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 CHAIRMAN S STATEMENT I am pleased to present the annual statement of National Funeral Trust for the 53 weeks ended 30th December Peter Hindley Iam pleased to present this annual statement for the Trust, which provides security for plan-holders payments for Chosen Heritage, Personal Choice, Royal London, Skipton Building Society, Post Office Financial Services and Dignity Funeral Plans. The Managing Trustees (referred to in this report as either the Managing Trustees or the Trustees ) have always been committed to providing clear information about the money held on behalf of plan-holders, together with other information about the Trust. I thank my fellow Trustees for their continued support. Annual Reports for the National Funeral Trust have been published since the early 1990s, as we believe it is important that we are open and give clear information about the Trust. Competition experienced by the Dignity plc Group ( Dignity ) who market and sell the plans has been greater in the last year. Nevertheless, the number of plans outstanding at the period-end was 138,593 compared with 128,464 at the same time last year following gross sales of 21,431 (2015: 20,973) in the period, a result of a strong performance. The Managing Trustees have continued to receive advice on a prudent investment strategy for the Trust. Early in 2017, they concluded that it would be appropriate to move investment advisers from Willis Towers Watson to Mercers. Mercers now provide investment advice to the Trustees and have been mandated to actively manage the investments on the Managing Trustee s behalf based on a defined statement of investment principles. This approach will continue to result in a broad 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 potentially result in greater volatility year on year in the reported value of the Trust s assets. The Trust held assets equating to an average of approximately 2,940 (2015: 2,560) per member at the end of the year. This compared favourably to the amount paid to Dignity for performing funerals as required, which averaged 2,615 (2015: 2,570).

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 However, the actuarial valuation (which is prepared annually and is not audited), which uses very cautious assumptions and assumed the investments fail to produce a return in excess of inflation, showed that after paying for the funeral of each plan-holder there remains a small deficit. This valuation does not take into account any benefit from the actuarial surplus generated by new plan sales or all of the anticipated returns from the Trust s investment strategy. Whilst the Managing Trustees cannot guarantee the level of investment returns in the future or whether the deficit will be eliminated in future years, they believe, based on the advice received, that the prudent investment strategy should deliver the returns targeted, thereby eliminating the deficit and providing more than sufficient funds to the Dignity plc Group, who ultimately guarantee to perform the services in Plans sold. The Managing Trustees therefore remain confident that the Trust is well placed to fund funeral payments as required. 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. The Trustees confirm that as far as each Trustee is aware there is no relevant audit information of which the Trust s auditor is 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 Trust s auditors are aware of that information. Peter Hindley Chairman of the Trustees National Funeral Trust 3

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 Pre Arrangement 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 policy s 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 Scheme Charges and charges of the funeral directors in providing their service. An independent audit of the Trust financial statements is carried out annually by Ernst & Young LLP. In addition an independent actuary reviews the value of the fund annually. 5

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 30th December 2016 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 ,128 54, ,732 82,145 (7,658) 74, ,070 17, ,875 38,227 (5,655) 35,572 Amount held in respect of future funeral obligations 407, , This includes amounts both falling due within one year and 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 Assets Members 7

8 NATIONAL F U N E R A L T R U S T THE INVESTMENT STRATEGY During the period, the Trustees, with advice from Willis Towers Watson, revised the investment astrategy of the Trust and now have the objective of holding assets in the following proportions: Target (%) Equities 22 Alternative investments 13 Investment grade bonds 45 Developed credit and cash 20 Total 100 This change in investment strategy is expected to enhance investment returns in the longerterm for a similar level of risk as that taken previously. The strategy will, however, potentially result in greater volatility year on year in the reported value of the Trust s assets. zzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzz The strategy will also mean that the assets are held by a number of different investment managers, who are considered to be the most appropriate manager for the particular asset class. aaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaa Since the period end, these investment objectives and allocations are under review and will change in

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 Pre Arrangement Limited 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. 9

10 MANAGING TRUSTEES Dignity Pre Arrangement Limited is aresponsible 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 FUNERAL PLAN A range to meet every requirement. For further details on our range of funeral plans call free on

12 NATIONAL F U N E R A L T R U S T MANAGING TRUSTEES PT Hindley (Chairman) JW Hough B Doherty CUSTODIAN TRUSTEE Royal Exchange Trust Company Limited 4th Floor 40 Dukes Place London EC3A 7NH Nephila Capital Ltd (Iron Catastrophe Fund Ltd) Victoria Place 3rd Floor West No. 31 Victoria Street Hamilton HM 10 Bermuda Alcentra NY LLC 200 Park Avenue New York NY10166 A N N U A L R E P O R T INDEPENDENT AUDITOR Ernst & Young LLP No.1 Colmore Square Birmingham B4 6HQ ACTUARY PricewaterhouseCoopers LLP Cornwall Court 19 Cornwall Street Birmingham B3 2DT INVESTMENT MANAGERS (as at 30 December 2016) M&G Investment Management Limited Governor s House Laurence Pountney Hill London EC4R 0HH Blackrock Investment Management UK Limited 12 Throgmorton Avenue London EC2N 2DL Lazard Asset Management 50 Stratton Street London W1J 8LL Schroders 31 Gresham Street London EC2V 7QA M&G (Guernsey) Limited Ground Floor, Dorey Court Admiral Park St Peters Port Guernsey GY1 1HT ADMINISTRATION MANAGERS Dignity Pre Arrangement Limited 4 King Edwards Court King Edwards Square Sutton Coldfield B73 6AP