GROUP PENSION SCHEME ANNUAL REPORT AND FINANCIAL STATEMENTS CHRIS SYMONDS D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.

Transcription

1 GROUP PENSION SCHEME ANNUAL REPORT AND FINANCIAL STATEMENTS 2002 CHRIS SYMONDS D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc

2 ANNUAL REPORT AND FINANCIAL STATEMENTS 2002 TRUSTEES C R Green (Chairman) C C Hartridge-Price A J Martin J F Searing G M Slough SECRETARY C J Symonds ACTUARY Mrs J Dingle Watson Wyatt LLP AUDITORS Deloitte & Touche LEGAL ADVISERS Sacker & Partners BANKERS The Royal Bank of Scotland plc INVESTMENT MANAGER Hermes Investment Management Limited CUSTODIAN JPMorgan Chase Bank The Trustees legal advisers throughout 2002 were Maxwell Batley. On 19 March 2003 the Trustees appointed Sacker & Partners as legal advisers in place of Maxwell Batley. Pension Schemes Registry Number: D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc

3 TRUSTEES REPORT TRUSTEES MISSION STATEMENT 1 CHAIRMAN S STATEMENT 2 INTRODUCTION 3 THE TRUST DEED 3 OVERVIEW OF THE PERIOD 3 TRUSTEES 4 APPOINTMENT OF ADVISERS 4 SCHEME ADMINISTRATION 5 MEMBERS AND BENEFICIARIES 5 ACTUARIAL VALUATION 6 BENEFITS, PENSION INCREASES AND TRANSFERS 6 BENEFIT STATEMENTS 7 STATEMENT OF INVESTMENT PRINCIPLES 7 INVESTMENT MECHANISM 7 ASSET MIX 9 INVESTMENT DURING THE PERIOD 10 INVESTMENT PORTFOLIO AT 31 DECEMBER INVESTMENT MANAGER S REPORT FOR THE PERIOD 11 D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc

4 INVESTMENT PERFORMANCE 11 MYNERS REPORT 12 CUSTODY OF THE SCHEME S ASSETS 13 ADDED YEARS AND ADDITIONAL VOLUNTARY CONTRIBUTIONS 13 INTERNAL DISPUTE RESOLUTION PROCEDURE 13 THE REPORT AND FINANCIAL STATEMENTS 14 ACTUARIAL STATEMENT 19 JUNE ACTUARIAL STATEMENT FOR MINIMUM FUNDING PURPOSES 17 ACTUARIAL CERTIFICATE 6 AUGUST 2002 SCHEDULE OF CONTRIBUTIONS ACCOUNTS FOR THE YEAR ENDED 31 DECEMBER 2002 STATEMENT OF TRUSTEES RESPONSIBILITIES IN RELATION TO FINANCIAL STATEMENTS REPORT OF THE INDEPENDENT AUDITORS TO THE TRUSTEES OF THE HERMES GROUP PENSION SCHEME FUND ACCOUNT 24 NET ASSETS STATEMENT 25 STATEMENT OF CHANGE IN MARKET VALUE OF ASSETS 26 NOTES TO THE FINANCIAL STATEMENTS 27 APPENDIX I TRUSTEE ARRANGEMENTS 33 D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc

5 TRUSTEES MISSION STATEMENT The Trustees mission is to manage the Scheme efficiently in the interests of the members, to provide the expected benefits, and to ensure that an excellent quality of service is given to those members. D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc 1

6 CHAIRMAN S STATEMENT It s a great pleasure to write my first report as Chairman of the Hermes Group Pension Scheme and I would like to thank my fellow Trustees, the Secretary and the staff at Hermes for their invaluable help and support in my induction was a grim year for the pensions industry and HGPS was not immune from the impact of further declines in world stock markets. This was the third year of declining asset values resulting in increased deficits. The year saw a fall in the value of the scheme of over 12%. But this snapshot in time bears little relation to the real health of the scheme in the long term. The actuarial valuation showed a past service deficit at the end of 2001 of 2.25 million but on the MFR valuation basis the funding level was 102% (see page 6 of the report). The Principal Employers have agreed to increase the employer contribution rate to 18.5% in order to eliminate the deficit over time and the Trustees will continue regularly to monitor the situation to ensure adequacy of funding. We are fortunate in having two financially sound Principal Employers and strong cash flows. I am confident that members recognise what a significant benefit the Scheme is. On a more positive note, the investment performance of the scheme outperformed the benchmark for the second year running. But largely as a result of our high equity holdings, we underperformed the WM Small Funds peer group. The membership of the Scheme is relatively young so the Trustees can afford to take a long term view of the investment strategy. We remain heavily invested in equities. We are in the process of undertaking an asset/liability study to determine whether we have the right strategic mix of assets to match our liabilities over time and will also review whether we have the right balance between passive and active management. We have also recently reviewed our statement of investment principles (which we will revise further when the asset/liability study has been concluded) and our policy on corporate governance. We have decided to increase our monitoring of the performance of the Scheme s advisers and to review on a rolling basis whether to renew mandates or seek competitive tenders. In 2003, as part of this process we have changed legal advisers to Sacker & Partners, a well respected firm of specialists in pensions. We are also introducing mechanisms to ensure we have the right skill mix among our Trustees, to monitor our own performance as Trustees and to ensure ongoing training for ourselves in a field which is so rapidly evolving. Unusually for a pension scheme, we rely exclusively for our investment management and advice on our Employer company, an arrangement that has worked well over the years. However we are relying also on the Actuaries for support on the asset/liability study. Finally I would like to thank my predecessor, Tony Thomson, for all his work as Chairman of the Scheme. COLIN GREEN 22372D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc 2

7 INTRODUCTION The Trustees are pleased to present the report of the Hermes Group Pension Scheme (HGPS) for the year ended 31 December The Scheme was set up by the Principal Employers (Hermes Pensions Management Limited and the Trustees of the BT Pension Scheme) by a Deed made on 16 September Members of the Scheme are contracted out of the State Second Pension (S2P) which replaced the State Earnings Related Pension Scheme (SERPS) on 6 April The Scheme is treated as an exempt approved scheme by Inland Revenue for taxation purposes. THE TRUST DEED The Trust Deed of the Scheme was executed on 16 September No changes were made to the Deed in OVERVIEW OF THE PERIOD 2.2 million of net new money was added to the Scheme in The value of investments decreased by 6.0 million taking the value of the Scheme at the end of 2002 to million. The scheme earned a return of 18.4 % overall in the year ended 31 December million Total Assets at Market Value May Dec D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc 3

8 TRUSTEES A lsit of the current Trustees is shown at the beginning of the report. Chilton (Tony) Thomson retired as Chairman of Trustees on 30 June Alison Edmonds retired as a member-nominated Trustee on 30 June The Trustees would like to record their thanks to both of them for their work as Trustees. John Searing was elected by the members as a new Trustee from 1 July Colin Green was appointed by the employers as the new Chairman of Trustees from 1 September Colin Green was formerly Group Commercial Director and Secretary of BT. He was also a Trustee of the BT Pension Scheme for 8 years up to his retirement in April Two of the Trustees, John Searing and Andrew Martin, are member-nominated trustees. The Trustee arrangements are set out in more detail on page 33. The Trustees normally meet quarterly but sometimes have additional meetings. In 2002 they had five meetings. The Trustees have a calendar of business which enables them to determine investment policy and monitor the performance of all aspects of the Scheme. APPOINTMENT OF ADVISERS The Trustees have appointed the persons or organisations shown at the beginning of the report to act on behalf of the Scheme. There was a change after the year end. Sacker & Partners, which is a specialist pensions law firm, was appointed in place of Maxwell Batley on 19 March 2003 as the Trustees legal advisers. Hermes Investment Management Limited, which is a wholly owned subsidiary of Hermes Pensions Management Limited, is the Scheme s Investment Adviser and Manager. The Trustees have set objectives and constraints for the Investment Manager, who has full discretion to act within these policies. At 31 December 2002 a significant part of the Scheme s assets were invested in a long-term unitised insurance policy with Schroder Hermes Limited (see Note 6 to the Accounts). On 24 January 2003 Hermes Pensions Management Limited completed the acquisition of Schroder Hermes Limited, which has now been renamed Hermes Assured Limited. Hermes Assured Limited receives fees from the Scheme, but otherwise the Hermes Group does not receive fees for managing the Scheme s investments. The auditors, Deloitte & Touche, do not provide any non-audit work for the Scheme. However, they do undertake audit and non-audit work for the Principal Employers, Hermes Pensions Management Limited and the Trustees of the BT Pension Scheme D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc 4

9 SCHEME ADMINISTRATION SBJ Benefit Consultants Limited maintains the membership records of the Scheme, calculates benefits, and deals with other administrative matters. The payment of pensions is still dealt with by the Hermes Personnel Department. The administrator's full address is SBJ Benefit Consultants Ltd Manor House 1 The Crescent Leatherhead Surrey KT22 8DH Telephone number: Fax number: MEMBERS AND BENEFICIARIES Hermes employees have the option of joining the Scheme, or making their own pension arrangements. Hermes policy is to require employees to positively opt out of membership of the Scheme and this appears to be effective in reducing the number of non-joiners. PENSIONERS Number of pensioners at 1 January Deferred pensions brought in to payment 2 Retirements during year 2 Pensions ceased - Number of pensioners at 31 December DEFERRED PENSIONERS Number of deferred pensioners at 1 January Deferred pensions brought in to payment (2) Transfer to other schemes - Refund of contributions (5) Death in deferment (1) New deferred pensions during year 17 Number of deferred pensioners at 31 December ACTIVE MEMBERS Number of active members at 1 January New members during year 49 Members leaving Scheme during year (17) Number of active members at 31 December D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc 5

10 ACTUARIAL VALUATION Members pay a contribution to the Scheme of 5% of their basic annual salary. The employers pay the balance of the costs of the Scheme. After the Scheme Actuary carried out a full valuation of the Scheme as at 31 December 1999 a 5 year schedule of contributions was agreed by the Trustees and employers in November The Actuary has to check annually the adequacy of the schedule of contributions. On 21 December 2001 she certified that it was no longer adequate to ensure the Scheme would meet the Minimum Funding Requirement (MFR) throughout the period of the schedule. Another full valuation of the Scheme was conducted as at 31 December The Actuary issued a report on the valuation to the Trustees on 19 June The outcome was that on an ongoing basis there was a deficit of assets, compared with the amount needed to cover the cost of the benefits earned up to 31 December 2001, of 2.25 million. The funding level was 93% using the Actuary s assumptions. On the MFR valuation basis the funding level was 102% at the end of The Actuary reported that the long-term rate of employers contributions required to cover the accrual of future service (including an allowance for administrative expenses) is 16.8% of current members Contributory Pay. In order to remove the deficit over the future working life of the current active members (15 years) the employers need to pay additional contributions of 1.7% of Contributory Pay. Therefore the total required employers contribution rate is 18.5% of Contributory Pay. The Actuary s statements on the funding position are on pages The employers and Trustees accordingly signed a new schedule of contributions agreeing an increased employers contribution rate of 18.5% of Contributory Pay. They increased their contributions to 15.0% from 1 January 2002 and implemented the further increase to 18.5% with effect from 1 August A copy of the schedule of contributions is on page 19 and the Actuary s certificate confirming its adequacy for MFR purposes is on page 18. The Actuary will review the adequacy of the schedule of contributions annually and another full actuarial valuation will be undertaken at 31 December BENEFITS, PENSION INCREASES AND TRANSFERS All benefits are funded. Pensions and deferred pensions for those members of the Scheme who had previously been members of the Hermes Pension Scheme are increased in line with the rise in the Retail Price Index. The increase for 2002 was 1.7%, based on the increase in the Retail Price Index from September 2000 to September The increase for 2003 is also 1.7% based on the increase in the Retail Price Index from September 2001 to September Pensions and deferred pensions for those members of the Scheme who had not previously been members of the Hermes Pension Scheme are increased in line with the rise in the Retail Price Index, up to a maximum of 5% per annum. The increase for these members was also 1.7% for 2002 and 1.7% for D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc 6

11 Transfers into and out of the Scheme are made on terms determined by the Actuary under the Rules of the Scheme. Transfer values represent fair value in relation to the alternative deferred benefits. No allowance is made for any discretionary increase. Lump sum death benefits for active members of the Scheme are insured under a Group Policy with Legal & General Assurance Society Ltd. BENEFIT STATEMENTS A benefit statement showing benefits as at 1 April 2002 was sent to each active member in June Benefit statements for pensioners and deferred pensioners were sent in April and May 2002 respectively. STATEMENT OF INVESTMENT PRINCIPLES In compliance with the Pensions Act 1995, the Trustees maintain a Statement of Investment Principles, which sets out their policy for investing the assets of the Scheme. It is currently under review and will be published after the review of the strategic asset mix (see page 9). Any member of the Scheme who would like a copy of the Statement of Investment Principles should contact Mr C J Symonds, the Scheme Secretary, at the address on page 14. For a number of years the Trustees have maintained detailed objectives and constraints for investing the Scheme s assets, and these are additional to the Statement of Investment Principles. The Trustees have not made any investments which are not consistent with the Statement of Investment Principles, nor have they made any employer-related investments or loans. INVESTMENT MECHANISM Most of the Scheme's equity assets are held in pooled unitised index-tracking funds. With the exception of the Emerging Markets fund (which is operated by State Street), these funds have been operated by Schroder Hermes. On 24 January 2003 Hermes purchased Schroder Hermes, which has now been renamed Hermes Assured Limited. Exposure to the Hermes Assured index-tracking funds is obtained via a unitised insurance policy whose value is determined by the performance of the underlying funds. The Scheme has continued to invest in the following Hermes Assured Funds: UK Index Tracker, European (ex-uk) Index Tracker, US Index Tracker, Japanese Index Tracker and Pacific (ex-japan) Index Tracker. The value of the unitised insurance policy at 31 December 2002 was 20,115, D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc 7

12 While it is correct for accounting purposes to treat the unitised insurance policy in the accounts as the Scheme's asset, the Trustees nevertheless consider that for assetmix purposes the values of the underlying funds should be used to determine sector exposure and the tables and charts which follow have been drawn up on that basis. Hermes Investment Management Limited is the investment manager for the Hermes Assured index-tracking funds. Exposure to index-linked securities is by direct investment. Exposure to property is via property unit trusts, principally the Hermes Property Unit Trust (HPUT). HPUT is managed by Hermes Property Asset Management Limited. It is a balanced fund providing exposure to all sectors of the commercial property market. This is an efficient means of investing indirectly in property for small pension schemes D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc 8

13 ASSET MIX The Trustees have approved the following strategic asset mix for the Scheme. Strategic Asset Mix % UK equities Overseas Equities Property Unit Trusts Index Linked The Trustees have authorised the Investment Manager to make short term tactical shifts in asset allocation within defined ranges around the strategic asset mix. The Trustees are reviewing the strategic asset mix with their advisers, and in consultation with the employers, and the review should be completed later in The Scheme s asset mixes at 1 January 2002 and 31 December 2002 are shown below: 1 January 2002 % UK equities Overseas Equities Property Unit Trusts Index Linked Cash and AVC Funds 31 December 2002 % UK equities Overseas Equities Property Unit Trusts Index Linked* Cash and AVC Funds * This is net of the short position in Fixed Interest UK Futures D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc 9

14 INVESTMENT DURING THE PERIOD The net investment during the period was as follows: million UK Equities 2.3 Overseas Investments 0.7 UK Property Unit Trusts (0.5) UK Index Linked Investments 0.1 UK Fixed Interest Futures (0.4) 2.2 These figures include the deposits backing the stock index futures. INVESTMENT PORTFOLIO AT 31 DECEMBER 2002 The breakdown of the investment portfolio at 31 December 2002 is shown in the following table. UK Equities million million Hermes Assured Unitised Insurance Policy 15.5 Stock Index Futures Overseas Equities Hermes Assured Unitised Insurance Policy 4.7 Emerging Markets Fund UK Property Unit Trusts 3.0 Index Linked UK Government Securities 0.8 Fixed Interest UK Futures (0.4) Deposits, Bank Balances and AVC Funds D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc 10

15 The amount invested in overseas investments at 31 December 2002 was as follows: million % of total investments North America Europe Japan Pacific Basin (ex Japan) Emerging Markets The Scheme does not hold any employer-related investments. INVESTMENT MANAGER S REPORT FOR THE PERIOD 2002 turned out to be a worse year for equity markets (in which the bulk of the Scheme s assets are invested) even than After a relatively quiet start appearing to consolidate the rebound after the catastrophic impact of September 11 th 2001, markets fell sharply again in response to geopolitical risks as the war on terrorism shifted its focus from Afghanistan towards Iraq. In this environment property and bonds again proved the best investments. Net investment during the period was directed towards the equity markets to maintain weightings broadly in line with the strategic asset mix. Some modest sales were made to limit the overweight in property exposure resulting from outperformance, but this was also counterbalanced by a reduction in exposure to bonds. On a purely tactical basis, this was effected through a short position in gilt futures as they appeared more over-valued than Index-Linked. INVESTMENT PERFORMANCE The Scheme s performance is measured by the WM Company, which also provides information comparing the Scheme s performance with that of a benchmark and other pension schemes. The benchmark return is obtained by combining the strategic asset allocation of the Scheme with the asset class returns of the WM universe of pension funds with assets of 10 million- 50 million. The following table shows the Scheme s rate of return for the year ended 31 December 2002, and also the market returns for the major classes of asset in which the Scheme was invested: D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc 11

16 The Scheme Market Indices UK Equities (FTSE Actuaries All Share Index) Overseas Equities (FT/S&P Actuaries World ex UK) Rate of Return % Index Linked (FTSE Actuaries Index Linked over 5 years) 8.4 Property (IPD Universe Benchmark) 9.5 During the year, the Retail Price Index increased by 2.9%. The Scheme s performance in the last five years is shown in the following table: COMPARISON WITH BENCHMARK AND WM AVERAGE (FUNDS MILLION) Annual Rate of Return (%) to 2002 HGPS Benchmark WM Average, funds with assets of 10 to 50 million For the third consecutive year, the Scheme had a negative rate of return (-18.4%). It outperformed the benchmark but underperformed its peer group in Over the five year period from 1998 to 2002, the Scheme's return of 0.2% per annum was below the benchmark (+0.3%) and its peer group (+0.4%). MYNERS REPORT In 2001 a review of institutional investment in the UK by Paul Myners concluded with a set of 10 Principles, which have been revised by the Government, that trustees of final salary schemes (such as HGPS) could use on a voluntary basis when looking at their investment policy. The HGPS Trustees were already virtually fully compliant, and applying the new Principles has not required many changes to existing procedures. HGPS does not have a permanent investment sub-committee as there D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc 12

17 is a small body of Trustees, many of whom have investment experience. The Trustees meet at least quarterly and believe that strategy (as opposed to day to day) decisions should be fully considered by the full Trustee body. All the HGPS Trustees receive training appropriate to their needs, and they will continue to assess whether they have the right set of skills both individually and collectively. As reported on page 9 the Trustees are reviewing the Scheme s strategic asset mix with their advisers, and in consultation with the employers, and the review should be completed later in The Trustees will consider the full range of investment opportunities, including private equity. Hermes Investment Management Limited has also been asked to advise on the appropriate split between active and passive management. The Trustees have agreed a corporate governance policy, a copy of which is available from the Scheme Secretary, at the address on page 14. CUSTODY OF THE SCHEME S ASSETS The Trustees consider that it is important to keep the investment management of its assets separate from their custody, to minimise the risk of the assets being misused. The custodians will deliver assets only on receipt of a properly executed instruction from the investment manager. The Trustees are responsible for appointing and replacing the custodians who have custody of the Scheme s assets, and this is done by written agreement. Before a custodian is appointed, a thorough due diligence exercise is carried out by Hermes Administration Services Limited on behalf of the Trustees. The Trustees custodian was JPMorgan Chase Bank throughout The Trustees have maintained bank accounts in their name to make and receive payments for the Scheme. ADDED YEARS AND ADDITIONAL VOLUNTARY CONTRIBUTIONS A member of the Scheme is able to provide increased benefits in three ways: i) by buying added years of pensionable service in the Scheme by paying an additional percentage of salary during their active membership; ii) iii) by making additional voluntary contributions (AVCs) to a separately invested deposit account with Abbey National Plc; and by making additional voluntary contributions (AVCs) to a with-profits fund managed by Prudential Assurance Company Limited. A member can pay into both the added years and AVC arrangements provided that Inland Revenue limits on contributions are not exceeded. INTERNAL DISPUTE RESOLUTION PROCEDURE The Trustees have found that virtually any query or request for information about the Scheme is capable of being answered satisfactorily by Hermes Personnel Department D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc 13

18 Nevertheless as a result of the Pensions Act 1995, the Trustees have put in place a procedure to resolve disputes, which gives a member the means of having a grievance considered at the highest level. The dispute resolution procedure is in two stages. At stage 1, the dispute/complaint is considered by the Secretary to the Trustees. A member not satisfied with his decision can ask at stage 2 for the matter to be reconsidered by the Trustees. A member of the Scheme who has a query or complaint which is likely to prove difficult to resolve is given a copy of the dispute resolution procedure. A copy of the procedure can be obtained from Hermes Personnel Department or the Secretary to the Scheme at the address below. THE REPORT AND FINANCIAL STATEMENTS The Trustees believe that this report contains all the information which is required to be disclosed to members under current legislation. The financial statements have been prepared and audited in accordance with the regulations made under sections 41(1) and (6) of the Pensions Act A summary of the report and accounts is being sent to all active members, pensioners and deferred pensioners. Copies of the full report and accounts are being made available via the Hermes Intranet to active members of the Scheme, who may also obtain a hard copy on request. A hard copy of the full report and accounts is available to pensioners and deferred pensioners on request. Members who have a general query about the report or their benefit entitlements in Hermes Group Pension Scheme, should contact either Sheena Gibson, Personnel Manager, or Chris Symonds, Scheme Secretary, Hermes Pensions Management Limited, Lloyds Chambers, 1 Portsoken Street, London E1 8HZ, telephone no COLIN R GREEN Chairman D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc 14

19 ACTUARIAL STATEMENT Actuarial Statement made for the purposes of Regulation 30 of The Occupational Pension Scheme (Minimum Funding Requirement and Actuarial Valuations) Regulations 1996 Name of scheme: Hermes Group Pension Scheme Effective date of valuation: 31 December Security of prospective rights In my opinion, the resources of the scheme are likely in the normal course of events to meet in full the liabilities of the scheme as they fall due. In giving this opinion, I have assumed that the following amounts will be paid to the scheme: Description of contributions By members: 5% of Contributory Pay By the Employers: 15% of Contributory Pay from 1 January 2002 to the date when the Schedule of Contributions is signed and certified. 18.5% of Contributory Pay from the date when the Schedule of Contributions is certified. Subject to review at future actuarial valuations. 2. Summary of methods and assumptions used For the purposes of Section 1 I have assumed that the Scheme will continue. In the normal course of events active members will continue to accrue benefits under the Scheme and their benefits will be based on their actual Pensionable Service at cessation of active membership and their Pensionable Salary at that time. The liabilities referred to in Section 1 relate to the benefits which are expected to become payable under the normal operation of the Scheme. They take account of future accruals and include appropriate allowance in full for future pay increases D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc 15

20 Funding method: Projected unit Main financial assumptions % per annum Long term investment return Past 6.6 Future 6.6 General salary increases 4.6 Price inflation 2.5 Pension increases (non-gmp former HPS members) 2.5 Pension increases (non-gmp, other members) 2.5 Further details of the methods and assumptions used are set out in my report on the actuarial valuation addressed to the Trustees dated 19 June Judith Dingle Watson Wyatt LLP Fellow of the Institute of Actuaries 21 Tothill Street Partner, Watson Wyatt LLP Westminster London 19 June 2002 SW1H 9LL D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc 16

21 ACTUARIAL STATEMENT FOR MINIMUM FUNDING PURPOSES Actuarial Statement made for the purposes of Regulation 14 of the Occupational Pension Schemes (Minimum Funding Requirement and Actuarial Valuations) Regulations 1996 Name of Scheme: Hermes Group Pension Scheme Effective date of valuation: 31 December Compliance with Minimum Funding Requirement In my opinion, on the effective date the value of the assets of the Scheme is 102% of the amount of the liabilities of the Scheme. 2. Valuation principles The Scheme s assets and liabilities are valued in accordance with section 56(3) of the Pensions Act 1995, the Occupational Pension Schemes (Minimum Funding Requirement and Actuarial Valuations) Regulations 1996 and the mandatory guidelines on minimum funding requirement (GN27), prepared and published by the Institute of Actuaries and the Faculty of Actuaries. Signature Judith Dingle Watson Wyatt LLP Fellow of the Institute of Actuaries 21 Tothill Street Partner, Watson Wyatt LLP Westminster London 19 June 2002 SW1H 9LL Note: The valuation of the amount of the liabilities of the Scheme does not reflect the cost of securing those liabilities by the purchase of annuities if the Scheme were to have been wound up on the effective date of the valuation. Hermes Pensions Management Ltd D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc 17

22 Actuarial Certificate Schedule of Contributions (Section 58, Pensions Act 1995) Name of Scheme: Hermes Group Pension Scheme Adequacy of rates of contributions 1. I hereby certify that, in my opinion, the rates of the contributions payable in accordance with the schedule of contributions dated 30 July 2002 are adequate for the purpose of securing that throughout the period it covers the scheme will meet the minimum funding requirement imposed by section 56(1) of the Pensions Act In forming this opinion I have complied with the requirements imposed by sections 56(3) and 58 of the Pensions Act 1995, the Occupational Pension Schemes (Minimum Funding Requirement and Actuarial Valuations) Regulations 1996 and the mandatory guidelines on minimum funding requirement (GN 27), prepared and published by the Institute of Actuaries and the Faculty of Actuaries, and have made the assumptions prescribed by them. Signature Date: 6 August 2002 Name: Judith Dingle Qualification: FIA Address: 21 Tothill Street Name of employer: Watson Wyatt LLP Westminster London SW1H 9LL Note The certification of the adequacy of rates of contributions for the purpose of securing the meeting of the minimum funding requirement is not a certification of their adequacy for the purpose of securing the scheme s liabilities by the purchase of annuities, if the scheme were wound up. Hermes Pensions Management Ltd D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc 18

23 Schedule of contributions for the purposes of Section 58 of the Pensions Act 1995 Hermes Group Pension Scheme The table below sets out rates of contribution payable by or on behalf of active members of Hermes Group Pension Scheme (the Scheme) and by or on behalf of employer in relation to the Scheme for the five years from the date of certification by the Actuary. 1. Rates of contribution: Member rate: Employer rate: 5% of Contributory Pay 18.5% of Contributory Pay An allowance for scheme expenses and the cost of the life insurance premium is included in the rate of contribution set out above. Additional contributions may be payable by the Employer, on the advice of the Scheme Actuary, to cover any enhancement in benefits or to cover the cost of any Scheme benefits which are not included in the normal funding rate (e.g. redundancy benefits). 2. Due dates of payment: Member contributions, including AVCs Employer contributions: due on, or before, the 19 of each month after that in which contributions are deducted from earnings due on, or before, the 19 of each month after that in which contributions are deducted from earnings. Signed by: C J Symonds On behalf of the Trustees of the Hermes Group Pension Scheme Date: 30 July 2002 Signed by: C C Hartridge-Price On behalf of the Trustees of the BT Pension Scheme Date: 25 July 2002 Signed by: A Watson On behalf of Hermes Pensions Management Limited Date: 27 July 2002 Valuation date: 31 December 2001 Date of signing valuation report: 19 June 2002 Date of certifying schedule of contributions 6 August 2002 Hermes Pensions Management Ltd D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc 19

24 GROUP PENSION SCHEME FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 Hermes Pensions Management Ltd D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc 20

25 STATEMENT OF TRUSTEES' RESPONSIBILITIES IN RELATION TO FINANCIAL STATEMENTS The following statement is made with a view to distinguishing for Scheme members and beneficiaries the respective responsibilities of the Trustees and of the Independent Auditors in relation to the financial statements. It should be read in conjunction with the Independent Auditors' Report on pages 22 and 23. The financial statements are the responsibility of the Trustees. Pension Scheme Regulations require the Trustees to make available to Scheme members, beneficiaries and certain other parties audited financial statements for each Scheme period 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 that period of the assets and liabilities, other than liabilities to pay pensions and benefits after the end of the Scheme period; 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 1996, including a statement whether the financial statements have been prepared in accordance with the Statement of Recommended Practice Financial Reports of Pension Schemes. The Trustees have supervised the preparation of the financial statements and have agreed suitable accounting policies, to be applied consistently, making any judgements or estimates on a prudent and reasonable basis. The Trustees are responsible under pensions legislation for ensuring that there is prepared, maintained and from time to time revised a schedule of contributions showing the rates of contribution (other than voluntary contributions) payable towards the Scheme by or on behalf of the employer and the active members of the Scheme and the dates on or before which such contributions are to be paid. The Trustees are also responsible under pensions legislation for keeping records in respect of contributions received in respect of any active member of the Scheme and for procuring that contributions are made to the Scheme in accordance with the schedule of contributions. Under Trust Law the Trustees have general responsibility for the system of internal control, for ensuring that adequate accounting records are kept and for taking such steps as are reasonably open to them to safeguard the assets of the Scheme and to prevent and detect fraud and other irregularities. They also have specific responsibilities to manage and administer the Scheme in accordance with the terms of its Trust Deed and Rules. Hermes Pensions Management Ltd D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc 21

26 REPORT OF THE INDEPENDENT AUDITORS TO THE TRUSTEES OF THE HERMES GROUP PENSION SCHEME We have audited the financial statements of the scheme for the year ended 31 December 2002 which comprise the fund account, net assets statement, the statement of change in market value of assets and the related notes 1 to 18. These financial statements have been prepared on the basis of the accounting policies set out therein. This report is made solely to the trustees, as a body, in accordance with regulations 3 and 4 of the Occupational Pension Schemes (Requirement to obtain Audited Accounts and a Statement from the Auditor) Regulations 1996 made under the Pensions Act Our audit and examination work has been undertaken so that we might state to the trustees those matters we are required to state to them in an auditors report and statement about contributions and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the trustees as a body for our audit and examination work, for this report and statement, or for the opinions we have formed. Respective responsibilities of Trustees and Auditors As described in the statement of trustees responsibilities, the scheme s trustees are responsible for obtaining audited financial statements which comply with applicable United Kingdom law and accounting standards and for making available certain other information about the scheme in the form of an annual report. They are also responsible for procuring that contributions are made to the scheme in accordance with the schedule of contributions certified by the actuary. Our responsibility is to audit the financial statements in accordance with United Kingdom legal and regulatory requirements and auditing standards. We report to you our opinion as to whether the financial statements show a true and fair view 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 1996 made under the Pensions Act We also provide a statement about contributions, in which we report to you our opinion as to whether contributions have been paid in accordance with the schedule of contributions certified by the actuary. We report to you if we have not received all the information and explanations that we require for our audit. We read the other information contained in the annual report for the above year as described in the contents section and consider whether it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Basis of audit opinion and statement about contributions We conducted our audit in accordance with United Kingdom auditing standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by or on behalf of the trustees in the preparation of the financial statements, and of whether the accounting policies are appropriate to the scheme s circumstances, consistently applied and adequately disclosed. Hermes Pensions Management Ltd D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc 22

27 We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of the information in the financial statements. Our work also included examination, on a test basis, of evidence relevant to the amounts of contributions payable to the scheme and the timing of those payments in order to provide us with reasonable assurance that contributions have been paid until 5 August 2002 in accordance with the schedule of contributions certified by the actuary on 30 November 2000 and from 6 August 2002 in accordance with the schedule of contributions certified by the actuary on 6 August Statement about contributions under the scheme In our opinion contributions payable to the scheme during the year ended 31 December 2002 have been paid in accordance with the schedules of contributions certified by the actuary as appropriate. Opinion In our opinion the financial statements show a true and fair view of the financial transactions of the scheme during the scheme year ended 31 December 2002, and of the amount and disposition at that date of the 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 1996 made under the Pensions Act Deloitte & Touche Chartered Accountants and Registered Auditors London Hermes Pensions Management Ltd D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc 23

28 FUND ACCOUNT FOR THE YEAR ENDED 31 DECEMBER NOTE 000'S 000'S CONTRIBUTIONS AND BENEFITS Contributions receivable 2 2, ,251.2 Benefits payable 3 (693.2) (559.5) NET ADDITIONS FROM DEALINGS WITH MEMBERS 2, RETURNS ON INVESTMENTS Investment income Change in market value of investments (5,996.9) (3,677.3) Interest on borrowings (0.6) (2.3) Management expenses 5 (193.7) (169.7) NET RETURNS ON INVESTMENTS (5,819.4) (3,513.1) NET DECREASE IN THE FUND DURING THE YEAR (3,801.5) (2,821.4) NET ASSETS OF THE SCHEME At start of year 29, ,596.7 At end of year 25, ,775.3 Hermes Pensions Management Ltd D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc 24

29 NET ASSETS STATEMENT AT 31 DECEMBER NOTE 000'S 000'S INVESTMENTS Pooled investment vehicle 6 20, ,773.9 UK equities 7 1, Overseas investments UK property unit trusts 2, ,385.1 UK index-linked investments UK fixed interest futures 9 (361.1) - Deposits and bank balances AVC funds , ,761.6 CURRENT ASSETS Debtors CURRENT LIABILITIES Creditors 13 (41.8) (31.5) NET CURRENT ASSETS NET ASSETS OF THE SCHEME AT 31 DECEMBER 18 25, ,775.3 C R GREEN Chairman C J SYMONDS Secretary Hermes Pensions Management Ltd D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc 25

30 CHANGE IN MARKET VALUE OF ASSETS FOR THE YEAR ENDED 31 DECEMBER 2002 NET MARKET INVESTMENT/ CHANGE IN MARKET VALUE (DIS- MARKET VALUE AT INVESTMENT) VALUE S 000 S 000 S 000 S Pooled investment vehicle 23, ,093.0 (5,751.3) 20,115.6 UK equities (138.0) 1,017.1 Overseas investments (56.8) (121.9) UK property unit trusts 3,385.1 (453.9) ,995.5 UK index linked investments UK fixed interest futures - (350.5) (10.6) (361.1) Deposits and bank balances (72.6) AVC funds (8.4) Total investments 29, ,205.2 (5,996.9) 25,969.9 Net current assets 13.7 (9.8) , ,195.4 (5,996.9) 25,973.8 Note: The change in market value column comprises profits and losses on investments sold and increases and decreases in the market value of investments held at 31 December Net investment/(disinvestment) is made up as follows: NET INVESTMENT/ PURCHASE SALES (DIS- COSTS PROCEEDS INVESTMENT) 000s 000s 000s Pooled investment vehicle 2,701.0 (608.0) 2,093.0 UK equities Overseas investments (184.6) (56.8) UK property unit trusts - (453.9) (453.9) UK index linked investments (70.1) UK fixed interest futures - (350.5) (350.5) Deposits and bank balances AVC funds ,872.3 (1,667.1) 2,205.2 Note: Purchase costs and sales proceeds include the net increase or decrease in exposure to futures and option contracts. Hermes Pensions Management Ltd D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc 26

31 NOTES TO THE FINANCIAL STATEMENTS 1 ACCOUNTING POLICIES The 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 Pensions Schemes (Revised 2002). The financial statements summarise the transactions of the Scheme and deal with the net assets at the disposal of the Trustees. They do not take account of obligations to pay pensions and benefits which fall due after the end of the Scheme year. The actuarial position of the Scheme, which does take account of such obligations, is dealt with in the statement by the Actuary on pages 15 to 16 of the annual report and these financial statements should be read in conjunction with it. (a) (b) (c) (d) (e) (f) BASIS OF ACCOUNTING. The accounts state the assets at market value. The long-term financial position of the Scheme, including liabilities for pensions and other benefits which are expected to arise in the future and which are not reflected in the accounts, is referred to in the Actuary's Statement on pages 15 to 16. CONTRIBUTIONS AND BENEFITS. Contributions and benefits in payment are accounted for on an accruals basis. INVESTMENT INCOME. Income from fixed interest and index linked securities and bank deposits is taken into account on an accruals basis. Income from all other marketable securities is taken into account on the date when stocks are quoted ex-dividend. REALISED GAINS AND LOSSES ON SALES OF INVESTMENTS. Realised gains and losses on sales of listed securities are calculated by reference to the average cost of holdings at the date of sale. FOREIGN CURRENCIES. Assets and liabilities in foreign currencies are translated into sterling at the rates ruling at the year-end. Income is converted into sterling when received. MARKET VALUE OF SECURITIES. Securities listed on recognised stock exchanges are valued at middle market prices at the year-end. Unit trusts are valued at the average of the unit bid and offer prices at the year-end. Unlisted securities are valued by the Scheme s investment managers using published prices where available, or at cost less any necessary provisions. (g) (h) STOCK INDEX AND BOND FUTURE CONTRACTS. These are valued at market prices at the year-end and have been reflected in the accounts on a full economic exposure basis. All gains and losses on open contracts are treated as unrealised. POOLED INVESTMENT VEHICLES. These are included at premium value at the year-end as determined by the Insurance Company. Hermes Pensions Management Ltd D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc 27

32 NOTES TO THE ACCOUNTS (continued) 2 CONTRIBUTIONS RECEIVABLE An actuarial valuation of the Scheme was carried out by the Actuary, Mrs J E Dingle of Watson Wyatt Partners, as at 31 December 1999, after which the employer s contributions continued to be suspended to 30 June Employer contributions then recommenced at a rate of 10.0% from 1 July 2001 to 31 December 2001, increasing to 15.0% from 1 January After a further actuarial valuation as at 31 December 2001 employers contributions increased to 18.5% from 1 August The Scheme has received contributions at that rate from 1 August 2002 to 31 December Members contributions remained at 5% throughout the year. A statement from the Actuary appears on pages 15 to S 000 S Employers Normal contributions 1, Special contributions Members Current service Added years Additional voluntary contributions (see Note 11) , ,174.1 Transfers in Individual transfers from other schemes , ,251.2 The special contribution in 2002 relates to a redundancy. In 2001 it was in respect of a director in recognition of his service to the Hermes Group. 3 BENEFITS PAYABLE S 000 S Benefits Pensions Commutation and lump sum retirement benefits Payments to and on account of leavers Transfer values, withdrawing members Refunds to members leaving service Hermes Pensions Management Ltd D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc 28

33 NOTES TO THE ACCOUNTS (continued) 4 INVESTMENT INCOME S 000 S UK equities Overseas investments UK property unit trusts UK index-linked securities Deposits and bank balances Income on UK equities and overseas investments includes interest on deposits and short-term investments held to meet the outstanding liabilities in respect of open stock index future contracts. Included within the above categories is income from cash backing futures as follows: S 000 S Dividends and interest received UK equities Overseas investments MANAGEMENT EXPENSES S 000 S Investment management fees Administration expenses Investment management fees are in respect of the Insurance Policy. All other investment management services are provided by the Hermes Group and have not been apportioned to the Scheme (Note 17). In accordance with the Trust Deed the expenses of administering the Scheme are borne by the Scheme. Management expenses include fees for audit services of 5,000 (2001: 4,500). Hermes Pensions Management Ltd D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc 29

34 NOTES TO THE ACCOUNTS (continued) 6 POOLED INVESTMENT VEHICLE This represents a long-term unitised insurance policy with Hermes Assured Limited (formerly Schroder Hermes). The value is determined by the performance of underlying indexed equity and bond funds. There is no commitment to pay future premiums. The investment represents 77.4% of the net assets of the Scheme (2001: 79.8%). 7 UK EQUITIES 'S 000'S Unlisted equities FTSE 100 index future contracts 1, , OVERSEAS INVESTMENTS 'S 000'S Emerging Markets Fund (Unit Trust) Overseas stock index future contracts - (53.6) UK FIXED INTEREST FUTURES UK fixed interest futures represent futures contracts sold for which there are no matching physical assets. 10 DEPOSITS AND BANK BALANCES 'S 000'S Interest-earning deposits Sterling Currency , Cash backing open stock index and fixed interest futures (712.3) (312.1) Hermes Pensions Management Ltd D:\Program Files\Microsoft FrontPage\temp\HGPS RA2002.doc 30