POPULAR REPORT Welcome. Benefit Statements. Closure of Delphi Plans. Company contributions. Plan Secretary. Financial overview.

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1 Welcome Benefit Statements Closure of Delphi Plans Company contributions Plan Secretary POPULAR REPORT 2011 For members of the DEOC Pension Plan Financial overview Pensions Board

2 Welcome Welcome to the popular version of the 2011 Annual Report and Accounts. We hope that you will find the information both helpful and interesting. In addition to the financial, investment and membership information, we have included details about the Company covenant, good news about being able to access your benefit statements online, an update on the closure of Delphi Plans and news of the appointment of a new Plan Secretary. The full report runs to many pages, but if you would like to see a printed copy, please contact the Pension Department at the address below: The Pension Department Griffin House Osborne Road Luton LU1 3YT or team@thepensiondepartment.co.uk More about the Plan, including the Member Booklet, can be found by visiting the pension website at 2

3 Benefit statements Members will know that many of our pension communications are already published on our website. Unfortunately, until now, we have had to send benefit statements by post. However, from this year onwards, the Trustee is pleased to announce that the annual benefit statement is available online. Naturally, this innovation will help cut our Pension Plan costs by saving on paper and postage. Receiving the benefit statement online allows members to: access the statement using a secure personal log-in revisit the statement at any time print a copy of the statement in future, access statements from previous years Members who want to receive their benefit statement by post can still do so by contacting the Pensions Department. Benefit statements can be viewed online now by following the link on the Trustee website at 3

4 Closure of Delphi Plans The Company and its Trade Unions met late in 2011 to discuss the Company s proposals on changes to the Pension Plan. The proposal was in two parts: closure of the Plan to all new starters an increase in member contributions: 1% in 2012 and 1% in 2013 (except for DEOC) A full member consultation followed, which included a ballot conducted by the Trade Unions. In the event, the ballot resulted in approximately 88% of members voting to accept the proposals. The Company therefore directed the Trustee to implement the changes. Following actuarial and legal advice, the changes were introduced by the Trustee as from 1 April Please note that new employees will not be left without the benefit of a pension scheme. A new arrangement of a different type has been introduced by the Company for new employees. 4

5 Company contributions The Trustee regularly monitors the Company covenant, seeking the input from specialist independent advisers when necessary. It was announced at the end of 2010 that manufacturing operations would cease in Kirkby but that DEOC would remain open as an Engineering Centre. This will lead to consequences for the covenant of the Company and the Trustee has been assessing this as part of the current valuation negotiations. It is also relevant that the Company paid 11.5m in advanced contributions in December 2011, which significantly improved the funding level. 5

6 Plan Secretary The Plan operates under the legal principles of trust law. A trust is essentially an arrangement by which assets are held by one party (the Trustee) for the benefit of others. The terms and rules of the trust are agreed between the Trustee and the Company and are set out in a formal deed. In our pension arrangement, the Trustee is a separate company, the directors of which are known as the Pensions Board. The Board is composed of both Member representatives and Company representatives. The Board appoints external advisers such as lawyers and actuaries and meets regularly to manage the Plan and for its day to day administration. The Plan Secretary organises Trustee meetings, sets the agendas, circulates meeting papers and prepares minutes. This function is provided by the Pension Department, which until recently was managed by Dave Mount. Dave retired recently, but the Trustee is fortunate to have Marion McDonald as his successor. Members may already know Marion as she has been with the Department for many years and is known for her in depth knowledge and experience of all things pensions. The Trustee welcomes Marion and congratulates her on her well deserved new role. 6

7 Financial overview Investment Spread of investments as at 31 December 2011: Matching portfolio - this consists of investments in nominal gilts, index-linked gilts and SWAPs in line with the liability hedging strategy. Equities - investments in company shares listed on the major stock exchanges of countries in Europe, Asia and America, and in some developing economies in Europe, Asia and South America. 9.7% : Investment Grade Corporate Bonds 6.3% : High Yield Corporate Bonds 6.2% : Emerging Market Bonds 27.4% : Developed Markets Equity 5.3% : Emerging Markets Equity 5.0% : Property 2.7% : Commodities 8.6% : Hedge Funds 28.8% : Matching Portfolio Property - a combination of UK investment properties including offices, shops and industrial units. The objective is to achieve income and capital returns. Alternative investments a range of different investments that seek to achieve consistently better returns regardless of how the markets move. The types of investments will vary for each market. Bonds - these are investments in loans issued by governments and companies around the world. Hedging - a process that removes the movements of foreign currencies when compared to Sterling. This reduces the volatility of overseas investments and ensures that the Plan receives the local market return. 7

8 Financial overview Membership numbers Total Plan membership decreased by 12 during the year, with the number of pensioners increasing by 14, active members falling by 22 and deferred members by four. As at December 2011: Income & expenditure Income 000 Company contributions 14,533 Employee contributions 40 AVC contributions 1,010 Other income 2 Total 15,585 Expenditure 000 Pensions 6,977 Lump sum commuted pension 469 Transfers out 69 Administration expenses 1, Total 8,871 Pensioners 1,141 1,127 Deferred members Active members Total 1,857 1,869

9 Financial overview 000 Fund value 1 January ,946 Net additions from dealing with members 6,714 Net returns on investments 2,144 Fund value 31 December ,804 9

10 Financial overview Investment overview The year 2011 was in many ways a year of two halves for investment markets. The first half went relatively well, driven by benign market sentiment and steadily improving economics. However, the second half took a turn for the worse, driven by two major themes: the escalating euro crisis and the realisation by the markets that recovery in economic growth was going to be a slower and more drawn out process than had been anticipated. Gilt yields fell very significantly over Q3 and Q4, driven by safe haven flows from the euro crisis, reducing growth expectations and the impact of a further round of quantitative easing. Long-dated inflation expectations did not reduce in line with the fall in interest rates, not helped by a run of high inflation prints through year. This led to very strong performance of in excess of 20% from the gilts held, but also a comparable increase in the value of UK pension schemes liabilities. Falling gilt yields in the second half also drove corporate bond yields down in the UK, more than offsetting the impact of increased risk aversion and concerns about the UK s dependence on Europe, which widened credit spreads. In the case of high yield corporate bonds, the credit-spread widening proved the stronger force, particularly so in Europe driven by liquidity issues and sovereign credit concerns in the Eurozone. The modest negative performance in emerging market debt was driven partly due to fears that price inflation in emerging markets was rising and might get out of control (though these fears receded in early 2012), but mainly due to the general flight to quality, particularly in Q3. The first half of 2011 saw steady progress in developed market economies, leading to reasonable equity returns. However, Q3 saw an increase in volatility and generally falling markets. By the year end, US equities had recovered on relatively positive economic news, the UK had nearly recovered, but Japan and Europe both ended the year significantly down due to the Fukushima disaster and the euro crisis, respectively. Emerging market equity also performed poorly in Q3, though this was less due to the fundamentals of these economies and more due to correlation with developed markets and the general flight to safety. Commodities were broadly flat over the year, due to a balance between the opposing forces of potential fall in demand from slowing developed market economies and concerns about the political situation in the Middle East. The selected hedge fund managers returned a positive performance, a relatively pleasing result in a year when most risk assets fell. The property portfolio also generated positive returns, despite the difficult economic environment. The Plan s performance DEOC Pension Plan 2011 % 3 yrs % pa 5 yrs % pa Plan return Benchmark

11 Pensions Board Employee Representatives I Gorry T Prout J Collins (resigned 31 January 2012) R Leigh (resigned 30 September 2011) Company Representatives G Rigby (Chairman) I Gaskell (Vice-Chairman) Ms S Locker (appointed 1 April 2012) J Burns (resigned 31 March 2012) D Kabluczenko (resigned 31 March 2012) Mrs L Kelly (resigned 31 March 2012) Ms L Sandford (resigned 31 March 2012) A Stoddart (resigned 31 March 2012) 11

12 Contact us The Pension Department Griffin House Osborne Road Luton LU1 3YT IMPORTANT Completion of a Nomination Form will greatly assist the Trustee in the payment of your lump sum benefit in the event that you die in service. Forms are available for download from the Pension Website at: