Xerox Final Salary Pension Scheme Statement of funding principles March 2008 1. Introduction This statement has been prepared by Xerox Pensions Limited (the Trustees ) acting in its capacity as the Trustee of the Xerox Final Salary Pension Scheme ( the Scheme ) to satisfy the requirements of Section 223 of the Pensions Act 2004, after obtaining the advice of the Scheme Actuary, Richard Akroyd. The Trustees have discussed and agreed it with Xerox Ltd (the Company ) which is the principal employer of the Scheme and represents all participating employers (the Employers ) in relation to discussions with the Trustees. This statement covers the Scheme s statutory funding objective, the principles used in determining that objective, the policy for securing that it is met, and the process through which the Trustees and Company reach agreement on the contents of this statement. It contains other information required under the Act, and applies to the actuarial investigation as at 31 March 2007. 2. Statutory funding objective The statutory funding objective is that the Scheme should have sufficient and appropriate assets to cover its technical provisions and this statement sets out the Trustees policy for securing that this objective is met. The Trustees wish to strike a fair balance between the interests of the members of the Scheme and their dependants on the one hand, and the interests of the Employers on the other. The Trustees may assume that the Scheme will be able to capture part of the expected investment premium available for asset classes other than Government Securities, and may hold investments in other asset classes. They acknowledge in doing so that the additional return expected from these other assets is not guaranteed, and that it may be necessary to request further contributions following future investigations if investment returns are below the level assumed. The Trustees have made an ongoing assumption that the Employers continue indefinitely to be able to pay the contributions required and do not become insolvent. The Trustees will adopt a prudent approach to determining the assumptions, and will consider whether and to what degree margins for adverse deviations should be taken into account in determining this approach. In particular, the Trustees will consider what a realistic allowance might be for future investment returns on the different asset classes in which the Scheme is likely to invest, and will base the funding assumptions on more conservative returns. The Trustees will consider the margin of prudence being taken. The Trustees will also, after taking the advice of the actuary, base the mortality assumptions on upto-date standard tables, taking account of the Scheme s recent experience, and making some allowance for possible future improvements in longevity.
3. Valuation process At each actuarial investigation, the Scheme Actuary will review the demographic assumptions in the context of the Scheme s own experience and trends within other similar schemes. The Company s views will be sought on its policy in relation to future increases in Pensionable Salary and early retirement policies. The Scheme Actuary should then prepare calculations on a range of possible assumptions consistent with the principles in this statement, and initially discuss the results of these calculations, and the sensitivity of the results to different assumptions, with the Investment and Funding Committee of the Trustees. This discussion will include considering the relationship between the assumptions for assessing scheme solvency and the technical provisions. The Investment and Funding Committee will then, after taking the advice of the Scheme Actuary, make a proposal to the Company on the funding policy and principles to be adopted, and on the assumptions on which it proposes the statutory funding objective should be determined. Discussions will then take place, if necessary, with the Company with a view to agreeing the Statement of Funding Principles and assumptions to be adopted. The agreed approach will then be presented for formal agreement to the Trustees. 4. Role of Scheme Actuary The Company and the Trustees have agreed that the Scheme Actuary should advise the Trustees, with regard to this Statement, the valuation of the Scheme and related matters, but is able to provide additional information requested by the Company. Any material provided by the Scheme Actuary to the Company will be made available to the Trustees. If it proves necessary for the Company and the Trustees to take separate advice, the Scheme Actuary will advise the Trustees. Under the Rules of the Scheme the Employers contributions are to be determined either by the Actuary or as agreed between the Company, the Trustees and the Scheme Actuary. These provisions are modified by the Pensions Act 2004, such that it will be necessary for the Scheme Actuary to certify his agreement to the level of Employers contributions agreed between the Company and the Trustees. 5. Technical provisions 5.1 Method The Trustees and the Company have agreed that the technical provisions for the Scheme at any given date are to be calculated as the capital value of the prospective benefits arising from service completed before that date, including allowance for prospective salary increases for those members in active service at that date. This method of calculating technical provisions is commonly known as the projected unit method. 5.2 Assumptions The Trustees and the Company have agreed that the financial assumptions to be used will be consistent with the yields available on long-dated fixed interest and index-linked gilts plus a margin to reflect some additional return expected from other assets held by the scheme subject to the Trustees agreeing, having considered the advice of the Scheme Actuary, that these are appropriate and prudent for the purpose of the Scheme s statutory funding objective. 2
5.3 Discretionary Benefits There are a number of areas where the benefits payable are subject to some exercise of discretion on the part of the Trustees and/or the Company, the principal details of which are set out below: 5.3.1 Pensions increases: Pensions in course of payment relating to service after 6 April 2006 which are guaranteed to increase at the lower of 2.5 and Retail Price Inflation have been increased each year by the exercise of the discretion of the Trustees with the consent of the Company in line with Retail Price Inflation. Pensions in course of payment relating to service before 6 April 2006 1 are guaranteed to increase at the lower of 5 and Retail Price Inflation. but may in certain circumstances be increased each year by the exercise of the discretion of the Trustees with the consent of the Company in line with Retail Price Inflation. While recognising that such discretionary increases will be considered by the Trustees and the Company taking into account all material factors at the time of the proposed award, the Trustees have agreed with the Company that for the purposes of calculating the technical provisions it will be assumed that discretionary increases will be awarded so that these elements of members pensions will increase in line with Retail Price Inflation. 5.3.2 Early retirement Subject to the consent of the Trustees (and of the Company in the context of retirements from active service), members may bring their benefits into payment early on terms which in many cases are more generous than the value of their benefits payable at normal retirement age. An allowance will be included within the calculation of the technical provisions for a proportion of members retiring from active service to do so on these terms. This proportion will be determined assuming a pattern of retirements determined after considering past experience and taking into account the advice of the Scheme Actuary. Deferred pensioners will be assumed to retire at their normal retirement age. 5.3.3 Augmentations At the request of the Company, and upon payment by the Company of any contributions that the Trustees (with the advice of the Actuary) may consider appropriate, the Trustees may increase any benefit or provide additional benefits under the Scheme. The Trustees and the Company have agreed that such discretionary benefits will not be taken into account in the calculation of technical provisions. 5.3.4 Other There are a number of further discretions that enable members to convert the benefit from one form into another, typically at the discretion of the Trustees, in particular the commutation of pension into cash at retirement. The Trustees and the Company, on the advice of the Scheme Actuary, have agreed that these and other minor discretions that do not have a material impact on the determination of the technical provisions will not be allowed for in the demographic assumptions used to determine technical provisions. 1 This includes any commuted pension eligible for pension increases but excludes any pension in payment which is either a Guaranteed Minimum Pension or pre-1997 protected rights pension 3
6. Subsidiary funding objective The Trustees believe it is appropriate to ensure that the Scheme provides a substantial degree of security of benefits since it is always possible that at some point in the future the Employers will no longer be in a position to support the Scheme. To provide this degree of security the Trustees have adopted a secondary (higher) funding target which if met would be expected to allow the Trustees to continue to operate the Scheme without additional financial support and to operate a low risk investment strategy with substantial investment in appropriate gilts. Full funding by reference to this target is to be calculated adopting the assumptions used to calculate the technical provisions, but using a discount rate equal to the relevant gilt yield without adjustment. The Trustees recognise that this target would not be sufficient to secure benefits by buying annuity policies from an insurance company but, in these circumstances, the Trustees consider that the Scheme is of a size where it could, if necessary, continue for a period as a closed scheme. The Trustees recognise that only if investment returns exceed those allowed for in setting contributions will this objective be achieved. The Trustees will consider how quickly it would be achieved if investment returns turn out to be at various levels, and decide whether this is satisfactory. 7. Employers contributions The Employers will pay contributions at an appropriate rate (or rates) to meet the cost of the future accrual of members benefits (the full rate ). These contributions will be agreed from time to time by the Company, the Trustees and the Scheme Actuary and may be based on different assumptions to those used to determine the technical provisions. The rate (or rates) of contributions must be sufficient to at least maintain or, in conjunction with any agreed shortfall contributions, achieve the statutory funding objective. In assessing their adequacy, a reasonable allowance will be made for future investment returns on the Scheme s assets. The Employers may make contributions at a rate lower than the full rate if the secondary funding target has been achieved or, at the discretion of the Trustees, is expected to be achieved within an appropriate period taking into account a reasonable allowance for future investment returns on the Scheme s assets. 8. Actuarial investigation as at 31 March 2007 The Trustees (having taken the advice of the Scheme Actuary) and the Company have agreed assumptions for the investigation as at 31 March 2007, in line with the process described above. These assumptions are set out in the Appendix to this statement. 4
9. Eliminating a shortfall If the results of an actuarial investigation show that the assets of the Scheme do not cover its technical provisions, the Trustees will negotiate a recovery plan with the employer. The intention is that the statutory funding objective should be reached within a short period from the date of the investigation through either or both of a reasonable allowance for future investment returns on the Scheme s assets and/or the payment of additional contributions, expressed either as a percentage of pensionable payroll or as fixed monetary amounts. In determining the recovery plan the trustees may also take into account factors such as the size of the shortfall, the business plans of the employers, their assessment of the covenants of the employers and any contingent security offered by the employers. The Trustees normally expect the recovery period to be no longer than 10 years. Modification of future benefit accrual will not be considered by the Trustees unless the additional contributions are not sufficient, on the actuarial assumptions chosen, to meet the statutory funding objective. 10. Frequency of actuarial investigations Each investigation should be made no more than three years after the preceding one. As at each 31 March between investigations the Scheme Actuary will provide an estimate of the up-to-date financial position of the Scheme relative to both the statutory funding objective and the secondary funding objective. The Trustees and Company recognise that there is likely to be short term volatility between the value of the assets and the amount required to meet the liabilities, and the updates provided by the Scheme Actuary will not normally lead to changes in the required contributions ahead of the next investigation unless, after discussions, the Trustees and Company agree upon them. The Trustees, after having considered the actuary s opinion, may call for a full actuarial valuation if they are of the opinion that events have made it unsafe to rely on the results of the previous actuarial investigation. The Trustees may wish to consider doing so: Following a request from the Company; If there is a significant fall in the value of the assets; If there is any event which might have a significant effect upon the Company covenant; or If there is a significant change in the membership for any reason. Under Rule 45 of the Trust Deed, the Trustees may request an investigation at any time should they so wish. 5
11. Arrangements for other parties to make payments to the Scheme No arrangements are in place for a person other than the Employers or a member of the Scheme to contribute to the funds held by the Scheme. 12. Paying funding surpluses to the employer In the event of a termination of the Scheme and subject to HMRC approval, any balance of the assets after securing in full benefit entitlements as set out in Rule 50.4 and applying such further assets in providing such additional benefits as the Trustees may decide, will be paid to the Employers in such proportion as they determine. 13. Cash equivalent transfer value calculations and policy on reduction The Trustees will ask the Actuary to advise them at each valuation of the extent to which assets are sufficient to provide cash equivalent transfer values for all non-pensioners without adversely affecting the security of the benefits of other members and beneficiaries. The Trustees policy is not to reduce cash equivalent transfer values paid to members if the Actuary advises that the Scheme s assets are at least sufficient to provide cash equivalent transfer values in full to all members, on the method and assumptions adopted for that purpose. 14. Dates of review of this Statement This Statement will be reviewed, and if necessary revised, by the Trustees either Within 15 months after the effective date of each full actuarial investigation; or Within a reasonable period after any occasion on which the Regulator has used its powers to modify future accrual of the Scheme, directed as to the manner in which technical provisions are to be calculated or the period over which failure to the statutory funding objective is to be remedied, or imposed a schedule of contributions. The Trustees may also elect to review, and if necessary revise, the statement at other times. Signed on behalf of the Company: Signature:. Print name:. Position:. Date:. Signed on behalf of the Trustees: Signature:. Print name:. Date:. 6
Appendix to Statement of Funding Principles Detailed summary of assumptions Financial assumptions as at 31 March 2007 Assumption Assumption made Rationale Price inflation 3 pa Based on market expectation taking into account Bank of England inflation target and gilt yields of a duration appropriate to the average duration of the liabilities. Salary increases 4.25 pa plus age-related scale Based on recent experience and Company s stated future pay policy. Pension increases Pre 1988 GMP Post 1988 GMP and pre 1997 protected rights Excess (pre and post April 2006) and commuted pension eligible for increases Nil 2.75 pa 3 pa Same as assumption for price inflation in line with Statement. Discount rate Primary target Secondary target Ongoing rate 5.25 pa 4.75 pa 7.25 pa before/5.25 pa after retirement Based on fixed interest gilt yields of a duration appropriate to the average duration of the liabilities, plus an additional return of 0.5 pa in the case of the primary target and assuming a further return of 2 pa before retirement when assessing the ongoing contribution rate. Return on investments to assess sufficiency of Employers contributions and to measure progress against secondary funding objective 6.15 pa Considered to be reasonably prudent at 31 March 2007 7
Statistical assumptions as at 31 March 2007 Mortality Mortality rates both before and after retirement are assumed to follow the standard 2000 tables published by the Faculty and Institute of Actuaries, projected from 2000 to calendar year 2007 using the medium cohort adjustment with a one year rating and with future improvements in line with the medium cohort projection. In the case of incapacity retirements from active service anticipated in the assumptions, mortality will be assumed to have a further 5 year age rating. Early retirement in normal health 1971 Scheme and Executive Section members 1988 Scheme members Age 50 0 0 51 0 0 52 0 0 53 0 0 54 0 0 55 20 5 56 10 5 57 12 5 58 14 5 59 16 5 60 30 5 61 30 5 62 30 5 63 30 5 64 30 5 65 100 100 Assumed rates for incapacity early retierement (sample rates shown) Age Males Females 25 0.02 0.03 30 0.03 0.07 35 0.07 0.11 40 0.13 0.16 45 0.23 0.26 50 0.43 0.52 55 0.94 1.10 60 1.97 2.45 8
Rates of withdrawal from Pensionable service (sample rates shown) Age Males Females 25 10 10 30 10 10 35 8 8 40 6 6 45 4 4 50 4 4 55 2 2 60 0 0 Retirement from deferred pensioner status All deferred pensioners are assumed to retire at normal retirement age. Spouses and dependants pensions The proportion of deceased members assumed to give rise to a spouse s or dependant s pension is 90 for male members and 70 for female members at ages up to 65 with the proportion at higher ages reduced in line with the mortality assumption for a member s spouse or dependant. A 5 loading is included on the valuation of active members benefits on death in service and death after incapacity retirement to allow for the payment of dependent children s benefits. Age difference between members and dependants All members are assumed to have an age difference (male - female) of three years. Allowance for option of members to commute pension for cash at retirement No allowance. Expenses Administrative and other expenses including Pension Protection Fund levies are met from the Scheme resources as they arise. The technical provisions have been increased by an allowance of 2 for this purpose. 9