NORTHERN FOODS PENSION SCHEME. Annual Report. For the year ended 31 March 2009

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1 Scheme Registration No Annual Report For the year ended 31 March

2 ANNUAL REPORT CONTENTS Page Trustee and its advisors 1 Trustee's report 3 Statement of Trustee's responsibilities 8 Independent auditors' report 9 Fund account 10 Net assets statement 11 Notes to the financial statements 12 Actuarial certificate 19 Independent auditors' statement about contributions 20 Summary of contributions 21 Where to go for help 22

3 ANNUAL REPORT TRUSTEE AND ITS ADVISORS TRUSTEE Northern Foods Trustees Limited, the directors of which are: R F Boyes (Independent Chairman) L Andrews * S Imeson I F Jackson S M Kennedy * C S Morecroft V Patel A C Wadley * *Indicates Member-Nominated Director Indicates Member of the Investment Committee SECRETARY TO THE TRUSTEE L Hall SCHEME ADMINISTRATOR P I Croskin, Northern Foods plc SCHEME ACTUARY R Mellor FIA, Hewitt Associates Limited INVESTMENT ADVISORS Watson Wyatt Limited SOLICITORS Linklaters LLP INVESTMENT MANAGERS Legal & General Investment Management BlackRock Pensions Fortress Credit Opportunities Fund (C) LP (appointed 29 April ) Lehman Brothers Real Estate Partners 111 LP (appointed 22 May ) DGAM Unique Strategies Fund (appointed 12 June ) Alinda Infrastructure Parallel Fund 11 LP (appointed 07 July ) Carnegie Worldwide Sub-Fund (appointed 25 July ) UOB Kinetics Paradigm Fund Class D (appointed 23 July ) Edinburgh Partners Opportunities Fund plc (appointed 15 July ) Cerberus Institutional Partners International LP (appointed 10 October ) Insight Investment Management (Global) Ltd (appointed 01 October ) SouthEastern Asset Management Inc (appointed 23 July ) American Securities Partners V LP (appointed 28 July ) M&G European Loan Fund (appointed 21 October ) 1

4 ANNUAL REPORT TRUSTEE AND ITS ADVISORS (continued) INVESTMENT MANAGERS (CONTINUED) Goldman Sachs Vintage Fund V Offshore LP (appointed 14 November ) Ares Institutional Offshore Loan Fund BV (appointed 12 December ) HgCapital 6 C LP (appointed 29 December ) Plainfield Special Situations Offshore Feeder Fund 11 Limited (appointed 14 January ) TRANSITION MANAGER State Street Bank Europe Limited (appointed 24 June ) AVC INVESTMENT MANAGERS The Equitable Life Assurance Society Clerical Medical CUSTODIAN BANKERS Bank of New York Limited HSBC Bank plc Bank of New York Limited PRINCIPAL EMPLOYER AUDITORS Northern Foods plc 2180 Century Way Thorpe Park Leeds LS15 8ZB Deloitte LLP (formerly named Deloitte & Touche LLP) 2

5 TRUSTEE S REPORT INTRODUCTION The Trustee is pleased to present its report and the audited financial statements of the Northern Foods Pension Scheme (the "Scheme") for the year ended 31 March, together with the statement and certificate of the actuary. The Scheme provides defined benefit pension and/or lump sum benefits to members and their dependants on retirement and/or death. The Scheme was closed to new members on 22 March LEGAL STATUS The Scheme is governed by a Deed and Rules dated 30 March which amended the previous rules to document the Scheme changes made with effect from 01 April. The Scheme started on 31 March Members of the Scheme are contracted out of the State Second Pension using the Reference Scheme Test. Exempt approval was previously granted by the Inland Revenue for the purpose of Part XIV of Chapter I of the Income and Corporation Taxes Act 1988 and the Scheme is now registered under the Finance Act TRUSTEE AND TRUSTEE DIRECTORS The power of appointment of a new Trustee or Trustees and the power of removal of one or more Trustees is vested in Northern Foods plc. Directors of the Trustee are appointed by resolution of the existing board of directors. The Member-Nominated Directors of the Trustee are elected under the rules notified to the members and serve for four years or until they cease to be an active member of the Scheme. As at 31 March, the Trustee of the Scheme, and its directors, was as detailed on page 1. MANAGEMENT AND ADVISORS The management and advisors to the Scheme during the year are shown on pages 1 and 2 of this report. CONTRIBUTIONS RECEIVABLE There were no special lump sum contributions during the year. 3

6 TRUSTEE S REPORT (continued) MEMBERSHIP ANALYSIS Details of the current membership numbers of the Scheme are as follows: Number Active members from the previous Trustee s Report 2,771 Retrospective movements (9) Active members as at 01 April 2,762 Transfers out (1) Transfers to deferreds (253) Members retiring (102) Deaths (5) Active members as at 31 March 2,401 Deferred members from the previous Trustee s Report 9,949 Retrospective movements (3) Deferred members as at 01 April 9,946 Transfers from active status 253 Fully commuted pensions and transfers out (49) Members retiring (266) Deaths (4) Deferred members as at 31 March 9,880 Member pensioners from the previous Trustee s Report 6,636 Retrospective movements (3) Member pensioners as at 01 April 6,633 Active members retiring 102 Deferred members retiring 266 Deaths (134) Member pensioners as at 31 March 6,867 Dependant pensioners from the previous Trustee s Report 971 Retrospective movements 5 Dependant pensioners as at 01 April 976 New dependants 80 Deaths (24) Dependant pensioners as at 31 March 1,032 Retrospective adjustments are due to delays in receipt of membership movements by the pensions department in time to process the year end cut-off. Some members of the defined benefit scheme also have investments in defined contributions schemes with Clerical Medical, Equitable Life or BlackRock Pensions either through a bulk transfer in when their previous employer s business was acquired by Northern Foods or by an individual decision to make additional voluntary contributions in addition to their contributions to the Northern Foods pension scheme. 4

7 TRUSTEE S REPORT (continued) INTERNAL DISPUTES RESOLUTION The Pensions Act 1995 requires the Trustee to establish a formal complaints procedure. The Trustee has put such a procedure in place and this is set out in the explanatory booklet dated April 1997, given to all Scheme members. PENSION INCREASES Under the Rules pensions in payment are guaranteed to increase by inflation up to a maximum of 3% per annum (or up to a maximum of 5% for pensionable service between April 1997 and 1 September 2005). Discretionary increases may also be given by the Trustee. On 1 April pensions in payment were increased by 0.1% (: 3.0%) in accordance with the Scheme rules. TRANSFER VALUE PAYMENTS All transfer value payments during the year were calculated in accordance with the statutory cash equivalent requirements in accordance with the Pension Schemes Act No discretionary benefits were included in the calculation of transfer values. FINANCIAL DEVELOPMENT OF THE SCHEME The financial statements of the Scheme for the year ended 31 March, as set out on pages 10 to 18, have been prepared and audited in accordance with Sections 41(1) and (6) of the Pensions Act A summary of the Scheme s financial statements is set out below. Contributions from members and from the company on behalf of members, AVCs made by members and transfer values received during the year amounted to 9,640 Benefits paid, transfer values and administrative expenses (37,520) Net withdrawals from dealings with members (27,880) The value of the net assets of the Scheme at the beginning of the year was 793,471 Investment income net of investment managers expenses 10,003 The decrease in the market value of the investments of the Scheme was (136,916) The value of the net assets of the Scheme at the end of the year was therefore 638,678 ACTUARIAL POSITION The financial statements set out on pages 10 to 18 do not take into account the liabilities to provide pension benefits which fall due after the year end. In respect of these liabilities the Scheme actuary carries out an actuarial valuation every three years. This valuation considers the funding position and the level of contribution payable. A full actuarial valuation of the Scheme was carried out by Robert Mellor of Hewitt Associates Limited as at 31 March. The valuation showed the Scheme has a shortfall of 75m having valued the liabilities (technical provisions) as 849m with assets of 774m. Following the valuation the Trustee and the company agreed a recovery plan with the intention of removing the shortfall in eight years from the valuation date by the expected out performance of the Scheme s assets above the discount rate over the agreed deficit recovery period. The formal actuarial statement accompanying the valuation report is set out on page 21, in accordance with the disclosure requirements. The formal actuarial certificate certifying the adequacy of the contributions for meeting the minimum funding requirements (MFR) is set out on page 21. The next full valuation of the Scheme is being carried out as at 31 March

8 TRUSTEE S REPORT (continued) INVESTMENT POLICY Over the last two years the Trustee has implemented a new investment strategy following advice from Watson Wyatt Limited with the intention of reducing investment risk under the portfolio by diversifying the asset classes held and through the use of derivative contracts to protect against changes in inflation and interest rate movements. The new investment strategy includes the allocation of around 70% of the Scheme s assets into return seeking investments spreading the investment risk between equities, credit and liquidity and by using active managers to add value to the overall strategy. The new investment classes include Long Term Long Only Equities Hedge Funds Private Equity Property Infrastructure Leveraged Loans Emerging market investments Commodities The balance of the fund s investments at 31 March were held in corporate bonds, index linked gilts and US Government treasury bills. STATEMENT OF INVESTMENT PRINCIPLES The Trustee has produced a Statement of Investment Principles as required under Section 35 of the Pensions Act 1995, amended to take account of the changes outlined above, and a copy is available on request. EMPLOYER RELATED INVESTMENTS There was no employer related investment at any time during the year. SAFE CUSTODY OF ASSETS To ensure the security of the Scheme's assets the Trustee gives particular attention to their safe custody and continuously reviews best practice. Efficiency of transaction settlement, income collection and tax recovery is monitored. The custodian supplies statements, reported on by their external auditors, concerning the operation of their internal controls. 6

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10 STATEMENT OF TRUSTEE S RESPONSIBILITIES FOR THE FINANCIAL STATEMENTS The financial statements are the responsibility of the Trustee. Pension scheme regulations require the Trustee to make available to Scheme members, beneficiaries and certain other parties, audited financial statements for each Scheme year 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 year of the assets and liabilities, other than liabilities to pay pensions and benefits after the end of the Scheme year, in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), 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 (Revised May 2007). The Trustee has supervised the preparation of the financial statements and has agreed suitable accounting policies, to be applied consistently, making any estimates and judgements on a prudent and reasonable basis. The Trustee is also responsible for making available certain other information about the Scheme in the form of an Annual Report. The Trustee is 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 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 Trustee is also responsible for keeping records in respect of contributions received in respect of any active member of the Scheme and for monitoring whether contributions are made to the Scheme by the employer in accordance with the schedule of contributions. Where breaches of the schedule occur, the Trustee is required by the Pensions Act 1995 and 2004 to consider making reports to the Pensions Regulator and the members. The Trustee also has a general responsibility for ensuring that adequate accounting records are kept and for taking such steps as are reasonably open to it to safeguard the assets of the Scheme and to prevent and detect fraud and other irregularities, including the maintenance of an appropriate system of internal control. 8

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12 FUND ACCOUNT Year ended 31 March Note Contributions and benefits Contributions 2 9,475 57,540 Transfers from other funds ,640 58,241 Benefits 4 (32,029) (31,118) Payments to and on account of leavers 5 (1,450) (3,477) Administration expenses 6 (4,041) (1,923) (37,520) (36,518) Net (withdrawals) /additions from dealings with members (27,880) 21,723 Returns on investments Investment income 7 12,014 3,403 Change in market value of investments 8 (136,916) (18,143) Investment management expenses 9 (2,011) (1,306) Net returns on investments (126,913) (16,046) Net (decrease) / increase in the funds during the year (154,793) 5,677 Balance of funds at the start of the year 793, ,794 Balance of funds at the end of the year 638, ,471 The notes on pages 12 to 18 form part of these financial statements. 10

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14 NOTES TO THE FINANCIAL STATEMENTS 1. ACCOUNTING POLICIES The principal accounting policies are summarised below. They have all been applied consistently throughout the year and the preceding year except where stated. Basis of preparation 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 guidelines set out in the Statement of Recommended Practice, Financial Reports of Pension Schemes (Revised May 2007), except that the Fund account has not been split between the Defined Benefit and Defined Contribution sections due to their relative sizes. Contributions receivable Employers and members contributions are accounted for on an accruals basis based on earnings in the year at rates agreed between the Trustee and the employer based on the recommendations of the actuary. Additional employer contributions are accounted for when received. Members additional voluntary contributions are accounted for on an accruals basis. Investment income Income from equities is included in the financial statements on the date when the securities are quoted ex-dividend. Income from other securities, cash deposits and unitised funds is included on an accruals basis. Individual transfers Individual transfers to and from the Scheme are accounted for when received or paid. Bulk transfers Bulk transfers to and from the Scheme during the year are included in the financial statements on an accruals basis. Estimates are based on the number of people who may transfer when the contract is signed. Benefits payable Benefits payable are included in the financial statements on an accruals basis. Investments Listed investments are valued at the closing or last traded price on the recognised stock exchange on which they are quoted depending on the relevant market convention. Unlisted investments are stated at the Trustee's estimate of market value. Managed funds are valued at the bid prices. Comparative values are at mid price and because the difference between mid and bid prices at 31 March is not material the comparative values have not been restated in accordance with the guidance in the Statement of Recommended Practice Financial Reports of Pension Schemes (Revised May 2007). Cash instruments, derivatives and property are valued at valuations advised by the investment managers. AVC investments are included at the year end values provided by the AVC investment managers. Group Transfer Plan investments relate to transfers in from other schemes and are included at the year end values provided by the Group Transfer Plan investment managers who are Clerical Medical and Equitable Life Assurance Society. The changes in investment market values are accounted for in the year in which they arise and include profits and losses on investments sold as well as unrealised gains and losses in the value of investments held at the year end. Foreign currencies Amounts denominated in foreign currencies at the year end are translated at the rate ruling at the year end. Differences on foreign currency transactions are shown in the fund account. Investment income denominated in foreign currencies is recorded at the rate of exchange on the date of receipt. Administrative expenses and investment management expenses Administrative expenses and investment management expenses are accounted for on an accruals basis. 12

15 NOTES TO THE FINANCIAL STATEMENTS 2. CONTRIBUTIONS RECEIVABLE Employers Normal 5,545 6,221 Special - 47,000 Members Normal 3,724 4,164 Additional Voluntary Contributions ,475 57,540 Contributions from members include 137,000 (: 157,000) and employers contributions include 409,000 (: 451,000) for the month of March. These were received by the Scheme on 18 April within the timescale required by the Pensions Act 1995 and the schedule of contributions. Members Additional Voluntary Contributions are invested with Clerical Medical or Equitable Life Assurance Society and are separate from the Scheme s other investments. The Contributions from the employers include lump sum contributions of 21,500,000 from Vision Capital Ltd in respect of the certified S75 debt relating to Fletchers Bakeries and additional contributions of 25,500,000 from Northern Foods plc. 3. TRANSFERS FROM OTHER FUNDS Individual transfers in from other schemes BENEFITS Pensions 25,122 23,574 Commuted pensions and lump sum retirement benefits 6,526 6,764 Death benefits ,029 31, LEAVERS Group transfers out to other schemes Individual transfers to other schemes 1,416 3,366 Refunds to members joining state scheme 8 63 Payments for members joining state scheme ,450 3,477 13

16 NOTES TO THE FINANCIAL STATEMENTS 6. ADMINISTRATION EXPENSES Fund administration costs Pension protection levies 1,935 - Actuarial fees Audit fee Legal and other professional fees 1,321 1,160 Medical fees 2 3 4,041 1, INVESTMENT INCOME Income from fixed interest securities 6,366 - Dividends from equities 2,163 2,470 Income from index linked securities Income from pooled investment vehicles 1, Interest on cash deposits Income from derivatives 827 Other investment income Total investment income 12,014 3, INVESTMENTS Market value at 1 April Purchases at cost and derivative payments Sales proceeds and derivative receipts Change in market value Market value at 31 March Fixed interest securities 603, ,215 (510,814) (53,985) 308,040 Equities 58,754 48,478 (72,132) (6,019) 29,081 Index-linked securities 96,682 88,808 (89,219) (3,404) 92,867 Pooled investment vehicles 26, ,061 (24,125) (9,927) 185,465 Derivative contracts - 72,506 - (66,429) 6,077 Properties - 9,280 (666) (1,334) 7,280 AVC investments 6, (551) (509) 5, , ,554 (697,507) (141,607) 634,114 Cash deposits 3,273 4,764 2,046 Other investment balances 388 (73) 2, ,335 (136,916) 639,100 There are no direct transaction costs. Indirect costs are incurred through the bid-offer spread on investments within pooled investment vehicles. The amount of indirect costs is not separately provided to the scheme. 14

17 NOTES TO THE FINANCIAL STATEMENTS 8. INVESTMENTS (continued) FIXED INTEREST SECURITIES UK corporate quoted 192, ,624 Overseas public sector quoted 57,860 - Overseas corporate quoted 57, , ,624 EQUITIES UK corporate quoted - 11,686 Overseas corporate quoted 29,081 47,068 29,081 58,754 INDEX LINKED SECURITIES UK corporate quoted 92,867 96,682 POOLED INVESTMENT VEHICLES Not designated to members sub-total Alliance Bernstein Equity managed funds - 11,437 Fortress Credit Opportunities 3,294 - DGAM 51,349 Carnegie 25,143 - UOB Kinetics 16,961 - Edinburgh Partners 26,405 - Cerberus 1,422 - Insight 11,999 - American Securities 1,293 - M&G European loans 9,434 - Goldman Sachs 5,485 - Ares 11,096 - Plainfield 8, ,006 11,437 Designated to members sub-total Clerical Medical 6,180 7,146 Equitable Life 5,606 5,720 BlackRock Pensions 1,673 2,153 13,459 15, ,465 26,456 15

18 NOTES TO THE FINANCIAL STATEMENTS 8. INVESTMENTS (continued) DERIVATIVE CONTRACTS Assets Swaps 89,931 - Forward currency hedging 4,889 94,820 - Liabilities Swaps (88,743) - The Trustees use derivatives to help remove the unrewarded inflationary interest rate risk from the portfolio INTEREST RATE SWAPS Asset Liability Expiration date less than 10 years 44,930 (44789) Expiration date 20 to 30 years 694 (725) Expiration date 30 to 40 years 1,078 (983) Expiration date 40 to 50 years 369 (430) INDEX LINKED SWAPS 47,071 (46,927) Asset Liability Expiration date less than 10 years 2,414 (2,879) Expiration date 10 to 20 years 6,986 (6,497) Expiration date 20 to 30 years 11,346 (11,274) Expiration date 30 to 40 years 14,745 (14,297) Expiration date 40 to 50 years 7,369 (6,869) 42,860 (41,816) FORWARD CURRENCY HEDGING Nominal Valuation Valuation 31 Mar 09 Asset US Dollars 178, ,363 4,542 Japanese Yen 5, Euro 12,985 12, The expiration date was 25 June 197, ,545 4,889 16

19 NOTES TO THE FINANCIAL STATEMENTS 8. INVESTMENTS (continued) PROPERTY Lehman Brothers 3,662 - Alinda 3,618-7,280 - The Scheme does not own individual properties but has a share in a portfolio of properties. The valuation represents the initial capital investment less distributions and any gains or losses. CASH Sterling 1,992 3,273 Foreign currencies 54-2,046 3,273 OTHER INVESTMENT BALANCES Unquoted investments Outstanding dividend entitlements 2, , The following investments represented more than 5% of the Scheme s net assets at 31 March % of net assets % of net assets Legal & General 152, , Alliance Bernstein , DGAM unique strategies fund 51, Insight investment management 210, US treasury bills 53, AVC INVESTMENTS The Trustee holds assets invested separately from the main fund in the form of insurance policies securing additional benefits on a money purchase basis for those members electing to pay additional voluntary contributions. Members participating in this arrangement each receive an annual statement made up to 31 March confirming the amounts held on their account and the movements in the year. The aggregate amounts of AVC investments are as follows: Clerical Medical 3,682 4,324 Equitable Life 1,622 1,834 5,304 6,158 17

20 NOTES TO THE FINANCIAL STATEMENTS 9. INVESTMENT MANAGEMENT EXPENSES Administration, management and custody 2,011 1, CURRENT ASSETS Contributions due Cash balances 81 - Sundry CURRENT LIABILITIES Unpaid benefits 813 1,813 Sundry expenses ,058 2, FINANCIAL COMMITMENTS There were no financial commitments as at 31 March (: Nil). 13. RELATED PARTY TRANSACTIONS During the period the Scheme had transactions with Northern Foods Pension Builder, a scheme which is controlled by Northern Foods Trustees Limited. There Scheme agreed to underwrite any death in service liability within Northern Foods Pension Builder for a premium of 58,696 (: 42,795). At the end of the period the amount due from Northern Foods Pension Builder was 4,974 (: 8,507) There were no other related party transactions requiring disclosure. 18

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25 WHERE TO GO FOR HELP If Scheme members have any queries concerning their benefits or other issues related to their membership they should contact the Scheme s Administrator by writing to him at Northern Foods Trustees Limited, Cavaghan & Gray, Brighton Street, Hessle Road, Hull. HU3 4UL. Information about the Scheme can also be obtained by visiting the Northern Foods Trustees website at nfpensions.co.uk. If a member has a complaint against the Scheme which has not been resolved to their satisfaction through the Scheme s dispute procedure, the Pensions Advisory Service (TPAS), may be able to offer advice. Pensions Advisory Service (TPAS) TPAS is an independent voluntary organisation with local advisers who are experts in pension matters. TPAS can be contacted through any local Citizens Advice Bureau or at the following address: TPAS Headquarters, 11 Belgrave Road, London, SW1V 1RB. Pensions Ombudsman If TPAS cannot resolve a complaint or dispute then the Pensions Ombudsman should be contacted at the same address as TPAS, shown previously. The Pensions Regulator Pension schemes are regulated by The Pensions Regulator, which has power to impose civil penalties and to bring criminal prosecutions for serious breaches of the Pensions Act 1995 s requirements. The Pensions Regulator can be contacted at the following address: The Pensions Regulator, Napier House, Trafalgar Place, Brighton BN1 4DW. The Pension Tracing Service Information about the Scheme (including a contact address) has been provided to the Pension Tracing Service as required by law. As the Pension Tracing Service holds the same information for other pension schemes it offers a service which enables members to trace benefits from previous employers schemes. The Pension Tracing Service can be contacted at the following address: The Pension Tracing Service, Tyneview Park, Whitley Road, Newcastle-upon-Tyne, NE98 1BA. 22