The Royal Bank of Scotland Group Pension Fund Annual Report for the year ended 31 March Registration number

Transcription

1 The Royal Bank of Scotland Group Pension Fund Annual Report for the year ended 31 March Registration number

2 Table of contents CHAIRMAN S REPORT... 1 TRUSTEE, ADMINISTRATION AND ADVISERS... 2 REPORT OF THE TRUSTEE... 6 INVESTMENT REPORT ACTUARIAL CERTIFICATES AND CERTIFICATIONS INDEPENDENT AUDITOR S REPORT INDEPENDENT AUDITOR S STATEMENT ABOUT CONTRIBUTIONS SUMMARY OF CONTRIBUTIONS CONSOLIDATED FUND ACCOUNT CONSOLIDATED NET ASSET STATEMENT NOTES TO THE FINANCIAL STATEMENTS... 27

3 Chairman s Report I am pleased to present the Annual Report for The Royal Bank of Scotland Group Pension Fund (The Fund) for the year ended 31 March. The Fund is one of the largest pension schemes in the UK and the Trustee Board keeps the financial health of the Fund under constant review. I am pleased to report that the value of the net assets increased during the year by 0.5 billion to 26.2 billion at 31 March. We continue to work effectively with the Principal Employer as scheme sponsor to review the funding strategy for the Fund. The Trustee has also kept under review relevant legal and regulatory developments affecting the Fund. During the year the Trustee has engaged with The Bank as Principal Employer and Her Majesty s Treasury in respect of the implications for the Fund, and the action required, of the Banking Reform Act and the European Resolution and Recovery Directive. Board and Committee meetings The Trustee Board met four times during the period. In addition the Board and Funding and Monitoring Committee met representatives of the Group on a number of occasions to discuss the actuarial valuation as at 31 March and the funding strategy of the Fund. There were also regular scheduled meetings of the Trustee Board s Administration and Benefits Committee, Funding and Monitoring Committee, Risk and Audit Committee and Investment Committee, together with a number of additional meetings as required. Changes to the Board There are several changes to the Trustee Board to report. Peter Easton, Graham Halstead and Colin Wilson all resigned on 25 March having completed their terms of office as member-nominated Trustee Directors I would like to thank Peter, Graham and Colin for their valuable contributions during their terms of office. We noted with sadness the death, following a lengthy illness, of Peter Boyd in October. Peter was a valued member of The Board and made a substantial and important contribution to the governance of the Fund. Our condolences go to his family and friends. Following the member-nominated Trustee Director elections in January, the Board welcomed Stephen Fallowell, Malcolm Groves, Marie Kiernan and Ian Purves as new member-nominated Trustee Directors. Finally, I would like to thank my fellow Trustee Directors and our internal and external advisors for their commitment and support throughout the year. Miller McLean Chairman RBS Pension Trustee Limited 27 June The Royal Bank of Scotland Group Pension Fund Page 1

4 Trustee, Administration and Advisers Principal Employer Corporate Trustee Trustee Directors Secretary to the Trustee Scheme Actuary National Westminster Bank plc RBS Pension Trustee Limited 1 Princes Street London EC2R 8PB Company registration number Miller McLean * ~ (Chairman) Peter Boyd # ~ Ronald Bowie ~ ^ Stephen Boyle*# Fiona Davis * # ^ Peter Easton # ^ Stephen Fallowell # ^ George Graham * ^ Malcolm Groves* Graham Halstead # Marie Kiernan # Ian Purves * ~ Colin Wilson*~ Donald Workman* ~ (Deputy Chairman) Bank appointed Trustee Director Chairman of Investment Committee Chairman of Funding and Monitoring Committee Member nominated Trustee Director Deceased 17 October Independent Trustee Bank appointed Trustee Director Chairman of the Administration & Benefits Committee Bank appointed Trustee Director Chairman of the Risk and Audit Committee Member nominated Trustee Director Resigned 25 March Member nominated Trustee Director Appointed 25 March Bank appointed Trustee Director Member nominated Trustee Director Appointed 25 March Member nominated Trustee Director Resigned 25 March Member nominated Trustee Director Appointed 25 March Member nominated Trustee Director Appointed 25 March Member nominated Trustee Director Resigned 25 March Bank appointed Trustee Director * Member of the Investment Committee # Member of the Administration and Benefits Committee ~ Member of the Funding and Monitoring Committee ^ Member of the Risk and Audit Committee Wendy Tavendale Andy Cox FIA AonHewitt 10 Devonshire Square London EC2M 4YP The Royal Bank of Scotland Group Pension Fund Page 2

5 Trustee, Administration and Advisers Administrator Independent Auditor Legal Adviser Banker Consultants Investment Custodian Administration is carried out by Pension Services, a unit within HR People Services, The Royal Bank of Scotland Group plc. Any member who has questions about the Fund, their pension benefits or who would like more information should rbspensionplans@rbs.co.uk or contact: Pension Services The Royal Bank of Scotland Group plc Citylink House 4 Addiscombe Road Croydon CR9 5PB Deloitte LLP 19 Bedford Street Belfast BT2 7EJ Dentons UKMEA LLP One Fleet Place London EC4M 7WS National Westminster Bank plc City of London Office PO Box Princes Street London EC2R 8PA Investment RBS Investment Executive Limited 24/25 St Andrew Square Edinburgh EH2 1AF AonHewitt 10 Devonshire Square London EC2M 4YP Tax Deloitte LLP Hill House 1 Little New Street London EC4A 3TR Employer Covenant Penfida Limited 1 Carey Lane London EC2V 8AE Bank of New York Mellon One Canada Square London E14 5AL The Royal Bank of Scotland Group Pension Fund Page 3

6 Trustee, Administration and Advisers Investment Managers Listed below are all the organisations who acted as an investment manager for part or all of the year covered by this Annual Report. Further details regarding the investment strategy are included in the Investment Report. Main Fund Investment Managers Aalto Invest LLP * Altrinsic Global Advisors LLC AQR Capital Management, LLC Axa Real Estate Investment Managers SGP * Axiom International Investors LLC Baillie Gifford & Co Brevan Howard Asset Management LLP Bridgewater Associates LP Brockton Capital LLP Brookfield Holding Canada Inc. * Cantab Capital Partners COMAC Global Macro Fund Limited Comgest Asset Management International Limited DSM Capital Partners LLC Epoch Investment Partners Inc Genesis Asset Mangers LLP Global Thematic Partners, LLC ( GTP ) * GMO UK Limited Gramercy Advisors LLC Fore Research & Management, LP * Fulcrum Asset Management Limited * Hastings Funds Management (UK) Limited Hermes Investment Limited JP Morgan Chase and Co LaSalle Investment Management Ltd Leadenhall Capital Partners LLP Legal & General Assurance (Pensions Management) Limited Lindsell Train Ltd Lothbury Investment Management Limited M&G Investment Management Limited MFS International (UK) Limited Millburn Ridgefield Corp. MKP Capital Management LLC Navis LLC Nephila Capital Ltd New Forests Asset Management Pty Ltd * Och Ziff Capital Management Group LLC Oldfield Partners LLP Old Mutual Global Investors (UK) Limited * Orion Capital Managers LP Partners Group (UK) Ltd Pathway Capital Management LLC PIMCO Europe Limited Pramerica Investment Management Prologue Capital LLP * Pzena Investment Management LLC Rogge Global Partners Sankaty Advisors LLC Southeastern Asset Management Inc Standard Life Investments Limited Tufton Oceanic Limited * Veritas Asset Management (UK) Limited The Royal Bank of Scotland Group Pension Fund Page 4

7 Trustee, Administration and Advisers Investment Managers (continued) Derivatives Clearing Brokers RBS AA Investment Managers Aviva Investors Global Services Limited Capital International Limited# Gramercy Advisors LLC * JP Morgan Alternative Asset Management Legal & General Assurance (Pensions Management) Limited MFS International (UK) Limited Nephila Capital Ltd New Forests Asset Management Pty Ltd * * appointed during the year # removed during the year J.P. Morgan Securities plc HSBC Bank plc The Royal Bank of Scotland Group Pension Fund Page 5

8 Report of the Trustee Introduction The Directors of RBS Pension Trustee Limited (the Trustee) have pleasure in submitting the report of The Royal Bank of Scotland Group Pension Fund (the Fund) which covers the year ended 31 March. The purpose of the report is to describe how the Fund has been managed during the year and to advise members of any significant changes that have been introduced during the year. Following the merger of the final salary section of the RBS AA Pension Scheme with the Fund on 31 March 2012 a new section was created within the Fund known as the ''RBS AA. This section is financially separate from the remainder of the Fund and is referred to separately, where appropriate, throughout this report. Constitution and Management of the Fund The Trustee Board has four standing committees: the Investment Committee, the Administration and Benefits Committee, the Funding and Monitoring Committee and the Risk and Audit Committee. Operating within Terms of Reference agreed by the Trustee Board, the Investment Committee meets regularly with the Fund s advisers to monitor performance of the Fund s investments and to make recommendations to the Trustee Board on investment strategy. The Investment Committee and Trustee Board are supported in their oversight of the investments by RBS Investment Executive Limited and other advisors. The Trustee Board has delegated certain responsibilities for the management if the Fund s investments to the RBS Investment Executive Limited. The Committee met four times during the period. The Administration and Benefits Committee meets regularly with the Fund s advisors, including its legal adviser, Dentons UKMEA LLP. The Committee is responsible for considering changes to the Fund s Rules as they affect benefits and exercising the Trustee s discretion in connection with the payment of benefits. Other responsibilities include monitoring the administration of the Fund and communication to members of the Fund. The Committee held four scheduled meetings during the period. In addition, six meetings were held by means of audio or to consider a number of time critical matters. The Funding and Monitoring Committee considers all aspects of the funding and covenant monitoring of the Fund, particularly the formal actuarial valuation. Between formal actuarial valuations, the Committee monitors the funding position of the Fund and reviews the financial covenant of the employers. The Committee is supported in this role by Penfida Limited as advisors on Employer Covenant. The Committee met ten times during the year. The Risk and Audit Committee is responsible for all aspects of financial and risk management of the Fund, including reviewing the Annual Report and Letter of Representation before presentation to the Trustee Board for approval. The Committee oversees the budgetary process and the Fund s system of financial authorities. The Committee is also responsible for establishing the Fund s risk appetite and reviewing the risk register. The Committee met five times during the year. The power to appoint or remove the Trustee of the Fund rests with National Westminster Bank plc. The power of appointing and removing Trustee Directors is contained in the Articles of Association of RBS Pension Trustee Limited. Six directors are appointed by The Royal Bank of Scotland Group plc and four directors are selected by and from the membership of the schemes of which RBS Pension Trustee Limited is the Trustee. The Trustee Board concluded the process of appointing new Member Nominated Directors (MNDs) in February. For the first time, the process was a two stage one, where member nominations were followed by a selection procedure and then an election where all members were eligible to vote. It was also agreed that MNDs will serve either a four or six year term of office to avoid large changes to the Trustee Board due to coterminous terms of office. The members of the Fund have been contracted out on the Reference Scheme Test basis from the State Second Pension (S2P) since 1 April The Royal Bank of Scotland Group Pension Fund Page 6

9 Report of the Trustee Tax Status The Fund was approved by the Commissioners of the Inland Revenue as a retirement benefits scheme for the purposes of Chapter I, Part XIV, of the Income and Corporation Taxes Act 1988 and is treated as an exempt approved scheme for the purposes of the Act. The Fund was registered under the Finance Act Trustee Training During the year, training sessions were held for Trustee Directors covering a number of areas including the Banking Reform Bill, actuarial valuations, the implications of Scottish independence and recent legal and regulatory developments. These training sessions were facilitated by RBS Investment Executive Limited. In addition, an Investment Conference for Trustee Directors took place on 24 and 25 April when the Trustee Directors reviewed three year investment performance and received a number of presentations from fund managers on the investments the Fund has made. Financial Review The Financial Statements set out on pages 25 to 43 provide an overview of the income, expenditure and net assets of the Fund. The Financial Statements have been prepared and audited in accordance with the regulations made under sections 41(1) and (6) of the Pensions Act During the year under review the net assets of the Fund increased from 25.7bn to 26.2bn. The Fund received contributions of 648m (: 820m), paid benefits of 829m (: 813m), administrative expenses of 29m (: 23m) and achieved net returns on investments of 672m (: 2,962m). Ownership of the Royal Bank of Scotland Group plc The Principal Employer, National Westminster Bank plc, is a wholly-owned subsidiary of The Royal Bank of Scotland plc, which is in turn wholly owned by The Royal Bank of Scotland Group plc. As at 31 March, HM Treasury owns 63.52% of the ordinary shares of The Royal Bank of Scotland Group plc. Due to the issue of 51 billion B Shares to HM Treasury in December 2009, HM Treasury s economic interest is 79.92%. Additional Member Contributions Arrangements for members to contribute to secure additional benefits in the Fund were revised from October A range of investment options are available covering UK and international equities, fixed-interest and index-linked bonds, cash and property. The Trustee Board agreed to participate in a common investment fund jointly with other pension schemes of the RBS Group. The investment options referred to above are provided by The Royal Bank of Scotland Group Common Investment Fund. Two of the Fund s Trustee Directors are Trustee Directors of the Common Investment Fund. The Trustee Board retains overall responsibility for the investment options made available to members and could at any time withdraw funds from the Common Investment Fund. The facility for members to pay contributions is now only available through the Bank s flexible benefit choice programme, RBSelect. From April members are able to start, stop or change their contributions on a monthly basis. The Royal Bank of Scotland Group Pension Fund Page 7

10 Report of the Trustee Statement of Funding Principles The Trustee has prepared Statements of Funding Principles (SFP) for the Main Fund and the RBS AA respectively. These statements set out the Trustee s policy for securing that the Statutory Funding Objective is met. The Statutory Funding Objective is defined in section 222 of the Pensions Act 2004, which states that every scheme must have sufficient and appropriate assets to cover its Technical Provisions. Further Information about the funding of the Fund is set out on pages 8 and 9, and pages 18 to 21. Copies of the SFPs are available from the Fund s administrator, Pension Services, at the address on page 3. Actuarial Certificate and Certification Main Fund The Actuarial Certificate in respect of the Main Fund 's Technical Provisions is included on page 18. The Actuarial Certificate in respect of the adequacy of contribution rates to meet the Statutory Funding Objective for the Main Fund is included on page 19. The Main Fund 's most recent actuarial valuation was completed as at 31 March. This actuarial valuation showed that the funding level was 81% as at 31 March, and the corresponding size of the funding shortfall of the assets relative to the liabilities was 5,652 million. To address the shortfall of 5,652 million, the Bank has agreed to pay the following lump sum cash contributions into the Main Fund. Year Amount Payment Due Date million March June September March March March * 31 March * 31 March * 31 March * 31 March * 31 March * 31 March Increased from 450M by the increase in Retail Prices Index for the twelve months ending 31 January 2017, subject to a minimum increase of 0%. * Increased from the contribution paid in the previous year by the increase in Retail Prices Index for the twelve months ending 31 January immediately preceding the date of payment, subject to a minimum increase of 0%. The Royal Bank of Scotland Group Pension Fund Page 8

11 Report of the Trustee Actuarial Certificate and Certification (continued) If experience from 31 March is line with the assumptions adopted for the actuarial valuation, these contributions together with investment returns are expected to remove the shortfall by 31 March The Trustee and the Bank have agreed that the Bank will pay contributions to meet administration expenses and the cost of future benefits being earned by active members at the following rates: For members accruing service in the Retiring Age 65 Schedule, 23.9% of members' basic salaries less any member contributions payable For all other active members, 31.1% of members' basic salaries less any member contributions payable Since 31 March experience has been more favourable than assumed, and there has been a rise in the funding level and an equivalent reduction in the shortfall. The Actuary's latest update for the Main Fund showed that the funding level was 86% as at 31 March. RBS AA The Actuarial Certificate in respect of the RBS AA 's Technical Provisions is included on page 20. The Actuarial Certificate in respect of the adequacy of contribution rates to meet the Statutory Funding Objective for the RBS AA is included on page 21. The RBS AA 's most recent actuarial valuation was completed as at 31 March. The actuarial valuation showed that the funding level of the RBS AA was 98% as at 31 March, and the corresponding size of the funding shortfall of the assets relative to the liabilities was 15.4 million. To address the funding shortfall of 15.4 million, the Bank has agreed to pay lump sum cash contributions of 5.2 million per annum in quarterly instalments until 31 March If experience from 31 March is in line with the assumptions adopted for the actuarial valuation, these contributions together with expected investment returns are expected to remove the funding shortfall by 31 March The Trustee and the Bank have agreed that the Bank will pay contributions to meet the cost of future benefits being earned by active members at the following rates: At least 32.6% of pensionable salary for employees who are active members of the RBS AA : Retiring Age 65 Schedule (Schedule 1B) At least 42.1% of pensionable salary for other active members (Schedule 1A) Since 31 March experience has been more favourable than assumed, and there has been a rise in the funding level such that the RBS AA has moved into a surplus. The Actuary's latest update for the RBS AA showed that the funding level was 104% as at 31 March. Transfer Values Cash equivalents and other individual transfer payments made during the year were calculated and verified on the basis recommended by the Scheme Actuary and in accordance with Regulations under the Pension Schemes Act No cash equivalents, guaranteed cash equivalents or transfer payments were paid on a reduced basis during the year. In calculating transfer values, the Trustee Directors included an allowance for discretionary benefits that may be awarded in respect of discretionary increases to pensions in payment and deferment, on a basis recommended by the Scheme Actuary. The Royal Bank of Scotland Group Pension Fund Page 9

12 Report of the Trustee Pension Increases Once in payment, most pensions in excess of the Guaranteed Minimum Pension (GMP) are guaranteed to increase annually by the lesser of 5% and the change in the UK Retail Prices Index for the twelve months to the preceding January. There are some exceptions, mainly former members of The Royal Bank of Scotland Staff Pension Scheme for whom the guaranteed increase in respect of their pension for service prior to 6 April 1997 is the lesser of 3% and the change in the UK Retail Prices Index for the twelve months to the preceding January. There is also a legal requirement to increase GMPs earned as a consequence of being contracted out of the State Second Pension (S2P) between 6 April 1988 and 5 April 1997, by the lesser of 3% and the increase in the UK Retail Prices Index during the twelve months to the preceding September. With effect from 1 April, GMPs in payment earned after 5 April 1988 were increased by 2.2% (2012: 3.0%) and most pensions other than GMPs in payment were awarded the guaranteed increase of 3.3% (2012: 3.9%). For former members of The Royal Bank of Scotland Staff Pension Scheme the increase in respect of their pension for service prior to 6 April 1997 was 3.3%. Different increases applied in some cases where members retired overseas or where members had service in old schemes with historically different pension increase arrangements. Deferred pensions accrued prior to 1 January 1985 by members who left service prior to 1 January 1991 are increased before the attainment of normal retiring age on a discretionary basis, with the exception of some members whose service was entirely with schemes with historically different practices which have now been merged into the Fund. The award at 1 April was 2.6% (2012: 3.0%). For service accrued after 1 January 1985 or by members who left service after 31 December 1990, deferred pensions were increased in accordance with current legislation. Investments and Custodians Responsibility for the administration and management of the Fund s assets is vested in the Trustee who has responsibility for the overall investment policy of the Fund. The Trustee has established an Investment Committee with responsibility to oversee all aspects of the investment arrangements of the Fund. Day to day investment decisions are delegated to the Fund s investment managers under formal legal agreements between the Fund and each investment manager. In accordance with the Pensions Act 1995, subsequently amended by the Pensions Act 2004, the Trustee maintains a Statement of Investment Principles that describes the Fund's investment policy. The majority of the Fund s assets are held in custody by the Bank of New York Mellon. The investments are held in the name of BNY (OCS) Nominees Limited. The remaining investment assets are pooled funds and private market assets and these are held externally but are registered in the name of the Trustee. The Investment Report is included on pages 13 to 17 of this report. Controlling Interests in Subsidiaries During the year the Fund invested in three entities in which it subsequently held controlling interests as at 31 March. West Granite Homes invests in residential property in the US and is 99.9% owned by the Fund although the Fund has 100% of the voting rights. Albemarle Shipping Ltd invests in shipping assets and is 100% owned by the Fund. Phoenix Natural Gas is a Northern Irish Natural Gas Distributor and is 50% owned as part of a joint venture. West Granite Homes and Albemarle Shipping Ltd have been fully consolidated into the Financial Statements set out on pages 25 to 43. Phoenix Natural Gas has been consolidated into the financial statements using the Gross Equity Method of accounting in accordance with the applicable accounting treatment for joint ventures. The Royal Bank of Scotland Group Pension Fund Page 10

13 Report of the Trustee Responsible investment and corporate governance The Trustee believes that environmental, social, economic and governance performance are fundamental to a company s enduring success and therefore to its long-term financial returns. The Trustee also believes that the goal of any company should be to generate and deliver sustainable long-term financial value, which will be helped by having long-term owners to whom the company is accountable and by having owners that are clear about their expectations. The Trustee seeks to invest in companies which embrace these objectives and are able to demonstrate that they do so. It is the Trustee s policy to implement Responsible Ownership in its investment approach. The Trustee is a signatory to the UK Stewardship Code as a framework for its interaction with companies in which it invests, and as a framework for its expectations of how its investment management processes will take into consideration relevant environmental, social and governance issues. The Trustee acknowledges the role of the Fund as an asset owner under the Stewardship Code and therefore seeks to hold to account its fund managers and service providers in respect of their commitments to the Code. The Trustee has adopted the UN Global Compact Principles as a framework for its expectations as to the behaviours and approach of the Fund s underlying assets. In order to give effect to this policy, the Trustee has employed a recognised third party service provider, Hermes Equity Ownership Services Ltd ( EOS ) to assist in its implementation. There are three major elements to this: monitoring of Fund investments, engagement with investee companies as appropriate and also with regulators and standard-setters, and voting of Fund shares. The Trustee s high-level investment policies, including the policies on voting and engagement are set out in the Statement of Investment Principles. The Statement of Investment Principles, the Responsible Ownership Policy and the Annual Voting and Engagement Report are available online at Membership Statistics The following table shows the changes in the membership of the Fund during the year ended 31 March : At 31 March Changes in year At 31 March RBS Main Fund Active members 35,290 (3,005) 32,285 Deferred pensioners 122, ,435 Pensioner members 62,006 1,327 63, ,412 (1,359) 218,053 RBS AA Active members 62 (7) 55 Deferred pensioners 2,134 (52) 2,082 Pensioner members ,860 (26) 2,834 Total members 222,272 (1,385) 220,887 Active members are employees accruing benefits. Deferred pensioners are those who have left the Fund with preserved pensions. Pensioner members are all those (including dependants) in receipt of a pension. Registration All the relevant details of the Fund and the Trustee Directors have been passed to the Pension Tracing Service, The Pension Service, Tyneview Park, Whitley Road, Newcastle upon Tyne NE98 1BA, which may be able to help anyone trying to trace pension rights under a previous pension scheme. The Royal Bank of Scotland Group Pension Fund Page 11

14 Report of the Trustee Statement of the Trustee s Responsibilities The Financial Statements, which are prepared in accordance with UK Generally Accepted Accounting Practice, are the responsibility of the Trustee. Pension scheme regulations require the Trustee to make available to Fund Members, beneficiaries and certain other parties, audited Financial Statements for each Fund year which: show a true and fair view of the financial transactions of the Fund during the Fund 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 Fund 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, including a statement whether the Financial Statements have been prepared in accordance with the Statement of Recommended Practice "Financial Reports of Pension Schemes". The Trustee has supervised the preparation of the Financial Statements and has agreed suitable accounting policies, to be applied consistently, making any estimates and judgments on a prudent and reasonable basis. The Trustee is also responsible for making available certain other information about the Fund in the form of an Annual Report. The Trustee is responsible for the maintenance and integrity of the Fund s financial information available on the Bank s intranet website. 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 Fund by or on behalf of the employer and the active members of the Fund 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 Fund and for monitoring whether contributions are made to the Fund by the employer in accordance with the Schedule of Contributions. Where breaches of the schedule occur, the Trustee is required by the Pensions Acts 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 them to safeguard the assets of the Fund and to prevent and detect fraud and other irregularities, including the maintenance of an appropriate system of internal control. Approval of the Trustee Report Approved by the Directors of RBS Pension Trustee Limited and signed on behalf of RBS Pension Trustee Limited by: Miller McLean Chairman - RBS Pension Trustee Limited 27 June Fiona Davis Director - RBS Pension Trustee Limited The Royal Bank of Scotland Group Pension Fund Page 12

15 Investment Report Investment Governance The Investment Committee ( the Committee ) oversees the management of the Fund within the framework of objectives and policies set out by the Trustee. The Committee is supported by RBS Investment Executive Limited ( RIEL ). The RIEL team comprises investment specialists led by the Chief Investment Officer, Robert Waugh. RIEL is responsible for advice and oversight of the Fund s investment strategy. AonHewitt are also employed to advise on strategic investment matters and provide a second opinion to the Committee and Trustee Board. Investment Activity Increasing diversification Liability hedging Central clearing and collateral management infrastructure for derivatives > The Fund continued to expand into a range of new asset classes to pick up a broader set of return streams including: Real estate debt Settled annuity obligations Infrastructure debt Infrastructure equity US residential property Shipping Forestry > The Fund increased the amount of the liability interest rate risk being hedged while inflation hedging remained broadly unchanged. > The Fund designed and implemented a new operational infrastructure for the central clearing of derivatives through exchanges and centralised management of derivatives collateral. The benefits of this operational infrastructure are: 1. Superior risk management by ensuring a common approach across all portfolios which use derivatives 2. More efficient management of collateral and therefore lower overall trading costs 3. Full compliance with new European and US derivatives regulations The Fund continued to diversify to achieve a reduced concentration of risk in equities. The purpose of this diversification is to give the Fund a more balanced portfolio which should generate more consistent returns. RIEL screens new asset classes and investment opportunities on an ongoing basis. The liability hedging programme allows the Fund to offset the effect of changes in the value of the liabilities arising from unexpected movements in interest rate and inflation. Derivatives have grown in importance, primarily as a risk management tool which allows the Fund to offset unwanted risks. The Royal Bank of Scotland Group Pension Fund Page 13

16 Investment Report Investment Performance In the year to 31 March the Fund outperformed the strategic benchmark by 313m. Over three years to 31 March the Fund outperformed the strategic benchmark by 385m. Over the full period starting 1 January 2010, when the Trustee put in place its new investment oversight arrangements and set up RIEL, to 31 March the Fund outperformed the strategic benchmark by 1,136m. Performance to 31 March 16% Performance, % per annum 14% 12% 10% 8% 6% 4% 2.9% 8.5% 9.3% 12.5% 13.8% Strategic Benchmark Fund 2% 1.5% 0% 1 Year to 31 March 3 Years to 31 March 5 Years to 31 March Asset Allocation and Strategic Benchmark Diversification is an ongoing theme of the investment programme. RIEL continues to actively pursue and evaluate potential new asset categories for suitability. The asset mix in place as at 31 March is illustrated in the chart below: Main Fund - Asset Portfolio 31 March Quoted equity - UK Quoted equity - Europe Quoted equity - North America Quoted equity - Japan Quoted equity - Asia pacific Quoted equity - Emerging markets Private equity Regulated utilities Infrastructure equity * Shipping * Timber and forestry Global credit Emerging markets credit Syndicated loans Distressed debt * Real estate debt * Infrastructure debt UK property European property US residential property * Global property Reinsurance - Life Reinsurance - Non-life Hedge funds Index linked Gilts and swaps Cash and liquidity * New asset classes added in the year to 31 March. The Royal Bank of Scotland Group Pension Fund Page 14

17 Investment Report The Strategic Benchmark for the Main Fund as at 31 March is set out in the table below: Asset class Sub asset class Investment Managers Equity Quoted equity Altrinsic Axiom Baillie Gifford Comgest DSM Epoch Genesis GMO GTP LGIM Lindsell Train Oldfield Pzena Southeastern Veritas Private equity Hermes GPE JP Morgan Navis Pathway Regulated utilities MFS Infrastructure equity Hastings Shipping Tufton Timber and forestry LGIM New Forests Credit Global credit LGIM M&G Pimco Pramerica Standard Life Emerging markets credit Gramercy Syndicated loans Sankaty Distressed debt Brookfield Real estate debt Axa Infrastructure debt Hastings Property UK Brockton Lothbury Standard Life Europe La Salle Orion US residential Aalto Global Partners Hedge funds Hedge funds AQR Brevan Howard Bridgewater Cantab Comac Fore Fulcrum Millburn MKP Capital Strategic Benchmark exposure at 31 March 9,478m 5,707m 1,510m 687m The Royal Bank of Scotland Group Pension Fund Page 15

18 Investment Report Reinsurance Liability hedging Non-life risks Life risks Liability hedging Cash & liquidity Collateral management Och Ziff Old Mutual Prologue Rogge Nephila Leadenhall LGIM LGIM LGIM 450m 55% of liability interest rate risk, implemented by a combination of UK government bonds and swaps, with additional hedging via swaptions 70% of liability inflation risk The assets of the RBS AA are managed on a ring-fenced basis. AA runs a simplified version of the strategy adopted within the Main allowing for the particular liability profile of members within the RBS AA. The asset mix in place as at 31 March for the AA is illustrated in the chart below: RBS AA - Asset Portfolio 31 March Quoted equity - UK Quoted equity - Europe Quoted equity - North America Quoted equity - Japan Quoted equity - Asia pacific Quoted equity - Emerging markets Regulated utilities Timber and forestry Global credit Emerging markets credit Property Reinsurance - Non-life Index linked Gilts and swaps Cash and liquidity The Strategic Benchmark for the RBS AA as at 31 March is set out in the table below: Asset class Sub asset class Investment Managers Strategic Benchmark exposure at 31 March Equity Quoted equity LGIM 225m Credit Global credit LGIM 141m Emerging markets credit Gramercy Property Property funds Aviva 36m Alternative equity + Regulated utilities MFS 25m Reinsurance Timber and forestry New Forests Non-life risks Nephila Liability hedging Liability hedging LGIM 70% of liability interest Cash & liquidity LGIM rate risk 70% of liability inflation risk The Royal Bank of Scotland Group Pension Fund Page 16

19 Investment Report Principal Investments Ten largest equity issuer exposures 0m 50m 100m 150m 200m Phoenix Natural Gas (infrastructure equity) Roche (quoted equity) Microsoft (quoted equity) Oracle (quoted equity) Samsung Electronics (quoted equity) Google (quoted equity) Hewlett Packard (quoted equity) GlaxoSmithKline (quoted equity) Chesapeake (quoted equity) Citigroup (quoted equity) 75m 64m 63m 54m 53m 52m 44m 44m 43m 43m Ten largest bond issuer exposures 0bn 1bn 2bn 3bn 4bn 5bn 6bn 7bn UK government Network Rail US Treasury German government Phoenix Natural Gas Verizon Communications General Electric Anheuser-Busch Connect Plus (M25) Associated British Ports UK Ten largest pooled fund investments 980m 110m 97m 90m 60m 56m 45m 40m 40m 5,862m 0bn 1bn 2bn 3bn LGIM Sterling Liquidity Fund (cash) Hermes GPE III (private equity) Lothbury Property Trust (property) Hermes GPE II (private equity) Pathway (private equity) Nephila Cronus Fund (reinsurance) LGIM Emerging Market Equity (passive equity) West Granite Homes (US residential property) Hermes GPE I (private equity) RBS US Dollar Liqudity Fund (cash) 335m 294m 260m 207m 206m 126m 117m 96m 94m 2,198m The Royal Bank of Scotland Group Pension Fund Page 17

20 Actuarial Certificates and Certifications The Royal Bank of Scotland Group Pension Fund Page 18

21 Actuarial Certificates and Certifications The Royal Bank of Scotland Group Pension Fund Page 19

22 Actuarial Certificates and Certifications The Royal Bank of Scotland Group Pension Fund Page 20

23 Actuarial Certificates and Certifications The Royal Bank of Scotland Group Pension Fund Page 21

24 Independent Auditor s Statement about Contributions to the Trustee of the Royal Bank of Scotland Group Pension Fund We have audited the Financial Statements of the Royal Bank of Scotland Group Pension Fund for the year ended 31 March which comprise the consolidated fund account, consolidated net assets statement and the related notes 1 to 16. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). This report is made solely to the Trustee, as a body, in accordance with regulation 3 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 work has been undertaken so that we might state to the Trustee those matters we are required to state to it in an auditor s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Trustee as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of the Trustee and Auditor As explained more fully in the Trustee s Responsibilities Statement, the Fund s Trustee is responsible for the preparation of Financial Statements which give a true and fair view. Our responsibility is to audit and express an opinion on the Financial Statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board s Ethical Standards for Auditors. Scope of the audit of the Financial Statements An audit involves obtaining evidence about the amounts and disclosures in the Financial Statements sufficient to give reasonable assurance that the Financial Statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Fund s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Trustee; and the overall presentation of the Financial Statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited Financial Statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on the Financial Statements In our opinion the Financial Statements: show a true and fair view of the financial transactions of the Fund during the year ended 31 March, and of the amount and disposition at that date of its assets and liabilities, other than the liabilities to pay pensions and benefits after the end of the year; have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and contain the information specified in Regulation 3 of, and 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 LLP Chartered Accountants and Statutory Auditor Belfast United Kingdom 27 June The Royal Bank of Scotland Group Pension Fund Page 22

25 Independent Auditor s Statement about Contributions to the Trustee of the Royal Bank of Scotland Group Pension Fund We have examined the summary of contributions to the Royal Bank of Scotland Group Pension Fund for the year ended 31 March as set out on page 24. This statement is made solely to the Trustee, as a body, in accordance with regulation 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 work has been undertaken so that we might state to the Trustee those matters we are required to state to it in an auditor s 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 Trustee as a body for our work, for this statement, or for the opinion we have formed. Respective responsibilities of the Trustee and Auditor As explained more fully in the Trustee s Responsibilities Statement, the Fund s Trustee is responsible for ensuring that there is prepared, maintained and from time to time revised a Schedule of Contributions showing the rates and due dates of certain contributions payable towards the Fund by or on behalf of the employer and the active members of the Fund. The Trustee is also responsible for keeping records in respect of contributions received in respect of active members of the Fund and for monitoring whether contributions are made to the Fund by the employer in accordance with the Schedule of Contributions. It is our responsibility to provide a Statement about Contributions paid under the Schedule of Contributions and to report our opinion to you. Scope of work on Statement about Contributions Our examination involves obtaining evidence sufficient to give reasonable assurance that contributions reported in the attached summary of contributions have in all material respects been paid at least in accordance with the Schedule of Contributions. This includes an examination, on a test basis, of evidence relevant to the amounts of contributions payable to the Fund and the timing of those payments under the Schedule of Contributions. Statement about Contributions payable under the Schedule of Contributions In our opinion contributions for the Main Fund for the year ended 31 March as reported in the summary of contributions have in all material respects been paid at least in accordance with the Schedule of Contributions certified by the Actuary on 27 September In our opinion contributions for the RBS AA for the year ended 31 March as reported in the summary of contributions have in all material respects been paid at least in accordance with the Schedule of Contributions certified by the actuary on 27 September Deloitte LLP Chartered Accountants and Statutory Auditor Belfast United Kingdom 27 June The Royal Bank of Scotland Group Pension Fund Page 23

26 Summary of Contributions During the year ended 31 March the contributions payable to the Fund by the employer under the Schedules of Contributions were as follows: Main Fund RBS AA Total Employers normal contributions 209,571 1, , ,094 Employers additional contributions 27,392 1,189 28, ,238 Employers augmentations 2, ,122 5,135 Deficit funding contributions 400,000 5, , ,300 Members normal contributions Total contributions payable under the Schedule of Contributions (as reported on by the auditors) 639,945 8, , ,815 In addition, further contributions were payable: Members additional voluntary Age-related rebates Contributions included in the Financial Statements 639,960 8, , ,890 Approved by the Directors of RBS Pension Trustee Limited and signed on behalf of RBS Pension Trustee Limited by: Miller McLean Chairman - RBS Pension Trustee Limited 27 June Fiona Davis Director - RBS Pension Trustee Limited The Royal Bank of Scotland Group Pension Fund Page 24

27 Consolidated Fund Account for the Year Ended 31 March Main Fund RBS AA Total Notes Contributions and benefits Contributions 4 639,960 8, , ,890 Transfers in 5 1,235-1,235 13,228 Other income ,195 8, , ,121 Benefits 6 741,970 13, , ,620 Leavers 7 68,690 5,325 74,015 63,585 Administrative expenses 8 28, ,608 23, ,853 19, , ,387 Net withdrawals from dealings with members (197,658) (10,967) (208,625) (3,266) Returns on investments Investment income 9 863,756 12, , ,791 Investment management expenses 10 (57,589) (1,077) (58,666) (52,746) Change in market value of investments 11 (157,764) 12,244 (145,520) 2,093,322 Net returns on investments 648,403 23, ,341 2,962,367 Net increase in the fund during the year 450,745 12, ,716 2,959,101 Net assets of the Fund at beginning of year 24,950, ,574 25,717,357 22,758,256 Net assets of the Fund at end of year 25,401, ,545 26,181,073 25,717,357 The accompanying notes on pages 27 to 43 are an integral part of these Financial Statements. The Royal Bank of Scotland Group Pension Fund Page 25

28 Consolidated Net Asset Statement for the Year Ended 31 March Notes Main Fund RBS AA Total Investment assets 26,348, ,312 27,129,723 26,942,693 Joint Venture assets 352, ,055-26,700, ,312 27,481,778 26,942,693 Investment liabilities (974,383) (1,391) (975,774) (1,215,936) Joint Venture liabilities (302,084) - (302,084) - (1,276,467) (1,391) (1,277,858) (1,215,936) Total Investments 11 25,423, ,921 26,203,920 25,726,757 Current assets 12 2,327 1,468 3,795 10,114 Current liabilities 13 (24,798) (1,844) (26,642) (19,514) Net assets of the Fund at end of year 25,401, ,545 26,181,073 25,717,357 The Financial Statements summarise the transactions of the Fund during the year and deal with the net assets at the disposal of RBS Pension Trustee Limited as at 31 March. They do not take account of obligations to pay pensions and benefits which fall due after the end of the Fund year. The actuarial position of the Fund, which does take account of such obligations, is dealt with on page 8 and 9 in the Report of the Trustee and the Actuarial Certificates, on pages 18 to 21, of the Annual Report and these Financial Statements should be read in conjunction with them. These Financial Statements were approved by the Directors of RBS Pension Trustee Limited and signed on behalf of RBS Pension Trustee Limited by: Miller McLean Fiona Davis Chairman - RBS Pension Trustee Limited Director - RBS Pension Trustee Limited 27 June The accompanying notes on pages 27 to 43 are an integral part of these Financial Statements. The Royal Bank of Scotland Group Pension Fund Page 26

29 Notes to the Financial Statements 1 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 the guidelines set out in the Statement of Recommended Practice (SORP), Financial Reports of Pension Schemes (revised May 2007). 2 Basis of consolidation Subsidiaries are entities over which the Fund has the power to govern the financial and operating policies of that entity. These powers generally accompany an interest in an entity of over 50%. Subsidiaries are fully consolidated from the date on which control is transferred to the Fund. The results of the subsidiary undertakings are derived from their latest unaudited financial statements at the year end. Joint ventures are subsidiaries where the power to govern is shared jointly with other partners in an undertaking. Joint ventures are accounted for using the Gross Equity method of accounting. Under this method the Funds proportionate share of assets and liabilities are taken up in the Net Assets Statement and the proportionate share of Profit or Loss is included in the Fund Account. 3 Accounting Policies 3.1 Valuation of investments Quoted securities are valued at fair value using the closing bid price as notified by the relevant stock exchange or closing prices if these are not available. Unquoted securities can consist of a range of different investment types. The valuation methods used in relation to these investments are set out below: Investments in private equities are valued at fair value by the Fund s investment managers in accordance with International Private Equity and Venture Capital (IPEVC) guidelines based on the latest information from investment managers. Corporate loans are carried at fair value using the latest available price in the market. Loans advanced for other investment activities are carried at cost less any provision for impairment. Investments in pooled investment vehicles are valued at fair value utilising the stated closing published bid price or single price as determined by the investment manager. Properties are valued at fair value at the year end date on the basis of open market value by CBRE Ltd, Knight Frank LLP and Cushman & Wakefield. Certain US Properties have been valued at cost. These properties were purchased within 6 months of the year end. The Trustee does not consider that any subsequent change to the value of these properties would materially impact these Financial Statements. The Trustee intends for independent valuations to be sought at the next year end date. Open future contracts are included in the net asset statement at fair market value, which is the unrealised profit or loss at the current bid or offer market quoted price of the contract. The fair value of swaps is calculated using pricing models where inputs are based on market data at the year end. Options are shown at fair value, which is their mark to market value. The Royal Bank of Scotland Group Pension Fund Page 27