Standard Life Assurance Limited

Annual Financial Statements for the year ended 31 December 2019

Scotland Registration Number: SC286833 Contents

Page

Directors, officers and other information 1

Strategic report 2

Directors’report 12

Statement of Directors’ responsibilities 16

Independent Auditors’ report to the members of Standard Life Assurance Limited 17

Statement of comprehensive income for the year ended 31 December 2019 25

Statement of financial position as at 31 December 2019 26

Statement of changes in equity for the year ended 31 December 2019 27

Statement of cash flows for the year ended 31 December 2019 28

Notes to the financial statements 29 Standard Life Assurance Limited

Directors, officers and other information

Directors Amanda Bowe Non-Executive Director Stephen Clarke Non-Executive Director John Lister Non-Executive Director Susan Mclnnes Chief Executive Officer Jonathan Pears Phoenix Group Chief Risk Officer Stephen Percival Finance Director Nicholas Poyntz-Wright Non-Executive Director Rakesh Thakrar Phoenix Group Deputy Finance Director Michael Urmston Non-Executive Director and Chair

Company secretary Pearl Group Secretariat Services Limited

Registered office Standard Life House 30 Lothian Road Edinburgh EH12DH

Registered number SC286833

Independent Auditors Ernst & Young LLP Bridgewater Place, 1 Water Lane Holbeck Leeds LS11 5QR

1 Standard Life Assurance Limited

Strategic report

The Directors present the strategic report, their report and the audited financial statements of Standard Life Assurance Limited (the Company) for the year ended 31 December 2019.

The financial statements of the Company for the year ended 31 December 2019 have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs) and applied in accordance with the Companies Act 2006.

Business review

Principal activities The principal activities of the Company are the provision of life assurance and pension products in the UK. The Company places customers at the heart of what it does and is committed to delivering a high level of customer service. The Company remains focused on delivering profits to support the cash generation policy of the Phoenix Group Holdings pic (Phoenix Group). During the year, the Company transferred its branches in Ireland, Germany and Austria to Standard Life International Designated Activity Company (SL Inti), a fellow Phoenix Group subsidiary, with the Irish and German with-profits business reinsured back to the Company.

The Company operates through three business channels: UK Open: this channel is comprised of the Company's Open Retail business, where the relationship is either directly with the customer or their financial adviser, and the Workplace business, where the pensions and savings products are provided to employees through their employers. Open products are actively marketed to new and existing customers. UK Heritage: this channel is comprised of the Company’s Heritage Retail book which includes older fee based business that was predominantly written before demutualisation and spread/risk products, such as annuities and protection, which provide a sustained contribution to the Company’s profit. Heritage products are not actively marketed to customers. Europe: this channel includes Irish, German and Austrian business reinsured to the Company from SL Inti.

Strategy The Company is a member of the Phoenix Group. The Phoenix Group is the largest specialist consolidator of heritage life assurance funds in Europe. The main focus has traditionally been on closed life fund consolidation, and the Group specialises in the acquisition and management of closed life insurance and pension funds. Alongside this, the Group has open business which manufactures and underwrites new products and policies to support people saving for their futures. Phoenix Group’s vision is to be Europe’s Leading Life Consolidator, and its mission is to improve outcomes for customers and deliver value for shareholders. The Company conducts the majority of the Phoenix Group’s Open business which manufactures and underwrites new products and policies to support people saving for their future in areas such as workplace pensions and self-invested personal pensions. This Open business is supported by the strategic partnership with Standard Life Aberdeen pic (SLA).

The Company operates under the governance and risk management frameworks of the Phoenix Group. The Company, Phoenix Life Limited and Phoenix Life Assurance Limited (together the Life Companies) operate joint Boards of Directors, Audit Committees and Risk Committees, which operate under the Phoenix Group’s frameworks whilst having responsibility delegated to them for oversight of policies and activities that only impact the Life Companies.

Corporate activity Following the acquisition of the Company by Phoenix Group on 31 August 2018 a transition programme was launched. During 2019, the Company has played its role in this program which is progressing towards delivering the combined Phoenix Group’s end state operating model.

On 29 March 2019, as part of preparations for Brexit and in order to maintain continuity of service to European customers, all of the long-term business and the assets and liabilities of the Irish, German and Austrian branches of the Company were transferred to SL Inti in accordance with the terms of a scheme under Part VII of the Financial Services and Markets Act 2000 (Part VII transfer) approved by the Court of Session on 19 March 2019. As part of the Part VII transfer the Company entered into reinsurance and retrocession arrangements with SL Inti, under which Irish and German with-profits business was reinsured back to the Company and the European customers retained access to other insurers fund offerings through the retrocession agreement with the Company. Prior to the Part VII transfer, the sale of SL Inti to Phoenix Group was agreed. Further details of the Part VII transfer are included in note 3.

On 12 November 2019, Phoenix Group confirmed an enlarged partnership with leading technology and service provider TCS, to drive the Company’s growth plans for its open book workplace business and meet the future needs of its workplace clients, customers and their advisers. The enlarged partnership will build on the strong innovation and customer service excellence to which the partners are committed, and enable further digital and technology capabilities to be developed.

With effect from 1 January 2020, the Company has entered into a Master Services Agreement (MSA) which sets out the basis on which management services will be provided and charges made from Standard Life Assets and Employee Services Limited (SLAESL) to the Company. The change in expense assumptions on the implementation of the MSA has resulted in an increase in insurance contract liabilities of £77m.

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Key performance indicators The Company’s performance is measured and monitored by the Board with particular regard paid for the following key performance indicators (KPIs):

Capital resources The Company’s solvency position is an important measure of financial strength. As at 31 December 2019 the Company’s Solvency II Own Funds (unaudited) and excess of own funds over solvency capital requirement (unaudited) were £4,4bn and £1.9bn respectively (2018: £4.2bn and £1.7bn).

Shareholders’ equity Total shareholders’ equity reduced by £453m to £1,044m (2018: £1,497m), largely due to the payment of dividends to Phoenix Group Holdings pic totalling £480m. Total comprehensive income in 2019 amounted to £35m (2018: £460m).

Operating profit Operating profit is one of the key performance indicators used by the Company’s Directors and executive management to explain the financial performance of the Company. This measure incorporates an expected return, including a longer term return on financial investments backing shareholder and policyholder funds over the period, with consistent allowance for the corresponding expected movements in liabilities. Operating profit excludes impacts arising from short-term economic volatility and other one-off items which, due to their size or nature, are not indicative of long-term operating performance.

This non-GAAP measure provides a more representative view of the Company’s performance than the IFRS result after tax as it provides long-term performance information unaffected by short-term economic volatility and one-off items, and is stated net of policyholder finance charges and tax. It helps give stakeholders a better understanding of the underlying performance of the Company by identifying and analysing non-operating items.

Operating profit before tax decreased by £64m to £314m (2018: £378m). Operating profit included a benefit from non-economic assumption changes of £50m (2018: £101m), primarily relating to longevity assumption changes. The reduction in the benefit from longevity assumption changes is the main reason for the reduction in operating profit in the year.

IFRS profit for the year reduced from £519m to £50m. Investment return variances and economic assumption changes decreased by £338m to a loss of £226m (2018: £112m profit), due to a decrease in the fair value of derivatives held to protect against reductions in equity markets, 2018 having seen an increase when equity markets fell. Other income and expenses decreased by £216m to a loss of £65m (2018: £115m profit), including the one-off impact of a £77m increase to IFRS insurance contract liabilities from the impact of expense assumption changes following the Company entering in to the MSA for the provision of services from SLAESL. 2018 included a one-off benefit of £133m arising from the transfer of the Company to Phoenix Group. Further information is provided in note 4 of the financial statements where operating profit for the Company is reconciled to IFRS profit for the year.

Net flows Gross inflows represent funds received from customers. Gross outflows is the money withdrawn by customers during the year, including annuity payments. Net inflows in the UK Open book of £1.7bn were £2.0bn lower than the £3.7bn in 2018. Inflows were lower across the UK Platform market in 2019. 03 market data showed brand new Platform sales were the lowest level since 04 2012. UK Heritage saw reduced net outflows of £3.6bn (2018: £3.7bn). Following the Part VII transfer of European business the Company’s net flows in Europe now reflect only business reinsured from SL Inti and this is seen in the 2019 net outflows of £0.2bn (2018: £16m net inflow).

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Directors duties continued

Area of consideration Demonstrating this in practice Reputation for high Being regulated by both the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) (together, standard of business the Regulators), the Life Companies have strict rules and guidelines which must be adhered to regarding conduct, conduct ethics and responsibilities. The Senior Managers and Certification Regime, which clearly documents those individuals within the business who are decision makers, requires that there is an annual review of their fitness and propriety.

The Regulators receive regular board reporting and minutes of meetings so that they can oversee the activity of the Life Company Boards. In addition, they conduct a series of meetings with the Directors and senior individuals throughout the year in order to enquire as to the conduct of the business.

Each year, the Regulators will issue letters (Firm Evaluation Meeting Letter from the FCA and a Periodic Summary Meeting Letter from the PRA) which highlight those areas of focus within the industry - to include those which may be Company specific - for which the Board monitor input and progress against any required actions.

Acting fairly between Whilst not having external shareholders, the Life Company Boards are required to link in with the activity of the members of the Phoenix Group Board, their ultimate shareholder on matters such as strategic direction and financial performance. Company The activities of the Life Company Audit and Risk Committees and Life Company Boards are regularly included in reporting to the Phoenix Group Board. The Phoenix Group Chief Executive and Phoenix Group Finance Director, on at least a quarterly basis, provide an update to the Life Company Boards on Phoenix Group matters.

Any matters requiring escalation to the relevant shareholder for each Life Company Board, and or the Phoenix Group Board are appropriately managed. For example, changes in Articles of Association, submission of Financial Accounts and Annual Incentive Plan Measures.

Enhancing our Risk Management Framework The Company adopts the Phoenix Group’s Risk Management Framework (RMF). The Phoenix Group’s RMF embeds proactive and effective risk management. It seeks to ensure that risks are identified and managed effectively and that the Phoenix Group is appropriately rewarded for the risks it takes. Over 2019 the Group has completed work to design and implement a combined framework for the enlarged Group following the acquisition of the Company. This takes the best of the legacy-SLAL and legacy-Phoenix frameworks and is designed to be appropriate for the risk profile of the enlarged Group. The nine components of the harmonised RMF are illustrated in the diagram below. Further details on each component are outlined in the Strategic Report of the Phoenix Group’s Annual Report and Accounts 2019.

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Principal risks and uncertainties From the perspective of the Company, its principal risks and uncertainties are integrated with the principal risks of the Phoenix Group. All 11 Phoenix Group principal risks are relevant to the Company and are outlined in the sections that follow.

During 2019, for the purposes of managing risks of the Company, including those impacting the Company’s financial assets and financial liabilities, the Company considered the following Risk Universe categories: Financial Soundness; Market; Insurance; Credit; Customer; Operational; and Strategic. Sources of these risks, and an explanation of actions taken to manage risk exposures during the year, are outlined in note 38.

At Phoenix Group level, following a review of principal risks, the number of principal risks has increased from ten to eleven with 'Climate Change and wider ESG risk’ moving from an emerging risk to a principal risk. This is due to the increasing understanding of the potential risks associated with the transition to a low carbon economy and longer-term financial risks.

The Company has contingency plans in place to ensure that the Company and its subsidiaries have access to sufficient funding to meet operating requirements.

Strategic risk

1. The Phoenix Group, including the Company, fails to ensure that its propositions continue to meet the evolving needs of customers and clients

Impact Mitigation Events in the year The Phoenix Group’s ability to deliver growth Our propositions are designed and The Company continues to progress assumed in business plans could be developed with our customers and clients propositional enhancements, in adversely impacted if our propositions fail to at the heart. particular across our Workplace meet the needs of customers and clients. We actively review and invest in our business. In October 2019 the The risk could materialise through increased propositions to ensure they remain Company launched a new passive outflows or reduced new business levels. competitive and meet expectations. investment solution for Workplace. We also regularly seek customer feedback The Company continues to invest in on our propositions, using this to inform its digital proposition in line with its future developments. importance in delivering its strategy; most recently through the announcement of an enhanced strategic partnership with Tata Consultancy Services (TCS) to increase the Phoenix Group’s digital and technology capabilities. This aims to build on the strong innovation and customer service excellence to which the Company committed.

2. The Phoenix Group’s Strategic Partnerships fail to deliver the expected benefits

Impact Mitigation Events in the year Our strategic partnerships are a core enabler The Joint Operating Forum (‘JOF’) between CSPA and TSA arrangements for delivery of the Phoenix Group’s strategy; SLA and Phoenix Group continues to develop continue to operate between they allow us to meet the needs of our the partnership with SLA in existing areas, Phoenix (including the Company) customers and clients, and deliver value for and identifying areas for future growth and and SLA. While the Phoenix our shareholders. The Phoenix Group’s end partnership, for the benefit of customers and Group’s pre-existing, functional state operating model will leverage the shareholders of each Group. relationship with TCS and its strengths of our strategic partners whilst The JOF also oversees the operation of the subsidiary - Diligenta - remains retaining in-house key skills which differentiate Client Service and Proposition Agreement strong and both parties have us. There is a risk that the Phoenix Group’s (CSPA), ensuring that each of the parties to significant experience working strategic partnerships do not deliver the the CSPA is performing against their CSPA together, there is a heightened expected benefits. obligations. risk around the increased dependency that the Phoenix The Strategic Partnership with SLA is The Transition Services Agreement (TSA) expected to provide additional growth Oversight Committee between SLA and Group and the Company now place on our partnerships, opportunities through our Open business Phoenix Group oversees TSA performance particularly TCS, to enable within the Company. In addition, SLA provides and activity to exit the TSAs in future. investment management services to around successful delivery of the Phoenix The Phoenix Group’s engagement with two thirds of our assets under administration Group’s, and the Company’s Diligenta, and its parent company TCS, strategy. across the Phoenix Group. adheres to a rigorous governance structure, Our recently enlarged partnership with TCS is in line with the Group’s Supplier Management also expected to support growth plans for our Model. As a result, productive and consistent Workplace business in the Company, enabling relationships have been developed with TCS, further digital and technology capabilities to be which will continue to develop throughout developed to support enhanced customer future phases of our enlarged partnership. outcomes.

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Strategic report continued

Principal risks and uncertainties continued

Strategic risk continued

3. The Phoenix Group fails to make further value adding acquisitions or effectively transition acquired businesses

Impact Mitigation Events in the year The Phoenix Group is exposed to the risk of The Phoenix Group applies a clear set of The execution of the Company’s failing to drive value through inorganic growth criteria to assess inorganic opportunities. transition into the Phoenix Group opportunities. This includes acquisitions of life Our acquisition strategy is supported by the is progressing well and remains and pensions books of business and further Phoenix Group’s financial strength and on track to deliver the Phoenix investment in the Bulk Purchase Annuity flexibility, its strong regulatory relationships Group’s synergy targets. (‘BPA’) market. and its track record of managing customer In December, Phoenix announced The transition of acquired businesses into the outcomes and generating value. its proposed acquisition of Phoenix Group could introduce structural or The financial and operational risks of target ReAssure Group pic; this brings operational challenges that result in Phoenix businesses are assessed in the acquisition additional scale to Phoenix’s Group, and the Company, failing to deliver the phase and potential mitigating actions are Heritage business and enhances expected outcomes for customers or value for identified. our key attributes of cash generation, resilience and growth. shareholders. Integration plans are developed and This transaction meets all of our resourced with appropriately skilled staff to acquisition criteria: it is value ensure target operating models are delivered accretive; it supports our in line with expectations. dividend; and, it is consistent with Our Corporate Development team continues maintenance of our investment to assess new Merger and Acquisition and grade rating. BPA opportunities. The Phoenix Group continues to actively manage operational capacity required to deliver our strategy; this includes capacity to complete transition activity. A Life Company operational capacity dashboard is regularly reviewed by both Life and Phoenix Group Boards.

4. The Phoenix Group, including the Company, fails to appropriately prepare for and manage the effects arising from Climate Change and wider ESG risks

Impact Mitigation Events in the year Phoenix is exposed to market risks related to The management of ESG risks has been This risk has moved from an climate change as a result of the potential embedded within the Phoenix Group’s emerging risk to a principal risk at implications of a transition to a low carbon harmonised RMF. The existing set of Group the Phoenix Group level. This is economy. Risk Policies has been enhanced through the due to the increasing In addition there are long-term market, addition of a Group Sustainability Risk Policy understanding of the potential insurance, reputational, propositional and which incorporates all material ESG risks for risks associated with the transition operational implications of physical risks the Phoenix Group, including climate change. to a low carbon economy and resulting from climate change (e.g. the impact The Phoenix Group continues to engage with longer-term financial risks. This of physical risks on the prospects of current regulators on deliverables regarding climate also presents a risk for the and future investment holdings, along with change and ESG risk. We continue to work Company. potential impacts on future actuarial with the PRA on evidencing mitigants in line assumptions). with the requirements outlined in PRA The Phoenix Group is also exposed to the risk Supervisory Statement 3/19. of failing to respond to wider Environmental, The Phoenix Group has appointed a Head of Social and Governance (ESG) risks; for Sustainability who reports directly into the example failing to meet our corporate and Phoenix Group CEO. social responsibility commitments. This can result in reputational damage and lead to a reduction in earnings or value.

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Strategic report continued

Principal risks and uncertainties continued

Customer risk

5. The Phoenix Group, including the Company, fails to deliver fair outcomes for its customers

Impact Mitigation Events in the year The Phoenix Group is exposed to the The Phoenix Group’s Conduct Risk Appetite which As part of the RMF harmonisation risk that it fails to deliver fair outcomes sets the boundaries within which the Phoenix an enhanced Conduct Risk for its customers, leading to adverse Group expect customer outcomes to be managed. Framework is being rolled out customer experience and/or potential This consists of a set of principles and standards across the Phoenix Group. The detriment. for all Phoenix Group staff to follow to meet the Conduct Risk Framework This could also lead to reputational ever changing needs of its customers and our provides a mechanism for damage for the Phoenix Group and/or business. enhanced oversight of customer financial losses. The Phoenix Group Conduct Risk Framework outcomes across the Phoenix (CRF), which overarches the Company’s Risk Group. Universe and all risk policies, is designed to detect The Company’s remediation where the Company’s customers are at risk of poor programme for customers outcome, minimise conduct risks, and respond with affected by the outcome of the timely and appropriate mitigating actions. FCA’s industry-wide annuity The Phoenix Group also has a suite of customer review is now substantially polices which set out the key customer risks and complete. minimum control standards in place to mitigate Over the year, two external asset them. managers (Woodford and M&G) The Phoenix Group maintains a strong and open suspended funds that some of the relationship with the FCA and other regulators, Phoenix Group’s customers particularly on matters involving customer invest in through its products. The outcomes. Company has a small exposure to these funds both in terms of assets and customer numbers. As part of the suspensions the Company has followed its standard fund deferral process.

Operational Risk

6. The Phoenix Group, including the Company, is impacted by significant changes in the regulatory, legislative or political environment

Impact Mitigation Events in the year Changes in regulation could increase The Phoenix Group actively engages with Whilst there still remains the Phoenix Group’s costs, impact regulators and governments in order to understand uncertainty around the outcome of profitability or reduce demand for our potential changes in the regulatory and legislative Brexit negotiations, the Company propositions. landscape. took action in March 2019, Changes in legislation, such as the The Phoenix Group assesses the risks and benefits through a Part VII transfer, to implications of Brexit, can also impact of regulatory and legislative changes to its protect the interests of its non-UK the Phoenix Group’s operations or customers and to the Phoenix Group and actively European customers in the event financial position. engages with regulators and governments as of a ‘No Deal’ Brexit. The Part VII transfer involved transferring Political uncertainty or changes in the appropriate. customers from the Company’s government could see changes in policy The Phoenix Group has contingency plans in European branches to SL Inti. that could impact the industry in which place to ensure it can continue to service non-UK the Company operates. policyholders after the UK leaves the EU. The Phoenix Group, including the Company, are well prepared for operational impacts as a result of potential Brexit outcomes and political changes. While the industry is susceptible to new regulatory deliverables, the Phoenix Group, and the Company, continually reviews the PRA and FCA 2019/2020 business plan and there are currently no large, unexpected changes that the Phoenix Group, and the Company, has to manage. Standard Life Assurance Limited

Strategic report continued

Principal risks and uncertainties continued

Operational Risk continued

7. The Phoenix Group, including the Company, fails to retain or attract a diverse and engaged workforce with the skills needed to deliver its strategy

Impact Mitigation Events in the year Delivery of the Phoenix Group’s strategy is Timely communications to the Company’s people Organisational changes from across dependent on a talented and engaged aim to provide clarity around corporate activities. the Phoenix Group as a result of the workforce. Communications include details of key milestones Company’s transition continue to Periods of uncertainty can result in a loss of to deliver against its plans. progress as planned. critical corporate knowledge, unplanned Terms and conditions are regularly benchmarked Activity is underway to monitor departures of key individuals or the failure against the market. colleague engagement and protect to attract individuals with the appropriate Succession plans are maintained and reviewed for customer service and IT operations skills to help deliver our strategy. key individuals. following the announcement of the enlarged partnership with TCS. This risk is inherent in the Phoenix Group’s The Phoenix Group continues to actively manage business model given the nature of its operational capacity required to deliver its strategy. acquisition activity. Potential areas of This is particularly pertinent across the Life uncertainty include the transition of the Companies given the increasing demands on our Company’s business into the Phoenix workforce in this part of the business. A Life Group; the recently expanded strategic Company operational capacity dashboard is partnership with TCS; and, the proposed regularly reviewed by both Life and Phoenix Group acquisition of ReAssure Group pic. Boards.

8. The Phoenix Group, including the Company, or its outsourcers are not sufficiently operationally resilient

Impact Mitigation Events in the year The Phoenix Group is exposed to the The Phoenix Group has a business continuity Outsourcer service delivery levels risk of being unable to maintain provision management framework that is subject to annual remain good against a backdrop of of services in the event of major refresh and regular testing. heightened change activity across the operational disruption, either within its Following the Regulators’ December 2019 update Phoenix Group. own organisation or those of on Operational Resilience, the Phoenix Group is The Phoenix Group’s reverse stress outsourcers. working to ensure that it will be inside disruption testing and recovery planning The Phoenix Group now relies on a wide tolerances within 3 years of the publication of final processes demonstrate the Phoenix range of IT systems, including those we guidelines. Group is resilient to specific, Board provide to SLA through the terms of the The Phoenix Group operates an oversight approved, scenarios. acquisition of the Company. In addition, framework to ensure that its outsource partners Whilst cyber-attacks show no sign of the Phoenix Group is increasing its use and critical suppliers adhere to the same business decreasing in volume and of online functionality to meet customer continuity principles. The Phoenix Group continues sophistication, Phoenix Group preferences. This exposes the Company to utilise cyber security tools and capabilities in continues to adapt its approach in to the risk of failure of Regulators order to mitigate information security and cyber order to keep up to date with the latest expectations of the speed and risk. threats. effectiveness of firms’ responses as A specialist Information Security and Cyber Risk business resilience incidents are Assurance team also provides independent increasing. oversight and challenge of IT and Information Security controls; identifying trends, internal and external threats and advising on appropriate mitigation solutions.

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Strategic report continued

Principal risks and uncertainties continued

Market risk

9. Adverse market movements can impact the Phoenix Group, and the Company’s, ability to meet its cash flow targets, along with the potential to negatively impact customer sentiment

Impact Mitigation Events in the year The Phoenix Group and its customers The Phoenix Group undertakes regular monitoring The UK General Election result in are exposed to the implications of activities in relation to market risk exposure, December provided greater adverse market movements. This can including limits in each asset class, cash flow political certainty, however, the impact the Phoenix Group’s capital, forecasting and stress and scenario testing. The potential for adverse market risk solvency and liquidity position, fees Phoenix Group, and the Company, continues to remains due to prospective earned on assets held, the certainty and implement de-risking strategies to mitigate against outcomes of Brexit negotiations timing of future cash flows and long­ unwanted customer and shareholder outcomes and geopolitical tensions. term investment performance for from certain market movements such as equities Markets have recently stabilised; shareholders and customers. and interest rates. The Phoenix Group also whilst yields have recovered, they There are a number of drivers for maintains cash buffers in its holding companies and remain at low levels. The market movements including has access to a credit facility to reduce reliance on Company continues to take government and central bank policies, emerging cash flows. management actions to provide geopolitical events, market sentiment, The Phoenix Group, and the Company’s excess resilience against unanticipated sector specific sentiment and financial capital position continues to be closely monitored market movements arising from risks of climate change including risks and managed, particularly in the low interest ongoing political and Brexit from the transition to a low carbon environment and any potential impact on financial uncertainty. economy. markets as a result of Brexit uncertainty. As part of the Company’s business planning process we stress our balance sheet to ensure it remains resilient to market movements; contingency actions are available to help us manage markets risks, e.g. as a result of Brexit or global economic downturn.

Insurance risk

10. The Phoenix Group, including the Company, may be exposed to adverse demographic experience which is out of line with expectations

Commentary related to the Impact Mitigation Company since 2018 The Phoenix Group, including the The Phoenix Group undertakes regular reviews Whilst the low yield environment Company, has guaranteed liabilities, of experience and annuitant survival checks to and market volatility continues to annuities and other policies that identify any trends or variances in assumptions. impact longevity and persistency are sensitive to future longevity, The Phoenix Group regularly reviews assumptions risk exposures, we are persistency and mortality rates. For to reflect the continued trend of reductions in future comfortable with current example, if annuity policyholders live for mortality improvements exposures across the Company when considered against board longer than expected, then the Phoenix The Phoenix Group continues to actively manage approved risk appetites. Group, including the Company, will its longevity risk exposures, which includes the use need to pay their benefits for longer. of reinsurance contracts to maintain this risk within The amount of additional capital appetite. required to meet additional liabilities The Phoenix Group actively monitors persistency could have a material adverse impact risk metrics and exposures against appetite across on the Phoenix Group, and the the open and heritage businesses. Company’s ability to meet its cash flow targets.

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Principal risks and uncertainties continued

Credit risk

11. The Phoenix Group, including the Company, is exposed to the failure of a significant counterparty

Commentary related to the Impact Mitigation Company since 2018 The Company is exposed to The Phoenix Group regularly monitors its Investment counterparty deterioration in the actual or perceived counterparty exposures and has specific limits exposures continue to be creditworthiness or default of relating to individual exposures, counterparty credit managed and monitored across investment, reinsurance or banking rating, sector and geography. the Phoenix Group (including the counterparties. This could cause Where possible, exposures are diversified through Company) and remain within immediate financial loss or a reduction the use of a range of counterparty providers. All board approved risk appetites. in future profits. material reinsurance and derivative positions An increase in credit spreads are appropriately collateralised. (particularly if accompanied by a higher For mitigation of risks associated with stocklending, level of actual or expected issuer additional protection is provided through indemnity defaults) could adversely impact the insurance. value of the Phoenix Group’s assets. The Phoenix Group is also exposed to trading counterparties, such as reinsurers or service providers failing to meet all or part of their obligations.

Environmental matters and social and community issues The Company’s sustainability strategy covers four key priorities, which are outlined below, and enables it to manage ESG risks and opportunities. This helps the Company make a positive contribution to the futures of its people, customers and clients, and wider society.

Priority Description Responsible business - to operate ethically and This is the core of how the Company runs its business and builds a with integrity positive culture. It aims to operate in a way that builds trust, to contribute to our communities and to manage its environmental impact. Engaging employment - to provide inclusive and The Company wants to provide inclusive and engaging employment to meaningful employment the staff of the Phoenix Group, encourage collaboration, and enable its people to reach their potential. Supporting saving - to help people manage their The Company provides support and expertise to enable people to money to support their lives and future ambitions manage their money and save for their future. Investing responsibly - to are a responsible The Company’s approach to responsible investment and stewardship investor and a steward of our clients’ investments considers investments as a tool to promote positive change.

On behalf of the Board of Directors

Kerry McDermott For and on behalf of Pearl Group Secretariat Services Limited Company Secretary 4 March 2020

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Directors’ report

The Company is an insurance company incorporated in Scotland (registration number SC286833) and is a wholly owned subsidiary of the Phoenix Group Holdings pic.

Corporate governance The Company’s ultimate parent, Phoenix Group Holdings pic is listed on the UK’s main market, and accordingly applies the UK Corporate Governance Code (the Code).

In 2016, the PRA set out principles as to how a ‘PRA-regulated firm’ such as the Company should govern itself when it is not a listed company and is, therefore, not within the remit of the Code. Within the requirements expected, such firms should focus on eleven aspects of governance, many of which echo the framework provided by the Code.

The Company has established a governance framework which ensures the ability for the Board to adhere to and demonstrate compliance with all eleven aspects of governance as noted below. This is reviewed and challenged by the Board on at least an annual basis with evidence focusing on the following:

Aspect of GovernanceDemonstrated by Setting Strategy An annual strategy review is held in June for the Board to debate and challenge the strategy for the Company and provide input to the overall Phoenix Group strategy debate.

A more refined view, with an associated annual operating plan is created for review and approval by the end of each year which maps out the ongoing strategic direction for the following 12 months and up to 5 years thereafter.

Board agendas are prepared so as to ensure that strategic items have sufficient time for review and challenge.

Culture of risk awareness On an annual basis, the Board approves a series of risk appetite statements for articulation and ethical behaviour throughout the Company.

In respect of remuneration, the Non-Executive Directors input into the proposed objectives and performance ratings for the executive management team of the Company, as well their respective salary and remuneration packages. This ensures that these objectives promote an effective culture of risk awareness and ethical behaviour.

Risk appetite, risk As noted above, the risk appetite statements are approved by the Board. Oversight of risks, risk management and internal management and internal controls is delegated to both the Board Audit Committee and Board controls Risk Committee in line with their Terms of Reference.

Both the Head of Internal Audit and Chief Risk Officer have access to the Chairman of the Board and the Audit Committee to raise any concerns directly. In addition, the Chief Risk Officer has direct access to the Chair of the Risk Committee.

The operation of a three lines of defence model within the Company ensures that there is appropriate oversight, not only from the individual business unit but also from the Risk function providing risk oversight independent of management and the Internal Audit function providing independent verification of the adequacy and effectiveness of the internal controls and risk management processes in operation.

Board composition A majority of the Directors appointed to the Board are independent Non-Executives. There are currently five Non-Executive Directors and four Executive Directors.

The Chairman of the Board is an independent Non-Executive Director.

From a governance perspective, there are no cross directorships between the Company and its ultimate parent, Phoenix Group Holdings pic.

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Corporate governance continued

Aspect of Governance Demonstrated by Role of Executive and All appointment letters and associated role profiles for Non-Executive Directors specify the Non-Executive Directors requirements of the role to include constructive challenge, scrutiny of management information and the integrity of financial information.

The 'Matters Reserved’ for the Board of the Company specify those activities for which the Board has retained approval with agendas for each meeting reminding all Directors of their responsibilities under section 172 of the Companies Act 2006.

Board meetings, as evidenced through the Board minutes produced, are an open forum for Directors to be robust and challenge the proposals presented.

Having a clear organisational structure allows for areas not covered by the Matters Reserved and for which fall into the day to day management of the Company can be appropriately delegated through a structure of approved Delegations of Authority.

Knowledge and The experience of the Non-Executive Directors is wide across the life insurance industry and all experience of Non- received a comprehensive induction on the business of the Company. Executive Directors The Board are provided with regular education sessions. Themes vary but have included Director responsibilities under the Senior Managers and Certification Regime, Company specific activity such as vulnerable customers, to workshops where there is a focus on ‘Black Swan’ events ('unknown unknown’ events that could significantly hinder the Company’s performance).

Board time and resource The Board have met at least 8 times in 2019 for scheduled meetings of at least 3 hours in length.

Any additional commitments that the Non-Executive Directors are considering are reviewed by the Board in advance during which time it is confirmed that the time commitment required will not impact their availability for Company matters.

Management information The Chief Executive presents an update on the Company at each meeting to include an overview (Ml) and transparency of the KPIs for the business.

Information packs on customer treatment, customer complaints and financial management information are also included.

Of note in 2019 the Board now review and consider the Company’s ‘Operational Capacity’ which allows Directors to more appropriately challenge the availability of resource for additional strategic projects and existing change activity.

Succession planning Succession planning matters are reviewed at least annually by the Company’s Nomination Committee and Boards.

Remuneration Whilst the remuneration of executives is a matter for the Board of Phoenix Group and, specifically, the Phoenix Group Board’s Remuneration Committee, the Non-Executive Directors are provided with the information necessary to enable them to oversee the design and operation of the remuneration arrangements for members of the Company's management team.

Board Committees The terms of reference of the committees of the Boards of the regulated Life Companies document the duties of the committees. Any matter which cannot be properly dealt with by the committee concerned or needs to be escalated is submitted to the Board for consideration.

13 Standard Life Assurance Limited

Directors’ report continued

Results and dividend The Company recorded a profit after tax attributable to shareholders of £50m (2018: £483m) which has been transferred to retained earnings. The Directors have not recommended the payment of a final dividend in respect of 2019 (2018: £nil). On 12 April and 22 November 2019 the Company made cash distributions of £132m and £348m, respectively (2018: £312 cash distribution and £378m distribution in specie).

Directors The names of the current Directors are listed on page 1. The changes to Directors during the period were as follows: Richard Houghton (resigned 31 December 2019) Diana Miller (resigned 31 December 2019)

The appointment of Andy Moss as a director has been approved by the Board and is awaiting regulatory approval.

The Non-Executive Directors have been appointed for an initial term of 3 years and are not subject to retirement by rotation.

Company Secretary Pearl Group Secretariat Services Limited acted as Company Secretary throughout the period.

Directors’ and Officers’ liability insurance The Company maintains Directors' and Officers' liability insurance cover which is renewed annually.

Our people The staff who manage the affairs of the Company are employed by SLAESL and during 2019 their costs were recharged to the Company. Prior to the acquisition of the Company by the Phoenix Group in 2018, staff were employed by Standard Life Employee Services Limited (SLESL) which is a subsidiary of SLA. The employees were transferred to SLAESL in September 2018. From 1 January 2020, the employee costs will be met by SLAESL and the Company will pay a variety of per policy charges to SLAESL in relation to policy administration, rather than being recharged the costs directly.

The Company takes pride in the high achieving, diverse and healthy working environment it has created, where all employees are valued, empowered and treated as individuals. It treats those with disabilities fairly in relation to job applications, training, promotion and career development. Adjustments are made to train and enable employees who become disabled whilst working on behalf of the Company to allow them to continue and progress in their role.

The Company is committed to an equal opportunities policy. The sole criterion for selection or promotion is the suitability of any applicant for the job regardless of ethnic origin, religion, sex, marital status or disability.

The Company is committed to engaging with employee representatives on a broad range of issues, including consultation on any major business change. The Company has a Partnership Agreement with VIVO, the Standard Life Staff Association, which outlines how the Company and VIVO will work on shared objectives including employment security, terms and conditions, equality and diversity and health and safety.

The Company also uses its intranet to communicate with staff on matters which may concern them as employees of the Phoenix Group and to ensure that employees are fully aware of any financial and economic factors which may affect the performance of the Company. All employees are encouraged to participate in the Phoenix Group share schemes.

Disclosure of information to Auditors The Directors who held office at the date of approval of this Directors’ Report confirm that, so far as they are aware, there is no relevant audit information of which the Company’s auditor is unaware and that each Director has taken all the steps that they ought to have taken as a Director to make themselves aware of any relevant audit information and to establish that the Company’s auditor is aware of that information.

During 2019, EY reported a breach of the rules of the FRC Ethical Standard to the Audit Committee. The breach occurred as a result of the provision of prohibited tax services by EY to Aberdeen Standard Investments (‘AST) legal entities, where the benefit of those services arose in ASI managed funds that are controlled by Standard Life. In considering these matters, the Audit Committee concluded that the independence of EY was not impaired. Further details are provided in the EY opinion on the financial statements on pages 17 to 24.

In light of the above, the Audit Committee is satisfied that the non-audit services performed during 2019 have not impaired the independence of EY in its role as external auditor.

14 Standard Life Assurance Limited

Directors’ report continued

Re-appointment of the Auditors In accordance with section 487 of the Companies Act 2006, the Company’s Auditor, Ernst & Young LLP ('EY’) will be deemed to have been re-appointed at the end of the period of 28 days following circulation of copies of these financial statements as no notice has been received from members pursuant to section 488 of the Companies Act 2006 prior to the end of the accounting reference period to which these financial statements relate.

The Director’s report was approved by the Board of Directors and signed on its behalf by

Kerry McDermott For and on behalf of Pearl Group Secretariat Services Limited Company Secretary 4 March 2020

15 Standard Life Assurance Limited

Statement of Directors’ responsibilities

The Directors are responsible for the preparation of the Strategic report, the Directors’ report and the Company’s financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Linder that law the Directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU). The Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.

In preparing these financial statements, the Directors are required to:

• select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • state whether IFRSs, as adopted by the EU; have been followed, subject to any material departure disclosed and explained in the Company financial statements; • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose, with reasonable accuracy at any time, the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are responsible for safeguard the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

16 Standard Life Assurance Limited

Independent Auditors’ report to the members of Standard Life Assurance Limited

Opinion We have audited the financial statements of Standard Life Assurance Limited for the year ended 31 December 2019 which comprise, the Statement of comprehensive income, the Statement of financial position, the Statement of changes in equity, the Statement of cash flows, and the related notes 1 to 46, (except for that element of note 38(cii), which is marked as unaudited) including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

In our opinion, the financial statements: • give a true and fair view of the company’s affairs as at 31 December 2019 and of its profit for the year then ended; • have been properly prepared in accordance with IFRSs as adopted by the European Union; and • have been prepared in accordance with the requirements of the Companies Act 2006.

Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report below. We are independent of the company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Conclusions relating to going concern We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where: • the directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or • the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue.

Overview of our audit approach Key audit matters Valuation of Insurance Contract Liabilities, comprising the following risk areas: Actuarial assumptions; Actuarial modelling; and Policyholderdata. Valuation of fair value hierarchy 3 (‘FVH3’) debt securities in ‘shareholder’ funds. Accounting for the Brexit-related transactions. Materiality Overall materiality of £21m which represents 2% of Net Assets.

Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in our opinion thereon, and we do not provide a separate opinion on these matters.

Valuation of insurance contract liabilities 2019: £29.0 billion. 2018: £28.8 billion. Refer to the Critical accounting estimates (page 31); Accounting policies 1(x), 1(y) and 1(z) and note 29 of the financial statements.

We considered the valuation of insurance contract liabilities to be a significant risk for the company. Specifically, we considered the actuarial assumptions and modelling that are applied, as these involve complex and significant judgements about future events, both internal and external to the business for which small changes can result in a material impact to the resultant valuation. Additionally, the valuation process is conditional upon the accuracy and completeness of the data. We have split the risks relating to the valuation of insurance contract liabilities into the following component parts: • Actuarial assumptions; • Actuarial modelling; and • Policyholder data.

The specific audit procedures performed to address the significant risk are set out below. In addition, we assessed management’s analysis of movements in insurance contract liabilities and obtained evidence to support large or unexpected movements as this provided important audit evidence over the valuation of insurance contract liabilities.

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Independent Auditors’ report to the members of Standard Life Assurance Limited continued

Key observations communicated Risk Our response to the risk to the Audit Committee Valuation of Insurance Contract To obtain sufficient audit evidence so as to We determined that the actuarial Liabilities conclude on the appropriateness of the assumptions used by Management actuarial assumptions, we have used EY are reasonable based on the analysis Actuarial Assumptions actuaries as part of our audit team to of experience to date, industry perform the following procedures: practice, and the financial and Economic assumptions are set by • Obtained an understanding of and regulatory requirements. management taking into account market tested the design and operating conditions at the valuation date. Non­ effectiveness of key controls over We concluded that the economic and economic assumptions such as future management’s process for setting non-economic assumptions have expenses, persistency, and longevity and updating key actuarial been appropriately included within are set based on past experience, assumptions; the year-end actuarial models. market experience, market practice, • Challenged and assessed whether regulations and expectations about the methodology and assumptions future trends. applied were appropriate based on our knowledge of the Company, The assumptions that we consider to industry standards and regulatory have the most significant impact are the and financial reporting base and longevity trend, persistency requirements and expenses. • Reviewed and challenged the results of management’s These assumptions are used as key experience analysis, including base inputs into the valuation models, which longevity and persistency, to use standard actuarial methodologies. assess whether these justified the adopted assumptions; • In respect of longevity improvements we have evaluated the results of management’s analysis on longevity trend and benchmarked the output against other industry participants and the results from the industry standard Continuous Mortality Investigation (‘CMI’) model; • Assessed the expense assumptions adopted by management with reference to the new management service agreement (‘MSA’) between the Company and the group service company; • Benchmarked the demographic and economic assumptions against those of other comparable industry participants; • Performed procedures to test that the assumptions used in the year end valuation were consistent with the approved basis; and • Reviewed and assessed whether the sensitivity disclosures in the financial statements, related to insurance contract liabilities, complied with the applicable financial reporting standards.

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Independent Auditors’ report to the members of Standard Life Assurance Limited continued

Key observations communicated Risk Our response to the risk to the Audit Committee Valuation of Insurance Contract To obtain sufficient audit evidence to We also determined that liabilities Liabilities conclude on the appropriateness of actuarial modelled outside these core actuarial models, including those models that exist modelling systems are reasonable Actuarial Modelling outside of the core actuarial system, we performed the following in conjunction with We consider the integrity and the EY actuaries: appropriateness of models to be critical to the overall valuation of insurance « Obtained an understanding of contract liabilities. management’s process for model change to the core actuarial system Over £27.7 billion of the £29 billion of and tested the design, insurance contract liabilities are implementation and operating modelled using the core actuarial effectiveness of key controls over modelling systems with the residual that process; balance modelled outside these • We stratified the components of the systems to cater for any additional balance modelled outside the core required liabilities not reflected in the actuarial system and focused our models. testing on that those that, in our professional judgement, present a We consider the key risks to relate to i) higher risk of material model developments applied to the core misstatement; actuarial models and ii) the • Reviewed the governance process appropriateness of the calculations that around model changes by review of are applied outside of the core actuarial the relevant committee minutes; model. and • Assessed the results of management’s analysis of movements in insurance contract liabilities to corroborate that the actual impact of changes to models was consistent with that expected when the model change was implemented. Valuation of Insurance Contract To obtain sufficient audit evidence to assess We determined, based on our audit Liabilities the integrity of policyholder data used in the work, that the policy holder data used valuation of insurance contract liabilities we: for the actuarial model inputs is Policyholder Data materially complete and accurate. • Gained an understanding of The insurance contract data held on the management’s process of data policy administration systems ('the extraction and input into the policyholder data’) is a key input into the actuarial models; valuation process. The valuation of • Identified and tested the design insurance contract liabilities is therefore and operating effectiveness of key conditional upon the accuracy and controls over the completeness and completeness of the data used. accuracy of the data transfer; • Assessed the integrity of data used in the valuation process involving: • The reperformance of key reconciliations; • the comparison, on a sample basis, of policy level data between data in the actuarial models and that contained within the policy administration systems; • the use of analytic techniques to interrogate the appropriateness of attributes and year on year trends within the data to be modelled.

19 Standard Life Assurance Limited

Independent Auditors’ report to the members of Standard Life Assurance Limited continued

Key observations communicated Risk Our response to the risk to the Audit Committee Valuation of FVH3 debt securities, To obtain sufficient and appropriate audit Based on the procedures performed held within the shareholder fund evidence regarding the valuation of these we are satisfied that the valuation of (£1.0 billion, 2018: £0.9 billion) financial instruments, we: level 3 debt securities in the non­ profit fund is reasonable. Refer to the Critical accounting • Reviewed the SOC1 report of the estimates (page 31), Accounting outsourcer and concluded on the Policies 1(s); and notes 19 and 40 of design and operating effectiveness the financial statements. of the relevant valuation controls for the period covered by the letter. We have deemed the risk to relate to • Obtained the bridging letter for the FVH3 modelled debt securities where period 1 October to 31 December, the valuation relates to assets in non­ to confirm the controls were profit funds. operating during the period and tested a sample of controls We consider the key risks related to impacting the value of FVH3 assets valuation of FVH3 debt securities to be to confirm they were operating the (i) use of complex valuation effectively; methodologies as opposed to • Engaged EY valuation specialists observable prices; ii) significant to calculate an independent range judgements involved in setting the of reasonable values for each spread above risk-free; iii) and, most sample selected, using an notably, the subjectivity surrounding the independent valuation model and selection of comparable bonds to derive considering reasonable alternate that spread. assumptions; and • Reviewed that disclosures have been made in the financial statements regarding the sensitivity of the valuation of FVH3 debt securities to changes in the key assumptions.

Accounting for the Brexit-related To obtain sufficient, appropriate audit Based on the procedures performed, transactions evidence to conclude on the accounting for we have concluded that the financial the Brexit related transactions we: statements appropriately reflect the Refer to note 3 of the financial values of the various assets and statements. • Reviewed the agreements between liabilities transferred and that the the respective entities in order to associated disclosures are There is a risk that the accounting for understand the basis upon which appropriate. the transactions in relation to Brexit, the transactions have taken place; due to their relative complexity, do not • Challenged the accounting reflect the substance of the underlying treatment adopted, having due agreements. regard to IFRS requirements; • Performed detailed testing to support the value of the net assets transferred from the company as a result of the transactions; and • Reviewed the financial statement disclosures made in respect of the transaction.

In the prior year, we included a key audit matter in relation to the provision for historic annuity sales practices. In the current year, we do not consider this to be a key audit matter as the remediation programme is nearing completion. This means that the subjectivity in the year end provision, and hence risk of mis-statement, is significantly less as at 31 December 2019 compared to 31 December 2018.

In the prior year we included a key audit matter in respect of the valuation of complex and illiquid financial instruments. In the current year we have refined our risk assessment, and this is now addressed in the ‘FVH3 debt securities’ key audit matter described above.

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Independent Auditors’ report to the members of Standard Life Assurance Limited continued

An overview of the scope of our audit

Tailoring the scope Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for the Company. This enables us to form an opinion on the financial statements. We take into account size, risk profile, the organisation of the Company and effectiveness of controls, including controls and changes in the business environment when assessing the level of work to be performed. All audit work was performed directly by the audit engagement team.

Our application of materiality We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in forming our audit opinion.

Materiality The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our audit procedures.

We determined materiality for the Company to be £21 million (2018: £22 million), which was 2% (2018: 2%) of net assets. The primary stakeholders of the Company are its shareholders (primarily concerned with capital surplus), and Prudential Regulation Authority (‘PRA’), and the Financial Conduct Authority (‘FCA) as regulators (primarily interested in balance sheet strength and solvency), and policyholders (whose main interest is solvency as it reflects the ability to pay claims). Given the focus of these stakeholders, we have determined net assets as the most appropriate basis for setting materiality. We note also that Net Assets is consistent with one of the Company’s Key Performance Indicators of Shareholder Equity (refer to page 3). It also correlates with another Key Performance Indicator, Capital resources, albeit that this is a non-GAAP measure.

During the course of our audit, we reassessed initial materiality (£27m) and concluded that, following capital distributions made during the year, it was appropriate to revise the materiality assessed at the planning stage of our audit reflecting net assets at the end of the year resulting in the £21 m previously noted.

Performance materiality The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately lo w level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.

On the basis of our risk assessments, together with our assessment of the Company’s overall control environment, our judgement was that performance materiality was 50% (2018: 50%) of our planning materiality, namely £10.5m (2018: £11m). We have set performance materiality at this percentage based on our assessment of the risk of misstatement.

Reporting threshold An amount below which identified misstatements are considered as being clearly trivial.

We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of £1.05m (2018: £1m), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.

We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant qualitative considerations in forming our opinion.

Other information The other information comprises the information included in the annual report, other than the financial statements and our auditor’s report thereon. The directors are responsible for the other information.

Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in this report, we do not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact.

We have nothing to report in this regard.

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Independent Auditors’ report to the members of Standard Life Assurance Limited continued

Opinions on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: • the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and • the strategic report and directors’ report have been prepared in accordance with applicable legal requirements.

Matters on which we are required to report by exception

In the light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or directors’ report.

We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: ® adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or • the financial statements are not in agreement with the accounting records and returns; or • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit

Responsibilities of directors As explained more fully in the Statement of Director’s responsibilities set out on page 16, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the directors are responsible for assessing the company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.

Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

Explanation as to what extent the audit was considered capable of detecting irregularities, including fraud

The objectives of our audit; • in respect to fraud, are; to identify and assess the risks of material misstatement of the financial statements due to fraud; to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through designing and implementing appropriate responses; and to respond appropriately to fraud or suspected fraud identified during the audit. However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management; and • in respect to irregularities, considered to be non-compliance with laws and regulations, are to obtain sufficient and appropriate audit evidence regarding compliance with the provisions of those laws and regulations generally recognised to have a direct effect on the determination of material amounts and disclosures in the financial statements ('direct laws and regulations'), and to perform other audit procedures to help identify instances of non-compliance with other laws and regulations that may have a material effect on the financial statements. We are not responsible for preventing non-compliance with laws and regulations and our audit procedures cannot be expected to detect non- compliance with all laws and regulations.

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Independent Auditors’ report to the members of Standard Life Assurance Limited continued

Explanation as to what extent the audit was considered capable of detecting irregularities, including fraud continued

Our approach was as follows:

• We obtained a general understanding of the legal and regulatory frameworks that are applicable to the company and determined that the direct laws and regulations related to elements of company law and tax legislation, and the financial reporting framework. Our considerations of other laws and regulations that may have a material effect on the financial statements included permissions and supervisory requirements of the Prudential Regulation Authority (‘PRA’) and the Financial Conduct Authority (‘FCA ® We obtained a general understanding of how the Company complies with these legal and regulatory frameworks by making enquiries of management, internal audit, and those responsible for legal and compliance matters. We also reviewed correspondence between the Company and UK regulatory bodies; reviewed minutes of the Board and it's Committees; and gained an understanding of the Company’s approach to governance, demonstrated by the Board’s approval of the Company’s governance framework and the Board’s review of the Company’s Risk Management framework (‘RMF’) and internal control processes. ® For direct laws and regulations, we considered the extent of compliance with those laws and regulations as part of our procedures on the related financial statement items; ® For both direct and other laws and regulations our procedures involved: making enquiry of those charged with governance and senior management for their awareness of any non-compliance of laws or regulations, inquiring about the policies that have been established to prevent non-compliance with laws and regulations by officers and employees, inquiring about the Company’s methods of enforcing and monitoring compliance with such policies, inspecting significant correspondence with the FCA and PRA; ® The Company operates in the insurance industry which is a highly regulated environment. As such, the Senior Statutory Auditor considered the experience and expertise of the engagement team to ensure that the team had the appropriate competence and capabilities, which included the use of specialists where appropriate; • We assessed the susceptibility of the Company’s financial statements to material misstatement, including how fraud might occur, by considering the controls that the Company has established to address risk identified by the entity, or the otherwise seek to prevent, deter or detect fraud. We also considered areas of significant judgement, complex transactions, performance targets, economic or external pressures and the impact these have on the control environment. Where this risk was considered to be higher, we performed audit procedures to address each identified fraud. These procedures included testing manual journals and were designed to provide reasonable assurance that the financial statements were free from fraud or error.

A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at https://www.frc.orq.uk/auditorsresponsibilities. This description forms part of our auditor’s report.

Other matters we are required to address

• We were appointed by the company on 31 August 2018 to audit the financial statements for the year ending 31 December 2018 and subsequent financial periods. ® The period of total uninterrupted engagement including previous renewals and reappointments is 2 years, covering the years ending 31 December 2018 to 31 December 2019. ® In November 2019 we identified that non-audit services which are prohibited under the FRC’s Ethical Standard, had been undertaken outside of the UK during the period December 2018 to March 2019. These related to assisting 4 non-UK investment funds with their EU withholding tax claims - these funds are controlled by Standard Life Assurance Limited. Currently no withholding tax has been recovered by the funds as the claims are pending. Therefore, there is no impact on the valuation of the funds on the financial statements of Standard Life Assurance Limited for the year ended 31 December 2019. We therefore consider this to be a minor breach of the Ethical Standard and we do not consider our independence to be impaired. We notified the Audit Committee of this breach in December 2019. The Audit Committee agreed with our conclusion that the breach is minor and that our independence is not impaired. The evaluation of whether our independence was impaired included consideration of the safeguards to independence in connection with the services. We considered an appropriate safeguard is that the year-end tax balances were audited by a separate UK tax team to the tax team that provided the non-audit services. • The audit opinion is consistent with the additional report to the audit committee

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Independent Auditors’ report to the members of Standard Life Assurance Limited continued

Use of our report This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Giles Watson (Senior statutory auditor) for and on behalf of Ernst & Young LLP, Statutory Auditor Leeds 5 March 2020

Notes: 1. The maintenance and integrity of the Standard Life Assurance Limited web site is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the web site. 2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

24 Standard Life Assurance Limited

Statement of comprehensive income for the year ended 31 December 2019

Restated1 2019 2018 Notes £m £m Revenue Gross earned premium 1,070 1,298 Premium ceded to reinsurers (24) (36) Net earned premium 1,046 1,262 Investment return/(loss) 5 16,326 (5,521) Change in reinsurers’ share of investment contract liabilities 602 (143) Revenue from contracts with customers 6 484 597 Other income 13 20 Total net revenue 18,471 (3,785) Expenses Claims and benefits paid 3,544 3,694 Claim recoveries from reinsurers (427) (454) Net insurance benefits and claims 3,117 3,240 Change in reinsurance assets 280 670 Change in insurance and participating contract liabilities 2,275 (3,586) Change in non-participating investment contract liabilities 29 11,914 (5,304) Change in unallocated divisible surplus 29 (115) (99) Expenses under arrangements with reinsurers 7 274 (22) Administrative expenses 8 522 740 Finance costs 1 15 Total expenses 18,268 (4,346) Profit before tax 203 561 Tax expense/(credit) attributable to policyholders’ returns 11 180 (80) Profit before tax attributable to equity holders 23 641 Total tax expense 153 42 Less: Tax (expense)/credit attributable to policyholders’ returns (180) 80 Tax (credit)/expense attributable to shareholders’ profits 11 (27) 122 Profit for the year 50 519 Other comprehensive income Items that will not be reclassified subsequently to profit or loss:

Remeasurement losses on defined benefit pension plans 32 - (64)

Total items that will not be reclassified to profit or loss - (64)

Items that may be reclassified subsequently to profit or loss:

Exchange differences on translating foreign operations (15) 5

Total items that may be reclassified subsequently to profit or loss (15) 5

Total other comprehensive income/(loss) (15) (59)

Total comprehensive income for the year 35 460

Attributable to:

Non-shareholders 28 - 36

Shareholders 35 424

Total comprehensive income attributable to equity holders 35 460 1 See note 19 for further information.

The notes on pages 29 to 107 form an integral part of these financial statements.

25 Standard Life Assurance Limited

Statement of financial position as at 31 December 2019

Restated1 2019 2018 Notes £m £m Assets Intangible assets 13 33 52 Deferred acquisition costs 14 311 528 Investments in subsidiaries held for investment purposes 15 27,373 25,544 Investments in subsidiaries held for strategic purposes 15 14 224 Investment property 16 4,973 5,519 Property and equipment 17 7 6 Deferred tax assets 18 - 1 Reinsurance assets 29 3,846 4,141 Loans and deposits 20 310 30 Derivative financial assets 21 2,552 1,857 Equity securities and interests in pooled investment funds 19 68,917 68,103 Reinsurers’ share of investment contract liabilities 19 3,978 2,914 Debt securities 19 30,875 32,376 Receivables and other financial assets 22 403 475 Other assets 23 160 190 Cash and cash equivalents 24 706 1,188 Total assets 144,458 143,148

Equity Share capital 25 21 21 Share premium 118 118 Retained earnings 26 353 783 Other reserves 27 552 575 Total equity 1,044 1,497

Liabilities Non-participating insurance contract liabilities 29 13,524 14,601 Non-participating investment contract liabilities 29 91,867 90,786 Participating contract liabilities 29 30,645 28,975 Deposits received from reinsurers 30 3,881 4,097 Deferred income 33 59 130 Current tax liabilities 18 - 56 Deferred tax liabilities 18 130 124 Derivative financial liabilities 21 280 160 Other financial liabilities 34 2,955 2,399 Other liabilities 35 73 323 Total liabilities 143,414 141,651

Total equity and liabilities 144,458 143,148 -’I See note 19 for further information.

The financial statements on pages 25 to 107 were approved by the Board of Directors on 4 March 2020 and signed on its behalf by

Stephen Percival Director

The notes on pages 29 to 107 form an integral part of these financial statements.

26 Standard Life Assurance Limited

Statement of changes in equity for the year ended 31 December 2019

Total Non­ Share Share Retained Other shareholders’ shareholders’ Total capital premium earnings reserves equity equity equity Notes £m £m £m £m £m £m £m At 1 January 2019 21 118 783 575 1,497 - 1,497

Profit for the year - - 50 - 50 - 50 Other comprehensive loss for the year (15) (15) „ (15) Total comprehensive income for the year 50 (15) 35 — 35

Dividends 12 . (480) _ (480) — (480) Part VII and linked 3 - - - (8) (8) - (8) reinsurance At 31 December 2019 21 118 353 552 1,044 - 1,044

Total Non­ Share Share Retained Other shareholders’ shareholders’ Total capital premium earnings reserves equity equity equity Notes £m £m £m £m £m £m £m At 1 January 2018 21 118 2,039 594 2,772 502 3,274 Profit for the year - - 483 - 483 36 519 Other comprehensive (loss)/income for the year _ — (64) 5 (59) (59) Total comprehensive income for the year M _ 419 5 424 36 460

Dividends 12 _ (312) (312) (38) (350) Distribution in specie of subsidiaries 12 __ (378) __ (378) _ (378) Transfer between reserves on distribution in specie of subsidiaries 24 (24) De-recognition of UK and Ireland pension schemes 32 — (1,009) — (1,009) (1,009) Repayment of non­ shareholders’ equity _ (500) (500) At 31 December 2018 21 118 783 575 1,497 - 1,497

The notes on pages 29 to 107 form an integral part of these financial statements. Standard Life Assurance Limited

Statement of cash flows for the year ended 31 December 2019

2019 2018 Notes £m £m Cash flows from operating activities Cash generated by operations 37 423 960 Taxation paid (147) (128) Net cash flows from operating activities 276 832

Cash flows from investing activities Purchase of intangible assets 13 (3) (8) Proceeds from sale of property and equipment 17 - 1 Part VII and linked reinsurance 3 (256) - Net cash flows from investing activities (259) (7)

Cash flows from financing activities Ordinary share dividends paid 12 (480) (312) Injection of capital in subsidiary 15 - (5) Repayment of subordinated liabilities 31 - (300) Repayment of non-shareholders’ equity 28 - (500) Repayment of other borrowings (1) (80) Proceeds from other borrowings - (35) Interest paid (4) (32) Payment of lease liabilities (1) - Appropriations 12 - (38) Net cash flows from financing activities (486) (1,302)

Net decrease in cash and cash equivalents (469) (477) Cash and cash equivalents at the beginning of the year 1,175 1,650 Effects of exchange rate changes on cash and cash equivalents (8) 2 Cash and cash equivalents at the end of the year 24 698 1,175

The notes on pages 29 to 107 form an integral part of these financial statements.

28 Standard Life Assurance Limited

Notes to the financial statements

Notes to the financial statements 1. Accounting policies

(a) Basis of preparation These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB) as endorsed by the European Union (EU), with interpretations issued by the IFRS Interpretations Committee (IFRIC), and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

The principal accounting policies set out below have been consistently applied to all financial reporting periods presented in these financial statements, unless otherwise stated.

Where necessary, comparatives have been reclassified for consistency with current year disclosures.

The company’s business activities, together with the factors likely to affect its future development, performance and position are set out in the strategic report on pages 2 to 11.

Note 38 includes the company’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk and liquidity risk.

The Company has considerable financial resources. As a consequence, the Directors believe that the Company is well placed to manage its business risks successfully. Having assessed the principal risks and the other matters, the Directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements.

(a)(i) New standards, interpretations and amendments to published standards that have been adopted by the Company In preparing the financial statements, the Company has adopted the following standards, interpretations and amendments which have been issued by the IASB and have been adopted for use by the EU:

IFRIC Interpretation 23 Uncertainty over Income Tax Treatments The Interpretation explains how to recognise and measure deferred and current tax assets and liabilities where there is uncertainty over a tax treatment. There are no new disclosure requirements however the Company has reviewed whether further information should be provided about judgements and estimates made in preparing the financial statements. No additional disclosures were considered necessary.

Annual Improvements to IFRS 2015-2017 Cycle: Amendments to IFRS 3 Business combinations, IFRS 11 Joint Arrangements, IAS 12 Income Taxes and IAS 23 Borrowing Costs These amendments do not currently have any impact on the Company.

IFRS 16 Leases The new standard replaces IAS 17 Leases and removes the classification of leases as operating or finance leases for the lessee, thereby treating all leases as finance leases. This has resulted in the recognition of the Company’s previously classified operating leases on the statement of financial position as right to use assets (see note 16) and lease liabilities (see note 34). Short-term leases (less than 12 months) and leases of low-value assets are exempt from the requirements. The Company has applied IFRS 16 using the modified retrospective approach, under which the cumulative effect of initial application is recognised in retained earnings at 1 January 2019. Accordingly, the comparative information for 2018 has not been restated and continues to be reported under IAS 17 and related interpretations.

(a)(ii) Standards, interpretations and amendments to published standards that are not yet effective and have not been early adopted by the Company The IASB has issued the following new or amended standards and interpretations which apply from the dates shown. The Company has decided not to early adopt any of these standards, amendments or interpretations where this is permitted.

IFRS 9 Financial Instruments (2018 - recommended implementation date extended to 2022) Under IFRS 9, all financial assets will be measured either at amortised cost or fair value and the basis of classification will depend on the business model and the contractual cash flow characteristics of the financial assets. In relation to the impairment of financial assets, IFRS 9 requires the use of an expected credit loss model, as opposed to the incurred credit loss model required under IAS 39 Financial Instruments: Recognition and Measurement. The expected credit loss model will require the Company to account for expected credit losses and changes in those expected credit losses at each reporting date to reflect changes in credit risk since initial recognition.

29 Standard Life Assurance Limited

Notes to the financial statements

1. Accounting policies continued

(a) Basis of preparation continued

(a)(ii) Standards, interpretations and amendments to published standards that are not yet effective and have not been early adopted by the Company continued IFRS 9 Financial Instruments (2018 - recommended implementation date extended to 2022) continued The Company has taken advantage of the temporary exemption granted to insurers in IFRS 4 Insurance Contracts from applying IFRS 9 until 1 January 2021 (recommended deferral period extended by the IASB to 2022) as a result of meeting the exemption criteria as at 31 December 2015. As at this date the Company’s activities were considered to be predominantly connected with insurance as the percentage of the total carrying amount of its liabilities connected with insurance relative to the total carrying amount of all its liabilities was greater than 90%. Following the Part VII transfer, this assessment was re-performed and the Company's activities were still considered to be predominantly connected with insurance.

IFRS 9 will instead be implemented at the same time as the new insurance contracts standard (IFRS 17 Insurance Contracts) effective from 1 January 2021 (IASB recommended extending the implementation date to 2022). During the year, the Company commenced its implementation activities in respect of IFRS 9 and these will continue through 2020.The Company expects to continue to value the majority of its financial assets as at fair value through profit or loss on initial recognition, either as a result of these financial assets being managed on a fair value basis or as a result of using the fair value option to irrevocably designate the assets at fair value through profit or loss. A number of additional disclosures will be required by IFRS 7 Financial Instruments: Disclosures as a result of implementing IFRS 9. Additional disclosures have been made in notes 19 and 38 to the financial statements to provide information to allow comparison with entities who have already adopted IFRS 9.

A table displaying the predominance test carried out for deferral, which has been reperformed at 31 December 2019 following the Part VII transfer, has been included below:

Carrying Liabilities amount as at Liabilities in connected with 31 December 2019 scope of IFRS 4 insurance Liabilities £m £m £m Non-participating insurance contract liabilities 13,524 13,524 13,524 Non-participating investment contract liabilities 91,867 - 91,867 Participating contract liabilities 30,645 30,645 30,645 Deposits received from reinsurers 3,881 3,881 3,881 Other liabilities 3,497 211 211 Total liabilities 143,414 48,261 140,128

% 34% 98%

Amendments to IFRS 9 Financial Instruments: Prepayment Features with Negative Compensation (2019 - recommended implementation date extended to 2022 for those companies applying the IFRS 4 deferral option) The proposed amendments would allow for a narrow exception to IFRS 9 that would permit particular financial instruments with prepayment features with negative compensation to be eligible for measurement at amortised cost or at fair value through other comprehensive income. It is not currently expected that these amendments will have an impact on the entity and its financial statements.

Amendments to References to the Conceptual Framework in IFRS (2020): Amendments to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (2020) The amendments clarify the definition of material and how it should be applied and ensures that the definition of material is consistent across all IFRS.

IFRS 17 Insurance contracts (2021 - IASB recommended extension of implementation date to 2022) Once effective IFRS 17 will replace IFRS 4 the current insurance contracts standard and it is expected to significantly change the way the Company measures and reports its insurance contracts. The overall objective of the new standard is to provide an accounting model for insurance contracts that is more useful and consistent for users. The new standard uses three measurement approaches and the principles underlying two of these measurement approaches will significantly change the way the Company measures its insurance contracts and investment contracts with Discretionary Participation Features (DPF). These changes will impact profit emergence patterns and add complexity to valuation processes, data requirements and assumption setting. The Phoenix Group’s implementation project continued through 2019 with an increasing focus on implementation activities alongside ongoing financial and operational impact assessments and methodology development.

30 Standard Life Assurance Limited

Notes to the financial statements

1. Accounting policies continued

(a) Basis of preparation continued (a)(ii) Standards, interpretations and amendments to published standards that are not yet effective and have not been early adopted by the Company continued IFRS 17 Insurance contracts (2021 - IASB recommended extension of implementation date to 2022) continued

In June 2019, the IASB published an exposure draft of amendments to IFRS 17 in response to feedback received. Whilst the IASB has confirmed some of the changes that will be made to the standard there still remains significant uncertainty in respect of certain key areas of the standard including the implementation date. Development of the Phoenix Group’s methodologies and accounting policies are progressing, however these will not be finalised until after the amended standard is published in mid- 2020. All activities will continue throughout 2020.

Classification of Liabilities as Current and Non-current (Amendments to IAS 1 Presentation of Financial Statements) (2022) The amendments clarify rather than change existing requirements and aim to assist entities in determining whether debt and other liabilities with an uncertain settlement date should be classed as current or non-current. It is currently not expected that there will be any reclassifications as a result of this clarification.

All of the above have been endorsed by the EL) with the exception of the following:

® IFRS 17 Insurance contracts; • Amendments to IFRS 3 Business Combinations; and • Classification of Liabilities as Current and Non-current (Amendments to IAS 1 Presentation of Financial Statements).

On 31 January 2020, the UK left the EU and consequently the European Financial Reporting Advisory Group (EFRAG) will no longer endorse IFRSs for use in the UK. Legislation is already in place that will onshore and freeze EU-adopted IFRSs from the date of the exit, and the European Commission’s powers to endorse and adopt IFRSs will be delegated by the Secretary of State to a UK endorsement board which will be set up by the UK Financial Reporting Council. IFRSs in the UK will be known as ‘UK-adopted International Accounting Standards’.

(a)(iii) Critical accounting estimates and judgement in applying accounting policies The preparation of financial statements requires management to exercise judgements in applying the accounting policies and make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses arising during the year. Judgements and sources of estimation uncertainty are continually evaluated and based on historical experience and other factors, including expectations of future events, that are believed to be reasonable under the circumstances. The areas where judgements, estimates and assumptions have the most significant effect on the amounts recognised in the financial statements are as follows:

Related Financial statement area Critical judgements in applying accounting policies notes Classification of insurance, Assessment of the significance of insurance risk transferred, and reinsurance and investment treatment of contracts which have insurance, non-participating investment contracts and participating investment elements. 29

Related Financial statement area Critical accounting estimates and assumptions notes Participating contracts, non­ Determination of economic assumptions in relation to market conditions. participating insurance contracts Determination of non-economic assumptions such as future longevity, and reinsurance contracts mortality and expenses. 29 Financial instruments at fair Determination of the fair value of private equity investments, debt value through profit or loss securities categorised as level 3 in the fair value hierarchy. 19, 40 Investment property and owner Determination of the fair value of investment property and owner occupied property occupied property categorised as level 3 in the fair value hierarchy. 16, 17, 40

(b) Subsidiaries Subsidiaries are all entities, including structured entities, which the Company is considered to control.

The Company has two categories of investment in subsidiaries: operating subsidiaries and investment subsidiaries, whose primary function is to generate capital or income growth through holding investments. Investment subsidiaries are held at fair value through profit or loss (FVTPL) since they are managed on a fair value basis. Equity investments in operating subsidiaries are held at cost less any impairment charge. Loans to subsidiaries are classified as loans (see accounting policy (r)).

31 Standard Life Assurance Limited

Notes to the financial statements

1. Accounting policies continued

(c) Structured entities The Company has investments in a range of investment vehicles including open-ended investment companies (OEIC’s), unit trusts and limited partnerships. These vehicles are structured in such a way that voting or similar rights are not the dominant factor in deciding who controls the entity and as such are classified as structured entities. The Company’s ownership interest in these vehicles can vary from day to day based on the Company and third party participation in them. The control assessment of each of these entities considers the rights of the Company to direct the relevant activities of the vehicle, its exposure to variability of returns and the ability to affect those returns using its power. In addition, the removal rights of other investors that may affect the capacity of the Company to direct the relevant activities are also taken into account. Where the Company is deemed to control such vehicles, they are presented as subsidiaries. Where the Company has an investment but not control over these types of entities, the investment is classified as equity securities and pooled investment funds and reinsurers’ share of investment contract liabilities in the statement of financial position.

(d) Foreign currency translation The financial statements are presented in millions pounds Sterling, which is the Company’s functional and presentation currency.

The statement of financial position of the Company’s operations that have a different functional currency than the Company’s presentation currency are translated into the presentation currency at the year end exchange rate (Euro: 2019: 1.18020, 2018: 1.11410) and their income statements and cash flows are translated at average exchange rates (Euro: 2019: 1.14232, 2018: 1.12913) for the year. All resulting exchange differences are recognised in other comprehensive income. Where the unallocated divisible surplus changes as a result of such exchange differences which are attributable to participating policyholders, this change in the unallocated divisible surplus is not recognised in the income statement but is recognised in other comprehensive income (see accounting policy (y)(iii)).

Foreign currency transactions are translated into the functional currency at the exchange rate prevailing at the date of the transaction. Gains and losses arising from such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.

Translation differences on non-monetary items, such as equity securities held at FVTPL, are reported as part of the fair value gain or loss in the income statement. Translation differences on financial assets and liabilities held at amortised cost are included in foreign exchange gains or losses in the income statement.

(e) Business combinations outside the scope of IFRS 3 Business Combinations The Company accounts for business combinations that involve other entities in the Phoenix Group and are outside the scope of IFRS 3 and are accounted for using merger accounting principles. Under the principles of merger accounting assets and liabilities transferred to a new entity are recorded in the new entity at the carrying value they were measured at by the transferor. No goodwill is recognised as a result of such transactions.

Where such a business combination involves:

• a change in the operation of with-profits funds which changes the measurement of participating contract liabilities and the present value of future profits (PVFP) on non-participating contracts with corresponding changes to the unallocated divisible surplus, these changes are not recognised in the change in participating contract liabilities, the change in the PVFP on non-participating contracts and the change in unallocated divisible surplus in the income statement. The liabilities are recognised at their revised valuation basis in the statement of financial position. • the transfer to the Company of net assets from a subsidiary with a carrying value that is less than the corresponding reduction required to the carrying value of the investment in subsidiary, the impact is recognised in other comprehensive income.

(f) Classification of insurance, reinsurance and investment contracts The measurement basis of assets and liabilities arising from life and pensions business contracts is dependent upon the classification of those contracts as either insurance or investment contracts. A contract is classified as insurance only if it transfers significant insurance risk. Insurance risk is significant if an insured event could cause an insurer to pay significant additional benefits to those payable if no insured event occurred, excluding scenarios that lack commercial substance. A contract that is classified as an insurance contract remains an insurance contract until all rights and obligations are extinguished or expire. When a policyholder exercises an option within an investment contract to utilise withdrawal proceeds from the investment contract to secure future benefits which contain significant insurance risk, the related investment contract liability is derecognised and an insurance contract liability is recognised. The withdrawal proceeds which are used to secure the insurance contract are recognised as premium income in accordance with accounting policy (g)(ii). Life and pensions business contracts that are not considered to be insurance contracts are classified as investment contracts.

The Company has written life and pensions business contracts which contain discretionary participating features (e.g. with- profits business). These contracts provide a contractual right to receive additional benefits as a supplement to guaranteed benefits. These additional benefits are based on the performance of with-profits funds and their amount and timing is at the discretion of the Company. These contracts are referred to as participating contracts.

32 Standard Life Assurance Limited

Notes to the financial statements

1. Accounting policies continued

(f) Classification of insurance, reinsurance and investment contracts continued

Generally, life and pensions business product classes are sufficiently homogeneous to permit a single classification at the level of the product class. However, in some cases, a product class may contain individual contracts that fall across multiple classifications (hybrid contracts). For certain significant hybrid contracts the product class is separated into the insurance element, a non-participating investment element and a participating investment element, so that each element is accounted for separately.

Contracts with reinsurers are assessed to determine whether they contain significant insurance risk. Contracts that do not give rise to a significant transfer of insurance risk to the reinsurer are considered financial reinsurance and are accounted for and disclosed in a manner consistent with financial instruments.

Contracts that give rise to a significant transfer of insurance risk to the reinsurer are assessed to determine whether they contain an element that does not transfer significant insurance risk and which can be measured separately from the insurance component. Where such elements are present they are accounted for separately with any deposit element being accounted for and disclosed in a manner consistent with financial instruments. The remaining elements, or where no such separate elements are identified, the entire contracts, are classified as a reinsurance contracts.

(g) Revenue recognition (g)(i) Deposit accounting for non-participating investment contracts Contributions received on non-participating investment contracts are treated as policyholder deposits and not reported as revenue in the income statement.

Deposit accounting is also applied to contracts with reinsurers that do not qualify as reinsurance contracts under accounting policy (f).

The fee income associated with non-participating investment contracts is dealt with under accounting policy (g)(iv).

(g)(ii) Premiums Premiums received on insurance contracts and participating investment contracts are recognised as revenue when due for payment, except for unit-linked premiums which are accounted for when the corresponding liabilities are recognised. For single premium business, this is the date from which the policy is effective. For regular (and recurring) premium contracts, receivables are established at the date when payments are due.

(g)(iii) Net investment return Gains and losses resulting from changes in both market value and foreign exchange on investments classified as FVTPL, include investment income received (such as interest payments, but excludes dividend income) are recognised in the income statement in the period in which they occur. Dividend income is recognised in the income statement when the right to receive payment is established.

Rental income on investment property is recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives granted such as rent free periods are recognised as an integral part of the total rental income and are spread over the term of the lease.

Changes in the fair value of derivative financial instruments that are not hedging instruments are recognised immediately in the income statement.

Interest income on loans and receivables is recognised in the income statement using the effective interest rate method. The effective interest rate method allocates interest and other finance costs at a constant rate over the expected life of the financial instrument, or where appropriate a shorter period, by using the interest rate that exactly discounts the future cash receipts over the expected life to the net carrying value of the instrument.

(g)(iv) Revenue from contracts with customers All fees related to unit-linked non-participating investment contracts are deemed to be associated with the provision of investment management services. Fees related to the provision of investment management services and administration services are recognised as the services are provided. Front-end fees, which are charged at the inception of service contracts, are deferred as a liability and recognised over the life of the contract. Ongoing fees that are charged periodically, either directly or by making a deduction from invested funds, are recognised as received, which corresponds to when the services are provided.

Commissions received or receivable are recognised as revenue on the commencement or renewal date of the related policies. However, when it is probable the Company will be required to render further services during the life of the policy, the commission is deferred as a liability and is recognised as the services are provided.

33 Standard Life Assurance Limited

Notes to the financial statements

1. Accounting policies continued

(h) Expense recognition (h)(i) Deposit accounting for non-participating investment contracts Withdrawals paid out to policyholders on non-participating investment contracts are treated as a reduction to policyholder deposits and not recognised as expenses in the income statement.

Deposit accounting is also applied to contracts with reinsurers that do not qualify as reinsurance contracts under accounting policy (f).

(h)(ii) Claims and benefits paid Claims paid on insurance contracts and participating investment contracts are recognised as expenses in the income statement.

Maturity claims and annuities are accounted for when due for payment. Surrenders are accounted for when paid or, if earlier, on the date when the policy ceases to be included within the calculation of the insurance liability. Death claims and all other claims are accounted for when notified.

Claims payable include the direct costs of settlement. Reinsurance recoveries are accounted for in the same period as the related claim.

(h)(iii) Change in insurance and participating investment contract liabilities The change in insurance and participating investment contract liabilities, comprising the full movement in the corresponding liabilities during the period, is recognised in the income statement.

(h)(iv) Change in investment contract liabilities Investment return and related benefits credited in respect of non-participating investment contracts are recognised in the income statement as changes in investment contract liabilities.

(h)(v) Change in unallocated divisible surplus (UDS) The change in UDS recognised in the income statement comprises the movement in the UDS during the period. However, where movements in assets and liabilities which are attributable to participating policyholders are recognised in other comprehensive income, the change in UDS arising from these movements is not recognised in the income statement as it is also recognised in other comprehensive income.

(h)(vi) Expenses under arrangements with reinsurers Expenses, including interest, arising under elements of contracts with reinsurers that do not transfer significant insurance risk are recognised on an accruals basis in the income statement as expenses under arrangements with reinsurers.

(h) (vii) Administrative expenses Administrative expenses are recognised on an accruals basis.

(i) Finance costs Interest payable is recognised in the income statement as it accrues and is calculated using the effective interest rate (EIR) method.

(j) Impairment of non-financial assets The carrying amounts of non-financial assets are reviewed for impairment indicators whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, at least at each reporting date. An impairment loss is recognised in the income statement for the amount by which the asset’s carrying amount exceeds its recoverable amount. Non- financial assets which have been impaired are reviewed for possible reversal of impairment losses at each reporting date.

The recoverable amount of an asset is the greater of its net selling price (fair value less costs to sell) and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit, or group of units, to which the asset belongs.

34 Standard Life Assurance Limited

Notes to the financial statements

1. Accounting policies continued

(k) Intangible assets Intangible assets, including internally developed software and software purchased from third parties, are recognised in the statement of financial position if it is probable that the relevant future economic benefits attributable to the assets will flow to the Company and their cost can be measured reliably and are either identified as separable (i.e. capable of being separated from the entity and sold, transferred, rented, or exchanged) or they arise from contractual or other legal rights, regardless of whether those rights are transferable or separable.

Intangible assets are assessed for impairment at each reporting date. An assessment is made as to whether there is an indication that the intangible asset has become impaired. If such an indication of impairment exists then the asset’s recoverable amount is estimated. Irrespective of whether there is any indication of impairment, for intangible assets that are not yet available for use the recoverable amount is estimated each year at the same time. If the carrying value of an intangible asset exceeds its recoverable amount then the carrying value is written down to the recoverable amount.

The Company also recognises as intangible assets software which has been developed internally and other purchased technology which is used in managing and executing our business. Costs to develop software internally are capitalised after the research phase and when it has been established that the project is technically feasible and the Company has both the intention and ability to use the completed asset.

Intangible assets are carried at cost less accumulated amortisation and any accumulated impairment losses. Amortisation is charged to the income statement on a straight-line basis over the estimated useful life of between 3 and 10 years of the intangible asset. Impairment losses are calculated and recorded on an individual basis in a manner consistent with accounting policy 0. Amortisation commences at the time from which an intangible asset is available for use.

(l) Deferred acquisition costs (l)(i) Participating insurance and investment contracts Acquisition costs incurred in issuing insurance or participating investment contracts are not deferred where such costs are borne by a with-profits fund that was subject to the PRA realistic capital regime. For other participating investment contracts, incremental costs directly attributable to the issue of the contracts are deferred. For other insurance contracts, acquisition costs, which include both incremental acquisition costs and other indirect costs of acquiring and processing new business, are deferred.

Deferred acquisition costs are amortised in proportion to projected margins over the period the relevant contracts are expected to remain in force. After initial recognition, deferred acquisition costs are reviewed by category of business and are written off to the extent that they are no longer considered to be recoverable.

(l) (ii) Non-participating investment contracts Incremental costs directly attributable to securing rights to receive fees for asset management services sold with unit-linked investment contracts are deferred. Where such costs are borne by a with-profits fund that is measured on a realistic basis, deferral is limited to the level of any related deferred income.

Deferred acquisition costs are amortised over the life of the contracts as the related revenue is recognised. After initial recognition, deferred acquisition costs are reviewed by category of business and are written off to the extent that they are no longer considered to be recoverable. Trail or renewal commission on non-participating investment contracts where the Company does not have an unconditional legal right to avoid payment, is deferred at inception of the contract and an offsetting liability for contingent commission is established.

(m) Investment property Property held for long-term rental yields or investment gain that is not occupied by the Company and property being constructed or developed for future use as investment property are classified as investment property.

Investment property is initially recognised at cost, including any directly attributable transaction costs. Subsequently investment property is measured at fair value. Fair value is determined without any deduction for transaction costs that may be incurred on sale or disposal. Gains or losses arising from changes in the fair value are recognised in the income statement. Investment property is not depreciated.

Rental income from investment property is recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income and are also spread over the term of the lease.

35 Standard Life Assurance Limited

Notes to the financial statements

1. Accounting policies continued

(n) Property and equipment Owner occupied property consists of property occupied by the Company. Owner occupied property is recognised initially at cost and subsequently at fair value at the date of revaluation less any subsequent accumulated depreciation. Cost includes the original purchase price of the asset and the costs attributable to bringing the asset into working condition for its intended use.

Increases in the fair value of owner occupied property are recognised in the statement of other comprehensive income and the revaluation reserve in equity. Decreases in the fair value of owner occupied property that offset previous increases in the same asset are recognised in other comprehensive income. All other decreases are charged to the income statement for the period.

Owner occupied property is depreciated on a straight-line basis over its estimated useful life, generally between 30 and 50 years. The depreciable amount of an asset is determined by the difference between the fair value and the residual value. The residual value is the amount that would be received on disposal if the asset was already at the age and condition expected at the end of its useful life.

Equipment is stated at historical cost less depreciation. Cost includes the original purchase price of the assets and the costs attributable to bring the asset to its working condition for its intended use. Depreciation on equipment is charged to the income statement on a straight-line basis over their estimated useful. The residual values and useful lives of the assets are reviewed at each reporting date and adjusted if appropriate.

(o) Leases At inception of a contract, the Company assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an individual asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Company assesses whether:

• The contract involves the use of an identified asset - this may be specified explicitly or implicitly and should be physically distinct or represent substantially all of the capacity of a physically distinct asset. If the lessor has a substantive substitutions right, then the asset is not identified; • The Company has the right to obtain substantially all of the economic benefits from use of the asset throughout the period of use; and • The Company has the right to direct the use of the asset i.e. it has the decision-making rights about how and for what purpose the asset is used.

This policy is effective from 1 January 2019.

The Company recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises, the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to restore the underlying asset, less any lease incentives received.

Where the right-of-use asset is classed as property and equipment, it is subsequently depreciated using the straight-line method from the commencement date to the end of the lease term. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurement of the lease liability.

Where the right-of-use asset is classed as investment property, the asset is subsequently measured at fair value. Fair value is determined without any deduction for transaction costs that may be incurred on sale or disposal. Gains or losses arising from changes in the fair value are recognised in the income statement. Investment property right-of-use assets are not depreciated.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the Company’s incremental borrowing rate as the rate implicit in the lease cannot be readily determined.

Lease payments included in the measurement of the lease liability comprise the fixed payments, including in-substance fixed payments, that were agreed at inception. The lease liability is measured at amortised cost using the EIR method. It is remeasured when there is a change in future lease payments for e.g. rent reviews or if the Company changes its assessment of whether it will exercise a termination option. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset.

(p) Taxation Income tax comprises current and deferred tax. Income tax is recognised as income or an expense in the statement of comprehensive income except to the extent that it relates to items recognised as other comprehensive income in the statement of comprehensive income, in which case it is recognised as other comprehensive income in that statement.

Current tax is the expected tax payable on the taxable income for the year, using tax rates and laws enacted or substantively enacted at the date of the statement of financial position together with adjustments to tax payable in respect of previous years.

36 Standard Life Assurance Limited

Notes to the financial statements

1. Accounting policies continued

(p) Taxation continued Deferred tax is provided for on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates and laws enacted or substantively enacted at the period end.

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

The tax charge is analysed between tax that is payable in respect of policyholders’ returns and tax that is payable on owners’ returns. This allocation is calculated based on an assessment of the effective rate of tax that is applicable to owners for the year. Deferred tax assets and liabilities taxed at policyholder rates are not offset against deferred tax assets or liabilities taxed at shareholder rates due to restrictions in place in life tax legislation

(q) Reinsurance assets Reinsurance assets arise under contracts that are classified as reinsurance contracts (refer to accounting policy (f)).

Reinsurance contracts are measured using valuation techniques and assumptions that are consistent with those used in measuring the underlying policy benefits and taking into account the terms of the reinsurance contract.

Reinsurance recoveries due from reinsurers and reinsurance premiums due to reinsurers under reinsurance contracts that are contractually due at the reporting date are separately recognised in receivables and other financial assets and other financial liabilities respectively.

If a reinsurance asset is considered to be impaired, the carrying amount is reduced to the recoverable amount and the impairment loss is recognised in the income statement.

(r) Loans Loans are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market other than those that the Company intends to sell in the short-term or that it has designated as FVTPL. For loans designated at FVTPL see accounting policy (s). Financial assets classified as loans include deposits with credit institutions, loans secured by mortgages and loans secured on policies.

Loans are initially measured at fair value plus directly attributable transaction costs. Subsequently, other than those loans designated at FVTPL, they are measured at amortised cost, using the EIR method, less any impairment losses. Revenue from financial assets classified as loans is recognised in the income statement on an EIR basis.

Impairment on individual loans is determined at each reporting date. Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the Company. This would include a measurable decrease in the estimated future cash flow from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group. The Company first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant.

If there is objective evidence that an impairment loss has been incurred on loans carried at amortised cost, the amount of the impairment loss is calculated as the difference between the present value of future cash flows, discounted at the loan's original effective rate, and the loan’s current carrying value. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the income statement. Subsequent recoveries are credited to the income statement.

If there is no evidence of impairment on an individual basis, a collective impairment review is undertaken whereby the assets are grouped together, on the basis of similar credit risk characteristics, in order to calculate a collective impairment loss.

Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.

Loans which are subject to collective impairment assessment and whose terms have been renegotiated are no longer considered to be past due but are treated as new loans after the minimum number of payments under the renegotiated terms have been collected. Individually significant loans whose terms have been renegotiated are subject to on-going review to determine whether they remain impaired or past due.

37 Standard Life Assurance Limited

Notes to the financial statements

1. Accounting policies continued

(s) Equity securities, debt securities and derivatives including embedded derivatives Management determines the classification of equity securities, debt securities and derivatives at initial recognition.

All of the Company’s equity securities and debt securities (including loans at FVTPL) are designated as at FVTPL as they are part of groups of assets which are managed and whose performance is evaluated on a fair value basis so as to maximise returns either for policyholders or equity holders.

All derivative instruments are classified as held for trading (HFT), except those designated as part of a hedging relationship.

Equity securities, debt securities and derivatives are recognised at fair value on the trade date of the transaction. In the case of derivatives, where no initial premium is paid or received, the initial measurement value is nil. For instruments classified as HFT or designated as at FVTPL, directly attributable transaction costs are not included in the initial measurement value but are recognised in the income statement.

Where a valuation technique is used to establish the fair value of a financial instrument, a difference could arise between the fair value at initial recognition and the amount that would be determined at that date using the valuation technique. When unobservable market data has an impact on the valuation of derivatives, the entire initial change in fair value indicated by the valuation technique is recognised over the life of the transaction on an appropriate basis, or when the inputs become observable, or when the derivative matures or is closed out. Instruments classified as HFT or as at FVTPL are measured at fair value with changes in fair value recognised in the income statement.

Options, guarantees and other derivatives embedded in a host contract are separated and recognised as a derivative unless they are either considered closely related to the host contract, meet the definition of an insurance contract or if the host contract itself is measured at fair value with changes in fair value recognised in income.

(t) Reinsurers’ share of investment contract liabilities Reinsurance contracts under which the transfer of insurance risk from the Company to the reinsurer is not significant are classified and accounted for as financial assets.

(u) Receivables Receivables are recognised when due and measured on initial recognition at the fair value of the amount receivable. Subsequent to initial recognition, these receivables are measured at amortised cost using the EIR method.

(v) Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits, money held at call and short notice with banks and any highly liquid investments with less than 3 months to maturity from the date of acquisition. Cash and cash equivalents are categorised for measurement purposes as loans and are therefore measured at amortised cost. For the purposes of the statement of cash flows cash and cash equivalents also include bank overdrafts, which are included in borrowings on the statement of financial position.

(w) Equity (w)(i) Share capital and non-shareholders’ equity An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. An instrument is classified as an equity instrument when there is no contractual obligation to deliver cash or other assets to another entity on terms that may be unfavourable. The difference between the proceeds received on issue of the shares and the nominal value of the shares issued is recorded in the share premium reserve. Incremental costs directly attributable to the issue of new equity instruments are shown as a deduction from the proceeds, net of tax. Incremental costs directly attributable to the issue of equity instruments in a business combination are excluded in the cost of acquisition.

(w)(ii) Merger reserve If the Company issues shares at a premium and the conditions for merger relief under section 612 of the Companies Act 2006 are met, a sum equal to the difference between the issue value and nominal value is transferred to a merger reserve.

38 Standard Life Assurance Limited

Notes to the financial statements

1. Accounting policies continued

(x) Measurement - insurance and participating investment contract liabilities For insurance contracts and participating investment contracts, IFRS 4 permits the continued application, for measurement purposes, of accounting policies that were being used at the date of transition to IFRS, except where a change is deemed to make the financial statements more relevant to the economic decision-making needs of users and no less reliable, or more reliable, and no less relevant to those needs. Therefore the Company applies accounting policies determined in accordance with the Association of British Insurers, Statement of Recommended Practice (ABI SORP) as described below. As was permitted under the ABI SORP, the Company adopts local regulatory valuation methods, adjusted for consistency with asset measurement policies, for the measurement of liabilities under insurance contracts and participating investment contracts.

(y) Measurement - participating contract liabilities Participating contract liabilities are analysed into the following components:

• Participating insurance contract liabilities; • Participating investment contract liabilities; • PVFP on non-participating contracts, which is treated as a deduction from the gross participating contract liabilities; and • Unallocated divisible surplus.

The policy for measuring each component is noted below.

(y)(i) Participating insurance and investment contract liabilities Participating contract liabilities are measured on a realistic basis. Under this approach the value of participating insurance and participating investment contract liabilities in each with-profits fund is calculated as:

• With-profits benefits reserves (WPBR) for the fund; plus • Future policy related liabilities (FPRL) for that fund; less • Any amounts due to shareholders included in FPRL; less • The portion of future profits on non-participating contracts included in FPRL not due to shareholders, where this portion can be separately identified.

The WPBR is primarily based on the retrospective calculation of accumulated asset shares. The aggregate value of individual policy asset shares reflects the actual premium, expense and charge history of each policy. The net investment return credited to the asset shares is consistent with the return achieved on the assets notionally backing participating business. Any mortality deductions are based on published mortality tables adjusted where necessary for experience variations. For those asset shares on an expense basis, the allowance for expenses attributed to the asset share is as far as practical, the appropriate share of the actual expenses incurred or charged to the fund. For those on a charges basis the allowance is consistent with the charges for an equivalent unit-linked policy. The FPRL comprises other components such as a market consistent stochastic valuation of the cost of options and guarantees.

The Company’s principal with-profits fund is the Fleritage With-Profits Fund (HWPF).

On 10 July 2006, the Standard Life Assurance Company (SLAC) demutualised. The demutualisation of SLAG was governed by its Scheme of Demutualisation (the Scheme). Under the Scheme substantially all of the assets and liabilities of SLAC were transferred to the Company.

Under the Scheme the residual estate of the HWPF exists to meet amounts which may be charged to the HWPF under the Scheme. However, to the extent that the Board of the Company is satisfied that there is an excess residual estate, it shall be distributed over time as an enhancement to final bonuses payable on the remaining eligible policies invested in the HWPF. This planned enhancement to the benefits under with-profits contracts held in the HWPF is included in the FPRL under the realistic basis resulting in a realistic surplus of £nil. Applying the policy noted above, this planned enhancement is therefore included within the measurement of participating contract liabilities.

The Scheme provides that certain defined cash flows (recourse cash flows) arising in the HWPF on specified blocks of UK and Irish business, both participating and non-participating, may be transferred out of that fund when they emerge, being transferred to the Company’s Shareholder Fund or Proprietary Business Fund (PBF) and thus accrue to the ultimate benefit of equity holders of Phoenix Group. Under the Scheme such transfers are subject to constraints to protect policyholders. The Scheme also provides for additional expenses to be charged by the PBF to the HWPF in respect of German branch business.

39 Standard Life Assurance Limited

Notes to the financial statements

1. Accounting policies continued

(y) Measurement - participating contract liabilities continued (y)(i) Participating insurance and investment contract liabilities continued Under the realistic basis the discounted value of expected future cash flows on participating contracts not reflected in the WPBR is included in the FPRL (as a reduction in FPRL where future cash flows are expected to be positive). The discounted value of expected future cash flows on non-participating contracts not reflected in the measure of non-participating liabilities is recognised as a separate asset (where future cash flows are expected to be positive). The Scheme requirement to transfer future recourse cash flows out of the FIWPF is recognised as an addition to FPRL. The discounted value of expected future cash flows on non-participating contracts can be apportioned between those included in the recourse cash flows and those retained in the HWPF for the benefit of policyholders.

Applying the policy noted above:

• The value of participating insurance and participating investment contract liabilities on the statement of financial position is reduced by future expected (net positive) cash flows arising on participating contracts. • Future expected cash flows on non-participating contracts are not recognised as an asset of the HWPF on the statement of financial position. However, future expected cash flows on non-participating contracts that are not recourse cash flows under the Scheme are used to reduce the value of participating insurance and participating investment contract liabilities on the statement of financial position.

Some participating contracts are issued by a non-participating fund with a with-profits investment element then transferred to a with-profits fund within the Company. The with-profits investment element of such contracts is measured as described above. Any liability for insurance features retained in the non-participating fund is measured using the gross premium method applicable to non-participating contracts (see accounting policy (z)(i)).

(y)(ii) PVFP on non-participating contracts held in a with-profits fund This applies only to the HWPF as no other with-profits fund holds non-participating contracts. An amount is recognised for the PVFP on non-participating contracts since the determination of the realistic value of liabilities for with-profits contracts in the HWPF takes account of this value. The amount is recognised as a deduction from liabilities. As this amount can be apportioned between an amount recognised in the realistic value of with-profits contract liabilities and an amount recognised in the UDS, the apportioned amounts are reflected in the measurement of participating contract liabilities and UDS respectively.

(y) (iii) Unallocated divisible surplus (UDS) The LIDS comprises the difference between the assets and all other recognised liabilities in the Company's with-profits funds. This amount is recognised as a liability as it is not considered to be allocated to shareholders due to uncertainty regarding transfers from these funds to shareholders.

In relation to the HWPF, amounts are considered to be allocated to shareholders when they emerge as recourse cash flows within the HWPF.

As a result of the policies for measuring the HWPF’s assets and all its other recognised liabilities:

(i) the UDS of the HWPF comprises the value of future recourse cash flows in participating contracts (but not the value of future recourse cash flows on non-participating contracts), the value of future additional expenses to be charged on German HWPF business and the effect of any measurement differences between the realistic value and IFRS accounting policy value of all assets and all liabilities other than participating contract liabilities recognised in the HWPF. (ii) the recourse cash flows are recognised as they emerge as an addition to shareholders’ profits if positive or as a deduction if negative. As the additional expenses are charged in respect of the German business they are recognised as an addition to equity holders' profits.

(z) Non-participating contract liabilities (z)(i) Non-participating insurance contracts The liability for annuity in payment contracts is measured by discounting the expected future annuity payments together with an appropriate estimate of future expenses at an assumed rate of interest determined to reflect conditions at the reporting date.

Other non-participating insurance contracts are measured using the gross premium method. In general terms, a gross premium valuation basis is a discounted cash flow in which the premiums brought into account are the full amounts receivable under the contract. The method includes explicit estimates of premiums, expected claims and costs of maintaining contracts. Cash flows are discounted at the assumed rate of interest determined to reflect conditions at the reporting date.

(z)(ii) Non-participating investment contracts Unit-linked non-participating investment contracts are separated into two components being an investment management services component and a financial liability. All fees and related administrative expenses are deemed to be associated with the investment management services component (see accounting policies (g)(iv), (l)(ii), (ee)). The financial liability component is designated at FVTPL as it is implicitly managed on a fair value basis as its value is directly linked to the market value of the underlying portfolio of assets.

40 Standard Life Assurance Limited

Notes to the financial statements

1. Accounting policies continued

(aa) Liability adequacy test The Company applies a liability adequacy test at each reporting date to ensure that the insurance and participating contract liabilities (less related deferred acquisition costs) are adequate in the light of the estimated future cash flows. This test is performed by comparing the carrying value of the liability and the discounted projections of future cash flows.

If a deficiency is found in the liability (i.e. the carrying value amount of its insurance liabilities is less than the future expected cash flows) that deficiency is provided for in full. The deficiency is recognised in the income statement.

(bb) Borrowings Borrowings include bank overdrafts and are recognised initially at fair value, less attributable transaction costs. Subsequent to initial recognition, borrowings are carried at amortised cost with any difference between the carrying value and redemption value being recognised in the income statement over the period of the borrowings on an EIR basis.

(cc) Subordinated liabilities Subordinated liabilities are debt instruments issued by the Company which rank below its other obligations in the event of liquidation but above the share capital. Subordinated liabilities are initially recognised at the value of proceeds received net of issue expenses. The total finance costs are charged to the income statement over the relevant term of the instrument using the EIR method. The carrying amount of the debt is increased by the finance cost in respect of the reporting period and reduced by payments made in respect of the debt in the period.

(dd) Pension costs and other post retirement benefits The Company has operated two types of pension plans for staff:

• Defined contribution plans where the Company agreed to contribute to a member’s pension plan but has no further payment obligations once the contributions have been paid; and • Defined benefit plans where the scheme is obligated to provide pension payments upon retirement to members as defined by the scheme rules.

For defined contribution plans, the Company pays contributions to publicly or privately administered pension insurance plans. The Company has no further payment obligations once the contributions have been paid. The contributions are recognised in staff costs and other employee-related costs when they are due.

The Company was the sponsoring employer for a number of the defined benefit plans for the SLA Group’s employees in the UK, Germany and Ireland and therefore recognised the total net defined cost of the plans. The liabilities in relation to these defined benefit plans were valued by at least annual actuarial calculations. Prior to the acquisition by Phoenix Group the SLA Group funded these liabilities in relation to its principal defined benefit plans by ring-fencing assets in an independent trustee- administered fund.

Net interest income (if a plan is in surplus) or interest expense (if a plan is in deficit) was calculated using yields on high quality corporate bonds and recognised in the income statement. A current service cost was also recognised which represented the expected present value of the defined benefit pension entitlement earned by members in the period.

Remeasurements, which include gains and losses as a result of changes in actuarial assumptions, the effect of the limit on the plan surplus and returns on plan assets (other than amounts included in net interest) were recognised in the statement of comprehensive income in the period in which they occurred. Remeasurements were not reclassified to profit of loss in subsequent periods.

(ee) Deferred income Front-end fees on service contracts, including investment management service contracts are deferred as a liability and amortised to the income statement over the period services are provided (between 5 and 30 years).

(ff) Provisions and contingent assets or liabilities Provisions are recognised when the Company has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole.

Contingent liabilities are possible obligations of the Company of which timing and amount are subject to significant uncertainty. Contingent liabilities are not recognised on the statement of financial position but are disclosed, unless they are considered remote. If such an obligation becomes probable and the amount can be measured reliably it is no longer considered contingent and is recognised as a liability.

Contingent assets are disclosed if the inflow of economic benefits is probable, but not virtually certain.

41 Standard Life Assurance Limited

Notes to the financial statements

1. Accounting policies continued

(gg) Payables Payables are recognised when due and are measured on initial recognition at the fair value of the consideration payable. Subsequent to initial recognition, these payables are measured at amortised cost using the EIR method.

(hh) Dividends and appropriations Final dividends on share capital classified as equity instruments are recognised in equity when they have been approved by shareholders. Interim dividends on these shares are recognised in equity in the period in which they are paid.

Coupon payments are recognised as appropriations of equity in the period in which they are paid.

(ii) Derecognition and offset of financial assets and liabilities A financial asset (or a part of a group of similar financial assets) is derecognised where:

• The rights to receive cash flows from the asset have expired; • The Company retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass-through’ arrangement; or • The Company has transferred its rights to receive cash flows from the asset and has either transferred substantially all the risks and rewards of the asset, or has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

Financial assets and liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. When financial assets and liabilities are offset any related interest income and expense is offset in the income statement.

(jj) Collateral arrangements The Company receives and pledges collateral in the form of cash or non-cash assets in respect of derivative contracts and reinsurance arrangements in order to reduce the credit risk of these transactions. The amount and type of collateral required where the Company receives collateral depends on an assessment of the credit risk of the counterparty.

Collateral received in the form of cash, where the Company has contractual rights to receive the cash flows generated, is recognised as an asset in the statement of financial position with a corresponding liability for its repayment. Non-cash collateral received is not recognised in the statement of financial position, unless the counterparty defaults on its obligations under the relevant agreement.

Non-cash collateral pledged where the Company retains the contractual rights to receive the cash flows generated is not derecognised from the statement of financial position, unless the Company defaults on its obligations under the relevant agreement. Cash collateral pledged, where the counterparty has contractual rights to receive the cash flows generated, is derecognised from the statement of financial position and a corresponding receivable is recognised for its return.

2. Fund structures and insurance, investment and reinsurance contract terms

The Company operates a fund structure which was established on the demutualisation of SLAG on 10 July 2006, under which its recognised assets and liabilities are allocated to one of the following funds:

• Shareholder Fund (SHF) • Proprietary Business Fund (PBF) • Heritage With-Profits Fund (HWPF) • UK Smoothed Managed With-Profits Fund (UKSMWPF) • German With-Profits Fund (GWPF) • German Smoothed Managed With-Profits Fund (GSMWPF)

42 Standard Life Assurance Limited

Notes to the financial statements

2. Fund structures and insurance, investment and reinsurance contract terms continued

(a) Fund Structure (a)(i) Insurance and investment contracts issued since demutualisation The liabilities and associated supporting assets for contracts issued since demutualisation in the UK and those that have been reinsured to the Company from SL Inti are held in the PBF except for the element of any contract where the customer has chosen to invest in a with-profits (i.e. participating) fund. The assets and associated liabilities, including liabilities for financial guarantees, for such with-profits investment elements are held in the UKSMWPF, GWPF or GSMWPF. The PBF is sub-divided into internal linked funds for UK business (unit-linked funds) and a non-unit-linked fund. Where a customer invests on a unit- linked basis, the assets and corresponding liabilities for such unit-linked investment elements are held in the unit-linked funds. Asset management charges are transferred from the unit-linked funds to the non-unit-linked sub-fund of the PBF as they arise. Any liabilities for insurance features or financial guarantees contained within a contract that has a unit-linked investment element are held in the non unit-linked sub-fund of the PBF. Sterling reserves in relation to contracts which have a with-profits element are held in the non-unit-linked sub-fund of the PBF. Deferred income and deferred acquisition costs arising on contracts that have a unit-linked investment element or a with-profits investment element are held in the non-unit-linked sub-fund of the PBF.

(a) (ii) Insurance and investment contracts issued before demutualisation The liabilities and associated supporting assets for contracts, both participating and non-participating, issued prior to demutualisation in the UK and those that have been reinsured by the Company from SL Inti are mostly held in the HWPF except for (i) the assets and corresponding liabilities for UK unit-linked investment elements of such contracts, and (ii) the supporting assets and associated liabilities for longevity risk and investment risk on certain annuity contracts. The assets and associated liabilities for these two contract components are held in the PBF. Asset management charges arising on unit-linked investment elements are transferred from the PBF to the HWPF as they arise. Any liabilities for insurance features or financial guarantees contained within a contract that has a unit-linked investment element or a with-profits investment element are held in the HWPF. Deferred income and deferred acquisition costs arising on contracts that have a unit-linked investment element or a with-profits investment element are also held in the HWPF.

Under the Scheme the residual estate of the HWPF exists to meet amounts which may be charged to the HWPF under the Scheme. However, to the extent that the board of the Company is satisfied that there is an excess residual estate, it shall be distributed overtime as an enhancement to final bonuses payable on the remaining eligible policies invested in the HWPF.

The Scheme provides that certain defined cash flows (recourse cash flows (RCF)) arising in the HWPF on specified blocks of UK and Ireland (reinsured from SL Inti) business, both participating and non-participating, may be transferred out of that fund when they emerge, being transferred to the SHF, and thus accrue to the ultimate benefit of shareholders of the Company. The Scheme also provides for additional expenses to be charged by the PBF to the HWPF in respect of Germany business reinsured from SL Inti. Under these mechanisms profits, on an RCF basis, on non-participating business excluding investment spread profits on annuities and profits, on an RCF basis or German additional expenses basis, on unitised with-profits contracts are transferred to the SHF. All investment return on the HWPF investments is retained in the HWPF for the ultimate benefit of participating policyholders. Under the Scheme, transfers to the SHF are subject to certain constraints in order to protect policyholders.

(b) Insurance, investment and reinsurance contract terms including guarantees and options Details of the significant types of insurance and investment contracts issued, the nature of any guarantees and options provided under these contracts and details of significant reinsurance contracts are given below.

(b)(i) Insurance and investment contracts issued since demutualisation UK annuity-in-payment contracts This class of business consists of single premium contracts that provide guaranteed annuity payments. The payments depend on the survival of a life or lives with or without a guaranteed period and may reduce on a specified death or increase each year at a predefined rate or based on the increase in the UK RPI. These contracts are classified as non-participating insurance contracts.

The total liability at 31 December 2019 for Retail Price Index (RPI) linked annuities in payment (including any guaranteed minimum rate of escalation) is £451 m (2018: £410m) and this represents approximately 10% (2018: 10%) of the total liability for UK annuity in payment contracts held within the PBF. There is a subset of annuities where the RPI linked annuity payment cannot fall or is guaranteed to increase at a minimum rate; the majority of such annuities are those whose payment cannot fall. If the market moves in line with the adverse scenarios as shown in the market risk sensitivity analysis in note 38 (d)(ii), then the impact on shareholder equity from these RPI linked annuities and corresponding assets is not significant.

For those annuities in payment which increase at a predefined rate, the total liability at 31 December 2019 is £496m (2018: £444m) and this represents approximately 11% (2018: 11%) of the total liability for UK annuity in payment contracts held in the PBF.

If the market moves in line with the adverse market conditions as shown in the market risk sensitivity analysis, the impact on shareholder equity from those annuities with a predefined rate of increase and the corresponding assets is not significant.

43 Standard Life Assurance Limited

Notes to the financial statements

2. Fund structures and insurance, investment and reinsurance contract terms continued

(b) Insurance, investment and reinsurance contract terms including guarantees and options continued (b)(i) Insurance and investment contracts issued since demutualisation continued UK unit-linked pension contracts This class of business comprises single or regular premium contracts under which a percentage of the premium is allocated to units in one or more unit-linked funds. These contracts do not provide significant death benefits in excess of the accumulated value of investment fund. They are classified as non-participating investment contracts.

The major unit-linked pension contracts include UK Active Money Self Invested Personal Pensions (SIPP), UK Active Money Personal Pension, UK Stakeholder, UK Group SIPP, UK Group Flexible Retirement Plan, UK Group Stakeholder and Trustee Investment Plan. These contracts do not contain a with-profits investment option except for UK Group Stakeholder and UK Stakeholder under which customers may invest in the UKSMWPF.

The costs of contracts invested in unit-linked funds are recovered by deduction of an asset management charge from the unit- linked funds. Under Stakeholder contracts, this asset management charge has a specified maximum limit. There are no other guarantees on these contracts with the exception that the unit prices of certain cash funds are guaranteed not to fall.

Under UK SIPP contracts, as well as investing in unit-linked funds offered by the Company, policyholders can choose to invest in a wide range of other permitted investments. These other investments are not recognised on the Company’s statement of financial position.

UK unit-linked investment bonds Unit-linked investment bonds (e.g. Capital Investment Bond) are single premium whole life contracts under which a percentage of the premium is allocated to units in one or more unit-linked funds. These contracts do not provide significant death benefits in excess of the accumulated value of investment fund. They are classified as non-participating investment contracts. There are no other guarantees on these contracts with the exception that the unit prices of certain cash funds are guaranteed not to fall.

German unitised with-profits deferred annuity contracts German unitised with-profits deferred annuities contracts are accepted under reinsurance from SL Inti in the PBF with the participating investment elements being transferred to the GWPF and, to a significantly lesser extent, to the GSMWPF. These contracts were closed to new business in 2015. The death benefit under all of the deferred annuities is the greater of the sum assured on death, 100% of the current surrender value, the fund value, and, for regular premium paying contracts and certain single premium contracts, a refund of premiums. These contracts are classified as participating insurance contracts.

The maturity value of contracts invested in the GWPF is subject to guaranteed minimum amounts. In addition, certain contracts are subject to guaranteed annuity amounts or guaranteed annuity factors and certain unit prices in the GWPF are guaranteed not to decrease.

The GWPF is operated such that all investment return on assets held in the fund will be distributed to participating policyholders over time subject to deductions of asset management charges and deductions for guarantees.

(b)(ii) Insurance and investment contracts issued before demutualisation and related reinsurance contracts HWPF participating contract allocations of regular and final bonuses This section firstly describes the method used by the Company to determine the regular and final bonuses allocated to participating contracts held in the FIWPF. It then describes the significant types of insurance and investment contracts held in that fund, the nature of any guarantees provided and significant reinsurance contracts.

As shown in the market risk sensitivity analysis in note 38, there is no impact on shareholder equity arising from contracts in the FIWPF for either of the market movements scenarios. As explained in the limitations of the sensitivity analysis, this is because although shareholders are potentially exposed to the full cost if the assets of the FIWPF are insufficient to meet policyholder obligations, the assumption changes given are not severe enough for such an event to occur.

Regular bonuses are declared at the discretion of the Company in accordance with the Principles and Practices of Financial Management (PPFM) of the HWPF and are set at levels which aim to achieve a gradual build-up in guaranteed participating policy benefits whilst not unduly constraining investment freedom and the prospects for final bonuses. In setting these rates, the financial position (both current and projected) of the HWPF is taken into account, and were it necessary, regular bonus rates would be set to zero. Regular bonus rates are set for each relevant class of participating policy and/or internal fund and reflect its characteristics, including any guarantees.

For some contracts, final bonuses may also be paid. These bonuses are not guaranteed and can be withdrawn at any time.

The Company’s aim is that, subject to meeting all contractual obligations and maintaining an adequate financial position, payouts on a participating policy (including any final bonus applying) should fairly reflect the experience of the HWPF applicable to such a policy, after any adjustments for smoothing, and any distribution of the residual estate deemed appropriate by the Company.

44 Standard Life Assurance Limited

Notes to the financial statements

2. Fund structures and insurance, investment and reinsurance contract terms continued

(b) Insurance, investment and reinsurance contract terms including guarantees and options continued (b)(ii) Insurance and investment contracts issued before demutualisation and related reinsurance contracts continued HWPF participating contract allocations of regular and final bonuses continued When setting payout levels, the Company seeks to ensure fair treatment between those participating policyholders who choose to withdraw and those who remain.

Asset shares are used as a tool to determine fair treatment. The calculation of asset shares varies between products, for example calculations can be on the basis of representative policies or on an individual policy basis.

The methodology and parameters used in payout calculations may, of necessity, involve some measure of approximation. The Company reviews regularly the methodology and parameters used and sets parameters on bases appropriate for the participating class and/or internal fund concerned.

In normal circumstances, the Company seeks to offer some smoothing of investment returns to participating policyholders at the time of claims due to maturity for life policies or for pension policies where the Company has no right to reduce benefits as defined in the relevant contractual terms and conditions. The Company may, at its discretion, also provide some smoothing of investment returns for death claims and some types of withdrawal at the time of payment. The Company aims to operate smoothing of investment returns in such a way as to be neutral for participating policyholders as a whole over time. The Company monitors the anticipated cost of smoothing on a regular basis and, in most circumstances, will reflect the costs in payouts and in some circumstances adjust the approach to smoothing.

When calculating asset shares, the Company may, at its discretion, make fair deductions to reflect its assessment of the cost of guarantees. The Company takes an allowance for the assessed costs of guarantees when determining final bonuses payable on claims, calculating policy switch values and calculating surrender and transfer values. These allowances vary between types of policies, reflecting the nature of the guarantees provided. These allowances are kept under review. A deduction is also taken from participating asset shares determined on an expense basis of 0.5% per annum as a contribution to the capital of the HWPF.

For policies eligible for a payment under Standard Life’s Mortgage Endowment Promise, an additional payment may be made on maturity subject to and in accordance with the terms of the Mortgage Endowment Promise as set out in the Scheme.

UK conventional with-profits contracts (no impact on shareholder profits in absence of burnthrough) Conventional (i.e. non-unitised) with-profits contracts consist of single or regular premium endowment, whole life and pension contracts held in the HWPF.

Under endowment and whole life contracts guaranteed benefits are payable on death. Regular bonuses may be added to the guaranteed sum assured over the term of the policy and, in addition, a final bonus may be paid on death and maturity. Certain endowment assurances have minimum surrender value provisions and minimum paid-up values.

Under pension contracts a minimum level of benefit is set at the outset and applies at the date(s) specified in the policy, for example under pure endowment contracts. Regular bonuses may be added to this initial minimum over the term of the policy and, in addition, a final bonus may be paid. Guaranteed annuity options providing for payment of a minimum annuity, in lieu of a cash sum, are available under pure endowment contracts. Under some of these contracts the guarantee applies only at the maturity date. Under other contracts, the option also applies for a specified period preceding the maturity date, in which case the sum assured and bonuses are reduced by specified factors and different guaranteed annuity rates apply.

All conventional with-profits contracts are classified as participating insurance contracts.

UK and Ireland unitised with-profits pension contracts This class of business comprises single or regular premium contracts held in the HWPF under which a percentage of the premium is allocated to units on a participating basis. Such contracts include hybrid contracts (see accounting policy 1(f)) resulting in the unitised with-profits investment elements being classified as participating investment contracts, although there are some contracts that are classified as participating insurance contracts, for example those with guaranteed minimum pensions. The major unitised with-profits pension contracts include Individual Personal Pension Plans, Group Personal Pension Plans, Executive Pensions and Stakeholder.

The significant options and guarantees under these contracts are where, subject to specified conditions, it is guaranteed either that the unit price will rise at an annual rate of at least 4% per annum or that the unit price will not fall, and, that there will be no unit price adjustment (UPA) at specified retirement dates or death.

45 Standard Life Assurance Limited

Notes to the financial statements

2. Fund structures and insurance, investment and reinsurance contract terms continued

(b) Insurance, investment and reinsurance contract terms including guarantees and options continued (b)(ii) Insurance and investment contracts issued before demutualisation and related reinsurance contracts continued UK and Ireland unitised with-profits life contracts Unitised with-profits life business comprises single or regular premium endowment and whole life contracts held in the HWPF under which a percentage of the premium is allocated to units on a participating basis. The death benefit under regular premium contracts is the greater of the bid value of units allocated and sum assured under the contract. Some contracts also contain critical illness cover providing for payment of a critical illness sum assured on diagnosis of certain defined serious illnesses. These contracts, principally Home Plan, With-profits Bonds and Versatile Investment Plans, are classified as participating insurance contracts.

The significant options and guarantees under these contracts are the following:

• Contracts where, subject to specified conditions, it is guaranteed on death or maturity either that the unit price will rise at an annual rate of at least 3% a year or that the unit price will not fall, and, that there will be no UPA at maturity; ® For bonds it is guaranteed that no UPA will apply on regular withdrawals up to certain specified limits.

Under contracts effected in connection with house purchase the death benefit is guaranteed. Under other regular premium contracts, at any time after the first 10 years, the Company may review the status of the contract and, if it deems it necessary, the sum assured may be reduced, within the limits permitted.

Under some contracts affected in connection with house purchase, provided the original contract is still in force the following options can normally be exercised at any time before the 55th birthday of the life assured:

• Future insurability option under which a new contract can be effected on then current premium rates, in connection with a further loan, up to the level of life and basic critical illness cover available on the original contract, without any further evidence of health. • Term extension option on then current premium rates under which the term of the contract may be extended by a whole number of years if the lender agrees to extend the term of the loan.

German unitised with-profits contracts Unitised with-profits German contracts held in the HWPF mainly consist of endowment assurances and deferred annuities, under which a percentage of each premium is applied to purchase units on a participating basis. The death benefit under endowment assurances is the greater of the sum assured on death or 105% of the current surrender value. The death benefit under deferred annuities is the greater of the sum assured on death, 100% of the current surrender value, the fund value and, for regular premium paying contracts and certain single premium contracts, a refund of premiums. These contracts are classified as participating insurance contracts.

The maturity value, and for certain contracts the surrender benefits, are subject to guaranteed minimum amounts. For some participating unitised policies it is guaranteed that there will be no UPA on claims on or after the surrender option date. Certain contracts are subject to guaranteed annuity amounts or guaranteed annuity factors. In addition certain unit prices in the HWPF are guaranteed not to decrease.

UK unit-linked pension contracts This class of business comprises single or regular premium contracts under which a percentage of the premium is allocated to units in one or more unit-linked funds held in the PBF.

Such contracts include hybrid contracts (see accounting policy 1(f)) resulting in the unit-linked investment elements being classified as non-participating investment contracts. The major unit-linked pension contracts include Individual Personal Pension Plans, Group Personal Pension Plans, Executive Pensions, Stakeholder and Trustee Investment Plans.

The costs of contracts invested in unit-linked funds are recovered by deduction of asset management charges from the unit- linked funds which are transferred from the PBF to the HWPF. Under Stakeholder contracts, this asset management charge has a maximum limit. There are no other guarantees on these contracts with the exception that the unit prices of certain cash funds are guaranteed not to fall.

UK unit-linked life contracts This class of business comprises principally unit-linked investment bonds (e.g. Capital Investment Bonds), classified as non­ participating investment contracts and the unit-linked investment element of Home Plan contracts, classified as non-participating insurance contracts. No significant guarantees, other than the guaranteed death benefit on Home Plan contracts, are provided under these contracts.

The costs of contracts invested in unit-linked funds are recovered by deduction of asset management charges from the unit- linked funds which are transferred from the PBF to the HWPF.

46 Standard Life Assurance Limited

Notes to the financial statements

2. Fund structures and insurance, investment and reinsurance contract terms continued

(b) Insurance, investment and reinsurance contract terms including guarantees and options continued (b)(ii) Insurance and investment contracts issued before demutualisation and related reinsurance contracts continued UK and Ireland annuity-in-payment contracts (no impact on shareholder profits in absence of burn through) This class of business consists of the same type of contracts described in section (b)(i) above and also includes the With Profit Pension Annuity (WPPA) under which changes to the level of annuity are based on a declared rate of return but reductions in the level of the annuity are limited. These contracts are classified as non-participating insurance contracts, except for the WPPA which is classified as a participating insurance contract.

The Company has reinsured both the longevity and market risk arising on a portfolio of annuity-in-payment contracts held within the HWPF. In order to limit counterparty credit exposure, the reinsurer was required to deposit back an amount equal to the reinsurance premium (referred to as ‘the deposit’). Interest is payable on the deposit at a floating rate. In respect of this arrangement the Company holds a ring-fenced pool of assets within the HWPF. See notes 7 and 38 for further details of the deposit back. A floating charge over the ring-fenced pool of assets has been granted to the reinsurer. The reinsurance asset recognised in relation to this arrangement is £3,768m (2018: £4,049m). The longevity risk on certain non-participating annuity- in-payment contracts held in the HWPF has been transferred to the PDF. The market risk on certain annuities has been transferred to the PBF. For those annuities in payment which increase at a predefined rate the total liability at 31 December 2019 is £2,251 m (2018: £2,345m) and this represents approximately 33% (2018: 33%) of the total liability for UK annuity in payment contracts held within the HWPF.

The total liability at 31 December 2019 for RPI linked annuities in payment (including any guaranteed minimum rate of escalation) is £1,540m (2018: £1,639m) and this represents approximately 23% (2018: 23%) of the total liability for UK annuity in payment contracts held within the HWPF. There is a subset of annuities where the RPI linked annuity payment cannot fall or is guaranteed to increase at a minimum rate; the majority of such annuities are those whose payment cannot fall.

UK other non-participating contracts This class of business consists primarily of deferred annuities that provide guaranteed annuity payments from the retirement age associated with the relevant pension plan. The payments depend on the survival of a life or lives with or without a guarantee period and may reduce on a specified death or increase each year at a predefined rate or in line with the increase in UK RPI. These contracts are classified as non-participating insurance contracts.

47 Standard Life Assurance Limited

Notes to the financial statements

3. Transfer of business During the year the Company completed its preparations for Brexit with a Part VII transfer of its Irish, German and Austrian branch business to SL Inti.

Prior to the Part VII transfer, the sale of SL Inti to Phoenix Group Holdings pic was agreed at a sale price equal to the carrying value of the investment in SL Inti held by the Company of £163m, plus an adjustment based on the carrying value of the assets and liabilities transferred to SL Inti under the Part VII transfer. The sale of SL Inti and the subsequent Part VII transfer were deemed to be a linked transaction. The settlement of the sale was made via an intercompany loan consideration between the Company and Phoenix Group, the terms of which reflect a commercially-available rate.

On 19 March 2019, the terms of a scheme under Part VII of the Financial Services and Markets Act 2000 to transfer all of the long-term business and the assets and liabilities of the Irish, German and Austrian branches of the Company to SL Inti was approved by the Court of Session. The Part VII transfer was conducted with effect from 29 March 2019. As a result of the Part VII transfer, the consideration received by the Company from the sale of SL Inti increased by £120m.

At the same time as the Part VII transfer, the Company entered reinsurance and retrocession arrangements with SL Inti totalling £11,972m and £795m, respectively.

The sale of SL Inti and the Part VII transfer result in a movement in the restructuring reserve of £8m, which represents the difference between the net assets transferred to SL Inti and the related loan consideration from Phoenix Group Holdings pic.

The following table represents the assets and liabilities transferred to SL Inti net of the linked reinsurance transaction.

Notes £m Assets Intangible assets 13 3 Deferred acquisition costs 14 161 Investments in subsidiaries 15 958 Investment property 16 33 Deferred tax asset 18 1 Reinsurance assets 29 14 Loans and deposits 1 Derivative financial assets 19 Equity securities and interests in pooled investment funds 4,280 Reinsurers' share of investment contract liabilities1 (795) Debt securities 391 Receivables and other financial assets 47 Other assets 8 Cash and cash equivalents 256 Total assets 5,377

Liabilities Non-participating insurance contract liabilities 29 983 Non-participating investment contract liabilities 29 4,149 Participating contract liabilities 29 (80) Deferred income 33 47 Current tax liabilities 9 Deferred tax liabilities 18 22 Derivative financial liabilities 36 Other financial liabilities 79 Other liabilities 4 Total liabilities 5,249 Net assets transferred to SL Inti 128 1 The reinsurers' share of investment contract liabilities of £795m represents the impact of the retrocession arrangement with SL Inti.

48 Standard Life Assurance Limited

Notes to the financial statements

4. Operating profit

The Company reports a non-GAAP measure of performance being operating profit. Operating profit is used as a performance measure of the underwriting activities of the Company as well as a key metric to manage the business. Operating profit is considered an appropriate measure of the underlying performance of the Company as it excludes the impact of short-term economic volatility and other one-off items.

Operating profit includes the effects of variances in experience for non-economic items, such as mortality and expenses, and the effect of changes in non-economic assumptions. It also incorporates the impacts of significant management actions where such actions are consistent with the Company’s core operating activities (for example, actuarial modelling enhancements and data reviews). Operating profit excludes investment return variances and economic assumption changes, non-operating items considered to fall outside of the course of the Company’s normal operations and shareholder tax.

Variances between actual and expected investment returns, and the impact of changes in economic assumptions on the valuation of liabilities are accounted for outside of the operating profit and presented in the IFRS profit before tax attributable to owners.

Other income and expense items which are excluded from operating profit include non-recurring items such as financial impacts of mandatory regulatory change, integration, restructuring or other significant one-off projects, and any other items which, in management’s view should be disclosed separately by virtue of their nature or incidence. In 2018 other income and expenses also contained profit attributable to non-shareholders, including coupons payable to holders of subordinated notes, which were repaid in 2018 but had been classified as non-shareholders’ equity under IFRS.

Operating profit

The following table shows operating profit for the Company reconciled to IFRS profit for the year:

2019 2018 £m £m Operating profit before tax 314 378 Total investment return variances and economic assumption changes (226) 112

Other income and expenses; Other non-operating items (65) 115 Profit attributable to non-shareholders 36 Total other income (65) 151

IFRS profit before tax expense attributable to owners 23 641 Total tax credit/(expense) attributable to owners profits 27 (122) IFRS profit for the year 50 519

Other non-operating items

Other non-operating items in 2019 include: • A £77m cost from the one-off impact of expense assumption changes following the Company entering in to a master services agreement for the provision of services by SLAESL to the Company. Whilst, the impact of the agreement is positive for the Company’s solvency position the IFRS impact is negative due to the impact of the changes on the valuation of IFRS insurance contracts at a Company level. • A £24m cost from the one-off impact on IFRS insurance contracts of establishing a reserve for expected future costs arising in relation to the reinsurance agreement with SL Inti. • A net benefit of £48m from a reduction in the annuity sales provision (see note 36), and • Restructuring and corporate transaction expenses amounting to £12m.

Other non-operating items in 2018 included: • A net benefit of £133m from impacts arising following the transfer of the Company to the Phoenix Group, including one- off impacts on the valuation of IFRS insurance contracts from aligning certain assumptions and estimates with those used by other Phoenix Group companies, and • Restructuring and corporate transaction expenses amounting to £18m.

49 Standard Life Assurance Limited

Notes to the financial statements

5. Investment return

Restated1 2019 2018 Notes £m £m Financial instruments other than those at FVTPL Interest income Cash and cash equivalents 42 27 Loans and deposits 55 47 Other 1 2 98 76 Foreign exchange gains on instruments other than at FVTPL 84 - Gain on financial instruments other than those at FVTPL 182 76

Financial instruments at FVTPL Dividend income 2,131 2,264 Gain/(loss) on financial instruments held at FVTPL2

Investment in subsidiaries 15 2,407 (2,452) Equity securities and interests in pooled investment funds 8,410 (6,507) Debt securities 2,475 188 Derivative financial instruments 486 543 Loans and deposits 36 6 Gain/(loss) on financial instruments held at FVTPL 15,945 (5,958) Gain/(loss) on financial instruments 16,127 (5,882)

Investment property Rental income 246 247 Net fair value (loss)/gain on investment property 16 (47) 114 199 361

Total investment return/(loss) 16,326 (5,521) ^ See note 19 for further information 2 Gains/(losses) including interest income, excluding dividend income

50 Standard Life Assurance Limited

Notes to the financial statements

6. Revenue from contracts with customers

(a) Revenue from contracts with customers

2019 2018 Notes £m £m

UK non-participating investment contracts

Fee income from non-participating investment contracts - Open 268 265 Fee income from non-participating investment contracts - Fleritage 174 231 Initial fees deferred during the year - Open 33 - (1) Amortisation of deferred income - Open 33 16 23 Amortisation of deferred income - Heritage 33 5 6

Revenue from UK non-participating investment contracts 463 524

Europe non-participating investment contracts

Fee income from non-participating investment contracts 15 72

Initial fees deferred during the year 33 (2) (8) Amortisation of deferred income 33 3 9

Revenue from Europe non-participating investment contracts 16 73

Other revenue from contracts with customers 5 -

Total revenue from contracts with customers 484 597

(b) Contract receivables, assets and liabilities

The Company has recognised the following receivables, assets and liabilities in relation to contracts with customers.

2019 2018

Notes £m £m Deferred acquisition costs on non-participating investment contracts 14 168 312

Total contract receivables and assets 168 312

Deferred income from investment and insurance contracts 33 (59) (130)

Total contract liabilities (59) (130)

7. Expenses under arrangements with reinsurers

2019 2018 £m £m Interest payable on deposits from reinsurers 33 30 Premium Adjustments 241 (52)

Expenses under arrangements with reinsurers 274 (22)

51 Standard Life Assurance Limited

Notes to the financial statements

7. Expenses under arrangements with reinsurers continued

The Company has reinsured the longevity and investment risk related to a portfolio of annuity contracts held within its Heritage With-profits Fund. At inception of the reinsurance contract the reinsurer was required to deposit an amount equal to the reinsurance premium with the Company. Interest is payable on the deposit at a floating rate. The Company maintains a ring- fenced pool of assets to back this deposit liability. Annuity payments under the reinsured contracts are made by the Company from the ring-fenced assets and the deposit liability is reduced by the amount of these payments. Periodically the Company is required to pay to the reinsurer or receive from the reinsurer Premium Adjustments defined as the difference between the fair value of the ring-fenced assets and the deposit amount, such that the deposit amount equals the fair value of the ring-fenced assets. This has the effect of ensuring that the investment risk on the ring-fenced pool of assets falls on the reinsurer. The investment return on the ring-fenced assets included in investment return in the income statement is equal to these expenses under arrangements with reinsurers.

8. Administrative expenses

2019 2018 Notes £m £m Commission expenses 107 130 Other interest expenses 3 3 Employee costs 9 5 21 Amortisation of intangible assets 13 16 16 Impairment losses on intangible assets 13 3 24 Impairment losses reversed on property and equipment 17 (2) - Investment management expenses 80 132 Service company recharge 283 368 Other (13) 2 Total expenses 482 696 Acquisition costs deferred during the year 14 (7) (29) Amortisation of deferred acquisition costs 14 47 73 Total administrative expenses 522 740

£12m (2018: £18m) of administrative expenses related to restructuring and corporate transaction costs.

9. Employee costs

Staff who manage the affairs of the Company are employed by SLAESL, a Phoenix Group company. Prior to 29 March 2019, the Company directly employed staff in Germany, who were transferred to SL Inti following the Part VII transfer. The costs incurred by the Company are set out below:

2019 2018 Notes £m £m The aggregate remuneration payable in respect of employees was: Wages and salaries 4 18

Social security costs 1 3

Total staff costs and other employee related costs 8 5 21

52 Standard Life Assurance Limited

Notes to the financial statements

9. Employee costs continued

2019 2018 Number Number The average yearly number of staff employed by the Company during the year was: Germany 61 238 Total average number of staff employed 61 238

10. Auditors’ remuneration

In 2019 auditors’ remuneration amounted to £0.6m (2018: £0.5m) in respect of the audit of the Company’s financial statements. Auditors’ remuneration for services other than the statutory audit of the Company are not disclosed in the Company’s financial statements since the consolidated financial statements of Phoenix Group Holdings pic, are required to disclose fees in respect of non-audit services on a consolidated basis.

11. Tax expense

The total tax expense is attributed as follows:

2019 2018 £m £m

Tax expense/(credit) attributable to policyholders’ returns 180 (80) Tax (credit)/expense attributable to shareholders’profits (27) 122 Total tax expense 153 42

The Company, as a proxy for policyholders in the UK, is required to pay taxes on investment income and gains each year. Accordingly, the tax benefit or expense attributable to UK life assurance policyholder earnings is included in the income tax expense. The tax expense attributable to policyholder earnings was £180m (2018: £80m benefit).

(a) Tax expense

2019 2018 Notes £m £m

Current tax: United Kingdom 132 146 International 2 9 Adjustment to current tax expense in respect of prior years (11) (17) Total current tax 123 138 Deferred tax: Deferred tax expense/(credit) arising from the current year 30 (142) Adjustment to deferred tax expense in respect of prior years - 46 Total deferred tax 18 30 (96) Total tax expense 153 42 Attributable to shareholders’ profits (27) 122

Unrecognised tax losses of £nil (2018: £12m) from previous years were used to reduce income tax expense.

The £1m of the adjustment to current tax expense in respect of prior year’s relates to policyholder tax, and is therefore included in the £180m in the reconciliation note 11b.

53 Standard Life Assurance Limited

Notes to the financial statements

11. Tax expense continued

(b) Reconciliation of tax expense

2019 2018 £m £m

Profit before shareholder tax 23 641 Tax at 19% (2018: 19%) 4 122 Permanent differences 5 (10) Different tax rates 3 (15) Adjustment to current tax credit in respect of prior years (12) (17) Recognition of previously unrecognised tax credit - (4) Adjustment to deferred tax expense in respect of prior years - 46 Write down/(reversal) of deferred tax liability (29) - Other 2 - Tax attributable to shareholders’ (27) 122 Policyholder tax 180 (80) Total tax expense 153 42

12. Dividends and appropriations

The Directors have proposed no final dividend for the year (2018: £nil). On 12 April and 22 November 2019 the Company made cash distributions of £132m and £348m, respectively.

In 2018, the Company paid a cash dividend of £312m relating to a dividend proposed in 2017, in addition to a distribution in specie of £378m and appropriations of £38m.

13. Intangible assets

2019 2018 Notes £m £m Cost or valuation At 1 January 204 196 Additions 3 8 Part VII and linked reinsurance 3 (21) - At 31 December 186 204

Amortisation and impairment At 1 January (152) (112) Amortisation charge 8 (16) (16) Impairment losses 8 (3) (24) Part VII and linked reinsurance 3 18 - At 31 December (153) (152)

Carrying amount At 1 January 52 84 At 31 December 33 52

Intangible assets consist wholly of internally generated software. Of the total carrying value above, £2m (2018: £6m) relates to intangible assets not yet ready for use. In 2019 impairment charges of £2m (2018: £24m) on intangible assets being developed under the Pensions Transformation programme and £1m (2018: Nil) on other intangible assets were recognised within administration expenses. The carrying value of the remaining Pensions Transformation intangible asset is £2m (2018: £2m). The element of the asset that was not impaired had additions of £2m during 2019 resulting in the carrying value of £2m at the end of 2019.

54 Standard Life Assurance Limited

Notes to the financial statements

14. Deferred acquisition costs

Insurance and Non­ participating participating investment investment contracts contracts Total 2019 Notes £m £m £m At 1 January 216 312 528 Additions 8 1 6 7 Amortisation charge 8 (8) (39) (47) Part VII and linked reinsurance 3 (55) (106) (161) Foreign exchange adjustment (11) (5) (16) At 31 December 143 168 311

2018 At 1 January 219 350 569 Additions 8 7 22 29 Amortisation charge 8 (12) (61) (73) Foreign exchange adjustment 2 1 3 At 31 December 216 312 528

The amount of deferred acquisition costs expected to be recovered after more than 12 months is £276m (2018: £461 m).

15. Investments in subsidiaries

The investments in subsidiaries held for investment and strategic purposes comprise:

2019 2018

Notes £m £m Investments in subsidiaries held for investment purposes Equity investments in subsidiaries held at FVTPL 15(a), 19 27,194 25,331 Loans 15(c), 19 179 213 Total investments in subsidiaries held for investment purposes 27,373 25,544

Investments in subsidiaries held for strategic purposes Equity investments in subsidiaries held at cost 15(b) 5 168 Loans 15(d), 19 9 56 Total investments in subsidiaries held for strategic purposes 14 224 Total investments in subsidiaries 27,387 25,768

55 Standard Life Assurance Limited

Notes to the financial statements

15. Investments in subsidiaries continued

(a) Equity investments in subsidiaries held at FVTPL The movement in equity investments in subsidiaries held at FVTPL during the year were as follows:

2019 2018 Notes £m £m At 1 January 25,331 53,977 Fair value gains/(losses) 5 2,407 (2,452) Acquisitions of controlling interest or increase of interest held 13,831 16,257 Cessation of controlling interest or disposal of interest held (13,078) (42,451) Part VII and linked reinsurance 3 (958) - Foreign exchange adjustment (305) 59 Other (34) (59) At 31 December 19 27,194 25,331

(b) Equity investment in strategic subsidiaries held at cost The movement in equity investments in strategic subsidiaries held at cost during the year were as follows:

2019 2018 Notes £m £m At 1 January 168 541 Additions - 5 Part VII and linked reinsurance 3 (163) - Distribution to parent - (378) At 31 December 5 168

On the 22 of February 2019, the ownership of SL Inti was transferred to Phoenix Group.

On 31 August 2018 the Company made a distribution in specie of £378m in respect of its shares in Standard Life Savings Limited, 1825 Financial Planning Limited and Standard Life Client Management Limited to SLA.

On 9 August 2018 the Company acquired Vebnet (Holdings) Limited from SLA for £1. In 2018 the Company made a £5m capital injection into Standard Life Assets and Employees Services Limited.

(c) Loans - investment subsidiaries The movement in loans during the year was as follows:

2019 20181 Notes £m £m At 1 January 213 65 Additions - 208 Settlement (23) (65) Foreign exchange adjustment (11) 5 At 31 December 19 179 213

1 The comparative disclosure has been restated to present the foreign exchange adjustment on a comparable basis to the current year. This has reduced additions by £5m from £213m to £208m with the £5m adjustment presented under foreign exchange adjustment.

Loans to subsidiaries consist of loans to finance property investments.

56 Standard Life Assurance Limited

Notes to the financial statements

15. Investments in subsidiaries continued

(d) Loans ~ strategic subsidiaries The movement in loans during the year was as follows:

2019 2018 Notes £m £m At 1 January 56 26 Additions - 47 Settlement (47) (17) At 31 December 19 9 56

Loans to strategic subsidiaries of £9m (2018: £10m) relate to loans to finance equity release mortgages provided by Standard Life Lifetime Mortgages Limited. During 2019 loans totalling £47m made to SLAESL were repaid.

(e) Subsidiaries held at FVTPL The following are particulars of the Company's largest investments in subsidiaries held at FVTPL at 31 December 2019, all of which are unlisted entities:

Country of % interest held or registration 2019 2018 Nature of business Standard Life UK Government Bond Trust* Scotland 100% 100% Unit trust ASI MyFolio Managed III Fund* Scotland 76% 73% OEIC** Aberdeen Liquidity Fund (Lux) - Seabury Euro Liquidity 1 Fund Luxembourg 99% 100% SICAV*** Standard Life European Trust II Scotland 100% 100% Unit trust Standard Life Short Dated UK Government Bond Trust* Scotland 100% 100% Unit trust Standard Life Pacific Basin Trust* Scotland 85% 86% Unit trust Standard Life Multi Asset Trust* Scotland 100% 100% Unit trust Standard Life International Trust Scotland 100% 100% Unit trust Standard Life UK Corporate Bond Trust* Scotland 100% 100% Unit trust Aberdeen Liquidity Fund (Lux) - Seabury Sterling Liquidity 2 Fund Luxembourg 86% 86% SICAV*** * Indicates the entity has a different reporting date to the Company. ** Open ended investment company (OEIC). *** Societe d’investissement a capital variable (SICAV).

A complete list of the Company’s subsidiaries, including unit trusts, OEICs and SICA Vs is included in note 45.

(f) Subsidiaries held at cost The following are particulars of the Company’s operating subsidiaries held at cost at 31 December 2019, all of which are unlisted entities:

Country of % interest held

or registration 2019 2018 Nature of business Standard Life Lifetime Mortgages Limited Scotland 100% 100% Mortgage finance Standard Life Pension Funds Limited Scotland 100% 100% Life assurance Standard Life Assets and Employee Services Limited Scotland 100% 100% Service company Vebnet (Holdings) Limited England & Wales 100% 100% Technology services Standard Life International Designated Activity Company Ireland - 100% Life assurance

57 Standard Life Assurance Limited

Notes to the financial statements

16. Investment property

2019 2018 Notes £m £m At 1 January 5,519 5,402 Additions - acquisitions 100 492 Additions - subsequent expenditure 111 54 Net fair value (losses)/gains 5 (47) 114 Foreign exchange adjustment (1) 4 Disposals (615) (547) Part VII and linked reinsurance 3 (33) - Change in right-of-use asset (61) -

At 31 December 4,973 5,519

The fair value of investment property can be analysed as Freehold 4,439 4,500 Long leasehold 534 1,019

4,973 5,519

The rental income arising from investment property during the year amounted to £246m (2018: £247m), which is included in investment return (see note 5). Direct operating expenses (included within other administrative expenses) arising in respect of such property during the year amounted to £21 m (2018: £20m).

Certain investment properties held by the Company possess a ground rent obligation which gives rise to both a right-of-use asset and a lease liability under IFRS 16. Under IAS 17, these leases were accounted for as finance leases. The right-of-use asset associated with the ground rent obligation is valued at fair value and is included within the total investment property valuation. The value of the ground rent right-of-use asset as at 31 December 2019 totalled £18m. The finance lease asset accounted for under IAS 17 for the period ended 31 December 2018 totalled £80m.

The change in the value of the right-of-use asset in the year is in line with the movement of the lease liability described in note 34.

The methods and assumptions used to determine fair value for investment property and property under development are discussed in note 40. All property valuations are provided by independent qualified professional valuers at 31 December 2019 or as at a date that is not more than 3 months before 31 December 2019. Where valuations have been undertaken at dates prior to the end of the reporting period adjustments are made where appropriate to reflect the impact of changes in market conditions between the date of these valuations and the end of the reporting period.

There are no restrictions on the realisability of investment property or the remittance of income and proceeds of disposal.

Future minimum lease rental receivables in respect of non-cancellable operating leases on investment property were as follows:

2019 2018 £m £m

Not later than 1 year 211 239 Later than 1 year and no later than 5 years 714 816 Later than 5 years 2,523 2,748 Total operating lease receivables 3,448 3,803

58 Standard Life Assurance Limited

Notes to the financial statements

17. Property and equipment

Owner occupied property Equipment Total Notes £m £m £m Cost or valuation At 1 January 2019 6 4 10 Impairment losses reversed 2 - 2 Part VII and linked reinsurance 3 - (4) (4) Other (1) - (1) At 31 December 2019 7 - 7

Accumulated depreciation At 1 January 2019 - (4) (4) Part VII and linked reinsurance 3 - 4 4 At 31 December 2019 - - -

Carrying amount at 31 December 2019 7 - 7

Owner occupied property Equipment Total £m £m £m Cost or valuation At 1 January 2018 7 4 11 Disposals (1) - (1) At 31 December 2018 6 4 10

Accumulated depreciation At 1 January 2018 and 31 December 2018 - (4) (4)

Carrying amount at 31 December 2018 6 6

If owner occupied property was measured using the cost model, the carrying amounts would be £7m (2018: £11m). Where the expected residual value of owner occupied property is in line with the current fair value, no depreciation is charged. Equipment primarily consisted of computer equipment

The methods and assumptions used to value owner occupied property are the same as those for investment property set out in note 16 and are discussed in note 40.

18. Tax assets and liabilities

2019 2018 Notes £m £m Current tax recoverable 23 109 134 Deferred tax assets - 1 Total tax assets 109 135

Current tax liabilities _ 56 Deferred tax liabilities 130 124 Total tax liabilities 130 180

There are no current tax assets or liabilities expected to be recoverable or payable in more than 12 months (2018: £nil).

59 Standard Life Assurance Limited

Notes to the financial statements

18. Tax assets and liabilities continued

(a) Recognised deferred tax

2019 2018 Notes £m £m Deferred tax assets comprise: Actuarial liabilities _ 3 Losses carried forward - 1 Deferred income 3 5 Tax acquisition expenses 6 7 Temporary timing differences 1 1 Other - 1 Gross deferred tax assets 10 18 Less: offset against deferred tax liabilities (10) (17)

Net deferred tax assets - 1

Deferred tax liabilities comprise: Unrealised gains on investment securities 100 45 Deferred acquisition costs 37 93 Insurance related items 3 4 Gross deferred tax liabilities 140 142 Less: offset against deferred tax assets (10) (18) Net deferred tax liabilities 130 124

Movements in deferred tax assets/(liabilities) comprise: At 1 January (123) (228) Amounts (charged)/credited to net profit 11 (30) 96 Part VII and linked reinsurance 3 21 - Foreign exchange adjustment 2 9 At 31 December (130) (123)

Finance (No. 2) Act 2015 set the rate of corporation tax at 19% from 1 April 2017, with a reduction from 19% to 18% from 1 April 2020. The Finance Act 2016 announced a further reduction in the rate from 18% to 17% from 1 April 2020.

The Finance Act 2012 introduced new rules for the taxation of insurance companies, with effect from 1 January 2013. The deferred tax on the non-profit surplus has reversed and was replaced with IFRS transitional adjustments. The deferred tax on the transitional adjustments is being amortised over a 10 year period on a straight-line basis commencing 2013 and ending in 2022 as the IFRS tax transitional adjustment is brought into account in the current tax computations.

Deferred tax assets and liabilities are netted off to the extent that legal offset is available under local tax law.

Deferred tax assets are recognised to the extent that it is probable that the losses will be capable of being offset against taxable profits and gains in future periods. The value attributed to them takes into account the certainty or otherwise of their recoverability.

Their recoverability is measured against anticipated taxable profits and gains based on business plans.

(b) Unrecognised deferred tax Due to uncertainty regarding recoverability, deferred tax has not been recognised in respect of the following assets/ (liabilities):

Tax reserves of the German branch of the Company of £nil (2018: £105m); these tax reserves have been utilised on the Part VII transfer to SL Inti.

60 Standard Life Assurance Limited

Notes to the financial statements

19. Financial investments

Restated1 2019 2018 Notes £m £m Financial investments at FVTPL: Classified as held for trading: Derivative financial assets 21 2,552 1,857 Total financial investments designated as held for trading 2,552 1,857

Designated upon recognition: Equity securities and interests in pooled investment funds 40 68,917 68,103 Reinsurers’ share of investment contract liabilities 40 3,978 2,914 Debt securities 40 30,875 32,376 Investments in subsidiaries 15 27,194 25,331 Total financial investments designated upon initial recognition 130,964 128,724 Total financial investments at FVTPL 133,516 130,581

Loans and receivables: Loans and deposits 20 310 30 Receivables and other financial assets 22 403 475 Investments in subsidiaries - loans 15 188 269 Cash and cash equivalents 24 706 1,188 Total loans and receivables 1,607 1,962 Total financial investments 135,123 132,543 See below for further information.

The amount of debt securities expected to be recovered after more than 12 months is £27,065m (2018: £29,280m). Due to the nature of equity securities and interests in pooled investment funds and reinsurers’ share of investment contract liabilities, there is no fixed term associated with these securities.

In the year the Company has chosen to present these contracts separately on the statement of financial position under reinsurers’ share of investment contract liabilities. This is to align the presentation by the Company with that of the Phoenix Group. As a result the prior year comparative have been restated to correspond to the current presentation. These contracts do not transfer significant insurance risk and so are not accounted for under IFRS 4. Instead they continue to be accounted for under IAS 39 Financial Instruments, with no change to their measurement. This has reduced the prior year equity securities and interests in pooled investment funds from £71,017m to £68,103m and presented £2,914m under reinsurers’ share of investment contract liabilities. The prior year comparative for investment losses have decreased from £5,664m to £5,521 m with the change of £143m presented under change in reinsurers’ share of investment contract liabilities. There is no impact on total assets, total equity and profit for the year as a result of this change.

61 Standard Life Assurance Limited

Notes to the financial statements

19. Financial investments continued

Following application of the temporary exemption granted to insurers in IFRS 4 from applying IFRS 9 until 1 January 2021 (IASB recommended extending the implementation date to 2022), the table below separately identifies financial assets with contractual cash flows that are solely principal and interest (excluding those held for trading or managed on a fair value basis) and all other financial assets, measured at fair value through profit or loss.

Fair value as at Change in fair value 31 December 2019 during 2019 £m £m Financial assets Financial assets with contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest1 1,607 Financial assets other than those above2 133,521 13,814

Total 135,128 13,814

Fair value as at Change in fair value 31 December 2018 during 2018 £m £m Financial assets Financial assets with contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest1 2,023 Financial assets other than those above2 130,748 (9,246) Total 132,771 (9,246) 1 Excluding any financial asset that meets the definition of held for trading in IAS 39, or that is managed and whose performance is evaluated on a fair value basis under IAS 39. 2 Any financial asset (i) with contractual terms that do not give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding; (ii) that meets the definition of held for trading in IAS 39; or (iii) that is managed and whose performance is evaluated on a fair value basis under IAS 39.

20. Loans and deposits

2019 2018 Notes £m £m Loans comprise: Loan to parent 43 288 - Loans secured by mortgages 40 20 27 Loans secured on policies 2 2 Deposits with banks in excess of 3 months - 1 Total loans and deposits 19 310 30

Loans with variable rates and fixed interest rates are £310m and £nil (2018: £29m and £1m) respectively. Loans that are expected to be recovered after more than 12 months are £307m (2018: £29m).

62 Standard Life Assurance Limited

Notes to the financial statements

21. Derivative financial instruments

The Company uses derivative financial instruments in order to match contractual liabilities, to reduce the risk from potential movements in foreign exchange rates, equity indices, property indices and interest rates, to achieve efficient portfolio management or for the transfer of risk between different parts of the business.

All derivative instruments have been classified as held for trading and are not part of a designated hedge relationship.

The following table provides an analysis of derivative instruments:

2019 2018 Contract Fair value Fair value Contract Fair value Fair value amount assets liabilities amount assets liabilities £m £m £m £m £m £m Equity derivatives: Futures 2,043 3 11 1,688 20 19 Options 2,008 325 161 1,973 546 52

Interest rate derivatives: Interest rate swaps 3,159 351 7 4,006 336 11 Interest rate floors 31 4 - - -- Options - - - 35 4 - Swaptions 6,796 1,717 16 6,721 885 3

Foreign exchange derivatives: Forwards 2,685 27 31 3,062 24 27

Other derivatives: Inflation rate swaps 908 4 14 636 6 21 Credit default swaps 1,185 109 8 362 6 10

Bond derivatives: Futures 4,507 12 32 3,631 30 17 Total derivative financial instruments held for 23,322 2,552 280 22,114 1,857 160 trading

22. Receivables and other financial assets

2019 2018 Notes £m £m

Amounts receivable on direct insurance business - 59 Amounts receivable on reinsurance contracts 1 - Outstanding sales of investment securities 123 145 Accrued income 93 83 Amounts due from related parties 67 31 Property related receivables 86 102 Other 33 55 Total receivables and other financial assets 19 403 475

The carrying amounts disclosed above reasonably approximate the fair values as at the year end. The amount of receivables and other financial assets expected to be recovered after more than 12 months is £18m (2018: £56m).

63 Standard Life Assurance Limited

Notes to the financial statements

23. Other assets

2019 2018 Notes £m £m

Current tax recoverable 18 109 134 Prepayments 13 16 Other 38 40 Total other assets 160 190

The amount of other assets expected to be recovered after more than 12 months is £nil (2018: £nil).

24. Cash and cash equivalents

2019 2018 Notes £m £m

Cash at bank and in hand 138 145 Money in call, term deposits and debt investments with less than 3 months to maturity from acquisition 568 1,043 Total cash and cash equivalents 19 706 1,188 Bank overdrafts 34 (8) (13) Total cash and cash equivalents for statement of cash flows 698 1,175

Cash in hand is non-interest bearing. All other cash and cash equivalents are subject to variable interest rates.

25. Share capital

Issued share capital

The allotted, issued and paid up share capital of the Company at the year end was:

2019 2019 2018 2018 Number £’000 Number £’000 Ordinary shares of £0.01 each 1,500,000,000 15,000 1,500,000,000 15,000 Ordinary shares of £0.01 each, £1 paid 118,403,162 1,184 118,403,162 1,184 Non-voting ‘B’ Ordinary shares of £1 each 5,000,000 5,000 5,000,000 5,000 Total 1,623,403,162 21,184 1,623,403,162 21,184

All the £0.01 ordinary shares in issue in the Company rank pari passu and carry the same voting rights and the rights to receive dividends and other distributions declared or paid by the Company.

The holders of ‘B’ ordinary shares are entitled to a discretionary non-cumulative dividend accruing at a specified rate per annum. The ‘B’ ordinary shares do not confer any further right of participating in the profits or assets of the Company other than as specified.

64 Standard Life Assurance Limited

Notes to the financial statements

26. Retained earnings

2019 2018 Notes £m £m At 1 January 783 2,039 Profit for the year attributable to shareholders 50 483 Remeasurement losses on defined benefit pension plans 32 - (64) Dividends paid (480) (312) Transfer from merger reserve 27 - 24 Distribution in specie of subsidiaries 12 - (378) De-recognition of UK and Ireland pension schemes 32 - (1,009) At 31 December 353 783

27. Movements in other reserves

The movement in the Company’s other reserves during the year is as follows

Foreign Capital currency contribution Merger Special Restructuring translation reserve reserve reserve reserve Total Notes £m £m £m £m £m £m At 1 January 2019 46 14 - 661 (146) 575 Exchange differences on translating foreign operations (15) _ --- (15) Part VII and linked reinsurance 3 -- -- (8) (8) At 31 December 2019 31 14 - 661 (154) 552

At 1 January 2018 41 14 24 661 (146) 594 Exchange differences on translating foreign operations 5 _ 5 Transfer to retained earnings on distribution of subsidiary 26 _ _ (24) _ (24) At 31 December 2018 46 14 - 661 (146) 575

Capital contribution reserve On 10 July 2006 Standard Life pic made a capital contribution of £200k to the Company. In August 2010 Standard Life pic made an additional capital contribution to the Company of £14m.

Special reserve On 21 July 2006, the Court of Session confirmed the cancellation of the Company’s entire share premium account of £1,766m. Following the reduction, a special reserve was created for the same amount against which was written off the sum of £1,005m, being the debit reserve which arose from the application of merger accounting principles to the demutualisation transaction and which represented the difference between the fair value and the book value of the life business assets and liabilities of SLAC at the time they were transferred to the Company. The special reserve forms part of the Company’s distributable profits for the purpose of section 830 of the Companies Act 2006. In 2012, a dividend of £100m was paid from the special reserve.

65 Standard Life Assurance Limited

Notes to the financial statements

27. Movements in other reserves continued

Restructuring reserve On 31 December 2011, the long-term business of Standard Life Investment Funds Limited, a wholly owned subsidiary of the Company, was transferred to the Company, under a Scheme of Transfer pursuant to Part VII of the Financial Services and Markets Act 2000. Following the Part VII transfer, £146m was transferred to the restructuring reserve being the difference between the net assets transferred under Part VII transfer and the value of the investment in subsidiary. Following merger accounting principles this reserve was created to reflect this balance in equity. The movement in the restructuring reserve of £8m in 2019, represents the difference between the net assets transferred to SL Inti in the 2019 Part VII transfer (see note 3) and the related loan consideration from Phoenix Group Holdings pic.

28. Non-shareholders’ equity

On 31 August 2018 the subordinated guaranteed bonds totalling £500m were repaid in full to SLA. The subordinated guaranteed bonds were perpetual securities and as such had no fixed redemption date. However, the bonds were redeemable at par at the option of the Company on 12 July 2027 and on every fifth anniversary thereafter. The Company had the option to defer the payment of interest on these bonds indefinitely. In accordance with the requirements of IAS 32 Financial Instruments: Presentation, the subordinated guaranteed bonds were classified as non-shareholders’ equity. Interest and accrued interest at 6.75% on any deferral was treated as profit attributable to non-shareholders and amounted to £36m.

29. Insurance contracts, investment contracts and reinsurance contracts

2019 2018 Notes £m £m Non-participating contract liabilities Non-participating insurance contracts 29(a) 13,524 14,601 Non-participating investment contracts 29(b) 91,867 90,786 Total non-participating contract liabilities 105,391 105,387

Participating contract liabilities Participating insurance contracts 29(a) 15,504 14,230 Participating investment contracts 29(a) 14,712 14,292 Unallocated divisible surplus 29(d) 429 453 Total participating contract liabilities 30,645 28,975

66 Standard Life Assurance Limited

Notes to the financial statements

29. Insurance contracts, investment contracts and reinsurance contracts continued

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

The movement during the year in insurance contract liabilities, participating investment contract liabilities and reinsurance assets is as follows: ______Total insurance and Reinsurers’ share of liabilities participating contracts1 (reinsurance assets) Net position Notes £m £m £m At 1 January 2019 43,123 (4,141) 38,982

Premiums 1,070 (24) 1,046 Claims (3,544) 427 (3,117) Part VII and linked reinsurance 3 (903) 14 (889) Other changes in liabilities 4,792 (123) 4,669 Foreign exchange adjustments (798) 1 (797) At 31 December 2019 43,740 (3,846) 39,894

At 1 January 2018 46,535 (4,811) 41,724 Premiums 1,298 (36) 1,262 Claims (3,694) 454 (3,240) Other changes in liabilities (1,162) 252 (910) Foreign exchange adjustment 146 - 146 At 31 December 2018 43,123 (4,141) 38,982

1 Unallocated divisible surplus (UDS) is a component of participating contract liabilities in the statement of financial position. Movement in UDS is disclosed in note 29(d).

Other changes in liabilities principally comprise of changes in economic and non-economic assumptions and experience.

Assumption changes During the year a number of changes were made to assumptions to reflect changes in expected experience or to harmonise the approach across the enlarged Phoenix Group. The impact of material changes during the year were as follows:

(Decrease)/increase in insurance liabilities 2019 2018 £m £m Change in longevity assumptions (56) (134) Change in persistency assumptions - (18) Change in mortality assumptions - (2) Change in expenses assumptions 93 6

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

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

Non-participating insurance contracts - Principal assumptions For non-participating insurance contracts, the assumptions used to determine the liabilities are updated at each reporting date to reflect recent experience. Material judgement is required in calculating these liabilities and, in particular, in the choice of assumptions about which there is uncertainty over future experience. These assumptions are determined as appropriate estimates at the date of valuation.

67 Standard Life Assurance Limited

Notes to the financial statements

29. Insurance contracts, investment contracts and reinsurance contracts continued

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

Mortality and longevity rates Mortality rates are based on company experience and published tables, adjusted appropriately to take account of changes in the underlying population mortality since the table was published, company experience and forecast changes in future mortality. Where appropriate, a margin is added to assurance mortality rates to allow for adverse future deviations. Annuitant mortality rates are adjusted to make allowance for future improvements in pensioner longevity.

Expenses The assumptions for future policy expense levels are determined from the Company’s recent expense analyses. No allowance has been made for potential expense improvement and the costs of projects to improve expense efficiency have been ignored. The assumed UK future expense levels incorporate an annual inflation rate for each future year, derived from a UK inflation swaps curve and an additional allowance for earnings inflation.

For non-participating immediate and deferred annuity contracts, an allowance for maintenance and investment expenses is included in the liabilities.

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

As part of the integration of the Company to the Phoenix Group, a MSA has been implemented between SLAL and its service company, SLAESL, to align the Company to the Phoenix Group’s operating model. The assumptions for future policy expense levels are now set in line with the rates defined by the MSA. The assumed UK future expense levels incorporate an annual inflation rate for each future year, derived from a UK inflation swaps curve plus fixed margins in accordance with the MSA. The change in expense assumptions resulting from the implementation of the MSA resulted in an increase in insurance contract liabilities of £77m.

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

(b) Non-participating investment contract liabilities

Change in non-participating investment contract liabilities is as follows: ______2019 2018 Notes £m £m At 1 January 90,786 104,309 Contributions 8,209 9,177 Account balances paid on surrender and other terminations (14,329) (16,998) Investment return and related benefits 11,914 (5,304) Part VII and linked reinsurance 3 (4,149) - Foreign exchange adjustment (211) 51 Recurring management charges (353) (449) At 31 December 91,867 90,786

(c) Expected settlement and recovery An indication of the term to contracted maturity/repricing date for insurance and investment contract liabilities is given in note 38. 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.

68 Standard Life Assurance Limited

Notes to the financial statements

29. Insurance contracts, investment contracts and reinsurance contracts continued

(d) Unallocated divisible surplus (UDS)

Movement in UDS is as follows: ______2019 2018 £m £m At 1 January 453 567 Change in UDS recognised in the income statement (115) (99) Foreign exchange adjustment 91 (15) At 31 December 429 453

30. Financial liabilities

2019 2018 Notes £m £m Financial liabilities at FVTPL Classified as held for trading: Derivative financial liabilities 21 280 160 Total financial liabilities classified as held for trading 280 160

Designated upon recognition: Non-participating contract liabilities 29 91,863 90,783 Total financial liabilities designated upon initial recognition 91,863 90,783 Total financial liabilities at FVTPL 92,143 90,943

Financial liabilities measured at amortised cost: Non-participating contract liabilities 29 4 3 Deposits received from reinsurers 3,881 4,097 Other financial liabilities 34 2,955 2,399 Total financial liabilities recognised at amortised cost 6,840 6,499 Total financial liabilities 98,983 97,442

31. Subordinated liabilities

On 31 August 2018 the subordinated intercompany loans were repaid in full to SLA. The sterling denominated Mutual Assurance Capital Securities (MACS) would bear interest at a rate of 6.546% per annum paid annually in arrears on 6 January. Amounts due under the MACS were classified as liabilities. This classification was determined by the interaction of these arrangements with a £100 internal subordinated loan note issued by the Company to Standard Life pic on 10 July 2006. There was no fixed redemption date for the internal loan note, but interest payments could not be deferred and must be paid on the date they became due and payable. Under the terms of the MACS any interest deferred on these instruments became immediately due and payable on the date of an interest payment in respect of the internal loan note. The existence of the internal loan note therefore removed the discretionary nature of the interest payments on the MACS, and resulted in their classification as liabilities.

69 Standard Life Assurance Limited

Notes to the financial statements

32. Pension and other post-retirement benefit provisions

Up until 31 August 2018 the Company was the sponsoring employer for the defined benefit plans. Details of the defined benefit and defined contribution pension plans operated by the SLA Group which were relevant to the Company in the United Kingdom, Ireland and Germany are outlined below. As there was no contractual agreement or policy for charging the net defined benefit cost of the defined benefit plans across the participating companies, the Company recognised the total defined benefit cost of the plans adjusted for the contributions made to the plans by other participating companies.

On 31 August 2018 the Company ceased to be the sponsoring employer and subsequently derecognised the UK and Ireland pension schemes at this point.

Plan regulations The plans were administered according to local laws and regulations in each country. Responsibility for the governance of the plans rested with the relevant Trustee Boards (or equivalent).

Defined benefit plans (a) Contributions to plans During 2018, actual contributions made to the plans by all participating companies amounted to £2m by UK entities and £1m by other entities.

(b) Analysis of amounts recognised in the income statement

2018 £m

Current service cost (2) Interest income 20 Administration expenses (2) Credit recognised in the income statement 16

The amounts in the table above relate to the total defined benefit cost of the plans adjusted for the contributions made to the plans by other participating companies.

(c) Movement in the net defined benefit asset The following table shows the comparatives for the year ended 31 December 2018:

Effect of limit Present value Fair value of on plan of obiigatior plan assets Total surpluses Total £rr £m £m £m £m At 1 January 2018 (2,963) 4,603 1,640 (592) 1,048 Current service cost (3) - (3) - (3) Administrative expenses (2) - (2) - (2) Interest (expense)/income (50) 79 29 (9) 20 Total (expense)/income recognised in the income statement (55) 79 24 (9) 15 Remeasurements: Return on plan assets, excluding amounts included - (170) (170) - (170) in interest income Loss from change in financial assumptions 70 - 70 - 70 Experience gains 1 - 1 - 1 Change in effect of limit on plan surpluses - - - 35 35 Remeasurements gain/(loss) recognised in other comprehensive income 71 (170) (99) 35 (64) Employer contributions - 2 2 - 2 Benefit payments 118 (118) - - - At 31 August 2018 (2,829) 4,396 1,567 (566) 1,001 De-recognition of UK and Ireland schemes 2,821 (4,396) (1,575) 566 (1,009) Transfer of German scheme to other liabilities 8 - 8 - 8

As at 31 December 2018 - - - --

70 Standard Life Assurance Limited

Notes to the financial statements

33. Deferred income

2019 2018 Notes £m £m At 1 January 130 157 Additions 6 2 9 Amortisation 6 (24) (38) Part VII and linked reinsurance 3 (47) - Foreign exchange adjustment (2) 2 At 31 December 59 130

Remaining performance obligations The following fee income revenue is expected to be recognised in the future and relates to performance obligations partly or wholly unsatisfied at the reporting date: More than 0-1 year 1-2 years 2-5 years 5 years £m £m £m £m Total remaining performance obligation in 2019 15 10 14 19 Total remaining performance obligation in 2018 31 23 45 31

34. Other financial liabilities

2019 2018 Notes £m £m Lease liabilities 18 - Property related creditors1 34 117 Amounts due to related parties 132 63 Accruals 59 66 Amounts payable on direct insurance business 212 333 Amounts payable on reinsurance contracts - 4 Outstanding purchases of investment securities 187 148 Cash collateral held in respect of derivative assets 1,999 1,424 Bank overdrafts 24 8 13 Negative futures margins 237 43 Other 69 188 Total other financial liabilities 30 2,955 2,399 ' In 2018 property related creditors included a £80m finance lease liability. Following application of IFRS 16, lease liabilities are now presented as a separate line item within other financial liabilities.

Bank overdrafts are subject to variable interest rates. The carrying amount of bank overdrafts disclosed above reasonably approximate the fair values as at the year end. The amount of other financial liabilities expected to be settled after more than 12 months is £43m (2018: £83m).

Lease liabilities

2019 £m

As at 1 January 80 Disposals (47) Interest expense 1 Lease payments (1) Remeasurements (15) As at 31 December 18 Amount due within twelve months 1 Amount due after twelve months 17

71 Standard Life Assurance Limited

Notes to the financial statements

34. Other financial liabilities continued

Maturity analysis - contractual undiscounted cash flows

2019 £m More than one year 1 More than one year and no later than five years 3 More than five years 45

35. Other liabilities

2019 2018 Notes £m £m

Provisions 36 35 213 Group relief - 50 Taxes payable 38 60 Total other liabilities 73 323

The amount of other liabilities expected to be settled after more than 12 months is £nil (2018: £20m).

36. Provisions

Provision for annuity sales practices Other provisions Total provisions £m £m £m At 1 January 2019 180 33 213 Part VII and linked reinsurance (note 3) - (4) (4) Additions in the year 31 10 41 Amounts used in year (126) (10) (136) Unused amounts reversed (79) - (79) At 31 December 2019 6 29 35

Provision for annuity sales practices Other provisions Total provisions £m £m £m

At 1 January 2018 248 30 278 Additions in the year - 11 11 Amounts used in year (68) - (68) Unused amounts reversed - (8) (8) At 31 December 2018 180 33 213

The amount of provisions expected to be settled after more than 12 months is £nil (2018: £20m).

Provision for annuity sales practices relating to enhanced annuities On 14 October 2016, the FCA published the findings of its thematic review of non-advised annuity sales practices. The Company was a participant in that review. The FCA looked at whether firms provided sufficient information to their customers about their potential eligibility for enhanced annuities.

At the request of the FCA, Standard Life have conducted a review of non-advised annuity sales (with a purchase price above a minimum threshold) to customers eligible to receive an enhanced annuity from 1 July 2008 until 31 May 2016. The purpose of this review was to identify whether these customers received sufficient information about enhanced annuities to make the right decisions about their purchase, and, where appropriate, provide redress to customers who have suffered loss as a result of not having received sufficient information. The review is now substantially complete and during 2019 the provision reduced from £180m to £6m. £126m was utilised in the year and there was a £79m reversal of unused amounts to reflect different experience in terms of the numbers of customers entitled to redress and the amount of redress per customer.

72 Standard Life Assurance Limited

Notes to the financial statements

36. Provisions continued

Provision for annuity sales practices relating to enhanced annuities continued

In relation to the review, the FCA carried out an investigation of the Company’s historic practices in the area. At the time of finalisation of the 2018 financial statements, it was not possible to determine a reliable estimate of any financial penalty that could have arisen as a result of the FCA investigation and a contingent liability disclosure was provided in this regard. The FCA’s review has now completed and the Company received a final notice in July 2019 which imposed a financial penalty on the Company of £31 m. The Company agreed to settle in accordance with the final notice and accordingly an addition to the provision of £31m was recognised as at 30 June 2019, and this has subsequently been paid.

37. Statement of cash flows

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

(a) Cash generated by operations

2019 2018 Notes £m £m Profit before tax 203 561 Non-cash movements in profit before tax: Amortisation of intangible assets 13 16 16 Amortisation of deferred acquisition costs 14 47 73 Change in unallocated divisible surplus 29 (115) (99) Impairment losses on intangible assets 13 3 24 Impairment losses reversed on property and equipment 17 (2) - Finance costs 1 15 Interest on lease liabilities 1 - Foreign exchange loss (15) - Adjustment for non-cash movements 1,539 (711) Net (decrease)/!ncrease in operating assets and liabilities (1,255) 1,081 Cash generated by operations 423 960

Supplemental disclosures on cash flows from operating activities Interest received 996 923 Dividends received 1,446 1,441 Rental income received on investment property 241 249

The Company’s operating portfolio of investment assets includes unit trusts and other investment funds, some of which are classified for financial reporting purposes as subsidiaries. Cash flows in relation to these assets are classified as operating cash flows.

73 Standard Life Assurance Limited

Notes to the financial statements

37. Statement of cash flows continued

(b) Net (decrease)/increase in operating assets and liabilities

Restated1 2019 2018 £m £m Change in operating assets: Investment property 405 (407) Pension and other post-retirement benefit assets - (20) Equity securities and interests in pooled investment funds 3,324 12,570 Reinsurers’ share of investment contract liabilities 333 (114) Debt securities 3,585 (543) Derivative net assets/(liabilities) (72) (176) Reinsurance assets 404 671 Investment in subsidiaries2 336 6,683 Receivables, other financial assets and other assets 33 (66) Deferred acquisition costs 9 (29) Loans and deposits 37 19 8,394 18,588

Change in operating liabilities: Other financial liabilities and other liabilities 432 188 Deposits received from reinsurers (216) (535) Deferred income - (28) Investment and insurance contract liabilities (9,865) (17,132) (9,649) (17,507) Net (decrease)/increase in operating assets and liabilities (1,255) 1,081 1 See note 19 for further information. 2 Investments in these investment vehicles have been classified as operating activities due to the nature of the underlying transactions.

(c) Movement in subordinated liabilities and other borrowings arising from financing activities

2019 2018 2018 Other1 Subordinated Other1 borrowings liabilities borrowings £m £m £m At 31 January 3 318 84 Cash flows from financing activities: Repayment of other borrowings (1) (80) Repayment of subordinated liability (300) - Interest paid (32) -

Non-cash movements: Interest capitalised 14 - Part VII and linked reinsurance (2) “ Other - (1) At 31 December - 3 1 Amounts included in other financial liabilities.

74 Standard Life Assurance Limited

Notes to the financial statements

38. Risk management

(a) Overview

Approach to risk management Taking rewarded risk is core to what Phoenix Group does as an organisation and we seek to take risks that are understood, managed effectively and consistent with our strategy. Risk management is the process by which these risks are identified, assessed, measured, monitored, reported on and mitigated as necessary.

Achieving the Phoenix Group’s strategy requires strong risk management at all levels of the organisation and a positive risk culture that supports informed decision-making and controlled risk-taking. The Company has developed specialist capabilities in the management of certain risk categories including customer treatment, proposition, capital management, tax, outsourcing and expense management.

The Company’s RMF enables the business to analyse its risk exposures and capital requirements, use this analysis to reduce exposure to unwanted risks, optimise capital allocation, and ensure the efficient release of capital to improve cashflows.

At the heart of the RMF is the Company’s ‘three lines of defence’. This model covers the detailed day-to-day risk management by those in the first line, with second and third line oversight and assurance provided to the Boards by Phoenix Group Risk and Phoenix Group Internal Audit Functions, respectively.

Risk Management Framework The Phoenix Group’s RMF embeds proactive and effective risk management across the Phoenix Group. It seeks to ensure that all risks are identified and managed effectively and that the Phoenix Group is appropriately rewarded for the risks it takes.

Over 2019 the Phoenix Group has completed work to design, implement and embed a combined framework that takes the best of the legacy Company and legacy Phoenix Group frameworks and is fit for purpose in managing the risks to the enlarged Phoenix Group, including those of the Company. A diagram showing the nine elements of the harmonised RMF is presented within the strategic report.

Phoenix Group Risk conducts an annual assessment of the Company’s adherence to the RMF that provides assurance to management and the Boards that the RMF has been implemented consistently and is operating effectively across the Phoenix Group.

75 Standard Life Assurance Limited

Notes to the financial statements

38. Risk management continued

(a) Overview continued

Risk universe The Company’s risk universe summarises the comprehensive set of risks to which the Company is exposed. The risk profile is an assessment of the impact and likelihood of those risks crystallising and the Company failing to achieve its strategic objectives. Changes in the risk profile are influenced by the commercial, economic and non-economic environment and are identified, assessed, managed, monitored and reported through the Phoenix Group’s RMF processes.

There are three levels of risk universe categories. The highest risk universe category is Level 1 and includes:

Level 1 category Definition

Strategic risk The risk to economic profit in the business plan and over the medium-term plan arising from a suboptimal business strategy, or the suboptimal implementation of the plan as agreed by the Board of Directors. Financial soundness The risk of financial failure, reputational loss, loss of earnings and/or value arising from a lack of liquidity, funding or capital, and/or the inappropriate recording, reporting and disclosure of financial, taxation and regulatory information. Market risk The risk of reductions in earnings and/or value, through financial or reputational loss, from unfavourable movements in market values and/or volatility. The risk typically arises from equity, property and bond exposures and the impact of interest rates and currency values. Credit risk The risk of reductions in earnings and/or value through financial or reputational loss as a result of the failure of the party with whom we have contracted to meet its obligations (both on and off balance sheet). Insurance risk The risk of reductions in earnings and/or value, through financial or reputational loss, due to experience variations in the timing, frequency and severity of insured/underwritten events and to fluctuations in the timing and amount of claim settlements. This includes fluctuations in profits due to new business, customer behaviour and as a result of annuity price competition. Customer risk The risk of reductions in expected earnings and/or value to the Company or customers, through financial, reputational or operational losses as a result of not treating customers fairly or inappropriate/poor customer treatment (including poor advice). Operational risk The risk of unplanned reduction in earnings and/or value, through financial or reputational loss from inadequate of failed internal processes or systems, or from people-related or external events.

The Company has also defined a more granular categorisation for Level 2 risks. This helps to further explain our attitude to these risks.

Unit-linked funds Unit-linked funds refers to the assets and liabilities of the Company’s unit-linked funds. It does not include the cash flows (such as asset management charges or investment expenses) arising from the unit-linked fund contract or the liabilities for insurance features or financial guarantees contained within the unit-linked fund contract. Such cash flows and liabilities are included in shareholder business or participating business. Further explanation of the fund structures is given in note 2.

The shareholder is exposed to operational, conduct, strategic, regulatory and legal risk and any losses incurred are typically borne by the shareholder.

(b) Strategic risk Strategic risks threaten the achievement of the Phoenix Group strategy through poor strategic decision-making, implementation or response to changing circumstances. The Company recognises that core strategic activity brings with it exposure to strategic risk. However, the Company seeks to proactively review, manage and control these exposures. The Company’s strategy and business plan are exposed to:

• External events that could prevent or impact the achievement of the strategy; • Events relating to how the strategy and business plan are executed; and • Events that arise as a consequence of following the specific strategy chosen.

The identification and assessment of strategic risks is an integrated part of the RMF. Strategic risk should be considered in parallel with the risk universe as each of the risks within the risk universe can impact the Phoenix Group’s strategy.

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38. Risk management continued

(b) Strategic risk continued A strategic overlay is particularly relevant when:

• the Life Companies and Phoenix Group’s annual operation plan (AOP) is being developed and executed; • the Life Companies and Phoenix Group’s project stack is being developed and executed; • the Life Companies and Phoenix Group’s Stress Testing Programme is being developed and executed; and • the Phoenix Group’s Own Risk and Solvency Assessment (ORSA) is being developed and published.

A strategic risk policy is maintained and reported against regularly, with a particular focus on risk management, stakeholder management, corporate activity and overall reporting against the Life Companies and Phoenix Group’s strategic ambitions.

(c) Financial soundness Financial soundness is a broad risk category encompassing liquidity risk, capital management risk and tax risk.

(c)(i) Liquidity risk As described in section (a), the shareholder is exposed to liquidity risk from shareholder, participating business and unit-linked funds.

For annuity, with-profits, and unit-linked business, liquidity risk is primarily managed by holding a range of diversified instruments which are assessed against estimated cash flow and funding requirements.

For annuity contracts, assets are held which are specifically chosen with the intention of matching the expected timing of annuity payments. The Company actively manages and monitors the performance of these assets against liability benchmarks and liquidity risk is minimised through the process of planned asset and liability matching.

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

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

For non-participating unit-linked contracts, a core portfolio of assets is maintained and invested in accordance with the mandates of the relevant unit-linked funds. Policyholder behaviour and the trading position of asset classes are actively monitored. The unit price and value of any associated contracts would reflect the proceeds of any sales of assets. If considered necessary, deferral terms within the policy conditions applying to the majority of the Company’s contracts are invoked. As at 31 December 2019 and 31 December 2018 none of the funds under management were subject to deferral.

The Company undertakes regular assessments of its cash flow requirements under normal conditions as well as considering scenarios where cash flows differ markedly from those expected (primarily due to extreme policyholder behaviour). In addition the Company performs periodic reviews of its liquidity risks and performs stress testing on these risks to define minimum liquid asset requirements. This mitigates the risk that the Company does not have appropriate liquidity under severe stress conditions.

The Company is required to monitor, assess, manage and control liquidity risk in accordance with the relevant principles within the Company’s risk policy framework. Oversight is provided both at a Phoenix Group level and within the Company. In addition, the Company benefits from membership of a larger Phoenix Group to the extent that, centrally, the Phoenix Group:

• Coordinates strategic planning and funding requirements; • Monitors, assesses and oversees the investment of assets within the Phoenix Group; • Monitors and manages risk, capital requirements, and available capital on a group-wide basis; and • Maintains a portfolio (currently undrawn) of committed bank facilities.

Each entity is responsible for the definition and management of its contingency funding plan. Liquidity risk is managed by each entity in consultation with the relevant Phoenix Group functions.

As a result of the policies and processes established with the objective of managing exposure to liquidity risk, the Company expects to be able to manage liquidity risk on an ongoing basis.

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38. Risk management continued

(c)(i) Liquidity risk continued The following tables present the expected timing of the cash flows payable on the amounts recognised on the statement of financial position for the insurance and investment contract liabilities of the Company as at the reporting date. To align with the risk management approach towards liquidity risk and existing management projections the analysis that follows facilitates consideration of the settlement obligations of both insurance and investment contracts.

Expected cash flows Greater No Within 2-5 6-10 11-15 16-20 than 20 defined 1 year years years years years years maturity Total 31 December 2019 £m £m £m £m £m £m £m £m Non-participating insurance contract liabilities 951 3,458 3,162 2,262 1,536 2,155 - 13,524 Non-participating investment contract liabilities 7,536 23,824 21,263 14,462 9,836 14,946 - 91,867 Participating insurance contract liabilities 1,175 3,699 3,127 2,928 2,657 1,918 - 15,504 Participating investment contract liabilities 1,331 5,243 4,197 2,313 1,071 557 - 14,712 Unallocated divisible surplus ------429 429 Total 10,993 36,224 31,749 21,965 15,100 19,576 429 136,036

31 December 2018 Non-participating insurance contract liabilities 1,029 3,544 3,381 2,459 1,726 2,461 - 14,600 Non-participating investment contract liabilities 8,261 25,088 20,980 13,757 9,154 13,546 - 90,786 Participating insurance contract liabilities 1,390 3,232 2,892 2,634 2,230 1,853 - 14,231 Participating investment contract liabilities 1,238 4,967 4,066 2,313 1,103 605 - 14,292 Unallocated divisible surplus ------453 453 Total 11,918 36,831 31,319 21,163 14,213 18,465 453 134,362

The tables below present the undiscounted cash flows payable by remaining contractual maturity at the reporting date and include the non-participating investment contract liabilities. The analysis excludes participating investment contract liabilities. Given that policyholders can usually choose to surrender in part or in full their unit-linked contracts at any time, the Company’s non-participating investment contract unit-linked liabilities presented in the table below have been designated as payable within 1 year. Such surrenders would be matched in practice, if necessary, by sales of underlying assets. The Company can delay settling liabilities to unit-linked policyholders to ensure fairness between those remaining in the fund and those leaving the fund. The length of any such delay is dependent on the underlying financial assets. In this analysis, the maturity within 1 year includes liabilities that are repayable on demand.

As required by IFRS 7 the amounts presented in the table below are the contractual undiscounted cash flows, whereas the Company manages inherent liquidity risk based on expected discounted cash flows.

Greater Within 1 2-5 6-10 11-15 16-20 than 20 year years years years years years Total 31 December 2019 £m £m £m £m £m £m £m Non-participating investment contracts 91,867 - - - - - 91,867

Derivative liabilities 221 13 20 19 14 16 303

Other financial liabilities 2,911 --- - - 2,911 Total 94,999 13 20 19 14 16 95,081

31 December 2018 Non-participating 90,786 - ---- 90,786 investment contracts Derivative liabilities (58) (4) - (15) (41) (11) (129) Other financial liabilities 2,581 20 23 23 23 - 2,670 Total 93,309 16 23 8 (18) (11) 93,327

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38. Risk management continued

(c)(i) Liquidity risk continued The principal amounts of financial liabilities where the counterparty has no right to repayment are excluded from the table along with interest payments on such instruments after 20 years.

Deposits received from reinsurers’ reflect the liability to repay the deposit received from an external reinsurer, in order to limit the Company's counterparty credit exposure, under a reinsurance transaction. The timing and amount of the payment of the cash flows under this liability are defined by the terms of the treaty under which there is no defined contractual maturity date to repay the deposit as at 31 December 2019.

(c)(ii) Capital management risk Capital management policies and objectives Managing capital is the on-going process of determining and maintaining the quantity and quality of capital appropriate for the Company, and ensuring capital is deployed in a manner consistent with the expectations of our stakeholders. For these purposes, the Company consider our key stakeholders to be the providers of capital (our equity holders, policyholders) and the PRA.

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

The capital requirements of the Company are forecast on a periodic basis, and the requirements are assessed against the forecast available capital resources. In addition, internal rates of return achieved on capital invested are assessed against hurdle rates, which are intended to represent the minimum acceptable return given the risks associated with each investment. Capital plans are ultimately subject to approval by the Board.

Regulatory capital framework From 1 January 2016 the Company has been required to measure and monitor it’s capital resource under the Solvency II (Sll) regulatory regime.

The Company has processes to manage and report its capital positions, and has capital framework policies that specify the buffer capital that the executive management believes is sufficient to hold within the Company.

The Company’s capital position under Sll is determined by aggregating the assets and liabilities of the Company recognised and measured on a Sll basis (being Company own funds) and comparing this to the Company’s Sll solvency capital requirement (SCR) to determine surplus capital.

Regulatory capital position (unaudited) On a Sll basis, as at 31 December 2019 the Company had unaudited own funds of £4.4bn (2018: £4.2bn) and a solvency capital requirement (SCR) of £2.5bn (2018: £2.5bn).

The Company has not breached any externally imposed capital requirements at any time during the year.

(c) (iii) Tax risk Tax risk is defined as the risk of financial or reputational loss arising from a lack of liquidity, funding or capital due to an unforeseen tax cost, or by the inappropriate reporting and disclosure of information in relation to taxation. The Company has exposure to tax risk through the annual statutory and regulatory reporting and through the processing of policyholder tax requirements. Tax risk is managed by maintaining an appropriately staffed tax team who have the qualifications and experience to make judgements on tax issues, augmented by advise from external specialists where required.

(d) Market risk As described in the table in section (a), the shareholder is exposed to market risk from shareholder business and participating business, as a result the following quantitative market risk disclosures are provided in respect of the financial assets of the shareholder and participating business.

Quantitative market risk disclosures are not provided in respect of the assets of the unit-linked funds since the shareholder is not exposed to market risks from these assets. The shareholder’s exposure to market risk on these assets is limited to variations in the value of future fee based revenue earned on the contracts as fees are based on a percentage of the fund value. The sensitivity to market risk analysis includes the impact on those statement of financial position items which are affected by changes in future fee based revenue due to the market stresses changing the value of assets held by the unit-linked funds.

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38. Risk management continued

(d) Market risk continued The Company manages market risks through the use of a number of controls and techniques including:

• Defined lists of permitted securities and/or application of investment constraints and portfolio limits; • Clearly defined investment benchmarks for policyholder and equity holder funds; • Stochastic and deterministic asset/liability modelling; • Active use of derivatives to improve the matching characteristics of assets and liabilities and to reduce the risk exposure of a portfolio; and • Setting risk limits for main market risks and managing exposures against these appetites.

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

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

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

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

• The economic liability and how this varies with market conditions; • The need to invest assets supporting participating business in a manner consistent with the participating policyholders’ reasonable expectations and the HWPF’s PPFM; and • The need to ensure that regulatory and capital requirements are met.

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

(d)(i) Elements of market risk The main elements of market risk to which the Company is exposed are equity risk, property risk, interest rate risk and foreign currency risk which are discussed below.

Information on the methods used to determine fair values for each major category of investment property and financial instrument measured at fair value is presented in notes 16 and 40.

(d)(i)(i) Equity risk The Company is exposed to the risk of adverse equity market movements which could result in a financial loss. This applies to daily changes in the market values and returns on the holdings in its equity securities portfolio. The Company’s shareholders are exposed to the following sources of equity risk:

• Burnthrough from the with-profits funds where adverse movements in the market values and returns on holdings in the equity portfolios of these funds mean the assets of the with-profits funds are not sufficient to meet their obligations; and • The indirect impact from changes in the value of equities held in funds from which management charges or a share of performance are taken.

Exposures to equity securities are primarily controlled through the use of investment mandates including constraints based on appropriate equity indices. For the participating business, exposures are also partially hedged through the use of derivatives.

Additionally, equity hedging instruments are used to provide protection against the impact of a fall in equities on the value of future management charges on policyholder business.

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38. Risk management continued

(d) Market risk continued (d)(i) Elements of market risk continued (d)(i)(i) Equity risk continued The tables below show the shareholder business and participating business exposure to different equity and property markets, arising from investments owned directly by the Company.

Equity exposure - by country

2019 2018

Participating and shareholder business £m £m UK 3,140 2,532 Australia 156 160 Canada 22 13 France 24 12 Germany 19 13 Ireland — 18 Netherlands 141 139 South Africa 68 66 Switzerland 57 82 US 18 41 Other 15 53 Total 3,660 3,129

Equity hedging instruments are held within the shareholder business to provide protection against the impact of a fall in equities on the value of future management charges on policyholder business.

(d)(i)(ii) Property risk The Company is exposed to the risk of adverse property market movements which could result in a financial loss. This applies to changes in the value and return on holdings in investment property. This risk arises from:

• Burnthrough from the with-profits funds where adverse movements in the market values and returns on investment property in these funds mean the assets of the with-profits funds are not sufficient to meet their obligations; and • The indirect impact from changes in the value of property held in funds from which management charges are taken.

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

• Any one property or group of property • Geographic area • Property type • Development property under construction

The shareholder business is not exposed to significant property price risk.

Investment property exposure - by sector

2019 2018

Participating and shareholder business £m £m Office 231 247 Industrial 290 284 Other 29 25 Total 550 556

The Company does not hold any residential investment property.

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38. Risk management continued

(d) Market risk continued (d)(i) Elements of market risk continued (d)(i)(iii) Interest rate risk Interest rate risk is the risk that arises from exposures to changes in the shape and level of yield curves which could result in financial loss due to the value of financial assets and liabilities, or the cash flows relating to these, fluctuating by different amounts.

The main financial assets held by the Company which give rise to interest rate risk are debt securities, loans and deposits, cash and cash equivalents. Insurance and investment contract liabilities exposed to interest rate risk principally comprise non-unit- linked liabilities. Other financial liabilities subject to interest rate risk include derivative financial instruments and borrowings.

Shareholder business The Company is required to manage its interest rate exposures in line with the Company’s qualitative risk appetite statements and quantitative risk metrics. The Company typically uses a combination of cash flow and duration matching techniques to manage their interest rate risk. Hedging is used to mitigate the risk that burnthrough may arise from the with-profits funds under certain circumstances where adverse interest rate movements could mean the assets of the with-profits funds are not sufficient to meet the obligations of the with-profits funds.

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

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

(d)(i)(iv) Foreign currency risk The Company’s financial assets are generally held in the local currency of its operational geographical locations principally to assist with matching of liabilities. However, foreign currency risk arises where adverse movements in currency exchange rates impact the value of revenues received from, and the value of assets and liabilities held in currencies other than the local currency. The Company can be exposed to foreign currency risk through the need to meet the expectations of particular groups of policyholders or to improve the Company’s risk profile through diversification. The Company manages the risk profile through the use of limits on the amount of foreign currency risk that is permitted.

The tables below summarise the Company’s foreign currency exposure, in sterling. The tables do not include the impact of derivative financial instruments which are used to hedge the Company’s exposure to foreign currency risk.

UK Sterling Europe Other Total

2019 2018 2019 2018 2019 2018 2019 2018 Participating and shareholder business £m £m £m £m £m £m £m £m Total assets 37,396 36,993 13,804 12,407 176 1,131 51,376 50,531 Total liabilities (38,015) (37,296) (12,264) (11,657) (58) (83) (50,337) (49,036) Total (619) (303) 1,540 750 118 1,048 1,039 1,495

Included within assets are £27m (2018: £3m) and in liabilities £32m (2018: £13m) in relation to derivatives used to manage currency risk exposures. Currency derivatives are held to provide economic hedges on some of the above exposures, including hedging euro denominated assets into sterling.

The foreign currency exposures shown above largely reflect the impact of financial assets being denominated in currencies other than the local currency of the operational geographic location. These exposures arise as a result of asset allocation decisions that are intended to meet the expectations of particular groups of policyholders or to improve the risk profile through diversification. The investment mandates used to manage the participating business contain limits to restrict the extent of foreign currency risk that can be taken and currency derivatives are held to provide economic hedges of some of the above exposures.

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Notes to the financial statements

38. Risk management continued

(d) Market risk continued (d)(ii) Sensitivity analysis - market risk The Company’s profit after tax and equity are sensitive to variations in respect of the Company’s market risk exposures and a sensitivity analysis presented in the tables that follow. The analysis has been performed by calculating the sensitivity of profit after tax and equity to changes in equity security, property prices and interest rates as at the reporting date.

Changes in equity security and property prices and/or fluctuations in interest rates will affect non-participating unit-linked liabilities and the associated assets by the same amount. Therefore, whilst the profit impact on unit-linked business has been included in the sensitivity analysis where there is an impact on the value of other statement of financial position, the change in unit-linked liabilities and the corresponding asset movement has not been presented.

For the participating business, in particular the HWPF and the GWPF, the risk to shareholders is that the assets of the fund are insufficient to meet the obligations to policyholders. Given the nature of the Company’s participating business, changes in equity security and property prices and/or fluctuations in interest rates will generally affect participating liabilities and the associated assets by the same amount. Therefore the change in participating contract liabilities and the corresponding asset movement has not been presented. However, under certain economic scenarios guarantees in participating contracts could require the shareholder to provide support to the participating business. This is presented as follows:

For the HWPF, whilst shareholders are only entitled to the recourse cash flows in respect of this business, there can be potential exposure to the full impact of any shortfall if the assets of the fund are insufficient to meet policyholder obligations. The recourse cash flows have been determined in accordance with the Scheme and consider the extent to which shareholders participate in the investment returns and surpluses of the HWPF. The Scheme, and in particular the Capital Support Mechanism, requires the financial state of the HWPF to be considered before recourse cash flows are transferred to the Shareholder Fund and, under certain circumstances, the payment of recourse cash flows can be withheld to support the financial strength of the HWPF. Therefore, the HWPF has been treated as a whole for the purpose of this sensitivity analysis and only the impact on the recourse cash flows of the sensitivity tests is presented. When assessing the impact of the sensitivity tests on the recourse cash flows, and in particular the risk that the assets of the HWPF may be insufficient to meet the obligations to policyholders, dynamic management actions have been assumed in a manner consistent with the relevant PPFM. The sensitivities presented are not sufficiently severe to have restricted recourse cash flows in 2019 and 2018.

For the GWPF, whilst shareholders are entitled to charges from this fund, there can be potential exposure to the full impact of any shortfall if the assets of the fund are insufficient to meet policyholder obligations. Profit after tax and equity are sensitive to the extent that the receipt of future charges is not taken into account in the measurement of the non-participating contract liabilities in the shareholder risk segment in economic scenarios where the charges are deemed foregone to support the participating liabilities. This sensitivity is included within the non-participating insurance contract liabilities in the table below.

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

For each sensitivity 'test', the impact of a reasonably possible change in a single sensitivity factor is presented, while the other sensitivity factors remain unchanged. Correlations between the different risks and/or other factors may mean that experience would differ from that expected if more than one risk event occurred simultaneously.

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

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38. Risk management continued

(d) Market risk continued (d)(ii) Sensitivity analysis - market risk continued Limitations continued The following tables present the impact which would have resulted from the given change in underlying assumptions at the year end.

Participating and shareholder business

Equity Interest +10% -10% +1% -1% 31 December 2019 £m £m £m £m (Decrease)/increase in profit after tax and equity

Non-participating insurance contract liabilities 541 (647)

Assets backing non-participating liabilities -- (540) 655 Other assets and liabilities (66) 110 (6) 6 Total (66) 110 (5) 14

31 December 2018 (Decrease)/increase in profit after tax and equity

Non-participating insurance contract liabilities - - 551 (664)

Assets backing non-participating liabilities -- (594) 713 Other assets and liabilities (108) 115 (20) 21 Total (108) 115 (63) 70

(e) Credit risk As described in section (a), the shareholder is exposed to credit risk from shareholder and participating business and as a result the following quantitative credit risk disclosures are provided in respect of the financial assets of these categories.

Quantitative credit risk disclosures are not provided in respect of the assets of the unit-linked funds since the shareholder is not directly exposed to credit risks from these assets. Included in unit-linked funds are assets which are held as reinsured external fund links. Under certain circumstances, the shareholder may be exposed to losses relating to the default of the reinsured external fund link. These exposures are actively monitored and managed by the Company and considers the circumstances under which losses may arise to be very remote.

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Notes to the financial statements

38. Risk management continued

(e) Credit risk continued (e)(i) Credit exposure The Company’s credit risk exposure mainly arises from its investments in its financial instruments. Concentrations of credit risk are managed by setting maximum exposure limits to types of financial instruments and counterparties.

The limits are established using the following controls:

Financial instrument with credit risk exposure Control Cash and cash equivalents Maximum counterparty exposure limits are set with reference to internal credit assessments.

Derivative financial instruments Maximum counterparty exposure limits, net of collateral, are set with reference to internal credit assessments. The forms of collateral that may be accepted are also specified and minimum transfer amounts in respect of collateral transfers are documented. Further details on collateral can be found in section (e)(iii).

Debt securities The Company’s policy is to set exposure limits by name of issuer, sector and credit rating.

Commercial mortgage loans Portfolio limits are set to specify the proportion of the value of the total portfolio of mortgage loans that are represented by single or a group of related counterparties, geographic area, employment status or economic sector, risk rating and loan to value percentage.

Infrastructure loans Portfolio limits are set to specify the proportion of the value of the total portfolio of infrastructure loans that are represented by single or a group of related counterparties, geographic area, infrastructure sectors and risk ratings.

Interests in pooled investment The Company’s policy is to place reinsurance only with highly rated counterparties. The funds and reinsurers’ share of Company must assign internal credit ratings to reinsurance counterparties which must be investment contract liabilities approved by the Company’s Credit Risk Committee. The Company is restricted from assuming concentrations of risk with few individual external reinsurers by specifying certain limits on ceding and the minimum conditions for acceptance and retention of reinsurers.

Other financial instruments Appropriate limits are set for other financial instruments to which the Company may have exposure at certain times, for example, commission terms paid to intermediaries.

The tables that follow provide an analysis of the quality of financial assets that are neither past due nor impaired at the reporting date and are exposed to credit risk. For those financial assets with credit ratings assigned by external rating agencies, classification is within the range of AAA to BBB. AAA is the highest possible rating and rated financial assets that fall outside the range of AAA to BBB have been classified as below BBB. For those financial assets that do not have credit ratings by external rating agencies but where the Company has assigned internal ratings for use in managing and monitoring credit risk, the assets have been classified in the analysis that follows as ‘internally rated’. The total amounts presented, represent the Company’s maximum exposure to credit risk at the reporting date without taking into account any collateral held. The analysis also provides information on the concentration of credit risk.

For reinsurance assets, where the counterparty is part of a group and a rating only exists for the parent of the group, then, where appropriate the rating of the parent company has been used.

The analysis presents assets that are neither past due nor impaired, assets that are past due and assets that are impaired. Assets are deemed to be past due when a counterparty has failed to make a payment when contractually due.

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

• a default against the terms of the instrument has occurred; and • the issuer is subject to bankruptcy proceedings or is seeking protection from creditors through bankruptcy, individual voluntary arrangements or similar process.

Financial assets held by custodians are properly segregated from the proprietary assets of the custodian and are free of the entitlements of creditors of the custodian in accordance with market conventions.

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38. Risk management continued

(e) Credit risk continued (e)(i) Credit exposure continued

An analysis of financial assets by credit rating within the shareholder and participating business is as follows:

Receivables Derivative and other Loans and Cash and cash financial Reinsurance financial Debt securities deposits equivalents assets assets assets Total 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 £m £m £m £m £m £m £m £m £m £m £m £m £m £m AAA 3,770 3,910 ------3,770 3,910 AA 7,793 8,732 - - 15 41 3 - 3,841 4,127 - - 11,652 12,900 A 5,136 4,987 -- 67 15 1,005 771 5 14 - - 6,213 5,787 BBB 2,373 2,390 --- 3 1,101 713 - - -- 3,474 3,106 Below BBB 278 294 ------278 294 Not rated 116 152 22 29 -- 298 282 - - 234 269 670 732 19,466 20,465 22 29 82 59 2,407 1,766 3,846 4,141 234 269 26,057 26,729 Past due ------2 1 2 1 Total 19,466 20,465 22 29 82 59 2,407 1,766 3,846 4,141 236 270 26,059 26,730

At 31 December 2019, receivables and other financial assets of £2m (2018: £1m) were past due by less than 3 months and are not impaired.

The shareholders’ exposure to credit risk arising from investments held in the HWPF and other with-profits funds is similar in purpose to that disclosed for market risk exposures in section (d). The financial assets of the HWPF include £3,829m (2018: £4,086m) of assets (primarily debt securities) deposited back under the terms of an external annuity reinsurance transaction, the transaction having been structured in this manner specifically to mitigate credit risks associated with reinsurer default. Credit losses and defaults within the portfolio of assets are borne by the external reinsurer.

As previously noted, IFRS 4 grants insurers a temporary exemption from applying IFRS 9 until 1 January 2021 (IASB recommended extending the implementation date to 2022). An additional requirement of the temporary exemption is to disclose information about the credit risk exposure, including significant credit risk concentrations, inherent in the financial assets, as outlined in note 19. The disclosures relate only to financial assets with contractual cash flows that are solely payments of principal and interest.

The company is required to disclose by credit risk rating grades as defined in IFRS 7, the carrying amounts applying IAS 39 (in the case of financial assets measured at amortised cost, before adjusting for any impairment allowances) and for the financial assets that do not have low credit risk at the end of the reporting period, the fair value and the carrying amount applying IAS 39 (in the case of financial assets measured at amortised cost, before adjusting for any impairment allowances). It is standard industry practice to deem any instrument or counterparty rated lower than BBB to be sub-investment grade. Therefore, assets rated lower than BBB have higher credit risk. Additional disclosure tables have been added to this effect below.

Financial assets with contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest excluding those held for trading or those managed and whose performance is evaluated on a fair value basis. An analysis of carrying amount of financial assets by credit rating per IFRS 9 as at 31 December 2019:

Investments in Receivables and subsidiaries - Loans and other financial Cash and cash loans deposits assets equivalents Total

Low Credit Risk Assets £m £m £m £m £m

AAA - - - 34 34

AA - -- 63 63

A - 288 - 609 897

Other assets with low credit risk 188 22 403 - 613

Total 188 310 403 706 1,607

1 Carrying amount applying IAS 39 (in the case of financial assets measured at amortised cost, before adjusting for any impairment allowances), The carrying amounts disclosed above reasonably approximate the fair values as at the year end.

86 Standard Life Assurance Limited

Notes to the financial statements

38. Risk management continued

(e) Credit risk continued (e)(i) Credit exposure continued An analysis of debt securities by country within the shareholder and participating business is as follows:

Other financial Government Banks institutions Other corporate Other1 Total 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 £m £m £m £m £m £m £m £m £m £m £m £m

UK 3,449 3,880 527 566 2,217 2,125 2,645 2,692 3 - 8,841 9,263

Canada 22 22 7 10 26 25 - - - 55 57

Australia — - 89 123 125 120 29 39 - - 243 282

Austria 342 331 -- 7 13 - - - 349 344

Belgium 645 604 1 5 - - 71 90 - - 717 699 Denmark -- 38 26 - - 19 13 - - 57 39 Finland 132 213 5 5 - - - -- 137 218

France 1,915 1,863 124 148 91 49 538 601 - - 2,668 2,661

Germany 2,655 2,705 11 11 85 84 330 376 - - 3,081 3,176

Ireland - -- - 13 17 10 22 - - 23 39

Italy -- 38 39 9 14 121 97 - - 168 150

Japan - 9 15 12 -- 35 33 - - 50 54

Jersey - - - - 92 89 9 - - - 101 89

Mexico ------111 149 - - 111 149

Netherlands 167 165 208 228 77 64 110 171 - - 562 628

Norway 5 5 3 4 13 - 76 91 - - 97 100

Portugal - - 2 - - - 2 2 -- 4 2 Singapore 24 22 - - 12 12 - - - - 36 34

Spain -- 87 84 - - 73 87 - - 160 171

Sweden - - 8 42 27 5 15 22 - - 50 69

Switzerland - - 52 49 28 27 16 33 - - 96 109

UAE 24 28 20 - - - - 1 - - 44 29

US 13 13 341 347 183 170 625 729 - - 1,162 1259 Other 38 51 7 16 120 101 148 252 338 424 651 844 Total 9,431 9,911 1,583 1,715 3,125 2,915 4,983 5,500 341 424 19,463 20,465 1 This balance primarily consists of securities held in supranational.

(e)(ii) Offsetting financial assets and liabilities The Company’s over the counter (OTC) derivatives are all subject to an International Swaps and Derivative Association (ISDA) master agreement, which provide a right of set off that is enforceable only in the event of default, insolvency, or bankruptcy. An ISDA master agreement is considered a master netting agreement.

The Company offsets loans to/from its parent where there is an unconditional right of set off and an intention to settle on a net basis. The Company does not offset any other financial assets and liabilities in the statement of financial position, as there are no unconditional rights to set off.

87 Standard Life Assurance Limited

Notes to the financial statements

38. Risk management continued

(e) Credit risk continued (e)(ii) Offsetting financial assets and liabilities The Company does not hold any other financial instruments which are subject to master netting agreements or similar arrangements. The following table presents the effect of master netting agreements:

Related amounts not offset in the statement of ______financial position______Gross amounts of financial instruments as presented in the Financial and cash statement of financial collateral pledged position Financial instruments (received) Net position As at 31 December 2019 £m £m £m £m Financial assets OTC derivatives 2,323 (228) (1,998) 97

Financial liabilities OTC derivatives (236) 228 1 (7)

As at 31 December 2018 Financial assets OTC derivatives 1,549 (117) (1,410) 22

Financial liabilities OTC derivatives (124) 117 7 -

(e)(iii) Collateral accepted and pledged in respect of financial instruments Derivative financial instruments Collateral in respect of derivatives is accepted from and provided to certain market counterparties in respect of derivative financial instruments to mitigate counterparty risk in the event of default. The use of collateral in respect of derivative financial instruments is governed by formal contractual agreements between the parties.

For derivatives, that are not centrally cleared, the amount of collateral required by either party is calculated at least daily based on the value of derivative transactions in accordance with these agreements and collateral is moved on at least a daily basis to ensure there is full collateralisation. With regard to either collateral pledged or accepted the Company may request the return of, or be required to return, collateral to the extent it differs from that required under the daily margin calculations. At 31 December 2019, the Company had pledged £83m (2018: £21 m) of securities as collateral for derivative financial liabilities. At 31 December 2019, the Company had accepted £1,998m (2018: £1,424m) of cash and £nil (2018: £nil) of securities as collateral. None of the above securities were sold or repledged at the year end.

For centrally cleared derivatives, an initial margin is required by the exchange/clearing house which acts as collateral. This is returned to the Company once the trades are closed or mature. Variation margin (net profit/loss) is calculated on at least a daily basis and is physically paid/received in cash on at least a daily basis so there are no collateral requirements to be posted in relation to variation margin. At 31 December 2019, the Company had posted £237m (2018: £70m) of cash in respect of initial margin requirements.

Any collateral moved under the terms of these agreements is transferred outright. Furthermore, alternative collateral such as securities may be provided if acceptable to both parties. Where there is an event of default under the terms of the agreements, any collateral balances will be included in the close out calculation of net counterparty exposure.

88 Standard Life Assurance Limited

Notes to the financial statements

38. Risk management continued

(e) Credit risk continued (e)(iii) Collateral accepted and pledged in respect of financial instruments

Reinsurance arrangement As described in note 3, the Company has entered into a Part VII transfer and reinsurance arrangement with SL Inti. Under the terms of this arrangement, all transferred with-profits business is reinsured back to the Company. As part of this reinsurance arrangement the Company is required to pledge certain assets relating to the reinsurance contracts as collateral.

The Company is not deemed to have transferred control of these assets to SL Inti and so these assets continue to be recognised on the balance sheet of the Company. As at 31 December 2019, £11,210m of assets are covered by a fixed charge.

(e)(iv) Credit spreads As at 31 December 2019, it is expected that an adverse movement in credit spreads of 50bps basis points would result in a reduction to profit for the year of £5m (2018: £33m).

(e)(v) Credit risk on loans and receivables and financial liabilities designated as FVTPL (e)(v)(i) Loans and receivables The Company holds a number of financial instruments, which meet the definition of loans and receivables under IAS 39 and on initial recognition were designated as FVTPL. These instruments are included in debt securities in the statement of financial position.

The Company’s exposure to such financial instruments at 31 December 2019 was £1,118m (2018: £1,652m). During the year, net fair value gains of £87m (2018: losses of £31 m) in relation to the loans and receivables was recognised in the income statement. The amount of this movement that is attributable to changes in the credit risk of these instruments was gains of £12m (2018: losses of £41m). The loans and receivables relating to unit-linked business consist solely of income strips (see note 40). Due to the long-term nature of these instruments it is not possible to identify the associated credit risk. The shareholder has no exposure to such risk.

The movement in the fair value of the loans and receivables incorporates both movements arising from credit risk and resulting from changes in market conditions.

(e) (v)(ii) Financial liabilities The Company has designated unit-linked non-participating investment contract liabilities as FVTPL. As the fair value of the liability is based on the value of the underlying portfolio of assets, the movement during the year and cumulatively in the fair value of the unit-linked participating investment contract liabilities is only attributable to market risk.

(f) Insurance risk As described in section (a), the shareholder is directly exposed to insurance risk from shareholder and participating business, as a result quantitative risk disclosures are provided in respect of these categories. Insurance risk is managed by analysing experience and using statistical data to make certain assumptions on the risks associated with the policy during the year that it is in force. Assumptions that are deemed to be financially significant are reviewed at least annually for pricing and reporting purposes. In analysing insurance risk exposures, the Company considers:

• Historic experience of relevant demographic and expense risks; • The potential for future experience to differ from that expected or observed historically; • The financial impact of variance in expectations; and • Other factors relevant to their specific markets, for example, obligations to treat customers fairly.

Reinsurance or other risk transfer mechanisms are used to manage risk exposures and are taken into account in the Company’s assessment of insurance risk exposures.

(f)(i) Elements of insurance risk The main elements of insurance risk that give rise to the Company’s exposure are discussed below.

Longevity The Company defines longevity risk as the risk that policyholders live longer than expected which gives rise to losses for the shareholder. This may arise from current experience differing from that expected, or the rate of improvement in mortality being greater than anticipated. This risk is relevant for contracts where payments are made until the death of the policyholder, for example, annuities.

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

89 Standard Life Assurance Limited

Notes to the financial statements

38. Risk management continued

(f) Insurance risk continued (f)(i) Elements of insurance risk continued Morbidity The Company defines morbidity risk as the risk that claims dependent on the state of health of a policyholder are incurred at a higher than expected rate or, in the case of income benefits, continue for a longer duration or start earlier than those assumed and could either arise over time or as a result of a single catastrophic event such as a pandemic. This risk will be present on disability income, healthcare and critical illness contracts. Income protection contracts have the risk that claim duration may be longer than anticipated.

Mortality The Company defines mortality risk as the risk that death claims are at a higher rate than assumed and could either arise over time or as a result of a single catastrophic event such as a pandemic. This risk will exist on any contracts where the payment on death is greater than the reserve held.

Persistency - withdrawals and lapse rates The Company defines persistency risk as the risk that clients or policyholders redeem their investments or surrender, lapse or pay-up their policies at different rates than assumed resulting in reduced revenue and/or financial losses. This risk may arise if persistency rates are greater or less than assumed or if policyholders selectively lapse when it is beneficial for them. If the benefits payable on lapse or being paid-up are greater than the reserve held then the risk will be of a worsening of persistency and if benefits are paid out that are lower than the reserve then the risk will be that fewer policyholders will lapse or become paid-up.

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

Variances in persistency will affect shareholder profits to the extent that charges levied against policies are dependent upon the number of policies in force and/or the average size of those policies. This risk is primarily relevant for unit-linked and unitised with-profits business. Profits may also be at risk if it is considered necessary, or prudent, to increase liabilities on certain lines of business.

(f)(ii) Sensitivity analysis - insurance risk Recognition of profits after tax and the measurement of equity are dependent on the methodology and key assumptions used to determine the Company’s insurance and investment contract liabilities, as described in note 2.

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

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

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

31 December 2019 Longevity Persistency Morbidity/mortality +5% -5% +10% -10% +5% -5%

(Decrease)/increase on profit after tax and equity £m £m £m £m £m £m Participating business Recourse cash flow (14) 13 - - (1) 1

Shareholder business Non-participating insurance contract liabilities (129) 121 -- (1) 1 Reinsurance assets - --- 1 (1) Total (143) 134 - - (1) 1

90 Standard Life Assurance Limited

Notes to the financial statements

38. Risk management continued

(f) Insurance risk continued (f)(ii) Sensitivity analysis - insurance risk continued

31 December 2018 Longevity Persistency Morbidity/mortality Restated1 Restated1

+5% -5% +10% -10% +5% -5% (Decrease)/increase on profit after tax and equity £m £m £m £m £m £m Participating business Recourse cash flow (17) 16 - - (1) 1

Shareholder business Non-participating insurance contract (123) 115 - - (D 1 liabilities Reinsurance assets - - - - 1 (1) Total (140) 131 -- (1) 1

' Restated as 2018 incorrectly disclosed the impact of mortality as persistency.

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

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

(g) Customer risk The Company defines customer risk as the risk that through our behaviours, strategies, decisions and actions the Company delivers unfair outcomes to our customer/client and/or poor market conduct.

The Company has a Conduct Risk Framework that ensures effective controls are embedded across our business activities to minimise customer risks, detects where our customers are at risk of poor outcomes, and responds with timely and appropriate mitigating actions.

The Conduct Risk Framework forms part of the risk universe within the RMF and ‘overarches’ all risk policies providing a mechanism for pulling together a holistic view of conduct risk ensuring alignment to the Phoenix Group conduct risk appetite statement and definition of conduct risk. Relevant risk categories, and therefore policies, within the risk universe will identify conduct related risks and minimum control standards. This facilitates an assessment of the conduct risk impact of non- compliance raised in other policies and the identification of underlying themes and trends.

The following are central to the Conduct Risk Framework:

• Culture • Proposition design • Communication and information • Advice and distribution • Service • Barriers • Proposition performance • Market integrity

91 Standard Life Assurance Limited

Notes to the financial statements

38. Risk management continued

(h) Operational risk Operational risk is the risk of reductions in earnings and/or value, through financial or reputational loss, from inadequate or failed internal processes and systems, or from people-related or external events.

The framework for identifying and managing operational risks comprises the following elements:

Approach The Company has a framework in place to manage operational risk.

Risk culture The Company seeks a culture based on clearly articulated values and behaviours, where risk management is part of what we do. Governance Appropriate governance arrangements to manage/oversee operational risk are in place to ensure that business is planned, executed, controlled and monitored in an efficient manner. Identification The Company seeks to ensure that all material operational risks are identified and captured through the components of the operational risk framework including Risk and Control Self-Assessment (RCSA), Incident Management, Key Risk Indicators and the SCR process. Risk and control The Company identifies and assesses operational risk to determine its impact and seeks to operate a environment strong control environment, where tolerance of operational risk within the business is subject to appropriate and proportionate levels of control. Monitoring and Regular monitoring and reporting is undertaken to support the management of operational risks within management agreed parameters, which through alignment to the business area and Company governance information structure, will support visibility of information, and hence to inform decision makers and drive appropriate action.

Operational risk arises due to failures in one or more of the following aspects of our business:

• Indirect exposures through our outsourcing service providers and suppliers; « Direct exposures through internal practices, actions or omissions; • External threats from individuals or groups focused on malicious or criminal activities, or on external events occurring which are not within the Company’s control; and • Negligence, mal-practice or failure of employees, or suppliers to follow good practice in delivering operational processes and practices.

It is accepted that it is neither possible, appropriate nor cost effective to eliminate operational risks from the business as operational risk is inherent in any operating environment particularly given the regulatory framework under which the Company operates. As such the Company will tolerate a degree of operational risk within the business subject to appropriate and proportionate levels of control around the identification, management and reporting of such risks.

92 Standard Life Assurance Limited

Notes to the financial statements

39. Structured entities

A structured entity is defined as an entity where control is not necessarily held through voting rights linked to ownership stake but rather through rights arising from contractual agreements that give power to direct the relevant activities. The Company’s interest in structured entities is comprised of investments in a range of investment vehicles. The principal types of structured entities in which the Company has an interest include: • Pooled investment funds and reinsurers’ share of investment contract liabilities managed internally and externally, including OEICs, SICAVs, unit trusts and limited partnerships; and • Debt securitisation vehicles which issue asset backed securities.

The Company has not provided any non-contractual financial or other support to any structured entities and there are no current intentions to do so.

Investments in structured entities The following table shows the carrying value of the Company’s investments in structured entities by line items in the statement of financial position.

Restated*1 2019 2018 ^£m Investments in subsidiaries 27,194 25,331 Equity securities and interests in pooled investment funds 39,074 40,871 Debt securities 1,661 1,783 1 The 2018 comparative in relation to equity securities and interests in pooled investment funds have been restated to conform to the current year’s presentation of reinsurance contracts under which the transfer of insurance risk from the Company to the reinsurer is not significant. Additionally, the 2018 comparative for debt securities was updated following an alignment exercise within the wider Phoenix Group relating to the determination of which issuers were considered structured entities. Accordingly the 2018 comparative for investment in structured equities and interests in pooled investment funds has been reduced by £2,914m from £43,785m and the 2018 comparative for investment in debt securities issued by structured entities reduced by £510m from £2,293m.

The asset value of investments in subsidiaries including the portion of which the Company has no interest is £32,127m (2018: £32,154m).

The total issuance balance relating to debt securities in which the Company has an investment in is £29,493m (2018: £29,100m).

The Company’s maximum exposure to loss in respect of the interests presented above is the carrying value of the Company’s investment. As noted in note 38, the shareholder is not exposed to market or credit risk in respect of investments held in the unit-linked funds.

Additional information on how the Company manages its exposure to risk can be found in note 38.

A complete list of the Company’s subsidiaries, including unit trusts and OEICs is included in note 45.

93 Standard Life Assurance Limited

Notes to the financial statements

40. Fair value of assets and liabilities

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

Level 1: Fair values measured using quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: Fair values measured using inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3: Fair values measured using inputs that are not based on observable market data (unobservable inputs).

For financial instruments that are recognised at fair value on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation at each reporting date and at the half-year point. Transfers identified are deemed to have taken place at the start of the reporting period.

(b) Financial investments and financial liabilities An analysis of the Company’s financial investments and financial liabilities in accordance with the categories of financial instrument set out in IAS 39 is presented in notes 19 and 30 and includes those financial assets and liabilities held at fair value.

(b) Non-financial investments An analysis of the Company’s investment property and owner occupied property within property and equipment in accordance with IAS 40 Investment property and IAS 16 Property, plant and equipment is presented in notes 16 and 17 respectively and includes those assets held at fair value.

(c) Methods and assumptions used to determine fair value of assets and liabilities The Company uses the methods applied by Phoenix Group to determine fair values for each major category of financial instrument measured at fair value. Information on these methods and assumptions is given below.

Investment property and owner occupied property The fair value of investment property and all owner occupied property is based on valuations provided by external property valuation experts. The fair value of investment properties is measured based on each property’s highest and best use from a market participant’s perspective and considers the potential uses of the property that are physically possible, legally permissible and financially feasible. No adjustment has been made for vacant possession for the Phoenix Group’s owner occupied property.

In the UK and Europe, valuations are completed in accordance with the Royal Institution of Chartered Surveyors (RIGS) valuation standards. These are predominantly produced using an income capitalisation approach. The income capitalisation approach is based on capitalising an annual net income stream using an appropriate yield. The annual net income is based on both current and estimated future net income. The yield and future net income used is determined by considering recent transactions involving properties with similar characteristics to the property being valued. Where it is not possible to use an income capitalisation approach, for example on property with no rental income, a market comparison approach is used by considering recent transactions involving properties with similar characteristics to the property being valued. In both approaches, where appropriate, adjustments will be made by the valuer to reflect differences between the characteristics of the property being valued and the recent market transactions considered.

As income capitalisation and market comparison valuations generally include significant unobservable inputs including unobservable adjustments to recent market transactions, these assets are categorised as level 3 within the fair value hierarchy.

Derivative financial assets The majority of the Company’s derivatives are OTC derivatives which are measured at fair value using a range of valuation models including discounting future cash flows and option valuation techniques. The inputs are observable market data and OTC derivatives are therefore categorised as level 2 in the fair value hierarchy.

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

Non-performance risk arising from the credit risk of each counterparty has been considered on a net exposure basis in line with the Company’s risk management policies. At 31 December 2019 and 31 December 2018 the residual credit risk is considered immaterial and no credit risk adjustment has been made.

Investments in subsidiaries at FVTPL, equity securities and interests in pooled investment funds and reinsurers’ share of investment contract liabilities Investments in subsidiaries at FVTPL are valued in the same manner as the Company’s equity securities and interests in pooled investment funds and reinsurers’ share of investment contract liabilities.

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

94 Standard Life Assurance Limited

Notes to the financial statements

40. Fair value of assets and liabilities continued

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

Investments in subsidiaries at FVTPL, equity securities and interests in pooled investment funds and reinsurers’ share of investment contract liabilities continued

The Company’s exposure to unlisted equity securities primarily relates to private equity investments. The majority of the Company’s private equity investments are carried out through European fund of funds structures, where the Company receives valuations from the investment managers of the underlying funds.

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

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

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

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

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

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

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

Income strips Income strips are transactions where an owner-occupier of a property has sold a freehold or long leasehold interest to the Company, and has signed a long lease (typically 30 - 45 years) or a ground lease (typically 45-175 years) and retains the right to repurchase the property at the end of the lease for a nominal sum (usually £1).

The valuation technique used by the Company to value these instruments is an income capitalisation approach, where the annual rental income is capitalised using an appropriate yield. The yield is determined by considering recent transactions involving similar income strips. Unlike investment properties which typically are leased on shorter lease terms, the estimated rental value is not a significant unobservable input. This is due to the length of the lease together with the nature of the rent reviews where the annual rental increases over the term of the lease in line with inflation or fixed increases. As the income capitalisation valuations generally include significant unobservable inputs including unobservable adjustment to the yield observed in other income strip transactions, these assets are categorised as level 3 in the fair value hierarchy.

95 Standard Life Assurance Limited

Notes to the financial statements

40. Fair value of assets and liabilities continued

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

Debt securities continued Infrastructure Loans These instruments are valued using models. The models use a discounted cash flow technique where future cash flows (including principal, interest and arrangement fees) are discounted to determine their present value. These inputs are generally observable with the exception of the spread used in the determination of the discount factor.

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

(d)(i) Fair value hierarchy for assets measured at fair value in the statement of financial position The table that follows presents an analysis of the Company’s assets measured at fair value by level of the fair value hierarchy:

Fair value hierarchy Level 1 Level 2 Level 3 Total Restated'z Restated' ^ Restated1 2019 2018 2019 2018 2019 2018 2019 2018 £m £m £m £m £m £m £m £m Investment in subsidiaries 27,053 3,261 70 21,974 71 96 27,194 25,331 Investment property - -- - 4,973 5,519 4,973 5,519 Owner occupied property - - -- 7 6 7 6 Derivative financial assets 228 308 2,324 1,549 - - 2,552 1,857 Equity securities and interests in 67,489 67,080 482 - 946 1,023 68,917 68,103 pooled investment vehicles Reinsurers’ share of investment 3,199 2,878 779 36 - - 3,978 2,914 contract liabilities Debt securities 13,498 14,510 15,500 16,229 1,877 1,637 30,875 32,376 Total financial assets at fair 111,467 88,037 19,155 39,788 7,874 8,281 138,496 136,106 value See note 19 for further information. Following an alignment exercise within the wider Phoenix Group, the Company no longer adjusts the quoted prices of pooled investment funds classified as investments in subsidiaries. As a result, £21,870m of investments in subsidiaries were transferred form level 2 to level 1 during the year (2018: £nil).

There were no transfers of financial instruments from level 1 to level 2 during the year (2018: £nil).

(d)(ii) Fair value hierarchy for liabilities measured at fair value in the statement of financial position The table that follows presents an analysis of the Company’s liabilities measured at fair value by level of the fair value hierarchy:

Fair value hierarchy Level 1 Level 2 Level 3 Total 2019 2018 2019 2018 2019 2018 2019 2018 £m £m £m £m £m £m £m £m Non-participating investment - - 91,863 90,786 -- contract liabilities 91,863 90,786 Derivative financial liabilities 43 35 237 125 -- 280 160 Total financial liabilities at fair 43 35 92,100 90,911 - - 92,143 90,946 value

There were no transfers between levels 1 and 2 during the year (2018: £nil).

96 Standard Life Assurance Limited

Notes to the financial statements

40. Fair value of assets and liabilities continued

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

(d)(iii) Reconciliation of movements in level 3 instruments The movements during the year of level 3 assets and liabilities held at fair value, are analysed below:

Equity securities and interests in Owner pooled Investment in Investment occupied investment subsidiaries property property funds Debt securities 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 £m £m £m £m £m £m £m £m £m £m At 1 January 96 973 5,519 5,402 6 7 1,023 168 1,637 1,443 Total gains/(losses) recognised in the 6 52 (47) 114 2 - (133) (37) 87 (31) income statement Purchases 3 - 211 406 -- 91 856 305 327 Disposal proceeds - (871) (616) (547) - (D (25) (7) (146) (102) Transfers out of level 3 ------(3) - Reclassification between investment -- - 140 ------property and debt securities Part VII and linked reinsurance - - (33) ------Foreign exchange adjustment - - 1 4 - - (10) - (3) - Other (34) (58) (62) - (D - - 43 - - At 31 December 71 96 4,973 5,519 7 6 946 1,023 1,877 1,637

As at 31 December 2019, of total losses, £64m (2018: losses of £105m) were recognised in the income statement for assets and liabilities held at fair value classified as level 3 at year end.

Transfers into level 3 generally arise when external pricing providers stop providing a price or where the price provided is considered stale. Transfers out of level 3 arise when acceptable prices become available from external pricing providers.

97 Standard Life Assurance Limited

Notes to the financial statements

40. Fair value of assets and liabilities continued

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

(d)(iv) Significant unobservable inputs in level 3 instrument valuations

Effect of changes of significant unobservable assumptions to reasonable possible alternative assumptions continued The table below identifies the significant unobservable inputs used in determining the fair value of level 3 instruments and quantifies the range of these inputs used in the valuation at the reporting date:

Fair value Valuation Range 31 December 2019 £m technique Unobservable input (Weighted Average) Investment property and owner 33 Development Profit on costs % 10% occupied property appraisal Construction cost per SQ metre £2,372 Investment property and owner 4,925 Income Equivalent Yield 3.6% - 10.0% (5.1%) occupied property capitalisation Estimated rental value per square £54 - £940 (£284) metre Equivalent Yield 4.8% - 6.5% (5.5%) Estimated rental value per parking £995-1,429 (£1,169) space Equivalent Yield 4.2% - 5.7% (4.9%) Estimated rental value per room £4,789-£12,500 (£8,298)

Investment property and owner 22 Market Capital Value per unit (square £2-£124 (£114) occupied property comparison metre)

Investment in subsidiaries, equity 1,017 Adjusted net asset Adjustment to net asset value1 N/A securities and interests in pooled value investment funds and reinsurers’ share of investment contract liabilities Debt securities (commercial 271 Discounted cash Credit spread 1.5%-2.9% (2.0%) mortgages) flow Debt securities 718 Discounted cash Credit spread 0.8%-3.2% (1.7%) (unquoted corporate bonds) flow Debt securities (income strips) 689 Income Equivalent Yield 3.8% - 8.7% (5.1%) capitalisation Debt securities (infrastructure loans) 199 Discounted cash Credit spread 1.1% - 3.4% (2.2%) flow

31 December 2018 Investment property and owner 76 Development Profit on costs % 5% occupied property appraisal Construction cost per SQ metre £1,954 Investment property and owner 5,392 Income Equivalent Yield 3.6% - 9.1% (5%) occupied property capitalisation Estimated rental value per square £40 -£1,429 (£338) metre Equivalent Yield 4.2% - 5.6% (4.6%) Estimated rental value per hotel £4,789-£13,800 (£8,948) room Investment property and owner 56 Market Capital Value per unit (square £1 -£11,711 (£3,722) occupied property comparison metre)

Investment in subsidiaries, equity 1,119 Adjusted net asset Adjustment to net asset value1 N/A securities and interests in pooled value investment funds and reinsurers’ share of investment contract liabilities Debt securities (commercial 348 Discounted cash Credit spread 1.5% - 2.9%(2%) mortgages) flow Debt securities 542 Discounted cash Credit spread 0.8% - 4%(2.1%) (unquoted corporate bonds) flow Debt securities (income strips) 653 Income Equivalent Yield 4.1% - 6.8% (5.2%) capitalisation Debt securities (infrastructure loans) 95 Discounted cash Credit spread 1.1% - 3.4% (2.2%) flow

1 An adjustment is considered to the valuations of private equity investments received from the investment managers of the underlying funds to estimate the effect of changes in market conditions between the date of their valuations and the end of the reporting period using market indices. The adjustment made at 31 December 2019 was £nil (2018: £nil).

98 Standard Life Assurance Limited

Notes to the financial statements

40. Fair value of assets and liabilities continued

(d) Methods and assumptions used to determine fair value of assets and liabilities continued (d)(v) Sensitivity of the fair value of level 3 instruments to changes in key assumptions The shareholder is directly exposed to movements in the value of level 3 instruments held by the shareholder business (to the extent they are not offset by opposite movements in investment and insurance contract liabilities). Movements in level 3 instruments held in other risk segments are offset by an opposite movement in investment and insurance contract liabilities and therefore the shareholder is not directly exposed to such movements unless they are sufficiently severe to cause the assets of the participating business to be insufficient to meet the obligations to policyholders.

Changing unobservable inputs in the measurement of the fair value of level 3 financial assets and financial liabilities to reasonably possible alternative assumptions would not have a significant impact on profit or on total assets. The alternative assumptions used in this assessment for debt securities are:

Reasonably possible alternative assumptions 2019 2018 Unquoted corporate bonds Credit spread +/- 0.45% Credit spread +/- 0.45% Commercial mortgages Credit spread +/- 0.40% Credit spread +/- 0.40%

Whilst not having an impact on profit for the year, the Company has also considered the plausible range for the fair value of the investment properties at 31 December 2019. Based on independent research that has considered the reasonableness of historic UK property values by comparing valuations with actual sales prices achieved a plausible range for the fair value of the Company’s UK property portfolio, comprising over 90% of the Company’s investment property portfolio is considered to be -4.8% to +8.3% of the 31 December 2019 valuation (2018: -4.8% to +8.3%).

(e) Fair value of assets and liabilities measured at amortised cost The table below presents estimated fair values of assets and liabilities whose carrying value does not approximate fair value.

Fair values of assets and liabilities are based on observable market inputs where available, or are estimated using other valuation techniques.

As recognised in statement of financial position line item Carrying value Carrying value Fair value Fair value 2019 2018 2019 2018 Notes £m £m £m £m Assets Loans secured by mortgages 20 20 27 20 2

Liabilities Non-participating investment contract liabilities 4 4 4

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

It is not possible to reliably calculate the fair value of participating investment contract liabilities. The assumptions and methods used in the calculation of these liabilities are set out in the accounting policies and notes 2 and 29. The carrying value of participating investment contract liabilities at 31 December 2019 was £14,712m (2018: £14,292m). The carrying value of all other financial assets and liabilities measured at amortised cost approximates their fair value.

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

Level 2 Level 3 Total 2019 2018 2019 2018 2019 2018 £m£m£m£m£m£m Assets Loans secured by mortgages 20 27 - - 20 27 Liabilities Non-participating investment contract liabilities 4 4 - - 4 4

99 Standard Life Assurance Limited

Notes to the financial statements

41. Contingent liabilities

Legal proceedings and regulations The Company, like other insurers, is subject to legal proceedings and complaints in the normal course of 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 Company.

The Company is subject to insurance solvency regulations in all the territories in which it issues insurance and investment contracts, and it has complied with all the local solvency regulations. There are no contingencies associated with the Company’s compliance or lack of compliance with these regulations.

42. Commitments

(a) Capital commitments As at 31 December 2019, capital expenditure that was authorised and contracted for, but not provided and incurred, was £163m (2018: £134m) in respect of investment property and income strips. Of this amount, £160m (2018: £124m) and £3m (2018: £10m) relates to contractual obligations to purchase, construct, or develop investment property and repair, maintain or enhance investment property respectively.

(b) Other financial commitments The Company has £112m (2018: £120m) unrecognised financial commitments of which £85m (2018: £93m) relate to private equity.

43. Related party transactions

(a) Transactions with related parties In the normal course of business, the Company enters into transactions with related parties that relate to insurance and investment management business.

As explained further in note 3, at the time of the Part VII transfer the Company entered into a reinsurance arrangement with SL Inti, a fellow subsidiary of the Phoenix Group. The following are details of reinsurance accepted from SL Inti and other related parties during the year:

2019 2018 £m £m Premiums: Fellow subsidiary 520 Claims: Fellow subsidiary 642 Revenue earned: Fellow subsidiary 5 Expenses reinsured: Fellow subsidiary 52 Share of insurance contract liabilities: Subsidiary 9 9 Fellow subsidiary 13,795 Share of investment contract liabilities: Fellow subsidiary 739

100 Standard Life Assurance Limited

Notes to the financial statements

43. Related party transactions continued

(a) Transactions with related parties continued

The following are details of reinsurance ceded to SL Inti and other related parties during the year:

2019 2018 £m £m Reinsurers’ share of investment contract liabilities

Fellow subsidiary 754 - Total reinsurers’ share of investment contract liabilities 754 -

The following are details of other significant transactions with related parties (including subsidiaries) during the year:

2019 2018 £m £m Revenue Subsidiary 419 884 Fellow subsidiary - 2 Parent 6 - Other related parties 21 2 Total revenue 446 888

Expenses Parent 1 50 Subsidiary 289 135 Fellow subsidiary - 324 Other related parties 66 30 Total expenses 356 539

Transactions shown under ‘Revenue: Subsidiary’ primarily relates to dividends and interest received from subsidiaries.

SLAESL is a subsidiary of the Company. Transactions shown under 'Expenses: Subsidiary’ relate primarily to intercompany recharges from SLAESL, which include staff costs and accommodation costs. The balance of this expenditure relates to other subsidiary relationships of the company during the year.

SLA is considered to have a significant influence over the Company due to their equity stake and representation on the Board of Phoenix Group Holdings pic. To align the Company with the Phoenix Group, the prior year balances have been represented to include transactions with and balances to/from SLA, shown under other related parties. Transactions with SLA and its subsidiaries make up all of the balances disclosed as Other related parties.

For the period 1 January 2018 to 31 August 2018, SLESL and Standard Life Investments Ltd (SL Inti) were fellow subsidiaries of the Company. Transactions shown under ‘Expenses: Fellow subsidiary’ for 2018 relate primarily to investment management fees paid to SLIL and intercompany recharges from SLESL, which include staff costs and accommodation costs.

101 Standard Life Assurance Limited

Notes to the financial statements

43. Related party transactions continued

(b) Balances due from/to related parties The year end balances arising from transactions with related parties are as follows:

2019 2018 Notes £m £m Due from related parties Subsidiary 16 16 Subsidiary-loans 15 188 269 Fellow subsidiary 18 1 Other related parties 33 14 Parent 20 288 - Total due from related parties 543 300

Due to related parties Parent 1 50 Subsidiary 29 27 Fellow subsidiary 69 - Other related parties 33 36 Total due to related parties 132 113

Amounts due from/to subsidiary/fellow subsidiary include financial assets and liabilities arising from reassurance accepted, and intercompany receivables/payables. Amounts due from/to parent and other related parties include intercompany receivables/payables.

The Company has been paying VAT for some of its subsidiaries to a fellow Group subsidiary, Phoenix Life Limited (PLL), and receiving revenue in return from its subsidiaries for the first half of the year. This approached changed during the period and now PLL bills the Company and its subsidiaries separately. Where financial instruments arising from transactions with related parties are offset in the statement of financial position the net position is presented in the tables above,

(c) Compensation of key management personnel Key management personnel, being those having authority and responsibility for planning, directing and controlling the activities of the Company, comprised 11 people (2018: 11 people) and included all Directors of the Company.

Compensation of key management personnel was:

2019 2018 £’000 £’000 Remuneration (executive and non-executive Directors remuneration excluding pension contributions and awards under share option schemes and other long-term incentive schemes) 1,270 1,187 Share option schemes and other long-term benefits 371 316 Contributions to money purchase scheme 1 36 Total compensation of key management personnel 1,642 1,540

There are 1 Directors (2018: nil people) accruing retirement benefits under a money purchase pension scheme.

The number of Directors who had exercised share options during the year was 4 (2018: 2 people).

102 Standard Life Assurance Limited

Notes to the financial statements

43. Related party transactions continued

(c) Compensation of key management personnel continued Of the amounts disclosed above the following is in respect of the Directors of the Company during the year:

2019 2018 £’000 £’000 Details of the highest paid director Highest paid Director’s remuneration (apportionment) 762 526

The Executive Directors are employed by SLAESL. The Non-Executive Directors are not employed but provide their services via a letter of appointment. For the purpose of this note an apportionment of the total remuneration paid to the Directors of the company by the Company has been based on an estimate of the services rendered to the Company.

(d) Transactions with and balances due from/to key management personnel All transactions between key management and Phoenix Group companies during the year are equivalent to those available to all employees of the Company.

During the year, key management personnel and their close family members contributed £1.5m (2018: £4k) to Pensions and Savings products sold by the Phoenix Group. At 31 December 2019 the total value of key management personnel’s investments in Phoenix Group Pensions and Savings products was £1.9m (2018: £538k).

44. Events after the reporting period

There are no other significant events after the reporting period.

103 Standard Life Assurance Limited

Notes to the financial statements

45. Related undertakings

The particulars of the Company’s related undertakings at 31 December 2019 are listed below. Country of incorporation or Name of Related Undertaking residence Share Class % Holding Address 28 Ribera del Loira SA Spain Ordinary Shares 100% 1 330 Avenida de Aragon SL Spain Ordinary Shares 100% 1 Aberdeen Standard Liquidity Fund (Lux): Seabury Euro Liquidity 1 Fund Luxembourg SICAV 99% 2 Seabury Sterling Liquidity 2 Fund Luxembourg SICAV 86% 2 Aberdeen Standard OEIC II: ASI Emerging Market Government Bond Fund Scotland OEIC 26% 3 ASI Emerging Markets Income Equity Fund Scotland OEIC 53% 3 ASI Global Unconstrained Equity Fund Scotland OEIC 45% 3 ASI Japanese Growth Equity Fund Scotland OEIC 71% 3 ASI (SLI) Emerging Markets Equity Fund Scotland OEIC 39% 3 ASI UK Opportunities Equity Fund Scotland OEIC 55% 3 Aberdeen Standard OEIC III: ASI Dynamic Multi Asset Growth Fund Scotland OEIC 48% 3 ASI MyFolio Managed I Fund Scotland OEIC 66% 3 ASI MyFolio Managed II Fund Scotland OEIC 66% 3 ASI MyFolio Managed III Fund Scotland OEIC 76% 3 ASI MyFolio Managed IV Fund Scotland OEIC 63% 3 ASI MyFolio Managed V Fund Scotland OEIC 68% 3 ASI MyFolio Market I Fund Scotland OEIC 42% 3 ASI MyFolio Market II Fund Scotland OEIC 39% 3 ASI MyFolio Market III Fund Scotland OEIC 54% 3 ASI MyFolio Market IV Fund Scotland OEIC 53% 3 ASI MyFolio Market V Fund Scotland OEIC 62% 3 ASI MyFolio Multi-Manager I Fund Scotland OEIC 51% 3 ASI MyFolio Multi-Manager II Fund Scotland OEIC 51% 3 ASI MyFolio Multi-Manager III Fund Scotland OEIC 56% 3 ASI MyFolio Multi-Manager IV Fund Scotland OEIC 52% 3 ASI MyFolio Multi-Manager V Fund Scotland OEIC 49% 3 ASI MyFolio Multi-Manager Income II Fund Scotland OEIC 38% 3 ASI MyFolio Multi-Manager Income III Fund Scotland OEIC 54% 3 ASI MyFolio Multi-Manager Income IV Fund Scotland OEIC 43% 3 Aberdeen Standard OEIC V: ASI Corporate Debt Fund Scotland OEIC 100% 3 ASI Ethical Corporate Bond Fund Scotland OEIC 42% 3 ASI Europe ex UK Ethical Equity Fund Scotland OEIC 81% 3 ASI Global Real Estate Share Fund Scotland OEIC 27% 3 ASI UK Unconstrained Equity Fund Scotland OEIC 28% 3 ASI Dynamic Distribution Fund Scotland Unit Trust 52% 3 ASI Global Real Estate Fund Scotland Unit Trust 34% 3 ASI Global Absolute Return Strategies Fund Scotland Unit Trust 64% 3

104 Standard Life Assurance Limited

Notes to the financial statements

45. Related undertakings continued

Country of incorporation or Name of Related Undertaking residence Share Class % Holding Address ESP II General Partner Limited Partnership Scotland Limited Partnership 46% 3 European Strategic Partners Scotland Limited Partnership 73% 3 European Strategic Partners II 'C Scotland Limited Partnership 69% 3 G Park Management Company Limited England & Wales Ordinary Shares 100% 5 Gallions Reach Shopping Park (Nominee) Limited England & Wales Ordinary Shares 100% 5 Gallions Reach Shopping Park Limited Partnership England & Wales Limited Partnership 50% 5 Gallions Reach Shopping Park Unit Trust Jersey Unit Trust 50% 4 Hundred S.a r.l. Luxembourg Ordinary Shares 100% 6 Iceni Nominees (No.2) Limited England & Wales Ordinary Shares 100% 5 Inesia S.A. Luxembourg Ordinary Shares 100% 6 Inhoco 3107 Limited England & Wales Ordinary Shares 100% 5 Lake Meadows Management Company Limited England & Wales Ordinary Shares 100% 5 North American Strategic Partners (Feeder) 2006 Scotland Limited Partnership 70% 3 North American Strategic Partners (Feeder) 2008 Scotland Limited Partnership 100% 3 Limited Partnership North American Strategic Partners 2006 L.P. United States Limited Partnership 40% 7 North American Strategic Partners 2008 L.P. United States Limited Partnership 80% 7 North American Strategic Partners, LP United States Limited Partnership 40% 7 SL (NEWCO) Limited Scotland Ordinary Shares 100% 8 SL Capital Infrastructure I LP Scotland Limited Partnership 26% 3 SLA Belgium No.1 SA Belgium Ordinary Shares 100% 9 SLA Germany No.1 S.a r.l. Luxembourg Ordinary Shares 100% 6 SLA Germany No.2 S.a r.l. Luxembourg Ordinary Shares 100% 6 SLA Germany No.3 S.a r.l. Luxembourg Ordinary Shares 100% 6 SLA Ireland No.1 S.a r.l. Luxembourg Ordinary Shares 100% 6 SLA Netherlands No.1 B.V. The Netherlands Ordinary Shares 100% 10 SLACOM (No. 10) Limited Scotland Ordinary Shares 100% 8 SLACOM (No.8) Limited Scotland Ordinary Shares 100% 8 SLACOM (No.9) Limited Scotland Ordinary Shares 100% 8 SLIP Property Investment GP Limited Scotland Ordinary Shares 100% 3 SLIF Property Investment LP Scotland Limited Partnership 100% 3 Standard Life Active Plus Bond Trust Scotland Unit Trust 100% 3 Standard Life Agency Services Limited Scotland Ordinary Shares 100% 8 Standard Life Assets and Employee Services Scotland Ordinary Shares 100% 8 Limited (UK) Standard Life Assurance (HWPF) Luxembourg Luxembourg Ordinary Shares 100% 6 S.a.r.l. Standard Life Client Management Limited Scotland Ordinary Shares 100% 8 Standard Life European Trust Scotland Unit Trust 81% 3 Standard Life European Trust II Scotland Unit Trust 100% 3 Standard Life Global Equity Trust II Scotland Unit Trust 100% 3 Standard Life International Trust Scotland Unit Trust 100% 3 Standard Life Investment Funds Limited Scotland Ordinary Shares 100% 8

105 Standard Life Assurance Limited

Notes to the financial statements

45. Related undertakings continued

Country of incorporation or Name of Related Undertaking residence Share Class % Holding Address Standard Life Investments Global SICAV: Absolute Return Global Bond Strategies Fund Luxembourg SICAV 32% 11 Emerging Market Debt Fund Luxembourg SICAV 93% 11 Emerging Market Local Currency Debt Fund Luxembourg SICAV 45% 11 Euro Government All Stocks Fund Luxembourg SICAV 100% 11 European Corporate Bond Fund Luxembourg SICAV 23% 11 European Equity Unconstrained Fund Luxembourg SICAV 62% 11 Global Bond Fund Luxembourg SICAV 75% 11 Global Corporate Bond Fund Luxembourg SICAV 41% 11 Global Emerging Markets Equity Unconstrained Luxembourg SICAV 87% 11 Fund Global High Yield Bond Fund Luxembourg SICAV 44% 11 Global REIT Focus Fund Luxembourg SICAV 30% 11 Indian Equity Midcap Opportunities Fund Luxembourg SICAV 47% 11 Standard Life Investments Global SICAV II: Global Short Duration Corporate Bond Fund Luxembourg SICAV 57% 11 Standard Life Investments UK Retail Park Trust Jersey Unit Trust 57% 12 Standard Life Investments UK Shopping Centre Jersey Unit Trust 41% 12 Trust Standard Life Japan Trust Scotland Unit Trust 61% 3 Standard Life Lifetime Mortgages Limited Scotland Ordinary Shares 100% 8 Standard Life Master Trust Co. Ltd England & Wales Ordinary Shares 100% 13 Standard Life Multi-Asset Trust Scotland Unit Trust 100% 3 Standard Life North American Trust Scotland Unit Trust 76% 3 Standard Life Pacific Basin Trust Scotland Unit Trust 85% 3 Standard Life Pan European Trust Scotland Unit Trust 100% 3 Standard Life Pension Funds Limited Scotland Ordinary Shares 100% 8 Standard Life Private Equity Trust pic Scotland Ordinary Shares 56% 3 Standard Life Property Company Limited Scotland Ordinary Shares 100% 8 Standard Life Short Dated UK Government Bond Scotland Unit Trust 100% 3 Trust Standard Life Trustee Company Limited Scotland Ordinary Shares 100% 8 Standard Life UK Corporate Bond Trust Scotland Unit Trust 100% 3 Standard Life UK Equity General Trust Scotland Unit Trust 94% 3 Standard Life UK Government Bond Trust Scotland Unit Trust 100% 3 The Heritable Securities and Mortgage Investment Scotland Ordinary Shares 100% 8 Association Limited The Standard Life Assurance Company of Europe Netherlands Ordinary Shares 100% 14 BV Vebnet (Holdings) Limited England & Wales Ordinary Shares 100% 13 Vebnet Limited Scotland Ordinary Shares 100% 8 Welbrent Property Investment Company Limited England & Wales Ordinary Shares 100% 5

106 Standard Life Assurance Limited

Notes to the financial statements

45. Related undertakings continued

Registered addresses:

1 Avenida de Aragon 330 - Building 5, 3rd Floor, Parque Empresarial Las Mercedes, 28022 Madrid, Spain 2 35a, Avenue John F. Kennedy, Luxembourg 3 1 George Street, Edinburgh, United Kingdom, EH2 2LL 4 Elian, 44 Esplanade, St Helier, Jersey, JE4 9WG 5 Bow Bells House, 1 Bread Street, London, United Kingdom, EC4M 9HH 6 6B, rue Gabriel Lippmann, Parc d’Activite Syrdall 2, L-5365 Munsbach, Luxembourg c/o Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, County of New Castle, Delaware, ' 19808 8 Standard Life House, 30 Lothian Road, Edinburgh, EH1 2DH 9 Avenue Louise 326, bte 33, 1050 Brussels, Belgium 10 Telestone 8 - Teleport, Naritaweg 165, 1043 BW Amsterdam, The Netherlands 11 2-4, rue Eugene Ruppert, Luxembourg 12 Elizabeth House, 9 Castle Street, St Helier, Jersey, JE4 2QP 13 14th Floor, 30 St Mary Axe, London, EC3A 8BF 14 Naritaweg 165, 1043 BW Amsterdam, The Netherlands

46. Ultimate parent undertaking and controlling party The Company’s immediate and ultimate parent company is Phoenix Group Holdings pic, a company incorporated and resident in the United Kingdom.

Under section 400 of the Companies Act 2006 the Company has taken the exemption from preparing consolidated financial statements since it is a wholly owned subsidiary of Phoenix Group Holdings pic. Copies of the Phoenix Group’s consolidated financial statements can be obtained from their company website, www.thephoenixqroup.com

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