Alvis Pension Plan. Annual Review for Pensioners Welcome to the Trustee s 2016 Annual Review of the Alvis Pension Plan ( the Plan ).

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1 Alvis Pension Plan Annual Review for Pensioners 2016 Welcome to the Trustee s 2016 Annual Review of the Alvis Pension Plan ( the Plan ). In the following pages you can read a summary of the 2016 Report and Accounts and obtain an overview of the past year. As you may know there is an actuarial valuation of the Scheme every three years. The next valuation will be at 31 March Over the coming months, the Trustee and the Scheme Actuary will start preparations for the valuation. You can read more about this and the funding update at 31 March 2016 on pages 2 and 3. Following a review across all BAE Systems pension schemes, there has been a change to the Scheme auditor. We are delighted to announce that the auditing firm Grant Thornton UK LLP has been appointed to this role. Deloitte Total Reward and Benefits Ltd, the Scheme s investment adviser, provides an update on how well the Scheme s investments have been performing over the last year on pages 6 and 7. Charlie Blakemore Chairman of the Trustee

2 Funding update I have now been your Scheme Actuary for seven years and am still very much enjoying working with your Trustee, helping to look after your pensions. Economic conditions over that period have not been helpful for pension schemes in general and, in particular, the cost to Employers of providing pensions has risen. Recently this has been exacerbated by uncertainties following the UK s decision to leave the EU, so my priority is to help improve the scheme s resilience further given greater levels of market turbulence. In the year ahead, I ll be working with the Trustee to plan for the actuarial valuation at 31 March 2017 and engaging with the Company to ensure that the Scheme maintains appropriate long-term plans to deliver your pensions. Richard Shackleton Hymans Robertson LLP The Scheme Actuary prepares regular valuations and advises the Trustee on funding matters. The valuations provide an assessment of the funding position of the Scheme and help the Trustee and the Company to reach agreement on an appropriate Recovery Plan and contributions payable to the Scheme. Triennial Actuarial Valuation Every three years, our Scheme Actuary carries out a full actuarial valuation. This gives a snapshot of the Scheme s financial health. The next valuation is at 31 March 2017 and the Scheme Actuary will soon start preparations for this. A valuation is a complex process that will take about a year to complete. Its purpose is: > to work out how much money the Scheme needs to set aside to be able to pay the pensions that have already built up > to work out what level of contribution should be paid to cover the cost of pensions earned in the future > to form the basis of discussions between the Trustee and the Employers to agree a Recovery Plan (a funding strategy for making up any shortfall) if the Scheme s assets are not sufficient to cover the value of the pensions already built up To carry out these calculations, the Actuary uses detailed Scheme data along with a range of carefully considered assumptions, which include what allowance to make for future investment returns, future rates of inflation (which affect what level of pension increases are assumed) and how long current and future pensioners are likely to live. Every three years, our Scheme Actuary carries out a full actuarial valuation 2 Alvis Pension Scheme Annual Review for Pensioners 2016

3 What happened to the funding level in the year to March 2016? 31 March 2016 m 31 March 2015 m Assets* Amount needed to provide benefits Surplus/(shortfall) (78) (61) Funding level 79% 83% *These figures differ from the asset values shown on pages 4 and 7 as they exclude AVCs. In the year since 31 March 2015, the funding level has reduced as shown above. This is largely attributed to decreasing interest rates but has been partially offset by lower than expected inflation. The funding position fell further over the summer, particularly after the Brexit vote. The Trustees and the company are keeping this situation under review in the run-up to the 2017 actuarial valuation and we concluded that no further action is required at this time. The figures shown in the table above fulfil the statutory requirements to update members annually on the Scheme s financial health, which the regulations call a Summary Funding Statement. What would happen if the Scheme had to be wound up? Whilst there is no intention to wind up the Scheme, it is a requirement to provide members with the information on the Scheme s position if that were to be the case. At the time of the last actuarial valuation at 5 April 2014, the Scheme Actuary estimated the cost of securing all members benefits with an insurance company as at 5 April 2014 to be around 466m. Since the Scheme s assets were 274m, the shortfall was 192m. This is approximately the amount the Employers would need to pay into the Scheme if it had been wound up on 5 April In the event of the Scheme having to be wound up because the Employers became insolvent, and the Scheme having insufficient assets to provide a certain minimum level of benefits for members, compensation might be provided by the Pension Protection Fund (PPF). Further information and guidance is available on the PPF s website at: > Or you can write to: > PPF, Renaissance, 12 Dingwall Road, Croydon, Surrey, CR0 2NA We are also required to confirm to you that there have been no payments to the Employers out of Scheme funds during the year, except to reimburse administration and investment expenses, and the Pensions Regulator has not had to intervene in the running of the Scheme. Alvis Pension Scheme Annual Review for Pensioners

4 Money in and money out The table below is a summary of how the value of the Scheme s assets changed during the year ended 31 March Income and expenditure Year Ended 31 March 2016 m Fund at beginning of the year 309 Total Income 11 Total Outgoings (15) Excess of outgoings over income (4) Change in the market value of assets (4) Fund at the end of the year 301 Net Investments 301 Net Current Assets 0 Net assets of the Scheme at year end 301 These figures include AVC funds. Trustee Directors and Advisers The Scheme s Trustee Directors: Charlie Blakemore (Chairman) Richard Baker Philip Elkes* David Green *Member Nominated Director (MND) Peter Howland* Joseph Reed* Paul Rogers John Watts* The Scheme s Advisers: Actuary Richard Shackleton, Hymans Robertson LLP Auditor PricewaterhouseCoopers LLP (up to 04/02/2016) Grant Thornton UK LLP (appointed on 25/02/2016) Legal Advisers Squire Patton Boggs (UK) LLP Investment Consultant Deloitte Total Reward and Benefits Ltd For a copy of the full Annual Report and Accounts, please contact the Pensions Service Centre (see back cover) 4 Alvis Pension Scheme Annual Review for Pensioners 2016

5 Who s in the Scheme? At 31 March 2016 the Scheme had a total of 2,410 members. This total was made up as follows: Active Members 166 Deferred Members 798 Pensioners 1,446 Alvis Pension Scheme Annual Review for Pensioners

6 Investment update Alistair Sutherland of Deloitte Total Reward and Benefits Ltd, the Scheme s investment adviser, brings members up to date on the Scheme s investments during the last year. Investment background the year to 31 March 2016 Renewed concerns around the pace of UK and global economic growth and in particular concerns over faltering demand in China, resulted in UK equities suffering a negative return over the 12 months to 31 March 2016, with the FTSE All Share Index returning -3.9%. UK markets were also impacted by a number of economic events overseas. Global markets performed in line with the UK in local currency terms over the year but outperformed the UK in sterling terms. The FTSE All World Index returned -0.5% in sterling terms and -3.9% in local currency terms. UK nominal gilts (fixed-interest bonds issued by the UK Government) delivered positive returns over the year, with the All Stocks Gilts Index returning 3.2% and the Over 15 Year Gilts Index returning 4.0%. Corporate bonds in general delivered marginally positive returns due to the positive impact of coupon payments, although returns for longer dated issues were negative. The iboxx All Stocks Non Gilt Index returned 0.4% over the period. The pace of growth within the UK property market slowed somewhat during the past year, however was still strong for the year as a whole, with the IPD All Balanced Funds Index delivering a return of 10.6% over the year to 31 March On 23 June 2016, the UK electorate voted to exit the EU. The Trustee, with the help of its investment and other advisers, will be keeping abreast of the situation as it unfolds and take any action where it feels this is necessary. Investment strategy At a high level there have been no significant changes to the Scheme s investment strategy over the year, with the benchmark allocation of 15% to UK equities, 15% to global equities, 10% to UK property, 40% to corporate bonds and 20% to index-linked gilts remaining broadly unchanged. The Trustee continues to look for opportunities to de-risk where market conditions allow, however no such opportunities arose over the past year. 6 Alvis Pension Scheme Annual Review for Pensioners 2016

7 Investment performance The table below shows the performance of the Scheme to 31 March 2016 against its benchmark: 1 year 2015/16 % 3 years %pa Scheme Benchmark Over Performance Against the background described on page 6, the Scheme had a positive return over the year, with returns in bond markets managing to offset the negative equity returns. Overall the Scheme s investment strategy delivered a positive return of 1.4% over the period. Despite this, net cashflows out of the Scheme (to pay members benefits) meant that the Scheme s invested asset value fell by approximately 7m over the year. In terms of performance against the benchmark, it has been a positive year. The Scheme outperformed its benchmark by 0.4% over the year. This outperformance is mainly attributable to outperformance on the part of the BlackRock UK equity and BMO bond mandates, which outperformed by 0.4% and 0.2% respectively. Asset allocation detracted 0.3% from performance over the year, with bond returns being strong over a period where the Scheme s asset allocation was slightly underweight on bonds for much of the year. The Scheme also outperformed its benchmark over the three years to 31 March 2016 delivering a positive relative return of 1.1% p.a. Change in Scheme s invested asset value from the previous valuation 31 March 2016 m 31 March 2015 m Direct Investments Pooled Investment Vehicles Additional Voluntary Contributions (AVCs) Total The spread of net investments as at 31 March 2016 Asset Allocation 2016 % 2015 % UK & Overseas Equities Matching Assets Cash 1 1 UK Property 10 8 Total Alvis Pension Scheme Annual Review for Pensioners

8 More information Pensions Service Centre contact details We are here if you need to get in touch with us or if you ve got any questions and importantly, if you need to give us your updated contact details. You can contact us using the details below: > Freephone: > If calling from overseas: > If you want to write to us our address is: > Alvis Pension Scheme, Pensions Service Centre, PO Box 1194, Crawley, West Sussex, RH10 0FZ There is lots of information on the pensions website: For more information visit BAE Systems Pensions Website w: BAE SYSTEMS. All rights reserved. BAE SYSTEMS is a registered trade mark of BAE Systems plc TC2919d.123