Half-year Report - Part 2 of 4

RNS Number : 6017G

Standard Life plc

09 August 2016

 

Standard Life plc

Half year results 2016

Part 2 of 4

At a glance

Key performance indicators

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

Financial

Assets under administration (AUA)		Net flows
£328.0bn		£0.9bn
(FY 2015: £307.4bn)		(H1 2015: £3.4bn)
Operating profit		Underlying cash generation		Operating return on equity
£341m		£254m		13.8%
(H1 2015: £290m)		(H1 2015: £230m) Comparative has been restated - See Section 1.2		(H1 2015: 12.9%) Includes discontinued operations
2015 comparatives are in relation to continuing operations unless otherwise stated.
We include measures here which have not been determined to be KPIs but we believe are integral to our performance.
IFRS profit after tax attributable to equity holders		Basic earnings per share		Interim dividend per share
£226m		11.5p		6.47p
(H1 2015: £69m) From continuing operations		(H1 2015: £3.2p) From continuing operations		(2015: 6.02p)

  

Find out more about our financial performance in Section 1.2. Definitions of our financial terms are included in the Glossary in Section 6.

Contents

1.	Management report	2
	1.1 Chief Executive's overview
	1.2 Chief Financial Officer's overview
	1.3 Business performance
	1.4 Risk management
	1.5 Basis of preparation
2.	Statement of Directors' responsibilities	22
3.	Independent review report from our external auditors	23
4.	Financial information	24
	IFRS condensed consolidated primary statements
	Notes to the IFRS condensed consolidated financial information
5.	Supplementary information	65
	5.1 Alternative performance measures
	5.2 Financial ratios
	5.3 Assets under administration and net flows
6.	Glossary	72
7.	Shareholder information	75

The Half year results 2016 are published on the Group's website at www.standardlife.com/hyresults

The Half year 2016 press release is also published on www.standardlife.com

The Directors are responsible for the maintenance and integrity of the financial information published on the website in accordance with UK legislation governing the dissemination of financial statements. Access to the website is available outside the UK, where comparable information may be different.

1. Management report

1.1 Chief Executive's overview

Standard Life has continued to deliver profitable growth. We have grown assets, revenue and profits, and increased our dividend, as we continue to make good progress in building a world-class investment company.

Diversification delivers growth in challenging markets

In the first half of this year we saw a very different mix of net flows compared to the first half of 2015. We are benefiting from our strong long-term relationships with a broad range of clients and customers who reacted in different ways to the changing market environment.

The agreement to acquire Elevate will strengthen our leading position in the advised platform market, while the increase in the stake in HDFC Life and the proposed merger with Max Life will increase our exposure to the attractive and fast growing Indian market.

Outlook

The first half of 2016 can only be characterised as a challenging external environment. While it would be rash to extrapolate the economic and political noise of the last six months, it is clear that the uncertainty that always accompanies economies, politics and markets will remain elevated. This will reinforce the global trends that are shaping the savings and investment landscape. Standard Life's long-term strategy is designed to take advantage of these trends.

Targeted investments to further our diversification agenda, together with a sharpened focus on operational efficiency as we drive our cost income ratio to significantly below its current level, will increase our pace of strategic delivery. This will ensure we continue to meet changing client and customer needs and generate sustainable returns for our shareholders.

1.2 Chief Financial Officer's overview

Further information on AUA, net flows and the components of our growth channels and mature books of business are included in Supplementary information in Section 5

Alternative performance measures:

We assess our financial performance using a variety of measures. Some of these measures are defined under IFRS such as IFRS profit. Others, such as operating profit, are not defined under IFRS and are therefore termed alternative performance measures. Further details are included in Supplementary information in Section 5.

Key financial performance indicators, including comparatives, exclude the Canadian and Singapore discontinued operations unless otherwise stated

We continue to deliver across our simple business model of increasing assets, maximising revenue and lowering unit costs which has driven the increase in profit. This supports our progressive dividend policy.

Increasing assets 

Assets under administration and net flows

The increase in AUA from £307.4bn to £328.0bn was driven by market movements, including benefit from a lower Sterling exchange rate at the end of June, and growth channel net inflows. Market conditions are expected to remain volatile in the short term following the outcome of the EU referendum.

We continue to deliver positive net inflows despite the impact of volatile markets, with resilient flows across our growth channels. Net inflows in our growth channels were lower than H1 2015 as a result of the impact of this market volatility on retail investor sentiment in the Wholesale channel. Pensions and Savings growth channels net inflows of £3.1bn (H1 2015: £3.2bn) were driven by the continued success of our Wrap platform. Net outflows in our mature books reduced by £0.7bn to £3.4bn. H1 2015 included a £0.6bn one-off redemption by Phoenix Group. Total net inflows across our business reduced by £2.5bn to £0.9bn in H1 2016.

Net flows
	H1 2016 £bn	H1 2015 £bn
Standard Life Investments Growth channels	1.7	5.2
Pensions and Savings Growth channels	3.1	3.2
Eliminations and other Growth channels	(0.7)	(1.0)
Total Growth channels	4.1	7.4
Standard Life Investments third party strategic partner life business	(1.4)	(2.2)
Pensions and Savings Mature fee business	(1.5)	(1.4)
Pensions and Savings spread/risk	(0.5)	(0.5)
Total Mature books	(3.4)	(4.1)
Associate and joint venture life businesses	0.2	0.1
Total net flows	0.9	3.4

Maximising revenue

Higher growth channel assets have driven the 4% increase in fee based revenue to £794m, with the Standard Life Investments growth channels and Pensions and Savings growth channels increasing by 11% and 10% respectively.

Fee based revenue from our mature books of business reduced in line with expected outflows.

Whilst AUA was boosted from market and exchange rate movements at the end of June, revenue growth was depressed by lower average market levels in the period. For example, the average daily FTSE All-Share Index was 10% lower in H1 2016 compared to H1 2015.

Spread/risk margin, which mainly relates to income earned on UK annuities, increased by £23m to £63m. H1 2016 includes a £22m 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.

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 is calculated on a rolling 12 months basis and includes the share of associates' and joint ventures' (JVs) profit before tax, has fallen to 62%. This reflects not just the rise in revenue but also our drive for greater cost efficiencies. 

Operating expenses increased by 4% to £566m (H1 2015: £542m) reflecting further investment in expanding the distribution and global reach of Standard Life Investments, building scale in the 1825 business and ongoing investment in technology in our Pensions and Savings business.

Driving Profit 

Operating profit before tax increased by 18% and IFRS profit from continuing operations increased by 228%.

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.

Operating profit before tax increased by £51m to £341m, driven by a combination of robust fee revenue in our growth channels and an increase in the spread/risk margin.

Capital management increased by £12m to £13m largely due to investment strategy changes and 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.

Exchange rate movements at the end of June did not have a material impact on profits in the period.

Underlying performance

Underlying performance increased by 14% to £341m (H1 2015: £299m). Underlying performance includes the £22m spread/risk margin benefit from an acceleration of payments from our main with profits fund.

Analysis of operating profit is included in Section 1.3

IFRS profit¹

IFRS profit from continuing operations increased to £226m (H1 2015: £69m) due to an 18% increase in operating profit and reduced restructuring costs which resulted in a lower non-operating loss of £61m.

The main non-operating items are discussed below.

Restructuring and corporate transaction expenses reduced to £36m (H1 2015: £62m), and included £10m relating to the integration of Ignis, £5m for staff pension scheme restructuring and a number of other business unit restructuring programmes and corporate transactions.

H1 2015 also included a £46m non-operating restructuring loss in Hong Kong following regulatory change.

Short-term fluctuations in investment return and economic assumption changes generated a loss of £17m (H1 2015: loss £42m) mainly due to a widening of credit spreads.

The total tax expense attributable to equity holders' profits from continuing operations was £49m, £69m (H1 2015: £37m) related to operating items and a credit of £20m (H1 2015: credit £19m) for non-operating items. The effective tax rate was 17%² (H1 2015: 15%²) compared to a UK corporation tax rate of 20% (H1 2015: 20.25%).

Other³ profit from continuing operations comprises the share of associates and JV tax of £5m (H1 2015: £5m). H1 2015 also includes a Singapore IFRS loss before tax of £40m which largely relates to expenses in respect of the closure of that business. The H1 2015 IFRS profit from discontinued operations of £1,142m includes the gain on sale of the Canadian business.

	H1 2016		H1 2015
	£m		£m
Continuing operations:
Operating profit before tax		341		290
Non-operating loss before tax		(61)		(158)
Total tax expense		(49)		(18)
Other3		(5)		(45)
IFRS profit from continuing operations1		226		69
IFRS profit from discontinued operations		-		1,142
Total IFRS profit1		226		1,211

¹    After tax attributable to equity holders of Standard Life plc.

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      Singapore is presented as a discontinued operation in the Management report and in operating profit by segment in line with internal management presentation. However, under IFRS 5, Singapore did not constitute a discontinued operation and is included in continuing operations in the consolidated income statement. Therefore, a reclassification of these results between discontinued and continuing operations is required. For further details see Note 4.3 of the IFRS condensed consolidated financial information.

A more detailed reconciliation of operating profit to IFRS profit for the period is included in the IFRS condensed consolidated financial information section of this report

Underlying cash generation

Underlying cash provides insight into our ability to generate cash that supports further investment in the business and the payment of dividends to our shareholders.

Underlying cash generation increased to £254m driven by the growth in fee based revenue and the spread/risk margin benefit from an acceleration of payments from our main with profits fund. This was partly offset by higher current tax on underlying performance mainly due to increased profits and a lower benefit from prior year tax adjustments compared to H1 2015.

Reconciliation of underlying cash generation
	H1 2016 £m	H1 2015 £m
Underlying performance	341	299
Associates and JVs adjustment4	(29)	(23)
Current tax on underlying performance	(53)	(33)
DAC/DIR adjustment	(3)	(3)
Fixed and intangible assets adjustment	(2)	(10)
Underlying cash generation	254	230

⁴      Underlying cash generation now includes dividends received from our Indian associates. Prior period figures have been restated. Further details are included in section 5.1 of Supplementary information.

Visit www.standardlife.com/investor for more information on underlying cash generation

Optimising the balance sheet

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 £179m to increase our stake in HDFC Life.

Operating return on equity increased to 13.8% 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 c£1bn pension scheme surplus.

Solvency II capital surplus²

	30 June 2016				1 January 2016
	Regulatory view	Add unrecognised capital	Remove with profits funds and pension scheme	Investor view	Regulatory view	Add unrecognised capital	Remove with profits funds and pension scheme	Investor view
Own funds	£6.3bn	£0.8bn	(£1.1bn)	£6.0bn	£5.5bn	£1.2bn	(£0.7bn)	£6.0bn
Solvency capital requirement (SCR)	(£4.1bn)	-	£1.1bn	(£3.0bn)	(£3.4bn)	-	£0.7bn	(£2.7bn)
Solvency II capital surplus	£2.2bn	£0.8bn	-	£3.0bn	£2.1bn	£1.2bn	-	£3.3bn
Solvency cover	154%			200%	162%			222%

²    30 June 2016 based on draft regulatory returns. 1 January 2016 based on final regulatory returns.

Our capital position 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.

The capital resources available to meet the requirements are called own funds. Own funds differ materially from IFRS equity for a number of reasons, including the different treatment of certain items, such as pension scheme surpluses and most intangibles, and a different approach for calculating liabilities.

We are well capitalised with a Solvency II capital surplus of £2.2bn representing a solvency cover of 154%. These regulatory figures do not take account of £0.8bn of capital in subsidiaries that is not deemed to be freely transferrable around the Group. Most of this unrecognised capital resides in Standard Life Assurance Limited (SLAL), our principal insurance company, which contributes over 90% of the Group SCR. This additional capital helps absorb market and other volatility, resulting in a resilient Solvency II capital surplus.

For example the Solvency II capital surplus of £2.2bn would change by £0.1bn 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 solvency cover prescribed by Solvency II regulations of 154% is diluted by the inclusion of £1.1bn of capital requirements for with profits funds and our defined benefit pension scheme. These capital requirements are covered in full by surplus assets in those funds.

We have also included a Standard Life Investor view of solvency which adjusts the regulatory position for the impacts from unrecognised capital and with profit funds / defined benefit pension schemes.

The Investor view provides insight into the actual solvency capital provided by equity and debt investors.

The Investor view of capital surplus has fallen by £0.3bn from 1 January 2016 of which £0.2bn was due to the increase in our investment in HDFC Life. The Regulatory view of capital surplus increased by £0.1bn, benefiting from a methodology change which enabled an additional £0.2bn of capital in SLAL to be recognised at Group.

Liquidity management

Standard Life plc, the Group holding company, holds substantial cash and liquid resources. At 30 June 2016, Standard Life plc held £346m (H1 2015: £539m) of cash and short-term debt securities, £301m (H1 2015: £292m) of bonds and £198m (H1 2015: £199m) 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 H1 2016.

In April 2016 we increased our stake in HDFC Life by 9% to 35%. The consideration was funded from existing Standard Life plc resources.

In H1 2016 we extended the maturity date of our syndicated revolving credit facility by a further year to 2021. This £400m facility is held as part of our contingency funding plans and is currently undrawn.

Standard Life plc cash and liquid resources
	H1 2016 £m	H1 2015 £m
Opening 1 January	1,012	630
Canada net retained proceeds	-	459
Dividends received from subsidiaries	277	247
Cash dividends paid to shareholders	(243)	(224)
Cash investments in associates and JVs	(177)	(3)
Cash investments in subsidiaries	(18)	(43)
Other	(6)	(36)
Closing 30 June3	845	1,030

³      IFRS presentation at 30 June 2016 consists of investments in subsidiaries at FVTPL of £277m, debt securities of £552m and cash and cash equivalents of £16m.

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

We propose an interim dividend for 2016 of 6.47p per ordinary share which is an increase of 7.5%. This will be paid on 19 October 2016 to shareholders on the register at close of business on 9 September 2016.

The dividend payment is strongly supported by the £0.8bn of cash and liquid resources which are backed by £1.6bn of Standard Life plc distributable reserves at 30 June 2016.

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 Section 1.4.

1.3 Business performance

Our reportable segments have been identified in accordance with the way that we are structured and managed. Our businesses' performances from continuing operations are set out in Sections 1.3.1 to 1.3.3. In H1 2015 discontinued operations for segmental reporting purposes relates 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 profit1 from continuing operations
	Standard Life Investments		Pensions and Savings2		India and China		Other3		Eliminations4		Total continuing operations
	H1 2016	H1 2015	H1 2016	H1 2015	H1 2016	H1 2015	H1 2016	H1 2015	H1 2016	H1 2015	H1 2016	H1 2015
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Fee based revenue	431	402	407	396	10	23	-	-	(54)	(60)	794	761
Spread/risk margin	-	-	63	40	-	-	-	-	-	-	63	40
Total operating income	431	402	470	436	10	23	-	-	(54)	(60)	857	801
Total operating expenses	(271)	(263)	(313)	(297)	(12)	(17)	(24)	(25)	54	60	(566)	(542)
Capital management	-	-	12	8	-	-	1	(7)	-	-	13	1
Share of associates' and joint ventures' profit before tax	16	15	-	-	21	15	-	-	-	-	37	30
Operating profit before tax	176	154	169	147	19	21	(23)	(32)	-	-	341	290
Underlying adjustments5	-	-	-	9	-	-	-	-	-	-	-	9
Underlying performance	176	154	169	156	19	21	(23)	(32)	-	-	341	299
Reversal of underlying                       adjustments	-	-	-	(9)	-	-	-	-	-	-	-	(9)
Share of associates' and joint ventures' tax expense	(5)	(5)	-	-	-	-	-	-	-	-	(5)	(5)
Non-operating items	(16)	(24)	(37)	(74)	-	(47)	(8)	(13)	-	-	(61)	(158)
Total tax expense	(32)	(24)	(28)	(11)	-	5	11	12	-	-	(49)	(18)
Singapore included in discontinued segment	-	-	-	-	-	(40)	-	-	-	-	-	(40)
Profit for the period attributable to equity holders of Standard Life plc	123	101	104	62	19	(61)	(20)	(33)	-	-	226	69

1   Operating profit is IFRS profit before tax adjusted to remove the impact of short-term market driven fluctuations in investment return and economic assumptions, restructuring costs, 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 significant 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 H1 2016 operating profit is based on the expected long-term pension expense, which results in a £5m increase to operating profit before tax (H1 2015: £20m) and a corresponding increase to non-operating restructuring and corporate transaction expenses - Refer to Note 4.4 of the IFRS condensed consolidated financial information 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 shareholder support provided to the German with profits business of £nil (H1 2015: £9m) included in operating expenses.

1.3.1 Standard Life Investments

Overview 

Standard Life Investments is a leading active asset manager with total AUM of £269.0bn (FY 2015: £253.2bn).

We offer market-leading investment funds and solutions to our clients through two main distribution channels:

·   Institutional: distributing to institutions either directly or through intermediaries

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

As 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 Focus on Change investment philosophy lies at the heart of our wide range of investment funds and solutions. Focus on Change is about looking beyond the things that would typically influence the price of stocks in the market, and understanding that there are other factors that can influence them.

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 was reflected in our creation in H1 2016 of a new role of Head of Stewardship and Environmental, Social & Governance Investment.

Increasing diversification

We have an expanding global reach with a presence in 27 cities worldwide including our Head Office in Edinburgh and regional hubs in Boston and Hong Kong. As well as our own distribution, we benefit from leveraging our strategic partner relationships in the US, Canada, India, Asia, Japan and in the UK with Phoenix Group and the wider Standard Life Group. The most recent of these is with Bosera Asset Management, in mainland China, with whom we are collaborating on a manufacturing basis, including joint product innovation and investment management cooperation.

We are increasingly diversified with investment capabilities across a range of asset classes, including equities, fixed income, real estate and private equity. We also provide innovative investment solutions, such as high quality liability aware and multi-asset investments, and our Standard Life Wealth proposition.

Investing for the longer term

A number of external factors are impacting global economic growth and are driving increased volatility in markets. The EU referendum result has dampened global outlook and caused uncertainty in Europe and especially the UK. There is uncertainty in the US ahead of the Presidential election at the same time as companies' profits are being hit due to labour cost rises. China is experiencing an economic slowdown but remains on its path to rebalance away from investment and to consumption.

In a world of slow growth, low inflation and compressed returns, we believe that active investment management offers opportunities to deliver superior returns.

The EU referendum result also leads to uncertainty about our future operating environment. We remain ready to adapt our business to future changes in regulations and markets. 

Following the EU referendum result we experienced an increase in redemption requests which led us to suspend trading in our UK Real Estate Fund, in line with our governance procedures. This action was taken to protect all investors in the fund. We monitor activity across all our funds and will continue to take any steps necessary to do the right thing to achieve the best possible outcome for our clients and customers.

We remain well positioned to deliver profitable 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.

Increasing assets 

Further information on AUA and net flows is included in Supplementary information in Section 5

	Gross Inflows			Net flows							AUM
	H1 2016	H1 2015		H1 2016	H1 2015					H1 2016		FY 2015
	£bn	£bn		£bn	£bn					£bn		£bn
Institutional	8.4	5.4		2.0		1.8				78.1			67.0
Wholesale	6.5	8.9		(0.4)		5.3				47.3			45.9
Wealth	0.5	0.4		0.2		-				6.7			6.5
Ignis1	0.3	1.3		(0.1)		(1.9)				5.6			11.1
Total Growth channels	15.7	16.0		1.7		5.2				137.7			130.5
Standard Life Group	1.9	2.3		(0.8)		(1.2)				88.3			83.1
Phoenix Group	-	-		(1.4)		(2.2)				43.0			39.6
Total strategic partner life business - Mature books	1.9	2.3		(2.2)		(3.4)				131.3			122.7
Total	17.6	18.3		(0.5)		1.8				269.0			253.2

AUM increased by 6% to £269.0bn driven by positive investment performance and favourable foreign exchange movements, against a background of volatile markets.

Strong long-term investment performance

We continue to deliver strong long-term money weighted average investment performance. 84% of growth channel AUM were ahead of benchmark over five years, with 85% ahead over three years and 29% over one year (H1 2015: five years 97%, three years 95%, one year 79%).

Investment performance was weak in the first two months of the year and was subsequently on an improving trend until the EU referendum vote, which caused sharp market movements undermining this recovery. During 2016 uncertainty in the economic outlook did not favour our portfolios generally, which were positioned for a modest pick-up in economic growth.

Resilient growth channel flows

Gross flows across our growth channels remained strong at £15.7bn, largely into Institutional and Wholesale business. This result reflects the breadth of our product offering, our expanding global distribution capability and the increasingly diverse range of client segments served. Net inflows reduced to £1.7bn driven by increased redemptions in Wholesale due to the continued impact of volatile markets on investor sentiment market-wide.

By channel:

Institutional - increasingly global

Our increasingly global Institutional business saw net inflows of £2.0bn with Q1 2016 seeing the highest quarterly net flows since Q2 2013. Net inflows into private equity, fixed income, real estate and multi-asset demonstrate the quality and breadth of our offering.

Wholesale - challenging markets

Lower gross flows and increased redemptions of £6.9bn (H1 2015: £3.6bn) led to a net outflow of £0.4bn. Investor sentiment has weakened in this channel globally given market volatility, the EU referendum result and some short-term investment performance concerns. Net inflows into MyFolio and fixed income remain particularly strong although multi-asset saw net outflows in the Wholesale channel during the period.

We remain well positioned in the UK wholesale market with a share of 5.3% (FY 2015: 5.4%).

Wealth

Standard Life Wealth continues to develop and as we improve the operational scalability of the business, we have started to gain momentum in the market. AUM increased to £6.7bn.

Ignis¹ 

Ignis, which is mostly institutional in nature, saw net outflows of £0.1bn (H1 2015: net outflow £1.9bn). H1 2015 was significantly impacted by a £1.7bn disinvestment from one large low revenue mandate.

By asset class²:

Multi-asset continued to attract net inflows, contributing £0.6bn (H1 2015: £5.6bn), £1.1bn of net outflows from Wholesale offset by £1.7bn of Institutional inflows. Almost half (48%) of this is into our non-GARS multi-asset solutions helped by the launch of the Liability Aware Absolute Return III fund and the Global Focused Strategies fund in the US. MyFolio saw net inflows of £0.7bn (H1 2015: £0.9bn) as AUM increased to £8.9bn (FY 2015: £8.1bn). Flows echoed market sentiment with investors continuing to retreat from equities towards fixed income with net outflows of £0.6bn and net inflows of £0.3bn respectively.

By geography²:

North America continues to see strong net inflows with £0.5bn in the period (H1 2015: £1.5bn) contributing to AUM reaching £12.5bn (FY 2015: £11.7bn). European and Asian net outflows of £0.6bn and nil respectively, reflected the impact of investment volatility on wholesale markets. This also impacted our domestic UK business with net inflows reducing to £1.1bn (H1 2015: £2.1bn). In India, our share of HDFC AMC net inflows increased to £0.8bn (H1 2015: £0.5bn).

¹      In H1 2016 a number of Ignis funds were merged with other SLI funds, resulting in a transfer of £5.6bn AUM out of Ignis into Institutional (£4.0bn) and Wholesale (£1.6bn) through Market and other movements.

²    'By asset class' and 'By geography' commentary excludes Ignis which is reported separately.

Mature books

In our mature business, overall net outflows were £2.2bn. This was largely due to net outflows of £1.4bn from the assets managed on behalf of Phoenix Group as well as net outflows from Standard Life Group of £0.8bn. H1 2015 included a £0.6bn one-off redemption by Phoenix Group.

Maximising revenue

Our track record of strong long-term investment performance and our range of proven investment solutions attract customers towards our higher margin products.

Increased fee based revenue

Growth channel fee based revenue increased by 11% to £331m due to increased AUM and a continued shift in mix towards our higher margin growth products. Total fee based revenue increased by 7% to £431m with a resilient performance from our mature business. The average revenue yield on growth AUM increased slightly to 53bps (FY 2015: 52bps) and for mature business reduced slightly to 16bps (FY 2015: 17bps).

Lowering unit costs

We are controlling our cost base as our business grows, capitalising on economies of scale across Standard Life Investments and the wider business.

Controlled operating expense growth

We have reduced our cost/income ratio to 60%. The integration of Ignis continues and is on track to deliver £50m of annual cost synergies by 2017.

Total operating expenses increased by 3% to £271m reflecting the increased scale of our business as we continue to invest in new products and expanding distribution and geographic reach.

Driving Profit 

		H1 2016  £m		H1 2015 £m
Fee based revenue		431		402
Operating expenses		(271)		(263)
Share of associates' profit before tax		16		15
Operating profit before tax		176		154
Interest, depreciation and amortisation			6	7
EBITDA	182			161
Reversal of interest, depreciation and amortisation	(6)			(7)
Non-operating items	(16)			(24)
Tax expense1	(37)			(29)
Total IFRS profit2	123			101

¹    Tax expense includes share of associates' tax expense.

²    After tax, from continuing operations, attributable to equity holders of Standard Life plc.

Operating profit before tax increased by 14% to £176m driven by a strong increase in fee revenue and controlled growth in expenses.

Operating return on equity increased to 34.6% (H1 2015: 32.0%).

EBITDA, which is closely aligned with operating profit, increased to £182m. Our EBITDA margin of 42% (H1 2015: 40%) continues to be strong, and we remain on track to achieve our target margin of 45% by 2017.

Total IFRS profit² increased to £123m due to strong operating performance and the benefit of lower Ignis integration costs.

1.3.2 Pensions and Savings

Overview 

Pensions and Savings is a leading provider of long-term savings and investment propositions to Workplace and Retail customers with total AUA of £160.6bn (FY 2015: £150.2bn). Our main aim is to help people manage their money today and save for their future.

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

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

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

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

Our Europe growth business consists of our Ireland domestic and international bond businesses as well as our unit linked business in Germany.

Our valuable mature book includes mature Retail and spread/risk products, such as annuities, which provide a sustained contribution to our profit.

Our close collaboration with Standard Life Investments allows us to support customers across the value chain, providing benefit to our customers, our business and Standard Life as a whole. Our Pensions and Savings business accounts for 85% of total MyFolio AUA. 73% of our Workplace AUA and 21% of our Wrap assets are managed by Standard Life Investments.

Broadening and deepening relationships

In May 2016 we announced an agreement to acquire the Elevate platform from AXA and expect this transaction to complete during 2016. The acquisition broadens our reach in the platform market and will bring a further £10bn of AUA to our business. Elevate, with its simpler platform offering, will complement our Wrap platform, which is designed for the more sophisticated wealth management segment. 

The new pension freedoms highlighted the importance of professional financial advice in the UK and in response we are building our own financial advice business called 1825. So far in 2016 we have announced the signing of the deals of four further acquisitions of quality adviser firms, broadening our reach across the country which, when complete, will bring total assets under advice in 1825 up to £3.3bn. 1825 offers a full financial planning and personal tax advice service which is focused on our clients' goals. Combined with a wide range of investment options, powered by our investment experts and technology, clients are able to access support how and when they need it.

Market update

The first half of 2016 has seen volatile conditions in global financial markets, which have negatively impacted investor and consumer sentiment, and lower daily average asset values than 2015. 

Following the EU referendum result in favour of leaving the EU we have seen increased volatility in financial markets and political uncertainty. We will monitor economic, political and regulatory developments and seek to engage in the process in a manner that represents the best interests of our clients, customers and people in our Pensions and Savings business. We will continue to leverage our existing local operating bases in Germany and Ireland.

The Solvency II regime came into force in January 2016 bringing consistency to the way EU insurers report capital and risk. We have now successfully completed our first quarter of Solvency II reporting.

New pension and savings regulations have provided customers with increased flexibility when accessing income in retirement. In the first year of the pension freedoms, 14% of our eligible customers made use of the new regulations. Our online retirement journey allows customers to access their savings in an efficient and fully self service basis.

In May 2016, the Financial Conduct Authority announced that exit charges will be capped at 1%. Our business is well positioned to meet this requirement with less than 7% of our customers having a potential exit charge, with the average exit charge less than 1% of their fund value.

Increasing assets 

Total AUA increased by 7% to £160.6bn, with UK AUA up 6% to £139.2bn (FY 2015: £131.6bn) and Europe AUA up 15% to £21.4bn (FY 2015: £18.6bn).

Growth channels

UK Workplace

AUA in our UK Workplace channel increased by 3% to £34.0bn, benefiting from net inflows of £0.8bn. Whilst we have seen fewer large scheme transfers as employers adapt to new pension regulations, we are benefiting from growing contributions into our existing schemes which provide a steady long-term source of growth.

Our success in attracting new flows through auto enrolment has resulted in a 4% increase in regular premiums to £1.5bn. Regular premiums now account for over 74% of Workplace inflows. Our Workplace business continues to be a source of growth for our Retail businesses with £1.0bn of assets transferring in H1 2016.

UK Retail

Net inflows of £2.0bn into our UK Retail channel were driven by a 14% increase in gross inflows to £4.1bn - the highest half year ever.

Our Wrap¹ platform continues to lead the UK advised platform market² with AUA increasing by 10% to £28.0bn. Since launch in June 2014, our Discretionary Investment Manager Hub on the Wrap platform has attracted over 60 discretionary fund managers and £2.1bn of assets, of which around 40% is managed by Standard Life Wealth.

AUA in our Active Money Personal Pension (AMPP) product, which provides customers with a simple means of accessing their income at retirement, grew 25% to £1.6bn.

Total assets invested in our market-leading drawdown propositions increased by 8% to £14.7bn (FY 2015: £13.6bn).

Europe growth

In our Europe business, AUA in our growth channels of £10.4bn is up 8% on 2015 with net inflows of £0.3bn and favourable foreign exchange movements. In Ireland, net inflows from our international bond business are up 8% on H1 2015. 

Mature books

UK mature Retail

Our UK mature Retail book of business saw stable net outflows of £1.2bn, £0.2bn of which went to our AMPP product, with customers continuing to take advantage of pension freedoms. We look to 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 to £16.1bn due to reductions in yields which offset net outflows from scheduled annuity payments of £0.5bn.

Europe mature fee

Europe mature fee includes our German with profits book which closed to new business in April 2015, resulting in lower net inflows in H1 2016.

Further information on AUA and net inflows is included in Section 5

				Gross inflows					Net flows					AUA
			H1 2016		H1 2015			H1 2016		H1 2015			H1 2016		FY 2015
			£bn		£bn			£bn		£bn			£bn		£bn
UK Workplace			2.0		2.1			0.8		1.1			34.0		33.0
UK Retail1			4.1		3.6			2.0		1.8			45.7		42.6
Europe Growth1			0.7		0.7			0.3		0.3			10.4		9.6
Total Growth channels			6.8		6.4			3.1		3.2			90.1		85.2
UK Mature Retail			0.4		0.4			(1.2)		(1.2)			32.6		32.7
Spread/risk			0.1		0.1			(0.5)		(0.5)			16.1		14.9
Europe Mature fee			0.3		0.4			0.1		0.2			10.3		8.4
Conventional with profits			-		-			(0.4)		(0.4)			1.0		1.3
Total Mature books			0.8		0.9			(2.0)		(1.9)			60.0		57.3
Assets not backing products			-		-			-		-			10.5		7.7
Total Pensions and Savings			7.6		7.3			1.1		1.3			160.6		150.2
1      Wrap AUA is reported predominantly within UK Retail (H1 2016: £25.8bn, FY 2015: £23.4bn). International bond AUA is reported within Europe Growth (H1 2016: £2.2bn, FY 2015: £2.1bn). 2      Highest net sales in Q1 YTD 2016, source Fundscape.

Maximising revenue 

Fee based revenue

UK fee based revenue increased by £7m to £321m. This included an 8% increase in our growth channels to £197m and a 6% reduction in our mature books to £124m. Whilst both channels were impacted by lower average equity levels during the period, fee based revenue in our UK growth channels has benefited from Workplace and Retail net inflows.

Average fee revenue yield remains stable at 59bps (FY 2015: 59bps).

Spread/risk margin

UK spread/risk margin increased by £17m to £55m. The result includes an £18m payment 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.

Although we had expected fewer asset and liability management opportunities to exist in the low yield environment, we took advantage of volatility in Q1 2016 to deliver a benefit of £16m (H1 2015: £6m).

Lowering unit costs 

Operating expenses

UK operating expenses increased by £19m to £238m reflecting the scaling of our 1825 business and the timing of our investment in technology to reduce future customer operations and IT maintenance costs. We continue to drive the scalability of our business model and cost discipline and the cost/income ratio has remained at 59%.

Our ongoing investment in technology has allowed further process automation and customer self service. Examples of our progress include:

·   To date 20,000 customers have fully self served using our online retirement journey

·   In H1 2016, 35% 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 schemes on the same day and has secured 2,000 schemes in H1 2016 (6,000 to date)

Driving Profit 

Operating profit

Pensions and Savings operating profit before tax increased by 15% to £169m, with underlying performance increasing by 8% to £169m.

UK

UK operating profit increased by £10m to £151m, mainly due to higher spread/risk margin.

Europe

Europe operating profit increased by £12m to £18m. The H1 2015 result was lower due to the impact of the £9m one-off shareholder support provided to the German with profits business. The Europe H1 2016 spread/risk result also includes the benefit of a £4m payment from our main with profits fund relating to changes to the scheme of demutualisation in response to the transition to Solvency II.

Operating return on equity

Operating return on equity decreased to 11.7% (H1 2015: 13.0%) reflecting higher opening shareholder net assets.

Profitability	UK		Europe		Pensions and Savings
	H1 2016	H1 2015	H1 2016	H1 2015	H1 2016	H1 2015
	£m	£m	£m	£m	£m	£m
Fee based revenue	321	314	86	82	407	396
Spread/risk margin	55	38	8	2	63	40
Total operating income	376	352	94	84	470	436
Operating expenses	(238)	(219)	(75)	(78)	(313)	(297)
Capital management	13	8	(1)	-	12	8
Operating profit before tax	151	141	18	6	169	147
Underlying adjustments1	-	-	-	9	-	9
Underlying performance	151	141	18	15	169	156
Reversal of underlying adjustments	-	-	-	(9)	-	(9)
Non-operating items2	(32)	(57)	(5)	(17)	(37)	(74)
Total tax expense	(16)	(10)	(12)	(1)	(28)	(11)
Total IFRS profit3	103	74	1	(12)	104	62

¹      H1 2015 underlying adjustment related to shareholder support provided to the German with profits business, included in operating expenses.

²      The main items included in non-operating items are short-term fluctuations in investment return and economic assumption changes of £10m (H1 2015: £37m) and restructuring and corporate transaction expenses of £26m (H1 2015: £39m).

³    After tax attributable to equity holders of Standard Life plc.

1.3.3 India and China

Overview

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 within Section 1.3.1 - Standard Life Investments.

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

Strengthened 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 comprehensive product portfolio which provides over 20 million customers with innovative insurance and savings solutions.

We continue to be encouraged by the future outlook of the life insurance industry 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 £179m.

On 8 August 2016, we announced that HDFC Life had agreed terms with Max Life Insurance Company (Max Life), Max Financial Services (Max FS) and Max India for the combination of the life insurance businesses of HDFC Life and Max Life. The transaction will be effected through a composite scheme of arrangement, the final form of which remains subject to approval by parties to the transaction and, once finalised, is subject to approval by the shareholders of HDFC Life, Max Life, Max FS and Max India as well as regulatory and high court approvals. Following completion of the transaction, the shares of HDFC Life will 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.

The transaction, if approved, is expected to cement HDFC Life's position as the leading private sector Indian life insurance business. Max Life's bancassurance relationships will complement HDFC Life's already strong distribution. Based on current shareholdings, following completion of the transaction, Standard Life would remain the second largest shareholder in the enlarged HDFC Life entity with a shareholding of 24.1%.

Positioned for future growth in China & 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 H1 2015.

The Chinese insurance market has grown in recent years to become the 3^rd 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 and retirement insurance. Heng An Standard Life, through their extensive sales network and product range, are well positioned to meet this need and continue to investigate opportunities to increase their presence in the growing pensions market.

In Hong Kong, continuing regulatory changes and market volatility have made growing AUA and flows challenging. We remain focused on retaining and efficiently managing our existing business at the same time as we evolve our propositions to meet the needs of the growing affluent and wealth segments both in Hong Kong and from mainland Chinese visitors. We continue to develop our future business strategy in mainland China and Hong Kong.

Increasing assets 

Further information on AUA and net flows is included in Supplementary information in Section 5

Total AUA increased by 46% to £4.1bn. HDFC Life's AUA increased to £3.0bn (FY 2015: £1.8bn). £0.8bn of the increase reflects our higher share of HDFC Life AUA following our stake increase in April.

AUA in Heng An Standard Life remained stable at £0.5bn (FY 2015: £0.5bn), while Hong Kong increased to £0.6bn (FY 2015: £0.5bn).

Net inflows continued to increase in our associate and joint venture businesses to £164m at H1 2016 (H1 2015: £119m), of which £7m relates to the increase in our share of HDFC Life net flows. Net flows in Heng An Standard Life increased by 128% compared to the prior period.

In Hong Kong, net inflows decreased to £26m (H1 2015: £31m) as a result of continuing regulatory changes and market volatility.

Maximising 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 the comprehensive product range, premium income increased by 15% compared to H1 2015.

Heng An Standard Life's new business sales in H1 2016 have increased by 31% compared to the comparative period.

In Hong Kong however, fee based revenue decreased by £13m due to lower fee revenue from regular premium business which we stopped selling in H1 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 staff costs compared to H1 2015.

Driving Profit 

Operating profit before tax decreased to £19m driven by an operating loss in Hong Kong of £2m. This was due to fee based revenue falling faster than operating expenses as a result of the fall in revenue from regular premium business.

This was partly offset by an increase in operating profit of £5m in HDFC Life to £17m and an increase of £1m in Heng An Standard Life to £4m. Both our associate and JV businesses continue to benefit from continued growth in premium income.

Operating return on equity for the India and China segment decreased to 10.9% (H1 2015: 15.6%) mainly due to the capital injection required to fund the increased stake in HDFC Life.

	H1 2016 £m		H1 2015 £m
Share of associates' and joint ventures' profit before tax	21	15
Hong Kong fee based revenue	10	23
Hong Kong operating expenses	(12)	(17)
Operating profit before tax	19	21
Non-operating loss including impairment of DAC and related reserving changes in Hong Kong	-	(47)
IFRS profit / (loss) before tax	19	(26)

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

1.4 Risk Management

Visit www.standardlife.com/annualreport for further information about our ERM framework and about how we manage risk in our Annual report and accounts 2015

Find out more about our risk management in Note 4.12 in the Financial information section

Our approach to risk management

Effective and pre-emptive risk management, over both the short and long term, is essential for our continued success.

We have a strong governance culture and our approach to risk management is consistently applied across our growth channels and mature book. This supports the development of long-term value by ensuring 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 has received external recognition. In May 2016, Standard & Poors 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. In February our risk function received an external award for insurance risk manager of the year from Risk.net's Risk Magazine.

Our principal risks and uncertainties

The categories of risk that are faced by the Company, which include Strategic, Operational, Conduct and Financial have not changed since year end 2015 and we expect these to stay broadly consistent over time.

From within these categories we have identified a number of specific principal risks and uncertainties. These should not be considered to be exhaustive but rather those which we currently believe have the greatest potential to affect our business model, future performance, solvency or liquidity. As our strategic development continues and we respond to changes in our external environment, it is to be expected that both the risks themselves and the relative importance of these may change. We have provided our current assessment of the forward trend for these risks and how these are evolving over 2016.

Risk environment

Political, regulatory and financial risks have been predominant themes in the first half of 2016. These feature strongly in our principal risks in the tables below.

We are entering a period of uncertainty following the EU referendum result and clarity over the specific details may not be known for some time. It is expected that the assessment of our principal risks may change as details emerge. We have a strong track record of successfully adapting to changing markets and regulations. Our pro-active risk management approach means we are well positioned to respond to any risks and opportunities as they emerge.

As a major financial services provider we have been asked to participate in a range of industry wide reviews and studies assessing competition, transparency and customer outcomes. The FCA's Asset Management Market Study, MiFID II and the evolving UK pension landscape will continue to be key areas of focus for us.

Volatile financial markets in H1 2016 have impacted investor sentiment and market confidence. The strong management of our balance sheet over many years has enabled us to maintain a robust capital position. In the first half of the year we carried out additional stress and scenario testing to understand the potential impact from the materialisation of further downside market risks.

Oversight of current and future market risks has been high on the agenda of our risk and management committees, as we manage the delivery of our business plans and continue to focus on ensuring we deliver consistently strong long-term investment performance for clients and customers.

In H1 2016 the business entered into an agreement to acquire AXA Elevate to support the continued growth of our platform business. In addition to the due diligence, our risk function carried out an independent risk assessment of the acquisition. Following the purchase we will ensure the business has full risk support and oversight as we transition the business under our risk framework and control environment.

Our principal risks and uncertainties STRATEGIC RISK 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.
Principal Risk		Trend		How the risk is evolving in 2016
Political Change		Increasing		Following the EU referendum result there is material uncertainty about what our future operating environment will be. We are proactively engaging with key stakeholders and are ready to adapt our business as appropriate to any changes in regulations and markets. Decisions taken by the UK and Scottish governments in particular, but also those in other global locations where we operate, may possibly impact our propositions or significantly change our business environment. The change of leadership within the UK government could result in a new or different policy agenda and we will continue to fully engage with industry bodies and key stakeholders, responding as appropriate. One key event in H2 2016 which may give an indication of any change in policy will be the UK Chancellor's Autumn Statement.
Regulatory Change		Increasing		The forthcoming requirements of MiFID II will have a significant impact on market transparency and investor protection aspects of the asset management industry. We continue to ensure we are well positioned to meet these new requirements when they come into force in January 2018. The FCA continues to progress their Asset Management Market Study to assess competition within the asset management sector. We welcome the FCA's work in this area and look to support the FCA in their industry wide review. In the second half of 2016 we expect the FCA to announce any next steps from their sample-based review of non-advised annuity sales. The outcome and consequences are currently uncertain. However, it may be necessary to compensate customers and this could have an adverse effect on our profitability and/or financial position.
Customer and Client Preferences and Demand		Increasing		We continue to diversify our revenue sources across our growth channels by responding to changing customer and client needs. In a changing economic, regulatory and political environment, our business needs to adapt its offering to ensure its products and propositions continue to be attractive to our customers and clients. We aim to help our customers and clients save and invest for their future, and make it convenient to do so. We have robust governance oversight to ensure products and propositions delivered to the market meet the client/customer needs and our profitability criteria. As an example, to support our clients in the management of their pension scheme liabilities Standard Life Investments has launched the first fund within our new Integrated Liability Plus Solution (ILPS) fund range aimed at our Institutional growth channel. The UK Pensions and Savings market continues to evolve 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 is fit for purpose. As a business we continue to support our customers and have recently raised awareness of the savings gap in the UK and the risk this poses in retirement. We have compiled a guide aimed at helping people make the most of their money and get their finances in order.
CONDUCT RISK The risk that through our behaviours, strategies, decisions and actions the firm, or individuals within the firm, 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.
Principal Risk	Trend				How the risk is evolving in 2016
Customer and Client Outcomes	Increasing						In May we entered into an agreement to acquire the Elevate platform from AXA. So far in 2016, in our advice business 1825, we have completed two acquisitions and have announced our intention to make a further two. As we transition these businesses into Standard Life, we will implement a robust process to ensure that they are embedded within our own risk and conduct framework and that the expectations of these new customers continue to be met following the change of ownership. Following the EU referendum in June, like many other property investment managers we saw an increase in redemption requests from UK property funds. We have taken appropriate action to protect investors, in line with our governance procedures. We monitor activity across all our funds and will continue to take any steps necessary to do the right thing to achieve the best possible outcome for our clients and customers. We have completed the delivery of our revised conduct risk management programme aiming to support fair outcomes for our customers and clients. This provides additional visibility of our conduct exposures and ensures a more robust and consistent application of their management. In the first half of the year Standard Life hosted a vulnerable consumer event bringing together other financial services companies and the FCA to discuss and share best practice in becoming more accessible and inclusive for all consumers.
OPERATIONAL RISK 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.
Principal Risk			Trend					How the risk is evolving in 2016
IT Failure & Security, including cyber risk			Increasing			Over time we expect our increasing global profile to raise the threat from cyber-attacks. Layered defensive controls are in place to protect against such attacks and we work with our external partners to ensure that our response is appropriate to the scale and nature of the threat. In 2016, we have established a Security Board to oversee and set the security priorities across the business. This Board has specified our risk appetite for cyber risk in order to better measure the risk and drive the appropriate responses to it. We continue to invest in and deliver on programmes to modernise, simplify and increase the security of our IT infrastructure to support the growth of our business.
Outsourcing Relationship Management			Stable			Through the planned acquisition of AXA Elevate we have broadened our relationship with one of our key outsourcing partners who operate and service our platform business. In addition, during the initial phases of the transition there will be a new reliance on AXA for servicing the platform through agreed transitional service agreements. These changes in risk exposure are well understood and have been assessed as part of our due diligence.
Change Management			Increasing			We continue to have a large change portfolio with an increased level of activity arising from regulatory changes and transition activity for acquisitions. Our risk committees across the business maintain a strong focus on ensuring effective management of change risk as our portfolio evolves to meet business needs. We welcome the new objectives of the EU General Data Protection Regulation which strengthens data protection for individuals. We have already initiated a company-wide working group to assess any changes and investment required across our business.

OPERATIONAL RISK continued
Talent Management			Stable			As significant new powers have been devolved to the Scottish Parliament a key area of focus will be the extended powers over personal income taxation. We are engaged with key stakeholders to ensure any changes do not become a barrier to attracting and retaining talent in Scotland. 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. For example, we have recently signed up to the HM Treasury Women in Finance Charter.
FINANCIAL MARKET AND CREDIT RISKS Risk of losses due to risks inherent in financial markets. We have 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 our risk adjusted return.
Principal Risk		Trend		How the risk is evolving in 2016
Market Risk		Increasing		Global political and economic events caused financial markets to be volatile over the first half of 2016 and this has been compounded by further uncertainty following the EU referendum vote. We continue to have a robust capital position as a result of the strong risk management of our balance sheet. We closely monitor and continue to focus on delivering strong long-term investment performance across our fund range by applying our proven investment process, against a backdrop of uncertain and volatile markets. Impacts on asset values as well as investor sentiment have provided headwinds in growing AUA/AUM and increasing fee based revenue. Impacts have been closely managed across the different sources of revenue to deliver a robust set of half year results. Our increasing trend continues to apply given the risks and uncertainties impacting financial markets and our growing fee based business model.
Counterparty Risk		Stable		In response to economic, political and regulatory developments we have seen a number of ratings downgrades from external credit rating agencies in the first half of 2016. During this time our governance processes in relation to investment mandates have operated effectively and there has been no significant adverse impact of downgrades on the business. Our forward-looking assessment, given the current uncertainty affecting financial markets, is for credit risk to remain at an elevated level.
DEMOGRAPHIC AND EXPENSE RISK 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. We have an appetite for such risks since we expect acceptance of the risk to be value additive.
Principal Risk	Trend				How the risk is evolving in 2016
Longevity	Decreasing				There has been no material change in the longevity exposure across our annuity book of business. Annuity sales continue to be materially lower post the introduction of pension freedoms, and as such we expect our longevity risk to decrease over time as our annuity book steadily runs off.

1.5 Basis of preparation

Overview

Our Management report for the period to 30 June 2016 has been prepared in line with the Disclosure and Transparency Rules (DTR) issued by the FCA. The DTR incorporates the requirement of the European Union (EU) Transparency

Directive for all UK listed companies to report their half year results in accordance with IAS 34 Interim Financial Reporting. Under DTR 4.2.7R, the Group is required to provide at least an indication of important events that have occurred during the first six months of the financial year, and their impact on the financial information, and a description of the principal risks and uncertainties for the remaining six months of the financial year. Principal risks and uncertainties are detailed in Section 1.4 - Risk management and Note 41 of the Group's Annual report and accounts 2015. Under DTR 4.2.8R the Group is also required to make certain related party disclosures. These are contained in Note 4.16 of the IFRS condensed consolidated financial information. 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 IFRS condensed consolidated half year financial information has been prepared in accordance with IAS 34 Interim Financial Reporting, as endorsed by the EU. However, our Board believes that alternative performance measures (APMs), which have been used in the Management report, are useful for both management and investors and make it easier to understand our Group's performance.

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

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

Going Concern

Having reassessed the principal risks, the Directors considered it appropriate to adopt the going concern basis of accounting in preparing the interim financial information.

Further details on alternative performance measures, financial ratios and assets under administration are included in the Supplementary information section of this report

IFRS Reporting

The financial results, which are unaudited at the half year, 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 Management report and in Section 4 have been prepared on the basis of the IFRS accounting policies applied by the Group in the Annual report and accounts 2015 as amended for new standards effective from 1 January 2016, as described in Note 4.1 - Accounting policies.

Operating profit

The H1 2016 reconciliation of consolidated operating profit to IFRS profit for the period, presented in Section 4 of this report, presents profit before tax expense attributable to equity holders adjusted for non-operating items. Further details on the calculation of operating profit is presented in Note 4.7 - Operating profit and non-operating items. 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 'forward-looking statements' about certain of the Standard Life Group's current plans, goals and expectations relating to future financial conditions, performance, results, strategy and objectives. Statements containing the words: 'believes', 'intends', 'targets', 'estimates', 'expects', 'plans', 'seeks' and 'anticipates' and any other words of similar meaning are forward-looking. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances which may be beyond the Group's control. As a result, the Group's actual financial condition, performance and results may differ materially from the plans, goals and expectations set out in the forward-looking statements, and persons receiving this document should not place undue reliance on forward-looking statements. The Standard Life Group undertakes no obligation to update any of the forward-looking statements in this document or any other forward-looking statements it may make.

 

END

 

 

IR DMGGRGRDGVZZ