Final Results - Part 3 of 3

RNS Number : 3372I

Standard Life plc

10 March 2010

Standard Life plc

Preliminary Results

2009

Part 3 of 3

Notes to the IFRS financial information

3.1 Accounting policies

(a) Basis of preparation

The preliminary announcement has been prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) as endorsed by the European Union (EU), with interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

The accounting policies as set out in the Group's Annual Report and Accounts for the year ended 31 December 2009 have been applied in the preparation of this preliminary announcement. The Group's accounting policies have not changed since the issue of the Annual Report and Accounts 2008, except as described below.

From 1 January 2009, the Group has adopted the requirements of the following new standards:

(i) IFRS 8 Operating Segments, which supersedes the disclosure requirements of IAS 14 Segment Reporting. In accordance with the provisions of the standard, comparatives have been restated. The standard has no financial impact but adoption has resulted in changes to the Group's segmental disclosures, including the reportable segments themselves. In compliance with the requirements of IFRS 8, the Group's reportable segments have been identified in accordance with the way in which the Group is structured and managed.

(ii) IAS 1 (revised) Presentation of Financial Statements. The revised standard includes an option to present one performance statement (the statement of comprehensive income) or two statements (the income statement and statement of comprehensive income). The Group has elected to present both statements. The preliminary announcement has been prepared under the revised disclosure requirements and adoption has not had any financial impact thereon.

(b) Preliminary announcement

The preliminary announcement for the year ended 31 December 2009 does not constitute statutory accounts as defined in Section 435 of the UK Companies Act 2006. PricewaterhouseCoopers LLP have audited the consolidated statutory accounts for the Group for the years ended 31 December 2008 and 31 December 2009 and their reports were unqualified and did not contain a statement under Section 498(2) or (3) of the UK Companies Act 2006. The Group's consolidated statutory accounts for the year ended 31 December 2008 have been filed with the Registrar of Companies. The Group's Annual Report and Accounts for the year ended 31 December 2009 will be available from 1 April 2010.

3.2 Segmental analysis

(a) Basis of segmentation

The Group's reportable segments have been identified in accordance with the way in which the Group is structured and managed and the way in which key financial information used by the Executive team to review performance is presented. The Group's reportable segments are as follows:

UK operations primarily comprise life and pensions business and banking business. The life and pensions business provides a broad range of pensions, protection, savings and investment products to individual and corporate customers. The banking business provides a range of retail mortgage and deposit products via online and telephone operations. However, the Group's banking business, Standard Life Bank plc, was sold on 1 January 2010 and has therefore been classified as a discontinued operation, refer to Note 3.18 - Events after the reporting period. Continuing UK operations also include healthcare business.

Canada

Canadian operations offer a broad range of pensions and savings products to individual and corporate customers in addition to commercial mortgage products.

Europe

The operations in Ireland, Germany and Austria provide life and pension products.

Asia

The Group has investments in joint ventures in India and China and a wholly owned subsidiary in Hong Kong. These businesses offer a range of life and pension products.

Global investment management

Investment management services are provided by global investment management operations to the Group's other reportable segments. Global investment management also provides a range of investment products for individuals and institutional customers through a number of different investment vehicles.

Other

This reportable segment primarily includes the Group corporate centre and the shared service centre.

(b) Reportable segments - income statement, underlying profit and asset information

Income statement and asset information are presented by reportable segment in the tables below. As described beneath the pro forma reconciliation of Group underlying profit to profit for the year, underlying profit is considered to present an indication of the underlying business performance of the Group. Underlying profit is one of the key measures utilised by Group management in their evaluation of segmental performance and is therefore also presented by reportable segment.

3.2 Segmental analysis continued

(b) Reportable segments - income statement, underlying profit and asset information continued

	UK	Canada	Europe	Asia	Global investment management	Other	Elimination	Total
2009	£m	£m	£m	£m	£m	£m	£m	£m
Revenue
Net earned premium	1,840	709	883	31	4	-	-	3,467
Net investment return	10,275	2,044	873	12	-	4	(34)	13,174
Other segment income	498	112	29	1	155	7	(8)	794
Inter-segment revenue	8	2	(5)	-	91	539	(635)	-
Total net revenue	12,621	2,867	1,780	44	250	550	(677)	17,435

Expenses
Segment expenses	12,109	2,833	1,737	44	200	603	(654)	16,872
Finance costs	120	13	-	-	5	-	(23)	115
Total expenses	12,229	2,846	1,737	44	205	603	(677)	16,987

Share of (losses)/profits from associates and joint ventures	7	(29)	-	(27)	19	1	-	(29)

Profit/(loss) before tax	399	(8)	43	(27)	64	(52)	-	419

Tax attributable to policyholders' returns	294	-	5	-	-	-	-	299
Tax attributable to equity holders' profits	(51)	33	(3)	-	13	(10)	-	(18)

Profit/(loss) for the year from continuing operations	156	(41)	41	(27)	51	(42)	-	138

Profit for the year from discontinued operations	42	-	-	-	-	-	-	42
Profit/(loss) for the year	198	(41)	41	(27)	51	(42)	-	180

Loss attributable to non-controlling interests from continuing operations	33	-	-	-	-	-	-	33
Profit/(loss) attributable to equity holders of Standard Life plc	231	(41)	41	(27)	51	(42)	-	213

Reconciliation to Group underlying profit: Tax (credit)/expense attributable to equity holders' profits:
From continuing operations	(51)	33	(3)	-	13	(10)	-	(18)
From discontinued operations	42	-	-	-	-	-	-	42

Adjustments to reconcile the Group underlying profit to profit for the year:
From continuing operations	61	1	7	-	2	7	-	78
From discontinued operations	(24)	-	-	-	-	-	-	(24)

Underlying profit/(loss) before tax attributable to equity holders of Standard Life plc and adjusted items:
From continuing operations	199	(7)	45	(27)	66	(45)	-	231
From discontinued operations	60	-	-	-	-	-	-	60
Underlying profit/(loss) before tax attributable to equity holders of Standard Life plc and adjusted items	259	(7)	45	(27)	66	(45)	-	291

Other income included in the income statement is as follows:
Interest income:
From continuing operations	154	145	60	-	1	5	-	365
From discontinued operations	350	-	-	-	-	-	-	350

Other expenses included in the income statement include:
Impairment losses recognised/(reversed):
From continuing operations	30	4	-	-	-	7	-	41
From discontinued operations	19	-	-	-	-	-	-	19
Amortisation of intangible assets¹	11	1	2	-	-	3	-	17
Amortisation of deferred acquisition costs¹	116	12	45	-	-	-	-	173
Depreciation of property, plant and equipment¹	-	2	1	-	1	6	-	10
Interest expense:
From continuing operations	132	19	2	-	5	116	(139)	135
From discontinued operations	238	-	-	-	-	-	-	238

Assets
Segment assets	114,042	20,423	9,441	75	506	796	(839)	144,444
Investments in associates and joint ventures	1,915	104	-	80	32	38	-	2,169
Total assets	115,957	20,527	9,441	155	538	834	(839)	146,613

Additions during the year¹
Intangible assets	6	1	5	-	-	4	-	16
Deferred acquisition costs	105	14	63	19	-	-	-	201
Property, plant and equipment	1	2	-	-	1	9	-	13
Investment properties	348	4	13	-	-	-	-	365
	460	21	81	19	1	13	-	595

¹ All from continuing operations.

	UK	Canada	Europe	Asia	Global investment management	Other	Elimination	Restated total
2008	£m	£m	£m	£m	£m	£m	£m	£m
Revenue
Net earned premium	(4,289)	649	846	16	4	-	-	(2,774)
Net investment return	(11,737)	(1,260)	(1,070)	(15)	12	1	(93)	(14,162)
Other segment income	443	109	24	-	162	6	(34)	710
Inter-segment revenue	21	1	-	3	105	560	(690)	-
Total net revenue	(15,562)	(501)	(200)	4	283	567	(817)	(16,226)

Expenses
Segment expenses	(15,303)	(406)	(221)	14	277	617	(806)	(15,828)
Finance costs	110	12	-	-	2	(4)	(11)	109
Total expenses	(15,193)	(394)	(221)	14	279	613	(817)	(15,719)

Share of profits/(losses) from associates and joint ventures	112	4	7	(25)	(4)	7	-	101

(Loss)/profit before tax	(257)	(103)	28	(35)	-	(39)	-	(406)

Tax attributable to policyholders' returns	(317)	-	(17)	-	-	-	-	(334)
Tax attributable to equity holders' profits	(69)	(64)	5	-	3	(13)	-	(138)

Profit/(loss) for the year from continuing operations	129	(39)	40	(35)	(3)	(26)	-	66
Loss for the year from discontinued operations	(49)	-	-	-	-	-	-	(49)
Profit/(loss) for the year	80	(39)	40	(35)	(3)	(26)	-	17

Loss attributable to non-controlling interests from continuing operations	83	-	-	-	-	-	-	83
Profit/(loss) attributable to equity holders of Standard Life plc	163	(39)	40	(35)	(3)	(26)	-	100

Reconciliation to Group underlying profit: Tax (credit)/expense attributable to equity holders' profits:
From continuing operations	(69)	(64)	5	-	3	(13)	-	(138)
From discontinued operations	(21)	-	-	-	-	-	-	(21)

Adjustments to reconcile the Group underlying profit to profit for the year:
From continuing operations	69	1	3	-	42	2	-	117
From discontinued operations	96	-	-	-	-	-	-	96

Underlying profit/(loss) before tax attributable to equity holders of Standard Life plc and adjusted items:
From continuing operations	212	(102)	48	(35)	42	(37)	-	128
From discontinued operations	26	-	-	-	-	-	-	26

Underlying profit/(loss) before tax attributable to equity holders of Standard Life plc and adjusted items	238	(102)	48	(35)	42	(37)	-	154

Other income included in the income statement is as follows:
Interest income:
From continuing operations	491	142	25	-	9	11	-	678
From discontinued operations	700	-	-	-	-	-	-	700

Other expenses included in the income statement include:
Impairment losses recognised/(reversed)¹	141	1	-	-	-	-	-	142
Amortisation of intangible assets¹	7	-	2	-	-	1	-	10
Amortisation of deferred acquisition costs¹	110	11	42	-	2	-	-	165
Depreciation of property, plant and equipment¹	-	2	1	-	-	7	-	10
Interest expense:
From continuing operations	121	18	3	-	2	112	(126)	130
From discontinued operations	638	-	-	-	-	-	-	638
Assets
Segment assets	107,611	17,458	8,383	41	509	804	(924)	133,882
Investments in associates and joint ventures	2,569	127	202	107	15	78	-	3,098
Total assets	110,180	17,585	8,585	148	524	882	(924)	136,980

Additions during the year¹
Intangible assets	13	-	4	-	-	9	-	26
Deferred acquisition costs	190	16	100	-	-	-	-	306
Property, plant and equipment	267	2	1	-	2	1	-	273
Investment properties	78	30	6	-	-	-	-	114
	548	48	111	-	2	10	-	719

¹All from continuing operations.

3.2 Segmental analysis continued

(b) Reportable segments - income statement, underlying profit and asset information continued

Inter-segment transactions are entered into under normal commercial terms and conditions that would be available to unrelated third parties. The allocation of total net revenue presented above is based on customer location and this basis is not materially different to geographical origin. The Group has a widely diversified policyholder base and is therefore not reliant on any individual customers. The Group utilises additional measures to assess the performance of each of the reportable segments, which are presented in the European Embedded Value information.

	2009	2008
	£m	£m
UK	6,292	7,400
Continental Europe	51	48
Canada	1,035	1,141
Asia	-	1
Total	7,378	8,590

Non-current non-financial assets for this purpose consist of investment property, property, plant and equipment and intangible assets (excluding intangible assets arising from insurance or participating investment contracts).

3.3 Administrative expenses

		2009	Restated 2008
	Notes	£m	£m
Restructuring and corporate transaction expenses		59	71
Commission expenses		331	452
Interest expenses		250	639
Staff costs and other employee-related costs		599	606
Acquisition costs deferred during the year		(201)	(307)
Amortisation of deferred acquisition costs		173	165
Impairment losses on deferred acquisition costs		33	1
Other administrative expenses		608	835
Total administrative expenses		1,852	2,462
Less: administrative expenses from discontinued operations	3.5	(290)	(684)
Administrative expenses		1,562	1,778

Interest expense includes interest payable on customer accounts and other funding instruments within the banking operation of the Group. Interest expense of £123m (2008: £129m) in respect of subordinated liabilities is included within finance costs of which £8m (2008: £20m) relates to discontinued operations. For the year ended 31 December 2009, total interest expense is therefore £373m (2008: £768m).

Restructuring costs from continuing operations incurred during the year of £59m (2008: £71m) include £50m of expenses in relation to the Group's Continuous Improvement Programme (CIP) (2008: £44m) and other restructuring costs of £9m (2008: £3m) of which £5m (2008: £nil) relates to transaction costs in relation to the sale of Standard Life Bank plc. Restructuring costs for the year ended 31 December 2008 include £24m of costs associated with the restructuring of a sub-fund of Standard Life Investments (Global Liquidity Funds) plc. On 30 April 2008, Standard Life Investments (Global Liquidity Funds) plc restructured one of its sub-funds, changing the pricing structure from an amortised cost to marked to market basis. The total costs to the Group associated with the restructuring of the sub-fund at the date of the transaction were £39m, of which £24m are restructuring costs and £15m is recognised in net investment return since it reflects the difference between the amortised cost and marked to market value of assets recognised directly on the consolidated statement of financial position.

Of the restructuring costs from continuing operations of £59m, £58m (2008: £70m) is adjusted when determining underlying profit for the year, with the remaining £1m (2008: £1m) relating to CIP expenses incurred by the Heritage With Profits Fund.

In addition, £1m (2008: £2m) of CIP costs were incurred by discontinued operations which is adjusted when determining the underlying profit from discontinued operations for the year.

Other administrative expenses in the year ended 31 December 2008 include £102m related to an expense incurred in respect of a unit linked fund, the Pension Sterling Fund. In January 2009, the value of units in that fund was reduced to reflect reductions in the market value of certain instruments held by the fund. In February 2009, in order to put customers invested in that fund back into the position they would have been before the valuation adjustment, the Group injected cash into the fund. The cost was accrued within other administrative expenses for the year ended 31 December 2008.

3.4 Tax expense/(credit)

The tax expense/(credit) is attributed as follows:

		2009	Restated 2008
	Notes	£m	£m
Tax expense/(credit) attributable to policyholders' returns		299	(334)
Tax credit attributable to equity holders' profits		(18)	(138)
		281	(472)

Tax expense/(credit) from discontinued operations	3.5	42	(21)
		323	(493)

The share of tax of associates and joint ventures is £9m (2008: £3m) and is included above the line 'Profit/(loss) before tax' in the summary consolidated income statement in 'Share of (losses)/profits from associates and joint ventures'.

The total tax expense is split as follows:

	2009	Restated 2008
	£m	£m
Income tax:
UK	162	253
Double tax relief	(1)	(1)
Canada and international	28	19
Adjustment to tax credit in respect of prior years	(3)	(21)
Total income tax	186	250

Deferred tax:
Deferred tax expense/(credit) arising from the current period	137	(743)
Total deferred tax	137	(743)

Total tax expense/(credit)	323	(493)
Less income tax (expense)/credit attributable to discontinued operations	(42)	21
Total income tax expense/(credit) attributable to continuing operations	281	(472)

Attributable to equity holders' profits	(18)	(138)

3.4 Tax expense/(credit) continued

Tax relating to components of other comprehensive income is as follows:

	2009	2008
	£m	£m
Tax on actuarial (gains)/losses on defined benefit pension schemes	(27)	50
Revaluation of land and buildings	(1)	-
Other	-	3
Tax on fair value gains/(losses) on cash flow hedges attributable to discontinued operations	3	(11)
Aggregate tax effect of items (credited)/debited directly to equity	(25)	42

All of the amounts presented above are in respect of equity holders of Standard Life plc.

3.5 Discontinued banking operations

The Group's banking business, Standard Life Bank plc, was sold on 1 January 2010 (refer to Note 3.18 - Events after the reporting period). It has therefore been classified as a discontinued operation and the assets and liabilities attributable to Standard Life Bank plc as at 31 December 2009 have been classified as held for sale.

The profit/(loss) included in the consolidated income statement in respect of the discontinued banking operations is as follows:

		2009	2008
	Notes	£m	£m
Revenue
Net investment return		389	631
Fee and commission income		4	5
Net revenue		393	636

Expenses
Administrative expenses:
Restructuring and corporate transaction expenses	3.3	1	2
Other administrative expenses	3.3	290	684
Total administrative expenses		291	686
Finance costs		8	20
Expenses		299	706

Loss recognised on the measurement of the assets of disposal group		(10)	-

Profit/(loss) before tax		84	(70)

Tax expense/(credit)	3.4	42	(21)
Total tax expense/(credit)		42	(21)

Profit/(loss) for the year		42	(49)

The comprehensive income included in the consolidated statement of comprehensive income in respect of the discontinued operations is as follows:

	2009	2008
	£m	£m
Profit/(loss) for the year from discontinued operations	42	(49)

Fair value gains/(losses) on cash flow hedges	11	(38)
Aggregate equity holder tax effect of items not recognised in the income statement	(3)	11
Other comprehensive income/(expense) for the year from discontinued operations	8	(27)

Total comprehensive income/(expense) for the year from discontinued operations	50	(76)

The analysis of assets and liabilities of the discontinued banking operations classified as held for sale as at 31 December 2009 is presented in Note 3.17 - Assets and liabilities of operations classified as held for sale.

3.6 Volatility arising on different asset and liability valuation bases

Group underlying profit has been adjusted in respect of volatility that arises from different IFRS measurement bases for liabilities and backing assets. The adjustment is analysed as follows:

	2009	2008
	£m	£m
From continuing operations
Measurement of subordinated liabilities and backing assets	18	47
From discontinued operations
Derivative volatility	(40)	94
Total volatility arising on different asset and liability valuation bases	(22)	141

Derivative volatility comprises amounts in respect of volatility arising from derivatives that are part of economic hedges undertaken by Standard Life Bank that do not qualify as hedge relationships under IAS 39 Financial Instruments: Recognition and Measurement.

3.7 Earnings per share

(a) Basic earnings per share

Basic earnings per share is calculated by dividing profit attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the year. The weighted average number of ordinary shares outstanding during the year is the weighted average number of shares in issue less the weighted average number of shares owned by employee share trusts that have not vested unconditionally to employees.

	2009	2008
Profit from continuing operations (£m)	171	149
Profit/(loss) from discontinued operations (£m)	42	(49)
Profit attributable to equity holders of Standard Life plc (£m)	213	100

Weighted average number of ordinary shares in issue (millions)	2,201	2,176

Basic earnings per share from continuing operations (pence per share)	7.8	6.9
Basic earnings per share from discontinued operations (pence per share)	1.9	(2.3)
Basic earnings per share (pence per share)	9.7	4.6

3.7 Earnings per share continued

(b) Diluted earnings per share

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Group has one category of dilutive potential ordinary shares - share awards and share options awarded to employees.

For share options, a calculation is made to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Company's shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated is compared with the number of shares that would have been issued assuming the exercise of the share options.

	2009	2008
Profit from continuing operations (£m)	171	149
Profit/(loss) from discontinued operations (£m)	42	(49)
Profit attributable to equity holders of Standard Life plc (£m)	213	100

Weighted average number of ordinary shares for diluted earnings per share (millions)	2,203	2,180

Diluted earnings per share from continuing operations (pence per share)	7.8	6.9
Diluted earnings per share from discontinued operations (pence per share)	1.9	(2.3)
Diluted earnings per share (pence per share)	9.7	4.6

The dilutive effect of share awards and options included in the weighted average number of ordinary shares above was 2 million (2008: 4 million). The effect of these dilutive potential ordinary shares did not impact the profit attributable to equity holders of the Company.

Earnings per share is also calculated based on the underlying profit before tax and certain non-operating items after tax as well as on the profit attributable to equity holders. The Directors believe that earnings per share based on underlying profit provides a better indication of operating performance.

	2009	2009	2008	2008
	£m	Per share p	£m	Per share p
Underlying profit before tax attributable to equity holders	258	11.7	71	3.3
Volatility arising on different asset and liability valuation bases	22	1.0	(141)	(6.5)
Impairment of intangible assets	(7)	(0.3)	-	-
Restructuring and corporate transaction expenses	(59)	(2.7)	(72)	(3.3)
Impairment loss on discontinued banking operations	(10)	(0.5)	-	-
Profit/(loss) before tax attributable to equity holders' profits	204	9.2	(142)	(6.5)

Tax (expense)/credit attributable to:
Underlying profit	(26)	(1.2)	100	4.6
Adjusted items	2	0.1	59	2.7
Loss attributable to non-controlling interests	33	1.6	83	3.8
Profit attributable to equity holders of Standard Life plc	213	9.7	100	4.6

3.8 Dividends

The Company paid a final dividend of 7.7 pence per share (final 2007: 7.7 pence) totalling £168m in respect of the year ended 31 December 2008 on 29 May 2009 (final 2007: £168m) and an interim dividend of 4.15 pence per share (interim 2008: 4.07 pence) totalling £92m (interim 2008: £89m) in respect of the year ended 31 December 2009 on 16 November 2009.

Subsequent to 31 December 2009, the Directors have proposed a final dividend for the year ended 31 December 2009 of 8.09 pence per ordinary share, £181m in total. The dividend will be paid on 28 May 2010 to shareholders on the Company's register as at 19 March 2010, subject to approval at the Annual General Meeting on 14 May 2010. This dividend will be recorded as an appropriation of retained earnings in the financial statements for the year ended 31 December 2010.

On 15 May 2009, the Group's equity holders approved the introduction of the Scrip dividend scheme, effective for the final 2008 dividend payment onwards. Investors taking part in the Scrip scheme receive their dividend entitlement in the form of shares rather than cash. The distribution under Scrip is recorded as an appropriation of retained earnings. Dividends paid during the year ended 31 December 2009 comprise £102m settled by the issue of shares under the Scrip scheme and £158m paid in cash.

3.9 Issued share capital

The movement in the issued share capital of the Company during the year was:

	2009	2009	2008	2008
	Number	£m	Number	£m
At 1 January	2,177,799,354	218	2,174,077,106	217
Demutualisation shares	449	-	-	-
Shares issued in lieu of cash dividends	55,018,211	6	-	-
Shares issued in respect of employee share plans	630,003	-	559,061	-
Shares issued in respect of share options	2,842,293	-	3,142,947	1
Shares issued in respect of bonus issue	1,847	-	20,240	-
At 31 December	2,236,292,157	224	2,177,799,354	218

The Scheme of Demutualisation sets a 10-year limit for those eligible members of The Standard Life Assurance Company (SLAC) who were not allocated shares at the date of demutualisation to claim their entitlements. During the year ended 31 December 2009, 449 ordinary shares were issued to eligible members in respect of their demutualisation entitlements (2008: nil).

The Group operates share incentive plans, allowing employees the opportunity to buy shares from their salary each month. The maximum purchase that an employee can make in any one year is £1,500. The Group offers to match the first £25 of shares bought each month. During the year ended 31 December 2009, the Company allotted 630,003 (2008: 559,061) ordinary shares to its employees under the share incentive plans.

The Group also operates a Long-Term Incentive Plan (LTIP) for executives and senior management. During the year ended 31 December 2009, 2,842,293 (2008: 3,142,947) ordinary shares were issued on exercise of share options in respect of the LTIP.

During the year ended 31 December 2009, the Group introduced a Scrip dividend scheme, and 55,018,211 shares have been issued in respect of dividends declared in the year.

As part of the offer on the demutualisation of SLAC and flotation of Standard Life plc, holders of demutualisation shares, employee shares or shares acquired in the preferential offer who retained their shares for a continuous period of one year from 10 July 2006 were entitled to one bonus share for every 20 shares. Equity holders who are entitled to bonus shares but were not allocated shares on 10 July 2007 have three years from 10 July 2007 to claim their entitlements. During the year ended 31 December 2009, a further 1,847 ordinary shares were issued to equity holders entitled to receive bonus shares (2008: 20,240 ordinary shares).

3.10 Insurance contract liabilities, non-participating investment contract liabilities, participating investment contract liabilities and reinsurance assets

	2009	2008
	£m	£m
Non-participating contract liabilities
Non-participating insurance contracts	22,164	19,635
Non-participating investment contracts	63,728	52,273
	85,892	71,908

Participating contract liabilities
Participating insurance contracts	16,568	17,625
Participating investment contracts	14,993	15,674
Unallocated divisible surplus	791	864
	32,352	34,163

Non-participating insurance contracts include £146m (2008: £160m) relating to Standard Life Healthcare and £3m (2008: £3m) relating to general insurance.

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

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

	2009	2008
	£m	£m
Participating contract liabilities before apportionment	31,269	32,413
Apportionment of non-participating PVFP	292	886
	31,561	33,299

Participating insurance contracts	16,568	17,625
Participating investment contracts	14,993	15,674
Participating contract liabilities after apportionment	31,561	33,299

Unallocated divisible surplus before apportionment	1,940	1,955
Apportionment of non-participating PVFP	(1,149)	(1,091)
Unallocated divisible surplus after apportionment	791	864

On 31 December 2009, Standard Life plc lent £588m to Standard Life Assurance Limited (SLAL) HWPF under a contingent loan agreement (a contingent recourse cash flows loan, as defined under the Scheme). Under the Scheme this resulted in an obligation arising in the HWPF to transfer the loan proceeds (the 'securitisation receipt') to the SLAL Shareholder Fund. The securitisation receipt will be transferred in March 2010. As a result of this transfer, the SLAL Shareholder Fund will hold a limited recourse loan issued by Standard Life plc. As the repayment of this limited recourse loan is contingent on the emergence of recourse cash flows and surplus in the HWPF, the obligation to transfer, and the subsequent transfer of, the securitisation receipt is not treated as an allocation to shareholders from the HWPF. Therefore the arrangement had no impact on equity holders' profits for the year. The purpose of the arrangement was to remove the market risk to the tax treatment of future shareholder transfers from the HWPF.

(a) Insurance contract liabilities, participating investment contracts and reinsurance assets

The movement in insurance contract liabilities, participating investment contracts and reinsurance assets during 2009 was as follows:

	Participating insurance contract liabilities	Non-participating insurance contract liabilities	Participating investment contract liabilities	Total insurance and participating contracts	Reinsurers' share of liabilities (reinsurance asset)	Net 2009
2009	£m	£m	£m	£m	£m	£m
At 1 January	17,625	19,635	15,674	52,934	(6,076)	46,858
Expected change	(627)	(379)	(828)	(1,834)	184	(1,650)
Methodology/modelling changes	(17)	(70)	(12)	(99)	(27)	(126)
Effect of changes in:
Economic assumptions	(311)	1,759	(268)	1,180	(1,117)	63
Non-economic assumptions	(22)	(90)	-	(112)	52	(60)
Effect of:
Economic experience	205	586	133	924	(25)	899
Non-economic experience	(21)	(324)	272	(73)	(4)	(77)
New business	38	777	110	925	(5)	920
Total change in contract liabilities	(755)	2,259	(593)	911	(942)	(31)
Foreign exchange adjustment	(302)	276	(88)	(114)	(14)	(128)
Change in unearned premium reserve	-	(6)	-	(6)	-	(6)
At 31 December	16,568	22,164	14,993	53,725	(7,032)	46,693

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

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

Non-economic experience changes in the year primarily represent higher than expected claims.

Economic experience changes in the year reflect higher than anticipated investment returns during the year.

3.10 Insurance contract liabilities, non-participating investment contract liabilities, participating investment contract liabilities and reinsurance assets continued

(a) Insurance contract liabilities, participating investment contracts and reinsurance assets continued

	Participating insurance contract liabilities	Non-participating insurance contract liabilities	Participating investment contract liabilities	Total insurance and participating contracts	Reinsurers' share of liabilities (reinsurance asset)	Net 2008
2008	£m	£m	£m	£m	£m	£m
At 1 January	19,446	20,980	17,491	57,917	(476)	57,441
Annuity reinsurance impact	49	(1)	64	112	(6,573)	(6,461)
Expected change	(1,078)	(341)	(1,047)	(2,466)	234	(2,232)
Methodology/modelling changes	93	(73)	(117)	(97)	51	(46)
Effect of changes in:
Economic assumptions	402	(1,357)	455	(500)	757	257
Non-economic assumptions	(61)	8	(9)	(62)	(44)	(106)
Effect of:
Economic experience	(2,314)	(728)	(1,591)	(4,633)	15	(4,618)
Non-economic experience	33	(308)	149	(126)	2	(124)
New business	45	706	-	751	(1)	750
Total change in contract liabilities	(2,831)	(2,094)	(2,096)	(7,021)	(5,559)	(12,580)
Foreign exchange adjustment	1,010	749	279	2,038	(41)	1,997
At 31 December	17,625	19,635	15,674	52,934	(6,076)	46,858

On 14 February 2008, Standard Life Assurance Limited (SLAL) entered into a reinsurance arrangement with Canada Life International Re in respect of certain annuity contracts. For the gross participating insurance and investment liabilities the impact of the annuity reinsurance transaction shown reflects the change in the residual estate, which therefore impacts the value of the planned enhancements (on an FSA realistic basis) included within these liabilities as covered by the Scheme. The increase in the reinsurance asset associated with the transaction represents the increase in the value of the reinsurance assets with external reinsurers due to this new arrangement.

(b) Non-participating investment contract liabilities

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

	2009	2008
	£m	£m
At 1 January	52,273	58,762
Contributions	8,997	10,170
Initial charges and reduced allocations	(21)	(50)
Account balances paid on surrender and other terminations in the year	(6,682)	(6,584)
Investment return credited and related benefits	9,088	(10,907)
Foreign exchange adjustment	376	1,314
Recurring management charges	(303)	(333)
Other	-	(99)
At 31 December	63,728	52,273

Reinsurance contracts are generally structured to match liabilities on a class of business basis. This has a mixture of terms. The reinsurance assets are therefore broadly expected to be realised in line with the settlement of liabilities (as per the terms of the particular treaty) within a reinsured class of business.

3.11 Borrowings

		2009	2008
	Notes	£m	£m
Certificates of deposit, commercial paper and medium term notes		816	573
Securitisations - mortgage backed floating rate notes		1,967	2,411
Bank overdrafts		87	101
Other		140	142
Total borrowings		3,010	3,227
Less: Borrowings classified as held for sale	3.17	(2,783)	-
Borrowings		227	3,227

The amounts included in Certificates of deposit, commercial paper and medium term notes and Securitisations - mortgage backed floating rate notes are wholly attributable to Standard Life Bank and have been reclassified as held for sale. Refer to Note 3.18 - Events after the reporting period.

(a) Certificates of deposit, commercial paper and medium term notes

The Group has issued certificates of deposit through its subsidiary Standard Life Bank plc (Standard Life Bank). The Group has also issued commercial paper and medium term notes through Standard Life Funding B.V. a wholly owned subsidiary of Standard Life Bank. Standard Life Bank has guaranteed the liabilities of its subsidiary in relation to the issuance of this debt. The guarantee is in respect of notes issued and is for a maximum of US$2bn and €4bn in relation to the US commercial paper and Euro commercial paper programmes respectively, and €4bn in respect of the medium term note programme. This guarantee is internal to the Group and is considered a financial guarantee contract under IAS 39 Financial Instruments: Recognition and Measurement.

On 11 February 2009, Standard Life Bank launched its Euro Medium Term Note programme under which it can issue debt, including debt covered by the Credit Guarantee Scheme (CGS). Under the terms of the CGS, HM Treasury guarantees specific bank and building society debt instruments issued during the period beginning from the announcement of the CGS (13 October 2008) and ending on 31 December 2009. On 18 February 2009, Standard Life Bank issued £500m of debt under the CGS.

	Average interest rates		Carrying amount
	2009	2008	2009	2008
	%	%	£m	£m
Due within 1 year
Standard Life Bank certificates of deposit - GBP	0.91%	4.13%	120	228
Standard Life Funding B.V. commercial paper - GBP	1.25%	6.20%	75	144
Standard Life Funding B.V. commercial paper - EUR	-	5.26%	-	84
			195	456

Due between 1 and 5 years
Standard Life Bank medium term notes - GBP	2.38%	-	513	-
Standard Life Funding B.V. medium term notes - EUR	0.97%	-	108	-
			621	-

Due after 5 years
Standard Life Funding B.V. medium term notes - EUR	-	4.10%	-	117
			-	117
Total certificates of deposit, commercial paper and medium term notes			816	573

The carrying amounts disclosed above reasonably approximate the fair values as at the year end.

(b) Securitisations - mortgage backed floating rate notes

Loans are issued by the Group, which are subject to securitisations. Under this arrangement, the beneficial interest in these mortgages is transferred to special purpose entities (SPEs). The issue of mortgage backed floating rate notes by the SPEs funded the purchase of the mortgages.

3.11 Borrowings continued

(b) Securitisations - mortgage backed floating rate notes continued

Although the Group does not directly or indirectly own any of the share capital of the SPEs, the nature of these entities, which are in substance controlled by the Group, means that the Group retains substantially all of the risks and rewards of the securitised mortgages.

The Group is not obliged to support any losses suffered by the note holders and does not intend to provide such support. The notes were issued on the basis that note holders are only entitled to obtain payment, of both principal and interest, to the extent that the available resources of the respective SPEs, including funds due from customers in respect of the securitised mortgages, are sufficient and that note holders have no recourse whatsoever to the Group. This has been clearly stated in the legal agreements with note holders.

The mortgage backed floating rate notes at year end are as follows:

	Average interest rates		Carrying amount
	2009	2008	2009	2008
	%	%	£m	£m
Lothian Mortgages No. 3 plc - GBP - Maturity 2039	0.88%	6.47%	626	730
Lothian Mortgages No. 4 plc - EUR - Maturity 2040	0.83%	5.12%	27	175
Lothian Mortgages No. 4 plc - GBP - Maturity 2040	0.73%	6.25%	563	571
Lothian Mortgages Master Issuer plc - USD - Maturity 2028	-	0.61%	-	59
Lothian Mortgages Master Issuer plc - USD - Maturity 2050	0.40%	3.71%	26	35
Lothian Mortgages Master Issuer plc - EUR - Maturity 2050	0.86%	5.16%	348	460
Lothian Mortgages Master Issuer plc - GBP - Maturity 2050	0.75%	6.25%	377	381
Total mortgage backed floating rate notes			1,967	2,411

3.12 Defined benefit and defined contribution plans

(a) Analysis of amounts recognised in the income statement

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

	2009	2008
	£m	£m
Current service cost	(53)	(64)
Interest cost on benefit obligation	(93)	(91)
Expected return on plan assets	91	88
Past service cost	1	-
Gains on curtailment	4	-
Expense recognised in the summary consolidated income statement	(50)	(67)

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

The present value of the defined benefit obligation less the fair value of gross scheme assets is as follows:

	2009				2008
	UK	Canada	Ireland	Total	UK	Canada	Ireland	Total
	£m	£m	£m	£m	£m	£m	£m	£m
Present value of funded obligation	(1,700)	(135)	(43)	(1,878)	(1,309)	(105)	(62)	(1,476)
Present value of unfunded obligation	-	(41)	-	(41)	-	(32)	-	(32)
Fair value of plan assets	1,644	144	48	1,836	1,462	123	44	1,629
Adjustment for unrecognised past service costs	-	(6)	-	(6)	-	(5)	-	(5)
Surplus not recognised	-	-	-	-	(153)	-	-	(153)
Net liability on the summary consolidated statement of financial position	(56)	(38)	5	(89)	-	(19)	(18)	(37)

The net liability is included in 'Other liabilities' in the summary consolidated statement of financial position. The Group also recognises a net liability of £5m (2008: £5m) arising from a scheme with a total defined benefit obligation of £5m (2008: £5m) administered for the benefit of employees in Germany, resulting in a net liability in the summary consolidated statement of financial position of £94m (2008: £42m).

The surplus which arose in respect of the UK scheme as at 31 December 2008 was not recognised as the Group did not consider that it had an unconditional right to a refund of contributions from the UK scheme, nor did the Group consider that it had the ability, under the guidance contained in IFRIC 14 IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction to anticipate a reduction in the level of future contributions that would enable the Group to recover this surplus.

The principal economic assumptions used in determining pension benefit obligation for the Group's plans are as follows:

		2009			2008
	UK	Canada	Ireland	UK	Canada	Ireland
	%	%	%	%	%	%
Rate of increase in salaries	4.80-5.80	3.50	3.50	4.35-5.35	3.50	4.83
Rate of increase in pensions	3.80	1.33	1.00	3.35	1.33	2.00
Discount rate	5.60	6.25	6.00	6.10	7.25	5.70
Inflation assumption	3.80	2.00	2.00	3.35	2.00	2.00
Expected return on plan assets	6.30	7.00	5.93	6.20	7.00	5.90

3.13 Contingencies

(a) Legal proceedings and regulations

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

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

(b) Joint ventures and associates

The Group has entered into agreements to share in the assets and liabilities of joint venture and associate investments. The Directors do not anticipate any material losses from such investments, and the operations of such investments are not material in relation to the operations of the Group.

The Group's share of contingent liabilities of the joint ventures and associates is not significant in relation to the operations of the Group.

3.13 Contingencies continued

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

(d) Guarantees

During the year ended 31 December 2007, the Company issued a guarantee to Standard Life Investments (Global Liquidity Funds) plc to cover the difference between amortised cost and marked to market value of the underlying assets of a sub-fund, should there be a need for Standard Life Investments (Global Liquidity Funds) plc to sell assets of the sub-fund at an amount below amortised cost to meet investor withdrawals. The guarantee was for a maximum of £5m and was released during 2009 as it was no longer considered to be required.

(e) Other

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

(ii) Under the Financial Services Compensation Scheme (FSCS), which covers business conducted by firms authorised by the Financial Services Authority (FSA), consumers can claim compensation where a firm is unable to pay claims against it. These costs are levied on the industry by the FSCS with each firm's contribution calculated based on the tariff base of the relevant sub-class of financial activities it undertakes. Each sub-class meets the claims in their class up to an annual threshold. During 2008, FSCS involvement was triggered to protect deposits in several firms and maintain market confidence. At 31 December 2008, a provision was recognised in respect of Standard Life Bank in relation to potential compensation levies due under the FSCS based on FSA guidance issued to the British Bankers Association (BBA) on 31 December 2008 and subsequently updated on 4 February 2009. At 31 December 2008, this provision was intended to cover the management expense levies for 2008/09 and 2009/10 in relation to interest and other costs incurred on the loans taken out by the FSCS, to compensate savers with banks which defaulted during 2008. The FSA guidance issued to the BBA was further updated on 29 July 2009. During the year ended 31 December 2009, the 2008/09 management expense levy was settled, and the corresponding element of the provision that was recognised as at 31 December 2008 was released. The provision recognised as at 31 December 2009 is intended to cover the management expense levies for 2009/10 and 2010/11. Uncertainty exists over the total market FSCS levies and therefore the Standard Life Bank proportion to provide for, which will be dependent on the period of recovery, FSCS funding costs and potential capital write-offs.

A contingent liability also exists in relation to future FSCS levies, including the actual compensation costs due in relation to the banks which defaulted during 2008. As this liability cannot be reliably calculated and is dependent on a determination at some point in the future, the Group has not attempted to quantify this amount.

3.14 Commitments

(a) Capital commitments

The Group's capital commitments as at 31 December are as follows:

	2009	2008
	£m	£m
Authorised and contracted for but not provided and incurred:
Investment properties	296	127
Property, plant and equipment	-	357
Funding of associates	-	1

Of the amounts above, £283m (2008: £115m) and £13m (2008: £12m) relates to the contractual obligations to purchase, construct or develop investment property and repair, maintain or enhance investment property respectively.

(b) Unrecognised financial instruments

The following indicates the contractual amounts of the Group's unrecognised financial instruments that commit it to customers and third parties, as at 31 December:

	2009	2008
	£m	£m
Guarantees and standby letters of credit	3	4
Commitments to extend credit:
Original term to maturity of less than one year	112	83
Original term to maturity of more than one year	1,859	2,165
Other commitments	715	964

Guarantees and letters of credit include guarantees in relation to the Group's Canadian operations. These guarantees are considered to be financial guarantee contracts under IAS 39 Financial Instruments: Recognition and Measurement.

Included in 'Other commitments' is £696m (2008: £942m) committed by certain subsidiaries which are not fully owned by the Group. These commitments are funded through (contractually agreed) additional investments in the subsidiary by the Group and the non-controlling interests. The levels of funding are not necessarily in line with the relevant percentage holdings.

The commitments to extend credit with an original term to maturity of more than one year are in respect of the Group's banking business, Standard Life Bank plc, which was sold on 1 January 2010. Refer to Note 3.18 - Events after the reporting period.

3.15 Related party transactions

(a) Transactions with/from related parties

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

	2009	2008
	£m	£m
Sale to:
Associates	11,607	17,022
Joint ventures	2	3
	11,609	17,025
Purchase from:
Associates	10,907	17,095
Joint ventures	100	62
	11,007	17,157

Transactions with associates shown above relate primarily to the sales and purchases of holdings in investment funds managed by the Group.

In addition to the amounts shown above, the Group's defined benefit pension schemes have assets of £528m (2008: £340m) invested in investment vehicles managed by the Group.

(b) Transactions with key management personnel

All transactions between key management and the Group are on commercial terms which are equivalent to those available to all employees of the Group.

During the year ended 31 December 2009, the key management personnel contributed £11.1m (2008: £0.5m) to products sold by the Group.

3.16 Capital statement

The Group's capital position is analysed between UK regulated life business, overseas life operations and other activities. The UK regulated life business is analysed by the nature of the underlying funds and includes German and Irish business written by branches of UK regulated companies. Other activities comprise investment management, general insurance and Group corporate centre. Standard Life Bank plc is a subsidiary of Standard Life Assurance Limited (SLAL) and therefore its capital resources are included within life business equity holders' funds. The Group's capital position, based on draft regulatory returns, is set out below:

	UK regulated life business
	Heritage With Profits Fund*	Proprietary business funds	Life business equity holders' funds	Total UK regulated life business	Overseas life operations	Total life business	Other activities	Group total
2009	£m	£m	£m	£m	£m	£m	£m	£m
Available capital resources

Equity holders' funds
Held outside life assurance funds	-	-	1,077	1,077	1,053	2,130	710	2,840
Held within life assurance funds	-	617	-	617	-	617	-	617

Equity attributable to ordinary equity holders of Standard Life plc	-	617	1,077	1,694	1,053	2,747	710	3,457

Unallocated divisible surplus	791	-	-	791	-	791	-	791

Other qualifying capital
Subordinated liabilities	-	-	265	265	-	265	1,846	2,111
Internal subordinated liabilities	-	-	1,876	1,876	236	2,112	(2,112)	-
	-	-	2,141	2,141	236	2,377	(266)	2,111

Adjustments onto regulatory basis
Changes to the valuation of contract liabilities	1,485	20	-	1,505	(75)	1,430	-	1,430
Exclusion of deferred acquisition costs and other inadmissible assets	(143)	(496)	(484)	(1,123)	(87)	(1,210)	(119)	(1,329)
Exclusion of deferred income	132	207	-	339	(2)	337	-	337
Changes to the valuation of other assets and liabilities	(610)	(90)	645	(55)	79	24	225	249
	864	(359)	161	666	(85)	581	106	687

Total available capital resources to meet regulatory requirement	1,655	258	3,379	5,292	1,204	6,496	550	7,046

Analysed as follows:
Capital not subject to constraints	-	-	3,112	3,112	422	3,534	432	3,966
Capital subject to constraints	1,655	258	267	2,180	782	2,962	118	3,080

Total available capital resources	1,655	258	3,379	5,292	1,204	6,496	550	7,046

Regulatory capital requirement				2,040	666	2,706	81	2,787

* Capital resources amounting to £13m in respect of other with profits funds are disclosed within the Heritage With Profits Fund column shown above.

	UK regulated life business
	Heritage With Profits Fund*	Proprietary business funds	Life business equity holders' funds	Total UK regulated life business	Overseas life operations	Total life business	Other activities	Group total
2008	£m	£m	£m	£m	£m	£m	£m	£m
Available capital resources

Equity holders' funds
Held outside life assurance funds	-	-	1,034	1,034	1,075	2,109	652	2,761
Held within life assurance funds	-	646	-	646	-	646	-	646

Equity attributable to ordinary equity holders of Standard Life plc	-	646	1,034	1,680	1,075	2,755	652	3,407

Unallocated divisible surplus	864	-	-	864	-	864	-	864

Other qualifying capital
Subordinated liabilities	-	-	266	266	-	266	1,938	2,204
Internal subordinated liabilities	-	-	2,000	2,000	225	2,225	(2,225)	-
	-	-	2,266	2,266	225	2,491	(287)	2,204

Adjustments onto regulatory basis
Changes to the valuation of contract liabilities	2,198	19	-	2,217	15	2,232	-	2,232
Exclusion of deferred acquisition costs and other inadmissible assets	(162)	(511)	(517)	(1,190)	(52)	(1,242)	(64)	(1,306)
Exclusion of deferred income	154	199	-	353	2	355	-	355
Changes to the valuation of other assets and liabilities	(78)	(86)	(27)	(191)	(77)	(268)	257	(11)
	2,112	(379)	(544)	1,189	(112)	1,077	193	1,270

Total available capital resources to meet regulatory requirement	2,976	267	2,756	5,999	1,188	7,187	558	7,745

Analysed as follows:
Capital not subject to constraints	-	-	2,380	2,380	436	2,816	424	3,240
Capital subject to constraints	2,976	267	376	3,619	752	4,371	134	4,505

Total available capital resources	2,976	267	2,756	5,999	1,188	7,187	558	7,745

Regulatory capital requirement				2,186	685	2,871	83	2,954

* Capital resources amounting to £2m in respect of other with profits funds are disclosed within the Heritage With Profits Fund column shown above.

UK regulated life business

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

Based on draft regulatory returns at 31 December 2009, SLAL had available capital resources of £5.3bn (2008: £6.0bn) and a CRR of £2.0bn (2008: £2.2bn). The capital resources shown in the capital statement are based on the value of assets and liabilities valued on a regulatory basis however, the CRR reflects the higher value required as a result of the application of the realistic peak.

3.16 Capital statement continued

Capital subject to constraints for the UK regulated life business of £2.2bn at 31 December 2009 (2008: £3.6bn) represents capital resources held within long-term business funds, or, in relation to other regulated entities, the amount of the CRR.

Standard Life Bank is owned by SLAL and therefore its capital resources are included within life business equity holders' funds. Standard Life Bank's capital resources of £576m (2008: £541m) exceed its CRR of £246m (2008: £358m) by £330m (2008: £183m), and the excess can therefore be used to meet the requirements of the life assurance business.

Overseas life operations

Capital resources of £1,204m (2008: £1,188m) which relate mainly to operations in Canada, also include operations in Asia. The capital resources of the Canadian operations are based on local Generally Accepted Accounting Principles financial statements adjusted where necessary to reflect the fair value of assets with a corresponding adjustment to liabilities. The Canadian regulator sets the minimum required capital. It also requires certain assets to be held in trust to increase policyholder protection (vested assets). As a result of the combination of the capital requirement and vested assets, the overseas life capital subject to constraints amounted to £782m at 31 December 2009 (2008: £752m).

Other activities

At 31 December 2009, capital resources of £550m (2008: £558m) and capital subject to constraints of £118m (2008: £134m) relate to the Group's healthcare, investment management businesses and Group corporate centre activities.

Intra-group transactions

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

SLAL has issued subordinated loans to the Company, which SLAL treats as capital for regulatory purposes. The Standard Life Assurance Company of Canada and Standard Life Investments Limited have issued subordinated debt of £236m (2008: £225m) and £12m (2008: £45m) respectively, to the Company. These amounts of subordinated debt are included within the capital resources of those businesses, but at Group level only subordinated debt issued to external parties is included in the Group's capital resources.

As referred to in Note 3.10, on 31 December 2009 Standard Life plc lent £588m to SLAL HWPF under a contingent loan agreement (a contingent RCF loan, as defined under the Scheme). Simultaneously, the HWPF lent £588m to Standard Life plc under a limited recourse loan agreement. Under the Scheme this resulted in an obligation arising in the HWPF to transfer the loan proceeds received under the contingent loan agreement (the securitisation receipt) to the Shareholder Fund. The securitisation receipt will be transferred in March 2010. The accrual of this future transfer is reflected in the capital statement as an increase in the capital of the SLAL Shareholder Fund and a reduction in the capital of the HWPF. However, immediately after that transfer of assets is made, the Shareholder Fund will lend the same amount to Standard Life plc under a second limited recourse loan agreement and these deposits will immediately be used to repay the first limited recourse loan from the HWPF to Standard Life plc. The net effect of these arrangements is that the admissible assets of the HWPF and the SLAL Shareholder Fund are unchanged. However, due to the fact that these arrangements are reported partly in 2009 and partly in 2010, the available capital resources of the HWPF and the UK life business shareholders' fund at 31 December 2009 appear artificially low and high respectively to the value of £588m.

Group capital requirement

The Group must also calculate a group solvency position under the Financial Groups Directive (FGD). The FGD calculation is a very prudent aggregate value for the Group's capital resources, because capital held within the long-term business funds of approximately £1.9bn (2008: £3.2bn) is restricted to the level of the CRR of those funds of approximately £1.6bn (2008: £1.7bn). Therefore, the Group recognises no net surplus in respect of capital within the long-term business funds.

The estimated FGD position at 31 December 2009 is shown in the Business review Section 1.5 - Capital and cash generation.

In respect of the Group's financial conglomerate reporting there were no breaches of regulatory capital requirements at any time during the year.

Movements in capital

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

		UK regulated life business
	Heritage With Profits Fund		Proprietary business funds	Life business equity holders' funds	Total UK regulated life business	Overseas life operations	Total life business	Other activities	Group total
2009	£m		£m	£m	£m	£m	£m	£m	£m
At 1 January	2,976		267	2,756	5,999	1,188	7,187	558	7,745

Methodology/modelling changes	113		12	-	125	(38)	87	-	87
Change in assumptions used to measure life assurance contract liabilities and experience differences	19		13	-	32	7	39	-	39
New business	(20)		(117)	-	(137)	(26)	(163)	-	(163)
Investment surplus	(124)		17	6	(101)	102	1	-	1
Equity holder/inter-fund transfers	(869)		(63)	932	-	16	16	(16)	-
Dividend transfers	-		-	(173)	(173)	-	(173)	15	(158)
Other factors	(440)		129	(142)	(453)	(45)	(498)	(7)	(505)

At 31 December	1,655		258	3,379	5,292	1,204	6,496	550	7,046

	UK regulated life business
	Heritage With Profits Fund	Proprietary business funds	Life business equity holders' funds	Total UK regulated life business	Overseas life operations	Total life business	Other activities	Group total
2008	£m	£m	£m	£m	£m	£m	£m	£m
At 1 January	6,158	54	3,047	9,259	1,149	10,408	555	10,963

Annuity reinsurance impact	108	105	-	213	-	213	-	213
Methodology/modelling changes	120	18	-	138	15	153	-	153
Change in assumptions used to measure life assurance contract liabilities and experience differences	81	26	-	107	(55)	52	-	52
Change in regulatory requirements	-	-	-	-	15	15	-	15
New business	(46)	(182)	-	(228)	(9)	(237)	-	(237)
Investment surplus	(2,374)	74	(165)	(2,465)	43	(2,422)	-	(2,422)
Equity holder/inter-fund transfers	(406)	377	29	-	26	26	(26)	-
Dividend transfers	-	-	(400)	(400)	(40)	(440)	183	(257)
Other factors	(665)	(205)	245	(625)	44	(581)	(154)	(735)

At 31 December	2,976	267	2,756	5,999	1,188	7,187	558	7,745

The investment surplus arises from changes in market conditions and reflects the total returns earned on the assets compared with the valuation interest rates previously assumed. It also reflects the consequent change in liabilities as a result of the change in the yield currently available on the assets and therefore the current valuation interest rates.

Changes in assumptions used to measure contract liabilities have not had a significant impact on capital resources.

Equity holder/inter-fund transfers include the transfer of £844m (2008: £367m) from the HWPF to the Shareholder Fund in respect of the recourse cash flows for UK and Ireland and £25m (2008: £39m) to the Proprietary Business Funds (PBF) in relation to additional expenses charged on German unitised with profits business. In addition, £88m was transferred to the Shareholder Fund from the PBF. In 2008, £338m was transferred from the Shareholder Fund to the PBF.

3.17 Assets and liabilities of operations classified as held for sale

Assets and liabilities of operations classified as held for sale as presented in the consolidated statement of financial position are analysed as follows:

		2009	2008
	Notes	£m	£m
Assets of discontinued banking operations	3.18	9,347	-
Assets of newly acquired subsidiaries classified as held for sale		48	-
Assets of operations classified as held for sale		9,395	-

Liabilities of discontinued banking operations	3.18	9,101	-
Liabilities of newly acquired subsidiaries classified as held for sale		42	-
Liabilities of operations classified as held for sale		9,143	-

(a) Discontinued banking operations

The assets and liabilities of discontinued banking operations classified as held for sale as at 31 December 2009 are analysed as follows:

		2009
	Notes	£m
Assets
Deferred tax assets		3
Loans and receivables		7,464
Derivative financial assets		139
Investment securities		195
Other assets		55
Cash and cash equivalents		1,491
Assets of discontinued banking operations classified as held for sale		9,347

Liabilities
Borrowings	3.11	2,783
Subordinated liabilities		279
Income tax liabilities		2
Customer accounts related to banking activities and deposits by banks		5,927
Derivative financial liabilities		102
Other liabilities		8
Liabilities of discontinued banking operations classified as held for sale		9,101

(b) Newly acquired subsidiaries classified as held for sale

The Group provides seed capital to newly established funds which may result in such funds becoming subsidiaries of the Group. Where the Group is actively seeking to reduce its investment in a subsidiary and it is considered highly probable that the Group will relinquish control of the subsidiary within 12 months of the original investment being made, the subsidiary is classified as held for sale. During the year, one fund (2008: none) was seeded in this manner, therefore the corresponding assets and liabilities of this fund have been classified as held for sale.

The assets of newly acquired subsidiaries classified as held for sale primarily comprise investment securities. The liabilities of newly acquired subsidiaries classified as held for sale primarily comprise third party interest in consolidated funds. No income or expense has been recognised in relation to newly acquired subsidiaries classified as held for sale. For the purpose of segmental analysis all newly acquired subsidiaries classified as held for sale have been included within the global investment management reportable segment.

3.18 Events after the reporting period

On 26 October 2009, the Group announced that it had entered into an agreement with Barclays Bank PLC to sell Standard Life Bank plc. The formal transfer took place on 1 January 2010, with an expected consideration of £245m, which is subject to adjustments resulting from the conclusion of the completion accounts of Standard Life Bank plc for the year ended 31 December 2009. The Group's decision to sell Standard Life Bank plc was primarily driven by the view that the growth of the volume of lending activity is no longer consistent with its long-term financial objectives.

As a result of entering into the disposal agreement, the assets and liabilities of Standard Life Bank plc were measured as at fair value less costs to sell, and this has resulted in a loss of £10m being recognised in the year ended 31 December 2009.

Separately, the Group has agreed heads of terms to enter into a strategic agreement with Barclays UK Retail Banking to explore joint opportunities in the UK retail long-term savings and investments sector. The initial focus is expected to be on the development of a simplified pension product and thereafter both parties will continue to explore and develop further opportunities in this market.

As a result of a statutory pension fund valuation carried out under Section 75 of the Pensions Act 1995, a payment of £25m was made in January 2010 by Standard Life Bank plc to the Standard Life UK staff pension scheme. As part of the disposal agreement, a corresponding payment of £25m was made by Standard Life Assurance Limited to Standard Life Bank plc in January 2010.

In January 2010, the FSA announced that it had fined Standard Life Assurance Limited £2.45m for serious systems and controls failings that resulted in the production of misleading marketing material for the Pension Sterling Fund. This amount has been recognised in the year ended 31 December 2009. A full and thorough review of existing literature has been conducted and a new improved process for new literature has been put in place.

4 Supplementary information

4.1 Group assets under administration and net flows

Group assets under administration (AUA) represent the IFRS gross assets of the Group adjusted to include third party AUA, which are not included in the statement of financial position. In addition, certain assets are excluded from the definition, for example deferred acquisition costs, intangibles and reinsurance assets.

Analysis of Group AUA

For the year ended 31 December 2009

	Opening at 1 January 2009	Gross inflows	Redemptions	Net flows	Market and other movements	Closing at 31 December 2009
	£bn	£bn	£bn	£bn	£bn	£bn
UK
Individual SIPP^(a)	8.7	2.9	(1.1)	1.8	1.3	11.8
Individual pensions	20.7	0.9	(2.3)	(1.4)	3.0	22.3
Group pensions^(a)	14.4	2.6	(1.1)	1.5	2.0	17.9
Institutional pensions	8.6	2.5	(0.9)	1.6	1.8	12.0
Pensions	52.4	8.9	(5.4)	3.5	8.1	64.0
Investment bonds	8.9	0.3	(1.6)	(1.3)	1.1	8.7
Mutual funds^(b)	2.4	1.0	(0.2)	0.8	0.5	3.7
Savings and investments	11.3	1.3	(1.8)	(0.5)	1.6	12.4
Annuities^(c)	11.9	0.6	(1.1)	(0.5)	1.7	13.1
Legacy Life	10.2	0.5	(1.8)	(1.3)	0.2	9.1
Assets not backing products	9.0	-	-	-	(2.0)	7.0
UK life and pensions^(d)	94.8	11.3	(10.1)	1.2	9.6	105.6

Europe
Ireland^(d)	4.7	1.0	(0.8)	0.2	-	4.9
Germany	3.6	0.8	(0.1)	0.7	(0.1)	4.2
Europe life and pensions	8.3	1.8	(0.9)	0.9	(0.1)	9.1

Canada
Group savings and retirement	9.8	1.3	(1.0)	0.3	1.8	11.9
Individual insurance, savings and retirement	5.9	0.7	(0.7)	-	0.8	6.7
Group insurance	0.4	0.4	(0.3)	0.1	-	0.5
Mutual funds^(b)	1.2	0.2	(0.2)	-	0.2	1.4
Assets not backing products	0.7	-	-	-	0.1	0.8
Canada life and pensions	18.0	2.6	(2.2)	0.4	2.9	21.3

Asia life and pensions^(e)	0.5	0.3	(0.1)	0.2	0.1	0.8

Total worldwide life and pensions	121.6	16.0	(13.3)	2.7	12.5	136.8

Non-life business	13.0	0.3	(2.3)	(2.0)	(0.1)	10.9

Standard Life Investments third party assets under management^(a)	45.5	9.7	(4.0)	5.7	5.7	56.9
Consolidation and elimination adjustments^(f)	(23.3)	(3.8)	1.9	(1.9)	(1.8)	(27.0)

Group assets under administration	156.8	22.2	(17.7)	4.5	16.3	177.6

Group assets under administration managed by:
Standard Life Group entities	138.5					152.4
Other third party managers	18.3					25.2
Total	156.8					177.6

(a) Included within non-insured SIPP is an element which is also included within UK mutual funds net flows in the third party Investment operations figures.

(b) The mutual funds net flows are also included within mutual funds net flows in the third party Investment operations figures.

(d) The offshore bond business is shown within Ireland AUA in 2009. This was previously included within UK life and pensions. Opening balances for UK and Ireland have been restated by £1.0bn to reflect this.

(e) Includes net flows in respect of our Hong Kong subsidiary and Standard Life's share of the Asia Joint Ventures.

(f) In order to be consistent with the presentation of new business information, certain products are included in both life and pensions AUA and Investment operations. Therefore, at a Group level an elimination adjustment is required to remove any duplication, in addition to other necessary consolidation adjustments.

Analysis of Group AUA

For the year ended 31 December 2008

	Opening at 1 January 2008	Gross inflows	Redemptions	Net flows	Market and other movements	Closing at 31 December 2008
	£bn	£bn	£bn	£bn	£bn	£bn
UK
Individual SIPP^(a)	7.7	3.4	(0.9)	2.5	(1.5)	8.7
Individual pensions	26.0	1.2	(3.1)	(1.9)	(3.4)	20.7
Group pensions^(a)	16.0	2.6	(1.1)	1.5	(3.1)	14.4
Institutional pensions	10.0	1.8	(1.2)	0.6	(2.0)	8.6
Pensions	59.7	9.0	(6.3)	2.7	(10.0)	52.4
Investment bonds	10.7	1.4	(1.5)	(0.1)	(1.7)	8.9
Mutual funds^(b)	2.6	0.6	(0.3)	0.3	(0.5)	2.4
Savings and investments	13.3	2.0	(1.8)	0.2	(2.2)	11.3
Annuities^(c)	13.0	0.6	(1.1)	(0.5)	(0.6)	11.9
Legacy Life	13.1	0.6	(2.1)	(1.5)	(1.4)	10.2
Assets not backing products	7.3	-	-	-	1.7	9.0
UK life and pensions^(d)	106.4	12.2	(11.3)	0.9	(12.5)	94.8

Europe
Ireland^(d)	3.9	1.1	(0.6)	0.5	0.3	4.7
Germany	2.5	0.8	(0.1)	0.7	0.4	3.6
Europe life and pensions	6.4	1.9	(0.7)	1.2	0.7	8.3

Canada
Group savings and retirement	9.6	1.5	(1.1)	0.4	(0.2)	9.8
Individual insurance, savings and retirement	5.6	0.4	(0.6)	(0.2)	0.5	5.9
Group insurance	0.3	0.3	(0.2)	0.1	-	0.4
Mutual funds^(b)	1.5	0.2	(0.2)	-	(0.3)	1.2
Assets not backing products	0.9	-	-	-	(0.2)	0.7
Canada life and pensions	17.9	2.4	(2.1)	0.3	(0.2)	18.0

Asia life and pensions^(e)	0.4	0.3	-	0.3	(0.2)	0.5

Total worldwide life and pensions	131.1	16.8	(14.1)	2.7	(12.2)	121.6

Non-life business	14.5	1.1	(2.7)	(1.6)	0.1	13.0

Standard Life Investments third party assets under management^(a)	47.7	8.9	(5.5)	3.4	(5.6)	45.5
Consolidation and elimination adjustments^(f)	(24.3)	(4.1)	2.3	(1.8)	2.8	(23.3)

Group assets under administration	169.0	22.7	(20.0)	2.7	(14.9)	156.8

Group assets under administration managed by:
Standard Life Group entities	158.2					138.5
Other third party managers	10.8					18.3
Total	169.0					156.8

(a) Included within non-insured SIPP is an element which is also included within UK mutual funds net flows in the third party Investment operations figures.

(b) The mutual funds net flows are also included within mutual funds net flows in the third party Investment operations figures.

(d) The offshore bond business is shown within Ireland AUA in 2009. This was previously included within UK life and pensions. Opening balances for UK and Ireland have been restated to reflect this.

(e) Restated to include net flows in respect of our Hong Kong subsidiary and Standard Life's share of the Asia Joint Ventures.

4.2 Exposure to investment property and financial assets

Group exposure to investment property and financial assets

The total Group exposure to investment property and financial assets has been segmented below based on the stakeholder sub-group with which the market and credit risk relating to those assets lies.

	Exposure
	Shareholder	Policyholder (participating)	Policyholder (unit linked)	TPICF and NCI*	Total
2009	£m	£m	£m	£m	£m
Investments in associates and joint ventures	47	1,138	686	72	1,943
Investment property	776	2,314	3,279	742	7,111
Equity securities	479	8,151	40,759	1,469	50,858
Debt securities	9,339	30,208	15,095	876	55,518
Loans and receivables	9,876	211	146	-	10,233
Other financial assets	1,533	7,657	668	112	9,970
Cash and cash equivalents	4,106	904	3,727	190	8,927
Total	26,156	50,583	64,360	3,461	144,560

	Exposure
	Shareholder	Policyholder (participating)	Policyholder (unit linked)	TPICF and NCI*	Total
2008	£m	£m	£m	£m	£m
Investments in associates and joint ventures	210	1,569	994	68	2,841
Investment property	856	3,344	3,186	352	7,738
Equity securities	413	7,806	30,452	1,078	39,749
Debt securities	8,272	28,880	13,442	373	50,967
Loans and receivables	11,670	250	149	-	12,069
Other financial assets	1,981	7,919	842	86	10,828
Cash and cash equivalents	3,518	3,173	3,221	140	10,052
Total	26,920	52,941	52,286	2,097	134,244

* Third party interest in consolidated funds and non-controlling interests.

Shareholder exposure to investment property and financial assets

The total shareholder exposure to investment property and financial assets of £26.2bn (2008: £26.9bn) includes £10.1bn (2008: £9.2bn) of assets held by non-segregated funds of the Group's Canadian operations. The effective exposure of shareholders to assets of the non-segregated funds in Canada was significantly lower than the nominal level of exposure presented below because changes in the value of assets are typically accompanied by offsetting changes in the value of related liabilities. The shareholder exposure is limited to the net impact on the shareholder surplus and the value of any guarantees which may be triggered.

	Canada non-segregated funds exposure		Standard Life Bank exposure		Other shareholder exposure		Total shareholder exposure
	2009	2008	2009	2008	2009	2008	2009	2008
	£m	£m	£m	£m	£m	£m	£m	£m
Investments in associates and joint ventures	17	15	-	-	30	195	47	210
Investment property	776	854	-	-	-	2	776	856
Equity securities	372	347	-	-	107	66	479	413
Debt securities	5,989	5,420	195	60	3,155	2,792	9,339	8,272
Loans and receivables	2,374	2,137	7,464	9,517	38	16	9,876	11,670
Other financial assets	458	435	194	376	881	1,170	1,533	1,981
Cash and cash equivalents	68	23	1,491	1,470	2,547	2,025	4,106	3,518
Total	10,054	9,231	9,344	11,423	6,758	6,266	26,156	26,920

Standard Life Bank exposure to financial assets consists primarily of exposure to a very high-quality retail mortgage book as well as highly rated short-term debt securities and cash and cash equivalents. Standard Life Bank was sold on 1 January 2010 and therefore the Group has no exposure to those assets after that date.

Shareholder exposure to debt securities excluding Canada non-segregated funds and Standard Life Bank consists primarily of debt securities backing annuity liabilities, subordinated debt liabilities and the stock lending programme. The increase in exposure can be attributed to new annuity business written in the period.

Group exposure to debt securities

The Group's exposure to debt securities has been further analysed in the tables below. The high quality of the debt security portfolio has been maintained, with 57% of debt securities rated AAA (2008: 65%) and 95% (2008: 97%) being rated as investment grade.

	Exposure
	Shareholder	Policyholder (participating)	Policyholder (unit linked)	TPICF and NCI*	Total
2009	£m	£m	£m	£m	£m
Government	4,231	18,679	7,285	478	30,673
Corporate - financial institutions	2,484	7,929	4,824	220	15,457
Corporate - other	2,374	3,228	2,552	173	8,327
Other	250	372	434	5	1,061
Total	9,339	30,208	15,095	876	55,518

	Exposure
	Shareholder	Policyholder (participating)	Policyholder (unit linked)	TPICF and NCI*	Total
2008	£m	£m	£m	£m	£m
Government	3,682	18,990	6,165	144	28,981
Corporate - financial institutions	2,331	6,870	5,432	211	14,844
Corporate - other	1,940	2,110	1,397	14	5,461
Other	319	910	448	4	1,681
Total	8,272	28,880	13,442	373	50,967

* Third party interest in consolidated funds and non-controlling interests.

4.2 Exposure to investment property and financial assets continued

Shareholder exposure to debt securities

Further details of the shareholder exposure to debt securities, including credit ratings, are presented below.

	Credit rating
	AAA	AA	A	BBB	Below BBB or not rated	Total
2009	£m	£m	£m	£m	£m	£m
Government	1,596	1,419	1,216	-	-	4,231
Corporate - financial institutions	787	532	679	70	416	2,484
Corporate - other	236	200	1,371	434	133	2,374
Other	155	-	11	11	73	250
Total	2,774	2,151	3,277	515	622	9,339

	Credit rating
	AAA	AA	A	BBB	Below BBB or not rated	Total
2008	£m	£m	£m	£m	£m	£m
Government	1,448	1,208	1,023	-	3	3,682
Corporate - financial institutions	1,116	431	634	89	61	2,331
Corporate - other	400	115	926	305	194	1,940
Other	259	-	49	11	-	319
Total	3,223	1,754	2,632	405	258	8,272

Debt securities classified as corporate include securities issued by corporate entities which carry government guarantees. Debt securities classified as other consist primarily of securities issued by supranational institutions.

Shareholder exposure to loans and receivables

Shareholders are directly exposed to loans and receivables of £9.9bn (2008: £11.7bn) which comprise the Standard Life Bank retail mortgage book and the Canadian non-segregated funds commercial mortgage book. Both mortgage books are deemed to be of very high quality.

	2009	2008
	£m	£m
Canada non-segregated funds commercial mortgage book	2,374	2,137
Standard Life Bank retail mortgage book	7,464	9,517
Other	38	16
Total	9,876	11,670

The Canadian mortgage book has an average loan to value of 46% (2008: 44%), has no loans in arrears by three or more months and has experienced no impairments during 2009.

Standard Life Bank's high-quality mortgage portfolio continues to perform well despite the adverse economic conditions, with arrears figures remaining low in comparison to the Council of Mortgage Lenders' (CML) average. Only 0.84% (2008: 0.40%) of total mortgages were three or more months in arrears or in repossession at the end of 2009, almost a third of the CML industry average of 2.51% (2008: 2.09%). Impairment charges increased to £8m in 2009 (2008: £5m). However, net write-offs for 2009 were only £3m (2008: £1m).

4.3 Fair value hierarchy of financial instruments

To provide further information on the approach used to determine the fair value of certain financial assets and derivative financial liabilities measured as at fair value on the Group's IFRS statement of financial position, the fair value of these financial instruments has been categorised below to reflect the following fair value hierarchy:

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

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

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

The amendment to IFRS 7 Financial Instruments: Disclosures which requires the presentation of a fair value hierarchy analysis and related disclosures was issued in March 2009. The implementation of these requirements has resulted in some reclassifications compared to the indicative fair value hierarchy information presented in the Preliminary Results 2008. The most significant reclassifications resulted in some government bonds being classified as level 2 rather than level 1 and some corporate bonds being classified as level 3 rather than level 2 on the basis that their valuation is based on a single broker indicative quote. The comparative figures in the following tables have been restated to reflect these revised classifications.

Total

	Fair value hierarchy
	Level 1		Level 2		Level 3		Total
	2009	Restated 2008	2009	Restated 2008	2009	Restated 2008	2009	2008
	£m	£m	£m	£m	£m	£m	£m	£m
Equity securities	49,621	38,347	17	31	1,220	1,371	50,858	39,749
Debt securities	26,158	25,581	27,845	23,768	1,515	1,618	55,518	50,967
Derivative financial assets	398	507	970	2,293	-	-	1,368	2,800
Derivative financial liabilities	(81)	(44)	(818)	(1,304)	-	-	(899)	(1,348)
Total	76,096	64,391	28,014	24,788	2,735	2,989	106,845	92,168

Level 1 financial instruments principally include equity securities listed on a recognised exchange, certain government and supranational institution bonds and exchange traded futures and options.

Level 2 financial instruments principally include certain government bonds, listed or publicly quoted corporate bonds, commercial paper, certificates of deposit and derivative instruments which are not exchange traded. Corporate bonds have generally been classified as level 2 as the composite price provided by external pricing providers may include, as an input, quotes provided by some banks that are not based on actual transaction prices.

Level 3 financial instruments principally include unlisted equity securities, being predominantly interests in private equity funds, listed or publicly quoted corporate bonds for which prices are not available from external pricing providers or where such prices are considered to be stale (including some asset backed securities) or are based on single broker indicative quotes and unquoted bonds where credit spreads, being a significant input to the valuation technique, are obtained from a broker or estimated internally.

4.3 Fair value hierarchy of financial instruments continued

Shareholder exposure

	Fair Value Hierarchy
	Level 1		Level 2		Level 3		Total
	2009	Restated 2008	2009	Restated 2008	2009	Restated 2008	2009	2008
	£m	£m	£m	£m	£m	£m	£m	£m
Equity securities	469	399	-	5	10	9	479	413
Debt securities	747	733	7,843	6,969	749	570	9,339	8,272
Derivative financial assets	-	-	455	784	-	-	455	784
Derivative financial liabilities	-	-	(151)	(230)	-	-	(151)	(230)
Total	1,216	1,132	8,147	7,528	759	579	10,122	9,239

Policyholder (participating) exposure

	Fair Value Hierarchy
	Level 1		Level 2		Level 3		Total
	2009	Restated 2008	2009	Restated 2008	2009	Restated 2008	2009	2008
	£m	£m	£m	£m	£m	£m	£m	£m
Equity securities	7,527	7,092	-	-	624	714	8,151	7,806
Debt securities	19,029	19,588	10,729	8,880	450	412	30,208	28,880
Derivative financial assets	391	496	327	1,161	-	-	718	1,657
Derivative financial liabilities	(16)	(29)	(446)	(560)	-	-	(462)	(589)
Total	26,931	27,147	10,610	9,481	1,074	1,126	38,615	37,754

Policyholder (unit linked) exposure

	Fair Value Hierarchy
	Level 1		Level 2		Level 3		Total
	2009	Restated 2008	2009	Restated 2008	2009	Restated 2008	2009	2008
	£m	£m	£m	£m	£m	£m	£m	£m
Equity securities	40,679	30,338	17	26	63	88	40,759	30,452
Debt securities	5,899	5,114	8,893	7,717	303	611	15,095	13,442
Derivative financial assets	6	11	159	325	-	-	165	336
Derivative financial liabilities	(54)	(14)	(193)	(448)	-	-	(247)	(462)
Total	46,530	35,449	8,876	7,620	366	699	55,772	43,768

Third party interest in consolidated funds and non-controlling interests exposure

	Fair Value Hierarchy
	Level 1		Level 2		Level 3		Total
	2009	Restated 2008	2009	Restated 2008	2009	Restated 2008	2009	2008
	£m	£m	£m	£m	£m	£m	£m	£m
Equity securities	946	518	-	-	523	560	1,469	1,078
Debt securities	483	146	380	202	13	25	876	373
Derivative financial assets	1	-	29	23	-	-	30	23
Derivative financial liabilities	(11)	(1)	(28)	(66)	-	-	(39)	(67)
Total	1,419	663	381	159	536	585	2,336	1,407

4.4 Total expenses and operating cost base

	2009	2008
	£m	£m
Total expenses per IFRS income statement	16,987	(15,719)
Total expenses attributable to savings and mortgages included within profit/(loss) for the year from discontinued operations	299	706
Total expenses	17,286	(15,013)
Less claims, commissions and changes in provisions and liabilities	(15,078)	17,238
Less IFRS adjustments and amortisation	(1,171)	(1,189)
Less finance costs	(123)	(129)
Total operating cost base	914	907

Movement in the operating cost base

			£m
Total opening operating cost base			907

Inflation¹			21
Foreign exchange impact²			25
Organic growth³			(9)
Efficiency savings⁴			(47)
Movement in one-off costs and investing for growth costs⁵			17
Total closing operating cost base			914

¹ Notional level of inflation that would have impacted the operating cost base during the year. Blended rate used for staff and non-staff of 2.3% for 2009 (2008: 3.7%).

² Adjustment to opening cost base as a result of movement in the average exchange rate.

³ Movement in the cost base implied by the growth of the organisation - annual premium income used as proxy for Standard Life Healthcare; a combination of PVNBP and policies in-force movements used for the life and pensions businesses; assets under management used for Standard Life Investments; and savings and mortgages account balances used for Standard Life Bank.

⁴ Difference between the movement in the cost base implied by the organic growth calculation and the actual change that has taken place, plus realised savings from cost initiatives and other reductions.

⁵ Movements in the operating cost base, which are specifically identifiable and relate to investing for growth, one-off items or the impact of acquisitions.

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