customers and clients over the long term. It takes a commitment to teamwork and excellence in everything we do - and ensuring that our people have the skills, resources and knowledge to deliver.

Our strategic objectives are the key areas that we are focusing on to deliver against our business model. By developing strong relationships with customers and clients and broadening and deepening our investment capability, we can increase assets and grow our revenue. We can lower our unit costs and grow our profits by building an efficient and effective business.

Attracting, retaining and developing our people will support us in performing strongly in the future.

Together our investments in diversification will help improve the resilience of our business model and the returns and value it delivers for our shareholders.

Broadening and deepening our investment capability

"We have continued to demonstrate our capabilities as a forward-looking, responsible company, as we look to deliver the investment outcomes our customers and clients expect."

Rod Paris,

Chief Investment Officer

2016 summary

Key activities

-- Continued to expand our liability aware range with launch of our unique Integrated Liability Plus Solutions

-- Increased our focus on private markets where we believe better investment returns are possible over the long term

-- Enhanced choice of investment funds with 16 funds launched during 2016

-- Launched MyFolio in our European markets following its success in the UK

-- Embedded Environmental, Social and Governance principles into our investment processes

Assets under administration (AUA)

GBP357.1bn +16%

Net flows

GBP2.6bn outflow

Key risks

-- Customer and client preferences and demand

-- Investment performance

-- Talent management

Objective

Broadening and deepening our investment capability gives us the potential to attract a wider range of future customers and clients.

We design propositions and fund choices to deliver the outcomes they expect over the long term.

Success is measured by delivering investment performance that meets the desired outcomes of our customers and clients. Our propositions and fund choices demonstrate our capabilities as a forward-looking, responsible investor. As a long-term asset manager, our customers and clients expect us to have a long-term view on how their investments will perform.

Market forces

We are well positioned to benefit from global trends that are shaping the savings and investments landscape. This includes the potential for slower economic growth and the compressed return environment continuing for longer which we expect will drive demand for active asset management.

2016 performance

Our short-term investment performance was weaker in 2016 and this had an adverse impact on net flows. Net outflows of GBP2.6bn were less than 1% of assets at the start of 2016. Our overall long-term investment performance remains strong.

We launched 16 new funds across a range of different asset classes, including Equities, Multi-asset and Fixed income. New funds, with specific objectives, are part of our ongoing aim to meet the investment needs of our customers and clients

Our MyFolio range of risk-based funds, which launched in 2010, reached GBP10bn in assets under management - a positive demonstration of our reputation and ability to actively manage assets over the long term.

Outlook and 2017 objectives

We expect the compressed/low-return market environment to persist during 2017. Our main objective is to continue to innovate and seek new, diverse investment opportunities, including:

-- Further strengthen our private markets capability such as private equity, real estate and illiquid credit

-- Convert our strong pipeline for our Integrated Liability Plus Solution with further variants planned

-- Target opportunities from growing global markets for outsourcing of management of insurance assets

Building an efficient and effective business

"Our continuing investment in technology is helping us to develop increasingly scalable operations. We are able to administer growing volumes of assets efficiently."

Colin Walklin,

Group Chief Operating Officer

2016 summary

Key activities

-- Continued to evolve our IT systems to reduce ongoing costs and increase scalability

-- Enhanced our position as a leading platform provider following the acquisition of Elevate

-- Increased automation in customer operations processes

Cost/income ratio

62% -1% pt

Assets under administration

GBP357.1bn +16%

Operating profit

GBP723m +9%

Key risks

-- Change management

-- IT failure and security

-- Outsourcer relationship management

-- Political change

Objective

Efficient and effective operations are critical for our business. They help us provide outstanding service to our customers, advisers and employers at a competitive unit cost.

We're transforming our operating platform to make it more modern, flexible and scalable. We are also focusing on efficiency - allowing us to deliver new products to market faster and effectively manage unit costs. The surrounding architecture - which includes our IT systems, the processes we follow and external service providers we use - gives us greater flexibility and reduces ongoing maintenance costs.

Market forces

To meet the expectations of our customers, advisers and employers, we've continued to work to deliver modern, consistent experiences across all of our platforms. Innovation, technology and digitalisation are major market trends - and we are investing in technology that helps us to become more scalable and operate more efficiently.

We're supportive of changes that will improve regulation, and we respond in an efficient and effective manner. For example, we've been early adopters of the European Market Infrastructure Regulation (EMIR) principles, designed to improve transparency and reduce risk in the derivatives market.

2016 performance

We celebrated 10 years of our Wrap platform. Since launching in 2006, the platform has been adopted by over 1,500 financial advice and wealth management firms, and currently serves over 200,000 customers.

We successfully embedded our new trade order management system - the core investment platform for our fund managers - and we've made significant progress with improving the technology and systems we use to manage investment data.

The cost/income ratio, which measures our efficiency, improved by 1% point to 62%. This includes the benefit of synergies delivered from the integration of Ignis. We have generated over GBP50m of annual cost synergies from this acquisition.

Outlook and 2017 objectives

-- Invest in technology to increase scalability, reduce ongoing costs and increase our ability to adapt to change

-- Modernise the information storage systems in our Pensions and Savings business to address risks around technology going out of date and to reduce costs

-- Transform the way we use digital platforms to provide information to customers and clients

Strategic objectives

Attracting, retaining and developing talented people

"We are committed to bringing out the best in our people and enabling them to reach their potential."

Sandy Begbie,

Chief People Officer

2016 summary

Key activities

-- Developed our people managers with a tailored 12-month training programme

-- Encouraged our people to develop their skills through external board appointments

-- Implemented the Living Wage Foundation's latest UK hourly rate of GBP8.45 (GBP9.75 in London)

Employee engagement survey

Engagement

65% +2% pts

Enablement

62% -2% pts

Key risks

-- Political change

-- Talent management

Objective

We invest in our employees' development because we know that engaged people are central to building long-term customer and client relationships, contributing to our businesses' performance, reputation, profitability and long-term shareholder value.

Market forces

We compete in a global marketplace where talented people are in high demand. We invest in mentoring, coaching and development programmes for our people as part of their ongoing career development.

We have a robust succession planning process in place for our strategic executive committee members. This includes ongoing talent management for people who have the potential and drive to become our future business leaders.

2016 performance

Around 1,200 of our people were supported through employee networks. We launched a Carers Network for people who are, or support, carers and also LGBT+ Allies, which aims to raise awareness of lesbian, gay, bisexual and transgender issues in the workplace.

We continued our commitment to employing young people, recruiting 46 graduates and 158 people through our youth employment initiatives. 8% of our people in the UK and Ireland are aged 25 or under, compared to just 0.5% in 2010.

Our peoples' contribution to business innovation and support for our communities was celebrated through our annual Inspiration Awards.

We had some small changes in the overall engagement and enablement scores from our latest employee survey. In 2017, we will create action plans to address the key themes from the survey.

Outlook and 2017 objectives

-- Continue to invest in our leaders and further develop our strong talent pipeline

-- Promote the continued importance and benefits of cooperation and collaboration to create high performing teams

-- Progress the policies and initiatives for a diverse and inclusive culture, including working towards our targets for the proportion of women in leadership roles

-- Identify and address key actions from our employee engagement survey

Developing strong relationships with customers and clients

"Our strong relationships with customers, clients and advisers have been the driving force of our success."

Colin Clark,

Global Client Director

A compelling proposition

Administration

We offer innovative products and services that allow customers and clients to easily manage their savings and investments. We make the most of technology to ensure people can easily access, service and consolidate their assets.

Advice

We offer financial planning and advice to help clients achieve a wide range of financial goals. We also offer a platform for independent advisers that helps them capitalise on the growing demand for their services and to serve their clients more efficiently.

Asset management

We're an active asset manager. We offer market-leading investment products that have clear investment outcomes. Our approach is supported by a team of investment experts and a philosophy which is focused on anticipating market change and carefully managing risks.

2016 summary

Key activities

-- Continued to expand and diversify Standard Life Investments' client base by geography, channel, client type and range of funds - supported by innovative solutions and commitment to service excellence

-- Supported leading advisers and consultants in the UK to embed workplace and platform solutions

-- Continued to grow strategic partnerships that serve clients in markets worldwide - including John Hancock in the US

Movement in Standard Life brand net promoter score

Down 11

Key risks

-- Customer and client outcomes

-- Customer and client preferences and demand

-- Outsourcer relationship management

Objective

We focus on putting customers and clients first, and we always aim to operate in a timely and efficient way. If we don't meet our own high standards, we look to put it right. Our processes and technology are designed to enable us to deliver great customer experiences that are also scalable, to support the future growth of our business.

Market forces

Increased regulatory and legislative complexity, as well as political uncertainty, have meant a greater need for advice and tailored investment solutions. Individual and institutional clients are looking to trusted organisations and advisers to help them make the right choices. In the UK, we've also seen increased complexity through pension freedoms - where people have greater choice in how they take their pension.

We're also competing against offerings from other organisations. We therefore aim to offer a premium service, consistent with our overall proposition.

2016 performance

During 2016 we continued to strengthen how we support the needs of our increasingly diverse range of institutional and wholesale clients. We've also looked for opportunities to diversify through our strategic relationships.

With individuals taking more responsibility for their finances and seeking advice, our Wrap platform has remained a popular choice for advisers - as it allows them to consolidate and manage clients' financial plans more efficiently. The acquisition of Elevate has strengthened our position in the UK advised platform market, connecting us with more advisers and customers.

Our brand net promoter score is an important measure of customer advocacy. In 2016 our score fell by 11 points. We believe the reasons for this include the processes around pension freedoms - which is a complex area - and lower customer confidence in financial services as a whole. We also saw challenges arising from new technology designed to improve customer experience. We've planned a number of actions for 2017 to improve customer experiences - including automating and simplifying key processes, better self service online, and greater collaboration to better understand customer needs.

We have also continued our work to address the findings of the Financial Conduct Authority's thematic review into the sale of non-advised annuities. The review showed that a portion of annuity sales that we made since July 2008 did not adequately explain to customers that they may have been eligible for an enhanced annuity.

Outlook and 2017 objectives

-- Continue to develop client relationships - including through new distribution partnerships and growing global brand awareness - and how we connect with advisers through our platform business

-- Integrating new technology to improve our telephone systems and online capabilities to deliver services that are scalable, automated and cost efficient

-- Continue to collaborate across our business to keep improving customer, client and adviser experiences

Growing and diversifying our revenue and profit

"Our targeted opportunities to further diversify our business help us to grow revenues and profits."

Luke Savage,

Chief Financial Officer

2016 summary

Key activities

-- Completed the acquisition of Elevate, making us one of the UK's largest and fastest growing adviser platform businesses

-- 1825, our financial advice business, completed three further acquisitions

-- Increased our holding in HDFC Life to 35% and also announced the proposed combination of this business with Max Life

Underlying cash generation

GBP502m +9%

Operating profit

GBP723m +9%

Full year dividend per share

19.82p +8%

Key risks

-- Counterparty risk

-- Investment performance

-- Longevity risk

-- Market risk

-- Regulatory change

Objective

We remain focused on growing and diversifying revenue and profit, to deliver sustainable value for our shareholders and other key stakeholders. We aim to do this by creating a world-class investment company that is well diversified by geography, distribution channel, client type, asset class and across the value chain.

To support diversification, we will continue to pursue organic growth opportunities from our own resources and activities - while also carefully targeting appropriate acquisitions and new strategic partnerships.

Market forces

As people are having to take more responsibility for their financial futures, we've seen a growing demand for financial advice and guidance. This presents an opportunity for us to diversify and grow our sources of revenue - in particular, through our financial advice business 1825.

We've seen increased customer and client appetite for simple and transparent products that have clear investment objectives, and to take a more active approach to managing their investments. These are areas of strength for our business, built on our track record of strong long-term investment performance and innovation.

2016 performance

We benefited from our diversified client base with business channels responding in different ways to the market environment - which was impacted by political and economic developments in the UK, the US and other parts of the world. We also enhanced our focus on financial discipline.

We continued to expand our global capabilities and distribution through new strategic relationships. These relationships are an important way of supporting our global growth and diversification plan by providing a cost-effective way of quickly accessing new markets.

Outlook and 2017 objectives

-- Expand our business in Europe, North America and Asia to continue extending our global reach

-- Grow our 1825 financial advice business through organic growth and acquisitions

-- Pursue a structured programme to seek further opportunities to grow and diversify our business, while also reducing costs

Chief Financial Officer's overview

Delivering diversified and sustainable growth

"Our financial performance demonstrates continued growth and resilience during a period of market uncertainty."

Luke Savage,

Chief Financial Officer

Q: How would you summarise Standard Life's performance in 2016?

A: Standard Life has demonstrated the benefits of our diversified business, delivering a robust set of results against a backdrop of challenging market conditions.

We have continued to attract high levels of gross flows, indicating strong demand for our products, but we saw an increase in redemptions, particularly in wholesale markets which were impacted by weaker investor sentiment. We delivered another year of increased revenue which together with our improved focus on cost discipline has driven a 9% increase in operating profit to GBP723m.

Q: You announced that there would be an increased focus on efficiency across the business during 2016. How has that work progressed so far and what can we expect during the remainder of 2017?

A: Standard Life has a good track record over recent years of improving operational efficiency. This has been demonstrated by the reduction in the cost/income ratio which has fallen by seven percentage points since 2012. The integration of Ignis which has delivered over GBP50m of annual cost savings and our investment in IT architecture are good examples of what we have done to improve efficiency. Whilst, in the short term, the investment to build our 1825 business and the acquisition of Elevate will impact the downward trajectory in the cost/income ratio, we are confident that the underlying direction remains unchanged. We remain focused on delivering further operational efficiencies at the same time as continuing to invest in the growth of our business.

Q: Standard Life has a strong capital and cash position. How can we expect to see this being used?

A: Our strong capital position is very important to us. It provides a buffer to support our progressive dividend policy which has continued uninterrupted for the last 10 years, something we are all very proud of. It also allows us to make strategic investments and acquisitions to grow our business, such as our increased stake in HDFC Life and the acquisition of Elevate. We intend to maintain our progressive dividend policy and continue to invest capital where we believe it increases shareholder value.

Q; Can you explain what is included in the results in relation to the FCA's enhanced annuity thematic review?

A: Our IFRS profit before tax includes a non-operating impact of GBP175m relating to a provision for an estimate of the redress payable to customers, the costs of conducting the review, and other related expenses. At this stage there is significant uncertainty relating to all of these elements. Note 40 of the Group financial statements provides further background, and explains that we are seeking for up to GBP100m of the financial impact to be mitigated by insurance. Discussions are ongoing with our insurers and, as a result, no insurance recovery has been recognised as an asset in these financial statements.

Increasing assets

Assets under administration and net flows

The increase in AUA from GBP307.4bn to GBP357.1bn was driven by market movements, including benefits from a lower Sterling exchange rate since the EU referendum, and the acquisition of the Elevate platform business.

Net outflows were GBP2.6bn (2015: inflows GBP6.3bn) against a backdrop of market uncertainty and weaker short-term investment performance. Resilient net inflows of GBP4.1bn across our growth channels were offset by net outflows of GBP7.1bn from our mature books, which are in long-term run-off. Gross inflows remained strong at GBP42.1bn (2015: GBP43.0bn) but redemptions increased to GBP44.7bn (2015: GBP36.7bn).

Our growth channels saw continued positive net flows, benefiting from product and client diversification. Standard Life Investments experienced net outflows of GBP0.7bn (2015: inflows GBP10.3bn). Institutional benefited from the breadth of our product offering with net inflows of GBP1.1bn (2015: GBP3.3bn). This was outweighed by net outflows of GBP1.7bn (2015: inflows GBP9.3bn) from Wholesale where investors reacted to market volatility and short-term investment performance. Pensions and Savings growth net inflows of GBP5.9bn (2015: GBP6.7bn) were driven by strong platform flows and growing contributions into existing Workplace schemes.

Net outflows from our mature books reduced by GBP1.7bn to GBP7.1bn, helped by a GBP1.2bn new mandate secured from Phoenix.

 
Net flows                     2016    2015 
                             GBPbn   GBPbn 
--------------------------  ------  ------ 
Standard Life Investments 
 growth                      (0.7)    10.3 
Pensions and Savings 
 growth                        5.9     6.7 
Eliminations and 
 other growth                (1.1)   (2.1) 
--------------------------  ------  ------ 
Total growth channels          4.1    14.9 
--------------------------  ------  ------ 
Standard Life Investments 
 third party strategic 
 partner life business       (2.7)   (4.8) 
Pensions and Savings 
 mature fee                  (3.5)   (3.1) 
Pensions and Savings 
 spread/risk                 (0.9)   (0.9) 
--------------------------  ------  ------ 
Total mature books           (7.1)   (8.8) 
--------------------------  ------  ------ 
Associate and joint 
 venture life businesses       0.4     0.2 
--------------------------  ------  ------ 
Total net flows              (2.6)     6.3 
--------------------------  ------  ------ 
 

Growing revenue

Fee based revenue

Fee based revenue increased by 5% to GBP1,651m (2015: GBP1,579m) driven by higher average asset levels, including the benefit of exchange rate movements. Average fee revenue yield remained broadly in line with the prior year.

Fee based revenue in the UK Pensions and Savings and Standard Life Investments growth channels increased by 11% and 9% respectively. This was partly offset by a GBP21m reduction in Hong Kong due to lower regular premium new business. Fee based revenue from our mature business reduced in line with expected outflows.

Spread/risk margin

Spread/risk margin, which mainly relates to income earned on annuities, decreased by GBP11m to GBP134m. 2016 includes a GBP22m benefit from an acceleration of payments from our main with profits fund relating to changes to the Scheme of Demutualisation in response to the transition to Solvency II. This was more than offset by a GBP26m reduction due to a number of other components including mortality experience in 2016 and new business profits. Although we had expected fewer asset and liability opportunities to exist in the low yield environment, we took advantage of a number of periods of market volatility to deliver a benefit of GBP25m (2015: GBP30m).

Operating assumption and actuarial reserving changes provided a benefit of GBP42m (2015: GBP44m), primarily relating to future longevity assumptions.

Lowering unit costs

We invest to enhance our propositions and capabilities in a disciplined manner that aims to improve both the scalability and efficiency of our business. The cost/income ratio which includes our share of associates' and joint ventures' (JVs) profit before tax, has improved by 1% point to 62%. This reflects not just the rise in revenue but also our continued cost discipline and drive for greater cost efficiencies.

Operating expenses increased by 3% to GBP1,159m (2015: GBP1,124m) reflecting further investment in expanding the distribution and global reach of Standard Life Investments, building scale in the 1825 business, the acquisition of Elevate, ongoing investment in technology in our Pensions and Savings business and the impact of exchange rate movements.

Driving profit

Operating profit before tax increased by 9% and IFRS profit from continuing operations(1) increased by 33%.

Operating profit before tax

Operating profit before tax continues to be a key measure which helps to give shareholders a fuller understanding of the performance of the business by identifying and analysing non-operating items.

Operating profit before tax increased by GBP58m to GBP723m, driven by higher fee revenue in our growth channels. Capital management increased by GBP12m to GBP21m largely due to the benefit of a higher pension scheme surplus. Our share of profit from associates and JVs continued to grow with strong performance from HDFC Life and HDFC Asset Management in India and further progress from Heng An Standard Life in China.

Operating profit benefited by approximately GBP20m from lower average Sterling exchange rates in 2016 compared to 2015.

Underlying performance

Underlying performance increased by 8% to GBP681m (2015: GBP630m) and includes the GBP22m spread/risk margin benefit from an acceleration of payments from our main with profits fund relating to changes to the Scheme of Demutualisation in response to the transition to Solvency II. Underlying performance excludes the GBP42m (2015: GBP44m) of operating assumption and actuarial reserving changes which benefited operating profit.

IFRS profit(1)

IFRS profit from continuing operations increased to GBP368m (2015: GBP276m) due to a 9% increase in operating profit and reduced restructuring costs offset by the GBP175m provision for annuity sales practices.

Short-term fluctuations in investment return and economic assumption changes generated a profit of GBP8m (2015: loss GBP63m) mainly due to a narrowing of credit spreads and a fall in yields.

Restructuring and corporate transaction expenses reduced to GBP67m (2015: GBP115m), and included GBP24m relating to the integration of Ignis, GBP5m for staff pension scheme restructuring, GBP4m of costs relating to the Elevate acquisition, GBP15m Pensions and Savings transformation costs and a number of other business unit restructuring programmes and corporate transactions.

2015 also included a GBP46m non-operating restructuring loss in Hong Kong following regulatory change.

The non-operating loss includes GBP175m relating to the provision for annuity sales practices.

The total tax expense attributable to equity holders' profit from continuing operations was GBP68m (2015: GBP77m). Further details are included on the next page.

Other(2) profit from continuing operations comprises the share of associates' and joint ventures' tax of GBP13m (2015: GBP13m). In 2015, this also included a Singapore IFRS loss before tax of GBP42m which largely related to expenses in respect of the closure of that business. The 2015 IFRS profit from discontinued operations of GBP1,147m included the gain on sale of the Canadian business of GBP1,102m.

 
IFRS profit                  2016   2015 
                             GBPm   GBPm 
--------------------------  -----  ----- 
Operating profit 
 before tax                   723    665 
Non-operating loss 
 before tax                 (274)  (257) 
Total tax expense            (68)   (77) 
Other(2)                     (13)   (55) 
--------------------------  -----  ----- 
IFRS profit from 
 continuing operations(1)     368    276 
--------------------------  -----  ----- 
IFRS profit from 
 discontinued operations        -  1,147 
--------------------------  -----  ----- 
Total IFRS profit(1)          368  1,423 
--------------------------  -----  ----- 
 
 
Analysis of non-operating    2016   2015 
 loss before tax             GBPm   GBPm 
--------------------------  -----  ----- 
Short-term fluctuations 
 in investment return 
 and economic assumption 
 changes                        8   (63) 
Restructuring and 
 corporate transaction 
 expenses                    (67)  (115) 
Impairment of intangible 
 assets                      (19)    (7) 
Provision for annuity 
 sales practices            (175)      - 
Other operating 
 profit adjustments          (21)   (72) 
Non-operating loss 
 before tax                 (274)  (257) 
--------------------------  -----  ----- 
 

(1) After tax attributable to equity holders of Standard Life plc. For further details on our IFRS results, see the Group's IFRS consolidated income statement on p113.

(2) Singapore was presented as a discontinued operation within operating profit, but under IFRS 5 it was included in continuing operations. Therefore a reclassification was required. For further details see Note 2 in the Group financial statements section.

(3) Underlying cash generation

(4) This measure provides insight into our ability to generate cash that supports further investment in the business and the payment of dividends to our shareholders.

(5) Underlying cash generation increased to GBP502m driven by the growth in fee based revenue within underlying performance.

 
Reconciliation of 
 underlying cash             2016  2015(1) 
 generation                  GBPm     GBPm 
--------------------------  -----  ------- 
Underlying performance        681      630 
Associates and JVs 
 adjustment(1)               (60)     (44) 
Current tax on underlying 
 performance                (106)    (114) 
DAC/DIR adjustment            (2)        5 
Fixed and intangible 
 assets adjustment           (11)     (18) 
--------------------------  -----  ------- 
Underlying cash 
 generation                   502      459 
--------------------------  -----  ------- 
 

(1) Group tax expense from continuing operations

(2) The total tax expense attributable to equity holders' profits from continuing operations was GBP68m (2015: GBP77m), of which GBP127m (2015: GBP114m) related to operating items and a credit of GBP59m (2015: credit GBP37m) to non-operating items. The reduction in the tax expense mainly reflects non-recurring items which increased the tax charge in 2015. The effective tax rate was 14%(2) (2015: 19%(2) ) compared to a UK corporation tax rate of 20% (2015: 20.25%). The main reasons for the rate being less than the UK corporation tax rate are the inclusion within profit before tax of our share of post-tax profit of JVs and associates with no added tax charge and low tax rates relating to profit attributed to non-controlling interests which are included in profit before tax. These are also expected to reduce the effective tax rate in future periods. There are also a number of one-off items affecting both years. Excluding the effect of the accounting for JVs and associates profit and non-controlling interests the effective tax rate would be 18% (2015: 25%). Excluding these effects, in the medium term we would expect the effective tax rate on profit attributable to equity holders (subject to one-off items in any given year) to be broadly in line with the UK corporation tax rate.

(3) In 2016, our total tax contribution from continuing operations to tax authorities in all the jurisdictions in which we operated was GBP1,149m (2015: GBP1,059m). Of the total, GBP451m (2015: GBP332m) was taxes borne by the Group whilst GBP698m (2015: GBP727m) represents tax collected by us on behalf of tax authorities. Taxes borne are higher than 2015 mainly due to increased UK corporation tax payments relating to investment returns on policyholder investments. Of the taxes collected, the largest items are pay-as-you-earn (PAYE) deductions from pension payments made to customers and from employee payroll payments.

(4) Tax policy

(5) Understanding tax risk, how to manage it, and how it impacts all our stakeholders are important parts of running our business responsibly. The Group proactively manages tax risks and employs an experienced in-house tax team to oversee the affairs of the Group. We have a tax risk management policy that is approved annually by the Board and have published our tax strategy on our website at www.standardlife.com/annualreport

Optimising the balance sheet

Solvency II capital surplus(3)

Our capital surplus is the amount of capital resources (referred to as Own funds) that the Group holds in excess of its capital requirement. The calculation of the Group's capital resources and requirement is governed by the Solvency II regulatory regime. Under Solvency II, every insurer is required to identify its key risks - e.g. that equity markets fall - and hold sufficient capital to withstand adverse outcomes from those risks. The capital required to withstand these outcomes is the Solvency capital requirement (SCR). The SCR is calibrated so that the likelihood of a loss being greater than the SCR in one year is less than 1 in 200. Around 90% of the Group SCR relates to Standard Life Assurance Limited (SLAL), our principal insurance company.

We are strongly capitalised with a Solvency II capital surplus (Investor view) of GBP3.3bn (2015: GBP3.3bn) representing a solvency cover of 214% (2015: 222%). Capital requirements have increased by GBP0.2bn as a result of lower interest rates and higher equity values. We disclose an Investor view of our solvency position as this provides insight into the solvency capital provided by equity and debt investors.

The Solvency II Investor view capital surplus of GBP3.3bn would change by GBP0.2bn or less following a:

-- 20% rise or fall in equities, or

-- 100bps rise or fall in fixed interest yields, or

-- 50bps rise or fall in credit spreads

The Regulatory view solvency cover prescribed by Solvency II regulations is 176% (2015: 162%). The Regulatory view capital surplus excludes GBP0.2bn (2015: GBP1.2bn) of capital in subsidiaries that is not deemed to be freely transferrable around the Group. The Regulatory view capital surplus increased to GBP3.1bn (2015: GBP2.1bn) due to a reduction in unrecognised capital following methodology and legislative changes. In addition, the Regulatory view solvency cover is diluted by the inclusion of GBP1.2bn (2015: GBP0.7bn) of capital requirements for with profits funds and our defined benefit pension scheme. These capital requirements are covered in full by capital resources in those funds.

 
                                 31 December 2016(3)                                 1 January 2016(3) 
----------------  -------------------------------------------------  ------------------------------------------------- 
                                                    Add                                                Add 
                                                   with                                               with 
Reconciliation                                  profits                                            profits 
of Standard Life                                  funds                                              funds 
Investor view                          Less         and                                   Less         and 
and Regulatory      Investor   unrecognised     pension  Regulatory    Investor   unrecognised     pension  Regulatory 
view                    view        capital      scheme        view        view        capital      scheme        view 
----------------  ----------  -------------  ----------  ----------  ----------  -------------  ----------  ---------- 
Own funds           GBP6.2bn     (GBP0.2bn)    GBP1.2bn    GBP7.2bn    GBP6.0bn     (GBP1.2bn)    GBP0.7bn    GBP5.5bn 
Solvency capital 
requirement 
(SCR)             (GBP2.9bn)              -  (GBP1.2bn)  (GBP4.1bn)  (GBP2.7bn)              -  (GBP0.7bn)  (GBP3.4bn) 
Solvency II 
capital 
surplus             GBP3.3bn     (GBP0.2bn)           -    GBP3.1bn    GBP3.3bn     (GBP1.2bn)           -    GBP2.1bn 
----------------  ----------  -------------  ----------  ----------  ----------  -------------  ----------  ---------- 
Solvency cover          214%                                   176%        222%                                   162% 
----------------  ----------  -------------  ----------  ----------  ----------  -------------  ----------  ---------- 
 
 

(1) Underlying cash generation now includes dividends received from our Indian associates. Prior period figures have been restated. Further details are included in the Supplementary information section of this report.

(2) Tax expense attributable to equity holders' profits divided by profit before tax expense attributable to equity holders' profits. Includes profit attributable to non-controlling interests.

(3) 31 December 2016 based on draft regulatory returns. 1 January 2016 based on final regulatory returns.

Operating return on equity

Operating return on equity measures our success in generating operating profit relative to our shareholder capital. We will continue to manage our capital position to ensure that we generate sustainable returns for our shareholders. For example, in April 2016 we invested GBP179m to increase our stake in HDFC Life.

Operating return on equity increased to 15.2% (2015: 14.2%) reflecting strong operating profit partly offset by a higher tax charge.

Our key growth channels including Standard Life Investments Institutional and Wholesale, and UK Workplace and Retail are

'capital-lite' which means that they do not require significant amounts of additional capital as they continue to grow.

Operating return on equity continues to be diluted by the impact of the cGBP1bn pension scheme surplus. Excluding the impact of the pension scheme, operating return on equity was 18.8% (2015: 16.9%).

Dividends

Dividend policy

Our progressive dividend policy is to grow the annual dividend from the prior year pence per share payment at a rate that is sustainable over the long term.

Proposed dividend

The Board is recommending a final dividend for 2016 of 13.35p per ordinary share which is an increase of 8.2% on last year's final dividend. Subject to shareholder approval, this will be paid on 23 May 2017 to shareholders on the register at close of business on 18 April 2017.

The dividend payment which is expected to be GBP262m is strongly supported by underlying cash generation. At 31 December 2016 Standard Life plc held GBP0.9bn of cash and liquid resources and GBP1.6bn of distributable reserves.

The final dividend, combined with the 2016 interim dividend of 6.47p, brings the total dividend for the year to 19.82p - an increase of 8.0% on the 2015 full year dividend.

How the dividend is funded

External dividends are funded from the cumulative dividend income that Standard Life plc receives from its subsidiaries. To provide some protection against fluctuations in subsidiary dividends, Standard Life plc holds a buffer of distributable cash and liquid resources. This buffer is dynamic and takes into account expected future subsidiary dividend flows and the risks to those dividends. Further information on the principal risks and uncertainties that may affect the business and therefore dividends is provided in the Risk management section of this Strategic report.

Liquidity management

Standard Life plc, the Group holding company, holds substantial cash and liquid resources. At 31 December 2016, Standard Life plc held GBP395m (2015: GBP522m) of cash and short-term debt securities, GBP304m (2015: GBP290m) of bonds and GBP201m (2015: GBP200m) of holdings in pooled investment funds managed by Standard Life Investments.

We continue to maintain a strong liquidity position and this was again shown in internal stress testing undertaken during 2016.

The increase in dividends received from subsidiaries includes approximately GBP50m related to capital released following the integration of Ignis.

In April 2016 we increased our stake in HDFC Life by 9% to 35%. This was funded from existing Standard Life plc resources. In October 2016 we completed the purchase of the Elevate platform business. This purchase was funded by Standard Life Assurance Limited, but the cost impact will be absorbed by Standard Life plc's resources over time.

In April 2016 we extended the maturity date of our syndicated revolving credit facility by a further year to 2021. This GBP400m facility is held as part of our contingency funding plans and is currently undrawn.

 
Standard Life plc 
 cash and liquid          2016   2015 
 resources                GBPm   GBPm 
-----------------------  -----  ----- 
Opening 1 January        1,012    630 
Canada net retained 
 proceeds                    -    460 
Dividends received 
 from subsidiaries         457    355 
Cash dividends paid 
 to shareholders         (370)  (343) 
Cash investments 
 in associates and 
 JVs                     (177)    (3) 
Cash investments 
 in subsidiaries          (31)   (44) 
Other                        9   (43) 
-----------------------  -----  ----- 
Closing 31 December(1)     900  1,012 
-----------------------  -----  ----- 
 

(1) 31 December 2016 excludes GBP36m of cash in the Unclaimed Assets Trust. The residual assets of this trust (after claims and costs have been settled) are expected to be donated to the Standard Life Foundation. IFRS presentation at 31 December 2016 consists of investments in subsidiaries at FVTPL of GBP276m, debt securities of GBP605m and cash and cash equivalents of GBP55m.

Business performance

Our reportable segments have been identified in accordance with the way that we are structured and managed. In 2015 discontinued operations for segmental reporting purposes related to our Canadian business which was sold on 30 January 2015 and our Singapore business, the closure of which was announced in June 2015.

Analysis of operating profit(1) from continuing operations

 
                     Standard           Pensions          India                                            Total 
                  Life Investments    and Savings(2)     and China     Other(3)     Eliminations(4)      continuing 
                 -----------------  -----------------  ------------  ------------  -----------------  ---------------- 
                    2016      2015      2016     2015   2016   2015   2016   2015      2016     2015     2016     2015 
                    GBPm      GBPm      GBPm     GBPm   GBPm   GBPm   GBPm   GBPm      GBPm     GBPm     GBPm     GBPm 
---------------  -------  --------  --------  -------  -----  -----  -----  -----  --------  -------  -------  ------- 
Fee based 
 revenue             885       843       861      808     17     38      -      -     (112)    (110)    1,651    1,579 
Spread/risk 
 margin                -         -       134      145      -      -      -      -         -        -      134      145 
---------------  -------  --------  --------  -------  -----  -----  -----  -----  --------  -------  -------  ------- 
Total operating 
 income              885       843       995      953     17     38      -      -     (112)    (110)    1,785    1,724 
Total operating 
 expenses          (537)     (532)     (655)    (610)   (22)   (36)   (57)   (56)       112      110  (1,159)  (1,124) 
Capital 
 management            -         -        22       14      -      -    (1)    (5)         -        -       21        9 
Share of 
 associates' 
 and joint 
 ventures' 
 profit before 
 tax                  35        31         -        -     41     25      -      -         -        -       76       56 
---------------  -------  --------  --------  -------  -----  -----  -----  -----  --------  -------  -------  ------- 
Operating 
 profit before 
 tax                 383       342       362      357     36     27   (58)   (61)         -        -      723      665 
---------------  -------  --------  --------  -------  -----  -----  -----  -----  --------  -------  -------  ------- 
Underlying 
 adjustments(5)        -         -      (42)     (35)      -      -      -      -         -        -     (42)     (35) 
---------------  -------  --------  --------  -------  -----  -----  -----  -----  --------  -------  -------  ------- 
Underlying 
 performance         383       342       320      322     36     27   (58)   (61)         -        -      681      630 
---------------  -------  --------  --------  -------  -----  -----  -----  -----  --------  -------  -------  ------- 
Reversal of 
 underlying 
 adjustments           -         -        42       35      -      -      -      -         -        -       42       35 
Share of 
 associates' 
 and joint 
 ventures' 
 tax expense        (11)      (11)         -        -    (2)    (2)      -      -         -        -     (13)     (13) 
Non-operating 
 items              (50)      (53)     (207)    (131)    (3)   (47)   (14)   (26)         -        -    (274)    (257) 
Total tax 
 expense            (63)      (53)      (25)     (38)      -      5     20      9         -        -     (68)     (77) 
Singapore 
 included in 
 discontinued 
 segment               -         -         -        -      -   (42)      -      -         -        -        -     (42) 
---------------  -------  --------  --------  -------  -----  -----  -----  -----  --------  -------  -------  ------- 
Profit for 
 the year 
 attributable 
 to equity 
 holders of 
 Standard Life 
 plc                 259       225       130      188     31   (59)   (52)   (78)         -        -      368      276 
---------------  -------  --------  --------  -------  -----  -----  -----  -----  --------  -------  -------  ------- 
 

(1) Operating profit is IFRS profit before tax adjusted to remove the impact of short-term market driven fluctuations in investment return and economic assumption changes, restructuring costs, amortisation and impairment of intangible assets acquired in business combinations, gain or loss on the sale of a subsidiary, associate or joint venture and other one-off items which are not indicative of the long-term operating performance of the Group. The impact of the restructuring of the UK staff pension scheme has been adjusted so that 2016 operating profit is based on the expected long-term pension expense, which results in a GBP5m increase to operating profit before tax (2015: GBP35m) and a corresponding increase to non-operating restructuring and corporate transaction expenses - refer to Note 10 in the Group financial statements section for further details.

(2) UK and Europe has been renamed as Pensions and Savings.

(3) Other primarily relates to corporate centre costs and head office related activities.

(4) Eliminations primarily relate to revenue and expenses included in both the Pensions and Savings business and Standard Life Investments. Therefore, at a Group level an elimination adjustment is required to remove intra Group impacts.

(5) Relates to operating assumption changes of GBP42m (2015: GBP44m), included in the spread/risk margin and principally in respect of longevity assumption changes. The 2015 underlying adjustment also included GBP9m shareholder support provided to the German with profits business, included in operating expenses.

Standard Life Investments

Delivering innovative, client focused, funds and solutions

"Continued revenue growth, together with controlled management of costs, has delivered increased profitability."

Keith Skeoch,

Chief Executive, Standard Life Investments

Standard Life Investments is a leading active asset manager. We offer market-leading investment funds and solutions to our third party clients through two main distribution channels:

-- Institutional: managing assets for a wide range of institutions, such as pension fund clients, government authorities, corporates, charities and insurance companies

-- Wholesale: providing funds and solutions to retail investors through wholesale distributors and platforms

We also provide active asset management services for life insurance books to the wider Standard Life Group and to strategic partners such as the Phoenix Group.

As truly active managers, we place significant emphasis on rigorous research and a strong team ethos. This, combined with disciplined risk management and shared commitment to a culture of investment excellence, is key to helping our clients look to their future with confidence.

Our distinctive investment philosophy, Focus on Change, lies at the heart of our wide range of investment funds and solutions. Focus on Change helps analyse key factors driving the market price of an investment and identifies the drivers that the wider market may have missed. Our core belief is that our experienced investment professionals can consistently add value to client portfolios by exploiting these market inefficiencies.

We recognise that corporate governance along with responsible stewardship of a business' capital, employees, customers, environment and society has a fundamental impact on long-term investment returns. Our commitment to socially responsible investing is a fundamental component of our Focus on Change investment philosophy and process.

Investing for the longer term

An uncertain political backdrop has the potential to dampen global economic growth: the form Brexit takes and the trade and immigration policies implemented by the new US administration makes the path for asset prices more complicated. A number of supportive factors are still in play: the US corporate profits recession is ending, fiscal policy is expected to be expansionary, and financial stress is contained at least for the time being. China is experiencing a slowing economy but remains on course to rebalance away from investment and to consumption.

In a world of slow growth, low inflation and compressed returns, there are still cyclical opportunities to be found. Our view emphasises sustainable yield as an investment theme, while searching for specific growth opportunities.

Britain's decision to leave the EU may also affect our future operating environment. We are monitoring developments on behalf of our stakeholders and we remain ready to adapt our business to future changes in regulations and markets. We remain committed to our strategy of European business development. Work has commenced to identify the optimal structure and distribution model in order to continue to meet our clients' needs.

We support the aims of the Financial Conduct Authority (FCA) Market Study of the asset management industry and are committed to improving transparency, value and outcomes for customers and clients. As a truly active asset manager we have always been committed to delivering consistent, long-term investment outperformance, and we welcome any moves which help individuals understand the merits of different approaches to investing. We will continue to work with the FCA throughout the period of its market study.

We remain well positioned to deliver profitable and diversified growth. We are broadening our offering to clients through a strong pipeline of new investment funds and solutions. Our track record of client co-development and commercialising innovation positions us well to continue to meet the changing demands of our clients. At the same time we continue to invest to drive performance, to raise our profile and to enhance our infrastructure to support our growth ambitions

Overview

-- Total AUM up 10% to GBP277.9bn

-- Fee based revenue from growth channels increased by 9% to GBP680m

-- Gross inflows, in our growth channels, were resilient at GBP28.5bn (2015: GBP31.4bn), while net outflows of GBP0.7bn (2015: inflows GBP10.3bn) were impacted by higher redemptions

-- EBITDA margin of 45% (2015: 42%), achieved one year ahead of stated target on acquisition of Ignis

-- Operating profit increased by 12% to GBP383m (2015: GBP342m) driven by increased fee revenue and controlled growth in expenses

-- Cost/income ratio improved to 58% (2015: 61%) with continued integration of the Ignis business and ongoing cost discipline

-- Weaker short-term investment performance with 20% of growth channels funds ahead of benchmark over one year, 76% over three years and 88% over five years

Increasing assets

AUM increased by 10% to GBP277.9bn (2015: GBP253.2bn) driven by market and other movements, of which around one-third relates to favourable foreign exchange gains. The increase has been offset somewhat by the natural run-off from our mature books together with net outflows in our Wholesale channel against a background of volatile markets.

Resilient growth channels flows

Gross flows across our growth channels remained strong at GBP28.5bn (2015: GBP31.4bn), largely into Institutional and Wholesale. This result reflects the breadth of our product offering, our expanding global distribution capability and the increasingly diverse range of client segments served. Net outflows of GBP0.7bn (2015: inflows GBP10.3bn) were recorded; Institutional net inflows of GBP1.1bn (2015: GBP3.3bn) were offset by Wholesale net outflows of GBP1.7bn (2015: inflows GBP9.3bn). This reinforces the benefit of our diversified client base where we have seen a clear difference in investor sentiment in our two main distribution channels. Wholesale redemptions increased as retail clients react quickly to volatile markets and weaker short-term investment performance while Institutional clients have longer term investment horizons and are happier to ride out periods of market volatility.

By channel:

Institutional(1) - record gross inflows

Our Institutional business saw record gross flows of GBP15.6bn during 2016 (2015: GBP11.1bn). Redemptions also increased to GBP14.5bn (2015: GBP7.8bn) resulting in net inflows of GBP1.1bn (2015: GBP3.3bn). The quality and breadth of our offering is demonstrated through net inflows into private equity, real estate and multi-asset.

Wholesale(1) - challenging markets

Investor sentiment has been weak in this channel globally given market volatility, the EU referendum result, other political uncertainty and weaker short-term investment performance. Despite this, we have achieved a top 5 gross sales position(2) in the UK wholesale market for 17 consecutive quarters and remain well positioned with a share of gross sales of 4.7%(3) (2015: 5.4%). In terms of net sales, our ranking was 30th in 2016. Lower gross flows and significantly increased redemptions of GBP13.8bn (2015: GBP7.5bn) led to a net outflow of GBP1.7bn (2015: inflows GBP9.3bn). Net inflows into MyFolio and fixed income are particularly strong although multi-asset saw net outflows during the year, largely due to GARS net outflows of GBP3.9bn.

By asset class:

Multi-asset experienced net outflows of GBP3.8bn (2015: inflows GBP9.5bn), GBP3.9bn of net outflows from Wholesale offset by GBP0.1bn of Institutional inflows. Gross flows into GARS slowed during 2016 to GBP10.2bn (2015: GBP17.0bn) with redemptions also increasing to GBP14.5bn (2015: GBP7.7bn) resulting in net outflows of GBP4.3bn (2015: inflows GBP9.3bn). The launch of the Liability Aware Absolute Return III fund and the Global Focused Strategies fund in the US helped other multi-asset solutions net inflows to reach GBP0.5bn.

Total growth channels gross flows excluding GARS were GBP18.3bn (2015: GBP14.4bn) with net inflows of GBP3.6bn (2015: GBP1.0bn). Our diversified fund offering is demonstrated by continued demand for asset classes such as our MyFolio range of funds, which saw net inflows of GBP1.6bn (2015: GBP1.9bn) as AUM increased to GBP10.5bn (2015: GBP8.1bn). Other flows echoed market sentiment with investors continuing to retreat from equities towards fixed income with net outflows of GBP0.3bn (2015: GBPnil) and net inflows of GBP1.1bn (2015: GBP0.3bn) respectively. Real estate also saw net outflows of GBP0.3bn (2015: inflows GBP0.3bn). Other asset classes saw net inflows of GBP1.0bn (2015: GBP0.8bn).

By geography:

North America returned net outflows in the year of GBP0.7bn (2015: inflows GBP3.0bn), with over half as a result of fund rationalisation activity. European and Asian net outflows of GBP1.5bn and GBP0.1bn respectively (2015: inflows of GBP3.4bn and GBP1.2bn respectively), reflected the impact of investment volatility on wholesale markets. This also impacted our domestic UK business with net inflows reducing to GBP0.1bn (2015: GBP4.4bn). In India, our share of HDFC AMC net inflows increased to GBP1.5bn (2015: GBP0.8bn).

Mature books

Our mature books business, which is in natural run-off, saw overall net outflows of GBP4.8bn (2015: GBP6.8bn). This was due to net outflows of GBP2.7bn (2015: GBP4.8bn) from the assets managed on behalf of Phoenix Group as well as net outflows of GBP2.1bn (2015: GBP2.0bn) from the life insurance books we manage for Standard Life Group. Notably, 2016 included the award of a new mandate for GBP1.2bn of assets from Phoenix Group, as our relationship with this strategic partner develops. 2015 included a GBP1.4bn one-off redemption by Phoenix Group.

 
                           Gross Inflows     Net flows          AUM 
                          ---------------  --------------  -------------- 
                             2016    2015    2016    2015    2016    2015 
                            GBPbn   GBPbn   GBPbn   GBPbn   GBPbn   GBPbn 
------------------------  -------  ------  ------  ------  ------  ------ 
Institutional(1)             15.6    11.1     1.1     3.3    87.0    67.0 
Wholesale(1)                 12.1    16.8   (1.7)     9.3    50.1    45.9 
Wealth                        0.8     0.9   (0.1)     0.2     6.8     6.5 
Ignis(1)                        -     2.6       -   (2.5)       -    11.1 
------------------------  -------  ------  ------  ------  ------  ------ 
Total growth channels        28.5    31.4   (0.7)    10.3   143.9   130.5 
------------------------  -------  ------  ------  ------  ------  ------ 
Standard Life Group           3.5     4.1   (2.1)   (2.0)    90.2    83.1 
Phoenix Group                 1.2     0.2   (2.7)   (4.8)    43.8    39.6 
------------------------  -------  ------  ------  ------  ------  ------ 
Total strategic partner 
 life business - mature 
 books                        4.7     4.3   (4.8)   (6.8)   134.0   122.7 
------------------------  -------  ------  ------  ------  ------  ------ 
Total                        33.2    35.7   (5.5)     3.5   277.9   253.2 
------------------------  -------  ------  ------  ------  ------  ------ 
 

(1) During 2016 Ignis funds were merged into Standard Life Investments funds and are now reported within Institutional and Wholesale. This has resulted in a transfer of GBP11.1bn AUM out of Ignis into Institutional (GBP9.8bn) and Wholesale (GBP1.3bn) through Market and other movements.

(2) Source: Pridham market report Q4 2016.

(3) Source: Investment Association Q4 2016.

Growing revenue

Increased fee based revenue

Growth channels fee based revenue increased by 9% to GBP680m due to higher AUM, a continued shift in mix towards our higher margin growth products and favourable foreign exchange movements. Total fee based revenue grew by 5% to GBP885m with a robust performance from our mature business. The average revenue yield on growth AUM was 53bps (2015: 52bps) and for mature books reduced slightly to 16bps (2015: 17bps) due to lower performance fees.

Lowering unit costs

Controlled operating expense growth

We have reduced our cost/income ratio to 58% (2015: 61%), which is helped by the integration of Ignis together with the operational leverage inherent within our business model. We have maintained flexibility in our cost base which provides resilience in current market conditions. Total operating expenses increased modestly by 1% to GBP537m demonstrating our ability to continue expanding our investment capabilities and global reach while maintaining cost discipline.

Driving profit

Operating profit before tax increased by 12% to GBP383m driven by the increase in fee revenue and the closely controlled growth in expenses. Operating return on equity increased to 39.5% (2015: 36.3%).

EBITDA, which is closely aligned with operating profit, increased to GBP395m. Our EBITDA margin grew to 45% (2015: 42%), achieving the target set when we acquired Ignis.

Total IFRS profit(1) increased to GBP259m (2015: GBP225m) due to strong operating performance and the benefit of lower Ignis integration costs.

 
                          2016   2015 
                          GBPm   GBPm 
-----------------------  -----  ----- 
Fee based revenue          885    843 
Operating expenses       (537)  (532) 
Share of associates' 
 profit before tax          35     31 
-----------------------  -----  ----- 
Operating profit 
 before tax                383    342 
-----------------------  -----  ----- 
Interest, depreciation 
 and amortisation           12     10 
-----------------------  -----  ----- 
EBITDA                     395    352 
-----------------------  -----  ----- 
Reversal of interest, 
 depreciation and 
 amortisation             (12)   (10) 
Non-operating items       (50)   (53) 
Tax expense(2)            (74)   (64) 
-----------------------  -----  ----- 
Total IFRS profit(1)       259    225 
-----------------------  -----  ----- 
 

(1) After tax, from continuing operations, attributable to equity holders of Standard Life plc.

(2) Tax expense includes share of associates' tax expense.

Ignis integration

As at 31 December 2016, in our second full year of ownership, the migration of the Ignis business onto the Standard Life Investments platform is substantially complete, with the final integration costs to be incurred in H1 2017.

The integration of Ignis has allowed us to deliver annual synergies in excess of GBP50m and helped us to achieve an EBITDA margin for the combined business of 45%, a year ahead of target.

Delivering long-term investment performance

Investment performance in 2016 was weak as short-term performance was adversely impacted by the market reaction to macro-economic and geopolitical events. Over one year, 20% of growth channels funds were ahead of benchmark. Despite this, the longer-term performance remains strong; 76% of funds were ahead over three years while 88% were ahead of benchmark over five years (2015: one year 88%, three years 95%, five years 90%).

Portfolios were positioned for a modest recovery in economic growth. Market volatility, initially in China but more latterly in response to the result of the UK's referendum on EU membership, undermined investor confidence, boosting prices for defensive assets at the expense of more growth orientated stocks. Performance did, however, stage a late recovery as investors regained their appetite for risk assets. However, this rebound was insufficient to offset the losses from earlier in the year.

Increasing diversification

We continue to build efficient and effective global operations with a presence in 29 cities worldwide including our Head Office in Edinburgh and regional hubs in Boston and Hong Kong. As well as our own distribution, we have developed strong relationships with strategic partners in the US, Canada, India, Asia, Japan and in the UK including the wider Standard Life Group, giving us an increasingly international client base across 45 countries. A recent example of this is our strategic partnership with Bosera International, in mainland China, with whom we are collaborating on a manufacturing basis, including joint product innovation and investment management cooperation. In February 2017 we also announced the commencement of a strategic partnership with Challenger, a leading retirement income group in Australia.

We are increasingly diversified with innovative investment solutions, such as liability aware and a range of multi-asset investment solutions as well as investment capabilities in traditional asset classes, including equities and fixed income. We are also working to strengthen our private markets capability.

Awards and recognition

Our dedication to meeting clients' financial needs resulted in us winning a number of industry awards, including:

-- UK Fixed Income Manager of the Year and Global Fixed Income Manager of the Year 2016 - Professional Pensions Investment Awards

-- Best Targeted Absolute Return Fund Provider - Moneyfacts Awards

-- Large Fund Manager of the Year - Local authority pension fund awards

-- UK Equity Income Unconstrained platinum award - Portfolio Adviser Fund Awards 2016

-- UK Core Fixed Income and Pan-Europe Small Cap Equity winner - Institutional Investor 2016 European Money Management Awards

-- Global Fixed Income - Financial Times PIPA Awards 2016

-- Best Application of ESG - Asia Asset Management Best of the Best 2016

-- Best House for Absolute Returns - Asia Asset Management Best of the Best 2016

-- Standard Life Wealth won 'Boutique Investment Management' at the Charity Times Awards

-- Boston office ranked best medium-sized employer - 2016 Pensions & Investments' Best Place to Work in Money Management awards

Pensions and Savings

Building lasting relationships with our customers

"We want to help and support people in managing their money today and saving for their future. By understanding their needs we use our skills and knowledge to advise, guide, inform and importantly, develop the right products and services."

Paul Matthews,

Chief Executive Pensions and Savings

Our Pensions and Savings business is a leading provider of long-term savings and investment propositions. Our main aim is to help people manage their money today and save for their future.

In the UK we offer products and services through two broad growth channels:

-- Retail: pensions and savings where the relationship is either directly with the customer, or with their financial adviser

-- Workplace: pensions, savings and flexible benefits to employees through their employers

We also own businesses that specialise in financial advice and risk and compliance services.

The Europe business consists of our domestic and international bond businesses in Ireland as well as our business in Germany.

Our valuable mature book includes UK mature Retail, which includes business that was predominantly written before demutualisation and spread/risk products, such as annuities and protection, which provide a sustained contribution to our profit.

Close collaboration with Standard Life Investments allows us to support customers with a full suite of solutions. Pensions and Savings accounts for 84% of total MyFolio AUA. Standard Life Investments manage 71% of our Workplace AUA and 21% of our Wrap assets. The interaction between the two businesses helps strengthen our relationship with our customers by improving the quality of our propositions and the choices available.

Broadening and deepening relationships

We acquired the Elevate platform from AXA on 31 October 2016, bringing a further GBP11.1bn of AUA to the business. Elevate, with its broad market appeal, award-winning service and positive net flows, will complement our existing Wrap platform with cGBP30bn of assets which is focused on the wealth management market. Together our platforms have over GBP44bn of assets and they will give more than 3,000 adviser firms access to the full range of Standard Life's pension and investment capabilities.

We continue to grow our 1825 financial advice business which offers a full financial planning and personal tax advice service. Offering a wide range of investment options, supported by investment experts and technology, clients are able to access support how and when they need it. We have completed the acquisition of four quality adviser firms to date, broadening our reach across the country and bringing total assets under advice in 1825 up to GBP3.2bn.

Our Workplace business continues to build scale. Since auto enrolment began in 2012 we have supported over 8,000 employers to set up Qualifying Workplace Pension Schemes (QWPS), with over one million members enrolled into these schemes.

External factors

A number of external factors have impacted global economic growth and led to increased uncertainty, increasing the customer need for advice, guidance and information. Volatility in financial markets resulted in lower daily average asset values in the first half of the year, whilst the rise in market levels increased asset values in the second half of 2016. The weakening of Sterling led to an increase in the value of overseas denominated assets.

The EU referendum result in favour of leaving the EU surprised global markets in June and combined with other factors brought challenging conditions for sales. We operate branches in Ireland and Germany and there is a risk that regulations may change and impact on our current operating structure. We will respond to these developments in a way that takes into account the best interests of customers, clients and our Pensions and Savings business.

The Financial Conduct Authority's thematic review into the sale of non-advised annuities showed that a portion of annuity sales that we made since July 2008 did not adequately explain to customers that they may have been eligible for an enhanced annuity. We are continuing the work to ensure we put things right and have made a provision in our accounts for the costs that we may incur in relation to this.

Overview

-- AUA up 21% to GBP181.5bn driven by the acquisition of Elevate, market movements and net inflows

-- Growth channels gross inflows of GBP13.5bn - the highest year ever

-- Growth channels net inflows of GBP5.9bn - down 12% as customers continue to take advantage of pension freedoms

-- Operating profit before tax remained stable at GBP362m

(2015: GBP357m), including a GBP5m loss from Elevate

-- Operating expenses are stable in real terms after excluding costs relating to the growth of 1825 and the acquisition of Elevate. We remain committed to driving further cost efficiencies to support future growth.

Increasing assets

 
                              Gross inflows     Net flows          AUA 
                             ---------------  --------------  -------------- 
                                2016    2015    2016    2015    2016    2015 
                               GBPbn   GBPbn   GBPbn   GBPbn   GBPbn   GBPbn 
---------------------------  -------  ------  ------  ------  ------  ------ 
UK Retail(1)                     8.1     7.5     3.7     3.9    62.9    42.6 
UK Workplace                     4.1     4.1     1.7     1.9    37.4    33.0 
Europe growth fee(1)             1.3     1.6     0.5     0.9    11.2     9.6 
---------------------------  -------  ------  ------  ------  ------  ------ 
Total growth channels           13.5    13.2     5.9     6.7   111.5    85.2 
---------------------------  -------  ------  ------  ------  ------  ------ 
UK mature Retail                 0.6     0.7   (2.5)   (2.4)    34.3    32.7 
Spread/risk                      0.2     0.2   (0.9)   (0.9)    16.1    14.9 
Europe mature fee                0.7     0.7   (0.1)     0.2    10.1     8.4 
Conventional with profits          -       -   (0.9)   (0.9)     0.6     1.3 
---------------------------  -------  ------  ------  ------  ------  ------ 
Total mature books               1.5     1.6   (4.4)   (4.0)    61.1    57.3 
---------------------------  -------  ------  ------  ------  ------  ------ 
Assets not generating 
 revenue from products             -       -       -       -     8.9     7.7 
---------------------------  -------  ------  ------  ------  ------  ------ 
Total Pensions and Savings      15.0    14.8     1.5     2.7   181.5   150.2 
---------------------------  -------  ------  ------  ------  ------  ------ 
 

(1) Platform AUA of GBP44.2bn (Wrap, Elevate and Fundzone) comprises of GBP41.7bn (2015: GBP24.4bn) reported within UK Retail and GBP2.5bn (2015: GBP2.1bn) relating to Wrap International Bond reported within Europe growth fee.

Growth channels

UK Retail

UK Retail AUA has increased 48% to GBP62.9bn (2015: GBP42.6bn), reflecting the acquisition of Elevate, strong platform inflows and positive market movements. Retail gross inflows exceeded GBP8bn for the first time.

Following pension freedoms we have seen more of our customers moving into our drawdown products, with total assets invested in drawdown products increasing by 21% to GBP16.4bn (2015: GBP13.6bn) reflecting both inflows and positive market movements. Gross Retail outflows increased by 22% to GBP4.4bn as the size of our proposition grows and customers make use of drawdown functionality.

UK Workplace

UK Workplace AUA increased by 13% to GBP37.4bn (2015: GBP33.0bn), benefiting from net inflows of GBP1.7bn. Whilst we have seen fewer large scheme transfers across the market as employers adapt to new pension regulations, we are benefiting from growing contributions into existing schemes which provide a steady long-term source of growth.

Our success in attracting new flows through auto enrolment has resulted in a 5% increase in regular premiums to GBP3.1bn. Regular premiums now account for 75% of Workplace inflows.

Our Workplace business continues to be a source of growth for our retail businesses with GBP2.2bn of assets transferring in 2016.

Europe growth fee

In our Europe business, AUA in our growth channels of GBP11.2bn is up 17% on 2015 with net inflows of GBP0.5bn and favourable foreign exchange and market movements.

Mature books

UK mature Retail

As expected, we continue to see stable net outflows on our UK mature Retail book of business. This included GBP0.3bn transferred to our Active Money Personal Pension product (included in our growth channels), with customers continuing to take advantage of pension freedoms. We engage with our customers who are approaching retirement or have maturing policies to help ensure they are equipped to make informed decisions. This is valued by our customers with many choosing to continue to save with us.

Spread/risk

Spread/risk AUA increased by 8% to GBP16.1bn, with net outflows from scheduled annuity payments of GBP0.9bn, offset by the benefit from reductions in yields increasing the value of bond investments backing our annuity book.

Europe mature fee

Europe mature fee includes our German with profits book which was closed to new business in April 2015, resulting in net outflows of GBP0.1bn in 2016.

 
Profitability                                              Pensions 
                                 UK          Europe       and Savings 
--------------------------  ------------  ------------  -------------- 
                             2016   2015   2016   2015    2016    2015 
                             GBPm   GBPm   GBPm   GBPm    GBPm    GBPm 
--------------------------  -----  -----  -----  -----  ------  ------ 
Fee based revenue             664    631    197    177     861     808 
Spread/risk margin            119    143     15      2     134     145 
--------------------------  -----  -----  -----  -----  ------  ------ 
Total operating income        783    774    212    179     995     953 
Operating expenses          (487)  (455)  (168)  (155)   (655)   (610) 
Capital management             23     15    (1)    (1)      22      14 
--------------------------  -----  -----  -----  -----  ------  ------ 
Operating profit before 
 tax                          319    334     43     23     362     357 
--------------------------  -----  -----  -----  -----  ------  ------ 
Underlying adjustments(1)    (38)   (43)    (4)      8    (42)    (35) 
--------------------------  -----  -----  -----  -----  ------  ------ 
Underlying performance        281    291     39     31     320     322 
--------------------------  -----  -----  -----  -----  ------  ------ 
Reversal of underlying 
 adjustments                   38     43      4    (8)      42      35 
Non-operating items(2)      (213)  (106)      6   (25)   (207)   (131) 
Total tax expense            (13)   (31)   (12)    (7)    (25)    (38) 
--------------------------  -----  -----  -----  -----  ------  ------ 
Total IFRS profit(3)           93    197     37    (9)     130     188 
--------------------------  -----  -----  -----  -----  ------  ------ 
 

(1) Relates to operating assumption changes of GBP42m (2015: GBP44m), included in the spread/risk margin and principally in respect of longevity assumption changes. The 2015 underlying adjustment also included GBP9m shareholder support provided to the German with profits business, included in operating expenses.

(2) Non-operating items primarily relate to a provision for annuity sales practices of (GBP175m), short-term fluctuations in investment return and economic assumption changes of GBP13m

(2015: (GBP54m)) and restructuring and corporate transaction expenses of (GBP38m) (2015: (GBP75m)).

(3) After tax attributable to equity holders of Standard Life plc from continuing operations.

Growing revenue

Fee based revenue

UK fee based revenue increased by 5% to GBP664m. Fee based revenue benefited from a combination of strong net inflows together with positive movement in market levels over the second half of the year. Our continued focus on the growth of 1825 and the acquisition of Elevate has enabled us to diversify our sources of revenue, increasing fee revenue by GBP8m. Average fee revenue yield remained broadly stable at 58bps (2015: 59bps).

Spread/risk margin

UK spread/risk margin decreased by GBP24m to GBP119m. Operating assumption and actuarial reserving changes provided a benefit of GBP38m (2015: GBP43m), primarily relating to future longevity assumption changes. Although we had expected fewer asset and liability opportunities to exist in the low yield environment, we took advantage of volatility in financial markets mainly in H1 2016 to deliver a benefit of GBP25m (2015: GBP30m). A number of other components contributed to a lower spread/risk margin than 2015 including adverse mortality experience and reduced new business. These reductions were partly offset by an GBP18m payment in 2016 from our main with profits fund relating to changes to the Scheme of Demutualisation in response to the transition to Solvency II. This effectively brings forward some of the payments expected in future years under the previous scheme rules.

Lowering unit costs

Operating expenses

UK operating expenses increased by GBP32m to GBP487m, impacted by the continued drive to scale our business. The growth of 1825 and acquisition of Elevate incurred operating expenses of GBP21m. The cost/income ratio rose to 62% (2015: 59%) which also included the impact of lower spread/risk margin in 2016. Excluding the acquisition of Elevate and the growth of 1825 the cost/income ratio would have been 60%.

Ongoing investment in technology to reduce future customer operations and IT maintenance costs has allowed further process automation and customer self service. Examples of our progress include:

-- In 2016, 30% of our customers who took action following pension freedoms transacted entirely online

-- Our online Good to Go proposition meets the needs of smaller employers efficiently by processing pension schemes on the same day and has secured c3,500 schemes in 2016 (c7,500 to date)

Driving profit

Operating profit

Pensions and Savings operating profit before tax remained stable at GBP362m (2015: GBP357m) including a loss of GBP5m from Elevate, GBP2m of which is underlying trading. Operating profit includes the GBP22m spread/risk margin benefit from an acceleration of payments from our main with profits fund relating to changes to the Scheme of Demutualisation in response to the transition to Solvency II.

UK

UK operating profit reduced by GBP15m to GBP319m. The reduction was due to a GBP24m reduction in the spread/risk margin and a GBP5m loss for Elevate. Excluding this our operating profit improved by GBP14m, with an 11% increase in our growth channels fee revenue.

Europe

Europe operating profit increased by GBP20m to GBP43m. The 2015 result was lower due to the impact of the GBP9m one-off shareholder support provided to the German with profits business. In 2016 our German business benefited from a GBP5m reduction in actuarial reserves due to lower maintenance expenses. The 2016 spread/risk result includes the benefit of a GBP4m payment from our main with profits fund relating to changes to the Scheme of Demutualisation in response to the transition to Solvency II. The 2016 result also benefited from favourable foreign exchange movements of GBP2m.

Operating return on equity

Operating return on equity decreased to 13.4% (2015: 15.2%) reflecting higher opening shareholder net assets and a higher tax charge. Operating return on equity continues to be diluted by the impact of the GBP1.1bn pension scheme surplus. Excluding the impact of the pension scheme surplus, operating return on equity was 20.4% (2015: 22.1%).

Total IFRS profit

Pensions and Savings total IFRS profit decreased by GBP58m to GBP130m. This is mainly due to a higher non-operating loss of GBP207m

(2015: GBP131m). The non-operating loss includes a provision of GBP175m for the costs that we may incur in relation to the FCA's review of our annuity sales practices. This was partly offset by favourable short-term fluctuations in investment return and economic assumption changes and lower restructuring and corporate transaction expenses compared to 2015.

Awards and recognition

-- Best Group Personal Pension Provider, Money Observer Pension Awards 2016

-- Group Pension Provider of the Year, Corporate Adviser Awards 2016

-- Group Personal Pension provider of the Year, Pensions Insight DC Awards 2016

-- Wrap awarded a Platinum Platform rating, Adviser Asset 2016

-- Wrap awarded Best Platform Provider with AUM over GBP15bn, Schroders UK Platform Awards 2016

-- Elevate awarded Best Platform Provider with AUM up to GBP15bn, Schroders UK Platform Awards 2016

-- Elevate awarded Best Platform for Adviser Service, Schroders UK Platform Awards 2016

Integrating two award winning platforms

We're delighted to have won the Best Large Adviser Platform Provider (AUM over GBP15bn) award at the Schroders UK Platform Awards 2016.

This award shows the exceptionally high standard of our Wrap Platform.

Elevate also won the Best Smaller Adviser Platform (AUM up to GBP15bn) award. This is an exciting time for us as we work towards bringing together two of the best platforms in the industry.

These awards are important because they are voted for by the adviser community, advocating the strength of our advisory relationships.

India and China

Well positioned for future growth

Our India and China life business consists of our life associate in India, HDFC Life; our life joint venture in China, Heng An Standard Life; and our wholly owned business in Hong Kong. The results of our Indian asset management associate business, HDFC Asset Management Company, are included in the Standard Life Investments section of this Strategic report.

Our operations in India and China continue to strengthen and are well positioned for future growth in the region.

Growing our presence in India

HDFC Life is currently one of India's leading life insurance companies with a 16% market share in the private sector. It has a broad product portfolio which provides over 20 million customers with innovative insurance and savings solutions.

We continue to be encouraged by the future outlook for the life insurance market in India. The insurable population is anticipated to reach 750 million in 2020 and life insurance is projected to comprise 35% of total savings by the end of this decade. Demographic factors such as a growing middle class, young insurable population and increasing awareness of the need for protection and retirement planning are anticipated to support the growth of the life insurance and pensions industry in India.

In April 2016, we completed the transaction to increase our stake in HDFC Life from 26% to 35% for GBP179m.

In August 2016, we announced that HDFC Life had agreed terms with Max Life Insurance Company Limited (Max Life), Max Financial Services Limited (Max FS) and Max India Limited for the combination of the life insurance businesses of HDFC Life and Max Life. The strategic benefits of this transaction include increased scale and enhanced distribution and product mix. Max Life's bancassurance relationships with three of the leading private sector banks in India will complement HDFC Life's already strong distribution capability.

The proposed transaction is subject to several regulatory, court and other necessary approvals. Although the Insurance Regulatory and Development Authority of India (IRDAI) expressed reservations on the proposed scheme, the transaction parties are working through these with the IRDAI and aim to complete the transaction in the next 12 months.

Following completion, Standard Life, based on current shareholdings, would hold a 24.1% stake in the enlarged entity. The shares of HDFC Life would list on the Bombay Stock Exchange and the National Stock Exchange of India, subject to approval of these stock exchanges and the Securities and Exchange Board of India.

After a significant amount of change over recent years the regulatory framework is now fairly stable with the Government of India focused on ensuring greater social security for Indian citizens. HDFC Life has responded well to these historic changes maintaining its position as one of the leading private companies in the life insurance market and will continue to work with regulators, in order to better understand and shape future changes and adapt to them efficiently and effectively.

Positioned for future growth in China and Hong Kong

Heng An Standard Life continues to build a sustainable and profitable business by offering a range of insurance and savings products to a growing customer base in mainland China. Both profitability and sales are ahead of 2015.

The Chinese insurance market has grown in recent years to become the second largest in the world and we believe that the prospects for future growth remain very positive, driven by an increasing middle class and wealthy population who are living longer and are more aware of the need for protection, medical insurance and retirement provision. Heng An Standard Life, through its extensive sales network and product range, is well positioned to meet this need. It also continues to investigate opportunities to increase its presence in the growing pensions market and has now submitted an application to the China Insurance Regulatory Commission for a new pension insurance company licence.

In Hong Kong, market volatility and recent regulatory changes have made growing flows challenging. We remain focused on retaining and efficiently managing the policies currently on our books as we continue to define our future business strategy.

Overview

India

-- Increased our stake in HDFC Life to 35% in April 2016

-- Proposed combination of the life insurance businesses of HDFC Life and Max Life announced in August 2016

-- HDFC Life operating profit increased to GBP34m in 2016 driven by the growth in premium income

-- HDFC Life dividend, paid in December 2016, was 22% higher compared to the prior year and Standard Life's share of the dividend was GBP8m

China

-- Heng An Standard Life's operating profit and net flows increased by over 70% in 2016

Hong Kong

-- Fee based revenue and net flows reduced in Hong Kong due to lower regular premium business which we stopped selling in 2015

Increasing assets

Total AUA increased by 64% to GBP4.6bn reflecting favourable market movements, including the benefit from a lower Sterling exchange rate. HDFC Life's AUA increased to GBP3.4bn (2015: GBP1.8bn). GBP0.8bn of the increase reflects our higher share of HDFC Life AUA following our stake increase in April 2016.

AUA in Heng An Standard Life increased to GBP0.6bn (2015: GBP0.5bn) and Hong Kong also increased to GBP0.6bn (2015: GBP0.5bn).

Net inflows continued to increase in our associate and joint venture businesses to GBP362m in 2016 (2015: GBP230m). Net inflows in HDFC Life were GBP295m of which GBP49m relates to the increased ownership. Net flows in Heng An Standard Life increased to GBP67m compared to net flows of GBP36m in the prior year.

In Hong Kong, net inflows decreased to GBP46m (2015: GBP63m) as a result of lower regular premium new business.

Growing revenue

HDFC Life's commitment to digital leadership and product innovation for its customers has driven the development of the successful 'Click2' online product series and award-winning cancer care plan. Through their broad product range, premium income increased by 18% compared to 2015.

Heng An Standard Life's new business sales have increased by 39% compared to 2015.

In Hong Kong fee based revenue decreased by GBP21m due to lower regular premium business which we stopped selling in 2015. This reduction is expected, as regular premium business generates most of its revenue during the first two years from policy issue date.

Lowering unit costs

In Hong Kong, we continue to manage costs whilst investing in new propositions in response to changes in regulation. Our focus on cost management resulted in a reduction in operating costs compared to 2015.

Driving profit

Operating profit before tax increased to GBP36m driven by an increase in operating profit from HDFC Life to GBP34m(1) (2015: GBP21m) and an increase in Heng An Standard Life to GBP7m (2015: GBP4m). Both our associate and JV businesses continue to benefit from growth in premium income.

This increase was partly offset by an operating loss in Hong Kong of GBP5m (2015: operating profit GBP2m), due to falls in both revenue and expenses as the business product mix continues to adjust following the regulatory changes in 2015. We are considering further actions to address the loss making position.

Total IFRS profit increased to GBP31m (2015: loss GBP59m). 2015 included a GBP46m non-operating restructuring loss in Hong Kong following regulatory change and a Singapore IFRS loss before tax of GBP42m which largely related to the closure of that business.

 
                            2016   2015 
                            GBPm   GBPm 
-------------------------  -----  ----- 
Share of associates' 
 and joint ventures' 
 profit before tax            41     25 
Hong Kong fee based 
 revenue                      17     38 
Hong Kong operating 
 expenses                   (22)   (36) 
-------------------------  -----  ----- 
Operating profit 
 before tax                   36     27 
-------------------------  -----  ----- 
Share of associates' 
 and joint ventures' 
 tax expense                 (2)    (2) 
Non-operating loss           (3)   (47) 
Total tax expense              -      5 
Singapore included 
 in discontinued 
 segment                       -   (42) 
-------------------------  -----  ----- 
Total IFRS profit/(loss) 
 after tax                    31   (59) 
-------------------------  -----  ----- 
 

Note: Results are presented on the basis of Standard Life ownership percentages during 2016 and do not include the 40% share in HDFC Asset Management which is included in the results for Standard Life Investments. HDFC Life ownership was 26% until the end of April 2016 and then 35% from May 2016, Heng An Standard Life ownership is 50% and Hong Kong is 100%.

(1) Based on Standard Life ownership percentages during 2016. Assuming a constant 26% shareholding the operating profit in 2016 would have been GBP28m compared to GBP21m in 2015.

Risk management

Effectively managing risk in an uncertain environment

"Our risk management framework continues to operate effectively in a constantly changing risk environment. This is essential for protecting the interests of our customers and clients while providing a sound platform for growth and building long-term value."

Raj Singh,

Chief Risk Officer

Our approach to risk management

The consistent application of effective and pre-emptive risk management across our business protects the value of Standard Life in the short-term while encouraging the development of long-term value. We ensure that:

-- Well informed risk-reward decisions are taken in pursuit of our business plan objectives

-- Capital is delivered to areas where most value can be created from the risks taken

Our approach to risk management, delivered through our Enterprise Risk Management (ERM) Framework, is well embedded in our business. The pace of change in the business and risk environment, and the threats and opportunities arising from it, mean we will always review and adapt our methods to ensure we are well placed to respond pre-emptively.

Over the past year our risk management approach has received external recognition. In May 2016, Standard & Poor's increased their rating on the Risk and Capital Models component of our framework to 'positive' and maintained their 'strong' rating of our overall ERM Framework.

We also received two external awards; Insurance Risk Manager of the Year (February 2016, Risk Magazine) and Insurance Risk and Actuarial Function of the Year for 2017 (January 2017, Insurance ERM).

We are building a simplified, well diversified and scalable world-class investment company and in order to deliver this effective risk management is essential. We must ensure that change is successfully implemented with any change in our overall risk profile understood. This includes the ongoing integration of Elevate and 1825 acquisitions.

Business and risk environment

The wider environment proved to be challenging in 2016. We continue to operate under a heightened level of uncertainty with political, financial and regulatory risks being the predominant themes over the year. We expect this heightened level of uncertainty to continue in 2017.

The major political event for our business in 2016 was the UK's vote to leave the EU. We will be directly impacted by the outcome of the negotiations between the UK and EU, although the details may not be known for some time. We have a strong track record of successfully responding to changing circumstances and are ready to adapt our business as appropriate to any post-Brexit changes in regulations and markets.

The outlook for financial markets is uncertain; however, we have a robust Focus on Change investment philosophy and a strong, resilient capital position which we have subjected to a wide range of stress and scenario testing. This allows us to be prepared for whatever market conditions we face.

Given the vital role that our industry has in society, we are subject to high levels of political and regulatory focus. In 2017 the regulatory agenda will continue to evolve with the outcome of a number of market studies and new regulatory initiatives. Also, the UK Government will look to determine its priorities and agenda. We are directly engaged with government, industry bodies and regulators to make sure that our knowledge and experience informs the decisions that are taken.

Our principal risks and uncertainties

The specific risks that we face as a business are driven by what we choose to do and how we do it, as well as the wider environment in which we are operating. We group these risks into categories which include Strategic, Conduct, Operational, Financial Market and Credit and Demographic and Expense.

From within these categories we have identified our principal risks and uncertainties. These should not be considered to be an exhaustive list of all the risks that the Company faces, but rather those which we currently believe have the greatest potential to affect our business model, future performance, solvency or liquidity. These principal risks were subject to robust assessment by the Board during 2016.

As our strategic development continues and we respond to changes in the external environment, it is to be expected that both the risks themselves and the relative importance of these may change.

Viability statement

The Directors confirm that they have a reasonable expectation that Standard Life will be able to continue in operation and meet its liabilities as they fall due over the next three years. The Directors' assessment takes into account Standard Life's current capital and liquidity position, as described in the Chief Financial Officer's overview, which shows a Solvency II regulatory capital surplus of GBP3.1bn and substantial cash and liquid resources held by Standard Life plc.

The key processes used by the Board to assess the prospects of Standard Life are set out below. The assessment process is overseen by the Risk function and is subject to challenge from executive management and the Risk and Capital Committee, as well as Board consideration.

The business and strategic planning processes: Strategic planning is a continuous process which underpins business planning. Strategic planning considers the sustainability and resilience of our business model as described on page 8 of this report, which is key to ensuring our business remains viable. Business planning is an annual process which projects the performance, regulatory capital and liquidity of Standard Life over a three year period, and considers multiple scenarios including a severe downside economic scenario. The severe downside used in 2016 assumes that the global economy tips into a severe recession; global equities fall and long-term interest rates reach new lows. Our projected capital positions are a measure of the capital we need in the business to cover our risks, including financial and operational risks, under such stress scenarios. Our analysis shows that, whilst capital is eroded under the severe downside scenario, the strength and quality of our capital base is such that regulatory solvency is maintained and our business remains viable.

Quantitative stress and scenario testing which investigates Standard Life's liquidity and capital positions' exposure to specific risks and combined scenarios. Stresses are calibrated at the 1-in-200 probability level, or more extreme, and test Standard Life's resilience to market, credit, expense and demographic shocks. Standard Life remains solvent in such circumstances and can support potential cash outflows.

Reverse stress testing which gives a quantitative and qualitative understanding of plausible but severe risk scenarios which could threaten the viability of Standard Life, and informs related management actions. The scenarios assessed evolve over time and are informed by the principal risks set out later in this section. Whilst a limited number of scenarios can be assessed each year the insight from previous years' exercises often remain relevant. This year scenarios assessed risk events related to failures of key third parties, significant regulatory change and political change, major shocks to financial markets, cyber threats, and reputational damage caused by matters of conduct in parts of Standard Life or its joint ventures. The assessment showed that, taking into account mitigating actions, Standard Life is resilient to extreme events as a result of its embedded risk management framework.

Oversight of risk within the business delivered through the Own Risk and Solvency Assessment (ORSA) processes described in this section.

We consider that three years is an appropriate period for this viability assessment, which is in line with our core business planning process. It is the period over which major strategic actions, such as the launch of new investment propositions, are typically delivered. It also takes into account the uncertain economic environment and changing political and regulatory environment, and the timescale over which changes to major regulations and the external landscape affecting our business typically take place. We consider that the severe scenarios assessed as part of our reverse stress testing are appropriate over this three year period.

Risk governance

Enterprise risk management framework

Standard Life's ERM framework enables a risk based approach to managing our business. It integrates concepts of strategic planning, operational management and internal control. Our framework has been developed and embedded in the business over several years.

-- Risk culture: The way we think and act as individuals and as a business. It encompasses our attitudes, capabilities and behaviours. Our culture drives how we identify, understand and openly discuss, and act on, current and future risks.

-- Risk control process: The practices by which we manage financial and non-financial risks within Standard Life. They are used to identify, assess, control and monitor risk.

-- Strategic risk management: This forms an integral part of the strategic planning process and is directly linked to our corporate objectives. It supports the development of long-term value by ensuring that well informed risk-reward decisions are taken in pursuit of our business plan. It also helps to ensure that capital is distributed to the areas where most value can be created from the risks taken.

-- Risk and capital models: The models that we use to measure our risk exposures and capital position and the work that we do to test and understand the sensitivity of these positions

-- Emerging risks: The aim of emerging risk management is to identify risks before they materialise. This gives us time to engage with the risk, understand it and respond accordingly. We use our emerging risk process to inform reverse stress testing and capital adequacy requirements across Standard Life. Our proactive screening process which looks across broad sources of risk including geopolitical, technological, environmental and societal, helps us to anticipate future threats.

ORSA process

The ORSA is the set of processes that underpin our ERM framework. The purpose of the ORSA is to inform and develop:

-- Our understanding of the current and potential risks to the business over the product lifecycles. This includes both financial and non-financial risks including environmental, social and governance (ESG) risks and their potential to affect both the long and short-term value of the business.

-- Our appetite for these risks and how we manage them

-- Our own assessment of current solvency and capital requirements with respect to the risks

-- A forward-looking assessment of the risk and solvency needs of the Company over a multi-year time horizon in light of the business plans

-- The ORSA plays a key role in supporting decision making and strategy development at our boards and risk committees

Three lines of defence

We operate a 'three lines of defence' model of risk management, with clearly defined roles and responsibilities for individuals and committees:

-- First line: Day-to-day risk management is delegated from the Board to the Chief Executive and, through a system of delegated authorities and limits, to business managers

-- Second line: Risk oversight is provided by the Chief Risk Officer and supported by the specialist Risk Management and Compliance functions across Standard Life as well as through established risk committees such as the Enterprise Risk Management Committee (ERMC) and with reporting to the Risk and Capital Committee (RCC).The majority of members of the ERMC are senior first line representatives. Independent oversight is provided by non-executive Directors at the RCC.

-- Third line: Independent verification of the adequacy and effectiveness of the internal risk and control management systems is provided by our internal audit function. This is independent from all other operational functions. It operates subject to supervision and challenge by the Audit Committee.

STRATEGIC RISK

Our definition and appetite

Risks which threaten the achievement of our strategy through poor strategic decision making, implementation or response to changing circumstances. We recognise that core strategic activity brings with it exposure to strategic risk. However, we seek to proactively manage and control these exposures.

 
The risks to our business and how we    Our principles in 
 managed them in 2016                    managing these risks                                        Link to strategy 
Investment Performance 
 (New) 
Our strategy to be a world-class                                                                     Broadening 
 investment company is underpinned       *    Our Focus on Change investment philosophy is driven     and deepening 
 by our ability to offer our                  by a robust and repeatable investment decision          our investment 
 customers and clients superior               process which is highly disciplined, research           capability 
 long-term investment performance             intensive and risk informed                             Growing 
 through active management.                                                                           and diversifying 
 Poor investment performance                                                                          our revenue 
 relative to peers, benchmarks           *    Our investment philosophy is designed to operate        and profit 
 or internal targets may impact               through the cycle and provides the opportunity to 
 our ability to grow assets                   outperform throughout the cycle 
 under administration and can 
 increase the level of outflows 
 across our business. This in            *    We regularly engage with our customers and clients on 
 turn can also cause a stagnation             service and performance 
 or decline in revenues. 
 Short periods of market dislocation 
 and heightened volatility,              *    We review our internal processes and investment 
 such as that seen in 2016,                   decisions in light of results on an ongoing basis 
 carries a risk that investment 
 performance is weaker. However, 
 our Focus on Change investment 
 philosophy has a good track 
 record of delivering resilient 
 long-term performance. 
 In 2016 we reviewed our investment 
 processes to ensure they continue 
 to work effectively for our 
 customers and clients. 
--------------------------------------  -----------------------------------------------------------  ----------------- 
Customer and Client Preferences 
 and Demand 
Delivering our business plan                                                                         Developing 
 requires us to attract and              *    The development of our new and existing propositions    strong 
 retain customers and clients                 start from the customer or client need                  relationships 
 across our business. We are                                                                          with 
 therefore exposed to the risk                                                                        customers 
 that our propositions do not            *    We regularly seek customer feedback on our              and clients 
 keep pace with emerging customer             performance and use focus groups to help with           Broadening 
 preferences or fail to meet                  proposition development                                 and deepening 
 the needs and expectations                                                                           our investment 
 of customers and clients.                                                                            capability 
 The UK pensions and savings             *    We invest in initiatives to build trust and long-term 
 market continues to evolve                   relationships with customers 
 as we seek to meet our customers' 
 savings and retirement needs. 
 As customer needs and behaviours 
 develop we continue to place 
 a focus on ensuring their long-term 
 investment solutions are fit 
 for purpose. 
 We have made a number of key 
 propositional enhancements 
 to our Pensions and Savings 
 business with the purchase 
 of Elevate and growth of our 
 financial advice business 1825. 
 Also, our highly differentiated 
 Workplace proposition continues 
 to increase engagement with 
 employers and employees. 
 Standard Life Investments has 
 delivered a number of new solutions 
 to meet client needs. For example, 
 the Integrated Liability Plus 
 Solution (ILPS) fund range 
 for our Institutional growth 
 channel and the expansion of 
 our Global Focused Strategies 
 Range into the US. 
--------------------------------------  -----------------------------------------------------------  ----------------- 
Political Change 
Political change can impact                                                                          Building 
 us directly through new laws            *    We constructively engage with key decision makers in    an effective 
 or indirectly by altering the                the best interests of our stakeholders, for example     and efficient 
 wider environment. Decisions                 by contributing to consultations                        business 
 taken by the UK and Scottish                                                                         Attracting, 
 governments, but also those                                                                          retaining 
 in other locations where we             *    Political risks are considered under our stress and     and developing 
 operate, can significantly                   scenario testing programme (which includes both         talented 
 alter circumstances and change               quantitative and reverse stress testing) and emerging   people 
 the way we do business. We                   risk process 
 witnessed several significant 
 political events in 2016. 
 Following the UK's vote to              *    For the most extreme scenarios we maintain 
 leave the EU in June, our business           appropriate business continuity and contingency plans 
 operations in Europe will be                 and these are regularly tested and reviewed 
 directly impacted by the outcome 
 of the forthcoming negotiations. 
 Also, the recent announcement 
 from Theresa May confirming 
 that the UK will leave the 
 European single market provides 
 an indication of the environment 
 we will face outside the EU. 
 The result of the presidential 
 election in the US is likely 
 to result in policy changes 
 that may impact global growth 
 and financial markets. 
 Since the change of leadership 
 within the UK Government we 
 have seen different approaches 
 being taken, for example with 
 secondary annuities. As we 
 look forward to the 2017 budget 
 we may see further changes 
 that could impact our business 
 and our customers and clients. 
 In light of actual and potential 
 political changes we are evaluating 
 possible scenarios and preparing 
 to adapt our business as appropriate. 
--------------------------------------  -----------------------------------------------------------  ----------------- 
 
 
The risks to our business 
 and how we managed them in             Our principles in managing 
 2016                                    these risks                                                 Link to strategy 
Regulatory Change 
We operate in a highly regulated                                                                     Growing 
industry and our global growth             *    Ongoing regulatory compliance is governed via our     and diversifying 
requires us to comply with                      Standard Life Policy Framework                        our revenue 
an increasing number of regulatory                                                                    and profit 
regimes. 
New or changing regulations                *    We maintain strong and open relationships with our 
can create opportunities for                    regulators and engage early with areas of potential 
our business but can also                       regulatory change 
increase risk. They can increase 
compliance costs, impact profitability 
and demand for our propositions,           *    Regulatory changes are considered under our stress 
or tie up resources which                       and scenario testing programme and emerging risk 
may slow the delivery of other                  process 
developments to support our 
growth plans. 
In 2016 the FCA carried out 
a number of thematic reviews, 
which we were part of, and 
also published the initial 
findings of its Asset Management 
Market Study which we await 
the final conclusions of in 
2017. 
While we see the level of 
regulatory change risk increasing, 
we remain well placed to deal 
with significant developments 
on the horizon including the 
Markets in Financial Instruments 
Directive II, Packaged Retail 
and Insurance-based Investment 
Products, European Union General 
Data Protection Reform and 
the likely introduction of 
a pension dashboard. 
--------------------------------------  -----------------------------------------------------------  ----------------- 
Strategic Transition and 
 Delivery (New) 
We continue our strategic                                                                            Impacts 
 delivery towards a simplified,           *    Our Strategic Executive Committee has responsibility   all areas 
 well diversified and scalable                 for our corporate strategy and execution of a single   of strategy 
 world-class investment company.               strategic plan 
 We aim to take advantage of 
 a number of growth opportunities 
 in the key markets in which              *    Our Chief Strategy Officer has responsibility to 
 we operate.                                   further develop our strategy 
 There is a risk that we fail 
 to deliver long-term value 
 for shareholders because we              *    Inorganic growth opportunities are fully assessed to 
 are unable to successfully                    ensure they align with strategic priorities 
 deliver this strategic transition. 
 We have continued to deliver 
 on our transition over 2016 
 with the growth of our investment 
 business and through acquisitions 
 such as Elevate. 
--------------------------------------  -----------------------------------------------------------  ----------------- 
 

CONDUCT RISK

Our definition and appetite

The risk that through our behaviours, strategies, decisions and actions the business, or individuals within the business, do not do the right thing and/or do not behave in a manner which:

-- Pays due regard to treating our customers and clients fairly

-- Is consistent with our disclosures and setting of customer and client expectations

-- Supports the integrity of financial markets

We recognise that our core strategic activity brings with it exposure to conduct risk which must be understood and managed. However, there is no appetite for purposeful or deliberate actions (behaviours/decisions) which result in conduct risk.

 
The risks to our business and how we     Our principles in 
 managed them in 2016                     managing these risks                                        Link to strategy 
Customer and Client Outcomes 
We are exposed to the risk                                                                            Developing 
 of unfair customer and client            *    Our Standard Life Code of Conduct sets out the          strong 
 outcomes as a result of our                   standards required of colleagues and mandatory          relationships 
 business not acting in the                    training embeds this across the business                with 
 right way. This can arise from                                                                        customers 
 failed or poorly designed processes,                                                                  and clients 
 badly designed or performing             *    Our Conduct Risk Policy helps to ensure that the 
 propositions, poor customer                   standards and outcomes we set are implemented 
 communications or conduct by                  consistently across the business 
 our people. Unfair customer 
 outcomes can also lead to significant 
 reputational damage and material         *    Strong oversight and challenge is provided within our 
 financial losses for our business.            business by our Conduct and Compliance risk centre 
 The standards that we aspire 
 to internally, as well as those 
 expected of us by regulators,            *    We maintain a strong and open relationship with the 
 third parties and our customers               FCA and other regulators 
 are consistently being raised. 
 However, higher standards mean 
 that there is a greater risk             *    Ensuring fair treatment of our customers and clients 
 of failing to meet these, which               is continually reinforced through the culture of 
 leads to our assessment that                  Standard Life 
 this risk is increasing. 
 As we transition to a world-class 
 investment company we must 
 ensure that we effectively 
 manage any conflicts of interest 
 across different parts of our 
 business to support fair outcomes 
 for customers. This includes 
 embedding our robust conduct 
 risk framework into any newly 
 acquired businesses. 
 At the FCA's request, we shall 
 be reviewing all non-advised 
 annuity sales from July 2008 
 to identify whether our customers 
 received sufficient information 
 about enhanced annuity options. 
 It is essential that conduct 
 risk is properly understood 
 and managed throughout this 
 process in order to deliver 
 fair customer outcomes. 
 Our response to increased redemption 
 requests after the EU referendum, 
 from UK property funds, protected 
 investors. We took action to 
 do the right thing to achieve 
 the best possible outcome for 
 our customers and clients. 
---------------------------------------  -----------------------------------------------------------  ---------------- 
 

OPERATIONAL RISK

Our definition and appetite

Risk of loss or adverse consequences resulting from inadequate or failed internal processes, people or systems, or from external events. We have limited appetite for large operational losses due to the related reputational damage and opportunity costs. We will seek to manage existing operational risk exposures and proactively control new exposures.

 
The risks to our business and how we     Our principles in 
 managed them in 2016                     managing these risks                                        Link to strategy 
IT Failure and Security, 
 including cyber risk 
Our business relies on a wide                                                                         Building 
 range of IT systems and our              *    We continuously invest in modernising our IT            an efficient 
 strategy requires greater use                 infrastructure via internal change programmes           and effective 
 of online functionality to meet                                                                       business 
 customer preferences, improve 
 efficiency and manage costs.             *    We work with specialist external cyber risk experts 
 This exposes us to the risk                   to identify new risks and develop our response to 
 of failure of key systems, and                them 
 technological security risks 
 such as cyber-attacks. 
 Over time we expect our increasing       *    IT failure, security and cyber risk are considered 
 global profile to raise the                   under our stress and scenario testing programme and 
 threat from cyber-attacks. We                 emerging risk process 
 continue to work with our external 
 providers to ensure that our 
 response is appropriate to the           *    For the most extreme scenarios we maintain 
 scale and nature of the threat.               appropriate business continuity and contingency plans 
 In 2016 we established a Chief                and these are regularly tested and reviewed 
 Information Security Office 
 to oversee and set the security 
 priorities across the business. 
 The Security Office has specified 
 our risk appetite for cyber 
 risk in order to better measure 
 the risk and drive the appropriate 
 responses to it. 
---------------------------------------  -----------------------------------------------------------  ---------------- 
Outsourcer Relationship Management 
We use a number of outsourcing                                                                        Developing 
 providers to operate and deliver         *    Our outsourcing policy sets out standards that must     strong 
 core systems, capabilities and                be complied with                                        relationships 
 processes. Key relationships                                                                          with 
 include Citigroup for our investment                                                                  customers 
 business and FNZ's role in the           *    We maintain strong relationships with external          and clients 
 delivery of platform functionality            providers to ensure that the risks arising are well     Building 
 for our Pensions and Savings                  understood                                              an efficient 
 business.                                                                                             and effective 
 These types of business arrangements                                                                  business 
 allow us to access specialist            *    Outsourcing risks are considered under our stress and 
 services and skills, and enable               scenario testing programme 
 our business to run more efficiently 
 and cost effectively. 
 The failure of a material outsourcing    *    For the most extreme scenarios we maintain 
 provider could lead to significant            appropriate business continuity and contingency plans 
 costs and disruption to our                   and these are regularly tested and reviewed 
 operations until we recover 
 the situation or put alternative 
 solutions in place. 
 Our acquisition of Elevate broadens 
 our relationship with FNZ. This 
 change in risk exposure is well 
 understood and was assessed 
 as part of our due diligence. 
---------------------------------------  -----------------------------------------------------------  ---------------- 
Change Management 
In today's dynamic world successful                                                                   Building 
 businesses need to be able to             *    Change management forms part of our operational risk   an efficient 
 respond effectively and efficiently            management framework which provides a robust and       and effective 
 to changes around them.                        established framework under which change is managed,   business 
 We run a large change portfolio                reported and implemented 
 with an increased level of activity 
 arising from regulatory changes, 
 transition activity for acquisitions      *    In recent years, our business has built up 
 and wider strategic initiatives.               significant experience of successfully responding to 
 This exposes us to the risk                    change, whilst continuing to develop market-leading 
 that change takes longer or                    propositions for customers 
 costs more than expected or 
 that the change does not meet 
 its intended objective. 
 Our risk committees maintain 
 a strong focus on ensuring the 
 effective management of our 
 change risk portfolio. 
---------------------------------------  -----------------------------------------------------------  ---------------- 
Talent Management 
The strength of our business                                                                          Broadening 
 is built on our people and it            *    We regularly benchmark our terms and conditions         and deepening 
 is essential that we are able                 against the market                                      our investment 
 to attract and retain people                                                                          capability 
 with the skills and capabilities                                                                      Attracting, 
 that we need to deliver our              *    Our Sustainability section explains the range of        retaining 
 business plan.                                initiatives that we use to support employee wellbeing   and developing 
 We are exposed to the risk that               and engagement                                          talented 
 we are not able to do this,                                                                           people 
 that it can only be achieved 
 at a higher cost than expected           *    We maintain succession plans for key individuals 
 or that key individuals leave                 which are regularly reviewed 
 the business unexpectedly. 
 As significant new powers are 
 devolved to the Scottish Parliament      *    Our Emerging Leaders Development Support and 
 it is essential for our business              Accelerated Development Support programmes help to 
 that these are used to make                   build our talent pipeline 
 Scotland an attractive place 
 for talented individuals to 
 live and work. 
 We continue to develop the diversity 
 of our workforce and are involved 
 in a wide range of initiatives 
 aimed at promoting social mobility 
 and increased diversity across 
 the organisation. These include 
 how we consider diverse Board 
 representation, talent pipeline 
 development, talent acquisition, 
 as well as actions to ensure 
 a more inclusive workplace. 
 In 2016 we signed up to the 
 HM Treasury Women in Finance 
 Charter. 
---------------------------------------  -----------------------------------------------------------  ---------------- 
 

FINANCIAL MARKET AND CREDIT RISKS

Our definition and appetite

Risk of losses due to risks inherent in financial markets. Standard Life has appetite for market risk exposures where exposures arise as a consequence of core strategic activity. We have an appetite for credit risk to the extent that acceptance of this risk optimises Standard Life's risk adjusted return.

 
The risks to our business and how 
we                                    Our principles in 
managed them in 2016                   managing these risks                                        Link to strategy 
Market Risk 
Our business is exposed to                                                                         Growing 
market risk from the direct            *    We set limits for market risk exposures where this is   and diversifying 
investment of shareholder assets,           appropriate                                             our revenue 
indirectly from UK and German                                                                       and profit 
with profits funds in our Pensions 
and Savings business, and as           *    We use our stress and scenario testing programme to 
a result of fluctuations in                 understand our sensitivities to markets and identify 
fees that we earn which are                 mitigating actions 
linked to the value of underlying 
assets in both our Pensions 
and Savings and investment             *    Hedging is used to manage market risks faced by 
businesses.                                 policyholders in our with profits funds where 
Over time this risk is becoming             appropriate 
more important as the contribution 
of spread business to our overall 
revenue reduces and we become 
more focused on fee based revenue 
as we transition to a world-class 
investment company. 
Global political and economic 
events caused financial markets 
to be volatile over 2016 and 
we expect this uncertainty 
to continue in 2017. This volatility 
in markets has an impact on 
asset values as well as investor 
sentiment. 
Our rigorous stress and scenario 
testing programme during 2016 
once again confirmed we have 
a resilient capital position 
which means we are well prepared 
for whatever market conditions 
we face in the future. 
------------------------------------  -----------------------------------------------------------  ----------------- 
Counterparty Risk 
In response to economic, political                                                                 Growing 
and regulatory developments             *    Our credit risk management policy sets out the         and diversifying 
we saw a number of ratings                   standards that must be complied with                   our revenue 
downgrades from external credit                                                                     and profit 
rating agencies in 2016. 
During this time our governance         *    Limits for individual counterparties are overseen by 
processes in relation to investment          our Group Credit Risk Committee 
mandates have operated effectively 
and we remain comfortable with 
the credit quality of our cash          *    Where appropriate, counterparties are collateralised 
counterparties and other                     and internal credit assessments are used 
investments. 
Our forward-looking assessment, 
given the current uncertainty           *    Exposures are proactively monitored with mitigation 
affecting financial markets,                 action taken where necessary 
is for credit risk to remain 
stable but at an elevated level. 
------------------------------------  -----------------------------------------------------------  ----------------- 
 

DEMOGRAPHIC AND EXPENSE RISK

Our definition and appetite

Risk that arises from the inherent uncertainties as to the occurrence, amount and timing of future cash flows due to demographic and expense experience differing from that expected which, for the purpose of risk management, includes liabilities of insurance and investment contracts. Within demographic risk we have an appetite for longevity risk since we expect acceptance of this risk to be value additive.

 
The risks to our business and how we     Our principles in 
 managed them in 2016                     managing these risks                                       Link to strategy 
Longevity Risk 
This is the risk that our annuity                                                                    Growing 
 customers live longer than               *    We set limits for longevity risk exposure              and diversifying 
 we expect.                                                                                           our revenue 
 In 2016 annuity sales continued                                                                      and profit 
 to be materially lower following         *    We have a robust governance process for setting our 
 the introduction of Pension                   longevity assumptions using the latest data sources 
 Freedoms in the UK. In November 
 we took the decision to restrict 
 annuity sales to existing customers      *    We have a reinsurance arrangement with Canada Life 
 only.                                         which transfers a material part of our longevity 
 We expect our longevity risk                  exposure. We monitor opportunities to implement 
 to decrease over time as our                  further transactions to reduce our exposure. 
 existing annuity book steadily 
 runs off. 
 Determination of longevity               *    We consider longevity scenarios under our stress and 
 assumptions is a critical accounting          scenario testing programme and emerging risk process 
 estimate. Further details on 
 this judgement are discussed 
 in the Audit Committee report 
 and in Note 33 of the Group 
 financial statements section. 
---------------------------------------  ----------------------------------------------------------  ----------------- 
 

Sustainability

Investing for a better future

Our sustainability strategy covers four key priorities and enables us to manage environmental, social and governance (ESG) risks and opportunities. This helps us make a positive contribution to the futures of our people, customers and clients, and wider society.

Our sustainability strategy and approach

During 2016 we engaged directly with our customers, investors and employees to review our strategy and ensure we continue to focus on the right areas. We asked these stakeholders to provide their views on what is important to them across our four sustainability priorities.

This materiality review highlighted a number of areas that matter most to our stakeholders including trust and transparency, governance, sustainable economic growth, cyber-crime, climate change, responsible investment and stewardship, financial inclusion and decent work and pay. This input will also help focus our activity in 2017 and beyond.

You can find out more about our review and what we are doing in these areas in our sustainability report at www.standardlife.com/sustainability

Sustainability at Board level

An update on internal and external ESG issues is provided for each Board meeting. Non-financial measures, which monitor progress against our sustainability strategy, are also highlighted on a quarterly basis.

Our best ever DJSI and FTSE4Good index scores

In 2016, we were listed for the sixth year running in the DJSI World and Europe indices, which include the top 10% and 20% respectively of sustainable companies in our sector. We received our best ever score in this and the FTSE4Good index, and our first ever Silver class distinction from RobecoSAM. These are based on an assessment of how we manage economic, environmental and social factors relevant to company success.

Responsible business

This is the core of how we run our business and build a positive culture. We aim to operate in a way that builds trust, to contribute to our communities and to manage our environmental impact

Business ethics

We recently updated our global code of conduct, which provides a set of guidelines on how we expect our people to behave. In the code, we frame many of the aspects of good conduct as a question, such as 'am I doing the right thing?' or 'what would our customers and clients think?' As part of the launch, we promoted our independent speak-up helpline - an anonymous way to raise concerns. We commit to follow up all issues raised and to support and protect the caller.

We held a series of events in collaboration with the University of Edinburgh Sustainable Business Initiative, the Institute of Business Ethics, and the Institute of Corporate Responsibility and Sustainability. These events were designed to raise awareness of the importance and benefits of investing in an ethical culture. As both a large business and an investor in other companies, we have a distinct perspective on this area and used the events to share best practice and further our learning.

Human rights

We have a responsibility to protect and respect human rights as an employer, investor, procurer and provider of services and through our business partnerships. We have a statement on our website setting out our approach and commitment to human rights and will be reviewing and building on this during 2017 using the UN Guiding Principles on Business and Human Rights framework. We have also published our Modern Slavery statement setting out the steps we are taking to help prevent modern slavery in our business and supply chains. You can find out more at www.standardlife.com/annualreport

Managing our environmental impact

Our operational environmental impact strategy focuses on our highest greenhouse gas (GHG) emitting activities: energy use in our buildings and business travel.

In 2016, we continued to run our awareness programme for our people and customers, including an environmental champions network, promoting sustainable travel, collaborative technology workshops and ongoing energy reduction and recycling initiatives.

In 2013, we targeted a 20% reduction in GHG emissions by 2020. At the end of December 2016, we had achieved an absolute 5% reduction, however, on a like-for-like basis we are ahead of target with a 16% reduction. The table below shows GHG emissions for our business operations. We also measure GHG emissions for our global real estate investment portfolio. You can find out more at www.standardlife.com/annualreport

We know that the biggest impact we can have on environmental issues, including climate change, is through how we invest. You can find out more about this within our sustainability report at www.standardlife.com/sustainability

Volunteering

We have strong links with our local communities and support our people to volunteer and make a difference through our #getinvolved initiative. Our volunteering policy gives our people the opportunity to take three paid days leave a year. Our people donated 1,529 days for volunteering work in 2016 (2015: 661 days), significantly exceeding our target of 1,000 days. In 2017 we are aiming to donate more time and have increased our target again to 2,000 days.

Our charity partners

Our people vote for the charities we support. They pick charities close to their hearts and carry out vital fundraising during the partnership. Our current charities are:

-- In the UK, Place2Be - provides emotional support to children in schools

-- In Ireland, ARC Cancer Centres - therapies and counselling for people with cancer and their carers

-- In Germany, Hilfe für krebskranke Kinder Frankfurt e.V - supports children with cancer

-- In Austria, Österreichische Krebshilfe Wien - provides cancer support in Vienna

-- In the US, Let's Get Ready - supports low-income high school students

-- In Hong Kong, Hong Kong Society for the Protection of Children - focusing on the care and welfare of children

2016 total charitable contribution

GBP2.6m(1)

(1) This consists of time given to the community, Raise and Match, Standard Life Foundation, Standard Life Charity Fund, donation of equipment and services and our employability scheme funding.

(2) Greenhouse gas emissions (continuing operations)

 
                                      2016  2015(6)  2013 (baseline)  Actual change(7)  2016 target(7) 
--------------------  ------------  ------  -------  ---------------  ----------------  -------------- 
Greenhouse gas 
 emissions (CO2e)     Scope 1(2)     2,227    2,675            2,134                4%            (6%) 
 Scope 2(3)                         10,194   12,123           12,034             (15%)            (6%) 
 Scope 3(4)                         12,575   10,755           12,070                4%           (15%) 
 ---------------------------------  ------  -------  ---------------  ----------------  -------------- 
 Total                              24,996   25,553           26,238              (5%)            (9%) 
 ---------------------------------  ------  -------  ---------------  ----------------  -------------- 
FTE / Tonnes 
 CO2e ratio(5)        Total           3.21     3.39             3.75              (8%)            (6%) 
--------------------  ------------  ------  -------  ---------------  ----------------  -------------- 
Paper used (tonnes)   Total            407      485              603             (32%)           (15%) 
--------------------  ------------  ------  -------  ---------------  ----------------  -------------- 
Waste (tonnes)        Landfill          10        7              276             (96%)             N/A 
 Divert from 
  landfill                             736      718              608               21%             N/A 
 ---------------------------------  ------  -------  ---------------  ----------------  -------------- 
 Total                                 746      725              884             (16%)            (6%) 
 ---------------------------------  ------  -------  ---------------  ----------------  -------------- 
 

(1) Scope 1 emissions include gas (and fluorinated greenhouse gas from 2014).

(2) Scope 2 emissions include electricity.

(3) Scope 3 emissions include business travel (air, rail and leased fleet), transmission and distribution losses for electricity and electricity use by a third party data centre.

(4) Based on a full-time equivalent (FTE) employee figure which includes contingent FTE.

(5) Figures have been restated to reflect full calendar year.

(6) vs 2013 baseline.

Engaging employment

We want to provide inclusive and engaging employment, encourage collaboration, and enable our people to reach their potential.

Employee proposition

As we continue to create a world-class investment company we appreciate the value that attracting, developing and retaining talented people brings to our business and the impact that they make on our global ambitions and our customers and clients. We offer a range of benefits and financial rewards to our people through our Total Reward package. Our people can tailor their package to suit their individual needs.

We use a performance-based remuneration system, including a variable pay scheme which is based on the performance of the relevant business unit as well as that of individual employees. Our people can access a range of our savings and investment products at preferential rates and have the opportunity to join two different company share schemes. One matches employees' share purchases of up to GBP50 per month (an increase of GBP25 in 2016) and the other enables employees to save for a fixed term and exercise their option to purchase shares at the end of the term at a discounted set price.

Our people strategy is consistent with both the United Nations and International Labour Organisation's standards.

Diversity

We continue to show our commitment to inclusion and supporting diversity and believe we have leading policies and practices in many areas. We aim to provide an inclusive workplace where everyone is valued and able to fulfil their potential. Our latest employee engagement survey showed that 85% of our people believe that our company appreciates difference among our employees, a 7% increase from the previous survey.

In 2016 we created new policies and continued activity in a number of areas for our people to feel part of a more inclusive workplace. Examples include the launch of our Carers Policy, the promotion of our Shared Parental Leave Policy featuring enhanced shared parental pay, the change to our enhanced paternity pay policy (which means new parents taking paternity leave will be entitled to be paid up to two weeks' salary regardless of how long they've worked at Standard Life), increasing the proportion of our people aged 25 and under in the UK and Ireland to 8% and providing unconscious bias training across our organisation. We also continued supporting our employee networks; Armed Forces, LGBT, LGBT+ Allies, Young People, Carers and Women's Development.

A key strand in our approach is gender equality as we know this is an area where we have more work to do. In 2016, we were one of the first signatories to the HM Treasury Women in Finance Charter. We have made firm, public commitments to support actions which will improve the representation of senior women in our industry, including setting progressive target ranges for our leadership population which is currently 25% women. We will also develop wider targets incorporating other aspects of diversity across our people including reporting our gender targets and our gender pay gap in the coming year.

Working communities

In 2016 we received accreditation from the UK Government as one of only 11 UK Social Mobility Champions based on our work to break down barriers to employment.

We believe job creation is vital to creating healthy communities. Providing quality employment, paid at a living wage, with access to skills and on-the-job experience for all, can turn jobs into careers and allow people to plan and look to the future with confidence. We work with people from disadvantaged backgrounds who are less well qualified or living in poverty, those who have been through the care system, people serving as carers, people with disabilities and people who are transitioning from a career with the Armed Forces.

In 2016 we published our UK community impact report highlighting our employability and financial capability work from 2013-2016.

Early careers

We offer challenging and rewarding opportunities for school leavers and graduates, and internships for those in their penultimate year of study.

Throughout 2016 we have continued our work with the Edinburgh Guarantee Scheme, providing 33 young people with paid work experience for six months. We have also continued our work with the Investment2020 scheme, offering 12-month paid work experience placements to 11 people. Across our global employability programmes we have provided 46 jobs in total in 2016.

Wellbeing

We know that people who work in a healthy and supportive workplace are more engaged in their roles. We base our ongoing wellbeing programme activities around three essential areas: healthy mind, healthy body and healthy culture.

Our analysis shows that mental health is one of the main wellbeing issues our people can face, so we are committed to creating a workplace where everyone feels comfortable discussing any and all mental health issues. To help raise awareness, we offer workplace training on how to build a mentally healthy environment, signed up to the Time for Change pledge, supported World Mental Health Day and in 2016 we became a See Me in Work Partner.

Employee engagement and enablement

Our 2015 employee engagement survey highlighted the importance our people placed on effective and transparent communication across our business. We want to enable collaboration and, during 2016, we made significant steps to address this by:

-- Introducing a new company-wide intranet, built on the principles of social sharing and conversation

-- Running new engagement programmes where our people meet and hear from senior leaders and subject matter experts covering all aspects of our business and the markets we operate in

-- Embedding Microsoft SharePoint as our chosen way to collaborate on projects and share knowledge across our global locations

In November 2016, we again ran our employee survey. The responses gave us a clear update on how our people feel about a range of topics. Our vision, social responsibility, and risk culture were our top three scoring themes. Our overall employee engagement score has increased, however, our enablement score - how well employee skills are utilised and working environments facilitate productivity - has decreased. Specifically, the question on understanding of strategic direction decreased, so this is a focus for us in 2017.

Our employee engagement survey scores were 65% for engagement and 62% for enablement, below the global financial services average scores of 69%.

Our gender targets

-- By September 2017: 26-30% leadership population will be female

-- By September 2021: 30-35% leadership population will be female

-- By end 2025: our leadership population will represent the gender split of our workforce (currently 49% female)

Our talent pipeline, which we've been developing since 2011, is pivotal to attaining these targets. The numbers we report for our talent pipeline and our leadership population are not mutually exclusive, with the pipeline feeding into our leadership population - 38% of our leadership population are also in our talent pipeline for succession to more senior roles.

 
                                    31      31     31 
                                   Dec     Dec    Dec 
                                  2016    2016   2015 
Gender                          Number       %      % 
-------------------  -------  --------  ------  ----- 
Board                Male            9      75     69 
 Female                              3      25     31 
 ---------------------------  --------  ------  ----- 
 Male                               97      75     80 
 
Leadership 
 population(1)       Female         32      25     20 
-------------------  -------  --------  ------  ----- 
Talent pipeline(2)   Male          143      58     60 
 Female                            102      42     40 
 ---------------------------  --------  ------  ----- 
Employees            Male        3,259      51     51 
 Female                          3,074      49     49 
 ---------------------------  --------  ------  ----- 
 

(1) If you include employees who are directors of consolidated subsidiaries, the percentage increases to 27% female and 73% males.

(2) Talent pipeline includes graduates and members of the Emerging Leaders Development Support (ELDS) and Accelerated Development Support (ADS) programmes.

Supporting saving

We provide support and expertise to enable people to manage their money and save for their future.

Workplace pensions

We support action which can make saving more inclusive and can help address the savings gap. In 2012 the UK Government introduced auto enrolment - where employers are required to offer workers a workplace pension - which opens up long-term saving into a pension for more people. Since then, we have helped over one million people to access saving through a workplace pension and look forward to their future with more confidence.

Inclusion

We have a customer inclusion panel, made up of internal and external specialists, to develop practical ways that we can make our products and services more accessible. We also work with The Wisdom Council - an organisation which helps provide insight on our customers and clients. Most recently we have been looking at financial services jargon and what would help to make communications simpler and more accessible for customers.

Standard Life Foundation

First announced at our AGM in May 2016, the Foundation is a charity that will focus on independent research to strengthen financial well-being and resilience in the UK. We will make a gift of around GBP80m to the Foundation which is funded from unclaimed shares and cash entitlements as a result of our demutualisation in July 2006. During the past decade we have made continued efforts to trace those entitled to claim and were successful in uniting over 97% of people with their entitlements before the deadline of 9 July 2016. Lord Darling, the former Chancellor of the Exchequer, is chair of the Foundation and is supported by a team of very experienced trustees. The Foundation will set out the priorities of its work during the course of 2017.

Customer trust and advocacy

Our brand Net Promoter Score (NPS) is an important measure of customer advocacy. The score indicates how likely a customer is to recommend Standard Life to family and friends. In 2016 our brand NPS fell by 11 points. We believe the reasons for this include the processes around pension freedoms - which some customers may have considered more complex - and lower customer confidence in financial services as a whole. We've planned a number of actions for 2017 to improve customer experiences.

Customer complaints

We aim to always do the right thing for our customers - and if something goes wrong, we are committed to putting it right. We carry out root cause analysis for any issue raised by a customer so we can understand what went wrong and take action. In 2016 we received 7,576 complaints from our customers (2015: 7,516 complaints), which is 17.8 complaints per 10,000 policies in force (2015: 18.5 complaints). 3% of these complaints went to the Financial Ombudsman Service (FOS). Of the complaint cases considered by FOS in H1 2016, they agreed with our decision in 77% of cases against an industry average of 70%.

Investing responsibly

Our approach to responsible investment and stewardship considers investments as a tool to promote positive change.

As stewards of our clients' investments we act responsibly in our investment activities. At Standard Life Investments we integrate ESG issues into our investment process as we believe these issues are significant components of investment risk and can have a fundamental impact on the achievement of sustainable long-term investment returns. We apply this approach throughout our investment processes and to mandates which have tailored sustainable responsible investment (SRI) or ethical criteria.

As a leading investment company, we take our role in this area seriously. We research, analyse and engage with companies on ESG issues to understand the risks and drive positive change. We transparently disclose our discussions and thematic reviews within our quarterly and annual update reports.

595 ESG engagements with companies

We actively use our influence through voting at shareholder meetings of investee companies - in order to hold boards to account and promote high standards of governance. We regularly provide updates of our voting records on our website.

We voted at 1,569 shareholder meetings of investee companies

Sustainable real estate

We are committed to sustainability across our direct real estate portfolio. We have a comprehensive Sustainable Real Estate Investment (SREI) Policy and accompanying procedures that govern how we embed ESG factors into development projects and asset management. Our strategic priorities for SREI cover climate change, resource scarcity and the health, wellbeing and productivity of building occupiers. We have targets in place to reduce waste, and water and energy use.

In 2016, Standard Life Investments achieved 15 'Green Stars' in the annual Global Real Estate Sustainability Benchmark (GRESB) Assessment - the leading global benchmark for real estate sustainability. This is the highest number gained of all participants for the second consecutive year. Three of our 15 Green Stars also attained GRESB's new 5 Star rating - putting us in the top 20% of our peers.

Our measurement and assurance

Our non-financial performance measures are aligned across our four priority areas: responsible business, engaging employment, supporting saving, and investing responsibly. They are independently assured by PricewaterhouseCoopers (PwC):

-- Total employee days volunteered

-- Carbon footprint

-- Total people directly employed through employability programmes

-- InterAction employee survey results

-- Gender diversity of the talent pipeline

-- Gender diversity of the leadership population

-- Total customer complaints

-- Annual movement in the Brand Net Promoter Score (NPS)

-- Voting at shareholder meetings of investee companies

-- Environmental, social and governance engagements with companies

Basis of preparation

Overview

Our Strategic report for the year to 31 December 2016 has been prepared in line with the Companies Act 2006 and the Disclosure and Transparency Rules (DTR) issued by the FCA. Under section 414 of the Companies Act 2006, DTR 4.1.8 and DTR 4.1.9, the Group is required to provide a fair, balanced and understandable review of the business and a description of the principal risks and uncertainties facing the Group. Principal risks and uncertainties are detailed in the Risk management section of this Strategic report and Note 41 in the Group financial statements section. To provide clear and helpful information, we have also considered the voluntary best practice principles of the Guidance on the Strategic report issued by the Financial Reporting Council in 2014. We have also considered the European Securities and Markets Authority (ESMA) guidelines on alternative performance measures issued in October 2015.

The Group's International Financial Reporting Standards (IFRS) consolidated financial statements have been prepared in accordance with IFRS, as endorsed by the European Union (EU). However, our Board believes that alternative performance measures (APMs), which have been used in the Strategic report, are also useful for both management and investors.

The most important APMs in the Strategic report include operating profit and underlying cash generation.

All APMs should be read together with the Group's IFRS consolidated income statement, IFRS consolidated statement of financial position and IFRS consolidated statement of cash flows, which are presented in the Group financial statements section of this report.

Going concern

The Group's business activities, together with the factors likely to affect its future development, performance and position, are set out in this Strategic report. This includes details on our liquidity and capital management in the Chief Financial Officer's overview section and our viability statement and principal risks in the Risk management section. In addition, the Group financial statements section includes notes on the Group's subordinated liabilities (Note 36), management of its risks including market, credit and liquidity risk (Note 41), its contingent liabilities and commitments (Notes 45 and 46), and its capital structure and position (Note 49).

The Group continues to meet Group and individual entity capital requirements, and day-to-day liquidity needs through the Group's available credit facilities. The Company has a revolving credit facility of GBP400 million as part of our contingency funding plans and this is due to mature in 2021. The Group has considerable financial resources together with a diversified business model, with a spread of business and geographical reach. As a consequence, the Directors believe that the Group is well placed to manage its business risks successfully.

Having assessed the principal risks and the other matters discussed in connection with the viability statement, the directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements.

IFRS reporting

The financial results are prepared on an IFRS basis. All EU-listed companies are required to prepare consolidated financial statements using IFRS issued by the International Accounting Standards Board (IASB) as endorsed by the EU. The IFRS financial results in the Strategic report and in the Group financial statements have been prepared on the basis of the IFRS accounting policies as disclosed in the Group financial statements section of this report.

Operating profit

The 2016 reconciliation of consolidated operating profit to IFRS profit for the year, presented on page 115 of this report, presents profit before tax expense attributable to equity holders adjusted for non-operating items. Further details on the calculation of Group operating profit is presented in Note 14. Operating profit reporting provides further analysis of the results reported under IFRS and the Directors believe helps to give shareholders a fuller understanding of the performance of the business by identifying and analysing non-operating items.

Forward-looking statements

This document may contain certain 'forward-looking statements' with respect to Standard Life's plans and its current goals and expectations relating to its future financial condition, performance, results, strategy and objectives. For example, statements containing words such as 'may', 'will', 'should', 'continue', 'aims', 'estimates', 'projects', 'believes', 'intends', 'expects', 'plans', 'pursues', 'seeks', 'targets' and 'anticipates', and words of similar meaning, may be forward-looking. By their nature, all forward-looking statements involve risk and uncertainty because they are based on information available at the time they are made, including current expectations and assumptions, and relate to future events and circumstances which may be or are beyond Standard Life's control, including among other things: UK domestic and global political, economic and business conditions (such as the United Kingdom's exit from the European Union); market related risks such as fluctuations in interest rates and exchange rates, and the performance of financial markets generally; the impact of inflation and deflation; experience in particular with regard to mortality and morbidity trends, lapse rates and policy renewal rates; the impact of competition; the timing, impact and other uncertainties of future acquisitions or combinations within relevant industries; default by counterparties; information technology or data security breaches; natural or man-made catastrophic events; the failure to attract or retain necessary key personnel; the policies and actions of regulatory authorities; and the impact of changes in capital, solvency or accounting standards, and tax and other legislation and regulations in the jurisdictions in which Standard Life and its affiliates operate as well as other factors described in the Risk management section of this Strategic report. These may for example result in changes to assumptions used for determining results of operations or re-estimations of reserves for future policy benefits. As a result, Standard Life's actual future financial condition, performance and results may differ materially from the plans, goals, strategy and expectations set forth in the forward-looking statements. Persons receiving this document should not place undue reliance on forward-looking statements. Standard Life undertakes no obligation to update any of the forward-looking statements contained in this document or any other forward-looking statements it may make. Past performance is not an indicator of future results and the results of Standard Life in this document may not be indicative of, and are not an estimate, forecast or projection of, Standard Life's future results.

The Strategic report has been approved by the Board and signed on its behalf by

Kenneth A Gilmour

Company Secretary

Standard Life plc (SC286832)

24 February 2017

This information is provided by RNS

The company news service from the London Stock Exchange

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