Heritage With Profits Fund Investment Report: UK Pension Business

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1 Heritage With Profits Fund Investment Report: UK Pension Business Q This leaflet gives information on the following factors that affect with profits plan values types of assets how these affect investment returns investment market conditions asset mixes the asset mix for different classes of with profits pension business asset and investment return details for each asset mix This leaflet is intended for individuals who are familiar with investment terminology. If you need an explanation of the terms used us at Please note that there is no guarantee that any sent will be received, or that the contents will remain private during internet transmission. Factors that affect with profits plan values The return on the asset mix is only one of the factors that affect with profits plan values. Other factors are the deductions we make, and any other discretionary adjustments that we may apply such as smoothing. The deductions are for example for costs of guarantees and our expenses. When Standard Life demutualised on 10 July 2006 the Heritage With Profits Fund was set up with an Inherited Estate. At least once a year we review whether it s appropriate to make distributions from the Inherited Estate. We use any distributions that we make to enhance with profits payouts. Some with profits plans guarantee a minimum payout, for example if it s used to buy an annuity at the retirement date selected at the start of the plan or on death. The payout will then be at least the guaranteed benefit, even if the investment returns have been poor. Types of assets We invest in a wide range of assets including equities, property, bonds and cash deposits. We expect that a higher proportion of equities and property will produce returns that are higher over the long term, but more variable over the short term. We expect that a higher proportion of bonds and cash will result in returns that are more stable, but lower over the long term. Investment Market Conditions Fears about the health of the global economy persisted US Federal Reserve postponed further interest rate rises while central banks in Europe and Japan eased policy further Major equity markets were volatile and mostly weaker Bond markets were volatile and mostly stronger UK Equities Worries about a possible Brexit dominated in the UK. This weighed on sentiment, with investors both at home and abroad reluctant to buy UK assets. Sterling also came under pressure. Worries about the state of the global economy further dampened spirits. Nonetheless, the market was able to recover somewhat along with all others, thanks to European Central Bank (ECB) stimulus measures, better Chinese data and hopes that US rates rises will be slower than first thought. Equities US equities managed to deliver a small positive return despite a turbulent three months. The period began with concerns that the US economy might be heading for recession. Rising jobless claims and continued weakness in the manufacturing sector were the principal reasons behind this. However, as the jobless claims resumed their previous downwards trend in February, fears of a recession eased. Nonetheless, this uncertainty around domestic and global growth led the Federal Reserve to defer interest rate rises and helped to calm markets. Heritage With Profits Fund Investment Report: UK Pension Business 01/07

2 European equities had a difficult start to the year. Limited growth and uncertainty around the effectiveness of monetary policy were key drivers of sentiment. The corporate reporting season did not offer clear evidence of earnings growth, with the oil sector suffering and banks struggling with low and negative interest rates. By the end of the quarter, further action by the ECB, the absence of a precipitous decline in corporate earnings and no deterioration in the banking sector allowed the market to steady. Fixed Interest bond markets fluctuated throughout the quarter, but US Treasuries, German bunds and UK gilts all delivered positive returns as their yields ended the period lower (i.e. bond prices ended higher) than they began. Core yields fell as investors sought out safe haven bonds due to concerns about recession in the US, fears around the potential impact of Brexit in the UK and further support measures announced by the European Central Bank, notably further purchases of government and for the first time corporate bonds. It was a dramatic three months for investors in corporate bonds. Mediocre US economic data, continued uncertainty about the Chinese economy and the oil price's ongoing descent compounded concerns that global growth was slowing. This helped the duration component of corporate bonds but caused their spreads to widen which hindered their performance. However, after central banks once again came to the rescue, credit investors took heart and in March credit spreads managed to recover much of the lost ground. Property Returns from UK commercial real estate moderated further during Q1, with capital value growth reducing for the seventh consecutive month. Rental growth generally remained positive because of strong occupier markets, where many tenants are looking to commit for the long term or seeking additional space. From an investment perspective, volumes were 25% lower in January and February than the previous year, as more investors wait for the outcome of the UK's EU referendum. Asset Mix Our aim when managing our with profits business is to provide growth over the long term, while continuing to maintain an appropriate level of financial strength so that we can meet all contractual obligations to our customers. We currently have five different asset mixes that cover most of our pensions business. Class of with profits business Fund Name (see your plan statement) Asset Mix Page For information on Stakeholder plans taken out from 10 July 2006 onwards, please see the investment Report for the UK Smoothed Managed With Profits Fund Unitised pensions for which a minimum unit price growth rate of 4% a year applies Most other unitised pensions Pension With Profits Fund Asset Mix 1 3 Pension With Profits One Fund Pension 2 With Profits 2 Fund Pension Millennium With Profits Fund Pension With Profits One 2006 Fund Pension 2 With Profits Fund Pension Millennium With Profits 2006 Fund Asset Mix 3 4 With Profits Pension Annuities N/A Asset Mix 4 5 Non unitised pensions N/A Asset Mix 5 6 Stakeholder plans taken out before 10 July 2006 Stakeholder With Profits Fund Stakeholder With Profits Fund Stakeholder 7 We regularly review the asset mix that backs our with profits business, taking account of such things as: the nature and size of the guarantees for each class of with profits business the strength of the fund any changes in current and expected future market conditions. Note: the asset mix will also change as market values change. Any change in the asset mix is likely to result in a change in future returns and plan payouts, see page 1 Types of assets and Factors that affect with profits plan values. But it will not affect existing guarantees. 02/07 Heritage With Profits Fund Investment Report: UK Pension Business

3 Asset Mix 1: Pension With Profits Fund UK equities 7.9% equities 4.0% equities 2.1% Property 5.5% Fixed Interest 13.7% Other* 66.8% * Bonds & Other includes index 4.Glencore International 1. UK Govt 5% UK Govt 4.75% UK Govt 2% UK Govt 2.5 IL% UK Govt 1.25% % AAA rated as measured by a composite rating structure, derived from Standard & Poor's and Moody's ratings. Asset Mix 1-2.3% 0.8% 0.4% 2.5% Asset Mix 1 is predominately invested in fixed interest and other bonds, in particular government bonds. This reflects the relatively higher guarantees provided by the classes of business backed by Asset Mix 1. The returns in Q1 reflect the positive returns in most asset classes tempered to an extent by the fall in UK and Global equities. UK Equities 11% 9% 11% 10% 8% Equities 4% 3% 5% 5% 4% Market / 2% 1% 3% 3% 2% Property 6% 6% 5% 5% 6% Fixed Interest & Other* 77% 81% 76% 77% 80% * Fixed Interest & Other includes fixed interest, bonds including index linked bonds, cash deposits and money. 8.7% 5.7% 2.6% 9.9% 1.7% Heritage With Profits Fund Investment Report: UK Pension Business 03/07

4 Asset Mix 3 - See page 2 for list of funds applicable UK equities 30.1% equities 13.7% equities 2.6% Property 16.8% Fixed Interest 13.5% Other* 23.3% * Bonds & Other includes index 4. Glencore International 1. UK Govt 2.5% IL UK Govt 2% UK Govt 4.75% UK Govt 1.25% UK Govt 5% % AAA rated as measured by a Asset Mix 3-1.2% -2.3% 2.6% 0.8% Asset Mix 3 is predominately invested in equities, in particular UK equities. The returns in Q1 reflect the positive returns in most asset classes tempered to an extent by the fall in UK and Global equities. UK Equities 30% 31% 36% 32% 31% Equities 12% 11% 15% 15% 14% Market/ 4% 5% 3% 3% 3% Property 16% 15% 15% 16% 16% Fixed Interest & Other* 38% 38% 31% 34% 36% * Fixed Interest & Other includes fixed interest, bonds including index linked bonds, cash deposits and money. 2.9% 9.8% 13.0% 8.3% 3.2% 04/07 Heritage With Profits Fund Investment Report: UK Pension Business

5 Asset Mix 4: With Profits Pension Annuities UK equities 28.6% equities 13.0% equities 2.5% Property 13.7% Fixed Interest 18.3% Other* 23.9% * Bonds & Other includes index 4. Glencore International 1. UK Govt 5% UK Govt 4.75% UK Govt 3.75% UK Govt 2% UK Govt 2.5% IL % AAA rated as measured by a Asset Mix 4-1.5% -2.0% 2.3% 1.1% Asset Mix 4 is predominately invested in equities, in particular UK equities. The returns in Q1 reflect the positive returns in most asset classes tempered to an extent by the fall in UK and Global equities. UK Equities 28% 28% 33% 30% 29% Equities 10% 11% 14% 13% 13% Market/ 4% 4% 3% 3% 2% Property 15% 14% 13% 14% 14% Fixed Interest & Other* 43% 43% 37% 40% 42% * Fixed Interest & Other includes fixed interest, bonds including index linked bonds, cash deposits and money. 3.7% 9.5% 11.7% 8.9% 2.9% Heritage With Profits Fund Investment Report: UK Pension Business 05/07

6 Asset Mix 5: Non unitised pensions UK equities 19.6% equities 9.3% equities 3.4% Property 17.4% Fixed Interest 9.7% Other* 40.6% * Bonds & Other includes index 4. Glencore International 1. UK Govt 1.25% UK Govt 2% UK Govt 2.5% IL UK Govt 5% UK Govt 4.5% % AAA rated as measured by a Asset Mix 5-0.6% -1.7% 2.3% 0.9% Asset Mix 5 is predominately invested in fixed interest, government bonds and other bonds. The returns in Q1 reflect the positive returns in most asset classes tempered to an extent by the fall in UK and Global equities. UK Equities 24% 23% 27% 20% 16% Equities 9% 8% 10% 10% 9% Market/ 3% 3% 3% 3% 4% Property 13% 13% 14% 19% 21% Fixed Interest & Other* 51% 53% 46% 48% 50% * Fixed Interest & Other includes fixed interest, bonds including index linked bonds, cash deposits and money. 4.9% 7.9% 9.7% 6.5% 2.9% 06/07 Heritage With Profits Fund Investment Report: UK Pension Business

7 Stakeholder Asset Mix Details UK equities 40.5% equities 20.1% Fixed Interest 17.6% Other* 21.8% * Bonds & Other includes index 4.Glencore International 5.Lloyds Banking Group 1. UK Govt 1% UK Govt 1.25% UK Govt 4.25% UK Govt 4.25% UK Govt 4.75% % AAA rated as measured by a Stakeholder With Profits Fund and Stakeholder With Profits Fund -2.5% -4.1% 2.9% 0.8% The Asset Mix for the Stakeholder Funds is predominately invested in equities, in particular UK equities. The returns in Q1 reflect the positive returns in most asset classes tempered to an extent by the fall in UK equities. UK Equities 41% 42% 46% 42% 42% Equities 16% 16% 21% 23% 20% Fixed Interest & Other* 43% 42% 33% 35% 38% * Fixed Interest & Other includes fixed interest, bonds including index linked bonds, cash deposits and money. 0.2% 12.6% 15.3% 6.6% 0.8% Standard Life Assurance Limited is registered in Scotland (SC286833) at Standard Life House, 30 Lothian Road, Edinburgh EH1 2DH. Standard Life Assurance Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. WP Standard Life 07/07