St James's Place Regulatory News (STJ)

PRESS RELEASE

28 February 2024

ROBUST UNDERLYING FINANCIAL PERFORMANCE IMPACTED BY ONE-OFF PROVISION

St. James's Place plc (SJP) today issues its results for the year ended 31 December 2023:

Financial Highlights

· Robust underlying financial performance

o  Pre-tax Underlying cash result of £483.0 million (2022: £485.5 million) in line with prior year, reflecting growth in average FUM and management of controllable costs

o  Post-tax Underlying cash result of £392.4 million (2022: £410.1 million) reflects higher corporation tax rate in effect in 2023

· Post-tax Cash result of £68.7 million (2022: £410.1 million) significantly impacted by one-off Ongoing Service Evidence provision

o  Provision of £426.0 million pre-tax (£323.7 million post-tax) established for potential client refunds linked to the historic evidencing and delivery of ongoing servicing

· IFRS loss after tax £(9.9) million (2022: £407.2 million profit)

· EEV net asset value per share £14.11 (2022: £16.66)

Shareholder Distributions

· Final dividend of 8.00 pence per share (2022: 37.19 pence per share), resulting in full year dividend of 23.83 pence per share (2022: 52.78 pence per share)

· Change in future dividend guidance:

o  Going forward, total annual shareholder distributions will be set at 50% of the full year Underlying cash result

o  Annual distributions are expected to comprise a fixed full year dividend of 18.00 pence per share declared for each of FY2024, FY2025 and FY2026, with the balance of distributions delivered through share repurchases

o  As earnings trajectory improves during FY2027 and beyond, anticipate capacity to grow dividend proportion of total shareholder distributions

o  Revised approach balances the need to retain investment for growth while recognising the importance of returns to shareholders

Other

· Announced, in October 2023, the conclusion of a comprehensive review of our client charging model, and plans for the future of simple and comparable charging at SJP

· Achieved 3% net growth in qualified adviser numbers to 4,834

Mark FitzPatrick, Chief Executive Officer, commented:

"It has been a challenging backdrop for UK savers and investors, but it is at times like these that advice really makes a difference, helping people stay on course to meet their long-term financial goals. Against this background, the hard work of everyone in our SJP community to keep delivering for clients has driven a resilient business performance where we've achieved continued strong net inflows underpinned by high client retention, strong investment performance, and record funds under management. With expenses managed tightly in the context of a high inflation environment, our underlying financial performance has been robust and the pre-tax Underlying cash result is broadly unchanged year on year, albeit 4% lower on a post-tax basis due to the higher corporation tax rate in effect for 2023.

The Cash result for the year of £68.7 million (2022: £410.1 million) has been significantly impacted by an assessment into the evidencing and delivery of historic ongoing servicing and the provision we have established for potential client refunds. This work was undertaken following a significant increase in complaints, particularly in the latter part of 2023, mostly linked to the delivery of ongoing servicing. The assessment revealed that our evidence of ongoing client servicing was less complete in the years preceding investment into our Salesforce CRM system in 2021, and we have therefore made a provision for potential client refunds to address this. Looking forward, the investment we've made into Salesforce means we are confident this is a historic issue.

While our financial results have been significantly impacted by this legacy matter, the Board recognises the importance of returns to shareholders and is confident that sufficient capital and liquidity is available to deal with the financial impact of the provision. In light of this, the Board therefore proposes a final dividend of 8.00 pence per share (2022: 37.19 pence per share) to make a total of 23.83 pence per share for the full year (2022: 52.78 pence per share).

A combination of the provision we have established and an expected decrease in the level of profit growth in the next few years as we transition to our new charging structure, reduces our ability to invest for long term growth in our business over the next few years. Accordingly, the Board has decided to revise our approach to shareholder distributions. Going forward, the Board expects that total annual distributions will be set at 50% of the full year Underlying cash result. For the next three years this will comprise 18.00 pence per share in annual dividends declared, with the balance distributed through share repurchases.

Once our new charging structure is fully embedded, we anticipate that the business will be on an improving earnings trajectory during 2027 and beyond. The Board expects that distributing 50% of the Underlying cash result will continue to strike the right balance between investment for growth and returns to shareholders, while seeing shareholder distributions increase over time. The upward trajectory in profits should then provide the Board with options to grow the dividend element within the total return.

Overall, 2023 was a difficult year for SJP but we've faced into our challenges. We've raised our standards around both the delivery and evidencing of ongoing client servicing and we've announced changes across our business, including our charges structure, so that we're in good shape for the future.

In the near-term, we expect the industry outlook to remain challenging given the pressures that clients continue to face. The near-term environment notwithstanding, the longer-term structural opportunity for the financial advice industry is hugely attractive. With scale advantage, a strong Partnership of advisers, and an investment approach that delivers for clients, we are very well placed to capture this opportunity and deliver value for all our stakeholders."

The details of the announcement are attached.

Enquiries:

2023 Full Year Results Presentation

Date: 28 February 2024

Time: 08:30 GMT

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Chair's report

Leading through change

Overview

2023 was a challenging year. High rates of inflation and interest rates have characterised both 2022 and 2023, as have global conflict and political instability. Against this background, clients have understandably used their savings and investments to support themselves and their families. However, the resilience evident in the underlying performance of the business, with funds under management reaching record levels in 2023, continues to give us confidence in the strength of our business model. More disappointing has been our share price performance, which reacted to the actions we have taken to modernise our fee structure. We believe these actions on our fees leave us well positioned for growth and aligned with the FCA's Consumer Duty. The system changes we need to make to accommodate a different fee structure will inevitably come at a cost.

We have also experienced a marked increase in clients registering complaints relating to whether they have received ongoing servicing historically. Given this, an initial assessment of client servicing records has been undertaken and the findings from this indicate the need for us to take action to refund clients where ongoing service has not been evidenced. The action we have taken has led to us increasing our provisions for refunds which has impacted our 2023 results. While this is disappointing, we know for the future that our investment in 2021 in our Salesforce customer relationship management system will enable us to monitor service levels to ensure our clients receive the advice and support they expect. The actions we have taken have involved close engagement with our key regulators and, as strong advocates for regulated advice, we remain determined to work with all policymakers and other stakeholders to help drive better financial resilience across society.

We cannot be complacent of our market leading position and we will evolve to continue to meet the needs of our clients. Expectations of clients are rightfully high and where we risk falling short of those expectations we must act. 

The Board and governance

Our continued growth and success over time have owed much to the strength of our Partnership structure and our management's ability to ensure continuity during periods of transition. Culture plays an important part in an organisation's success and was a key consideration in the appointment of Mark FitzPatrick as Chief Executive Officer. Succession planning is an ongoing process and the Board and Group Nomination and Governance Committee have spent considerable time in the last couple of years ensuring that success criteria balanced the importance of continuity with the value that diversity and a fresh perspective could provide.

The robust process identified Mark FitzPatrick as the outstanding candidate and Mark joined the Board on 1 October 2023, succeeding Andrew Croft as Chief Executive Officer on 1 December 2023. Andrew has been with St. James's Place since 1993, serving as its Chief Financial Officer and then Chief Executive Officer since 2018, and on behalf of the Board I would like to thank Andrew for his unwavering commitment to the business. He will be greatly missed by everyone at SJP, and we wish him our very best in his retirement.

As we announced on 9 November 2023, Dominic Burke also stepped down as a Director on 31 January 2024. Dominic contributed much in his short time with us and I wish him all the best in his future ventures. As part of our ongoing succession planning, plans to recruit further Non-executive Directors were already underway and we hope to appoint a new Senior Independent Director in the near future.

Further detail on the work of the Group Nomination and Governance Committee can be found in its report in the Annual Report and Accounts.

The Board's priorities and our strategy

In recent years I have outlined the Board's key areas of focus alongside our strategy to 2025: the Partnership, investment performance, administration and digital. These are all key contributors to good client outcomes and the Board continues to monitor our progress in these areas. Our work on strategy beyond 2025 is also well underway.

While our financial results have been significantly impacted by the increase in the provisions relating to ongoing servicing evidence, the underlying performance of the business remains strong. The Board recognises the importance of returns to shareholders and is confident that sufficient capital and liquidity has been set aside to deal with this legacy matter. In light of this, the Board believes it prudent to recommend a final dividend for 2023 of 8.00 pence per share. Combined with the interim dividend of 15.83 pence per share we declared at the half year, this brings our full-year dividend to 23.83 pence per share.

The Board has also made the decision to revise guidance for future shareholder distributions, believing that this approach strikes an appropriate balance of ensuring the business retains sufficient capacity for investment alongside the importance of returns to shareholders.

Our culture and responsibilities

Culture is a critical enabler for any organisation and what we understand by the term culture continues to change over time. We have committed to being a responsible business, and what it means to be a responsible business is not solely about the actions we take but also about how we respond to threats to our culture and how we foster inclusive behaviour.

Responsibility is also not measured just through our own expectations, but through the eyes of our stakeholders. Our corporate governance report sets out how the Board has listened to our stakeholders and taken account of their views in our decision-making. The Board also recognises that there is a compelling commercial case for being a responsible business and the progress we have made in 2023 is detailed in the Our Responsible Business section of the Annual Report and Accounts. Further information on how our commitment to being a responsible business feeds through to the remuneration of Executives, can be found in the report of the Group Remuneration Committee.

Concluding remarks

I would like to express my thanks to my Board colleagues and management for their support and hard work during a challenging year, and commend employees and in particular our Partner businesses for the strong underlying performance achieved in a challenging year. I have provided a high-level overview of some of the key areas of the Board's activity in 2023, and would encourage you to read the corporate governance report which covers this in more detail. Whilst 2022 and 2023 have presented tough environments for clients, savers and investors in general, the value of advice has never seemed more important. This is reflected in the FCA's recent statement of its aims for forthcoming consumer policy initiatives which highlighted that it wants consumers of all wealth levels to be able to make good investment decisions and invest with confidence, understanding the risks and the protection involved. The Board is confident that SJP can contribute to helping the FCA meet its aims. I look forward to welcoming shareholders to this year's Annual General Meeting, which will be held on 15 May 2024.

Paul Manduca, Chair

27 February 2024

Chief Executive Officer's report

Setting up for success

I am delighted to be leading St. James's Place, the largest advice-led wealth manager in the UK, and a business that has a critical role to play in helping secure the futures of our clients and their families.

During my initial weeks and months at the Company, I've met a lot of people from across the St. James's Place community and I've listened carefully, with every conversation bringing new insight. I've been really struck by the importance of what we do for clients and how passionately the whole community cares: supporting clients with trusted financial advice that provides peace of mind and the confidence to benefit from investing over the long term.

This focus has helped us to build a fantastic position within our marketplace over the past three decades, where we now look after £168.2 billion of funds under management for our clients. We've achieved a lot already, but I believe we can still do better for all our stakeholders.

Operating and financial performance

The economic environment in 2023 was undoubtedly challenging. It is at precisely these times that financial advice can really help clients, acting as a steady hand to keep them on track to meet their long-term financial goals. High inflation and high interest rates have put pressure on UK consumers with rising mortgage rates contributing to rising living costs more generally. This impacted some individuals' capacity and confidence to invest. Meanwhile, those with capacity to invest may have been attracted to elevated short-term savings rates over long-term investing.

Against this backdrop, we have attracted £15.4 billion of new client investments and client retention rates have remained high at 95.3%, contributing to net inflows of £5.1 billion; these figures highlight the sheer scale of SJP today and the fundamental resilience of our business model in challenging market conditions. This new business performance, together with strong investment returns, has seen funds under management close the year at a record £168.2 billion, up 13% compared to the beginning of the year.

We have delivered an Underlying cash result of £392.4 million (2022: £410.1 million), which is 4% lower year on year. This result reflects growth in average funds under management during the year and tight cost control in line with guidance, but this robust underlying financial performance was largely offset by an increased UK corporation tax rate.

Our Cash result for the year of £68.7 million (2022: £410.1 million) has been significantly impacted by an assessment we undertook into the evidencing and delivery of historic ongoing servicing and the provision we have now established for any client refunds required. The underlying performance of our business means I'm confident we will emerge from these short-term historic challenges as an even stronger business.

Delivering change

While our business continues to perform well against a difficult backdrop, it's important that we address our challenges and develop our client offering so that we remain in good shape for the future.

Managing ongoing servicing complaints

We saw a marked increase in the number of clients registering complaints linked to the evidencing and delivery of ongoing servicing in the past. We've taken this very seriously and where gaps in record-keeping mean that there is a lack of evidence of the delivery of ongoing servicing, we've refunded these charges to clients. With the number of complaints accelerating in late 2023, we engaged extensively with the FCA on this matter and the resulting assessment of historic client servicing records. This assessment indicates that we have an improved body of evidence for the delivery of ongoing servicing since we invested in Salesforce in 2021, but that evidence is less complete before then. Based on assumptions derived from this assessment, we have established a provision of £426 million for refunds, impacting our financial results in 2023. We recognise that this is a disappointing outcome for everyone.

We know that our clients really value what we offer them, and we take comfort from outstanding client retention and advocacy, but we must be able to evidence the delivery of ongoing servicing that clients trust and value. Through leveraging the investment we've made in our Salesforce CRM system and our Consumer Duty work, in 2023 we switched off ongoing servicing charges for 2% of clients where there was a lack of evidence that ongoing servicing was provided in this period. Our central CRM capability gives us confidence in our ability to minimise the risks that clients will be charged for services they do not receive.

Introducing simple and comparable charging

Our charging structures have often been interpreted by commentators as being complex and this has brought some challenge for our business. In 2023 we made some significant decisions around our charges, including the announcement in October that we are implementing our programme to simplify our charging structures, which will be completed in the second half of 2025. The changes enhance the value that clients receive and introduce improved comparability that will help market perceptions of our services.

Our current charging structures have also limited the comparability of our investment performance over time, impacting our brand and reputation. Our simplified charging structure will make it much easier to compare investment performance across the industry on a like-for-like basis, enabling us to tell a more accurate story of how we are delivering for clients.

This move to unbundle our charges, which we announced in October, has been designed to ensure sustainability for the long-term. This gives confidence that we can grow the business without the need for further changes to our charges that would impact the guidance we communicated to shareholders last October. The changes we are making will be good for clients, appropriate for our marketplace and built for a Consumer Duty world. By extension, they will be good for our long-term business health by giving us the opportunity to consider new propositions and real agility in how we grow the business.

Evolving our investment proposition

We've got an investment proposition that works well for clients, and it's important that we continue to develop our offer so that we meet client needs as they change over time. In late 2022 we launched our Polaris range of portfolios, supporting clients looking to grow their long-term finances, and I am pleased to report that this range has got off to a very strong start with all four portfolios outperforming their IA and ARC benchmarks since launch. Polaris has also proved incredibly popular with clients, attracting more than £25bn in investments already. We are exploring further developments in our investment approach, including the role of passives in providing greater choice for clients.

Developing our investment proposition is just one example of how we're making changes that ensure we continue to support our clients and the communities in which we operate. Beyond these actions, as the market leader in financial advice we have the opportunity, and indeed responsibility, to promote our business, our brand, and our broader industry. We will build a stronger voice, supported by a new national marketing and media campaign that will launch this spring.

Building for the future

The structural market opportunity for financial advice is clear. The savings gap in the UK is already considerable and it continues to grow because planning for retirement is complicated, as is thinking about investing, managing risk, and considering protection. This is where personal and trusted financial advice can make a real difference.

We're well positioned to seize this market opportunity: we have the largest group of financial advisers in the UK, and we continue to grow it through our market-leading Academy programmes and by recruiting talented financial advisers who are attracted to us because they know we can help them thrive. We accomplish this through scale that gives us real advantage, from helping us curate a distinct investment proposition that works for clients, partner with leading global businesses to underpin our technology and administrative capabilities, and better support the 2,666 businesses that comprise the SJP Partnership. We have a strong and enviable track record of driving growth through an unbroken history of net inflows in every year over three decades.

Our marketplace will evolve as client expectations and preferences change over time, so it's important that we keep looking forward to consider how we are best placed to capture both existing and emerging opportunities over time, and drive sustained growth in the business.

I've therefore commenced a business review, supported by a leading external consultancy, so that we build on everything we've achieved and the changes we're already making. Putting aside the matter of our charges, which has already been dealt with, the review is comprehensive in its scope, with the aim of ensuring we plot a sustained path for growth as market trends evolve, focus on cost and efficiency to drive operating leverage, and manage our resources effectively and efficiently so that we drive improving returns.

This work is underway and we plan to update the market on the outcome of the review at the time of our half-year results.

Summary and outlook

The underlying performance of our business has been robust in what has been a very difficult external environment, highlighting the strength of our advice-led model in attracting and retaining client investments, as well as the resilience of our financial model. 2023 was also a year in which we faced into some important historic challenges. We are working hard to put these challenges behind us so that we can move forward with confidence as we plot our path to 2030.

In the near-term, we expect the industry outlook to remain challenging in 2024 given the pressures consumers continue to face. The near-term environment notwithstanding, the longer-term structural opportunity for the financial advice industry is hugely attractive. With scale advantage, a strong Partnership of fantastic advisers, and an investment approach that delivers for clients, we are very well placed to capture this opportunity and perform for all our stakeholders.

Mark FitzPatrick, Chief Executive Officer

27 February 2024

Chief Financial Officer's report

Robust underlying financial results

We are pleased to report a year of robust underlying financial results, despite a continued challenging operating environment.

Our underlying business has performed well, delivering growth in average funds under management (FUM) and therefore fee income. Paired with continued discipline in managing controllable costs in line with guidance, this has enabled us to deliver a pre-tax Underlying cash result that is broadly in line with the prior year, albeit 4% lower on a post-tax basis due to the impact of a higher corporation tax rate in 2023.

In the context of an external environment that has been challenging for our industry, this outcome for 2023 highlights that our underlying business performance is robust, putting us in a good position for a bright future despite the near-term challenges we face.

Our reported financial results for 2023 have been significantly impacted by the Ongoing Service Evidence provision that we have established following the appointment of a skilled person and an assessment undertaken into the evidencing and delivery of historic ongoing servicing. The anticipated cost of refunding ongoing servicing charges, together with the interest, and the administrative costs associated with completing the work, is reflected in our Financial Statements through an Ongoing Service Evidence provision of £426.0 million, which is £323.7 million net of tax within the Cash result.

Our financial results are presented in the Financial Review, but this report provides a summary of financial performance on a statutory International Financial Reporting Standard (IFRS) basis, as well as our chosen alternative performance measures (APMs). We also summarise the progression of our FUM and provide shareholders with an overview of our balance sheet.

Funds under management

Client capacity and confidence to commit to long-term investment continues to be impacted by the economic environment and the short-term alternative arising from elevated cash deposit rates.

While this has presented a challenging backdrop, our new business performance has remained robust, with our advisers attracting £15.4 billion (2022: £17.0 billion) of new client investments, and client retention rates remaining strong at 95.3% (2022: 96.5%). As a consequence, we continue to generate significant levels of net inflows, once again demonstrating the resilience and strength of our advice-led business model.

The combined impact of ongoing net inflows and strong investment performance during the year has resulted in FUM increasing by 13% to a record £168.2 billion (2022: £148.4 billion). Growth in FUM, and indeed an accelerating balance of gestation FUM maturing in the coming years, provides our business with good visibility over future growth in income and the creation of sustainable value for shareholders over time.

Financial results

IFRS

As is often the case, IFRS profit before tax of £439.6 million (2022: £2.8 million) and IFRS loss before shareholder tax of £4.5 million (2022: £503.9 million profit) are each heavily distorted by the inclusion of policyholder tax and the associated charges, with further detail included in the Financial Review.

Excluding the short-term impact of items related to policyholder tax, IFRS profit before shareholder tax is subject to similar drivers as those described for the Cash result below.

Cash result

The Cash result, and the Underlying cash result contained within it, are based on IFRS but adjusted to exclude certain non-cash items. They therefore represent useful guides to the level of cash profit generated by the business. All items in the Cash result, and in the commentary below, are presented net of tax.

The Underlying Cash result of £392.4 million for 2023 (2022: £410.1 million) is 4% lower than the prior year. Excluding the impact of an increased rate of corporation tax, the Underlying cash result is broadly unchanged, representing a robust result in a challenging market environment. The Cash result of £68.7 million for 2023 (2022: £410.1 million) has been significantly impacted by the Ongoing Service Evidence provision that we have established. More detail is set out below and in the financial review.

During the year, the Net income from funds under management was £599.2 million (2022: £607.7 million), comprising an increase of 4% on a pre-tax basis, together with the impact of a higher rate of corporation tax. This outcome reflects an increase in average mature FUM, including a contribution of over £40 million from gestation balances that matured during the period.

For the first half of 2023, our margin range for net income was 0.59% to 0.61%, reducing by 0.04% from August 2023 to a range from 0.55% to 0.57%, reflecting the introduction of a charge cap applicable to bond and pension investments with a duration longer than ten years. Looking forward, 2024 will see the corporation tax rate of 25% being applicable for the whole year, with the effect being to further reduce our margin range by 0.01%, resulting in a range from 0.54% to 0.56%.

This margin range is applicable to average mature FUM, excluding discretionary fund management (DFM) and Asia FUM, in line with prior guidance. It is this mature FUM that contributes to the net income figure and, at any given time, it comprises all unit trust and ISA business, as well as life and pensions business written more than six years ago.

Under our current charging structure, new life and pensions business does not contribute annual product management charges for the first six years after the business is written. This means that the Group has six years' worth of FUM in the gestation period that does not materially contribute to the Cash result. At 31 December 2023, the balance of gestation FUM stood at £47.6 billion (2022: £45.5 billion). Once this current stock of gestation FUM has all matured, it will (assuming no market movements or withdrawals, and allowing for the corporation tax rate in 2024 and new charging structure in 2025) contribute in excess of a further £270 million to annual net income from FUM and hence to the Underlying cash result, at no additional cost.

St. James's Place also generates a Margin arising from new business where initial product charges levied on gross inflows exceed new-business-related expenses. The decrease in margin arising from new business in 2023 largely reflects the decrease in gross flows over the year, although the relationship between the two is generally directionally consistent rather than linear, as the margin includes some expenses which do not vary with gross inflows.

Controllable expenses are a key metric for the business and despite the persistence of high inflation we contained the annual growth of controllable expenses in 2023 to 2% on a post-tax basis (2022: 5%), in line with the guidance we set out early in the year. We are currently budgeting to contain growth in controllable expenses for 2024 to 3% post-tax, or 5% pre-tax.

Growth in income, coupled with this management of controllable expenses, has enabled us to deliver a resilient underlying financial performance despite significant short-term challenges.

In addition to these key components of the Cash result, we have seen an increase in Shareholder interest, which represents the interest earned on shareholder working capital and business loans to Partners. We have also seen a short-term reduction in the FSCS levy as a result of a prior year surplus that had built up within the FSCS scheme. Partially offsetting these effects is a reduced benefit from Tax relief from capital losses as we utilised our remaining historic balances, with the result being that this line will no longer feature in the Cash result going forward.

Reported as a Miscellaneous cost, we have seen a significant increase in client complaints over the last 12 months as a result of the activity of claims management firms.

European Embedded Value

We supplement our IFRS and Cash results with additional disclosure on a European Embedded Value (EEV) basis, providing a measure of the total value that might be expected to arise over the lifetime of the existing business, though without making any allowance for new business that may be written in the future.

The EEV result has been significantly impacted by the changes to our charging structure that we announced during the year. As a result of these changes, the contribution to EEV operating profit from new business written in the year has reduced. It has also been necessary to remeasure the future cash flows expected to arise from our existing business, with the impact reflected in an exceptional item of £2,506.6 million.

The EEV operating profit before exceptional items for the year is £1,041.0 million (2022: £1,589.7 million), reflecting a lower contribution from new business, which is impacted by reduced inflows and the effects of changes to our charging structure, as well as the significant benefit of persistency assumption changes in 2022.

The EEV operating loss after exceptional items for the year is £1,891.6 million (2022: £1,589.7 million profit), reflecting the exceptional items of £2,932.6 million arising from changes to our charging structure during the year, as well as the impact of the Ongoing Service Evidence provision that we have established.

The EEV loss before tax for the year of £1,387.4 million (2022: £510.8 million profit) has benefitted from a positive investment return variance of £501.7 million (2022: negative £1,314.0 million). The positive return reflects increased market values across our FUM that exceeded our long-term assumptions, and this compares to a significant negative impact from market returns in 2022.

The EEV net asset value per share was £14.11 at 31 December 2023 (2022: £16.66).

Charge Structure

During the year we made some important changes related to our charges, ensuring both compliance with an evolving regulatory environment, and the creation of a sustainable charging platform that will see the business thrive over the long-term.

In July, we announced the introduction of a fee cap on long term bond and pension investments which came into effect in August 2023. Later in the year, we announced the conclusion of a comprehensive review of our client charging structure, resulting in simplifying charging from the middle of 2025 that will improve comparability across the marketplace and enable a clearer articulation of the value that we provide to clients across all elements of our proposition.

The effect of these changes will be to reduce the net income margin range by 0.11% to a range between 0.43% and 0.45%, though this will be applicable to all FUM once the existing gestation FUM has matured, with no further concept of gestation. There will also no longer be a material contribution from margin arising on new business.

These changes will impact the shape of our financial results over time and will require investment in systems and processes in order to deliver. However, they will result in long-term simplicity and comparability, which can only strengthen our proposition, our brand and our reputation. They also give us confidence that we can grow the business without the need for further changes to our charges that would impact the guidance set out above.

Financial position

Our prudent approach to managing our balance sheet has ensured that we have more than sufficient funding capacity to cover the financial implications of setting up the Ongoing Service Evidence provision. We are confident that the provision we have set up is sufficient. We have, however, arranged access to an additional £250 million of credit which we do not anticipate utilising, but which provides for additional funding certainty.

Solvency and capital

We have always taken a simple and prudent approach to managing the balance sheet and our capital requirements. This continues to be the case, with both the Group and our life companies in a strong financial position. Given the simplicity of our business model, our preferred approach to considering solvency remains to hold assets to match client unit-linked liabilities and allow for a management solvency buffer (MSB).

At 31 December 2023 we held surplus assets over the MSB of £603.5 million (2022: £847.2 million), reducing as a result of the Ongoing Service Evidence provision that we have established.

We also ensure that our approach meets the requirements of the Solvency II regime. Our UK life company, the largest Solvency II entity in the Group, has increased its target capital from 110% to 130% of the standard formula, reflecting the change in its financial model as a result of the charging structure changes we have announced. This has been discussed with its regulator, the PRA.

At 31 December 2023, the solvency ratio for our life companies after payment of a year-end intra-Group dividend was 162% (2022: 130%), reflecting the impact of the change in charging structures, and the Solvency II reform changes to the risk margin.

Dividends

While our financial results have been significantly impacted by the Ongoing Service Evidence provision, the Board recognises the importance of returns to shareholders and is confident that sufficient capital and liquidity is available to deal with this legacy matter. In light of this, the Board therefore proposes a final dividend of 8.00 pence per share (2022: 37.19 pence per share) to make a total dividend of 23.83 pence per share for the full year (2022: 52.78 pence per share).

A combination of the provision we have established and an expected decrease in the level of profit growth in the next few years as we transition to our new charging structure, reduces our ability to invest for long term growth in our business over the next few years. Accordingly, the Board has decided to revise our approach to shareholder distributions. Going forward, the Board expects that total annual distributions will be set at 50% of the full year Underlying cash result. For the next three years this will comprise 18.00 pence per share in annual dividends declared with the balance distributed through share repurchases.

Once our new charging structure is fully embedded, we anticipate that the business will be on an improving earnings trajectory during 2027 and beyond. The Board expects that distributing 50% of the Underlying cash result will continue to strike the right balance between investment for growth and returns to shareholders, while seeing shareholder distributions increase over time. The upward trajectory in profits should then provide the Board with options to grow the dividend element within the total return.

Craig Gentle, Chief Financial Officer

27 February 2024

Summary financial information

1 Restated to reflect the adoption of IFRS 17. See Note [1a].

A complete glossary of APMs is below.

The Cash result should not be confused with the IFRS Consolidated Statement of Cash Flows, which is prepared in accordance with IAS 7.

Financial Review

This financial review provides analysis of the Group's financial position and performance.

It is split into the following sections:

Section 1

Funds under management (FUM)

1.1 FUM analysis

1.2 Gestation

As set out below, FUM is a key driver of ongoing profitability on all measures, and so information on growth in FUM is provided in Section 1.

Section 2

Performance measurement

2.1 International Financial Reporting Standards (IFRS)

2.2 Cash result

2.3 European Embedded Value (EEV)

Section 2 analyses the performance of the business using three different bases: IFRS, the Cash result, and EEV.

Section 3

Solvency

Section 3 addresses solvency, which is an important area given the multiple regulated activities carried out within the Group.

Our financial business model

Our financial business model is straightforward. We generate revenue by attracting clients through the value of our proposition, who trust us with their investments and then stay with us. This grows our funds under management (FUM), on which we receive:

· advice charges for the provision of valuable, face-to-face advice; and

· product charges for our manufactured investment, pension and ISA/unit trust products.

Further information on our charges can be found on our website: www.sjp.co.uk/charges. A breakdown of fee and commission income, our primary source of revenue under IFRS, is set out in Note 4.

The primary source of the Group's profit is the income we receive from annual product management charges on FUM. However, under our current charging structure, most of our investment and pension products are structured so that annual product management charges are not taken for the first six years after the business is written. This means that the Group has six years' worth of FUM in the 'gestation' period that is not generating annual product management charges, but will 'mature' over a six-year period and begin to contribute annual product management charges.

We will be simplifying our charging structure from the middle of 2025 and new business will no longer enter a gestation period, but in the meantime, gestation FUM represents a significant store of shareholder value.

Initial and ongoing advice charges, and initial product charges levied when a client first invests into one of our products, are not major drivers of the Group's profitability, because:

· most advice charges received are offset by corresponding remuneration for Partners, so an increase in these revenue streams will correspond with an increase in the associated expense and vice versa; and

· under IFRS, initial product charges are spread over the expected life of the investment through deferred income (DIR). The contribution to the IFRS result from spreading these historic charges can be seen in Note 4 as amortisation of DIR. Initial product charges contribute immediately to our Cash result through margin arising on new business.

Our income is used to meet overheads, pay ongoing product expenses and invest in the business. Controllable expenses, being the costs of running the Group's infrastructure, the Academy and development expenses, are carefully managed in line with our 2025 business plan ambition to limit their growth to 5% per annum. Other ongoing expenses, including payments to Partners, increase with business levels and are generally aligned with product charges.

Gross inflows into FUM

Section 1

Funds under management

1.1 FUM analysis

Our financial business model is to attract and retain FUM, on which we receive an annual management fee. As a result, the level of income we receive is ultimately dependent on the value of our FUM, and so its growth is a clear driver of future growth in profits. The key drivers for FUM are:

· our ability to attract new funds in the form of gross inflows;

· our ability to retain FUM by keeping unplanned withdrawals at a low level; and

· net investment returns.

The following table shows how FUM evolved during 2023 and 2022. Investment return is presented net of all charges.

Included in the table above is:

· Rowan Dartington Group FUM of £3.43 billion at 31 December 2023 (31 December 2022: £3.29 billion), gross inflows of £0.36 billion for the year (2022: £0.44 billion) and outflows of £0.18 billion (2022: £0.14 billion); and

· SJP Asia FUM of £1.72 billion at 31 December 2023 (31 December 2022: £1.52 billion), gross inflows of £0.21 billion for the year (2022: £0.28 billion) and outflows of £0.15 billion (2022: £0.10 billion).

The following table shows the significant net inflows and the progression of FUM over the past six years.

The table below provides a geographical and investment-type analysis of FUM at 31 December.

1.2 Gestation

As explained in our financial business model, due to our current product structure, there is a significant amount of FUM that has not yet started to contribute to the Cash result.

When we attract new FUM there is a margin arising on new business that emerges at the point of investment, which is a surplus of income over and above the initial costs incurred at the outset. Within our Cash result presentation this is recognised as it arises, but it is deferred under IFRS.

Once the margin arising on new business has been recognised the pattern of future emergence of cash from annual product management charges differs by product. Broadly, annual product management charges from unit trust and ISA business begin contributing positively to the Cash result from day one, whilst investment and pensions business enters a six-year gestation period during which no net income from FUM is included in the Cash result. Once this business has reached its six-year maturity point, it starts contributing positively to the Cash result, and will continue to do so in each year that it remains with the Group. Approximately 54% of gross inflows for 2023, after initial charges, moved into gestation FUM (2022: 54%).

The following table shows an analysis of FUM, after initial charges, split between mature FUM that is contributing net income to the Cash result and FUM in gestation which is not yet contributing, as at the year-end for the past five years. The value of both mature and gestation FUM is impacted by investment return as well as net inflows.

During the year, we announced the outcome of an internal review which will see us simplify our charging structure from the second half of 2025, following a period of investment in the required systems and processes. Under the revised charging structure, new business will no longer enter a period of gestation and the existing gestation business at the point of implementation will gradually mature, after which there will be no further concept of gestation FUM. In the meantime, gestation FUM continues to be a material store of shareholder value that will make a significant contribution to the Cash result in the future.

The following table gives an indication, for illustrative purposes, of the way in which the reduction in fees in the gestation period element of the Cash result could unwind, and so how the gestation balance of £47.6 billion at 31 December 2023 may start to contribute to the Cash result over the next six years and beyond, allowing for the changes to our charging structure in 2025 and the applicable rate of corporation tax in each year. For simplicity it assumes that FUM values remain unchanged, that there are no surrenders, and that business is written at the start of the year. Actual emergence in the Cash result will reflect the varying business mix of the relevant cohort and business experience.

Section 2

Performance measurement

In line with statutory reporting requirements we report profits assessed on an IFRS basis. The presence of a significant life insurance company within the Group means that, although we are a wealth management group in substance with a simple business model, we apply IFRS accounting requirements for insurance companies. These requirements lead to financial statements which are more complex than those of a typical wealth manager and so our IFRS results may not provide the clearest presentation for users who are trying to understand our wealth management business. Key examples of this include the following:

· our IFRS Statement of Comprehensive Income includes policyholder tax balances which we are required to recognise as part of our corporation tax arrangements. This means that our Group IFRS profit before tax includes amounts charged to clients to meet policyholder tax expenses, which are unrelated to the underlying performance of our business; and

· our IFRS Statement of Financial Position includes policyholder liabilities and the corresponding assets held to match them, and so policyholder liabilities increase or decrease to match increases or decreases experienced on these assets. This means that shareholders are not exposed to any gains or losses on the £167.8 billion of policyholder assets and liabilities recognised in our IFRS Statement of Financial Position, which represented over 97% of our IFRS total assets and liabilities at 31 December 2023.

To address this, we developed alternative performance measures (APMs) with the objective of stripping out the policyholder element to present solely shareholder-impacting balances, as well as removing items such as deferred acquisition costs and deferred income to reflect Solvency II recognition requirements and to better match the way in which cash emerges from the business. We therefore present our financial performance and position on three different bases, using a range of APMs to supplement our IFRS reporting. The three different bases, which are consistent with those presented last year, are:

· International Financial Reporting Standards (IFRS);

· Cash result; and

· European Embedded Value (EEV).

APMs are not defined by the relevant financial reporting framework (which for the Group is IFRS), but we use them to provide greater insight to the financial performance, financial position and cash flows of the Group and the way it is managed. A complete glossary of APMs is set out below, in which we define each APM used in our financial review, explain why it is used and, if applicable, explain how the measure can be reconciled to the IFRS Financial Statements.

2.1 International Financial Reporting Standards (IFRS)

On 1 January 2023, the Group adopted IFRS 17 Insurance Contracts, with comparatives restated from 1 January 2022. The adoption of IFRS 17 resulted in an increased IFRS profit after tax of £1.8 million for the year ended 31 December 2022. For further explanation, refer to Note 1a.

As referenced above, our IFRS results are impacted by policyholder tax balances which we are required to recognise as part of our corporation tax arrangements. This means that our Group IFRS profit before tax includes amounts charged to clients to meet policyholder tax expenses, which are unrelated to the underlying performance of our business. The scale and direction of these amounts can vary significantly: for example in 2023 we deducted £444.1 million from clients due to investment market gains which flowed through our IFRS profit before tax as income, whereas in 2022 we were required to refund £501.1 million to clients due to investment market falls which flowed through our IFRS profit before tax as an expense. See Note 4 Fee and commission income for further information. This leads to substantial distortion within our IFRS profit before tax: for the year ended 31 December 2023 it was £439.6 million, compared to £2.8 million for the year ended 31 December 2022.

To address the challenge of policyholder tax being included in the IFRS results we focus on the following two APMs, based on IFRS, as our pre-tax metrics:

· IFRS profit before shareholder tax; and

· underlying profit.

Further information on these IFRS-based measures is set out below.

Profit before shareholder tax

This is a profit measure based on IFRS which aims to remove the impact of policyholder tax. The policyholder tax expense or credit is typically matched by an equivalent deduction or credit from the relevant funds, which is recorded within fee and commission income in the Consolidated Statement of Comprehensive Income. Policyholder tax does not therefore normally impact the Group's overall profit after tax. The following table demonstrates the way in which IFRS profit before shareholder tax is presented in the Consolidated Statement of Comprehensive Income.

1 Restated to reflect the adoption of IFRS 17. See Note 1a.

However, in both the current and prior year IFRS profit before shareholder tax and IFRS profit after tax have been impacted by another nuance of life insurance tax, which has led to decreases in each of these balances year on year.

As set out above, life insurance tax incorporates a policyholder tax element, and the financial statements of a life insurance group need to reflect the liability to HMRC and the corresponding deductions incorporated into policy charges. In particular, the tax liability to HMRC is assessed using IAS 12 Income Taxes, which does not allow discounting, whereas the policy charges are designed to ensure fair outcomes between clients and so reflect a wide range of possible outcomes. This gives rise to different assessments of the current value of future cash flows and hence an asymmetry in the Consolidated Statement of Financial Position between the deferred tax position and the offsetting client balance. The net balance reflects a temporary position, and in the absence of market volatility we expect it will unwind as future cash flows become less uncertain and are ultimately realised. Movement in the asymmetry is recognised in the Consolidated Statement of Comprehensive Income and analysed in Note 4 Fee and commission income. We refer to it throughout this Annual Report and Accounts as the impact of policyholder tax asymmetry.

Under normal conditions this asymmetry is small, but market volatility can result in significant balances. Market gains combined with higher interest rates in the year to 31 December 2023 have resulted in a negative policyholder tax asymmetry impact of £44.4 million, whereas market falls in the year to 31 December 2022 resulted in a positive movement of £50.6 million. This leads to a £95.0 million year-on-year difference in both IFRS profit after tax and IFRS profit before shareholder tax.

Ultimately the effect will be eliminated from the Consolidated Statement of Financial Position, and so it is temporary and we expect it to reverse as markets increase further.

Shareholder tax reflects the tax charge attributable to shareholders and is closely related to the performance of the business. However, it can vary year on year due to several factors: further detail is set out in Note 6 Income and deferred taxes.

Underlying profit

This is IFRS profit before shareholder tax (as calculated above) adjusted to remove the impact of accounting for deferred acquisition costs (DAC), deferred income (DIR) and the purchased value of in-force business (PVIF).

IFRS requires certain upfront expenses incurred and income received to be deferred. The deferred amounts are initially recognised on the Statement of Financial Position as a DAC asset and DIR liability, which are subsequently amortised to the Statement of Comprehensive Income over a future period. Substantially all of the Group's deferred expenses are amortised over a 14-year period, and substantially all deferred income is amortised over a six-year period.

The impact of accounting for DAC, DIR and PVIF in the IFRS result is that there is a significant accounting timing difference between the emergence of accounting profits and actual cash flows. For this reason, Underlying profit is considered to be a helpful metric. The following table demonstrates the way in which IFRS profit reconciles to Underlying profit.

1 Restated to reflect the adoption of IFRS 17. See Note 1a.

The impact of movements in DAC, DIR and PVIF on IFRS profit before shareholder tax is further analysed as follows. Due to policyholder tax on DIR, the amortisation of DIR during the year and DIR on new business for the year set out below cannot be agreed to the figures provided in Note 11 in the Annual Report and Accounts, which are presented before both policyholder and shareholder tax.

1 Restated to reflect the adoption of IFRS 17. See Note 1a.

Net impact of DAC

The scale of the £32.3 million negative overall impact of DAC on the IFRS result (2022: negative £42.3 million) is largely due to changes arising from the 2013 Retail Distribution Review (RDR). After these changes, the level of expenses that qualified for deferral reduced significantly, but the large balance accrued previously is still being amortised. As deferred expenses are amortised over a 14-year period there is a significant transition period, which could last for another few years, over which the amortisation of pre-RDR expenses previously deferred will significantly outweigh new post-RDR expenses deferred despite significant business growth, resulting in a net negative impact on IFRS profits.

Net impact of DIR

The reduction in new business in the year means income deferred in 2023 is lower than it was in 2022. Income released from the deferred income liability has reduced as balances arising from the reassessment of investment contract liabilities in 2016 were fully amortised by the end of 2022. Together, these effects mean that DIR has had a positive £39.0 million impact on the IFRS result in 2023 (2022: £32.5 million positive).

2.2 Cash result

The Cash result is used by the Board to assess and monitor the level of cash profit (net of tax) generated by the business. It is based on IFRS with adjustments made to exclude policyholder balances and certain non-cash items, such as DAC, DIR, deferred tax and equity-settled share-based payment costs. Further details, including the full definition of the Cash result, can be found in the glossary of APMs. Although the Cash result should not be confused with the IAS 7 Consolidated Statement of Cash Flows, it provides a helpful supplementary view of the way in which cash is generated and emerges within the Group.

The Cash result reconciles to Underlying profit, as presented in Section 2.1, as follows.

1 Restated to reflect the adoption of IFRS 17. See Note 1a.

Equity-settled share-based payments have reduced compared to 2022, reflecting a lower average share price, partially offset by an increase in the number of shares and share options granted during the year.

The impact of deferred tax is the recognition in the Cash result of the benefit from realising tax relief on various items including capital losses, share options, capital allowances and deferred expenses. These have already been recognised under IFRS, and hence Underlying profit, through the establishment of deferred tax assets. Two notable points in the year, are the need for life companies to spread acquisition expenses equally across 7 years is removed with immediate allowance for tax relief instead, and that recognition has been allowed for the deferred tax relief arising from the establishment of the exceptional Ongoing Service Evidence provision. More information can be found in Note 6.

The impact of policyholder tax asymmetry is a temporary effect caused by asymmetries between fund tax deductions and the policyholder tax due to HMRC. Movement in the asymmetry can be significant in volatile markets. 

Other represents a number of other small items, including the removal of other intangibles and the difference between the lease expense recognised under IFRS 16 Leases and lease payments made.

The following table shows an analysis of the Cash result using two different measures:

· Underlying cash result This measure represents the regular emergence of cash from the business, excluding any items of a one-off nature and temporary timing differences; and

· Cash result This measure includes items of a one-off nature and temporary timing differences.

Consolidated cash result (presented post-tax)

The Cash result comprises the emergence of cash from in-force business of £222.5 million (2022: £544.3 million) and an investment in new business of £153.8 million (2022: £134.2 million)

Notes to the Cash result

1. Net income from FUM

The net annual management fee is the net manufacturing margin that the Group retains from FUM after payment of the associated costs: for example, advice fees paid to Partners, investment management fees paid to external fund managers and the policy servicing tariff paid to our third-party administration provider. Each product has standard fees, but they vary between products. Overall post-tax margin on FUM reflects business mix but also the different tax treatments, particularly life insurance tax on onshore investment business.

Our investment and pension business product structure means that these products do not generate net Cash result, after the margin arising from new business, during the first six years. This is known as the 'gestation period' and is reflected in the reduction in fees in gestation period line.

Net income from FUM reflects Cash result income from FUM that has reached maturity, including FUM which has emerged from the gestation period during the year, and this line is the focus of our explanatory analysis. As with net annual management fees, the average rate can vary over time with business mix and tax.

For 2023, our net income from FUM is consistent with the weighted average of our margin range throughout the year. The margin range for the first half of the year was year 0.59% to 0.61%, reducing by 0.04% from August 2023 to a range from 0.55% to 0.57%, reflecting the introduction of a charge cap applicable to client bonds and pension investments with a duration longer than ten years.

There will be another, more modest impact in 2024 when the tax rate will be 25% for the full year, with the effect of this being to further reduce our margin range by 0.01%, resulting in a range from 0.54% to 0.56%. Following the simplification of our charging structure from the middle of 2025, the range will reduce by a further 0.11%, resulting in a range from 0.43% to 0.45%, though this will be applicable to all FUM once the existing gestation FUM has matured.

Net income from Asia and DFM FUM is not included in this line. Instead, this is included in the Asia - net investment and DFM - net investment lines.

2. Margin arising from new business

This is the net positive Cash result impact of new business in the year, reflecting initial charges levied on gross inflows and new-business-related expenses. The majority of these expenses vary with new business levels, such as the incremental third-party administration costs of setting up a new policy on our back-office systems, and payments to Partners for the initial advice provided to secure clients' investment. As a result, gross inflows are a key driver behind this line.

However, the margin arising from new business also contains some fixed expenses, and elements which do not vary exactly in line with gross inflows. For example, our third-party administration tariff structure includes a fixed fee, and to provide some stability for Partner businesses, elements of our support for them are linked to prior-year new business levels.

Therefore, whilst the margin arising from new business tends to move directionally with the scale of gross inflows generated during the year, the relationship between the two is not linear.

3. Controllable expenses

Controllable expenses are those expenses which do not vary with business volumes, including establishment expenses, development expenses and the costs associated with running our Academy. Growth in controlled expenses has been contained to 8% on a pre-tax basis, with the increase driven by the high inflation environment. This is equivalent to a 2% increase on a post-tax basis as presented in the Cash result, reflecting an increase in the rate of corporation tax.

We anticipate returning to our target of 5% annual growth in pre-tax controllable expenses in 2024, balancing disciplined expense management with the need to invest in the business for the future.

Establishment expenses in 2023 increased by 4% on a net-of-tax basis to £206.2 million (2022: £198.9 million), as inflation driven increases were partially offset by an increased level of tax relief. These costs predominantly relate to people, property and technology and hence are relatively fixed in nature.

Development expenses were £65.3 million (2022: £67.4 million). Our investment in technology, alongside our commitment to making it easier to do business, is the driver behind our development expenditure. We continue to improve our technology infrastructure and data quality, and to invest in Salesforce.

Reflecting its critical role in providing a source of future organic growth in our adviser population, we continue to invest in building our Academy programme.

4. Asia and DFM

These lines represent the net income from Asia and DFM FUM, they include the Asia and DFM expenses set out in the reconciliation between expenses presented separately on the face of the Cash result before tax and IFRS expenses.

We have continued to invest in developing our presence in Asia, as well as in discretionary fund management via Rowan Dartington. The increased investment in Asia includes the cost of restructuring during the year, as well as the cost of setting up a new office in Dubai. While both Asia and Rowan Dartington have been impacted by the challenging market conditions in 2023, they remain well positioned for the years ahead.

5. Regulatory fees and FSCS levy

The costs of operating in a regulated sector include regulatory fees and the Financial Services Compensation Scheme (FSCS) levy. On a post-tax basis, these are as follows:

Our position as a market-leading provider of advice means we make a substantial contribution to supporting the FSCS, thereby providing protection for clients of other businesses in the sector that fail. The FSCS levy has fallen substantially in 2023, reflecting the short-term utilisation of scheme surpluses that had built up in prior years. The levy is anticipated to increase again in 2024.

6. Shareholder interest

This is the income accruing on investments and cash held for regulatory purposes together with the interest received on the surplus capital held by the Group. It is presented net of funding-related expenses, including interest paid on borrowings and securitisation costs. It has increased significantly during the year following rises in the Bank of England base rate.

7. Tax relief from capital losses

A deferred tax asset was previously recognised under IFRS for historic capital losses which were regarded as being capable of utilisation over the medium term. The tax asset is ignored for Cash result purposes as it is not fungible, but instead the cash benefit realised when losses are utilised is shown in the tax relief from capital losses line.

Utilisation during the year of £2.1 million tax value (2022: £20.7 million) reflects the utilisation in full of the remaining stock of capital losses. Due to the exhaustion of the balance, this will not feature in the Cash result in the future.

8. Charge structure implementation costs

We announced in October 2023 that we would be simplifying our charging structure and disaggregating our charges into their component parts, supporting clients by making it easier to compare charges for advice, investment management and other services, on a component-by-component basis.

We have commenced a broad and complex programme to accommodate these changes, investing £140-160 million over a two-year period to develop our systems and processes to support the new charging structure to be implemented in the second half of 2025.

9. Miscellaneous

This category represents the net cash flow of the business not covered in any of the other categories. Miscellaneous has increased in 2023, reflecting an increase in remediation costs as a result of elevated complaints experience.

10. Ongoing Service Evidence provision

The Ongoing Service Evidence provision has been established following the appointment of a skilled person and an assessment undertaken into the evidencing and delivery of historic ongoing servicing. The anticipated cost of refunding ongoing servicing charges, together with the interest, and the administrative costs associated with completing the work, is reflected in our Financial Statements through an Ongoing Service Evidence provision of £426.0 million, which is £323.7 million net of tax (and a deferred tax balance) within the Cash result.

Reconciliation of Cash result expenses to IFRS expenses

Whilst certain expenses are recognised in separate line items on the face of the Cash result, expenses which vary with business volumes, such as payments to Partners and third-party administration expenses, and expenses which relate to investment in specific areas of the business such as DFM, are netted from the relevant income lines rather than presented separately. In order to reconcile to the IFRS expenses presented on the face of the Consolidated Statement of Comprehensive Income, the expenses netted from income lines in the Cash result need to be added in, as do certain IFRS expenses which by definition are not included in the Cash result. In addition, all expenses need to be converted from post-tax, as they are presented in the Cash result, to pre-tax, as they are presented under IFRS.

Expenses presented on the face of the Cash result before and after tax are set out below.

The total expenses presented separately on the face of the Cash result before tax then reconcile to IFRS expenses as set out below.

1 Restated to reflect the adoption of IFRS 17. See Note 1a.

2 Restated to reclassify other finance income. See Note 1a.

Expenses which vary with business volumes

Other performance costs vary with the level of new business and the operating profit performance of the business.

Payments to Partners, investment expenses and third-party administration costs are met through charges to clients, and so any variation in them from changes in the volumes of new business or the level of the stock markets does not impact Group profitability significantly.

Each of these items is recognised within the most relevant line of the Cash result, which is determined based on the nature of the expense. In most cases, this is either the net annual management fee or margin arising from new business lines.

Other expenses includes the provision that we have established following a review into the evidencing of historic ongoing servicing, as well as the operating costs of acquired financial adviser businesses, donations to the St. James's Place Charitable Foundation and complaint costs. They are recognised across various lines in the Cash result.

Expenses relating to investment in specific areas of the business

Asia expenses and DFM expenses both reflect disciplined expense control during the year, whilst continuing to invest to support growth. The increased investment in Asia includes the cost of restructuring during the year.

In the Cash result, Asia and DFM expenses are presented net of the income they generate in the Asia - net investment and DFM - net investment lines.

Reconciling items to IFRS expenses

DAC amortisation, net of additions, PVIF amortisation and equity-settled share-based payment expenses are the primary expenses which are recognised under IFRS but are excluded from the Cash result.

Expenses associated with insurance contract expenses are included in the Cash result but are shown within the Insurance service expense rather than the expenses line under IFRS 17.

Derivation of the Cash result

The Cash result is derived from the IFRS Consolidated Statement of Financial Position in a two-stage process:

Stage 1: Solvency II Net Assets Balance Sheet

Firstly, the IFRS Consolidated Statement of Financial Position is adjusted for a number of material balances that reflect policyholder interests in unit-linked liabilities together with the underlying assets that are held to match them. Secondly, it is adjusted for a number of non-cash 'accounting' balances such as DIR, DAC and associated deferred tax. The result of these adjustments is the Solvency II Net Assets Balance Sheet and the following table shows the way in which it has been calculated at 31 December 2023.

1 Restated to reflect the adoption of IFRS 17. See Note 1a.

Adjustment 1 strips out the policyholder interest in unit-linked assets and liabilities, to present solely shareholder-impacting balances.

Adjustment 2 removes items such as DAC, DIR, PVIF and their associated deferred tax balances from the IFRS Statement of Financial Position to bring it in line with Solvency II recognition requirements.

Notes to the Solvency II Net Assets Balance Sheet

1. Property and equipment, and other payables

The property and equipment balance includes the right to use leased assets of £118.5 million (2022: £114.4 million), together with fixtures, fittings and office equipment of £32.1 million (2022: £28.6 million) and computer equipment of £2.5 million (2022: £2.7 million).

The right to use leased assets has increased year on year as a result of taking on a lease for the new London Paddington office, partially offset as the leased assets are depreciated. Lease liabilities of £120.5 million are recognised within the other payables line (2022: £116.6 million).

2. Deferred tax assets and liabilities

Analysis of deferred tax assets and liabilities, including how they have moved year on year, is set out in Note 6 Income and deferred taxes within the IFRS Financial Statements.

3. Other receivables and other payables

Detailed breakdowns of other receivables and other payables can be found in Note 7 Other receivables and Note 8 Other payables within the IFRS Financial Statements.

Other receivables on the Solvency II Net Assets Balance Sheet have increased from £1,369.2 million at 31 December 2022 to £2,147.3 million at 31 December 2023, principally reflecting an increase in short-term outstanding market trade settlements in the unit-linked funds and consolidated unit trusts.

Within other receivables there are two items which merit further analysis:

Operational readiness prepayment asset

One of the items within other receivables is the operational readiness prepayment asset. This arose from the investment we have made into our back-office infrastructure project, which was a complex, multi-year programme. In addition to expensing our internal project costs through the IFRS Statement of Comprehensive Income and Cash result as incurred, we capitalised Bluedoor development costs as a prepayment asset on the IFRS Statement of Financial Position.

The asset, which stood at £283.5 million at 31 December 2023 (31 December 2022: £278.3 million) has been amortising through the IFRS Statement of Comprehensive Income and the Cash result since 2017 and will continue to do so over the remaining life of the contract, which at 31 December 2023 is 10 years.

A project to migrate our offshore business onto Bluedoor is in progress, with £29.9 million added to the total operational readiness prepayment asset during 2023 that will begin to amortise from 2024.

The movement schedule below demonstrates how the operational readiness prepayment has developed over the past two years.

The amortisation expense is recognised within third-party administration expenses in the IFRS result, and within the net annual management fee line of the Cash result. It is more than offset by the lower tariff charges on Bluedoor compared to the previous system, which grew as the business grew, benefiting both the IFRS and Cash results.

Business loans to Partners

Facilitating business loans to Partners is a key way in which we are able to support growing Partner businesses. Such loans are principally used to enable Partners to take over the businesses of retiring or downsizing Partners, and this process creates broad stakeholder benefits. First, clients benefit from enhanced continuity of St. James's Place advice and service over time; second, Partners are able to build and ultimately realise value in the high-quality and sustainable businesses they have created; and finally, the Group and, in turn, shareholders, benefit from high levels of adviser and client retention.

In addition to recognising a strong business case for facilitating such lending, we recognise too the fundamental strength and credit quality of business loans to Partners. Over more than ten years, cumulative write-offs have totalled less than 5 bps of gross loans advanced, with such low impairment experience attributable to a number of factors that help to mitigate the inherent credit risk in lending. These include taking a cautious approach to Group credit decisions, with lending secured against prudent business valuations. Demonstrating this, loan-to-value (LTV) information is set out in the table below.

If FUM were to decrease by 10%, the net exposure to loans where LTV is over 100% at 31 December 2023 would increase to £7.7 million (31 December 2022: increase to £8.3 million).

Our credit experience also benefits from the repayment structure of business loans to Partners. The Group collects advice charges from clients. Prior to making the associated payment to Partners, we deduct loan capital and interest payments from the amount due. This means the Group is able to control repayments.

During the year we have continued to facilitate business loans to Partners. Following the sale, in the second half of 2022, of a portfolio of securitised business loans to Partners, the balance was negligible at 31 December 2022. Since then, we have continued to make use of the securitisation vehicle to support the advance of further loans to Partners.

4. Liquidity

Cash generated by the business is held in highly rated government securities, AAA-rated money market funds and bank accounts. Although these are all highly liquid, only the latter is classified as cash and cash equivalents on the Solvency II Net Assets Balance Sheet. The total liquid assets held are as follows.

The Group's primary source of net cash generation is product charges. In line with profit generation, as most of our investment and pension business enters a gestation period, there is no cash generated (apart from initial charges) for the first six years of an investment. This means that the amount of FUM that is contributing to the Cash result will increase year on year as FUM in the gestation period becomes mature and is subject to annual product management charges. Unit trust and ISA business does not enter the gestation period, and so generates cash immediately from the point of investment.

Cash is used to invest in the business and to pay the Group dividend. Our dividend guidance is set such that appropriate cash is retained in the business to support the investment needed to meet our future growth aspirations.

5. Borrowings

The Group continues to pursue a strategy of diversifying and broadening its access to debt finance. We have done this successfully over time, including via the creation and execution of the securitisation vehicle referred to above. For accounting purposes we are obliged to disclose on our Consolidated Statement of Financial Position the value of loan notes relating to the securitisation. However, as the securitisation loan notes were secured only on the securitised portfolio of business loans to Partners, they were non-recourse to the Group's other assets. This means that the senior tranche of non-recourse securitisation loan notes, whilst included within borrowing, is very different from the Group's senior unsecured corporate borrowings, which are used to manage working capital and fund investment in the business.

Further information is provided in Note 10 Borrowings and financial commitments within the IFRS Financial Statements.

During the year our revolving credit facility, one of our primary senior unsecured corporate borrowings facilities, was renewed. The credit available under this facility is £345 million, which is repayable at maturity in 2028.

6. Other provisions

Further information on other provisions, including how the balance has moved year on year, is set out in Note 9 Other provisions and contingent liabilities within the IFRS Financial Statements.

Provisions have increased from £46.0 million at 31 December 2022 to £500.1 million at 31 December 2023, driven by a £426.0 million Ongoing Service Evidence provision that we have established following a review into the evidencing and delivery of historic ongoing servicing.

7. Income tax liabilities

The Group has an income tax liability of £11.5 million at 31 December 2023 compared to an asset of £35.0 million at 31 December 2022. This is due to a current tax charge of £225.3 million, tax paid in the year of £179.4 million and other impacts of £0.6 million including those related to the acquisition of Group entities. Further detail is provided in Note 6 Income and deferred taxes.

Stage 2: Movement in Solvency II Net Assets Balance Sheet

After the Solvency II Net Assets Balance Sheet has been determined, the second stage in the derivation of the Cash result identifies a number of movements in that balance sheet which do not represent cash flows for inclusion within the Cash result. The following table explains how the overall Cash result reconciles to the total movement.

2.3 European Embedded Value (EEV)

Wealth management differs from most other businesses, in that the expected shareholder income from client investment activity emerges over a long period in the future. We therefore supplement the IFRS and Cash results by providing additional disclosure on an EEV basis, which brings into account the net present value of the expected future cash flows. We believe that a measure of the total economic value of the Group's operating performance is useful to investors.

As in previous reporting, our EEV continues to be calculated on a basis determined in accordance with the EEV principles originally issued in May 2004 by the Chief Financial Officers Forum (CFO Forum) and supplemented both in October 2005 and, following the introduction of Solvency II, in April 2016.

Many of the principles and practices underlying EEV are similar to the requirements of Solvency II, and we have sought to align them as closely as possible. The table below and accompanying notes summarise the (loss)/profit before tax of the combined business.

A reconciliation between EEV operating (loss)/profit before tax and IFRS profit before tax is provided in Note 3 Segment reporting within the IFRS Financial Statements.

Notes to the EEV result

1. Funds management business EEV operating profit

The funds management business operating profit has reduced to £1,234.3 million (2022: £1,725.8 million) and a full analysis of the result is shown below.

The new business contribution for the year at £695.4 million (2022: £977.2 million) was 29% lower than the prior year, reflecting the reduction in new business volumes, together with the impact of changes to our charging structure described opposite.

The unwind of the discount rate for the year was higher at £506.0 million (2022: £440.7 million), reflecting the increase in the opening risk discount rate to 7.0% (2022: 4.2%), offset by a lower value of in-force business after allowing for the changes to our charging structure described opposite.

The experience variance during the year was £(11.3) million (2022: £89.0 million). The change relative to 2022 principally reflects the lower persistency experience in the year.

The impact of operating assumption changes in the year was £13.9 million (2022: positive £210.1 million), reflecting a small change to the persistency assumptions for our offshore bond business. The impact in the prior year reflects a small improvement to the persistency assumptions for unit trust and ISA business.

2. Distribution business

The distribution loss includes the positive gross margin arising from advice income less payments to advisers, offset by the costs of supporting the Partnership and building distribution capabilities in Asia. The reported loss has benefited from a reduction in the FSCS levy expense for our distribution business to £10.6 million (2022: £23.8 million), offsetting a reduction in the gross margin reflecting lower new business volumes.

3. Other

Other represents a number of miscellaneous items including development expenditure, the costs of running our Academy and implementing our new charging structure, as well as the cost of redress associated with client complaints. The increase reflects elevated complaints experience seen during the year.

4. Exceptional items:

The exceptional charge reflects the impact on the opening position of changes to our charge structure announced during the year as well as the impact of a provision that we have established following a review into the evidencing of historic ongoing servicing. The changes announced to our charge structure include:

· the change, announced in July 2023, to improve value for long-term clients by capping annual product management charges at 0.85% for bond and pension investments with a duration longer than ten years;

· the change, announced in October 2023, to simplify our charging structure from the middle of 2025.

5. Investment return variance

The investment return variance reflects the capitalised impact on the future annual management fees resulting from the difference between the actual and assumed investment returns. Given the size of our FUM, a small difference can result in a large positive or negative variance.

The typical investment return on our funds during the year was 11.2% after charges, compared to the assumed investment return of 4.8%. This resulted in an investment return variance of £501.7 million (2022: negative £1,314.0 million).

6. Economic assumption changes

The positive variance of £2.5 million arising in the year (2022: positive £235.1 million) reflects broadly neutral economic assumption changes overall, compared to the significant increase in real yields seen in the prior year.

New business margin

The largest single element of the EEV operating profit (analysed in the previous section) is the new business contribution. The level of new business contribution generally moves in line with new business levels. To demonstrate this link, and aid understanding of the results, we provide additional analysis of the new business margin (the margin). This is calculated as the new business contribution divided by the gross inflows, and is expressed as a percentage.

The table below presents the margin before tax from our manufactured business.

The overall margin for the year was 4.5% (2022: 5.7%), reflecting the impact of the impact of exceptional changes to our charge structure.

Economic assumptions

The principal economic assumptions used within the cash flows at 31 December are set out below.

The risk-free rate is set by reference to the yield on ten-year gilts. Other investment returns are set by reference to the risk-free rate.

The inflation rate is derived from the implicit inflation in the valuation of ten-year index-linked gilts. This rate is increased to reflect higher increases in earnings-related expenses.

EEV sensitivities

The table below shows the estimated impact on the reported value of new business and EEV to changes in various EEV-calculated assumptions. The sensitivities are specified by the EEV principles and reflect reasonably possible levels of change. In each case, only the indicated item is varied relative to the restated values.

Notes to the EEV sensitivities

1. This is the key economic basis change sensitivity. The business model is relatively insensitive to change in economic basis. Note that the sensitivity assumes a corresponding change in all investment returns but no change in inflation.

2. The 10% increase is applied to the withdrawal rate. For instance, if the withdrawal rate is 8% then a 10% increase would reflect a change to 8.8%.

3. For the purposes of this sensitivity all unit-linked funds are assumed to be invested in equities. The actual mix of assets varies and in recent years the proportion invested directly in UK and overseas equities has exceeded 70%.

4. For the purposes of this sensitivity only non-fixed elements of the expenses are increased by 10%.

5. This reflects a 100bps increase in the assumed RPI underlying the expense inflation calculation.

Although not directly relevant under a market-consistent valuation, this sensitivity shows the level of adjustment which would be required to reflect differing investor views of risk.

Analysis of the EEV result

The table below provides a summarised breakdown of the embedded value position at the reporting dates.

The EEV result above reflects the specific terms and conditions of our products. Our pension business is split between two portfolios. Our current product, the Retirement Account, was launched in 2016 and incorporates both pre-retirement and post-retirement phases of investment in the same product. Earlier business was written in our separate Retirement Plan and Drawdown Plan products, targeted at each of the two phases separately, and therefore has a slightly shorter term and lower new business margin.

Our experience is that much of our Retirement Plan business converts into Drawdown Plan business at retirement, but, in line with the EEV guidelines, we are required to defer recognition of the additional value from the Drawdown Plan until it crystallises. If instead we were to assess the future value of Retirement Plan business (beyond the immediate contract boundary) in a more holistic fashion, in line with Retirement Account business, this would result in an increase of approximately £250 million to our embedded value at 31 December 2023 (31 December 2022: £340 million).

Section 3

Solvency

St. James's Place has a business model and risk appetite that result in underlying assets being held that fully match our obligations to clients. Our clients can access their investments 'on demand' and because the encashment value is matched, movements in equity markets, currency markets, interest rates, mortality, morbidity and longevity have very little impact on our ability to meet liabilities. We also have a prudent approach to investing shareholder funds and surplus assets in cash, AAA-rated money market funds and highly rated government securities. The overall effect of the business model and risk appetite is a resilient solvency position capable of enabling liabilities to be met even during adverse market conditions.

Our Life businesses are subject to the Solvency II capital regime which applied for the first time in 2016. Given the relative simplicity of our business compared to many, if not most, other organisations that fall within the scope of Solvency II, we have continued to manage the solvency of the business on the basis of holding assets to match client unit-linked liabilities plus a management solvency buffer (MSB). This has ensured that not only can we meet client liabilities at all times (beyond the Solvency II requirement of a '1-in-200-years' event), but we also have a prudent level of protection against other risks to the business. At the same time, we have ensured that the resulting capital held meets with the requirements of the Solvency II regime, to which we are ultimately accountable.

For the year ended 31 December 2023 we reviewed the level of our MSB for the Life businesses, and chose to maintain it at £355.0 million (31 December 2022: £355.0 million).

The Group's overall Solvency II net assets position, MSB, and management solvency ratios are as follows.

1 After payment of year-end intra-Group dividend.

2 Before payment of the Group final dividend.

Our regulated wealth management business has been impacted by an exceptional item, being the recognition of an Ongoing Service Evidence provision. On 27 February 2024, the Group completed a capital injection into the regulated wealth management business, of which £323.7 million was used to meet the cost of the Ongoing Service Evidence provision. The liquidity necessary to support this capital injection was provided by a £260.0 million intra-Group dividend, together with a £190.0 million intra-Group loan, both from St James's Place UK plc, our main life company.

Solvency II Balance Sheet

Whilst we focus on Solvency II net assets and the MSB to manage solvency, we provide additional information about

the Solvency II free asset position for information. The presentation starts from the same Solvency II net assets, but

includes recognition of an asset in respect of the expected value of in-force (VIF) cash flows and a risk margin (RM)

reflecting the potential cost to secure the transfer of the business to a third party. The Solvency II net assets, VIF and RM

comprise the 'own funds', which are assessed against our regulatory solvency capital requirement (SCR), reflecting the

capital required to protect against a range of '1-in-200' stresses. The SCR is calculated on the standard formula

approach. No allowance has been made for transitional provisions in the calculation of technical provisions or the SCR.

During the year, we announced the outcome of an internal review which will see us simplify our charging structure from the second half of 2025, addressing the evolution over time of an external environment that is increasingly seeking simple comparability of all advice, investment management and other services on a component-by-component basis. As a result of this disaggregation of charges, the proportion of Group profit that will arise within our life companies will reduce, in favour of increased profit emergence in our other regulated companies. Reflecting the different regulatory treatment of these businesses, the effect of this change is to reduce the value of in-force, risk margin and the solvency capital requirements associated with our life companies at 31 December 2023, with a corresponding increase in the solvency ratio.

The solvency ratio has been further improved by the confirmation in December 2023 of a number of regulatory changes to the calculation of the risk margin as part of a wider package of Solvency II reform, with the effect being a material reduction in the risk margin.

An analysis of the Solvency II position for our Group, split by regulated and non-regulated entities at the year-end,

is presented in the table below.

1 After payment of year-end intra-Group dividend.

2 Before payment of the Group final dividend.

As a result of these key changes, the solvency ratio after payment of the proposed Group final dividend is 188% at 31 December 2023, increased from 149% at 31 December 2022.

We target a solvency ratio of 130% for St. James's Place UK plc, our largest insurance subsidiary. The combined solvency ratio for our life companies, after payment of the year-end intra-Group dividend, is 162% at 31 December 2023 (31 December 2022: 130%).

Solvency II sensitivities

The table below shows the estimated impact on the Solvency II free assets, the SCR and the solvency ratio of changes in various assumptions underlying the Solvency II calculations. In each case, only the indicated item is varied relative to the restated values.

The solvency ratio is not very sensitive to changes in experience or assumptions and, due to our approach of matching unit-linked liabilities with appropriate assets, can move counter-intuitively depending on circumstances, as demonstrated by the sensitivity analysis presented below.

Notes to the Solvency II sensitivities

1. This is the key economic basis change sensitivity. The business model is relatively insensitive to change in economic basis. Note that the sensitivity assumes a corresponding change in all investment returns but no change in inflation.

2. The 10% increase is applied to the lapse rate. For instance, if the lapse rate is 8% then a 10% increase would reflect a change to 8.8%.

3. For the purposes of this sensitivity all unit-linked funds are assumed to be invested in equities. The actual mix of assets varies and in recent years the proportion invested directly in UK and overseas equities has exceeded 70%. The sensitivity reflects the impact of changes in the equity dampener on market risk capital.

4. For the purposes of this sensitivity all expenses are increased by 10%.

5. This reflects a 100bps increase in the assumed RPI underlying the expense inflation calculation.

Risk and Risk Management

Effective risk management

Overview and culture

The business activities and the industry within which the Group operates expose us to a wide variety of inherent risks. Therefore, effective risk management, underpinned by a strong risk and control culture, is critical to our success. We rigorously identify and assess risks, agree our appetite for those risks, and then manage them accordingly. When assessing risks and deciding on the appropriate response we consider the potential impacts and harms these risks could have on our key stakeholders: clients, advisers, shareholders, regulators, employees and society.

The inherent risk environment faced by the Group changes over time as emerging factors and trends (including macroeconomic factors, regulation, cyber crime, climate change, and political risks such as changes in taxation) may impact on our short- and/or longer-term profitability. Under the leadership, direction and oversight of our Board, these risks are carefully assessed and managed in accordance with our strategic objectives and to meet our obligations towards our clients, shareholders, regulators and other key stakeholders.

We do not, and cannot, seek to eliminate risk entirely; rather we aim to understand our risks and deal with them appropriately. The emphasis is on applying effective risk management strategies, so that all material risks are identified and managed within the agreed risk appetite. Risk management is linked to culture and therefore is a core aspect of our governance and decision-making.

Risk management forms a key part of our strategic and business processes, including decisions on strategic developments affecting our client and Partner propositions, investments, change delivery, recruitment and retention, and dividend payments.

Our risk appetite

The Board sets its appetite for taking risk in the context of the Group's strategic objectives. These choices are set out in detail in our Group risk appetite statement, which is reviewed at least annually by the Group Executive Committee, senior risk owners and the Group Risk Committee before being approved by the Board. The Group risk appetite statement also provides a mechanism to record the key individuals within the Group who have responsibility for managing particular risks. It also informs the risk appetite statements prepared for and approved by the regulated subsidiary boards within the Group.

The Group risk appetite statement includes a risk appetite scale. This scale has several risk acceptance levels, ranging from no appetite for taking risks at all, through to acceptance of risk. The level of risk we are willing to accommodate will vary depending on individual risk scenarios. Risk appetite can and will change over time, sometimes rapidly as economic and business environment conditions change, and therefore the statement is an evolving document.

A comprehensive suite of key risk indicators (KRIs) is incorporated into regular risk reporting, alongside qualitative information, to enable the Group Risk Committee, on behalf of the Board, to monitor the Group's risk profile.

Our risk management and control framework

The internal control environment is built upon a strong risk and control culture and organisational assignment of responsibility. The 'first line' business is responsible and accountable for risk management. This is then overlaid with oversight and challenge from the 'second line' risk and compliance functions, with independent assurance from the 'third line' internal audit function to form a 'three lines of defence' model.

The risk management and control framework is a combination of processes by which the Group identifies, assesses, measures, manages and monitors the risks that may impact the successful delivery of its strategic objectives and its ability to meet obligations towards clients, regulators and other key stakeholders. Based upon our risk appetite, the risks identified are either accepted or appropriate actions are taken to mitigate them.

The Board, through the Group Risk Committee, takes an active role in overseeing the risk management and control framework, for which it is responsible. To this end the Board robustly assesses its principal and emerging risks, which are considered in regular reporting and summarised annually in the Group's own risk and solvency assessment (ORSA). Further information on this is provided overleaf.

On behalf of the Board, the Group Audit Committee takes responsibility for assessing the effectiveness of the Group's risk management and internal control systems, covering all material controls, including financial, operational and compliance controls. It does this by monitoring the effectiveness of the internal control model throughout the year, which is supplemented by an annual review of risk and control self-assessments accompanied by executive-level attestations. The risk management and internal control systems have been in place for the year under review and up to the date of approval of the Annual Report and Accounts.

The Board receives regular reports from the Group Risk Committee and Group Audit Committee and approves key aspects of the Group's risk management and control framework including the risk appetite statement and Group ORSA.

Own risk and solvency assessment (ORSA)

We are classified as an insurance group and are subject to Solvency II insurance regulation. A key part of this regulation requires a consistent approach to risk management across the Group, supported by the production of an annual ORSA.

The ORSA process follows an annual cycle, which applies comprehensive risk assessments to the business's activity, and ensures the Group is resilient to stresses in both the short term and over a five-year period.

The Solvency Capital Requirement for insurers allows for at least a '1-in-200-year' risk event over a one-year time horizon. In addition, severe stresses and scenarios are used to help provide insight into the ability to maintain regulatory capital in such conditions. Our results show that it would be possible to maintain regulatory capital across the Group under all stresses for the business planning horizon. This assists us when considering the calculations and allocation of risk capital to all major risks in the Group, and the adequacy of capital positions.

The ORSA uses a five-year projection period for the medium term. Due to the gestation period on some of our current pension and investment product ranges we do not earn annual management fees on these in the first six years. The revised charging structure, which will be launched in mid-2025, will have no gestational period and will instead earn annual management fees from year 1.

The ORSA is particularly useful in assessing viability, as it involves a comprehensive assessment of risks and capital requirements for the business.

For example, consideration is given to factors or events that impact on the income from funds under management such as market movements, retention of clients or ability to attract new clients. We also consider factors which impact costs, such as inflation, non-inflationary expense increases and operational event-related losses. Combinations of these factors are used to form scenarios which are tested, providing for more extreme combinations of events. This scenario testing process was used to inform strategic decisions relating to 2023.

The scenarios are used to assess both the immediate impact of an event and the impact over the longer term (in the wake of an event). In addition to a standard set of extreme 'combination' scenarios which we test every year, assessments are also completed based on more current/topical or emerging risk exposures affecting the Group or financial services more generally.

The ORSA assists decision-making by bringing together the following:

· strategic planning;

· risk appetite consideration;

· risk identification and management; and

· capital planning and management.

The ORSA continues to evolve and further strengthen risk management processes throughout the Group.

Current risk environment

There was a complex and rapidly evolving macroeconomic risk picture through 2022 and 2023, which was exacerbated in the UK by political turmoil. We expect to see challenges at a national level in 2024 and beyond as people and businesses continue to adjust to a higher interest rate environment and the higher cost of living. This is despite the fact that towards the end of 2023, inflation appeared to be on a trajectory to return towards the Bank of England's target and interest rates are expected to reduce over 2024. We are also mindful of potential longer term risks relating to changes in tax policy which could affect the amount our clients have available to save and how much tax they pay on income (particularly with tax thresholds frozen) and investments. However, with 2024 being an election year, we do not expect taxes to rise further in the very short term. We also recognise an opportunity for our advisers, through ongoing financial advice, to support clients in managing their financial affairs in a volatile market; to combat the effects of inflation on the standard of living they are aiming for in retirement; and to remain tax-efficient in their savings as the tax landscape changes. We are also mindful of the potential for global geopolitical tensions to escalate, which could have relevance to the Group through impacts on financial markets and through heightened cyber risk.

In October SJP announced important changes to its costs and charges for clients, which are expected to come into force through 2024 and into mid-2025. To date there has been minimal reaction from clients to these changes; however, we are at the start of an important period of communication and engagement with them to ensure that they understand how their charges will change. We believe the change improves our proposition for clients and as such will have long-term benefits for the business. It also reflects the Group's long-term commitment to improving client outcomes.

Although the new charging structure will not be launched until mid-2025, a significant amount of the systems development that is required will be conducted in 2024. We are conscious of the risk introduced through this significant project and the need for strong change practices and careful management. We believe the timeline is realistic for safely implementing the changes and we have a positive track record, including recent large-scale system migrations.

Whilst we consistently aim to achieve good outcomes for our clients, we have reconsidered all our client-focused activities and challenged where there may be features that could inadvertently lead to, or insufficiently mitigate, risk of harm to clients. This includes gathering further evidence from our clients on their understanding of our key literature and making changes to enhance the evidence we record to monitor and assess the value delivered to clients. For example, this has led to changes which will give more consistent, centralised evidence of the activities of the Partnership with clients and reduce the risk of clients not receiving an ongoing advice service of value to them. During the year the Group has experienced elevated levels of complaints principally in connection with the delivery of historic ongoing advice services. Given the claims experience and further analysis the Group has committed to review the sub-population of clients that has been charged for ongoing advice services since the start of 2018 but where the evidence of delivery falls below an acceptable standard. A provision has been recognised at 31 December 2023 which includes an estimated refund of charges.

The emergence of Claims Management Companies (CMC) interest in the Group and its clients may also have an impact in relation to the ongoing cost of complaints. This could be through other CMCs targeting the Group, or general growth in clients seeking redress due to CMC marketing. Alongside our existing advice standards and checking processes, the actions we have been taking to develop our proposition; enhanced evidential standards for ongoing advice; and switching off ongoing advice charges for clients who haven't received an ongoing advice service are expected to help to further manage the risk, and mitigate the potential level of complaints over the medium to long term.

Overall, we remain confident in our ability to withstand further challenges that may or may not emerge from the risk environment, which is described in more detail below.

Macroeconomic

The macroeconomic risks associated with high inflation, the unwinding of 15 years of low interest rates and the threat of increasing geopolitical tension are not to be underestimated and the Group is not immune. For instance, whilst noting that variations in new business flows are not absolutely attributable to any one factor, the reduction in net and gross new business levels over 2023 is believed to be principally driven by changing economic conditions for clients. Nevertheless, the Group's business model has demonstrated resilience, with inflows remaining significantly positive through 2023, and we continue to be well positioned to survive adverse conditions whilst investing for long-term growth. We remain mindful of key macroeconomic risks:

· Asset prices could fall if the economic outlook deteriorates. Asset price falls reduce future profitability but, counter-intuitively, improve the Group's solvency position in the short to medium term because our capital requirement reduces at a quicker rate than our own funds. The Group's financial resilience is demonstrated through stress and scenario testing, and we remain highly confident in our ability to weather further extreme market falls, should they occur, although such scenarios would negatively impact cash generation.

· Whilst inflation has fallen over the last year, there can be lagging effects (e.g. contractual inflation-related increases) which render our strategic targets of both limiting growth in controllable expenses to 5% per annum and investing in the business to support future growth more difficult jointly to achieve. A key strategic consideration for the business is value creation through development expenditure which will improve our proposition for clients and Partners. The inflationary environment also reduces clients' investable income, resulting in reduced new business and higher outflows, particularly in the ISA and unit trust products.

· Business loans to advisers continue to have higher interest payments. However, we have operated careful lending criteria, which we are confident will limit the number of advisers who could require support, and we maintain the capacity to do so. Our Field Management team work with advisers to help them develop their businesses and, if required, SJP is able to provide targeted financial assistance.

Despite the potential macroeconomic risks we believe there are good reasons to be optimistic about investment opportunities across financial markets, and our advisers are well placed to advise clients on the benefits of taking a long-term view and investing or continuing to invest when markets are relatively low, the advantages of which would have been experienced through 2023.

Regulatory change

Regulatory change is a constant and, amongst the significant regulatory changes we face, the FCA continues to reinforce the need for firms to embed the Consumer Duty regulation. We are a client-focused business and have engaged proactively with this important regulatory initiative. Whilst we believe that we have consistently aimed to achieve good outcomes for our clients, we have reconsidered all our client-focused activities and challenged on how we develop these activities to meet current and ever-increasing expectations. The business is embedding activity to monitor and assess clients' outcomes and implementing Consumer Duty requirements for closed books by July 2024. A very small relative proportion of the Group's liabilities are in closed book policies; however, we recognise the importance of these policies to the clients who have them.

Changes to the determination of the risk margin requirement under Solvency II regulation were applied prior to 31 December 2023. These changes saw a significant reduction in capital requirements for SJPUK, the Group's UK insurance company. This has resulted in an improvement in the Solvency II capital coverage for SJPUK. Whilst recognising the rationale for the change and the potential benefits of a release of capital, the SJPUK Board is giving careful consideration to its financial risk appetite and ensuring a prudent approach to capital management, recognising the interests of SJPUK's clients.

Climate change

Tackling climate change is of high importance. We aim to grow in a sustainable way, taking a long-term view which ensures we are a force for good for our clients and the wider world. As an example of how we are putting this into practice we have pledged that our operations will become climate positive by 2025 and that our investments will be net zero by 2050. More information on the actions we are taking can be found in the Our Responsible Business section under climate change.

Climate-change-related risks affect companies in different ways, and periodically we carefully consider how climate change could impact the Group. This allows us to identify, understand and manage the risks and opportunities. Climate change is a driver of market-related risk, be that through physical climate events or impacts from transitioning away from fossil fuels. Whilst recognising the unique ways in which climate change can affect individual investments, our approach to managing this risk is very similar to how we manage other drivers of market-related risk: namely through our investment management approach (IMA) and within that our approach to responsible investing. Through this we aim to take account of climate risks whilst seeking to deliver returns for clients in line with their risk appetite. Further, to ensure our resilience as a Group to market movements, our liabilities to clients are fully matched by our invested assets.

We also consider physical climate-related risks on our business as we look to enhance our operational resilience. Generally, through the nature of our operations and the geography in which we operate, the physical risks to our business are low. We further work to understand the risk to our material third parties' and engage with them to share and remediate material concerns.

Principal risks and uncertainties

Whilst the risk landscape evolved over the course of the year, the inherent principal risk areas that the business faces remain consistent with the previous year. An example of this is that security and resilience remains a principal risk area and we recognise that the cyber environment continues to develop, particularly with state-sponsored threats.

The business priority areas which our principal risks impact are set out in the tables in the following pages, together with the high-level controls and processes through which we aim to mitigate them. Reputational damage and impacts to shareholders and other stakeholders are a likely consequence of any of our principal risks materialising.

The following descriptions are used to indicate which primary business priorities our principal risks could impact, while recognising that they could also have a secondary impact on other business priorities:

· Building community

· Being easier to do business with

· Delivering value to advisers and clients through our investment proposition

· Building and protecting our brand and reputation

· Our culture and being a leading responsible business

· Continued financial strength

Emerging risks

Emerging risks are identified through many activities: conversations and workshops with stakeholders and governance forums throughout the business, reviewing academic papers, attending industry events and other horizon scanning by the Group Risk team.

The purpose of monitoring and reporting emerging risks is to give assurance that we are well positioned to manage the risks to our future strategy. The Group Risk Committee reviewed emerging risks during 2023.

Examples of emerging risks that have been considered include:

· economic risks including cost of living and inflation;

· geopolitical factors including consequences of the invasion of Ukraine and the conflict in Gaza and Israel;

· regulatory framework and increasing regulatory landscape;

· increasing regulation and legislation relating to climate change;

· employee-related risks including future specialist skillset requirements for areas such as artificial intelligence technologies;

· competitor threat analysis including potential impacts on Partnership;

· technology enhancements including digitisation and automation, artificial intelligence and ChatGPT;

· cyber crime threats; and

· energy supply risks including energy blackouts.

Viability statement

How we assess our viability

The business considers five-year financial forecasts when developing its strategy. These incorporate our budget for the next financial year and four further years of forecasts based on reasonable central assumptions around the development of business drivers.

At the core of assessing our viability we seek to understand how different principal risks could materialise. We consider risks which might present either in isolation or in combination and which could result in acute shocks to the business or long-term underperformance against forecasted business drivers. We consider that a five-year time horizon is sufficiently long to assess potential impacts and aim to ensure that the business remains viable, noting that identified management actions could also be taken to restore the business's prospects.

When considering how the principal risks previously described might impact the business, we consider our ability to deal with particular events which may impact one or more of the following key financial drivers:

· reduction in client and Partner retention;

· reduction in new business relative to forecasts;

· market stresses;

· increases in expenses; and

· direct losses through operational risk events.

We carry out stress and scenario testing on these key financial drivers, alongside operational risk assessments. To provide comfort over viability over the next five years, the scenarios and assessments look at events which would be extreme, whilst still remaining plausible. This work as at year-end 2023 demonstrated that the Group is resilient and is expected to be able to continue to meet regulatory capital requirements over five years should even the more extreme risks materialise. For adverse stresses and scenarios there would be impacts on profitability, and depending on the severity of the scenario the Group would review and implement recovery actions which aim to protect and/or restore the Group's finances. We have demonstrated the use of these recovery actions through the establishment of the provision relating to the review of clients that have been charged for ongoing advice services since the start of 2018 but where the evidence of delivery falls below an acceptable standard.

Example stress and scenario test

As part of the strategic decision-making process, the new charging structure was re-tested using our standard suite of stresses and scenarios to understand the resilience of the Group under different charging models. While the new charging structure was focused on improving our client proposition it was imperative also to focus on the outcomes for our advisers and shareholders. We therefore stress tested a scenario whereby the changes might be adversely received by the Partnership and/or clients. In this scenario we applied the following stresses to the cash flow and solvency forecasts for the new charging structure: reductions in new business; increases in lapses; reductions in the proportion of clients paying ongoing advice charges; and increases in expenses (beyond those planned to implement the changes). The results showed that whilst this scenario would have an impact on profit prior to any mitigating management actions, it would not cause solvency concerns. Furthermore, we have been encouraged by the response so far to the announced changes, which gives us further confidence that the scenario tested is highly unlikely.

Resilience over different time horizons

The table below provides an indication of which risks are relevant over which timeframes, and why the Group is considered to be resilient over these timeframes.

Conclusion

In accordance with the UK Corporate Governance Code (Provision 31), the Directors have assessed the Group's current financial position and prospects over the next five-year period and have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due. The Directors believe that the Group's risk planning, management processes and culture allow for a robust and effective risk management environment.

Consolidated Statement of Comprehensive Income

1 Restated to reflect the adoption of IFRS 17. See Note 1a.

2 Restated to reclassify revenue from investment and insurance business. See Note 1a.

3 Restated to reclassify Other finance income. See Note 1a.

The results relate to continuing operations.

Consolidated Statement of Changes in Equity