Annual Report and Financial Statements 2012

ANNUAL REPORT AND FINANCIAL STATEMENTS 2012 | 59

6. Exceptional income and expenditure (a) Other exceptional net operating expenses The Group has classified the following operating (expenses)/income as exceptional:

Notes Exceptional employment expenses

TRC Management Retention and Incentive Plans Exceptional outsourcing expenses TRC Commutation expenses F&C Partners litigation expenses Exceptional premises expenses

F&C REIT variable non-controlling interests SBP income TRC integration expenses

(i) (ii)

(iii) (iv) (v)

(vi) (vii) (viii)

2012 £m

(8.2) (6.2) (3.3) (1.6) (1.3) (1.3) – –

(21.9)

2011 £m

(8.7) (4.6) (2.7) (5.7) (1.9) –

4.8 (0.2) (19.0)

(i) Exceptional employment expenses During 2011, the Board initiated actions to achieve staff cost savings as a result of the operations outsourcing and the subsequent strategic review process. As a result, some £8.7m of non-recurring redundancy and related staff costs were incurred during that year in order to achieve the targeted level of recurring staff cost savings. During the year ended 31 December 2012 further strategic review initiatives have been implemented to achieve additional staff cost savings, resulting in the recognition of £8.2m of non-recurring employment-related expenses.

The Directors consider these non-recurring employment expenses to be exceptional in nature and have therefore excluded them from the measurement of underlying earnings in each financial year.

(ii) TRC Management Retention and Incentive Plans As a condition of the acquisition of TRC, the Group established a Management Retention Plan (MRP) and Management Incentive Plan (MIP) to retain and incentivise certain TRC personnel. The MRP expense (including NIC) recognised in the Income Statement is £6.2m (2011: £4.7m). No MIP expense was incurred in 2012, as during 2011 it was assessed that none of the performance criteria would be met and, as a result, the cumulative charge previously recognised was reversed and an associated credit of £0.1m was recognised in the 2011 Income Statement. Details of these share-based payment arrangements are given in notes 25(e) and (f).

Given the quantum and nature of these awards, the Directors consider it appropriate to treat the associated net expense as exceptional and exclude them from the measurement of underlying earnings for each financial year.

(iii) Exceptional outsourcing expenses During 2012, a further £2.3m of advisory and consultancy costs were incurred in respect of the continued execution of the outsourcing of certain of the Group’s back and middle office investment operations to State Street. In addition, £1.0m of non-recurring costs were incurred as part of the strategic review activity to rationalise other outsourced activities of the Group.

The Directors consider these project costs to be exceptional in nature and have therefore excluded this expense from the measurement of underlying earnings for each financial year.

(iv) TRC Commutation expenses The Divisional Members of TRC Investment Teams entered into put and call options at the time of the TRC acquisition, which, if exercised, will typically transfer up to 20% of their entitlement to management fee profits to the F&C Group. Under IFRS, the share element of the consideration payable under these Commutation arrangements requires to be accounted for as a share-based payment.

The net expense of £1.6mrecognised in 2012 comprises a £3.5mcharge for the Investment Teams where options have been, or are expected to be exercised, offset by a credit of £1.9mfor those teams where it is no longer expected that F&C would exercise its call option. At 31 December 2012, F&C’s call options are the only remaining options; they become exercisable in September 2013.

Given the capital nature of these arrangements, the Directors consider it appropriate to treat the total Commutation expense as exceptional in nature and exclude it from the measurement of underlying earnings for each financial year.

(v) F&C Partners litigation expenses As highlighted in note 23, the F&C Partners litigation was settled in June 2012, resulting in a net expense of £1.3m being recognised in the Income Statement for the year ended 31 December 2012.

Given the quantum and nature of this expense and the previous costs incurred, the Directors continue to consider it appropriate to treat these costs as exceptional in nature and exclude them from the measurement of underlying earnings in both financial years.

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