Business Review

The Board and Senior Management Team use a number of key indicators to monitor the performance of the Group. A five year history of these key performance indicators is shown below.

Investment performance	Fixed income and equity funds performed extremely well during the year, with 94% and 70% of assets achieving or beating their benchmarks, respectively. Property performance was disappointing with 22% of assets achieving or beating their benchmarks. Overall, three year performance has improved with 64% of assets achieving or beating their benchmarks. Investment performance over 1 and 3 years
Fee margins	Total and management fee margins improved in 2009 due to higher transaction and management fees largely as a result of the New Star acquisition. Good investment performance and diversity of revenue streams have supported business performance. Fee margin (bps)
Fund flows excluding Pearl	Our Horizon, US and UK Wholesale funds recorded net inflows for the year of £1.0bn. We had strong demand in Institutional fixed income products offsetting net outflows from NSIM and cash funds. Property flows picked up towards the end of the year. Net flows (excluding Pearl)
Operating margin and compensation ratio	Operating margin fell slightly in the year to 27.6% due to the impact of lower market levels on fee income (offset by the take-on of New Star) and the impact of higher operating costs due to New Star, partly offset by cost reduction measures. The compensation ratio fell slightly during the year reflecting the reduction in variable staff costs due to tougher market conditions. Operating margin and compensation ratio
Earnings per share 1	EPS on recurring profit reduced in the year due to lower earnings, a higher effective tax rate and the issue of shares to partially fund the New Star acquisition. Basic and diluted earnings per share1   Before intangible amortisation and void property finance charge
Treating customers fairly	We are committed to the highest standards of customer care. We believe the Treating Customers Fairly (TCF) initiative promoted by the FSA is embedded within the culture and procedures of the Group. TCF, among other priorities, is intended to promote fair treatment of customers by regulated firms throughout the product life cycle, from design to post-sales support. We always aim to: treat our customers fairly; ensure that any information provided in respect of a product is clear, fair and not misleading; and align our interests with those of our customers.

The results of the Group for the year ended 31 December 2009 are summarised below, with comparatives:

	FY09 £m	FY081 £m
Management fees (net of commissions)	226.8	221.9
Transaction fees	24.9	16.5
Performance fees	31.6	32.0
Total fee income	283.3	270.4
Finance income	4.3	15.3
Total income	287.6	285.7
Operating costs	(205.0)	(193.0)
Finance costs	(8.9)	(12.3)
Total expenses	(213.9)	(205.3)
Recurring profit before intangible amortisation, void property finance charge and tax	73.7	80.4
Intangible amortisation	(8.7)	(0.1)
Void property finance charge	(2.0)	-
Recurring profit before tax	63.0	80.3
Non-recurring items	(47.5)	(97.3)
Profit/(loss) before tax	15.5	(17.0)
Taxation on recurring operations	(13.3)	(8.6)
Taxation on non-recurring items	12.3	4.8
Total taxation	(1.0)	(3.8)
Profit/(loss) after tax	14.5	(20.8)
Attributable to:
Equity holders of the parent	13.8	(20.9)
Minority interests	0.7	0.1
	14.5	(20.8)
Operating margin 2	27.6%	28.6%
Assets under management (AUM) as at 31 December (£bn)	58.1	49.5
Margins on average AUM
Average AUM (£bn)	53.0	53.7
Total fee margin (bps)	53.5	50.4
Management fee margin (bps)	42.8	41.3
Net margin (bps) 3	13.9	15.0
Basic and diluted earnings per share
Basic on recurring profit 4	7.5p	10.8p
Basic	1.8p	(3.2p)
Diluted on recurring profit 4	7.0p	10.0p
Diluted	1.7p	(3.2p)

Notes

1. Certain comparatives have been restated to conform with the current year's presentation. This relates to the recognition of performance fee bonuses as an operating cost, which were previously netted off against performance fees, and the elimination of Corporate Office and its resultant impact on finance income and total expenses.
2. Total fee income less operating costs divided by total fee income.
3. Net margin calculated on recurring profit before intangible amortisation, void property finance charge and tax.
4. Before intangible amortisation and void property finance charge.

The Group result

Group recurring profit before intangible amortisation, void property finance charge and tax in FY09 was £73.7m, a decrease of 8% on FY08 (£80.4m). Group profit before tax was £15.5m, compared to a loss of £17.0m in FY08.

Revenues and fee margins

Total fee income in FY09 of £283.3m was 5% above FY08 (£270.4m). Driving this increase, management fee income increased by 2% to £226.8m in FY09, with the take-on of New Star assets more than outweighing the impact of lower market levels. The FTSE 100 Index averaged 15% lower in FY09 than FY08. Transaction fees increased 51% to £24.9m in FY09 (FY08: £16.5m), primarily due to registry fees earned on New Star wholesale funds and advisory fees earned by our Structured Products business. Performance fees decreased marginally in FY09 to £31.6m (FY08: £32.0m), with institutional and hedge funds being the main contributors in FY09.

Total fee margin increased from 50.4bps in FY08 to 53.5bps in FY09, largely due to higher transaction fees and improving management fee margins following the New Star acquisition. Average management fee and net margins in FY09 were 42.8bps (FY08: 41.3bps) and 13.9bps (FY08: 15.0bps) respectively.

Finance income

Finance income in FY09 decreased by £11.0m to £4.3m due to: FY08 dividend income from equity investments in Banco Popolare Gruppo Bancario (BP) and Aquilae of £4.4m (FY09: nil); net gains on seed capital investment disposals of £6.2m in FY08 (FY09: net losses £0.1m); and lower interest income generated from lower cash balances and lower interest rates.

Operating costs

Operating costs increased by 6% to £205.0m in FY09. The main components compared to FY08 are shown in the table opposite:

The increase in operating costs is primarily as a result of the acquisition of New Star in April 2009, partly offset by the cost reduction programme commenced in FY08.

Employee compensation and benefits were £0.2m lower at£126.3m in FY09 compared to FY08. Within this, fixed staff costs increased by £2.5m (impact of New Star net of cost reduction programme) and variable staff costs fell by £2.7m. The number of Group full-time employees at 31 December 2009 was 939, including 85 staff who transferred from New Star, compared to 863 at 31 December 2008.

Investment administration costs increased by £6.2m to £22.6m in FY09, due to the take-on of New Star funds, partly offset by the tariff benefits of combining the two books of business. Information Technology costs increased by £1.9m to £11.5m in the same period, mostly due to additional support following the acquisition of New Star combined with the adverse impact of GBP weakening against the US dollar, as a number of investment management systems and data provision services are billed in US dollars.

Office costs increased by £3.0m to £16.2m in FY09, primarily due to the release, in FY08, of a void space provision of £2.4m and a lease incentive of £1.2m, following the lease surrender of the Group's previously occupied London offices, in November 2008. In addition, inflation and adverse currency movements on overseas accommodation contributed to the increase in FY09.

Depreciation increased by £0.9m to £3.2m in FY09, mainly due to depreciation of capital expenditure incurred in relocating the Group's London offices in 2008.

	FY09 £m	FY081 £m
Operating costs
Employee compensation and benefits	(126.3)	(126.5)
Investment administration	(22.6)	(16.4)
Information Technology	(11.5)	(9.6)
Office	(16.2)	(13.2)
Depreciation	(3.2)	(2.3)
Other expenses	(25.2)	(25.0)
Operating costs	(205.0)	(193.0)
Operating margin	27.6%	28.6%

Note

1. Certain comparatives have been restated to conform with the current year's presentation. This relates to the recognition of performance fee bonuses as employee compensation and benefits, which were previously netted off against performance fees, and the elimination of Corporate Office and its resultant impact on total expenses.

Operating margin fell slightly in FY09 to 27.6% (FY08: 28.6%) due to the impact of lower market levels on fee income (offset by the take-on of New Star) and the impact of higher operating costs due to New Star, partly offset by cost reduction measures. As expected, the New Star acquisition has had a net beneficial impact on operating margins. The compensation ratio has fallen slightly in FY09 reflecting the reduction in variable staff costs due to tougher market conditions.

Compensation ratio

Finance costs

Finance costs in FY09 were £8.9m, £3.4m less than FY08. The reduction was primarily a result of the amortisation of the profit arising from the unwind of an interest rate swap on debt in December 2008. The remaining profit on the interest rate swap (as at 31 December 2009: £7.2m) will be amortised over the residual term of the debt, which matures on 2 May 2012.

Non-recurring items

The following non-recurring items of £47.5m were recognised in FY09:

1. a credit of £14.3m for insurance recoveries;
2. a charge of £33.8m in respect of New Star integration;
3. a charge of £20.7m for infrastructure fund management fees; and
4. a charge of £7.3m for impairment of seed capital investments in three property funds.

The non-recurring items in FY08 amounted to a net charge of £97.3m.

Group taxation

The tax charge on recurring operations in FY09 was £13.3m (FY08: £8.6m), giving an effective tax rate of 21.2% (FY08: 10.7%). The effective tax rate on recurring operations is less than the current UK statutory rate primarily as a result of Group profits being subject to lower tax rates in overseas subsidiaries. The increase in the effective tax rate in FY09 compared to that for FY08 is as a result of the recognition of previously unrecognised deferred tax assets and the release of prior year provisions in FY08, not repeated in FY09 and, to a lesser extent, the impact of New Star where most of the profits are earned in the UK.

Assets under management

Total AUM at 31 December 2009 were £58.1bn,£8.6bn or 17% above AUM at 31 December 2008, whilst average AUM in FY09 was 1% below that in FY08 (excluding New Star this would have been 13% lower). The acquisition of New Star added£8.1bn to AUM on 9 April 2009. Net fund outflows were £4.6bn, with higher margin net inflows of £0.7bn, institutional net inflows of £0.6bn, Cash funds net outflows of £0.6bn, New Star Institutional Managers (NSIM) net outflows of £1.1bn and Pearl net outflows of £4.2bn. In addition, there were favourable market and foreign exchange rate movements of £5.1bn during FY09. Wholesale funds net inflows for FY09 of £1.0bn, were 8% of opening AUM (adjusted for the New Star take-on assets). Overall higher margin assets are up £8.7bn during the year, with New Star take-on representing 62% of this increase. Whilst Pearl continues to withdraw assets, the investment management and other agreements entered into with Pearl in June 2006 ensure that these withdrawals will not have any material unexpected impact on future revenues.

Summary of movements in AUM

	Opening AUM 1 Jan 09 £bn	New Star take-on FY09 £bn	Net flows FY09 £bn	Market/FX FY09 £bn	Closing AUM 31 Dec 09 £bn	Manage- ment1 fees FY09 £m	Manage- ment1 fees FY08 £m
Higher margin
Investment Trusts	2.7	0.1	-	0.7	3.5	12.9	13.5
Horizon Wholesale	2.3	-	0.5	0.6	3.4	24.2	25.3
UK Wholesale	3.1	4.7	0.1	2.4	10.3	59.8	30.3
US Wholesale	2.3	-	0.4	0.5	3.2	21.3	25.3
Hedge funds	0.8	0.1	(0.1)	0.1	0.9	10.4	16.2
Property (non-US) 2	7.6	0.5	-	(0.5)	7.6	32.1	41.1
Property (US)	1.7	-	-	(0.4)	1.3	5.5	4.8
Private Equity 3	1.2	-	-	(0.6)	0.6	9.5	12.3
Structured Products	2.2	-	(0.2)	(0.2)	1.8	4.4	8.8
Higher margin total	23.9	5.4	0.7	2.6	32.6	180.1	177.6
Lower margin and Pearl 4
Institutional	11.2	0.2	0.6	1.2	13.2	-	-
Cash funds	2.9	-	(0.6)	-	2.3	-	-
New Star Institutional Managers (NSIM)	-	2.5	(1.1)	0.6	2.0	-	-
Lower margin total	14.1	2.7	(1.1)	1.8	17.5	-	-
Pearl	11.5	-	(4.2)	0.7	8.0	-	-
Lower margin and Pearl total	25.6	2.7	(5.3)	2.5	25.5	46.7	44.3
Total	49.5	8.1	(4.6)	5.1	58.1	226.8	221.9

Notes

1. Net of commission expense.
2. Property AUM (at 31 December 2009) excludes£1.0bn of UK wholesale funds and £0.4bn of Pearl Property managed funds.
3. Private Equity AUM (at 31 December 2009) excludes£0.2bn of Pearl Private Equity managed funds.
4. The composition of lower margin and Pearl management fees by category is not shown due to client confidentiality.

AUM by asset class

The table below shows AUM by asset class and includes cash holdings within products in Fixed Income AUM, and fund of funds holdings in Equities AUM. Property asset AUM excludes £0.3bn of cash holdings and £0.6bn of fund of fund holdings held in Property related products.

	31 Dec 2009 £bn	31 Dec 2008 £bn
Equities	26.9	18.0
Fixed Income	21.0	21.4
Property	9.4	8.8
Private Equity	0.8	1.3
Total AUM	58.1	49.5

Investment performance

Henderson's one year investment performance has improved significantly in most areas in FY09, with 94% of Fixed Income and 70% of Equity funds achieving or beating their benchmarks. The US Wholesale fund range has maintained its excellent track record with 88% and 97% of assets outperforming over one and three years respectively. UK Wholesale performance has improved significantly in 2009, with more than 75% of assets outperforming over one year. In the Institutional business, all fund classes performed well over one and three years, with 100% of enhanced index funds out performing over both time periods and fixed income funds over one year.

In Property, the performance track record is pending publication of the IPD Annual Benchmarks next month. The 2009 one and three year scores for relative benchmarked assets were 49% and 21% respectively, but reducing to 22% and 10% respectively when including funds with absolute return benchmarks. The scores, including funds with absolute return benchmarks, are disproportionately impacted by falling markets making it difficult to outperform absolute return benchmarks.

The second half of 2009 has seen an improvement in Property performance, as demonstrated by 89% of non-US assets, with relative benchmarks, outperforming.

There has been an improvement in investment performance, in respect of New Star UK Wholesale funds, since acquisition. At 31 December 2009, 62% of funds achieved or beat their benchmarks over one year.

The number of rated products increased by 75 to 123, including 45 New Star funds. Henderson won a total of 32 investment performance awards during FY09 (FY08: 21), including:

• Investment Week Investment Trust of the Year Awards - Best Management Group;
• Pensions and Investment Provider Award - Best UK Fixed Income Manager of the Year;
• Lipper Equity Sector Information Technology category Award (UK) - Global Technology Fund as Best Fund over 10 Years;
• Moneywise Pensions Award Top Cautious Managed Fund category 2009 - Multi-Manager Income and Growth Fund Winner; and
• Asia Hedge Awards - Management Firm of the Year.

Summary of investment performance

Funds at or above benchmark to 31 December1	One year		Three years
	2009 %	2008 %	2009 %		2008 %
Equities	70	41	70		48
Fixed Income	94	55	80		62
Property 2	22	30	10		50
Total 2	70	41	64		49
Higher margin
Investment Trusts	45	34	24		54
Horizon Wholesale	52	72	78		82
UK Wholesale	76	46	65		72
US Wholesale	88	88	97		87
Hedge funds	100	17	87		38
Property 2	22	30	10		50
Total higher margin	52	43	49		63
Lower margin
Enhanced index	100	19	100		6
Fixed Income	100	43	70		40
Balanced/active equity	73	28	68		40
Total lower margin	93	31	80		29
New Star UK Wholesale	62	-	4		-
New Star Institutional Managers (NSIM)	12	-	56		-

Notes

1. Asset weighted of funds measured over one and three years to 31 December 2009 excluding the performance of New Star funds, in order to be consistent with 2008. One year Equity and Fixed Income performance to 31 December 2009 including New Star funds is 67% and 95% respectively.
2. Estimated, pending Property benchmark data.

Business management

The Group is a single segment investment management business governed by the Board, with sole discretion for setting the strategic direction of the business. Whilst the Group's Executive Directors and key management are responsible for and have discretion over, the day to day management of the business and support functions, all strategic, financial management and key operational decisions are taken centrally by the Board. The Board receives reports across product lines, distribution channels and geographic regions, however financial performance and allocation of capital are determined and reported centrally. The operation of the Board and its responsibilities is set out in more detail in the Corporate Governance Statement on page 25.

Global Distribution

Henderson distributes its products across geographies and business teams. Whilst each team focuses on their core products, they are structured to capitalise on opportunities for cross selling. This reduces the Group's exposure to individual product lines and enables the business to deliver attractive product offerings in different market conditions in all geographies.

For example the Pan-European equity team manages Institutional, Hedge Funds, Investment Trusts and Wholesale assets for clients in the UK, Europe, North America and Asia.

In North America, we see opportunities to increase our distribution of both institutional and hedge funds and have recently increased resources in this region. In Asia, we continue to improve our distribution capabilities in China, Japan and Australia by developing regional distribution agreements and building core products for these markets.

The acquisition of New Star is expected to accelerate the realisation of Henderson's strategy, to build a scalable, profitable, active investment management business offering higher margin products in core equity, fixed income and alternative investment capabilities. The Board continues to regard Henderson's home markets as the UK and Europe, with growing businesses in North America and Asia. The New Star acquisition has added significantly to Henderson's market share in the UK and more importantly, has provided a scalable platform for growth in the UK wholesale market.

Global Listed Assets

This team comprises 375 people, approximately one third of whom are investment professionals primarily located in London, with some investment staff in Edinburgh, Singapore and Amsterdam. Distribution professionals are centred in London (and regionally within the UK), across Continental Europe, North America and Asia.

The product range consists of Wholesale funds (Luxembourg SICAVs, US mutual funds, UK OEICs and unit trusts), Hedge funds (Offshore funds and managed accounts), Investment Trusts, Institutional segregated and pooled funds (including Pearl assets), Cash funds and Structured Products. With the exception of Investment Trusts, which are distributed exclusively in the UK and New Zealand, all other product ranges contain funds that are distributed in all geographies. Investment performance was strong across the Listed Assets business in FY09, resulting in a large number of products with saleable performance across geographies and channels.

Following the acquisition of New Star, their senior Pan European Retail distribution team successfully transitioned to Henderson. The UK Retail distribution team has now been restructured, and there has been a major UK advertising campaign throughout 2009 promoting the Henderson New Star product range. Advertising campaigns have been focused on Multi Manager and Strategic Bond funds resulting in strong fund flows. We intend to continue the commitment to advertising spend in 2010 and we are rationalising our UK Wholesale range which we expect to result in further fund mergers and closures, as well as the launch of selected new funds. As we focus on our clients and distribution partners' needs, we will continue to actively communicate these changes at the earliest opportunity.

In 1H09 market conditions meant that significant outflows continued in our Hedge fund range following the market dislocation in 2008. The performance of our Hedge fund range has been excellent in FY09 and this has been reflected in 2H09 through good inflows which have substantially offset outflows from 1H09, resulting in only£0.1bn of net outflows in FY09. Within the Hedge fund range, a number of funds have capacity to take on new assets and we aim to continue our growth in 2010 and beyond as investor confidence returns. As at 31 December 2009, seven Hedge funds were above highwater marks, representing 60% of total Hedge fund AUM. This includes a new strategy, the specialist currency team we hired from Fortis Investment Bank in January 2009, for whom we launched a Global Currency hedge fund in May 2009, which has delivered over 13.5% since inception. They have also achieved their first consultant buy rating, which is developing a significant pipeline.

Strong performance has also been delivered in our UCITS III absolute return fund range, with the Pan-European Alpha Fund and Credit Alpha Fund in particular gaining traction with Hedge Fund of Funds, institutional and retail clients across Europe. We were early developers of UCITS III absolute return funds, making the requisite operational and risk infrastructure developments in 2006, with some funds now having almost three years worth of track record. We intend to continue building the onshore absolute return fund range, alongside our offshore range, as evidence grows that an increasing proportion of investors prefer the greater transparency, liquidity and regulation.

FY09 was a successful year in both equities and fixed income. In equities strong performance in both core and specialist products has resulted in growing business flows and pipeline in a number of areas. Good examples are our EAFE Equity products distributed to US institutional and wholesale clients. Fixed Income had an extremely successful year, in particular, due to our significant expertise in successfully navigating credit markets for our clients over the past three years. We are extending our credit product range to capitalise on the strong risk-adjusted performance and new business success in UK institutional and UK Wholesale, in order to increase distribution across geographies (primarily Europe and Japan) and channels (particularly Hedge funds and Wholesale). We continue to have a healthy new business institutional pipeline of unfunded wins.

Whilst FY09 performance fees of £31.6m were broadly in line with the prior year (FY08: £32.0m) the mix was quite different, reflecting the benefits of a diversified business. For example, institutional funds were the largest contributor in FY09, whereas hedge funds were the largest in FY08. Market levels notwithstanding, we expect performance fees to continue to be an integral part of fee structures.

Listed Assets FY09 net fund flows

Listed Assets New Star Take-on and FY09 AUM

Global Property

This team comprises circa 190 people, including staff in North America, of which approximately 40% are investment professionals located in London, Madrid, Paris, Frankfurt, Vienna, Milan, Singapore, Hong Kong and North America. Distribution professionals are centred in London, Frankfurt, Singapore and North America. These offices also distribute to other markets e.g. Scandinavia and Australia.

Global Property AUM, comprising institutional client assets and the New Star UK Wholesale funds, rose from £10.0bn at 31 December 2008 to £10.3bn at 31 December 2009. The addition of the New Star UK Wholesale funds, being £1.0bn at 31 December 2009, was largely offset by a fall in asset values in FY09. The charts below include investments by Pearl in closed-ended Property funds,£0.4bn at 31 December 2009 (31 December 2008: £0.7bn). The product range consists of closed ended funds, segregated accounts, open-ended funds and UK wholesale funds.

Typically, closed-ended funds have seven to ten year life spans and exit is only possible on a matched bargain basis. The acquisition of New Star has provided greater diversity across the Property product range, with the Global Property team now managing £1.0bn of UK Wholesale assets. Distribution of UK Wholesale assets is carried out by Global Listed Assets distribution.

At 31 December 2009, the pipeline of client committed, but uninvested, capital was £1.4bn (31 December 2008: £1.4bn). During the year £0.7bn of capital has been invested, including£0.3bn of assets raised in the year, with £0.7bn being added to the pipeline. Whilst property valuations have been adversely impacted by recent economic conditions, the committed capital remains in place and is expected to fund investment opportunities in 2010 and into 2011.

Management has conducted an impairment review of all its available-for-sale financial assets at 31 December 2009, by comparing the most recent market valuation to the book cost and determining whether a diminution is prolonged or significant. The global decline in property markets has impacted the valuation of the Group's property funds and as a result, the Group's seed capital holdings in three property funds was impaired at the reporting date. The impairment of £7.3m has been recognised as a non-recurring charge in the FY09 results.

Global Property AUM as at 31 December 2009

Global Property AUM as at 31 December 2008

Global Private Equity

This team comprises 25 people, 15 of whom are investment professionals located in London, Singapore, Hong Kong, Beijing and New Delhi. Distribution is carried out by the Private Equity team, Global Listed Assets distribution and, in some cases, by external placement agents. The product range consists of Infrastructure, Asia Private Equity and Private Equity Fund of Funds. Total AUM fell £0.5bn to £0.8bn in FY09 primarily due to the turmoil in financial markets affecting the Private Equity business' ability to execute its original strategy for one of its infrastructure funds. This fund suffered a significant fall in valuation. As a consequence, the Group has recognised a non-recurring charge of £20.7m in FY09, in respect of management fees, with a view to ensuring that the Group's interests remain closely aligned with those of our clients. A series of initiatives were implemented during 2009 that will contribute to a recovery of the fund's value and performance. Further measures to restore value in the fund will be implemented during 2010.

Other parts of our Private Equity business are performing well. The Asia Private Equity team's first fund made nine investments. It has exited six of these completely, and sold a third of its stake in another. The remaining three companies, each based in India, are all now listed. During 2009, the value of these companies increased by almost 150%. The team's second fund has made three investments to date across India and China, and these are progressing strongly. Private Equity Fund of Funds performed well during the year. The unlisted Global Fund of Funds continued its good long-term performance, whilst the business grew through its absorption on 1 May 2009 of New Star's listed fund of funds vehicle, now renamed the Henderson Private Equity Investment Trust plc (HPEQ).

Pension schemes

The Group has three types of pension schemes. A defined benefit scheme and a defined contribution scheme, together forming the Henderson Group Pension Scheme (the Pension Scheme), and a number of smaller unapproved pension top-up schemes for previous executives.

There was a net surplus in the Pension Scheme of £90.0m, at 31 December 2009 (FY08: £152.5m). The decrease since last year is partly due to a lower discount rate used to value the Pension Scheme's liabilities for accounting purposes, set by reference to AA-rated corporate bonds with approximately 21 years' duration, down to 5.6% p.a. from 6.4% p.a. A higher assumption for future price inflation, based on the Bank of England's published price inflation curve, set at 3.7% p.a. (FY08: 3.0% p.a.) also contributed to an increase in the present value of the Pension Scheme liabilities.

During 2H09, in keeping with industry best practice the Group adopted a post-retirement mortality assumption based on 100% of SAPS ‘S1 Light' tables and improvements from 2002 in line with the medium cohort with an annual 1% underpin. The change in this demographic assumption has also given rise to higher Pension Scheme liabilities.

The increases in the Pension Scheme liabilities noted above were partially offset by the performance of the Pension Scheme asset portfolio. The future expected return on assets assumption is 5.7% p.a., representing a 0.9% p.a. improvement on FY08 (4.8% p.a.). The main reasons for the increase to the expected return are higher gilt yields and a higher proportion of the assets being invested in ‘return-seeking' assets.

The Group has reached agreement with the Pension Scheme trustee regarding the results of the 2008 triennial valuation, whilst the statement of funding principles and schedule of contributions are currently being finalised. The valuation has resulted in no deficit funding contributions being made or to be made by the Group.

The liability in respect of the Group's unapproved pension schemes amounted to £6.1m at 31 December 2009 (FY08: £4.7m).

Regulatory requirements

The Group is subject to regulatory oversight and inspection by the UK Financial Services Authority and other international regulatory bodies. Consequently, the Group's internal controls, governance, procedures and capital are reviewed on a continuous basis. Both Management and the Board of Directors ensure that the Group is compliant with its regulatory obligations at all times. The Group has a waiver from consolidated supervision in place, valid until April 2014. The regulatory capital surplus of the Group under the Parent Financial Holding Company test amounted to £323m at 31 December 2009 (FY08: £299m).

Dividends

The Board is recommending a final dividend for 2009 of 4.25 pence per share, which will bring the total dividend for 2009 to 6.1 pence per share, the same as the total dividend paid for 2008. The proposed final dividend will be paid to shareholders on 28 May 2010

to shareholders on the register on 7 May 2010. Although this dividend payment, if approved by shareholders, will result in a higher pay-out ratio compared to historical dividend payments, the Board is confident about the outlook for the business. Additionally, the Board has decided to implement a dividend payment formula where the interim dividend will be the equivalent of 30% of the total dividend for the previous year, assuming the Group has the resources to fund the dividend payment.

New Star acquisition

The New Star business perfectly matched our strategic ambitions and comfortably exceeded our financial criteria. New Star was integrated with speed and minimal disruption to our clients and other parts of our business so that, within a matter of months, we had significantly strengthened our UK retail franchise. We are already seeing the benefits in our UK retail sales and expect a significant boost to earnings from 2010 onwards as a result of the New Star acquisition.

The Group acquired New Star Asset Management Group PLC on 9 April 2009 for a purchase consideration of £94.2m. The net liabilities of £3.4m acquired from New Star were adjusted to their fair value, as required under IFRS, giving rise to net liabilities of £29.8m. These were incorporated into the Group's balance sheet in 2Q09.

The acquisition resulted in the recognition of an intangible asset representing, in the main, the investment management contracts of the New Star funds. These were valued at£86.9m based upon a discounted cash flow model. The amortisation of the intangible asset is charged to the consolidated income statement on a straight line basis over the expected life of the contracts, being approximately eight years. The amortisation charge for FY09 was £8.4m. In addition, a deferred tax credit of £2.4m in respect of the intangible management contracts is included within taxation on recurring operations.

After taking into account the investment management contracts and deferred tax thereon, as required under IFRS, purchased goodwill of £61.4m was recognised. The total goodwill balance of the combined Group now stands at£285.7m.

The total costs incurred by the Group, included as a non-recurring item, integrating the New Star business amounted to £33.8m, lower than previously guided at£40m. These included costs in respect of fund mergers, rebranding, office relocation and reorganisation, transition of outsourced retail and investment operations and staff related expenses.

The Group recognised a provision in respect of the New Star leased offices equal to the net present value of excess lease and other payments less amounts expected to be recovered from subletting these properties. The unwinding of the discounted cash flows over the remaining life of the leases is charged to the consolidated income statement as a void property finance charge. The charge for FY09 was £2.0m.

Insurance recoveries

During 2H09 the Group reached agreement with insurers regarding a number of insurance claims made by Towry Law International and Henderson Global Investors in 2003 and 2004 under an AMP Limited run off insurance policy, resulting in a net receivable of £14.3m, which has been shown as a non-recurring credit in the FY09 results.

Outlook

We remain committed to providing clients with more valuable investment products. Generating profitable organic growth continues to be our primary focus. We also remain alert to opportunities to accelerate our strategic plan subject to our strict financial discipline. Overall, we are optimistic about the outlook for markets although we expect that volatility will remain high throughout the year. Henderson is well placed to grow its existing product ranges in all of our channels and the geographies we operate in.

Risk management

The Group regards the effective management of its risks as being central to the successful achievement of business objectives. It therefore has in place a framework which is designed to embed the management of risk at all levels within the organisation. The framework also ensures that business objectives are met without exceeding the Group's risk appetite; and is subject to continuous review to ensure it recognises both new and emerging risks in the business. During 2009, for example, the acquisition of New Star, introduced consideration of acquisition risk into the framework.

The risk management framework is set out in more detail in the Corporate Governance Statement.

The Group's risk management and capital disclosures in accordance with chapter 11 of the FSA's Prudential Sourcebook for Banks, Building Societies and Investment Firms (Pillar 3 disclosures) are available on Henderson's website at www.henderson.com.

Key risks and their mitigation

The principal risks within the Group fall into a number of distinct categories and the means adopted to mitigate them are both varied and relevant to the nature of the risk concerned. The principal risks and the means used to mitigate them are set out below:

Key Risks	Description	Mitigation
Acquisition	The Group's long-term strategy involves its willingness to consider the acquisition of businesses. This introduces the risk of organisational stress through the potential demands made on staff and resources through the need to integrate acquired businesses.	The Group only considers acquisitions if they provide a fit with its strategic goals and are at a price at which the Group can realise value for its shareholders. There is thorough due diligence performed before any acquisition is made and this includes assessing the ability of the Group to successfully integrate the acquired business.
Business disruption	Business disruption risk is the risk of the occurrence of unforeseeable events which could have a material impact on the operations of the business.	The Group has in place business continuity plans designed to ensure that, should such an event occur, it could maintain its operations without irreparable damage being done to the business. These plans are subject to regular testing. The Group also ensures that its TPAs have in place similarly comprehensive plans for their operations. Additionally, the Group has insurance arrangements should losses of revenue occur through business interruption.
Credit	Credit risk is the risk of a counterparty to the Group either defaulting on Group funds deposited with it or the non-receipt of a trade debt.	The Group has an established credit risk policy to ensure its counterparties meet strict minimum rating requirements consistent with the Group's risk appetite; and the Credit Risk Committee meets regularly to approve, review and set limits for all new and existing counterparties. In addition, the Group has many clients that have fees deducted directly from their assets or alternatively are billed regularly with strict payment terms.
Employee retention	The loss of either a member of the Senior Management Team or one of the Group's principal investment or distribution professionals could have a material adverse effect on both the growth of the business and the retention of existing business. If the loss were of a principal investment manager, there is also a risk that clients may either redeem their funds or move their mandates elsewhere. The loss of a key member of the distribution team could severely impact the ability of the Group to grow the business in line with its strategy.	The Group operates appropriate incentive packages designed to be competitive and to recognise and reward out performance. It also has a succession planning policy aimed at ensuring there is appropriate cover for key roles should they become vacant. In addition, staff surveys are carried out to identify any areas which could adversely impact staff retention; and comprehensive training is undertaken to ensure skills and knowledge reside in more than one individual.
Foreign currency	Foreign currency risk is the risk that the Group will sustain losses through adverse movements in exchange rates, as a result of its exposure to non-GBP income and expenses and assets and liabilities of its overseas subsidiaries; as well as certain other assets and liabilities denominated in a currency other than GBP.	The Group mitigates this risk through the effect of natural hedges i.e. holding financial assets and liabilities of equal value in the same currency; by limiting the net exposure to an individual currency; and by entering into hedging instruments such as foreign exchange contracts, which are primarily used to hedge available-for-sale financial assets. A Hedge Committee oversees this risk and reports to the Board quarterly.
Investment performance	Investment performance risk is the risk that funds fail to deliver the expected level of performance. The effect of this might be that clients redeem investments, which in turn would result in a reduction in fees earned by the Group. Poor fund performance will also impact the level of performance related fees earned.	The Group mitigates this risk: by operating a robust investment process which includes detailed research; by having a clearly articulated investment philosophy; and by analysing fund performance and comparing it against appropriate benchmarks.
Liquidity	Liquidity risk is the risk that the Group may be unable to meet its payment obligations as they fall due.	The Group manages its liquidity on a daily basis within the Finance function, which ensures that the Group has sufficient cash and/or highly liquid assets available to meet its liabilities. The Group ensures that it has access to funds to cover all forecast commitments for at least the following twelve months. Henderson does not bear any liquidity risk associated with its clients' funds and has no obligation to provide short term liquidity to its clients.
Market	Market risk is the risk that market conditions lead to a decline in the value of Group available-for-sale financial assets and/or a reduction in the value of clients' AUM, which could result in a potentially significant reduction in the level of the fees that are based on the value of clients' AUM.	The Group mitigates the market risk on the Group's available-for-sale assets by investing in a diversified range of assets; and mitigates a fall in the value of clients' AUM by having a broad range of clients by distribution channel, product, asset class and region. In addition, the Group actively seeks fee bases which are not solely related to market value of AUM. It also makes a significant amount of its expense base variable and therefore capable of reduction, without having a significant impact on the Group's operating capability.
Operational	Operational risk is the risk that the Group will sustain losses through inadequate or failed internal processes, people, systems and external events. In addition, it could also suffer indirect losses through damage to its reputation arising from operational failures.	The Group operates a system of controls which is designed to ensure operational risks are mitigated to the required level. The operation and effectiveness of the controls is regularly assessed and confirmed through the work of the Group's assurance functions: Risk Management, Compliance and Internal Audit.
Outsourcing	Outsourcing risk is the risk of failure in respect of the provision of services by TPAs. Any significant interruption in services or deterioration in performance could damage the Group's operations. Furthermore, if the contracts with any of the TPAs are terminated, the Group may not be able to find alternative TPAs on a timely basis or on equivalent terms.	The Group oversees the operation of its TPAs to ensure agreed key performance standards are being met and meets regularly with its TPAs to discuss any service concerns or problems and work in partnership with TPAs to deliver solutions. The Group's assurance functions also review controls operated by our major TPAs. The financial strength of a TPA is given careful consideration when contracts are awarded and also if a material deterioration should occur in a TPA's financial strength.
Reputational	The Group regards the risk of damage to its reputation as more likely to result from one of the risks described above materialising rather than as a standalone risk.	The Group believes that avoidance of reputational risk is achieved through ensuring that the mitigation of the other risks is effective. In addition it maintains an effective means of communication with shareholders and analysts to address rumours and misrepresentations of its position to further mitigate the risk of damage to its reputation.