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BRITISH STEEL PENSION SCHEME Registered number – 10110638
TRUSTEE’S ANNUAL REPORT AND
FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2016
Contents Trustee and advisers 1
Chairman’s introduction 2
Trustee’s annual report 4
Report on Actuarial liabilities 7
Trustee’s Summary of Contributions 9
Statement of Trustee’s responsibilities for the Financial Statements 16
Independent Auditor’s report to the Trustee 17
Fund Account 18
Summary of Net Assets (available for benefits) 19
Notes (forming part of the Financial Statements) 20
Chairman’s Annual Governance Statement 38
Independent Auditor’s Statement about Contributions to the Trustee 42
Actuary’s Certification of Schedule of Contributions 43
1
Trustee and advisers
Principal company
Tata Steel UK Limited 30 Millbank London SW1P 4WY
Participating companies
Ashorne Hill Management College (until 1 December 2015) B.S. Pension Fund Trustee Limited Cogent Power Limited Federated Property Services Limited ISSB Limited Kalzip Limited Tata Steel UK Consulting Limited UK Steel Enterprise Limited
Trustee
B. S. Pension Fund Trustee Limited
Trustee directors
A J Johnston (Chairman) S Corten N Davies (resigned 4 March 2016) M Driscoll A Dunbar T Godfrey K Haigh R Last (resigned 3 December 2015) D S Maddock S Mather A McNeil (appointed 7 March 2016) M Rees P Rees J Regan (appointed 7 March 2016) I Smith A Szczur
Scheme Secretary
M Donohue
Director, Pensions
D Mulholland
Actuary
C P Burbidge Willis Towers Watson LLP
Solicitors
Travers Smith LLP
Auditor
KPMG LLP
Administrator
B. S. Pension Fund Trustee Limited
Administration office
Ground Floor Sentinel 105 Waterloo Street Glasgow G2 7BW
Adviser to the Trustee board
J Cumming
Investment Manager
Pension Services Limited 125 Old Broad Street London EC2N 1AR
Chief Investment Officer
H C Smart
Independent Investment Advisers
P Craven S Francis P E Oldham
Custodian
JP Morgan Chase Bank
Provider of DC administration and investment services
Legal & General
Banker
Barclays Bank plc
Corporate Finance Adviser
Penfida Limited
Medical Adviser
Dr S Williams
Enquiries about the Scheme generally, or about an individual’s entitlement to benefit, should be addressed to the Pensions Office, where a copy of the Trust Deed and Rules can be inspected.
Alternatively, enquiries may be made to: [email protected] or via the Scheme website www.bspensions.com or by telephone on 0330 440 0802
2
Chairman’s introduction I am pleased to present the Annual Report and the Financial Statements for the British Steel Pension Scheme for
the year ended 31 March 2016. You will recognise that this year’s report is in a somewhat different format,
reflecting recent revisions to the reporting requirements for pension schemes.
The performance of the Scheme’s sponsor, Tata Steel UK Limited, has continued to be impacted by worse than
expected trading conditions, muted global steel demand, high manufacturing costs, and currency volatility. I
have included an update on significant post year-end developments affecting the Company and Scheme at the
end of this introduction. Further information will be provided to Scheme members as it becomes available.
Scheme assets decreased over the Year to £13.6 billion and the total investment return achieved was 1.4%.
Against a background of continued difficult financial conditions, this was a respectable return and just in excess
of the Scheme Specific Benchmark return for the year of 1.3%. The Fund produced an annualised return of 5.7%
compared to the Scheme Specific Benchmark return of 5.6% over the three years ended 31 March 2016. Over
the 9 years since the inception of the Scheme Specific Benchmark the Fund produced an annualised return of
7.5% as compared with 7.0% for the benchmark, in line with its outperformance target. Over the last 10 years
the Fund’s return was in the top 5th percentile of the State Street WM50 peer group.
The twelve months to 31 March 2016 were characterised by small positive returns from bond markets, negative
returns from most equity markets and higher positive returns from property. Economic activity remained in a
positive, albeit weak, trend both globally and in the UK whilst central banks maintained low interest rates on the
back of subdued inflation and regional uncertainties. The continuing downward trend of low interest rates has
negatively impacted Scheme funding as noted below. A more detailed analysis of the performance of
investments is contained in the Trustee’s report, beginning on page 12.
The latest actuarial Valuation of the Scheme, effective as at 31 March 2014, was completed during the year
against the background of very challenging conditions. Whilst assets continued to perform strongly the funding
position was adversely affected by historically low bond yields and by a weakening of the Company covenant
over the inter-valuation period. As part of the Valuation outcome, these issues were addressed by means of a
package of changes to future pension provision which reduced Scheme liabilities. Secondly, a range of measures
were taken to improve the Company covenant. These measures included enhancing the security package
available to the Scheme and a commitment to continue the existing Recovery Plan through to March 2018.
Taken together these measures significantly improved the funding position.
One aspect of the package of changes to future pension provisions was the introduction of a cap on future
pensionable earnings growth in the Standard Section, with earnings above the cap being pensionable via the DC
Section. As a result the Scheme has seen a very significant increase in members making contributions to the DC
Section. Allowing for these measures, the on-going deficit was reduced from £553 million as at 31 March 2011
to a residual deficit of £90 million as at 31 March 2014 and this shortfall would be addressed by the deficit
recovery payments over the three years to 31 March 2018 due under the Recovery Plan agreed with Tata Steel
UK Limited. Since then, very difficult economic conditions have continued to challenge defined benefit pension
arrangements. At the most recent funding update, as at 31 March 2015, the Scheme’s funding level on an on-
going basis fell slightly to 97%, with a deficit of £485 million. In common with defined benefit pension schemes
generally, market conditions as at 31 March 2016 are likely to have put further pressure on the Scheme’s
funding position.
3
Following completion of the 2014 Valuation, the Valuation / Covenant Sub Committee, on behalf of the Trustee
board, commenced an Investment Strategy Review. The Sub Committee, plus the Scheme’s investment and
actuarial advisers, concluded that increased hedging of Scheme assets was appropriate and the board agreed to
proceed with the creation of additional leveraged exposure to bonds equivalent to around 10% of Scheme
assets, which would form a new “Insurance portfolio” to complement the existing maturity and growth
portfolios. This will increase the overall liability hedge ratio to around 65% of assets / 55% of liabilities and the
necessary revisions to the Scheme’s Statement of Investment Principles have been made.
Post Year End Developments
Tata Steel UK Limited signed a Letter of Intent on 22 December 2015 with Greybull Capital regarding the
divestment of its Long Products division which includes the Scunthorpe steelworks, several downstream
manufacturing facilities, and a number of distribution sites in the UK. The divestment was completed on 31 May
2016 following which around 4,000 employee members became deferred pensioners in the Scheme.
Separately, Tata Steel Limited announced on 29 March 2016 its intention to explore all options for portfolio
restructuring including the potential divestment of Tata Steel UK Limited. The Trustee board and its advisers
have since been fully engaged in detailed negotiations with all of the various interested parties, including the
Pension Protection Fund (PPF), the Pensions Regulator, DWP, BIS, the Company and others, regarding possible
outcomes for the Scheme. Based on the information currently available to it, the Trustee considers it likely that
it will not be possible to find a new employer wishing to take on the Scheme in its current form, and that the
Scheme would be required to go into the PPF. This is no reflection on how the Scheme has been run or on the
performance of its assets, but is simply a general provision of UK law for pension schemes which do not have an
employer able to support them.
The Trustee believes that exchanging the Scheme's assets for PPF compensation would be a poor outcome. The
Trustee believes that the Scheme's assets are more than enough to meet the cost of paying PPF compensation
and that it would be better for the Scheme to stay out of the PPF. The Scheme could then provide modified
benefits at levels which, for the vast majority of members, would be better than PPF compensation. The Trustee
would then adopt investment policies designed to minimise the risk of not being able to pay the modified
benefits at any time in the future.
The Trustee therefore asked the Government to make changes to the law applying to the Scheme to make it
easier to modify benefits with a view to remaining outside the PPF indefinitely on a low-risk basis. Although this
would entail future pension increases being cut back from their current levels, benefits would be more
generous than those provided by the PPF for the vast majority of Scheme members and the Trustee would have
a power to reinstate pension increases in the future from any surplus that emerged in the Scheme, provided it
was financially safe to do so. At the time of writing, the Government has been consulting about these proposals
but has not yet made a decision. We have written to all members and pensioners with details of the proposals.
To end on a more positive note, I am pleased to be able to report another three successes at the Investment &
Pensions Europe 2015 Awards. The Fund was awarded the overall Gold Award for Best European Pension Fund
(the highest accolade), the Best In-House Investment Team and Best UK Pension Fund. Once again I wish to
record once again my gratitude to my colleagues on the Trustee board and all those involved in the
administration of the Scheme and the Fund for their work and commitment during the period under review.
AJ Johnston
Chairman of the Board of Trustees
4
Trustee’s annual report The Trustee has pleasure in submitting its annual report on the British Steel Pension Scheme (“the Scheme”),
together with the financial statements of the Scheme for the year ended 31 March 2016.
Constitution of the Scheme
The British Steel Pension Scheme provides a defined benefit section (“the Standard Section”) and a defined
contribution section (“the DC Section”) governed by a definitive Trust Deed dated 31 January 2013, as amended
from time to time. The Trustee holds Scheme funds on trust to apply them for the purpose of paying pensions
and other benefits in accordance with the Trust Deed.
Scheme benefits accrue:
in the Standard Section based on a Member’s earnings and length of service; and
in the DC Section based on a member’s individual member account.
Employee members of both sections are able to make Top Up Contributions (“TUCs”) on a defined contribution
basis to secure additional benefits.
During the year changes to the Rules were agreed which:
gave effect to the post consultation pensions package agreed as part of the outcome of the 2014 Actuarial
valuation,
amended the definition of pensionable pay in respect of part time Members, and
clarified certain other Rules.
Management of the Scheme
The Trustees who served during the year are listed on page 5.
The day-to-day management and operation of the Scheme has been delegated to the in-house pension
administration and investment offices set out on page 1 and is supervised by the Trustee board, who are
directors of the Trustee Company. Half of the Trustee directors are Company Nominated Trustee Directors
(“CNTDs”) and half are Member Nominated Directors (“MNDs”). Of the MNDs, one pensioner member is chosen
from the ranks of former employee pensioners on the recommendation of a selection panel consisting of
Trustee directors, and the balance of MNDs is selected by the Trade Unions.
Under the Trust Deed and Rules of the Scheme, Trustee directors are appointed and may be removed by Tata
Steel UK Limited (“the Company”). CNTDs can serve until removed by the Company. MNDs are appointed for a
three-year period on a rolling-basis and may be re-nominated through the agreed nomination process.
Appointments may be for less than three years if an MND is appointed to fill a vacancy that has occurred as a
result of an MND resigning before they have served their full term.
The appointment periods for M Rees and I Smith ended on 30 September 2015. Following confirmation through
the agreed nomination process, Mr Rees and Mr Smith were re-appointed for a further three year term,
commencing 1 October 2015.
5
The Trustee board has delegated the exercise of its investment powers in respect of the Standard Section to an
Investment Committee comprising six members drawn from the Trustee board, half of whom are CNTDs and half
are MNDs. The Investment Committee is advised by the Fund’s Chief Investment Officer and is assisted by three
independent advisers. The Trustee board has also established a Valuation/Covenant Sub Committee to engage
directly with the Scheme’s sponsoring employers on matters that might affect the employers’ covenant or
Scheme’s funding position. The Sub Committee comprises four members drawn from the Trustee board, half of
whom are CNTDs and half are MNDs, assisted by Scheme Officers, the Scheme Actuary and other professional
advisers as required. The Sub Committee has no authority to make decisions on behalf of the Trustee except as
may be conferred by resolution of the Board from time to time.
The Trustee directors’ attendance at meetings of the Trustee board and relevant Committees is summarised
below. Where a Trustee director was not entitled to attend all of the meetings in the year the maximum
number of meetings is given in brackets.
TRUSTEE DIRECTOR TRUSTEE BOARD 5 MEETINGS
INVESTMENT COMMITTEE 4 MEETINGS
VALUATION/COVENANT SUB COMMITTEE
3 MEETINGS
A J Johnston 5 4 3
S Corten 4 N/A N/A
N Davies (resigned 4 March 2016) 3(4) N/A N/A
M Driscoll 4 N/A N/A
A Dunbar 5 4 N/A
T Godfrey 5 4 3
K Haigh 4 N/A N/A
R Last (resigned 3 December 2015) 3(3) N/A N/A
S Maddock 4 4 3
S Mather 2 3 2
A McNeil (appointed 7 March 2016) 1(1) N/A N/A
M Rees 5 N/A N/A
P Rees 4 3 N/A
J Regan (appointed 7 March 2016) 1(1) N/A N/A
I Smith 3 N/A N/A
A Szczur 5 N/A N/A
The Trustee board has implemented a governance framework intended to provide reassurance that the Scheme
is well run and a means of monitoring the effectiveness of the arrangements put in place to manage the
Scheme. The governance arrangements for the Scheme take account of the recommendations and Codes of
Practice of the Pensions Regulator and best practice, and are kept under continuous review. The Governance
framework covers:
appointment and removal of Trustee directors,
operation and performance of the Trustee Board and its sub committees,
review of advisers to the Trustee board,
conflicts of interest,
data protection and data quality,
Trustee Knowledge and Understanding,
6
anti-corruption and bribery,
risk management,
confidentiality agreements,
delegated authorities and service standards,
internal control regimes,
annual business planning, and
recovery in the event of a disaster.
Governance issues are considered throughout the year. Further details regarding Scheme governance can be
found in the Chairman’s Annual Governance Statement on page 38.
Recent developments
During the year the Company concluded consultations with employees and their representatives regarding
changes to the Scheme. This “post consultation pensions package” included:
A pensionable earnings growth cap of 1.75% with a DC Section top-up on excess pensionable earnings
growth above the cap.
An actuarial reduction in respect of employee members retiring early with the employer’s consent, will be
phased in over the 5 year period from Oct 2015 to Sept 2020.
Future increases to pensions in payment and deferment in respect of benefits accrued from 1 April 2016
will be limited to the statutory minimum (currently the lesser of Consumer Prices Indexation and 2.5%).
A participating employer in the Scheme, Ashorne Hill Management College, withdrew from the Scheme on 1
December 2015. The past service benefits of the employees of Ashorne Hill Management College will remain in
the Scheme as deferred benefits. The estimated s75 debt identified relating to the past service benefits of the
employees concerned was addressed by means of a Flexible Apportionment Arrangement under which the
Company assumed responsibility for the liabilities.
The Company announced on 22 December 2015 the signing of a Letter of Intent with Greybull Capital to enter
negotiations for the potential sale of its Long Products Europe business. The Long Products division employs
around 4,000 Scheme employee members. In anticipation of the potential sale, the Company transferred the UK
longs steel business of the Tata Steel Group to Longs Steel UK Limited (“LSUK”), a newly incorporated, wholly
owned subsidiary of Tata Steel UK Limited. LSUK is not a participating employer in the Scheme.
Following a strategic review of Tata Steel’s European operations, the Board of Tata Steel Ltd announced on 30
March 2016 that it had instructed the Board of its European holding company to explore all options for portfolio
restructuring including the potential divestment of Tata Steel UK, in whole or in parts. The Trustee board is fully
engaged with all relevant stakeholders regarding the Company’s announcement and has taken independent
professional advice on the potential implications for the Scheme of various possible outcomes. The Trustee is
monitoring developments closely and expects to discuss with Tata Steel and any purchaser how the Scheme
might be affected by any new proposals for a sale or restructuring of Tata Steel UK. The Trustee has briefed the
Pensions Regulator and will be seeking to ensure the best outcome for Scheme members.
The Scheme ceased to be a contracted-out arrangement following the introduction of the single State pension
with effect from 6 April 2016; see “Pension increases” on page 12.
7
Report on actuarial liabilities
The financial statements set out on pages 18 to 37 do not include liabilities in respect of promised retirement
benefits which fall due after the year end. These liabilities are considered by the Scheme Actuary who carries
out an actuarial valuation of the Scheme every three years. This valuation considers the funding position of the
British Steel Pension Scheme (excluding the DC Section) and the level of contributions payable.
Under section 222 of the Pensions Act 2004, every scheme is subject to the Statutory Funding Objective, which
is to have sufficient and appropriate assets to cover its technical provisions, which represent the present value
of benefits to which members are entitled based on pensionable service to the valuation date. As described, this
is assessed at least every three years using assumptions agreed between the Trustees and the employer and set
out in the Statement of Funding Principles, a copy of which is available to Scheme members on request.
The most recent triennial actuarial valuation of the Scheme was carried out as at 31 March 2014. The Scheme
Actuary also provides an Annual Funding Update each year between actuarial valuations to provide an
approximate update of the funding position of the Scheme. An Annual Funding Update was undertaken as at 31
March 2015.
VALUATION DATE: 31 MARCH 2015
31 MARCH 2014
Formal valuation report*
After benefit changes
Value of technical provisions £14,476 million £13,639 million £12,763 million
Value of assets available to meet technical provisions
£13,991 million £12,673 million £12,673 million
Deficit £485 million £966 million £90 million
Funding level 97% 93% 99%
* The actuarial valuation of the Scheme as at 31 March 2014 does not reflect changes to benefits included in
the Deed of Amendment dated 31 July 2015. Allowing for these changes in the Recovery Plan reduces the deficit
at 31 March 2014 by £876 million, leaving a residual funding shortfall of £90 million.
The value of technical provisions is based on Pensionable Service to the valuation date and assumptions about
various factors that will influence the scheme in the future, such as the levels of investment returns and pay
increases, when members will retire and how long members will live. The method and significant actuarial
assumptions used in the calculations are as follows:
Method
The actuarial method to be used in the calculation of the technical provisions is the Projected Unit Method.
Significant actuarial assumptions
Pre-retirement discount rate
a prudent assessment of the expected return from equities and any other return seeking asset classes held by the Scheme in respect of non-pensioner liabilities, having regard to market conditions at the valuation date.
Post-retirement discount rate
based on returns expected from gilts and high quality corporate bonds, having regard to market conditions at the valuation date and allowing for an appropriate margin of prudence within the expected asset return, in order to allow for possible reinvestment and default risk.
8
Pensionable Earnings increases
real pay increases of 1% p.a.
Retail Price Inflation (RPI)
term dependent rates derived from the Bank of England; fixed interest and index-linked gilt curves at the valuation date.
Consumer Price Inflation (CPI)
term dependent rates derived from the Bank of England; fixed interest and index-linked gilt curves at the valuation date, less an adjustment equal to 0.75% per annum.
Pension increases The majority of pensions increase in line with RPI. Where pension increases are capped, an allowance is made for this.
Mortality for the period in retirement, standard tables S1NMA with a scaling factor of 94% and S1DFA with a scaling factor of 100%. CMI (2009) projections with a long term trend of 1.50% pa from 2011.
Recovery plan
A Recovery Plan and Schedule of Contributions were agreed between the Trustee and the Company on 30
September 2015. Under the Schedule of Contributions, it was agreed that the Company contributions for active
Standard Section members would decrease from 13% to 11.5% of pensionable earnings and employee
members’ contributions would decrease from 7.5% to 6.5% of pensionable earnings with effect from 1 April
2016. Under the Recovery Plan, the Company also agreed to pay additional deficit recovery contributions of
£170 million over the period from April 2015 to March 2018. On the basis of conditions prevailing at that date,
the Scheme funding deficit was expected to be eliminated by 31 March 2017. A copy of this Scheme Actuary’s
certificate in respect of the Schedule of Contributions is included on page 43 of this annual report.
The next triennial valuation is due as at 31 March 2017.
Financial developments of the Scheme
The financial statements included in this annual report are the accounts required by the Pensions Act 1995.
They have been prepared and audited in compliance with regulations made under sections 41(1) and (6) of that
Act.
A summary of the Scheme’s financial statements is set out in the table below.
STANDARD SECTION DC SECTION TOTAL
2016 £’000
2015 £’000
2016 £’000
2015 £’000
2016 £’000
2015 £’000
Member related income 148,634 153,947 4,855 1,353 153,489 155,300
Member related payments (675,686) (647,474) (95) - (675,781) (647,474)
Net (withdrawals)/additions from dealings with members
(527,052) (493,527) 4,760 1,353 (522,292) (492,174)
Net returns on investments 167,539 1,809,860 2 517 167,541 1,810,377
Net (decrease)/increase in fund (359,513) 1,316,333 4,762 1,870 (354,751) 1,318,203
Net assets at start of year 13,988,173 12,671,840 2,717 847 13,990,890 12,672,687
Net assets at end of year 13,628,660 13,988,173 7,479 2,717 13,636,139 13,990,890
9
Significant developments affecting the financial position of the Scheme during the year included:
During the year member income into the Standard Section reduced to £149 million compared with £154
million for the prior year reflecting the on-going reduction in employee members.
Deficit recovery contributions increased by £5 million.
Membership of the DC Section increased significantly reflecting the introduction of the cap on Standard
Section pensionable earnings growth of 1.75% per annum. Earnings growth above the cap remains
pensionable by means of DC Section contributions.
Member payments increased by around £20 million. The majority of this increase was due to lump sum
retirement benefits paid to retirees during the year. The DC Section does not pay pensions; instead
members can elect to purchase annuities from insurance companies, or take the value of their member
account in cash, 25% of which will be tax free with the remainder taxed at the member’s marginal rate.
The net returns on investment of £167,541,000 (2015 £1,810,377,000) comprised change in market value of
(£167,274,000) (2015 £1,472,465,000) and investment income of £350,330,000 (2015 £353,712,000) offset by
investment management expenses including interest payable of £8,084,000 (2015 £8,420,000) and taxation of
£7,431,000 (2015 £7,380,000).
A more detailed analysis of the financial developments over the year can be found in the Notes to the Financial
Statements on pages 20 to 37.
Contributions
Standard Section Member contributions were payable during the year at 7.5% of pensionable earnings with an
ordinary contribution rate 13% from the Company. Members of the DC Section paid 6% of Pensionable Earnings
and also received the benefit of a Company contribution of 10% into their Member Account.
Pensionable Earnings and contributions are determined after applying an offset (known as the Lower Earnings
Limit (LEL) deduction). The LEL deduction for the 2015/16 Scheme Year was £4,048 per annum. Pensionable
Earnings during the year were normally gross earnings less the LEL deduction of £4,048, subject to a fixed cap of
£100,000. The LEL deduction increases annually in line with the increase in the Retail Prices Index over the
preceding January to January period and accordingly has been increased to £4,100 per annum from 1 April
2016.
The level of contributions required to be paid by Members and the employers during the year was documented
in the Schedules of Contributions certified by the Scheme Actuary on 7 November 2012 and 30 September
2015.
Members can opt to make pension contributions via a salary sacrifice arrangement, known as "SMART Pension".
Trustee’s Summary of Contributions payable under the Schedules in respect of the Scheme year ended 31
March 2016
The Trustee is responsible under pensions legislation for ensuring that there is prepared, maintained and from
time to time revised a Schedule of Contributions showing the rates of contributions payable towards the
Scheme by or on behalf of the Employer and the active members of the Scheme and the dates on or before
which such contributions are to be paid. The Trustee is also responsible for keeping records of contributions
received in respect of any active member of the Scheme and for procuring that contributions are made to the
Scheme in accordance with the Schedule.
10
This Summary of Contributions has been prepared by, and is the responsibility of, the Trustee. It sets out the
Employer and member contributions payable to the Scheme under the Schedules of Contributions certified by
the actuary on 7 November 2012 and 30 September 2015 in respect of the Scheme year ended 31 March 2016.
The Scheme Auditor reports separately on contributions payable under the Schedules in the Auditors’
Statement about Contributions on page 42.
CONTRIBUTIONS PAYABLE UNDER THE SCHEDULES IN RESPECT OF THE SCHEME YEAR £’000
Employer
Normal contributions 85,578
Deficit funding contributions 45,000
Member
Normal contributions 21,203
Contributions payable under the Schedules (as reported on by the Scheme Auditor) 151,781
Reconciliation of Contributions Payable under the Schedule of Contributions to Total Contributions reported in the
Financial Statements
£’000
Contributions payable under the Schedules (as above) 151,781
Contributions payable in addition to those due under the Schedules (and not reported on by the
Scheme Auditor):
-
Member Additional Voluntary Contributions 1,708
Total contributions reported in the Financial Statements 153,489
Membership
The membership of the Scheme at the beginning and end of the year and changes during the year are set out
below.
EMPLOYEE MEMBERS STANDARD SECTION
DC SECTION TOTAL
Employee members at start of year 15,627 448 16,075
New entrants in year - 721 689
15,627 1,169 16,764
Leavers and exits during the year
Retirements (1,111) (1) (1,112)
Deferreds (1,124) (131) (1,223)
Refunds (71) - (71)
Death in service (19) - (19)
(2,325) (132) (2,425)
Employee members at end of year 13,302 1,037 14,339
New entrants during the year are stated net of opt-outs where contributions were never remitted to the
Scheme. In addition to the DC Section members above, 3,548 active members of the Standard Section are also
making DC contributions in respect of earnings in excess of the pensionable earnings growth cap.
11
DEFERRED PENSIONERS STANDARD SECTION
DC SECTION TOTAL
At start of year 32,559 - 32,559
New deferred pensioners 1,171 131 1,315
33,730 131 33,874
Cessation of deferred pension resulting from:
Retirements (1,670) - (1,670)
Deaths (139) - (139)
Transfers to other employer’s schemes (13) - (13)
Transfers to personal pension schemes (157) (3) (160)
Refunds - (29) (29)
Moved to unclaimed file (83) - (83)
(2,062) (32) (2,094)
Deferred pensioners at end of year 31,668 99 31,780
In addition to the deferred pensioner members above there are 1,020 “untraced” members (members who
have reached normal pension age but who are not in receipt of a pension because their whereabouts cannot be
traced) and a further 1,277 “unclaimed” members (members who have been untraced members for more than
5 years).
Under current Rules, DC Section funds at retirement must be used to purchase an annuity or be paid to the
Member as cash.
PENSIONERS STANDARD SECTION
In payment at start of year 86,071
New pensioners in year 3,654
89,725
Cessation of benefits:
Cessations during the year (5,183)
Commutation of trivial pensions (512)
(5,695)
In payment at end of year 84,030
PENSIONERS ANALYSIS AT 31 MARCH 2016
Pensioners 56,403
Widow(er)s/civil partners 27,005
Children 622
Included within the above are 185 pensioners and 14 beneficiaries whose benefits are provided by annuities.
The BSPS is a qualifying pension scheme for auto enrolment purposes, which means it meets or exceeds the
minimum standards set by the Government.
12
Pension increases
Pensions in payment were generally increased by 1.3% effective from 1 April 2016. Increases to Scheme
benefits in respect of service between 1 April 2006 and 31 March 2012 are subject to a cap of 4% per annum,
and increases to Scheme benefits in respect of service from 1 April 2012 are subject to a cap of 3% per annum,
in accordance with the Rules of the Scheme. Additionally, increases in respect of service before 1 April 2006, for
members of the former Acquisition Section, are subject to a cap of 5% per annum.
The pension increases referred to above do not apply to that element of the pensions in payment representing
any Guaranteed Minimum Pensions (GMP), which the Scheme is required to provide as a consequence of
contracting out of the State pension arrangements for the Standard Section, as these increases are provided by
the State. GMP earned after April 1988 will be increased by the Scheme in line with inflation, as required by
legislation, up to a maximum of 3% per annum. GMPs relate to service accrued from April 1978 to April 1997,
when contracting out arrangements were changed and GMP ceased to apply. Contracting out arrangements
ceased from 6 April 2016.
Deferred pensions have been increased in line with statutory requirements. All increases were in accordance
with the Trust Deed and Rules of the Scheme or legislative requirements.
There were no discretionary increases awarded in the year.
Transfers
All transfer values paid to other pension schemes or credits given in respect of transfer values received from
other pension schemes during the year were calculated and verified by the Scheme Actuary or calculated in
accordance with instructions prepared by him, in accordance with statutory regulations.
The Trustee has instructed the Scheme Actuary not to take account of discretionary increases in calculating cash
equivalents for transfer purposes. No transfers were reduced to less than their cash equivalent value.
Custody
Custodian services are provided by JP Morgan Chase Bank N.A. In accordance with normal practice, the
Scheme’s investments are registered in the name of the custodian’s own nominee company with designation
for the Scheme, Chase Nominees Limited for B.S. Pension Fund Trustee Limited acting for the British Steel
Pension Scheme. The Trustee reviews the internal control reports produced by the custodian and regularly
reconcile the custodian’s records of securities and cash to the investment manager’s records.
The Trustee has implemented mandates ensuring that rights attaching to Scheme investments are acted upon.
This includes active voting participation and a requirement to consider social, ethical and environmental issues
when formulating the Scheme’s investment strategy.
Investment management
The Trustee delegates the day-to-day management of investments to Pension Services Limited (“PSL”), its in-
house managed investment manager. It is a wholly owned subsidiary of the Scheme and regulated by the
Financial Conduct Authority. The Trustee sets the investment strategy for the Scheme after taking advice from
the Scheme’s Investment Adviser. The Trustee has in place an investment mandate with their investment
manager which implement this strategy.
13
In accordance with section 35 of the Pensions Act 1995, a Statement of Investment Principles (“SIP”) has been
prepared by the Trustee which incorporates the investment strategy and a copy of the SIP can be obtained from
the Administration Office.
Pension Services Limited is remunerated by a fixed fee and the balance of the fees are borne by the Scheme.
The performance related remuneration for members of Pension Services Limited is agreed by the Chairman of
the Trustee in conjunction with the Company and the Chief Investment Officer and is based on meeting the
short to medium term objectives of the Scheme in out-performing the Scheme Specific Benchmark.
The main investment objective of the Standard Section is to maintain a portfolio of suitable assets of
appropriate liquidity which will generate investment returns to meet, together with future contributions, the
benefits of the Standard Section payable under the Trust Deed and Rules as they fall due. The Trustee sets the
investment strategy for the Standard Section taking into account considerations such as the strength of the
Employer covenant, the long term liabilities, and the funding agreed with the Employer. The investment
strategy is set out in the SIP.
The current strategy is to hold broadly:
70% in Maturity investment portfolio that moves in line with the long term liabilities of the Scheme. This
comprises UK and overseas government, corporate and high return bonds and UK and overseas index
linked bonds. It also includes maturity property portfolio which shares certain characteristics, namely long
lease terms, good tenant covenants and rent reviews subject to inflation linked uplifts and cash.
Derivatives in the form of inflation rate swaps hedge against the impact of inflation rate movement on long
term liabilities and interest rate swaps hedge against the impact of interest rate movements on long term
liabilities.
30% in Growth investments comprising UK and overseas equities, investment property and alternatives.
The actual allocations will vary from the above due to market price movements and intervals between
rebalancing the portfolio. Actual allocation at the Scheme’s year end are shown below:
TOTAL 2016 TOTAL 2015
% %
Maturity portfolio 66 65
Growth portfolio 34 35
100 100
The Trustee invests directly into equity and bonds as well as pooled investment vehicles and derivative
contracts. The Trustee has authorised the use of derivatives by PSL for efficient portfolio management purposes
and to reduce certain investment risks. The principle investment in derivatives is interest rate and inflation
swaps in the LDI portfolio.
14
The nature and disposition of the Standard Section investments are set out below, together with the actual
allocation of investments at 31 March 2016, with pooled investment vehicles and derivatives analysed by
underlying economic exposure:
2016 DIRECT
INVESTMENTS
POOLED INVESTMENT
VEHICLES
DERIVATIVES TOTAL PERCENTAGE
£’000 £’000 £’000 £’000 %
Maturity Portfolio
Fixed Interest and Interest/inflation swaps
8,485,873 10,488 (108,037) 8,388,324 62
Property 575,289 - - 575,289 4
Growth Portfolio
Equities (UK and overseas)
3,360,796 208,328 - 3,569,124 26
Property 733,931 49,798 - 783,729 6
Private Equity - 111,382 - 111,382 1
Other 201,223 - - 201,223 1
13,357,112 379,996 (108,037) 13,629,071 100
2015 DIRECT
INVESTMENTS
POOLED INVESTMENT
VEHICLES
DERIVATIVES TOTAL PERCENTAGE
£’000 £’000 £’000 £’000 %
Maturity Portfolio
Fixed Interest and Interest/inflation swaps
8,592,041 10,616 (83,609) 8,519,048 61
Property 564,935 - - 564,935 4
Growth Portfolio
Equities (UK and overseas)
3,443,252 233,251 - 3,676,503 26
Property 644,906 42,126 - 687,032 5
Private Equity - 132,638 - 132,638 1
Other 374,080 - - 374,080 3
13,619,214 418,631 (83,609) 13,954,236 100
Other than the pooled investment vehicles and OTC (“over the counter”) derivatives (interest and inflation
swaps) and property, all investments described above are quoted on a recognised stock exchanges. The
property portfolios are managed and valued by the investment manager on the anniversary of the date of
purchase. The derivatives are and mark to market on daily basis and the pooled investment vehicles are priced
by the investment manager of those vehicles. The Trustee regards all the investments of the Standard Section as
readily marketable other than the pooled investment vehicles.
15
The Standard Section investments, managed by PSL, achieved an annualised return of 1.4% compared to its
Scheme Specific Benchmark return of 1.3% over the one year ended 31 March 2016 and achieved a return of
5.7% compared to 5.6% over three years ended 31 March 2016. Over the 9 years since the inception of the
Scheme Specific Benchmark the Fund produced an annualised return of 7.5% as compared with 7.0% for the
benchmark, in line with its outperformance target. Over the last 10 years the Fund’s return was in the top 5th
percentile of the State Street WM50 peer group.
The annualised performance of the investment funds is as follows:
1 YEAR 3 YEARS 5 YEARS 9 YEARS*
% % % %
Maturity portfolio 1.4 4.9 8.0 7.8
Growth portfolio 1.3 7.3 7.3 6.2
Total Return 1.4 5.7 7.8 7.5
Scheme Specific Benchmark 1.3 5.6 7.7 7.0
* since the inception of the Scheme Specific Benchmark.
Signed for and on behalf of the Trustee of the British Steel Pension Scheme on 14 June 2016
A J Johnston
Chairman of the Board of Trustees
D S Maddock
Director
A Dunbar
Director
16
Statement of Trustee’s responsibilities for the Financial Statements The audited Financial Statements, which are to be prepared in accordance with UK Generally Accepted
Accounting Practice (UK GAAP) including FRS102 The Financial Reporting Standard applicable in the UK and
Republic of Ireland, are the responsibility of the Trustee. Pension scheme regulations require the Trustee to
make available to scheme members, beneficiaries and certain other parties, audited financial statements for
each Scheme year which:
show a true and fair view, of the financial transactions of the Scheme during the Scheme year and of the
amount and disposition at the end of the Scheme year of the assets and liabilities, other than liabilities to
pay pensions and benefits after the end of the Scheme 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 have agreed suitable accounting
policies, to be applied consistently, making estimates and judgements on a reasonable and prudent basis. It is
also responsible for making available each year, commonly in the form of a trustee’s annual report, information
about the Scheme prescribed by pensions legislation, which it should ensure is consistent with the financial
statements it accompanies.
The Trustee also has certain responsibilities in respect of contributions which are set out in the statement of
Trustee’s responsibilities accompanying the Trustee’s summary of contributions.
The Trustee has a general responsibility for ensuring that adequate accounting records are kept and for taking
such steps as are reasonably open to it to safeguard the assets of the Scheme and to prevent and detect fraud
and other irregularities, including the maintenance of appropriate internal controls.
17
Independent Auditor’s report to the Trustee of the British Steel Pension Scheme We have audited the Financial Statements of the British Steel Pension Scheme for the year ended 31 March
2016 set out on pages 18 to 37. The financial reporting framework that has been applied in their preparation is
applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice) including FRS 102 The
Financial Reporting Standard applicable in the UK and Republic of Ireland.
This report is made solely to the Scheme Trustee, as a body, in accordance with the Pensions Act 1995 and
Regulations made thereunder. Our audit work has been undertaken so that we might state to the Scheme
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 Scheme
Trustee, as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of Trustees and Auditor
As explained more fully in the Statement of Trustees’ responsibilities set out on page 16, the Scheme Trustee is
responsible for the preparation of Financial Statements which show 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). These standards require us to comply with the Auditing Practices
Board’s Ethical Standards for Auditors.
Scope of the audit of the Financial Statements
A description of the scope of an audit of Financial Statements is provided on the Financial Reporting Council’s
website at www.frc.org.uk/auditscopeukprivate.
Opinion on Financial Statements
In our opinion the Financial Statements:
show a true and fair view of the financial transactions of the Scheme during the Scheme year ended 31
March 2016 and of the amount and disposition at that date of its assets and liabilities, other than liabilities
to pay pensions and benefits after the end of the Scheme year;
have been properly prepared in accordance with UK Generally Accepted Accounting Practice; and
contain the information specified in 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 1995.
Catherine Burnet for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 15 Canada Square London E14 5GL
18
Fund Account FOR THE YEAR ENDED 31 MARCH 2016
Standard Section DC Section Total Total 2016 2016 2016 2015 Notes £'000 £'000 £'000 £'000
Contributions and Benefits
Contributions receivable 4
Employer 126,981 3,597 130,578 126,748
Employees 21,653 1,258 22,911 28,552
148,634 4,855 153,489 155,300
Benefits payable 5 (653,662) - (653,662) (631,333)
Payments to and on account of leavers
6 (18,030) (95) (18,125) (12,206)
Administrative expenses 7 (3,994) - (3,994) (3,935)
(675,686) (95) (675,781) (647,474)
Net (withdrawals) / additions from dealings with members
(527,052) 4,760 (522,292) (492,174)
Return on Investments
Investment income 8 350,330 - 350,330 353,712
Change in market value of investments
13 (167,276) 2 (167,274) 1,472,465
Investment management expenses
17 (2,220) - (2,220) (2,253)
Taxation 8 & 9 (7,431) - (7,431) (7,380)
Interest payable (54) - (54) -
Investment administration expenses
18 (5,810) - (5,810) (6,167)
Net return on investments 167,539 2 167,541 1,810,377
Net (decrease) / increase in the fund during the year
(359,513) 4,762 (354,751) 1,318,203
Net Assets of the Scheme
At beginning of year 13,988,173 2,717 13,990,890 12,672,687
At end of year 13,628,660 7,479 13,636,139 13,990,890
The notes on pages 20 to 37 form part of these financial statements.
19
Summary of Net Assets (available for benefits) AS AT 31 MARCH 2016
Notes Standard Section DC Section Total Total 2016 2016 2016 2015 £’000 £’000 £'000 £'000
Investment assets
Equities 13 & 16 3,360,796 - 3,360,796 3,443,252
Bonds 13 & 16 8,485,873 - 8,485,873 8,592,041
Properties 13 & 16 1,309,220 - 1,309,220 1,209,841
Pooled investment vehicles 10 & 13 379,996 7,479 387,475 421,348
Derivatives 11 3,766 - 3,766 5,136
Other investments 13 11 - 11 11
AVC investments 12 & 13 1,640 - 1,640 1,763
Cash 13 131,636 - 131,636 304,394
Other investment balances 13 70,939 - 70,939 72,838
13,743,877 7,479 13,751,356 14,050,624
Investment liabilities
Derivatives 11 (111,803) - (111,803) (88,745)
Other investment balances 13 (3,621) - (3,621) (4,926)
(115,424) - (115,424) (93,671)
Total net investments 13,628,453 7,479 13,635,932 13,956,953
Current assets 19 66,929 - 66,929 69,622
Current liabilities 20 (66,722) - (66,722) (35,685)
207 - 207 33,937
Net Assets of the Scheme 13,628,660 7,479 13,636,139 13,990,890
The notes on pages 20 to 37 form part of these financial statements. The Financial Statements summarise the
transactions of the Scheme and deal with the net assets at the disposal of the Trustee. They do not take account
of obligations to pay pensions and benefits which fall due after the end of the Scheme year. The actuarial
position of the Standard Section, which does take account of such obligations, is dealt with in the Report on
Actuarial Liabilities included on pages 7 and 8 and these Financial Statements should be read in conjunction with
that Report.
Signed for and on behalf of the Trustee of the British Steel Pension Scheme on 14 June 2016
A J Johnston
Chairman of the Board of Trustees
D S Maddock
Director
A Dunbar
Director
20
Notes (forming part of the Financial Statements) 1. General information
The British Steel Pension Scheme is an occupational pension scheme established under trust. The Scheme was established to provide retirement benefits to employees of British Steel plc and its successors. The address of the Scheme’s principal office is 125 Old Broad Street, London, EC2N 1AR. The Scheme has a defined benefit section which is no longer open to new members but existing members continue to accrue benefits, and a defined contribution section which is open to new members. The Scheme is a registered pension scheme under the Chapter 2, Part 4 of the Finance Act 2004. This means that contributions by employers and employees are normally eligible for tax relief, and income and capital gains earned by the Scheme receive preferential tax treatment.
2. Basis of Preparation The Financial Statements have been prepared in accordance with Financial Reporting Standard 102 – The Financial Reporting Standard applicable in the UK and Republic of Ireland issued by the Financial Reporting Council and with the guidance set out in the Statement of Recommended Practice (SORP) (Revised November 2014). This is the first year FRS 102 and the Revised SORP have applied to the Scheme’s financial statements. The adoption has resulted in increased disclosures in respect of investment risk reporting and investment valuation basis with no changes to the figures reported in the Fund Account or the Statement of Net Assets in the current or prior year. The Scheme has elected to early adopt the amendments to FRS 102 issued by the Financial Reporting Council in respect of fair value hierarchy disclosure requirements for financial instruments held at fair value as permitted for retirement benefit plans.
3. Accounting policies a) Investments
The principal accounting policies of the Scheme are as follows:
i. Investments are included at fair value.
ii. The majority of listed investments are stated at bid price at the date of the Statement of Net
Assets.
iii. Fixed interest and index linked securities are stated at their clean prices (excluding accrued interest). Accrued income is accounted for within investment income. Where applicable, fixed interest and index linked securities have their respective sinking factors and indexation factors applied to the valuation.
iv. Unquoted securities are included at fair value estimated by the Trustees based on advice from the investment manager.
v. The private equity portfolio, infrastructure funds and the high return fixed interest funds have been valued using the latest company or limited partnership financial statements at 31 March 2016, or at fair value if lower, as determined by the Investment Committee on behalf of the Trustee, based on advice from the investment manager.
21
vi. Freehold and long leasehold (over fifty years) property purchased prior to 1 April 2015 has been included at an open-market internal valuation made during the period for each property in the month of the anniversary of purchase. The valuation is in accordance with the Royal Institution of Chartered Surveyors’ Appraisal and Valuation Standards and Practices. These valuations have been agreed by a sub-committee comprising the Property Adviser, the Chief Investment Officer, the Head of Property and the Senior Valuation Surveyor, and have been approved by the Investment Committee. Property purchased on or after 1 April 2015 has been included at cost. Property purchases and sales are recognised at the point of completion. The Scheme’s property deeds are held at Tata Steel UK Limited’s records centre, under the control of the Scheme.
vii. Included within Properties is an investment in a joint venture. The valuation is based on the net asset value held by the Scheme as at 31 March 2016. The property within the joint venture was wholly owned by the Scheme until 4 October 2007 and was last valued on the same basis as other properties held by the Scheme as at 31 March 2016. The net income related to this joint venture has been separately disclosed as from 4 October 2007.
viii. Maturity portfolio properties tend to share certain characteristics, namely long lease terms, good tenant covenants and rent reviews subject to inflation linked uplifts. These properties are valued on the same basis as the properties held in the Growth portfolio i.e. valued on the anniversary of the purchase date. The net income related to the Maturity properties has been separately disclosed.
ix. Property development costs are valued as per the contractual agreement at the balance sheet date and are held at cost until completion.
x. Annuities purchased in the name of the Trustee have been included at nil value in the financial statements on the grounds of materiality.
xi. Derivatives are stated at fair value as at 31 March 2016.
Exchange traded derivatives are stated at fair value determined by using market quoted prices.
Swaps are valued taking the current value of future cash flows arising from the swap determined by using discounted cash flow models and market data at 31 March 2016.
All gains and losses arising on derivative contracts are reported within “Change in Market Value”.
Receipts and payments arising from derivative instruments are reported as sale proceeds or purchase of investments.
xii. US dollar cash deposits held in the form of Treasury bills were valued at bid price on the balance
sheet date.
xiii. Reverse Repurchase arrangement. Under reverse repurchase (reverse repo) arrangements, the Scheme does not recognise the collateral securities received as assets in its Financial Statements. The Scheme does recognise the cash delivered to the counterparty as a receivable in Financial Statements.
b) Investment income
i. Dividends from quoted securities are accounted for when the security is declared ex-dividend.
ii. Fixed interest income and index linked interest income have indexation and sinking factors applied to the income receivable where applicable.
iii. Interest is accrued on a daily basis.
22
iv. Investment income is reported net of attributable tax credits but gross of withholding taxes which are accrued in line with the associated investment income. Irrecoverable withholding taxes are reported separately as a tax charge.
v. Rents from properties are recognised in accordance with the terms of the underlying leases and stated net of expenses.
vi. Income from reverse repurchase agreements is accrued on a daily basis dependent on the market rate prevailing on the day.
vii. Receipts from annuity policies held by the Trustees to fund benefits payable to Scheme members are included within investment income on an accruals basis.
c) Foreign currencies
The functional and presentational currency of the Scheme is sterling. Balances denominated in foreign currencies are translated into sterling at the rate prevailing at 31 March 2016. Asset and liability balances are translated at the bid and offer rates respectively. Transactions denominated in foreign currencies are translated at the rate ruling on the date of the transaction. Differences arising on investment balance translation are accounted for in “Change of market value” in the Fund Account.
d) Contributions
i. Employee normal contributions and additional voluntary contributions are accounted for when
deducted from pay, with the exception of contributions deducted from auto-enrolled members during the opt-out period which are accounted for on the earlier of receipt or the expiry of the opt out period. Employer normal contributions which are expressed as a rate of salary are accounted for in the period they are due under the Schedule of Contributions.
ii. Employer deficit funding contributions are accounted for on the due dates on which they are payable in accordance with the Schedule of Contributions and Recovery Plan under which they are being paid.
iii. Employer s75 debt contributions are accounted for when a reasonable estimate of the amount due can be determined.
e) Payments to members
i. Benefits are accounted for in the period in which they fall due for payment. Where there is a choice, benefits are accounted for in the period in which the member notifies the Trustees of his decision on the type or amount of benefit to be taken or, if there is no member choice, they are accounted for on the date of retirement or leaving.
ii. Opt outs are accounted for when the Scheme is notified of the opt out.
iii. Individual transfers in or out are accounted for when paid or received which is normally when member liability is accepted/discharged.
iv. Group transfers are accounted for in accordance with the terms of the transfer agreement.
f) Expenses
Expenses are accounted for on an accruals basis. The Scheme bears all of the direct costs of administration.
23
4. Contributions Receivable
STANDARD
SECTION DC SECTION TOTAL 2016 TOTAL 2015
£'000 £'000 £'000 £'000
Employer:
Normal 81,981 3,597 85,578 86,748
Deficit Funding 45,000 - 45,000 40,000
126,981 3,597 130,578 126,748
Members:
Normal 20,197 1,006 21,203 26,718
Additional Voluntary Contributions 1,456 252 1,708 1,834
21,653 1,258 22,911 28,552
148,634 4,855 153,489 155,300
Deficit funding contributions are being paid by the Company into the Scheme for a period of three years to 31 March 2018 in accordance with a Recovery Plan in order to improve the Scheme’s funding position. The amounts to be paid in the future are £60 million payable on 31 March 2017 and £65 million payable on 31 March 2018
5. Benefits Payable
STANDARD
SECTION DC SECTION TOTAL 2016 TOTAL 2015
£'000 £'000 £'000 £'000
Pensions (531,779) - (531,779) (532,360)
Commutations (5,162) - (5,162) (29,245)
Lump sum retirement benefits (111,688) - (111,688) (65,773)
Lump sum death benefits (4,649) - (4,649) (3,947)
Taxation (384) - (384) (8)
(653,662) - (653,662) (631,333)
Taxation arising on benefits paid or payable is in respect of members whose benefits exceeded the lifetime or annual allowance and who elected to take lower benefits from the Scheme in exchange for the Scheme settling their tax liability.
6. Payments to and on account of leavers
STANDARD
SECTION DC SECTION TOTAL 2016 TOTAL 2015
£'000 £'000 £'000 £'000
Individual transfers to other schemes (683) (16) (699) (490)
Transfers to personal pension arrangements
(17,039) - (17,039) (11,273)
Refunds to members leaving service (308) (79) (387) (443)
(18,030) (95) (18,125) (12,206)
24
7. Administrative expenses
STANDARD
SECTION DC SECTION TOTAL 2016 TOTAL 2015
£'000 £'000 £'000 £'000
Staff costs (907) - (907) (940)
Establishment costs (566) - (566) (414)
Legal, audit & other professional fees (1,796) - (1,796) (1,565)
Computer system costs (325) - (325) (411)
Communication costs (218) - (218) (194)
Pension levies (3) - (3) (3)
Other expenditure (179) - (179) (408)
(3,994) - (3,994) (3,935)
During the year DC Section costs of £235,000 were met from Standard Section assets.
8. Investment income
STANDARD
SECTION DC SECTION TOTAL 2016 TOTAL 2015
£'000 £'000 £'000 £'000
Dividends from equities 101,561 - 101,561 98,214
Income from bonds 179,007 - 179,007 186,325
Net rental income 57,018 - 57,018 55,200
Income from pooled investment vehicles 9,636 - 9,636 10,434
Income from derivatives 899 - 899 922
Net income from securities lending 1,341 - 1,341 997
Net income from class actions 117 - 117 172
Income from cash deposits 717 - 717 1,401
Annuity income 34 - 34 47
350,330 - 350,330 353,712
Taxation (7,431) - (7,431) (7,380)
Net income 342,899 - 342,899 346,332
Investment income shown above reflects income earned by investments within the Standard Section. All income earned on pooled investment units held by the Defined Contribution Section is accounted for within the value of those funds. Overseas investment income is stated gross of withholding taxes. Irrecoverable withholding taxes are reported under Taxation in the Fund Account. Net rental income is stated after deduction of £2,150,000 (2015: £2,466,000) of property related expenses.
25
9. Taxes on investment income The British Steel Pension Scheme is a registered pension scheme for tax purposes under the Finance Act 2004. The Scheme is therefore exempt from taxation except for certain withholding taxes relating to overseas investment income. Tax charges are accrued on the same basis as the investment income to which they relate.
10. Pooled Investment Vehicles (PIVs) The Scheme’s holdings of PIVs are analysed below:
STANDARD
SECTION DC SECTION TOTAL 2016 TOTAL 2015
£'000 £'000 £'000 £'000
Global bond funds 10,488 700 11,188 10,616
UK equity funds 65,962 303 66,265 76,906
Global equity funds 142,366 5,866 148,232 159,062
UK property funds 26,276 - 26,276 25,325
Global property funds 23,522 - 23,522 16,801
UK private equity funds 44,947 - 44,947 66,680
Global private equity funds 66,435 290 66,725 65,958
Cash funds - 320 320 -
2016 379,996 7,479 387,475 421,348
2015 418,631 2,717 421,348
The assets underlying these PIVs are:
£'000 £'000 £'000 £'000
Equities 319,710 6,459 326,169 368,606
Bonds 10,488 700 11,138 10,616
Others 49,798 320 50,118 42,126
2016 379,996 7,479 387,475 421,348
2015 418,631 2,717 421,348
All PIVs in the DC Section are managed by Legal & General on behalf of the Trustee.
11. Derivatives
Objectives and policies The Trustee has authorised the use of derivatives in a controlled manner to facilitate the timely implementation of significant asset allocation moves, for the purpose of efficient portfolio management, to reduce investment risk and to facilitate closer asset/liability management. The use of derivative contracts for such purposes is subject to prior approval by the Investment Committee.
Swaps The Scheme started its swaps programme in 2008. The Trustee's aim is to match, as far as possible, the fixed income portfolio to the Scheme's long term liabilities, particularly in relation to their sensitivities to inflation rate and interest rate movements.
26
Inflation swaps are used as "overlays" in conjunction with the increased non-government fixed interest bond holdings to match liabilities and to improve potential returns. The Scheme has inflation swap contracts outstanding as at 31 March 2016 relating to its fixed interest investment portfolio and these contracts are traded Over The Counter (OTC). The details are:
2016 2015
Assets Liabilities Assets Liabilities
£'000 £'000 £'000 £'000
Swaps - interest rate 2,450 - 2,976 -
Swaps – inflation 1,316 (111,803) 2,160 (88,745)
3,766 (111,803) 5,136 (88,745)
OTC contracts are used to transform floating rate interest income from certain investments into fixed income returns which are better suited to the liability profile of the Scheme. The Scheme has the following interest rate swap contracts outstanding as at 31 March 2016: TYPE OF SWAP NUMBER OF
CONTRACTS EXPIRATION NATURE
OF SWAP
NOTIONAL AMOUNT OF
OUTSTANDING CONTRACTS
AGGREGATE ASSETS
AGGREGATE LIABILITIES
£'000/$'000 £'000 £'000
Interest rate swap
2 Expires April 2018 – June
2019
Pay LIBOR for 3.6% -
3.8% 30,000/0 2,450 -
Total 2016 2,450 -
Total 2015 2,976 -
Under the OTC contracts for inflation rate and interest rate contracts, the Scheme had deposited £108,973,000 and received £Nil (2015: deposited £83,464,000 and received £Nil) of Gilts as collateral for the fair value with the various market counterparties as at 31 March 2016. The Scheme held collateral against the contracts showing unrealised gains and posted collateral for unrealised losses. The deposited collateral is reported within the Scheme’s net assets.
27
TYPE OF SWAP NUMBER OF CONTRACTS
EXPIRATION NATURE OF SWAP
NOTIONAL AMOUNT OF
OUTSTANDING CONTRACTS
AGGREGATE ASSETS
AGGREGATE LIABILITIES
£'000/$'000 £'000 £'000
Within 5 years
Inflation swap 4 November 2017 – January 2019
Pay 2.06% - 3.312% for UK RPI
£25,000 /
£50,000
1,316 (8,631)
Inflation swap 1 January 2019 Pay 1.65% for US CPI
$50,000 - (474)
Within 5 to 10 years
Inflation swap 1 February 2024 Pay 2.35% for US CPI
$50,000 - (4,057)
Within 10 to 15 years
Inflation swap 12 June 2028 – January 2029
Pay 1.95% - 2.89% for US CPI
$50,000 - (96,202)
Within 45 years
Inflation swap 1 January 2059 Pay 3.33% for UK RPI
$10,000 - (2,439)
Total 2016 1,316 (111,803)
Total 2015 2,160 (88,745)
12. Additional Voluntary Contributions
STANDARD
SECTION DC SECTION TOTAL 2016 TOTAL 2015
£'000 £'000 £'000 £'000
Corus Engineering Steels Pension Scheme
1,640 - 1,640 1,763
1,640 - 1,640 1,763
Prudential have valued the Additional Voluntary Contributions for former members of the Corus Engineering Steels Pension Scheme.
28
13. Investments reconciliation
Reconciliation of investments held at the beginning and the end of the year.
STANDARD SECTION
Opening Value Purchase Costs Sale Proceeds Change in Market Value
Closing Value
£'000 £'000 £'000 £'000 £'000
Equities 3,443,252 1,006,589 (980,670) (108,375) 3,360,796
Bonds 8,592,041 418,519 (466,048) (58,639) 8,485,873
Properties 1,209,841 70,319 (10,913) 39,973 1,309,220
Pooled Investment Vehicles
418,631 30,206 (52,992) (15,849) 379,996
Derivatives (83,609) - - (24,428) (108,037)
Other investments 11 - - - 11
AVC investments 1,763 15 (180) 42 1,640
13,581,930 1,525,648 (1,510,803) (167,276) 13,429,499
Cash deposits 304,394 131,636
Other investments 67,912 67,318
Net investment assets 13,954,236 13,628,453
DC SECTION
Pooled investment vehicles
2,717 4,855 (95) 2 7,479
Net assets 2,717 7,479
Total net assets 13,956,953 13,635,932
The change in market value of investments during the year comprises all increases and decreases in the market value of investments held at any time during the year, including profits and losses realised on sales of investments during the year. Annuities held by the Trustee in respect of pensioner members are not included on the grounds of materiality. DC Section funds are all designated to DC Section members.
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14. Transaction costs Included within the Standard Section purchases and sales are direct transaction costs of £4,881,000 (2015: £4,893,000) comprising fees, commissions and stamp duty. These costs are attributable to the key asset classes as follows:
FEES COMMISSIONS STAMP DUTY TOTAL
2016
£'000 £'000 £'000 £'000
Equities 889 645 1,197 2,731
Other 263 29 1,858 2,150
1,152 674 3,055 4,881
2015
Equities 1,018 636 773 2,427
Other 458 - 2,008 2,466
1,476 636 2,781 4,893
Transaction costs are borne by the Scheme in relation to transactions in pooled investments vehicles. Such costs are taken into account in calculating the bid/offer spread of these investments and are not separately reported.
15. Investment fair value hierarchy The fair value of financial instruments has been disclosed using the following fair value hierarchy: Level 1: The quoted price for an identical asset in an active market.
Level 2: Where quoted prices are unavailable, the price of a recent transaction for an identical asset,
adjusted if necessary.
Level 3: Where a quoted price is not available, and recent transactions of an identical asset on their own
are not a good estimate of fair value, the fair value is determined by using a valuation technique which
uses observable market data or non-observable data.
For the purpose of this analysis, daily priced funds have been included in Level 1, weekly priced funds in Level 2 and monthly and quarterly net asset values for Private Equity funds and Limited Liability Partnerships in Level 3.
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The Scheme’s investment assets and liabilities have been categorised using the above fair value hierarchy as follows:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
At 31 March 2016
Standard Section £'000 £'000 £'000 £'000
Equities 3,353,313 7,445 38 3,360,796
Bonds - 8,485,873 - 8,485,873
Pooled Investment Vehicles 233,026 35,589 111,381 379,996
Swaps - (108,037) - (108,037)
Properties - - 1,309,220 1,309,220
Investment in subsidiaries - - 11 11
AVC investments - 1,640 - 1,640
Cash 131,636 - - 131,636
Other investment balances 67,318 - - 67,318
3,785,293 8,422,510 1,420,650 13,628,453
DC Section
Pooled Investment Vehicles - 7,479 - 7,479
3,785,293 8,429,989 1,420,650 13,635,932
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
At 31 March 2015
Standard Section £'000 £'000 £'000 £'000
Equities 3,431,760 11,326 166 3,443,252
Bonds - 8,592,041 - 8,592,041
Pooled Investment Vehicles 234,000 51,992 132,639 418,631
Swaps - (83,609) - (83,609)
Properties - - 1,209,841 1,209,841
Investment in subsidiaries - - 11 11
AVC investments - 1,763 - 1,763
Cash 304,394 - - 304,394
Other investment balances 67,912 - - 67,912
4,038,066 8,573,513 1,342,657 13,954,236
DC Section
Pooled Investment Vehicles - 2,717 - 2,717
4,038,066 8,576,230 1,342,657 13,956,953
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16. Investment risk FRS 102 requires the disclosure of information in relation to certain investment risks. These risks are set out by FRS 102 as follows: Credit risk: The risk that one party to a financial instrument will cause a financial loss for the other party by
failing to discharge an obligation.
Market risk: This comprises currency risk, interest rate risk and other price risk.
Currency risk: This is the risk that the fair value or future cash flows of a financial asset will fluctuate
because of changes in foreign exchange rates.
Interest rate risk: This is the risk that the fair value or future cash flows of a financial asset will fluctuate
because of changes in market interest rates.
Other price risk: This is the risk that the fair value or future cash flows of a financial asset will fluctuate
because of changes in market prices (other than those arising from interest rate risk or currency risk),
whether those changes are caused by factors specific to the individual financial instrument or its issuer, or
factors affecting all similar financial instruments traded in the market.
The Scheme has exposure to these risks because of the investments it makes to implement its investment strategy described in the Trustees’ Report for the Standard Section and DC Section. The Trustees manage investment risk, including credit risk and market risk, within agreed risk limits which are set taking into account the Scheme’s strategic investment objectives. These investments objectives and risk limits are implemented through the investment management agreement in place with the Scheme’s investment manager, Pension Services Limited and monitored by the Trustees with regular reviews of the investment portfolios. Further information on the Trustees’ approach to risk management and the Scheme’s exposures to credit and market risks are set out below. This does not include annuity insurance policies or AVC investments as these are not considered significant in relation to the overall investments of the Scheme. Standard Section Credit risk The Standard Section is subject to credit risk as the Scheme invests in bonds, OTC derivatives, has cash balances, undertakes securities lending activities and enters into repurchase agreements. The Scheme also invests in pooled investment vehicles and is therefore directly exposed to credit risk in relation to the instruments it holds in the pooled investment vehicles and is indirectly exposed to credit risks arising on the financial instruments held by the pooled investment vehicles.
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Analysis of direct credit risk
2016
Investment grade Non-investment
grade
Unrated Total
£'000 £'000 £'000 £'000
Bonds 8,269,327 131,175 85,371 8,485,873
Pooled Investment Vehicles - - 379,996 379,996
Swaps (108,037) - - (108,037)
Cash 131,636 - - 131,636
Securities lending 89,750 - - 89,750
8,382,676 131,175 465,367 8,979,218
2015
Investment grade Non-investment
grade
Unrated Total
£'000 £'000 £'000 £'000
Bonds 8,363,394 139,516 89,131 8,592,041
Pooled investment vehicles - - 418,631 418,631
Swaps (83,609) - - (83,609)
Cash 304,394 - - 304,394
Securities lending 120,366 - - 120,366
8,704,545 139,516 507,762 9,351,823
Credit risk arising on bonds is mitigated by investing in government bonds where the credit risk is minimal, or corporate bonds which are rated at least investment grade. The Scheme also invests in high yield bonds which are non-investment grade. The Trustees manage the associated credit risk by requesting the investment manager to diversify the portfolio to minimise the impact of default by any one issuer. Credit risk arising on other investments is mitigated by investment mandates requiring counterparties to have at least investment grade credit rating. This is the position at the year-end. Credit risk arising on derivatives depends on whether the derivative is exchange traded or OTC. OTC derivative contracts are not guaranteed by any regulated exchange and therefore the Scheme is subject to risk of failure of the counterparty. The credit risk for OTC swaps is reduced by collateral arrangements (See Note 11). Cash is held within financial institutions which are at least investment grade credit rated. The Scheme lends certain equity securities under a Trustee-approved securities lending programme. The Trustees manage the credit risk arising from securities lending activities by restricting the amount of overall securities that may be lent, only lending to approved borrowers who are rated investment grade, limiting the amount that can be lent to any one borrower and putting in place collateral arrangements. This arrangement does not include cash.
33
The Scheme engages in securities lending arrangements with third parties to secure additional income. The total exposure of the Scheme's investments on loan at 31 March 2016 was £89,750,000 (2015: £120,366,000) and the collateral provided against these loans by borrowers in the form of US Government Securities, UK Gilts and Other “Triple A” Government Securities was £95,486,000 (2015: £128,941,000). The Scheme’s holdings in pooled investment vehicles are unrated. Direct credit risk from pooled investment vehicles is mitigated by the underlying assets of the pooled arrangements being ring-fenced from the pooled manager, the regulatory environments in which the pooled managers operate and diversification of investments amongst a number of pooled arrangements. The Trustee carries out due diligence checks on the appointment of new pooled investment managers and on an ongoing basis monitor any changes to the regulatory and operating environment of the pooled manager. A summary of pooled investment vehicles by type of arrangement is as follows:
STANDARD
SECTION DC SECTION TOTAL 2016 TOTAL 2015
£'000 £'000 £'000 £'000
Authorised unit trusts 62,900 7,479 70,379 53,529
Open ended funds 90,278 - 90,278 110,131
Limited Liability Partnerships 103,085 - 103,085 120,504
Closed ended funds 123,733 - 123,733 134,467
2016 379,996 7,479 387,475 418,631
2015 415,914 2,717 418,631
Indirect credit risk arises in relation to underlying investments held in the bond pooled investment vehicles. This risk is mitigated by only investing in pooled funds which invest in at least investment grade credit rated securities.
Currency risk The Scheme is subject to currency risk because some of the Scheme’s investments are held in overseas markets, either as segregated investments or via pooled investment vehicles. The Trustees limit overseas currency exposures through a selective currency hedging policy. The Scheme’s total net unhedged exposure by major currency at the year-end was as follows:
2016 2015
£'000 £'000
US Dollar 774,449 884,763
Euro 460,395 483,302
Japanese Yen 274,723 316,314
Australian Dollar 122,336 120,817
Hong Kong Dollar 120,303 128,723
Korean Won 115,174 106,913
Taiwanese Dollar 96,955 99,607
Swiss Francs 93,494 69,481
Swedish Krona 41,779 50,176
Other 241,527 224,982
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Interest rate risk
The Scheme is subject to interest rate risk on the investments comprising bonds and interest rate swaps held directly or through pooled investment vehicles and cash. At the year end the portfolio comprised of:
2016 2015
£'000 £'000
Direct
Bonds 8,485,873 8,592,041
Swaps (108,037) (83,609)
Indirect
Bond PIVs 10,488 10,616
Other price risk Other price risk arises principally in relation to the Scheme’s growth portfolio which includes directly held equities, equities held in pooled vehicles, hedge funds, and private equity and investment properties. The Scheme manages this exposure to other price risk by constructing a diverse portfolio of investments across various markets. At the year-end, the Scheme’s exposure to investments subject to other price risk was:
2016 2015
£'000 £'000
Direct:
Equities 3,360,796 3,443,252
Investment Properties 1,309,220 1,209,841
Indirect:
Equity PIVs 208,328 233,251
Property PIVs 49,798 42,126
Private Equity PIVs 111,382 132,638
369,508 408,015
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DC Section
FUND FUND VALUE
31 MARCH 2016
FAIR VALUE LEVEL
CREDIT RISK CURRENCY RISK
INTEREST RISK
OTHER PRICE RISK
£’000
Growth
Diversified (PMC) 3 290 2 Partial Significant Partial Significant
Equity
Global Equity Market Weights 30:70 Index (PMC) 3
5,629 2 None Partial None Significant
UK Equity Index (PMC) 3
303 2 None None None Significant
World (Ex-UK) Equity Index (PMC) 3
236 2 None Significant None Significant
Cash
L&G Cash 3 320 2 Significant None Partial None
Bond
Over 5 Year Index Linked Gilts Index (PMC) 3
238 2 Significant None Significant None
Pre-Retirement (PMC) 3
463 2 Significant Partial Significant None
Total 7,479
17. Investment management expenses
STANDARD
SECTION DC SECTION TOTAL 2016 TOTAL 2015
£'000 £'000 £'000 £'000
Fees paid to Pension Services Limited (1,642) - (1,6429) (1,682)
Fees paid to Custodian (566) - (566) (559)
Fees paid to Adviser (12) - (12) (12)
(2,220) - (2,220) (2,253)
Pension Services Limited is an in-house investment manager with sole responsibility for managing the Standard Section's investments.
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18. Investment administration expenses
STANDARD
SECTION DC SECTION TOTAL 2016 TOTAL 2015
£'000 £'000 £'000 £'000
Staff costs (4,940) - (4,940) (5,273)
Establishment costs (507) - (507) (399)
Utilities (84) - (84) (82)
IT costs (58) - (58) (210)
Other administration expenses (146) - (146) (116)
Non-recoverable VAT (75) - (75) (87)
(5,810) - (5,810) (6,167)
19. Current Assets
STANDARD
SECTION DC SECTION TOTAL 2016 TOTAL 2015
£'000 £'000 £'000 £'000
Contributions due
Employee - - - 2,356
Employer - - - 7,665
Cash balances
UK 15,305 - 15,305 8,256
Pre-paid pensions 42,233 - 42,233 41,880
Other debtors and prepayments 9,391 - 9,391 9,465
66,929 - 66,929 69,622
Contributions due to be paid in the prior Scheme year were paid in accordance with the effective Schedule of Contributions.
20. Current liabilities
STANDARD
SECTION DC SECTION TOTAL 2016 TOTAL 2015
£'000 £'000 £'000 £'000
Unpaid benefits 45,936 - 45,936 17,163
Other creditors and accruals 20,786 - 20,786 18,522
66,722 - 66,722 35,685
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21. Outstanding capital commitments
STANDARD
SECTION DC SECTION TOTAL 2016 TOTAL 2015
£'000 £'000 £'000 £'000
Properties
Commitments in Maturity properties 3,647 - 3,647 9,255
Commitments in Growth properties 3,774 - 3,774 10,323
7,421 - 7,421 19,578
Other
Commitments in infrastructure and alternative investments
12,020 - 12,020 14,579
19,441 - 19,441 34,157
22. Related party transactions
At 31 March 2016, all directors of the Trustee were members of the Scheme. All directors receive benefits on the same basis as other members of the Scheme. Certain directors of the Trustee Company and its subsidiaries receive remuneration, which is disclosed in the financial statements of those companies. The Scheme bears all costs of administration in the Glasgow and London offices. Contributions received in respect of Trustee directors who are members of the Scheme have been made in accordance with the Trust Deed and Rules.
23. Employer related investments The Scheme holds no investment in the sponsor company, Tata Steel UK Limited.
38
Chairman’s Annual Governance Statement This statement has been approved by the Trustee of the British Steel Pension Scheme (“the Scheme”) to
demonstrate how the Defined Contribution Section (“the DC Section”) has complied with the governance
standards introduced under the Occupational Pension Schemes (Charges and Governance) Regulations 2015
effective from 6 April 2015.
This statement covers four key areas:
1. The investment strategy relating to the Scheme’s default options;
2. The processing of Scheme financial transactions;
3. Charges and transaction costs within the Scheme;
4. The Trustee’s compliance with the statutory knowledge and understanding (TKU) requirements.
The Scheme’s default investment strategy
The Trustee has prepared a Statement of Investment Principles which governs their decisions about
investments including:
a. The Trustee’s aims and objectives.
b. The Trustee’s policies in relation to the:
1. Kinds of investments to be held
2. Balance between the different kinds of investment
3. Risks, including how these are measured and managed
4. Expected return on investments
5. The realisation of investments and
6. The extent (if any) to which social, environment or ethical considerations are taken into account in the
acquisition, retention and disposal of investments.
c. An explanation of how the default strategy (i.e. (a) and (b) above) is intended to ensure that assets are
invested in the best interests of members and beneficiaries.
The Trustee and its adviser, Willis Towers Watson, review how the funds within the default strategy, self-select
lifestyle options, and self select fund range have performed against the investment managers’ objectives and
benchmark which the Trustee review every 6 months via Willis Towers Watson’s biannual investment
performance monitoring report.
The Trustee considered its triennial investment strategy review in December 2015. In response to the new
pension flexibilities introduced in April 2015, the Trustee undertook a holistic and strategic review of the
Scheme’s default investment strategy, self-select lifestyle options and self-select fund range.
Following its review the Trustee agreed changes to the default investment lifestyle strategy, self-select lifestyle
options and self-select asset class funds. The Trustee believes that this is suitable based on analysis of the
demographics and risk profile of the Scheme’s membership. The following changes were implemented:
Three new lifestyle strategies were launched which focused on managing absolute volatility of portfolio
returns as members progress to retirement and providing choice of investment strategy to allow members
to invest appropriately for how they intend to use their benefits at retirement.
The existing two lifestyle options were closed to new members.
39
New fund options were made available to provide a greater flexibility in asset class exposure.
The default lifestyle strategy was amended for new pure DC members targeting an asset allocation
appropriate for those intending to take a 25% cash lump sum and purchase an annuity at retirement.
The Scheme’s Defined Benefit (DB) Standard Section members paying excess DC and/or Top-Up
Contributions would be defaulted into a lifestyle strategy targeting an asset allocation appropriate for
members intending to take their benefit as a cash lump sum at retirement.
The Trustee would also undertake an ad-hoc review of their investment policy in the event of significant
legislative, market, and/or member demographic changes.
A copy of the Trustee’s Statement of Investment Principles is available on request. The financial transactions made within the Scheme The Trustee monitors the core financial transactions of the Scheme annually via the Scheme’s DC
administrators’ (Legal and General) administration report. These include the investment of contributions,
transfers into and out of the Scheme, fund switches and payments out of the Scheme.
The Trustee’s annual Report and Accounts (including the financial transactions) are independently audited by
the Scheme auditor.
Willis Towers Watson has undertaken an independent review of the Scheme’s governance processes and
internal controls and has confirmed that they are compliant with the Pensions Regulator’s DC Code of Practice
number 13 on the governance and administration (paragraphs 206 to 225) of occupational DC schemes. The
Scheme is also compliant with the Code of Practice number 5, and with the relevant legislation, on reporting
late payments of contributions.
Based on the above, the Trustee is satisfied that the Scheme’s core financial transactions have been processed
promptly and accurately during the part Scheme year i.e. covering from 6 April 2015 to 31 March 2016.
Charges and transaction costs The Total Expense Ratio
1 applied to the Scheme’s default arrangement and self-select asset class fund range as
at 31 March 2016 are shown in the tables below.
The charges applied to the Scheme’s default arrangement are set out below:
NAME ANNUAL
MANAGEMENT CHARGE
FUND MANAGEMENT
CHARGE
TOTAL MANAGEMENT
CHARGE
Legal & General (PMC) Global Equity
Market Weights 30:70 Index 0.30% 0.14% 0.44%
Legal & General (PMC) Diversified Growth Fund 0.30% 0.20% 0.50%
Legal & General (PMC) Pre-Retirement 0.30% 0.12% 0.42%
Legal & General Cash 0.30% 0.10% 0.40%
The charges applied to all other self-select funds are set out below.
1 The Total Expense Ratio provides investors with the annual costs involved in running an investment fund. This includes the annual management charge, plus other charges incurred in administering the fund (these include share registration fees, legal fees, auditor fees, custodian fees etc). Transaction costs are not included in the Total Expense Ratio.
40
NAME ANNUAL MANAGEMENT
CHARGE
FUND MANAGEMENT
CHARGE
TOTAL MANAGEMENT
CHARGE
Legal & General (PMC) World Emerging Markets Index 0.30% 0.45% 0.75%
Legal & General (PMC) Global Equity Market
Weights 30:70 Index 0.30% 0.14% 0.44%
Legal & General (PMC) World (ex-UK) Equity Index 0.30% 0.12% 0.42%
Legal & General (PMC) UK Equity Index 0.30% 0.10% 0.40%
Legal & General (PMC) Diversified Growth Fund 0.30% 0.20% 0.50%
Legal & General (PMC) AAA-AA-A Corporate Bond All Stocks Index 0.30% 0.12% 0.42%
Legal & General (PMC) Pre-Retirement 0.30% 0.12% 0.42%
Legal & General (PMC) Over 5 Years Index- Linked Gilt Index 0.30% 0.08% 0.38%
Legal & General Cash 0.30% 0.10% 0.40%
Transaction costs are the costs that have been incurred by the investment managers as a result of buying,
selling, lending or borrowing investments. Transaction costs incurred by the investment managers in running
the funds are automatically incorporated into the daily fund price for each fund, and are therefore incorporated
into the investment managers’ net performance figures.
The Trustee and its professional advisers have reviewed the requirements to gather and disclose transaction
costs in the annual Chairman’s Statement. However, it is noted that the Financial Conduct Authority (“FCA”) and
the Department for Work & Pensions (“DWP”) have not provided any further guidance in respect of the
disclosure of the transaction costs. Therefore, it is not possible to carry out a detailed assessment of the impact
of transaction costs at the current time. The Trustee and its professional advisers will undertake an assessment
of the transaction costs once further guidance is available from the FCA and DWP.
Value for money considerations
The Trustee is committed to ensuring that members receive value for money from the DC Section (i.e. the costs
and charges deducted from members’ accounts and contributions paid provide good value in relation to the
benefits and services provided by the Section). The Trustee, with support from its advisers, undertakes a value
for money assessment as part of the DC Section’s periodic fees review. The latest such assessment was carried
out in December 2014.
The assessment was in accordance with the Pensions Regulator’s DC Code of Practice number 13 (paragraphs
18-41) and with the relevant legislation. The Trustee concluded that the DC Section’s overall benefits and
options do represent value for money in comparison to the costs payable by members for the following reasons:
Charges for the DC Section’s default investment strategy are below the charge cap of 0.75% a year,
Members have access to low investment fund management charges which the Trustee believes are highly competitive and unlikely to be obtained on the open market e.g. via personal pensions,
Members have access to a variety of well-designed investment options which the Trustee and its adviser monitor and update as appropriate, and therefore cater for members’ different risks/returns needs and income preferences,
Members pay for the administration and fund management charges. However, they do not pay for the costs of professional advisers and other costs associated with running the DC Section,
41
The Company offers a generous contribution structure where members contribute 6% of earnings and the Company contribute 10% of earnings via a tax efficient salary sacrifice arrangement. Additionally, members can contribute above 6% if they wish via the Top Up Contribution facility available in the Scheme.
Trustee Knowledge and Understanding (TKU) The Trustee has a TKU process in place which enables it, together with the advice available to them, to exercise
its functions as Trustee of the Scheme. The Trustee’s approach to meeting the TKU requirements includes:
Maintaining a rolling programme of bespoke Trustee training, which is delivered as part of their regular Trustee meetings throughout the calendar year.
Recording all training and attendance at appropriate seminars in the Trustee training log in order to support the Chairman’s Statement.
Circulating to each Trustee hot topics and general DC updates/news from its advisers about matters relevant to the Scheme.
Trustee director are required to complete the relevant parts of the Pensions Regulator’s Trustee Toolkit within six months of appointment.
Reviewing the training programme and Trustee training needs biennially.
The Trustee board and the Company consider the Trustee’s effectiveness on an annual basis. In the Trustee Chairman’s opinion, the Trustee board believes the Trustee Board’s TKU is fit for purpose.
Willis Towers Watson has undertaken an independent assessment of the TKU process and has confirmed that it
meets the regulatory standards and is therefore compliant with the Pensions Regulator’s DC Code of Practice
number 13 (paragraphs 27-58) and the Code of Practice number 7 on TKU. The Trustee is satisfied that it has
met the relevant legislative requirements enabling it to properly exercise its duties as Trustee.
Trustee board members undertook an aggregate of 470 hours training in the Scheme year to 31 March 2016.
Signed by the Chairman on behalf of the Trustee of the Scheme
A J Johnston
Chairman of the Board of Trustees
14 June 2016
42
Independent Auditor’s Statement about Contributions to the Trustee of the British Steel Pension Scheme We have examined the Summary of Contributions payable under the Schedule of Contributions to the British
Steel Pension Scheme in respect of the Scheme year ended 31 March 2016 which is set out on pages 9 and 10.
This statement is made solely to the Scheme’s Trustee, as a body, in accordance with the Pensions Act 1995 and
Regulations made thereunder. Our work has been undertaken so that we might state to the Scheme Trustee
those matters we are required to state 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
Scheme Trustee, as a body, for our work, for this statement, or for the opinions we have formed.
Respective responsibilities of Trustees and Auditor
As explained more fully in the Statement of Trustee’s responsibilities set out on page 16, the Scheme 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 Scheme by or on
behalf of the Employer and the active members of the Scheme. The Trustee is also responsible for keeping
records in respect of contributions received in respect of active members of the Scheme and for monitoring
whether contributions are made to the Scheme 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 to
the Scheme 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 Summary of Contributions have in all material respects been paid at least in accordance with the
Schedules of Contributions. This includes an examination, on a test basis, of evidence relevant to the amounts of
contributions payable to the Scheme and the timing of those payments under the Schedules of Contributions.
Statement about contributions payable under the Schedules of Contributions
In our opinion contributions for the Scheme year ended 31 March 2016 as reported in the Summary of
Contributions and payable under the Schedules of Contributions have in all material respects been paid from 1
April 2015 to 29 September 2015 at least in accordance with the Schedule of Contributions certified by the
actuary on 7 November 2012 and subsequently have been paid at least in accordance with the Schedule of
Contributions certified by the actuary on 30 September 2015.
Catherine Burnet for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 15 Canada Square London E14 5GL
43
Actuary’s Certification of Schedule of Contributions British Steel Pension Scheme
1. Adequacy of rates of contributions
I certify that, in my opinion, the rates of contributions shown in this Schedule of Contributions are such that the
statutory funding objective on 31 March 2014 could have expected to be met by the end of the period specified
in the Recovery Plan.
I also certify (as required under Clause 9 of the British Steel Pension Scheme Trust Deed) that the rate of
contributions shown in this schedule of contributions are not less than those I consider sufficient to maintain
the benefits payable under the Scheme, nor are they lower than I would have provided for had I had
responsibility for preparing or revising the schedule and the statement of funding principles.
2. Adherence to Statement of Funding Principles
I hereby certify that, in my opinion, this Schedule of Contributions is consistent with the Statement of Funding
Principles dated September 2015.
The certification of the adequacy of the rates of contributions for the purpose of securing that the statutory
funding objective can be expected to be met is not a certification of their adequacy for the purpose of securing
the Scheme's liabilities by the purchase of annuities, if the Scheme were to be wound up.
C P Burbidge
Fellow of the Institute of Actuaries
Towers Watson Limited
Midcity Place
71 High Holburn
London
WC1V 6TP