Dairy Crest Group pension fund Report to Members

Dairy Crest Group pension fund Report to Members 2012

01 This report, from Dairy Crest Pension Trustees Limited (the Trustee), is for members who are receiving a pension (pensioners) or with an entitlement to a deferred pension (deferred pensioners) from the Dairy Crest Group Pension Fund (the Fund). Contents Introduction by Chairman 2 Trustee Board and Advisers 4 Financial Information 5 Fund Membership 7 Record Keeping and Pension Increases 7 Fund Investments 8 Contact Details 10 Additional Voluntary Contributions 11 Summary Funding Statement 12 Further Information 16 Regulatory Organisations 16 Appendix 17

02 Introduction by the Chairman During 2012 the Fund continued to make progress, with investment returns in the financial year to 31 March 2012 being satisfactory and in line with our benchmarks and assumptions. We were also able to undertake and complete a number of projects during the year whilst maintaining a good service to members and continuing a funding dialogue with Dairy Crest Limited (the Company). The Trustee has also received regular Employer Covenant updates from its Financial Adviser, Deloitte LLP. In May 2012 we completed an Enhanced Transfer Value (ETV) exercise as a result of which 219 deferred pensioners accepted transfer values of 14.4m and transferred their benefits to alternative providers. We have also completed a project to bring pensions increases for certain former Unigate Scheme C members into line with the increases payable to other Fund members. The relevant Scheme C members have been individually notified of the resulting changes to their benefits which were implemented in at the end of the year. The Trustee has also taken appropriate actions in response to the Pensions Regulator s guidance on record keeping and details are provided later in this Report. Legal & General has continued to provide a good pensioner payment and administration service and the administration of deferred pensioners by Aon Hewitt has shown a significant improvement during the year with all performance targets being substantially achieved. Dairy Crest Group pension fund Report to Members 2012

03 Funding issues continue to be a major focus for the Trustee. Despite the satisfactory recent investment performance and on-going deficit funding from the Company in accordance with the Recovery Plan agreed following the 2010 Actuarial Valuation (the 2010 Valuation), there remains a significant funding deficit. The Trustee is currently engaged in discussions with the Company with regard to the provision of additional funding and security following the disposal of the St Hubert spreads business at the end of August 2012. In last year s Report we requested candidates to put themselves forward for consideration as Member Nominated Trustee Directors (MNTDs). A number of good quality candidates were interviewed in addition to the two incumbent MNTDs, John Brown and Richard Halkes, both of whom had expressed the wish to continue in office. The Trustee s selection panel subsequently recommended the reappointment of the two incumbent MNTDs together with the appointment of David Lattimore as an additional MNTD. These recommendations were accepted by the Company and were implemented with effect from 1 April 2012. Rob Tansey ceased employment with the Company at the end of July 2012 and has been replaced by Gareth Hopkins who has previously served as a Management Nominated Trustee Director. I am pleased to welcome David and Gareth to the Trustee Board and I should like to thank all members of the Board for their continuing valuable contributions to the effective governance of the Fund. We have recently posted the Summary Funding Statement (as at 31 March 2012) to members together with notification that a Trustee website www.dairycrestpensiontrustees.co.uk has been established for the purposes of member information and communication. Members will be able to view this Report via the website and download a copy. Printed copies of the Report will only be sent in future to those members who so request. David Felder Chairman Dairy Crest Pension Trustees Limited January 2013

04 Trustee Board and Advisers Trustee Board The Law Debenture Pension Trust Corporation plc* (nominated representative David Felder). David acts as a professional trustee for a number of major pension funds, following an earlier career in investment management. He is the chairman of the Trustee Board and of the Trustee s Investment Committee. Appointed September 2007. * Denotes members of the Investment Committee John Brown* John was Director of Milk Management and External Affairs of Dairy Crest Limited, retiring in 1995. He is a Member Nominated Trustee Director. Appointed March 2008. Richard Halkes Richard is a driver based at Hanworth. He is an active member of Unite and is a Member Nominated Trustee Director. Appointed March 2008. Roger Newton* Roger was Company Secretary of Dairy Crest Group plc and its subsidiaries during the period 1992-2008. He is also Fund Secretary and responsible for the overview of day to day Fund operations. Appointed September 1994. David Lattimore* David is a former senior manager within both Unigate and Dairy Crest Limited and became a pensioner of the Fund in 2004. He is a Member Nominated Trustee Director. Appointed April 2012. Gareth Hopkins Gareth has held senior HR positions in the Dairy Crest Group and in other companies and is currently interim Dairy Crest Group HR Director. Appointed August 2012. Michael Brydges* Michael is Financial Controller, Dairy Crest Customer Direct. Appointed June 2011. Dairy Crest Group pension fund Report to Members 2012

05 Trustee Advisers Actuary Bankers Financial Adviser Fund Administrators Investment Adviser Legal Advisers paul Dooley, Aon Hewitt Lloyds Banking Group PLC Deloitte LLP Aon Hewitt for deferred pensioners (see page 10) Legal & General Assurance Society Ltd for pensioners (see page 10) Mercer Investment Consulting Wedlake Bell LLP, Clifford Chance LLP Financial Information Opposite is a summary of the Fund s accounts for the year ended 31 March 2012, together with comparative figures for the year ended 31 March 2011, which have been audited by the Trustee s independent auditors, Ernst & Young LLP, who have issued an unqualified opinion on the financial statements and an unqualified statement that the contributions have been calculated and received in accordance with the Fund s Schedule of Contributions.

06 2012 2011 Contributions 000 000 contributions receivable 37,144 20,562 37,144 20,562 Benefits and other payments out pensions and benefits payable (30,053) (30,084) payments to and on account of leavers (4,660) 1 (468) group life assurance premiums (29) (51) administrative fees and expenses (2,208) 2 (1,313) (36,950) (31,916) Net payments in (out) 194 (11,354) Returns on investments investment income 3,682 2,862 investment management expenses (171) 3 (1,362) change in market value of investments 76,462 4 52,442 Net increase in investments 79,973 53,942 Net increase in the Fund during year 80,167 42,588 Net assets of the Fund at: 1 April 797,779 755,191 31 March 877,946 797,779 1 This amount includes 4,003,000 of transfers out of the Fund made during the year pursuant to the Enhanced Transfer Value exercise. 2 This amount includes fees related to the 2010 Valuation together with the Pension Protection Fund levy which is now paid by the Trustee and then reimbursed by the Company. 3 The lower expense reflects changes in the charging of investment management fees whereby most fees are now deducted from unit prices and are not directly charged to the Fund. 4 This amount includes the freeholds/long leasehold investments acquired from the Company in June 2011 and valued at 16,619,000 at the year end. This purchase was funded from a special contribution of 17,250,000 made by the Company and included in contributions receivable for the year. Dairy Crest Group pension fund Report to Members 2012

07 Fund Membership Year Deferred pensioners Pensioners Total 31 March 2011 8,382 7,879 16,261 31 March 2012 8,001 7,989 15,990 As at 30 June 2012, the number of deferred pensioners had reduced to 7765, primarily as a result of the completion of the ETV exercise. Record Keeping & Pension Increases Record Keeping The Pensions Regulator has provided trustees with guidance about Record Keeping and the quality of the data it is expected that pension plans should hold. The expectation is that common data, comprising data which is relevant to any member of a pension plan, should be held for 95% of members for pre June 2010 activity and for 100% of members for post June 2010 activity. The Trustee has commissioned an independent audit of its deferred pensioner data which indicates that at least the guidance common data is held electronically across the Fund s member records. A number of areas were indicated for attention and an improvement plan has been agreed to address these items during the first half of 2013. In relation to pensioner data, a detailed data cleanse exercise of pensioner records held to August 2008 has been carried out by the Fund s administrators as part of the process to finalise data and agree the final premiums for the bulk annuity policies purchased from Legal & General in December 2008 and in June 2009. Further the records for pensioners retiring after August 2008 have been checked by administrators at the point of retirement and relevant data has been entered electronically into Legal & General s systems for pensioner payment and administration purposes. Accordingly the Trustee is confident that its pensioner data is of a high quality and is in conformance with the Pensions Regulator s guidance.

08 Pension Increases The Fund provides increases to pensions in payment based on the increase in the December RPI (Retail Price Index) figure, subject to a maximum of 5% for service up to 5 April 2006 and to 4% for service from 6 April 2006 to 31 March 2010. Pensions relating to service in the MMB Fund prior to 1 December 1993 receive increases in payment based on the increase in the December RPI subject to a maximum of 7%. After state pension age the GMP (Guaranteed Minimum Pension) element of the pension, in respect of service on or after 6 April 1988, will be increased by the change in the September CPI (Consumer Prices Index) up to 3%. If the increase in CPI is greater than 3%, the State is responsible for payment of the excess through the state pension. Similarly increases on GMP earned in respect of service prior to 6 April 1988 are the responsibility of the State. Fund Investments The Investment Committee, the meetings of which are attended by Alastair Murray, the Company s Group Finance Director, monitors the performance of the Fund s investments and makes recommendations to the Trustee on asset allocation and on investment management arrangements having regard to performance data and other advice provided by the Fund s Investment Adviser and by the Actuary. The Statement of Investment Principles and the Investment Policy Implementation Document (SIP/IPID) set out the key features of the Fund s investment strategy and are updated periodically. Returns, during the financial year to 31 March 2012, from investment markets were positive and the total return for the Fund for the year was 9.6%, identical to the total return achieved in the previous year. The Investment Committee has continued to review performance and to receive presentations from Investment Managers during the year and has no current concerns about Investment Manager appointments. There have been no major changes in investment strategy during the year. Market conditions have not been favourable to further Dairy Crest Group pension fund Report to Members 2012

09 de-risking activities and, accordingly, the Fund s total return equity swaps which expired in June 2012 were rolled forward. The Trustee will continue to review de-risking opportunities regularly with input from the Fund s advisers. In December 2011 the Trustee replaced a 40m nominal interest rate swap with Insight Investments by an Index linked Gilt total return swap in a similar amount in order to provide an improved match for the Fund s liabilities. In March 2012 the Trustee extended Wellington s appointment to include a High Yield bond mandate with an initial investment of 20m. As at the end of 2012 the Fund s equity investments ( 292m) were primarily managed by Insight, Russell and Schroders with its bonds investments ( 285m) managed by PIMCO, Insight and Wellington. The Fund s investments in real property ( 59m) were split between Legal & General and AVIVA with a small allocation to Russell. In addition the Fund continues to hold the freeholds/ long leasehold interests in three operational sites and to receive rentals from the Company in respect of the leasebacks of these sites.

10 Contact Details Legal & General carries out the function of pensioner payroll and administration and the contact details are as follows:- Legal & General Assurance Society Ltd Legal & General House Kingswood Tadworth Surrey KT20 6EU Helpline: 01737 375151 Email: dcps@landg.com Aon Hewitt carries out the function of deferred pensioner administation and the contact details are as follows:- Aon Hewitt 5th Floor Fountain Precinct Balm Green Sheffield S1 2JA Tel: 0845 026 3925 Email: dairycrestpensions@aonhewitt.com Please ensure that you inform the relevant administrator of any changes to your or your dependant s personal details. Dairy Crest Group pension fund Report to Members 2012

11 Additional Voluntary Contributions (AVCs) The Fund s AVCs arrangements were closed to new contributions after 31 March 2010 following the cessation of future accrual at that date. However the Fund continues to hold AVCs on behalf of deferred pensioners with the large majority of funds being held with Clerical Medical in Unit funds and in the Prudential Deposit fund. The Trustee has carried out a recent review of its AVC providers through Aon Hewitt who have advised that all providers continue to be appropriate. The Trustee allows deferred pensioners to utilise AVCs to fund tax free cash at retirement and individuals may wish to take independent advice upon the choice of appropriate funds for their AVCs as they approach retirement. A small number of deferred pensioners remain invested in the Equitable Life With Profits Fund and have received periodic updates from the Trustee. Individuals who require details of the current position in relation to AVCs with Equitable Life should contact Aon Hewitt at the address given on page 10.

12 Summary Funding Statement (as at 31 March 2012) i) Introduction The Pensions Act 2004 introduced a requirement for the Trustee to provide members with information in connection with the funding of their pension fund on an annual basis. This Summary Funding Statement provides information about the financial health of the Fund as at the 2010 Valuation date (31 March 2010) and most recent actuarial reports (as at 31 March 2011 and 31 March 2012) and the details are set out below. 31 March 12 31 March 11 31 March 10 M M M Value of Assets* 863.9 795.1 751.0 Amount needed to provide benefits 1,030.0 906.9 887.7 Deficit 166.1 111.8 136.7 Funding Level 84% 88% 85% * These amounts do not include members AVCs. The 31 March 2012 asset value is reduced to allow for ETVs that had been accepted but not yet paid. The 2010 Valuation was the second valuation carried out under the Government s new funding regime and was based on actuarial assumptions that have been agreed by the Trustee and the Company. The estimated funding positions as at 31 March 2011 and 31 March 2012 are based on the actuarial assumptions and methodology consistent with the 2010 Valuation. Following the 2010 Valuation, as required by legislation, a Recovery Plan was agreed with the Company aimed at removing the deficit by 31 March 2018. Since the 2010 Valuation the Company has made deficit contributions to the Fund totalling 20 million in the year to 31 March 2011 and 36.7 million in year to 31 March 2012. It has also agreed to pay 1.431 million each month from 31 March 2012 to 31 March 2018. Dairy Crest Group pension fund Report to Members 2012

13 ii) Change in funding position from 31 March 2011 to 31 March 2012 The main factors affecting the change in the funding level since 31 March 2011 were as follows: Changes in market conditions led to a significant increase in the amount needed to provide benefits, which worsened the funding level. The investment return of the Fund s assets was slightly better than expected over the period, leading to an improvement in the funding level. The Company has paid additional contributions of 36.7 million over the period to reduce the deficit, which improved the funding level. Overall, the above factors led to a change in the funding level from 88% at 31 March 2011 to 84% at 31 March 2012. iii) Recent developments At the time of writing, changes in financial markets since 31 March 2012 are likely to have had a small positive impact on the funding level of the Fund. The impact of the recent changes will be assessed as part of the Fund s next Actuarial Valuation, at 31 March 2013, but we will continue to monitor the position with our advisers in the meantime. iv) Securing benefits with an insurance company Benefits can be secured with an insurance company, however, such an approach may be expensive as the strict solvency requirements that apply to insurance companies mean that they have to set up significant reserves and adopt very conservative investment strategies when taking on such business; furthermore, they would need to build in certain profit margins. If the Fund had started winding up as at 31 March 2010 it was estimated that 396 million would have been due from the Company and the estimated shortfall as at 31 March 2012, had the Fund started winding up at that date, was 408 million.

14 Inclusion of this information is a requirement of the legislation, and does not imply that either the Company or the Trustee are considering winding-up the Fund. However, in common with many other Funds, the Trustee will continue to monitor the insurance market to establish if there are opportunities to secure further Fund liabilities on satisfactory terms with third party providers. v) The Pension Protection Fund (PPF) If the Fund starts to wind up the Company has to pay whatever the Fund needs to buy insurance policies to provide member benefits. If the Company is insolvent (and unable to provide these benefits), the PPF may step in and pay a proportion of member benefits. As at 31 March 2010 the Fund s assets were equal to 101% of the Fund s PPF liabilities. This means the Fund at that date already had sufficient assets to provide the PPF benefits (which are only a proportion of members actual benefits) and so the Fund would not have needed to be placed in the PPF in the event of wind-up and insolvency. Further information can be found on the PPF s website at www.pensionprotectionfund.org.uk Alternatively you may write to the PPF at Knollys House, 17 Addiscombe Road, Croydon, Surrey CR0 6SR. vi) Statutory information The Pensions Regulator can change the Fund, give directions about working out its technical provisions or impose a Schedule of Contributions. The Pensions Regulator has not needed to use its powers in this way for the Fund. Also there has not been any payment to the Company out of the Fund in the previous twelve months, other than in relation to standard administration charges. Dairy Crest Group pension fund Report to Members 2012

15 vii) More information If you have any other questions, or would like any more information about your benefits, please contact Aon Hewitt if you are a deferred member or Legal & General if you are a pensioner. Please remember to notify the administrators if any of your personal details or your address changes. See page 10 for the relevant contact details. The following documents are available on request to: The Secretary, Dairy Crest Pension Trustees Limited, Claygate House, Littleworth Road, Esher, Surrey, KT10 9PN: The Statement of Investment Principles / Investment Policy Implementation Document. This explains how the Trustee invests the Fund s assets. The Schedule of Contributions. This shows the amount that is being paid into the Fund. The Annual Report and Accounts of the Fund, which shows the Fund s income and expenditure in the year up to 31 March 2012. The Actuarial Valuation 2010. The Fund s Trust Deed and Rules. By law, the Trustee cannot give you advice about your pension arrangements. If you are thinking about any changes as a result of the funding position of the Fund, you may wish to obtain independent financial advice. For an explanation of how the Fund operates, please refer to the Appendix on Page 17 of this Report.

16 Further Information Your details Please contact the relevant Fund administrator if your address or any other important details about you or your situation have changed. It is also important that you keep your expression of wish form up to date in order to advise the Trustee of who you would like to receive benefits in the event of your death. If you would like to make changes to your instructions contact the relevant Fund administrator or download a new form from the Trustee s website at www.dairycrestpensiontrustees.co.uk Fund Factors/Transfer Values During the year the Trustee has received advice from the Actuary on the assumptions used for determining Fund factors for cash commutation, early retirement, AVCs conversion and trivial commutation and has agreed revisions where appropriate. The Trustee has also determined a policy on cash equivalent transfer values, following advice from the Actuary. Regulatory Organisations The Pensions Advisory Service (TPAS) Members with concerns about their pension benefits who are not satisfied with explanations given by the Trustee or its advisers should contact TPAS at 11 Belgrave Road, London SW1V 1RB, telephone 0845 601 2923. email: enquiries@pensionsadvisoryservice.org.uk. TPAS prefers that it is not approached until the Fund s internal disputes resolution procedure has been followed. For details of this procedure, members should contact the Fund Secretary. Pensions Ombudsman Where a complaint or dispute cannot be resolved, normally after a referral to TPAS, an application can be made to the Pensions Ombudsman for adjudication. The Ombudsman operates from the same address as TPAS and the telephone number is 020 7630 2200. Dairy Crest Group pension fund Report to Members 2012

17 Appendix How the Fund operates The Company makes contributions to the Fund so that it can build up an investment fund to enable it to pay pensions to members when they retire. The investments to pay for members pensions are held in a common fund. They are not held in separate funds for each individual, except for AVCs where such members have notionally separate funds. The Trustee obtains regular valuations of the benefits payable to members together with updates on the performance of the Fund s investments. Using this information, the Trustee arrives at an agreement with the Company on future contributions. The Trustee s objective is to have enough money in the Fund to pay pensions now and in the future. However, the achievement of this objective relies on the Company continuing to support the Fund because: - ultimately the Company will be paying the future expenses of running the Fund on an annual basis; - the funding level can fluctuate and, when there is a funding shortfall, the Company will usually need to put in more money; and - the cost of benefits may increase so that the Company will need to put in more money. If the Fund were to start to wind up, the Company is required to pay enough into the Fund to enable the members benefits to be completely secured with an insurance company. It may be, however, that the Company would not be able to pay this amount in full. Whilst the Company is in a position to support the Fund through contributions, even though the funding level may be temporarily below target, benefits will continue to be paid in full.

18 If the Company is unable to support the Fund without becoming insolvent, then you may not get the full amount of pension you have built up even if the Fund is fully funded on its targeted funding level. If the Company became insolvent, the PPF might be able to take over the Fund and pay compensation to members. The PPF helps to protect members pensions where a company becomes insolvent, although PPF compensation would not match the Fund s full benefits. The full solvency position of the Fund assumes that benefits will be secured by buying insurance policies. Insurers are obliged to take a cautious view of the future and include a profit margin. The cost of securing pensions in this way also incorporates the future expenses involved in administration. By contrast, the Trustee s funding plan assumes that the Company will continue in business and support the Fund while adopting less cautious, albeit still prudent assumptions about the future. Dairy Crest Group pension fund Report to Members 2012

Dairy Crest Pension Trustees Limited Claygate House Littleworth Road Esher Surrey KT10 9PN Tel: 01372 472200 Fax: 01372 472333 www.dairycrestpensiontrustees.co.uk Registered in England and Wales, number 02047060