DAIRY CREST GROUP PENSION FUND REPORT TO MEMBERS

DAIRY CREST GROUP PENSION FUND REPORT TO MEMBERS - 2013

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 the Chairman 3 Trustee Board 5 Trustee Advisers 6 Financial Information 6 Fund Membership 8 Record Keeping & Pension Increases 8 Fund Investments 9 Contact Details and Information 10 Additional Voluntary Contributions (AVCs) 12 Company Funding Arrangements 13 Summary Funding Statement 13 Statutory Information 13 Further Information 14 Regulatory Organisations 14 Appendix 15 2

DAIRY CREST GROUP PENSION FUND Report to Members 2013 INTRODUCTION BY THE CHAIRMAN 2013 has been another busy year for the Fund with investment and funding issues remaining the top priorities for the Trustee. Investment returns were strong and ahead of our benchmarks in the financial year to 31 March 2013, with all investment managers performing in line with expectations. The satisfactory overall Fund return reflected the benefits of the asset allocation and diversification decisions made by the Trustee and investment returns during the remainder of 2013 have continued to be encouraging. As reported previously, the Company completed the disposal of its St Hubert Spreads business in August 2012 and the Trustee then engaged in discussions with the Company in order to agree additional funding arrangements, having regard to advice from Deloitte LLP (the Fund s Financial Adviser) on the implications of the disposal and the subsequent use of the sale proceeds for the financial strength of the Company. Following consultation with the Pensions Regulator, agreement on a funding package was reached comprising the payment to the Trustee of a special contribution of 40m and the grant by the Company of a floating charge over cheese stocks to generate a realisable value of 60m. Further details of this arrangement, which was completed in April 2013, are set out later in this Report. The Trustee is now working with the Company in relation to the 2013 Actuarial Valuation, the assumptions to be used in determining Fund liabilities and the related investment and funding plans. This valuation needs to be completed by 30 June 2014 and will need to have regard to the Pensions Regulator s Code of Practice on Funding Defined Benefits which is currently being reviewed and is scheduled to be implemented in mid-2014. 3

Because of the key importance of funding and investment matters the Trustee has decided to discontinue meetings of the Investment Committee in order to include an extended investment review at future full Trustee meetings. The number of full Trustee meetings will be increased to four a year and it is considered that these revised arrangements will facilitate more efficient use of advisers together with enabling all Trustee Directors to participate equally in funding and investment discussions. I should like to thank all members of the Trustee Board for their continuing valuable contributions to the effective governance of the Fund and would remind members that the Trustee website www.dairycrestpensiontrustees.co.uk is available for the purposes of member information and communication. Members will be able to view this Report via the website and to download a copy. Printed copies of the Report will only be sent to those members who so request. David Felder Chairman Dairy Crest Pension Trustees Limited January 2014 4

DAIRY CREST GROUP PENSION FUND Report to Members 2013 TRUSTEE BOARD 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. Appointed September 2007. 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 has been Fund Secretary since the inception of the Fund in December 1993. 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 currently provides HR consultancy services to the Company. Appointed August 2012. Michael Brydges Michael is Group Financial Controller of the Company. Appointed June 2011. 5

TRUSTEE ADVISERS Trustee Advisers Actuary Paul Dooley, Aon Hewitt Bankers Lloyds Banking Group PLC Financial Adviser Deloitte LLP Fund Administrators (see page 10) Aon Hewitt for deferred pensioners Legal & General Assurance Society Ltd for pensioners Investment Adviser Mercer Investment Consulting Legal Advisers Wedlake Bell LLP Clifford Chance LLP FINANCIAL INFORMATION Opposite is a summary of the Fund s accounts for the year ended 31 March 2013, together with comparative figures for the year ended 31 March 2012, 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. 6

DAIRY CREST GROUP PENSION FUND Report to Members 2013 2013 2012 000 000 Contributions 17,490 37,144 1 Benefits and other payments out pensions and benefits paid (31,984) (30,053) payments to and on account of leavers 2 (11,989) (4660) administrative fees and expenses (1,478) (2,237) (45,451) (36,950) Net payments in (out) (27,961) 194 Returns on investments investment income 3 4,348 3,682 investment management expenses (278) (171) change in market value of investments 4 121,858 76,462 Net increase in investments 125,928 79,973 Net increase in the Fund during year 97,967 80,167 Net assets of the fund at: 1 April 877,946 797,779 31 March 975,913 877,946 1 This amount included a special contribution from the Company of 17,250,000 to enable the Trustee to fund the purchase by the Trustee of certain freehold/long leasehold properties from the Company. 2 This amount includes 6,604,000 (2012 4,003,000) of transfers out of the Fund made during the year pursuant to the Enhanced Transfer Value exercise which was completed in May 2012. 3 This amount includes 2,835,000 (2012 2,126,000) of rentals from the Company in respect of the leaseback of freehold/long leasehold interests acquired by the Trustee in June 2011. 4 This amount also includes the change in market value during the year of the bulk annuity policies taken out with Legal & General Assurance Society Ltd in 2008/09, less the annuity payments received by the Fund from these policies during the year. 7

FUND MEMBERSHIP Year Deferred pensioners Pensioners Total 31 March 2013 7,537 8,076 15,613 31 March 2012 8,001 7,989 15,990 The reduction in the number of deferred pensioners includes 222 members who left as a result of the completion of the Enhanced Transfer Value exercise in May 2012. RECORD KEEPING & PENSION INCREASES Record Keeping The Trustee continues to work on the improvement of member records in line with the Pensions Regulator s guidance to Trustees about record keeping and the quality of the data it is expected that pension plans should hold. The Trustee is also proceeding with an exercise to reconcile the Fund s records of Guaranteed Minimum Pensions (GMP) against those records held by Her Majesty s Revenue & Customs. Pension Increases The Fund provides annual increases to pensions in payment based on the increase in the December Retail Price Index (RPI) 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 element of the pension, in respect of service on or after 6 April 1988, will be increased by the change in the September Consumer Prices Index (CPI) 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. The increase in the RPI during the 12 months to December 2012 was 3.1%. 8

DAIRY CREST GROUP PENSION FUND Report to Members 2013 FUND INVESTMENTS The Trustee monitors the performance of the Fund s investments and makes decisions 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 from investment markets were good, during the financial year to 31 March 2013, and the total return for the Fund for the year was 15.3%, bringing the total return achieved over the previous three years to 11.6% per annum. There have been no major changes in investment strategy during the year. Market conditions have not been favourable to further significant de-risking activities, although the Fund has made some progress in matching its future pensions liabilities through a liability hedging programme managed by Insight Investments. The Trustee will continue to review de-risking opportunities regularly with input from the Fund s advisers. In June 2013, the Trustee placed a further 25m in the Wellington Emerging Markets Debt fund (bringing the total amount invested in this fund to 60m as at 30th September 2013) and, in December 2013, placed 30m with PIMCO for investment in its Absolute Return Bonds fund. As a further part of the reorganisation of its bonds investments the Trustee has agreed to transfer its investments in the Wellington Global Bonds and High Yield Debt funds into a Multi-Credit fund also managed by Wellington. The Trustee has also decided, as part of its asset diversification strategy, to invest 25m in an Insurance-Linked Securities fund managed by Naphila Capital Limited, an investment which is expected to be uncorrelated to other investment classes. As at the end of 2013 the Fund s equity investments were primarily managed by Insight, Russell and Schroders with its bonds investments managed by PIMCO, Insight and Wellington. The Fund s investments in real property were split between Legal & General and AVIVA with a small allocation to Russell. In addition the Fund continues to hold the freehold/long leasehold interests in three operational sites (valued at 14.8m on 31 March 2013) and to receive rentals from the Company in respect of the leasebacks of these sites. 9

CONTACT DETAILS AND INFORMATION 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 administration 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 10

DAIRY CREST GROUP PENSION FUND Report to Members 2013 If you have any other questions, or would like any more information about your benefits, please contact Aon Hewitt if you are a deferred pensioner or Legal & General if you are a pensioner. The following documents are available to download from the Trustee s website or on written request to: The Fund Secretary, c/o Inside Pensions, 6 Victoria Street, St Albans, Hertfordshire AL1 3JB 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 2013. 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 15 of this Report. 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 Cash Deposit fund. The Trustee carries out periodic reviews of its AVC providers through Aon Hewitt and the Trustee allows deferred pensioners to utilise AVCs to fund tax free cash at retirement. Individuals may wish to take independent advice from time to time with regard to the choice of appropriate funds for their AVCs. The Trustee has previously advised deferred pensioners that, although no new contributions are permitted, it is possible to switch existing AVCs pots between the Prudential Cash Deposit fund and the range of unit funds offered by Clerical Medical, including their "lifestyle" investment strategies. A reminder note with further information will be issued to deferred pensioners later this year. Individuals who wish to switch their funds should contact Aon Hewitt at the address given on page 10. 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. 12

DAIRY CREST GROUP PENSION FUND Report to Members 2013 COMPANY FUNDING ARRANGEMENTS Following discussions subsequent to the disposal of the St Hubert spreads business, the Company paid a special deficit reduction contribution to the Trustee of 40m in April 2013. This amount has subsequently been applied by the Trustee to increase its bonds investments and to fund the investment in Insurance-Linked Securities as described in Fund Investments on page 9. The Company has also granted to the Trustee a floating charge over maturing cheese stocks of an amount which will realise a value of 60m. This charge will only take effect in the event of an insolvency and so it is not additional funding but can be considered as some security for the payment of future deficit reduction contributions. The Company has undertaken to maintain maturing cheese stocks of at least 30m tonnes at the Nuneaton cheese store and provides the Trustee with monthly stock valuation reports, to enable it to monitor its security arrangements. SUMMARY FUNDING STATEMENT There is no Summary Funding Statement to members included in this Report because the 2013 Valuation is currently in progress and the relevant regulations provide for such Statements to be provided only within a reasonable period following the completion of the Valuation processes. On this basis the Trustee anticipates publishing the next Statement towards the end of 2014. 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. 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. 13

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 The Trustee receives advice from the Actuary on the assumptions used for determining Fund factors for cash commutation, early retirement, AVCs conversion and trivial commutation and these factors are reviewed every three years. 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. 14

DAIRY CREST GROUP PENSION FUND Report to Members 2013 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. 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 Pension Protection Fund (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. 15

Dairy Crest Pension Trustees Limited Inside Pensions 6 Victoria Street St Albans Hertfordshire AL1 3JB Tel: 08454 377321 www.dairycrestpensiontrustees.co.uk Registered in England and Wales, number 02047060