F U N E R A L T R U S T A N N U A L R E P O R T

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1 NATIONAL F U N E R A L T R U S T A N N U A L R E P O R T

2 NFT 2015 UPDATE_NFT Annual Report 08/10/ :47 Page 2 CHAIR MA N S S TATEMENT I am pleased to present the annual statement of National Funeral Trust for the 52 weeks ended 26th December I Peter Hindley am pleased to present this annual statement The Trustees have set out strict investment for the Trust, which provides security for guidelines designed to prudently minimise risk. plan-holders payments for Chosen These are presented later in this document. Heritage, Personal Choice, Royal London and During the period, the Managing Trustees Dignity Funeral Plans. The Managing Trustees completed the review of the Trust s investment (referred to in this report as either the strategy, receiving independent advice. This Managing Trustees or the Trustees ) have review will result in a broader mix of always been committed to providing clear investments being held, including some information about the money held on behalf of exposure to overseas markets and to equities. plan-holders, together with other information This change is expected to enhance investment about the Trust. returns, in the longer term for a similar level of Annual Reports for the National Funeral Trust have been published since the early 1990s, volatility year on year in the reported value of as we believe it is important that we are open the Trust s assets. and give clear information about the Trust. Every year, the Managing Trustees request the Once again I am pleased to be able to report Actuary to the Trust to undertake an actuarial that this year has seen continued improvement valuation of assets and liabilities. The Actuary in the asset values of the Trust. is appointed by the Trustees and conducts his The number of plans outstanding at the review following discussions and agreement with period-end was 117,600 compared with 107,715 the Managing Trustees of the assumptions that at the same time last year. he should use. Although the requirement under The Managing Trustees receive quarterly 2 risk. The strategy will however result in greater the rules of HM Treasury is only triennial the reports from M&G Investment Management Managing Trustees believe that annual Limited (M&G) who are also invited to Trustee valuations are appropriate to ensure a constant meetings to discuss the options available. assessment of the funds of the Trust.

3 Financial Conduct Authority requirements for Funeral Plan providers HM Treasury requirement Trust established by written instrument More than half the trustees must be unconnected with Dignity Pre-arrangement Limited The trust must have an independent fund manager Annual accounts must be audited by a registered auditor The assets and liabilities of the trust must be actuarially valued at least once every 3 years The National Funeral Trust Yes Yes Yes Yes Yes - The National Funeral Trust has annual actuarial valuations The actuarial valuation (which is not audited) showed that after paying for the funeral of each plan-holder there remains a surplus. The Funeral Planning Authority (FPA) was established in 2001 and monitors annually, the activities of all its members. Dignity Pre-arrangement Limited is a founder member of the FPA. Finally, the Trust has changed its independent auditors from PricewaterhouseCoopers LLP to Ernst & Young LLP. This mirrors a change made by the Dignity Group, who own Dignity Pre-arrangement Limited and will also ensure greater distinction in the role of the actuary and the auditor. As always, I thank my fellow Trustees for their commitment and wise counsel during the year. The Trustees confirm that as far as each Trustee is aware there is no relevant audit information of which the Trusts auditors are unaware. The Trustees further confirm each of them have taken all steps that they ought to have done as Trustees to make themselves aware of any relevant audit information and to establish that the Trusts auditors are aware of that information. Peter Hindley Chairman of the Trustees National Funeral Trust 3

4 NFT 2015 UPDATE_NFT Annual Report 08/10/ :47 Page 4 Geographic coverage of funeral directors serving NFT members National Funeral Trust funeral directors 4

5 ABOUT THE TRUST National Funeral Trust ( the Trust ) is a fund whose assets are entirely separate and independent of Dignity Prearrangement Limited ( the Company ) and its other subsidiaries (together the Dignity Group ). The Trust Fund is fundamental to the security of both members and funeral directors. Dignity plc ( Dignity ), the ultimate parent of the Company provides a guarantee to carry out the funeral service for each plan-holder, and payment is only made to the funeral director once the funeral has taken place. In this way we are able to ensure plan-holders receive the funeral that they have chosen. The Trust was established in 1986 and the Statement of Net Assets show the amount held in respect of future funeral obligations. The trust has been able to meet its liabilities every year since 1986 and continues to be able to meet its liabilities. WHY A TRUST FUND? It is a requirement of the Financial Conduct Authority that funeral plan providers place customer monies into either an independently managed Trust Fund or into whole of life insurance policies. Dignity chose to operate independent Trust Funds for a number of key reasons. A funeral plan Trust Fund is specifically designed to protect customer's money until it is needed to pay for the funeral and to invest the funds in a way that will provide the required return. The actuary to the Trust is specifically assessing the Trust's ability to meet future funeral payments and liabilities. This is very different to a whole of life policy, which is usually only designed to pay out a set sum assured and where the insurance companies actuaries are not considering future funeral costs, only the policies ability to pay out the sum assured. Furthermore, because the Trust Funds sole purpose is to pay for funeral expenses, all the money invested in it goes towards this aim (but see below). There are fees taken to manage the Trust and scheme expenses, but there are no insurance company profits to be deducted from the return on the assets meaning more goes towards future funeral payouts. The Trustees may also make additional payments to Dignity Pre-arrangement Limited if the actuarial review shows there is a surplus of funds and they consider it prudent so to do. TRUST FUND SECURITY One hundred per cent of all funeral plan payments received are paid directly into the Trust. All of the Trust s bank accounts are under the complete control of the Custodian Trustee, Royal Exchange Trust Company Limited. Members make cheques payable to National Funeral Trust. No director or employee of Dignity is a signatory to the Trust bank accounts. Payments from National Funeral Trust to Dignity Pre-arrangement Limited can only be made by Royal Exchange Trust Company Limited after agreed payment procedures between them and the Managing Trustees have been followed. These payments include membership fees where applicable, charges of the funeral directors in providing their service and sums in respect of approved allowances in marketing and administering the scheme. An independent audit of the Trust financial statements is carried out annually by Ernst & Young LLP (previously PricewaterhouseCoopers LLP). In addition an independent actuary reviews the value of the fund annually. 5

6 NFT 2015 UPDATE_NFT Annual Report 08/10/ :47 Page 6 NATIONAL F U N E R A L T R U S T STATEMENT OF NET ASSETS Extracted from the audited accounts. As at 26th December 2014 Fixed asset investments Current assets Short term deposits and cash Prepayments Instalments due from members (1) Current liabilities Accruals and other creditors Net current assets ,353 35, ,415 50,664 (4,512) 46, ,354 22, ,860 34,993 (3,505) 31,488 Amount held in respect of future funeral obligations 289, , This includes 5,772,000 (2013: 5,114,000) falling due after more than one year. 6

7 NATIONAL F U N E R A L HOW THE FUND IS INVESTED T R U S T Trust Fund Net Assets and numbers of current members 300,000, , ,000, , ,000, , ,000, , ,000, , ,000, , ,000, , ,000, , ,000, , ,000, , ,000, ,000 80,000,000 80,000 Assets 60,000,000 60,000 Number of Members 40,000,000 40,000 20,000,000 20, Assets Members

8 NFT 2015 UPDATE_NFT Annual Report 08/10/ :47 Page 5 NATIONAL F U N E R A L T R U S T THE INVESTMENT MANAGERS M&G Investment Management Limited (part of the Prudential group) has managed the investments of the Trust Fund since 1 May Fixed income management is a key focus with billion of fixed income assets under management as at 31 December 2014 and 62.8 billion managed on behalf of institutional clients. The objectives and restrictions that guide their investment are regularly reviewed by the Managing Trustees. A generally prudential strategy is pursued and the following criteria were in force in 2014: The assets shall comprise only sterling denominated index-linked and fixed interest bonds or non-gilt floating rate notes. All investments are of investment grade or higher. Investments shall comply with the limits set out in the table below. In addition, M&G is permitted to invest up to eight per cent of the Trust s assets in residential mortgage securities and commercial mortgage backed securities. Such investments may be made provided the weighted average life is no more than five years; are rated by at least one of Fitch, S&P and Moody s (the Rating Agencies ) and rated AAA by each of the Ratings Agencies that rate the investment concerned; and are the senior tranche of any issue. The maximum exposure to a single investment is 0.5 per cent of the Trust s assets. Funds are also held in the Newton Absolute Return Fund. The Trustees may, from time to time, realise bonds and hold funds in cash. As noted in the Trustees report, during the period, the Managing Trustees completed a review of the Trust s investment strategy, receiving independent advice. This review will result in a broader mix of investments being held, including some exposure to overseas markets and to equities. This change is expected to enhance investment returns, in the longer term for a similar level of risk. The strategy will however result in greater volatility year on year in the reported value of the Trust s assets. A full breakdown of the investment strategy being implemented will be detailed in the 2015 annual report following implementation of the strategy. Description of investment Maximum proportion of portfolio Minimum proportion of portfolio Maximum holding in any one entity within the class UK Government 100% 25% 100% Non-gilt issued by supranational, government-guaranteed or sovereign organisations 75% 0% 50% Others rated AAA 60% 0% 10% Rated AA+ 45% 0% 5% Rated A+ 35% 0% 5% Rated BBB- to BBB+ 15% 0% 1% 8

9 HOW THE PLAN WORKS It is widely known that funeral costs have risen rapidly over the years. This means the precise pricing of Plans, payments to funeral directors and the careful investment of funds are critical. In addition there are substantial costs for running the scheme, both at the time of sale and throughout the life of the Plan that have to be taken into account. These include marketing and administration, the costs of the customer contact centre, legal and regulatory fees and other management expenses ( the Scheme Charges ). Each year an assessment of likely future costs, life expectancy and investment returns is undertaken, along with a review of the current market price of funerals, when setting Plan prices. An allowance for the Scheme Charges is paid from the Trust Fund at the time of a plan sale. The remaining sum is held in the Trust and is available to pay the funeral director for providing the services promised in the Plan. This means that the amount paid to the funeral director must be less than the normal market price for a funeral. Dignity, which owns the majority of the funeral directors supporting the Plan, has committed to accept this reduced amount and provides a guarantee to all plan-holders in respect of the services described in their Plans. As a consequence the trustees and investment managers can make sensible and prudent investment decisions. The prudential and balanced approach to plan pricing, the level of remuneration for funeral directors and the criteria adopted for investment of the funds (see under The Investment Managers ) seeks to ensure that Dignity can meet its obligations to plan-holders. THE CUSTODIAN TRUSTEE Royal Exchange Trust Company Limited is the legal Custodian Trustee. Following the transfer of Royal Exchange Trust Company Limited to Capita plc (a FTSE100 Company), some activities are carried out by Capita Trust Company Limited under a Power of Attorney. Capita Trust Company Limited is a subsidiary of Capita plc and its business is the provision of a wide range of corporate and trust services. Royal Exchange Trust Company Limited is a fully owned subsidiary of Capita Trust Company Limited. All payments from the Trust s bank accounts are controlled by, and all investments are registered in designated accounts held under the control of, Royal Exchange Trust Company Limited. The Custodian Trustee maintains regular contact with the Investment Manager and the Managing Trustees. THE ACTUARY Mr Jeremy May of PricewaterhouseCoopers LLP has been the appointed actuary to the Trust from the beginning of His task is to make a skilled and informed assessment of the future liabilities of the Trust, and the investment strategy required to meet all future commitments. A team of actuaries at PricewaterhouseCoopers LLP, a leading consultancy firm, supports him. The actuary is completely independent from Dignity and prepares a full actuarial valuation every twelve months. The actuary compares the assets of the Trust with the expected cost of existing members funeral plans to ensure that it is not dependent upon new members joining to maintain its financial strength. The unaudited actuarial valuation of the fund liabilities is not presented within these financial statements. 9

10 NFT 2015 UPDATE_NFT Annual Report 08/10/ :47 Page 3 MANAGING TRUSTEES Dignity is responsible for the day to day marketing and administration of the various plans. The Managing Trustees have overall responsibility for the management of the National Funeral Trust. Their specific duties include setting the investments policy in consultation with the Actuary and ensuring that this policy is communicated to, and followed by, the Investment Managers. They meet on a regular basis and keep a close watching brief on the performance and administration of the Trust. Peter Hindley John Hough Brian Doherty Peter Hindley is the chairman of the Trustees, and was appointed Non-Executive Chairman of Dignity plc in January John Hough was appointed as an Independent Trustee of the National Funeral Trust in October John was Chairman and Managing Director of Aspen plc, a city-based firm of actuaries and pension consultants, for 19 years. He was a founding shareholder of this firm having previously followed an actuarial career and then worked as an investment consultant. As an independent trustee of various pension schemes, institutional funds, charity distribution funds, and Non-Executive Chairman of two Companies, John has wide experience of such roles. Brian Doherty has been a professional within the pensions industry for more than 30 years, having worked for Prudential and Sedgwick. Brian established his own pensions consultancy, which was acquired by what is now Gallaghers. He now operates as an independent trustee through his company, Caledonian Trustees Ltd. 10

11 THE DIGNITY PORTFOLIO A range to meet every requirement. For further details on our range of funeral plans call free on

12 NFT 2015 UPDATE_NFT Annual Report 08/10/ :47 Page 1 NATIONAL F U N E R A L T R U S T A N N U A L R E P O R T MANAGING TRUSTEES PT Hindley (Chairman) JW Hough B Doherty CUSTODIAN TRUSTEE Royal Exchange Trust Company Limited 4th Floor 40 Dukes House London EC3A 7NH INDEPENDENT AUDITORS Ernst & Young LLP No.1 Colmore Square Birmingham B4 6HQ ACTUARY PricewaterhouseCoopers LLP Cornwall Court 19 Cornwall Street Birmingham B3 2DT INVESTMENT MANAGER M&G Investment Management Limited Laurence Pountney Hill London EC4R 0HH ADMINISTRATION MANAGERS Dignity Pre-arrangement Limited 4 King Edwards Court King Edwards Square Sutton Coldfield B73 6AP