ELECTRICITY SUPPLY PENSION SCHEME ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2014

Transcription

1 ELECTRICITY SUPPLY PENSION SCHEME ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH

2 CONTENTS Page 2 Page 3 Page 4 Page 9 Page 13 Page 14 Page 16 Page 17 Page 18 Page 39 Message from the Chair of the Scheme Trustee Introduction Structure of the Scheme Report of the Scheme Trustee Responsibilities of the Scheme Trustee Independent Auditors Report to the Scheme Trustee Consolidated Fund Account Consolidated Net Assets Statement Notes to the Consolidated Financial Statements Independent Auditors Statement about Contributions to the Scheme Trustee Page 40 Aggregated Summary of Contributions payable in the year ended 31 March Page 42 Page 46 Page 47 Page 50 Page 53 Page 54 Page 59 Glossary of Terms Membership Statistics Appendix on Investments for which Electricity Pensions Trustee Limited (EPTL) has responsibility Directors and Advisers to EPTL Fund managers used by the Scheme Contact Addresses for Group Administrators Names and Addresses of External Bodies 1

3 MESSAGE FROM THE CHAIR OF THE SCHEME TRUSTEE Major Events The major events in the Scheme Year ended 31 March were as follows: The Scheme paid benefits of 1.5 billion in the year and received contributions of 1.2 billion. After allowing for investment income and contributions, and taking into account benefit payments during the year, the Scheme s assets ended the year 0.3 billion higher with total assets of 31.3 billion. The effect varied from Group to Group; There were two sets of Scheme-wide changes made to the Scheme s provisions during the year under review. These related to changes for the selection of EPTL Board Directors and Reserves and the retention of existing Tripartite Fund Manager Agreements; and Further work was undertaken on the Scheme s investment framework and related documentation. Acknowledgements I would like to convey many thanks to the Directors who served on the Board of EPTL during the year for their service to EPTL and the Electricity Supply Pension Scheme (ESPS) generally. I also wish to convey our thanks and appreciation of the work of Capita Employee Benefits, who carry out the administrative and accounting functions on behalf of EPTL, and the work of our professional advisers and the Scheme custodians for the support they have provided over the year. I would also like to express thanks on behalf of EPTL to David Hager of Aon Hewitt, who has recently retired after nearly eighteen years in the role of Investment Adviser to the Scheme Trustee. David was an extremely important figure in the history of the ESPS, particularly because he advised EPTL all through the Segregation process and subsequent transition of the Unitised Fund, as well as providing advice on general investment issues. We extend our best wishes to both David and his family. Joanna Matthews of Capital Cranfield Trustee Limited CHAIR OF THE SCHEME TRUSTEE Electricity Pensions Trustee Limited 22 October 2

4 INTRODUCTION The Annual Report and Consolidated Financial Statements for the Scheme year 2013/14, contained in the following pages, are presented by the Scheme Trustee, EPTL, in accordance with the provisions of the ESPS (registration number: ). Separate Annual Reports and Financial Statements are also prepared by each of the Groups which together constitute the Scheme. For individual members, the Annual Report and Financial Statements of their own Group are the primary source of information. These include details of the investment performance of Group assets, the Actuarial Certificate of Technical Provisions, the Actuarial Certificate of the Schedule of Contributions from the Group Actuary, information on employer-related investments and pension increases. The Consolidated Financial Statements of the Scheme, taken together with the Financial Statements of the Groups, have been prepared and audited in accordance with the Schedule to the Occupational Pension Schemes (Requirement to obtain Audited Financial Statements and a Statement from the Auditor) Regulations 1996 and in line with best practice, and adopt the content of the Statement of Recommended Practice Financial Reports of Pension Schemes (SORP revised May 2007). A glossary of terms has been included as part of the Annual Report and Consolidated Financial Statements. This provides brief explanations of pension and investment related terms which members may not be familiar with. 3

5 STRUCTURE OF THE SCHEME Industry-wide pension scheme The ESPS is an industry-wide pension scheme in which the Participating Employers are companies formed upon the privatisation of the electricity industry in 1990, associated companies of those companies, and companies established within the electricity industry since privatisation. The Scheme is established under irrevocable trusts and its provisions are set out in the Clauses and Rules contained in the Scheme Document. The Scheme is a registered pension scheme under the Finance Act 2004 and is contracted out of the State Second Pension. The Scheme is also registered for tax. The Scheme provides for two types of pensions: Defined Benefit pensions which provide benefits based on a member s salary and length of service; and Defined Contribution pensions which provide benefits based on what a member s accumulated fund value will purchase at retirement. The facility for Defined Contribution pensions was utilised by four Groups during the financial year. Organisation of the Scheme The Scheme has separate actuarially independent sections (known as Groups ) in respect of each of the companies participating in the Scheme as Principal Employers, and each Group has its own share of the assets of the Scheme. Each Group is administered by its Group Trustees or by the Directors of a Group Trust Company. In addition there is a central Scheme Trustee, Electricity Pensions Trustee Limited (EPTL), with defined Scheme-wide responsibilities. Each Principal Employer has the power to amend certain provisions of the Scheme insofar as they apply to its Group. As a consequence of the exercise of this power by Principal Employers, the benefit structures of the Groups differ. Scheme-wide amendments may also be made to the provisions of the Scheme on behalf of the Principal Employers collectively by the Co-ordinator, EPL, subject to the unanimous approval of all the Principal Employers. 4

6 The Groups within the Scheme As at 31 March the number of Groups within the Scheme remained unchanged at twenty three Groups comprising the following: British Energy Generation Carillion Central Networks Drax Power EA Technology EDF Energy Generation and Supply Eggborough Power Electricity North West E.ON UK EPSL First Hydro Company International Power Magnox Electric Manweb National Grid Electricity Northern Powergrid Powerhouse Retail RWE npower Schneider Southern Electric UK Power Networks United Utilities plc Western Power Distribution The Magnox Electric Group is divided into four actuarially independent Sections. The Sections are Magnox Babcock Services, Magnox Energy Solutions, Magnox National Nuclear Laboratory and Magnox Site Licensing Company. The Trustees of the Scheme (a) Group Trustees The Group Trustee bodies take the form either of individual trustees, or of a trust company with a Board of Directors, both referred to in this Report as Group Trustees. Half of the Group Trustees in voting power are elected by members of each Group, and half are appointed by the Principal Employers. Issues put to the vote at Group Trustee meetings are decided on a majority vote, and in the event of an equality of votes, the Chair, who is appointed by the Principal Employer, has a casting vote. Details of any use of the Chair s casting vote are given each year in Groups Reports and Financial Statements. No issues discussed by Group Trustees during the year under review were decided on the casting vote of the Chair. Group Trustees appointed by the Principal Employer may be removed by the Principal Employer. Group Trustees elected by members may be removed on a majority resolution by the other Elected Group Trustees. (b) Independent Trustee In addition to the Group Trustees, some Principal Employers, with the consent of their Group Trustees, have appointed an Independent Trustee with special powers. The appointment of an Independent Trustee does not affect the powers of the Group Trustees. Certain powers which were previously the exclusive right of the Principal Employer can, however, only be exercised in the Groups concerned either with the approval of, or after consultation with, the Independent Trustee. The Independent Trustee can also call an extraordinary meeting of Group members in circumstances where it believes that the actions of the Principal Employer are not in accordance with the provisions of the Scheme or with legislation. 5

7 The Trustees of the Scheme (continued) (c) Scheme Trustee In addition to the Group Trustee bodies there is a central trustee body, the Scheme Trustee, Electricity Pensions Trustee Limited (EPTL). EPTL is a trust corporation with a Board of Directors. Each Group has the option to appoint two individuals to be Councillors of the Scheme Trustee Council (EPTL); one chosen by the Principal Employers and the other by the Elected Group Trustees. A Councillor nominated by a Principal Employer can only be replaced by the Principal Employer who nominated him/her and a Councillor nominated by Elected Group Trustees can only be replaced by the Elected Group Trustees who nominated him/her. These individuals may be Group Trustees, or other persons nominated with the consent of the Group Trustees as a body. The Council is responsible for the appointment of a smaller Board of eight Directors, selected from their number under the following criteria: (a) Four Directors must be Councillors chosen by the Elected Group Trustees; and (b) Four Directors must be Councillors chosen by Principal Employers. Directors are now appointed for two year terms, with interim arrangements in the first year, such that half the Board is elected on a biennial basis. More information is given on page 10 covering Changes in Scheme Provisions Scheme-wide Amendments by the Scheme Co-ordinator, Electricity Pensions Limited (EPL). The Board also has an Independent Chair, Joanna Matthews of Capital Cranfield Pension Trustees Limited who was appointed on 23 December This initial three year appointment was made by the shareholders of EPL (the Principal Employers) and all subsequent appointments will be made by resolution of at least two thirds of the Board. The Council also select a panel of four reserves to fill any Director vacancies arising during the year, two chosen by the Elected Group Trustees and two by the Principal Employers. The reserves can also attend Board Meetings as observers but have no voting rights. Any issues put to the vote at meetings of EPTL Directors are decided on a majority vote. Each EPTL Director has one vote, and in the event of an equality of votes the Independent Chair has a casting vote. No issues discussed by the Directors during the year were decided on the casting vote of the Chair. The powers and responsibilities of the Group Trustee bodies and EPTL respectively are summarised as follows. Trustee Responsibilities Separate responsibilities have been allocated under the Scheme s provisions to the Group Trustee bodies and EPTL. The Group Trustee bodies are responsible for the administration of the Scheme in relation to their Group, including the collection of members contributions and Employers contributions; the calculation and payment of members benefits; the preparation of audited Group Financial Statements; the investment strategy in relation to their Group assets; and investment 6

8 Trustee Responsibilities (continued) management of those Group assets, other than assets invested by Group Trustees in the Unitised Fund whose managers are appointed by EPTL, for Defined Benefit arrangements. Defined Contribution and AVC arrangements are managed by Fund Providers appointed by the Group Trustees. Each Group is treated as a separate pension scheme under the Pensions Act 2004 funding regime. As a consequence, the Group Trustees are responsible for appointing a Group Actuary to carry out the actuarial valuations of their Group. EPTL, as the Scheme Trustee, is responsible for the registration and safe custody of all the assets of the Scheme, and for the administrative control of and transfers of assets between all portfolios. EPTL is also responsible for the production of the Scheme Annual Report and Consolidated Financial Statements, and for the investment management of the Unitised Fund, and some AVC and Defined Contribution funds, under the management of fund managers and providers appointed by EPTL. Certain other formal responsibilities of EPTL are set out in more detail on page 13 and the manner in which EPTL carries out its responsibility for the registration and safe custody of the Scheme s assets is set out in the following section. In addition to the responsibilities imposed on Group Trustees and EPTL under the provisions of the Scheme, powers and responsibilities are imposed on them by pensions legislation. These statutory powers and responsibilities have been allocated to Group Trustees or to EPTL under the Scheme document, in the light of their respective responsibilities under the Scheme. Custody of the Scheme s Assets EPTL carries out its responsibility for the registration and safe custody of the Scheme s assets by appointing Scheme-wide custodians. BNY Mellon is the custodian in relation to securities. Where certificates are available in relation to such securities, they are held by BNY Mellon and identified as investments of the Scheme. Where certificates are not available, but records are held on computer based systems, the relevant data records the Scheme s interest. Documents of title in relation to UK properties are held by EPTL s conveyancing solicitors in the name of EPTL s wholly owned nominee companies, Electricity Supply Nominees Limited and BEGG (Nominees) Limited. All cash is held in bank accounts in the name of the Scheme or in institutional cash funds, commonly referred to as STIFs (short term investment funds). This type of investment allows cash to be invested across a broad range of institutions thereby reducing risk and exposure. Investment Management Arrangements Group Trustees may at their discretion invest Group assets, in accordance with their investment strategy, in Funds whose managers they appoint and in Sectors of the Unitised Fund whose managers are appointed by EPTL. Group Trustees are responsible for the investment performance of the Funds for which they have appointed the Fund managers. Details of these Funds and their performance are given in the Annual Report and Financial Statements of the Group concerned. 7

9 Investment Management Arrangements (continued) EPTL is responsible for the investment management of the Unitised Fund, and the fund manager for each Sector of the Unitised Fund is appointed by EPTL. EPTL is also responsible for monitoring the performance of those DC Fund Providers appointed by EPTL, and has a duty to select one or more AVC Providers, give notice to Group Trustees of its selection and monitor the effectiveness of Scheme-wide arrangements. Details of the Unitised Fund and the investment performance of the Unitised Fund Sectors and the DC Fund Providers appointed by EPTL are given in the Appendix to this Annual Report and Financial Statements. Information about AVC investments is shown in Note 11 on page 33. Statements of Investment Principles Each Group Trustee body has prepared a Statement of Investment Principles in accordance with the provisions of the Pensions Act 1995, setting out the principles on which the decisions on the investment of their Group s assets are made. A copy of that Statement may be obtained from the Group Administrator of the Group at the contact address given on the pages 54 to 58 of this Scheme Annual Report and Consolidated Financial Statements. EPTL has also prepared a Statement of Investment Principles in relation to its responsibilities for the Unitised Fund, AVC investments and DC investments, and relevant extracts from that Statement are included in the Statements of Investment Principles of each Group Trustee body. Administration Arrangements Group Trustees delegate day to day administration of their Groups to the Principal Employer or outsource the administration to companies offering pension administration services. Administration of the Scheme, in relation to those areas for which EPTL is responsible was carried out on its behalf by Capita Employee Benefits. 8

10 REPORT OF THE SCHEME TRUSTEE The Board of EPTL met six times during the year. The Scheme retains a Scheme-wide investment framework and further work is being undertaken to fully implement the investment aspects of the review. The Board of EPTL has undertaken central lobbying on certain issues such as the Department of Work and Pensions (DWP) consultation on the abolition of contracting-out in relation to a statutory override for Protected Persons Regulations. Pensions Legislative Reforms The following were some of the main pension issues during the year under review: the Budget on 19 March proposed revolutionary range of changes to the rules relating to drawing benefits from Defined Contribution schemes, but the proposals have implications for all pension provision and savings; from the tax year /2015 the Annual Allowance and Lifetime Allowance will further reduce to 40,000 and 1.25 million respectively; a single tier flat rate State pension will be introduced from April 2016 and as a consequence, contracting-out for defined benefit schemes will cease; and the Marriage (Same-Sex Couples) Act 2013 came into force in England and Wales on 13 March. The implications to the Scheme of these reforms are mainly addressed at a Group level although, form example, the introduction of Same Sex Marriages was initially addressed by a Schemewide amendment. Other Issues Other regular matters considered by EPTL during the year included: focusing on its new business timetable and governance requirements; completing the Scheme Annual Report and Consolidated Financial Statements; making arrangements for the Scheme Annual General Meeting and associated members resolutions; the ongoing review of the Scheme advisers; monitoring performance of the Unitised Funds in UK Property and UK Forestry; further work was undertaken on the Scheme s investment framework and related documentation; submitting claims in respect of discriminatory withholding tax and VAT; participating in securities class actions claims; and Trustee training Casting Vote of Chair There was no occasion during the year on which it was necessary for the Chair of EPTL to use a casting vote. 9

11 Changes in Scheme Provisions - Scheme wide amendments by the Scheme Co-ordinator, Electricity Pensions Limited (EPL) EPL may amend the provisions of the Scheme with the unanimous consent of all of the participating Principal Employers. During the year ended 31 March the following Schemewide amendments were made: EPTL Board Directors and Reserves A Deed of Amendment was made on 8 November 2013, amending Clause 23A. This made changes to the selection procedures for EPTL Board Directors in two specific areas. Directors are now appointed for two years, with interim arrangements in the first year, such that half the Board is elected on a biennial basis. Four Directors and Two Reserves are now elected from each of the two constituencies (Group Trustee Councillors and Employer Nominated Councillors). The changes were made to ensure greater continuity in the composition of the Board; and Tripartite Fund Manager Agreements A Deed of Amendment was made on 3 March, introducing a new Clause 6 (12) and amending Clause 46. These changes were to allow the retention of Tripartite Fund Manager Agreements following work on the Scheme s investment arrangements. Custody and Accounting Arrangements EPTL s primary roles during the year continued to be its responsibilities for the registration, safe custody and administrative control of all the Scheme s assets, and for production of the Scheme Financial Statements. All the assets managed in the Scheme s investment portfolios are subject to EPTL s overall custody and control. The custody responsibility was discharged through the continued appointments of BNY Mellon (in respect of all assets excluding property) and EPTL s solicitors (in respect of property) as Scheme custodians to safeguard all assets. Fund managers investing in individual assets (but not pooled funds) are required to use the custodian appointed by EPTL to safeguard these assets. Maintenance of the majority of the Scheme s prime investment records continues to be undertaken through the outsourced arrangements with BNY Mellon. Capita Employee Benefits has responsibility on behalf of EPTL for monitoring the quality of their service, and for preparation of the Scheme Annual Financial Statements. Investment of Assets The Group Trustees of each Group may appoint fund managers to manage their Group assets in Funds which are specific to that Group. Group Trustees may also hold Group assets in Sectors of the Scheme s Unitised Fund (for which fund managers are appointed by EPTL). Group Trustees determine the investment strategy for their Group, including the use made of the Unitised Fund, in the light of appropriate professional advice. Details of the investment performance of individual Group funds and the compliance of each Group with its individual Statement of Investment Principles are given in the Groups Annual Reports and Financial Statements. In addition, a report on the investment performance of the Unitised Fund Sectors and other investments for which EPTL has responsibility is provided as an appendix to this Report. 10

12 Investment of Assets (continued) During the year the market value of the Scheme s investments increased by 0.2 billion. The effect varied from Group to Group, and members should refer to their own Group s Annual Report and Financial Statements for details of the investment performance of their Group s assets. Disposition of Scheme s Investments The disposition of the Scheme s investments at the year-end was as follows: 2013 Market Value of discretionary and pooled funds 30,037 29,981 Market Value of Unitised Fund (see page 48) AVC Investments Insurance Policies 1 1 Current assets Current liabilities (17) (56) Defined Benefit 31,187 30,982 Market Value of unitised insurance policies assigned to members Current assets 2 2 Defined Contribution Total Consolidated Fund 31,262 31,042 See Note 20 on page 38 for an analysis of the Fund by Group. Employer-related Investments Investment Regulations restrict direct employer-related investments by occupational pension schemes. Employer-related Investments include shares, loan stocks, debentures and other securities issued by the employers participating in the scheme and their associated companies, together with loans made to the employers, and any properties or land owned by the scheme and occupied by the employers. Late contributions also qualify as employer-related investments until received. The Investment Regulations apply separately to each Group within the ESPS, by reference to the investments of the Group Trustees in the Employers participating in their Group and their associated companies, and provide that such employer-related investments must not exceed 5% of the market value of the Group s assets. Details of any employer-related investments are provided in the Annual Report and Financial Statements of each Group. These show that employer-related investments were either minimal or zero. In no Groups, did the proportion of the Group assets invested in employer-related investments exceed 5% of the market value of the relevant Group assets during the financial year ended 31 March, and all Groups therefore complied with legislative requirements. 11

13 Late Contributions Details of contributions received outside the scope of the individual Groups Schedules of Contributions are given in the relevant Groups Annual Reports and Financial Statements. Three Groups had qualifications to their Statements about Contributions for the year ended 31 March in respect of the late payment of contributions (see page 41). Enquiries Where members - contributing, deferred members or pensioners - have queries about their benefits under the Scheme, they should refer to the contact details given in their Group s Annual Report and Financial Statements. In many Groups, detailed enquiries relating to personal information and benefits are handled by third party pensions administrators and they will generally be best placed to answer members questions. Where an enquiry relates to the Scheme more generally, questions should be addressed to the relevant Group Administrator. Contact details for Group Administrators are also given in pages 54 to 58 of this Scheme Annual Report and Consolidated Financial Statements. Members should contact their Group Administrator if they would like to receive a copy of their own Group s Annual Report and Financial Statements. The Scheme AGM will be held at noon on Wednesday 3 December at the offices of Herbert Smith Freehills LLP, Exchange House, Primrose Street, London EC2A 2HS. Signed on behalf of the Scheme Trustee: Joanna Matthews of Capital Cranfield Trustee Limited CHAIR OF THE SCHEME TRUSTEE 22 October 12

14 RESPONSIBILITIES OF THE SCHEME TRUSTEE The Scheme Consolidated Financial Statements, which are prepared in accordance with UK Generally Accepted Accounting Practice, are the responsibility of EPTL. Pension scheme regulations require EPTL to make available to Scheme members, beneficiaries and certain other parties, audited Scheme Consolidated Financial Statements for each Scheme year which: show a true and fair view of the financial transactions of the Scheme during the Scheme year and of the amount and disposition at the end of the Scheme year of the Scheme s assets and liabilities, other than liabilities to pay pensions and benefits after the end of the Scheme year; and contain the information specified in the Schedule to the Occupational Pension Schemes (Requirement to obtain Audited Accounts and a Statement from the Auditor) Regulations EPTL has supervised the preparation of the Scheme Consolidated Financial Statements and has agreed suitable accounting policies, to be applied consistently, making any estimates and judgements on a prudent and reasonable basis. EPTL is also responsible for making available certain other information about the Scheme in the form of an Annual Report. EPTL also has a general responsibility for ensuring that adequate accounting records are kept and for taking such steps as are reasonably open to it to safeguard the assets of the Scheme and to prevent and detect fraud and other irregularities, including the maintenance of an appropriate system of internal control. Group Trustees responsibilities are outlined on pages 6 and 7. 13

15 INDEPENDENT AUDITORS REPORT TO THE TRUSTEE OF THE ELECTRICITY SUPPLY PENSION Report on the Consolidated Financial Statements Our opinion In our opinion the Consolidated Financial Statements, defined below: show a true and fair view of the financial transactions of the Scheme during the year ended 31 March, and of the amount and disposition at that date of its assets and liabilities, other than liabilities to pay pensions and benefits after the end of the year; have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and taken with the Group Financial Statements of the individual Groups of the Scheme contain the information specified in Regulation 3 of, and the Schedule to, the Occupational Pension Schemes (Requirement to obtain Audited Accounts and a Statement from the Auditor) Regulations 1996, made under the Pensions Act This opinion is to be read in the context of what we say in the remainder of this report. What we have audited The Consolidated Financial Statements, which are prepared by Electricity Supply Pension Scheme, comprise: the consolidated fund account for the year ended 31 March ; the consolidated net assets statement as at 31 March ; and the notes to the Consolidated Financial Statements, which include a summary of significant accounting policies and other explanatory information. The financial reporting framework that has been applied in their preparation comprises applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). In applying the financial reporting framework, the Scheme Trustee has made a number of subjective judgements, for example in respect of significant accounting estimates. In making such estimates, it has made assumptions and considered future events. What an audit of Financial Statements involves We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) ( ISAs (UK & Ireland) ). An audit involves obtaining evidence about the amounts and disclosures in the Consolidated Financial Statements sufficient to give reasonable assurance that the Consolidated Financial Statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Scheme s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Scheme Trustee; and the overall presentation of the Consolidated Financial Statements. 14

16 INDEPENDENT AUDITORS REPORT TO THE TRUSTEE OF THE ELECTRICITY SUPPLY PENSION (continued) In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited Consolidated Financial Statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Responsibilities for the Consolidated Financial Statements and the audit Our responsibilities and those of the Scheme Trustee As explained more fully in the responsibilities of the Scheme Trustee, the Scheme Trustee is responsible for the preparation of the Consolidated Financial Statements and being satisfied that they show a true and fair view. Our responsibility is to audit and express an opinion on the Consolidated Financial Statements in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board s Ethical Standards for Auditors. This report, including the opinion, has been prepared for and only for the Scheme Trustee as a body in accordance with section 41 of the Pensions Act 1995 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 22 October 15

17 CONSOLIDATED FUND ACCOUNT For the Year Ended 31 March Note Defined Benefit Defined Contribution Total 2013 Total Contributions and benefits Contributions 3 1, ,161 1,313 Transfers in Other income , ,178 1,344 Benefits 6 1, ,496 1,440 Payments to and on account of leavers Other payments Administration expenses , ,550 1,504 Net (withdrawals)/additions from dealings with members (382) 10 (372) (160) Returns on investments Investment income Change in market value of investments 11, ,921 Investment management expenses 13 (50) - (50) (43) Net returns on investments ,293 Net increase in the Scheme ,133 Opening net assets of the Scheme 30, ,042 27,909 Closing net assets of the Scheme 31, ,262 31,042 The Notes on pages 18 to 38 form part of these Financial Statements. The facility for operating Defined Contribution Sections was used by four Groups. 16

18 CONSOLIDATED NET ASSETS STATEMENT As at 31 March Note 2013 DEFINED BENEFIT Investment assets 11 31,429 31,846 Investment liabilities 11 (321) (876) Net investment assets 31,108 30,970 Current assets Current liabilities 15 (17) (56) Total net assets Defined Benefit 31, DEFINED CONTRIBUTION Investment assets Current assets Total net assets Defined Contribution Total net assets 31,262 31,042 The Consolidated Financial Statements summarise the transactions of the Scheme and deal with the net assets at the disposal of the Group Trustees. They do not take account of obligations to pay pensions and benefits which fall due after the end of the Scheme financial year. The actuarial position of the Groups, which does take account of such obligations, is dealt with in the Summary Funding Statements, Trustees Report and Actuarial Certificate Statements included within the Annual Reports and Financial Statements of the Groups. These Consolidated Financial Statements should be read in conjunction with those statements. These Consolidated Financial Statements on pages 16 to 38 were approved by the Scheme Trustee on 22 October. Signed on behalf of the Scheme Trustee: Joanna Matthews of Capital Cranfield Trustee Limited CHAIR OF THE SCHEME TRUSTEE 17

19 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Preparation The Consolidated Financial Statements have been prepared in accordance with the Occupational Pension Schemes (Requirement to obtain Audited Accounts and a Statement from the Auditor) Regulations 1996, and with the guidelines set out in the Statement of Recommended Practice, Financial Reports of Pension Schemes (SORP) (revised May 2007). 2. Accounting Policies The following principal accounting policies, which have been applied consistently, have been adopted in preparation of the Consolidated Financial Statements. Basis of Consolidation and Aggregation The Scheme Consolidated Financial Statements are an aggregation of the Financial Statements of each of the twenty three Groups which make up the Scheme (please refer to the section Structure of the Scheme on pages 4 to 8). Inter-Group transactions, such as member transfers between Groups, are eliminated on aggregation. Consistent accounting policies have been applied in the preparation of these Scheme Consolidated Financial Statements. Investments Equities traded through the London Stock Exchange Electronic Trading Service ( SETS ) are valued on the basis of the bid price. Other quoted investments are valued on the basis of the bid price (or, if unavailable, the most recent transaction) on the relevant stock market. Pooled investment vehicles are valued at the closing bid price if both bid and offer prices are published, or, if single priced, at the closing price obtained by the Custodian or provided by the Investment Manager. Unquoted securities are valued by the fund managers at the year end in accordance with accepted guidelines. Unquoted equities are valued by the fund managers using the guidelines of the British Venture Capital Association or equivalent guidance for overseas managers. Accrued interest is excluded from the market value of fixed-interest securities and index-linked securities, and is included in investment income receivable i.e. fixed interest stocks are quoted clean. Freehold and leasehold property (including development property) in the UK Property Sector of the Unitised Fund and direct property portfolios, is stated at open market value at the financial year-end. This is estimated using the Royal Institution of Chartered Surveyors (RICS) Valuation Standards by the Scheme Trustee on the basis of professional advice from DTZ Debenham Tie Leung, chartered surveyors appointed as independent property valuers to the Scheme Trustee and those Groups which have direct property portfolios. No depreciation is provided on freehold land and buildings or long lease properties. Purchases and sales of property are recognised in the Financial Statements on completion of contracts. 18

20 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. Accounting Policies (continued) Investments (continued) The Scheme Trustee s valuation of other property investments (whether held directly or through pooled funds) is based on professional advice from the relevant property managers whose valuations are in accordance with RICS valuation standards. Forestry in the UK Forestry Sector of the Unitised Fund is valued on an open market basis at the financial year-end by Smiths Gore, the appointed external forestry valuers to the Scheme Trustee. Investment management fees are accounted for on an accruals basis. Acquisition costs are included in the purchase cost of investments. Transaction costs are reflected in sale proceeds. Acquisition and transaction costs include costs charged directly to the Scheme such as fees, commissions, stamp duty and other fees. Where stock lending has been undertaken, the securities loaned are included in the net assets statement to reflect the Scheme s continuing economic interest. The total amount of stock loaned at the year end has been disclosed in a note to the Financial Statements together with a description of the related collateral received. Insurance policies are included in the Financial Statements at a valuation undertaken by the insurer. Where insurance policies provide all the benefits payable to particular members of the Group, effectively discharging the Group Trustees full liability towards such members, then these policies have been included in the Financial Statements at nil value. The purchase cost of annuities is charged to the Fund Account as benefits payable. Where insurance policies (pre-vesting and Scientists Schemes) provide benefits payable to the Group rather than individual members, then these policies have been included in the Financial Statements at their actuarially assessed value. Investment Income Income from equities, and any pooled investment vehicles which distribute income, is accounted for on the date stocks are quoted ex-dividend/interest. The change in market value of investments during the year comprises all increases and decreases in market value of investments held at any time during the year, including profits and losses realised on sales of investments and unrealised changes in market value. In the case of pooled investment vehicles which are accumulation funds, changes in market value also include income - net of any withholding tax - which is reinvested in the fund. Income from fixed interest, index-linked securities, cash and short term deposits is accounted for on an accruals basis. Rental income is accounted for as earned under the terms of the relevant lease. 19

21 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. Accounting Policies (continued) Derivatives Derivative contracts are valued at fair value. Assets in respect of exchange traded derivatives are shown at bid prices and similarly liabilities are shown at offer prices. Changes in derivative contract values are included in the change in market value where the economic rationale for the contracts relates to assets. Where the underlying economic rationale relates to income, the change in fair value is reflected in investment income. Futures contracts are stated at fair value using exchange quoted prices at the reporting date. Fair value is the unrealised profit or loss at the financial year-end bid or offer market quoted price of the contract. A clearing broker is used by the Scheme to settle all market traded futures contracts. Amounts due to or from the broker represent the initial margin (reflecting collateral on the contracts) and any variation margin (reflecting subsequent market movement) which is due to or from the broker. The amounts included in change in market value are the realised gains and losses on closed futures contracts and any unrealised gains and losses on open futures contracts. Exchange traded options are stated at fair value which is determined by using the exchange price for closing out the option at the reporting date. Options and other derivatives are sometimes traded directly between two parties without any supervision from an exchange. Such transactions are referred to as over the counter (OTC) or off-exchange. For OTC contract options, fair value is determined using generally accepted pricing models, using inputs which reflect market data at the year end date. Interest rate and currency swaps are stated at fair value and are calculated using pricing models based on the prevailing market price of comparable instruments at the financial year-end unless the swaps are publicly traded, in which case the market price is used. Interest is accrued monthly on a basis consistent with the terms of the swap. The amounts included in the change in market value are the realised gains and losses on closed contracts and unrealised gains and losses on open swap contracts. Net receipts or payments on swap contracts are either reported in change in market value (where the economic rationale relates to assets) or investment income (where the economic rationale relates to income). Forward currency contracts are stated at fair value and are based on market forward exchange rates at the year-end date and determined as the gain or loss that would arise if the outstanding contracts were closed out with equal and opposite contracts. Repurchase Agreements Repurchase Agreements (Repos) are accounted for on the following basis. Securities transferred continue to be shown within investment assets, since economic exposure to the security remains unchanged. Cash amounts received, which are repayable on expiration or settlement of the contracts, are shown within other investment liabilities and identified as Repos. This represents the amount which is required to be paid to repurchase the securities at the maturity of the agreement. Interest charged on the loan is accounted for on an accrual basis. Collateral received is held by BNY Mellon. 20

22 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. Accounting Policies (continued) Foreign Currencies Assets and liabilities in foreign currencies are expressed in sterling at the relevant rates of exchange ruling at the financial year-end. Transactions denominated in foreign currencies are translated into sterling at the prevailing spot exchange rate at the date of the transaction. Gains and losses arising on conversion or translation are shown within the change in market value of investments. Contributions Normal contributions, due from the members, are accounted for on an accruals basis in the month employee contributions are deducted from the payroll. Normal contributions due from Employers are accounted for on an accruals basis in the month the related employee contributions are deducted from payroll. Augmentations and other contributions are accounted for in accordance with the agreement under which they are paid, or in the absence of such agreement, they are recognised when received. Employers deficit funding contributions are accounted for in accordance with the agreement under which they are being paid. In the absence of an agreement, they are accounted for on a receipts basis. Additional voluntary contributions from members are accounted for, on an accruals basis, in the month deducted from the payroll. Age related rebates Age related rebates are accounted for on an accruals basis, based on the contracted out earnings of relevant members in the Scheme year. Benefits Members can take their benefits in accordance with the Rules of their Group. This is generally in the form of a pension and lump sum benefit and is accounted for on an accruals basis. Transfers to and from the Scheme Transfer values represent the capital sums either receivable in respect of members from other pension schemes of previous employers, or payable to the pension scheme of new employers for members who have left the Scheme. They are accounted for on a cash basis or, where the Group Trustees have agreed to accept liability in advance of receipt of funds on an accruals basis from the date of the agreement where the transfer amount can be determined with reasonable certainty. Bulk transfers of members, where the Group Trustees have agreed to accept liability prior to receipt, are accounted for in accordance with the agreement between the Group Trustees and the Trustees of the other pension schemes. 21

23 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. Accounting Policies (continued) Expenses Administrative expenses, premiums on term insurance policies and investment management expenses are accounted for on an accruals basis. 3. Contributions Defined Benefit Defined Contribution Total 2013 Total Employers Normal Deficit repair* Augmentations - Early retirements Other - Supplementary pensions funding** Other Members Normal Other Additional voluntary contributions (AVCs) , ,161 1,313 * Deficit repair contributions have been paid as a result of the funding deficits declared in the Groups Actuarial Valuations, and under the terms of the agreements between the Employers and the Group Trustees, will continue to be paid in accordance under the Groups' Schedules of Contributions as certified by the Group Actuaries. Further details of deficit repair contributions are provided in the individual Groups Annual Reports and Financial Statements. ** Supplementary pensions funding represents Employer contributions to grant additional benefits on early retirement. 4. Transfers in Defined Benefit Defined Contribution Total 2013 Total Transfer values received from other pension arrangements: Bulk transfers Individual transfers Individual transfers AVCs In 2013, bulk transfers were received by two Groups, The E.ON UK Group received bulk transfers totalling 5 million from the Siemens Benefits Scheme and the Electricity North West Group received 2 million from the Vertex UK Pension Plan. These transfers were in respect of members accrued rights following acquisitions by their respective Principal Employers. 22

24 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. Other Income Defined Benefit Defined Contribution Total 2013 Total PPF levy paid by the Employers Age related rebates Claims on term insurance policies Other Benefits Defined Benefit Defined Contribution Total 2013 Total Pensions 1,263-1,263 1,236 Lump sum retirement benefits and commutations Purchase of annuities (AVCs) Lump sum death benefits (in service) Lump sum death benefits (in retirement) , ,496 1, Payments to and on Account of Leavers Defined Benefit Defined Contribution Total 2013 Total Transfer values paid to other pension arrangements: Bulk transfers Individual transfers Purchase of annuities to match preserved benefits In 2013, the bulk transfer of 15 million was from the E.ON UK Group to the EDS 1994 Pension Scheme. 23

25 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 8. Other Payments - Defined Benefit 2013 PPF levy 4 4 Other The PPF was established by the Government with effect from 6 April 2005 to provide compensation to members of eligible defined benefit pension schemes, when there is a qualifying insolvency event in relation to the employer, and where there are insufficient assets in the pension scheme to cover the PPF level of compensation. Funding is by means of a levy raised on all defined benefit pension schemes. The Scheme Rules allow for the payment of PPF levies from Group assets (with subsequent payment of an increased Employer contribution or direct reimbursement) or to be paid directly by the Employer. For 2013/14, the 4 million represents the amount paid from Group assets (2012/13: 4 million). Of the 4 million paid, 2 million was paid under the Secretary s Protocol arrangements where the Groups concerned have received enhanced contributions. The remaining 2 million was directly reimbursed to the Scheme by Employers (and is shown as income under Note 5). 9. Administration Expenses 2013 Administration expenses 6 6 Actuarial fees 4 3 Legal fees 1 1 Other Other than the items shown above, all administration expenses i.e. all expenses other than those relating to investments, were paid directly by the Employers within the Scheme. Following a Scheme-wide Rule change made in 2004, Groups may pay administration expenses provided that an actuarial enhancement is made to the rate of Employer contributions (the enhanced contributions means that Employers continue to be responsible for meeting all administration expenses). Eleven Employers have adopted this option. 24

26 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 10. Investment Income 2013 Dividends from equities Income from fixed interest securities Income from index-linked securities Income from pooled investment vehicles Net rental income Interest on cash deposits 7 6 Income from derivatives (1) 3 Other 2 2 Less irrecoverable tax (3) (4) Dividends from equities are shown gross and irrecoverable tax is disclosed separately. 25

27 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 11. Investment assets and liabilities - Defined Benefit Investment assets 2013 Equities 2,225 2,145 Fixed interest securities 2,853 3,792 Index-linked securities 1,286 2,658 Pooled investment vehicles 23,104 21,141 Derivatives Property Agriculture and forestry Insurance policies 1 1 AVC investments Cash and other investment assets Total investment assets 31,429 31,846 Investment liabilities Derivatives (93) (707) Repurchase agreements - (93) Other investment liabilities (228) (76) Total investment liabilities (321) (876) Net investment assets 31,108 30,970 During the year, one Group re-organised its Liability Driven Investment (LDI) portfolio, such that assets which were previously held directly were transferred into a Pooled investment vehicle. This explains much of the year on year change as regards Fixed Interest Securities, Index-linked Securities, Pooled Investment Vehicles and Derivatives. 26