ANNUAL REPORT AND FINANCIAL STATEMENTS 2012 | 17


treatment adopted in previous years, these amounts have been excluded fromunderlying earnings.


Firstly, the Group established aManagement Retention Plan (MRP) to retain and incentivise certain key individuals within Thames River. Under this plan some 21.7million F&C shares were awarded, of which we currently expect some 19.2million shares to be issued and vest to employees in September 2013. At the date of announcing the acquisition, these share awards had a value of some £15.0million. The value of the share awards at the date of grant is treated as an expense over the vesting period and a cost of £6.2million under this plan has been recognised in the 2012 results.


Secondly, at the time of the acquisition, the Group entered into agreements (the Commutation Arrangements) with the Individual Members of the Thames River Limited Partnerships. Under the Commutation Arrangements, the Group agreed, under certain circumstances, to purchase part of the IndividualMembers’ profit share in the partnerships by issuing F&C shares in consideration. As the Commutation Arrangements can only be exercised bymembers who are still actively involved in the Thames River business and those membersmust continue in the business for a further two years in order to receive the full amount of their consideration, IFRS requires the estimated value of the shares whichmay be issued under the Commutation Arrangements to be treated as an expense, recognised between the date of award and the expiry of the period in which the membermust remain in the business. The Commutation Arrangements can be split into two parts.


Under the first commutation, an investment teamwhich had positive fund flows in the 12months prior to the commutation date could require the Group to purchase a proportion of their profit share. This commutation option was exercisable in H1 2012 and under these arrangements, the Group purchased approximately £1.4million of profit entitlement, in return for the issuance of 10.7million shares, of which 5.35million vested immediately and the remaining 5.35million vest inMarch 2013.


Under the second commutation, the Group can, if it wishes, acquire profit share fromeach or any investment team. Themaximumamount of profit share which can be acquired through the first and second commutation is typically 20 per cent of the profit share of each investment team. An accounting cost of £1.4million has been recognised in the 2012 Financial Statements in respect of those teams where it appears economically attractive at December 2012 to exercise the commutations. If the second commutation had occurred at 31 December 2012, the Group would have issued approximately 3.8million new shares in satisfaction of its obligations. No commitment to exercise those commutation rights has beenmade.


The aggregate commutation expense of £1.6million therefore reflects the charge of £3.5million for those commutation options which have been exercised or assumed to be exercisable, less a £1.9million credit, which primarily relates to options which are no longer assumed to be exercisable.


F&C REIT Ourminority interest partners in F&C REIT, the Group’s property asset manager, currently own 30 per cent of the business. In certain circumstances, they can require F&C to purchase their interests at


future dates and a liability for this potential obligation is included in our financial statements. As this option is required to be carried at its exercise value, it is revalued each year, with any revaluation gain or loss reflected in the Income Statement. During 2012, a downward revaluation resulted in a gain of £11.5million being included in the 2012 Income Statement. This gain is excluded fromunderlying earnings.


Underlying earnings The Board utilises underlying earnings per share as one of its key metrics in assessing financial performance. The reconciliation between underlying earnings and statutory earnings is provided in note 10 to the Consolidated Financial Statements and is summarised on page 118. Underlying earnings per share for the year ended 31 December 2012 were 7.1p (2011: 5.5p).


Dividends An interimdividend of 1.0 pence per share was paid during the year. After a review of the results for the year, themarket conditions that prevailed during the year and the business outlook for 2013, the Board has declared a final dividend of 2.0 pence per share. If approved by shareholders, this dividend, together with the interimdividend, will result in a total dividend for the year of 3.0 pence per share. The Board is conscious of the need to balance returns to shareholders through dividends with the profit enhancing objective of repaying the Group’s senior and subordinated loans over themediumterm.


Cash resources The Group has gross debt of some £258.0million (2011: £274.7 million), comprising £116.0million of subordinated loan notes and £142.0million of senior loan notes. Neither the subordinated loan notes nor the senior loan notes include any financial covenants. During 2012, the Group repurchased for cancellation £9.0million of subordinated loan notes and £7.7million of senior loan notes, in line with the stated intention of reducing its gross debt. These loan notes were, in aggregate, repurchased for £1.1million less than their par value.


At 31 December 2012, the Group held cash resources of £165.2million (2011: £225.0million), of which some £4.5million (2011: £28.1million) relates to policyholders and is not available for corporate purposes. A significant portion of cash is held in our regulated subsidiaries against their capital requirements. As asset management is a cash-generative business, we should not require significant cash for working capital purposes beyond our regulatory capital requirements.


Our borrowings carry fixed rates of interest. The subordinated loan notes currently bear interest at 6.75 per cent and the senior loan notes carry a fixed 9 per cent interest rate. Our cash resources earn interest based on bank deposit rates.We usemultiple counterparties for our cash deposits, which are approved by the Group’s credit committee. Themaximumamount that can be held with a single counterparty is £25.0million.


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