Schroders : Pillar 3 Disclosures as at 31 December 2023

Schroders plc (Schroders or the Group) is supervised in the United Kingdom (UK) on a consolidated basis by the Prudential Regulation Authority (PRA). The PRA sets capital requirements for the Group and monitors the Group's capital adequacy on an ongoing basis. Regulated subsidiaries within the Group are supervised by their local regulators who set and monitor local capital adequacy requirements.

The Group's regulatory capital is assessed under the Basel framework, as implemented in the UK in the Capital Requirements Directive (UKCRD)/UK Capital Requirements Regulation (UKCRR) package and the PRA's rulebook. The Basel framework comprises three pillars:

• Pillar 1 sets rule-based minimum capital standards;
• Pillar 2 establishes the approach to supervisory review and the setting of individual capital requirements, taking into consideration the firm's own assessment of how much capital is required to support the business; and
• Pillar 3 sets disclosure requirements; these aim to promote market discipline by enabling market participants to access information relating to regulatory capital and risk exposures.

This document sets out the consolidated Pillar 3 disclosures for the Group as at 31 December 2023. They are made in accordance with Part Eight of the UKCRR and the Group's internal disclosure policy. The document sets out information on the Group's risk management objectives and policies, own funds and remuneration policy. Some disclosures listed in Part Eight of the UKCRR are omitted on the grounds that they are non-material, confidential or proprietary.

The disclosures are produced annually, with key metrics published semi-annually, and published alongside the Schroders plc Annual Report and Accounts (Annual Report and Accounts). They are not subject to audit and have been produced solely for the purposes of satisfying the Pillar 3 regulatory requirements. Additional relevant information can be found in the Annual Report and Accounts, which is available on the Schroders website (www.schroders.com/ir).

Richard Oldfield,

Chief Financial Officer

As at 31 December 2023, the Group had total regulatory own funds of £2,072m (2022: £2,001m), consisting entirely of Common Equity Tier 1 capital (CET1). The Group's overall regulatory capital requirement was £1,443m (2022: £1,346m). Therefore as at 31 December 2023 the Group had surplus capital of £629m (2022: £655m). The Group's capital ratio was 18.6% (2022: 18.6%).

The Group's overall capital requirement comprises a Total Capital Requirement (TCR), which was £1,059m as at 31 December 2023 (2022: £1,022m), and a capital requirement in respect of regulatory buffers and our insurance companies, which was £384m as at

31 December 2023 (2022: £324m).

The TCR is the minimum amount of capital that the Group is required to maintain at all times. It incorporates our Pillar 1 regulatory capital requirement of £893m (2022: £862m) which is calculated as 8% of risk weighted assets (RWA). It also includes a Pillar 2A requirement, which is an institution-specific requirement set by the PRA,

taking the Group's Pillar 2 assessment into account. The Group's regulatory buffer requirement combines a capital conservation buffer equal to 2.5% (2022: 2.5%) of RWA and a countercyclical capital buffer equal to 0.92% (2022: 0.47%) of RWA. The capital conservation buffer is designed to ensure that institutions have a certain level of capital buffer which can be drawn upon if required in periods of stress. The countercyclical capital buffer is used in a jurisdiction when excess credit growth is associated with an increase in system-wide risk. These buffers represent the capital the Group is required to hold in excess of the minimum. They are available to absorb losses in times of stress.

The Group is also required to calculate a leverage ratio. The leverage ratio is calculated by dividing the Group's regulatory own funds by its leverage ratio exposures, which are defined as the total of on- and off-balance sheet exposures less the deductions applied to Tier 1 capital and any exempted exposures.

The Group's key regulatory metrics are shown in table 1. As at 31 December 2023, the Group complied with all externally imposed regulatory capital requirements.

Table 1: Key regulatory metrics

Approach to capital management

The Group's approach to capital management is to maintain a strong capital position to enable it to invest in the future of the Group, in line with its strategy, and to support the risks inherent in conducting its business. Capital management is an important part of the Group's risk management framework and is underpinned by the Internal Capital Adequacy Assessment Process (ICAAP). The ICAAP considers the relevant current and future risks to the business and the capital considered necessary to support these risks. The Group actively monitors its capital base to ensure it maintains sufficient and appropriate capital resources to cover the relevant risks to the business and to meet consolidated and local regulatory and working capital requirements.

For further information on the components of the Group's capital position please refer to note 18 of the Annual Report and Accounts.

¹June 2023 CET1 capital includes the Group's interim 2023 profits following PRA approval received in August 2023.

2The institution-specific countercyclical buffer that applies to the Group is the weighted average of the countercyclical capital buffers applicable in jurisdictions in which the Group is active.

3Excluding eligible claims on central banks.

Regulatory developments

Regulatory basis of consolidation

Implementation of Basel 3.1

The PRA published a number of consultation papers and policy statements in 2023 in respect of proposed changes to the UK CRR based on the Basel 3.1 package. These changes are due to take effect on 1 July 2025 and include a new operational risk framework as well as revisions to the standardised approach for credit risk and the standardised approach for market risk.

'Near final' rules on market and operational risk were published in December 2023. 'Near final' rules on credit risk are due to be published in June 2024.

Capital buffers

The Group's institution-specific countercyclical capital buffer (CCyB) rate increased from 0.47% as at 31 December 2022 to 0.92% as at 31 December 2023. This was primarily driven by an increase in the UK's CCyB rate from 1% to 2%, which became effective in July 2023.

The Group's Pillar 3 disclosures are produced on a consolidated basis. Information about the Group's subsidiaries, including regulated entities, is provided in note 35 of the Annual Report and Accounts.

The regulatory basis of consolidation differs from the accounting basis of consolidation due to the following adjustments:

• The Group's insurance entities (Schroder Pension Management Limited and Burnaby Insurance (Guernsey) Limited) are excluded from the regulatory basis
  of consolidation. Insurance entities are subject to a separate regulatory framework and are outside the scope of UKCRD/UKCRR. The Group's insurance entities are, however, included in the Group's risk management framework and have been adequately capitalised throughout the year.
• Certain joint ventures are proportionally consolidated for the purpose of calculating the Group's regulatory capital position.
• Certain Collective Investment Undertakings (CIUs) are consolidated in the Group's financial accounts but are excluded from the regulatory basis of consolidation as they do not meet the definition of financial institutions.
  The Group's interests in such vehicles are recognised in the regulatory framework as financial assets and are included in the determination of the relevant capital requirement.

Table 2: Reconciliation of financial position - financial accounting to regulatory scope of consolidation

¹Other reserves consist of the net exchange differences reserve, associates and joint ventures reserve and profit and loss reserve. ²Non-controlling interests relate to equity capital of subsidiaries held by entities that are not within the scope of consolidation.

3The references identify balance sheet components that are used in the calculation of regulatory own funds in Table 13.

Risk management framework and governance

Risk management framework

The Board is accountable for the maintenance of a sound system of internal control and risk management. It assesses the most significant risks facing the business and also uses quantitative exposure measures, such as stress tests, where appropriate, to understand the potential impact on the business. Non executive oversight of the risk management framework process with respect to standards of integrity, risk management and internal control is exercised through the Audit and Risk Committee. The Group embeds risk management within all areas of the business at a Group and legal entity level.

The Group Chief Executive and Group Management Committee (GMC), as an advisory committee to the Group Chief Executive, have responsibility for regularly reviewing the key risks we face. They are also responsible for monitoring that individual behaviours reflect the culture and core values of the business.

The executive oversight of risk is delegated by the Group Chief Executive to the Chief Financial Officer. The Chief Financial Officer has responsibility for the risk and control framework of the Group. For further information on the risk management framework please refer to page 38 of the Annual Report and Accounts.

The Group has an effective risk and controls process in place supported by an appropriate governance process.

Management of key risks

Emerging risks, and changes to our existing risks, are identified throughout the year, during the normal course of business, and are reviewed and discussed at relevant risk committees. In addition, on a periodic basis we complete a formal assessment of the risks faced by our business using a `top-down' and `bottom-up' approach. The 'top-down' approach uses analysis from Group Risk and discussion with GMC members and subject matter experts around the Group. The 'bottom-up' approach uses the results from Risk and Control Assessments (RCAs), trends in risk events and high-impact issues logged in our operational risk database, Archer.

The results of these assessments are used to inform our internal key risks which are presented to the Group Risk Committee (GRC) prior to the GMC, Audit and Risk Committee and Board. Our internal key risks are reviewed to identify a sub-set that are the most material to the firm. These are set out on page 40 of the Annual Report and Accounts.

Pillar 2 and ICAAP

The ICAAP is the Group's own assessment of the level of capital required to support current and future risks in its business. The ICAAP examines the principal risks to the Group and its consolidated financial position and assesses the capital required to meet unexpected losses, calculated at a confidence level specified by the Board.

RCAs are an important part of the risk management framework. These are completed by each business area to identify and assess their operational risks and controls. Outputs from this process, together with other information such as internal and external risk events, support the operational risk scenario analysis that is used to determine the level of capital required.

The ICAAP also uses a range of scenarios to assess the impact of severe but plausible stress events on capital resources and regulatory capital requirements. The stress testing analysis is used to determine the appropriate size of any capital planning buffer that should be held over and above the Group's combined buffer requirements. The next section provides further detail on the approach to stress testing.

The ICAAP is updated and reviewed by the Board on at least an annual basis, with more frequent reviews in the event of a fundamental or anticipated change to the business or the environment in which the Group operates. The latest ICAAP shows that the Group has sufficient capital to support its current and future business.

Stress testing

Stress testing is an important element of the Group's planning and risk management processes, helping to identify, analyse and manage risks within the business. Capital planning forms part of the ICAAP and a range of stress tests and scenario analyses are used to estimate the impact of stress events on capital resources and regulatory capital requirements.

Stress testing is performed on the Group's business plan and considers the impact of a number of the Group's key risks crystallising over the assessment period. This includes consideration of new and emerging risks, identified through the business planning process, that could have a material impact over the five-year planning period.

The severe but plausible stress scenarios applied to the business plan include consideration of the following factors:

• a deterioration in the value of our AUM, for example as a result of a severe period of market stress, the return of significant inflationary pressures combined with a marked slowdown in global growth, or the early crystallisation of certain climate change risks;
• a significant decline in net operating revenue margins reducing projected revenues;
• the impact of a material operational risk event or poor performance which could lead to reputational damage and significant outflows of our AUM;
• an increase in the ratio of total operating expenses to net operating income.

The Group also assesses the impact of regulatory stress scenarios published by the PRA.

As well as forming part of the ICAAP, stress testing is conducted for the Group's Internal Liquidity Adequacy Assessment Process (ILAAP) and Recovery Plan. Reverse Stress Tests are conducted and demonstrate the unlikely and very extreme conditions required to make the Group's business model non viable.

Together with the Group's business plan, capital and liquidity stress tests support the Directors' assessment of the Group's viability as detailed in the Viability Statement (page 47 of the Annual Report and Accounts).

Board succession and diversity policy

The Board succession process is detailed on page 64 of the Annual Report and Accounts. The Board policy on diversity is detailed on page 65 of the Annual Report and Accounts.

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Regulatory own funds

Regulatory capital is categorised as either CET1, Additional Tier 1 or Tier 2 depending on the characteristics of the capital items. The Group's regulatory capital meets all of the conditions of UKCRR article 28 and consists entirely of CET1 capital. As well as ordinary shares, CET1 capital includes share premium, retained profits and certain other reserves.

A number of deductions and adjustments are made before arriving at the Group's regulatory own funds. In calculating CET1 capital as at 31 December 2023, deductions have been made for the Group's intangible assets net of deferred tax of £1,967m (including £1,390m of goodwill), the Group defined benefit pension surplus net of deferred tax of £104m and own shares held to hedge employee share schemes of £172m. Regulatory adjustments for deferred tax assets and significant investments in financial sector entities are required when certain thresholds are exceeded. As at 31 December 2023, an adjustment for the deferred tax asset of £0.2m was required.

The composition of the Group's regulatory capital is shown in table 3, with additional detail provided in Appendix 1.

Table 3: Composition of regulatory capital

¹Shareholder equity per the regulatory balance sheet includes the deduction for direct holdings of own CET1 instruments.

²Direct holdings of own CET1 instruments are added back to equity because these are presented as a regulatory adjustment in the composition of regulatory capital requirements published by the PRA.

³A value adjustment is a deduction from CET1 capital where the prudent value of financial assets measured at fair value is materially lower than the fair value recognised in the financial statements.

Pillar 1 minimum capital requirements

Pillar 1 covers the minimum capital requirements for credit risk, market risk and operational risk. Table 4 shows a breakdown of the Group's Pillar 1 RWA and capital requirement. The following sections set out the approach to managing these risks and the approach used under the Pillar 1 rules to measure RWA.

Table 4: Risk Weighted Assets and Capital Requirement breakdown

Credit risk

Overview

Credit risk is the risk that a counterparty to a financial instrument, loan or commitment will cause the Group financial loss by failing to discharge their obligations. The Group has exposure to credit risk from its normal activities where it is exposed to the risk that a counterparty will be unable to pay amounts when due.

Credit risk management

The Group carefully manages its exposure to credit risk by monitoring exposures to individual counterparties and sectors, monitoring counterparties' creditworthiness, taking collateral and reducing settlement risk where possible and approving lending policies that specify the type of acceptable collateral and lending margins. The Group's maximum exposure to credit risk is represented by the gross carrying value of its financial assets.

Externally published credit ratings are indicators of the level of credit risk associated with a counterparty. The Group has a credit risk management framework in place to assess and monitor the creditworthiness of the Group's counterparties using, where appropriate, External Credit Assessment Institutions (ECAI) ratings supplemented by internal assessments. Exposures are monitored against relevant thresholds including regulatory large exposure requirements. The Group seeks to diversify its exposure across different counterparties.

The Group does not usually provide loans, overdrafts or advances to clients on an unsecured basis.

Please note more detail on our approach to credit risk management is included in note 18 of the Annual Report and Accounts.

Credit risk measurement

For the purposes of Pillar 1 regulatory capital requirements, Schroders has elected to adopt the standardised approach to credit risk. Under the standardised approach, the Group's credit risk capital requirement is calculated as 8% of total RWA. RWA are calculated by applying a prescribed regulatory risk weight to individual credit risk exposures.

As the Group's trading book is small, the Group applies the derogation allowed under article 94 of the UKCRR to include exposures arising from the Group's limited trading activities in the Group's credit risk exposure.

Calculating the credit risk exposure

The Group's regulatory credit risk exposure is calculated using the accounting value of the relevant instruments. Items deducted from regulatory capital are excluded from the credit risk exposure. Adjustments are made under the Credit Risk Mitigation (CRM) part of the rule book for the effect of funded credit protection on reverse repurchase agreements and the portfolio loan book. An add-on to reflect the potential future exposure that could arise on the Group's derivative portfolio due to movements in market prices is calculated under the Standardised Approach for Counterparty Risk (SA-CCR). And off-balance sheet exposures are included after applying the relevant credit conversion factor (CCF).

The recognition of funded credit protection is subject to a number of considerations, including ensuring the legal enforceability of the collateral arrangements, monitoring the market value of the collateral and ensuring that the value of the collateral is not materially correlated with the credit quality of the counterparty.

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