Scottish Widows Retirement Benefits Scheme 30 June 2017 ......E-mail:...

Scottish Widows Retirement Benefits Scheme

30 June 2017

Annual report and financial statements

Registered number:10232730


Contents Pages Trustee Directors, advisers and service providers 1 Trustee's annual report 3 Annual statement regarding DC governance 18 Independent auditors’ report to the Trustee of Scottish Widows Retirement Benefits Scheme 22 Fund account 24 Statement of net assets available for benefits 25 Notes to the financial statements 26 Independent auditors’ statement about contributions to the Trustee of Scottish Widows Retirement Benefits Scheme 43 Trustee summary of contributions payable under the Schedule of Contributions 44 Actuary’s certification of the Schedule of Contributions 45

Appendix: Statement of Investment Principles

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Trustee Directors, advisers and service providers Principal Employer Scottish Widows Limited (the “Employer”)

Participating Employers Lloyds Bank PLC (until 5 October 2016) Scottish Widows Services Limited

Corporate Trustee Scottish Widows Pension Trustees Limited (the "Trustee")

Trustee Directors Independent Trustee:

The Law Debenture Pension Trust Corporation PLC represented by Vicky Paramour (Acting Chair from 1 November 2017) Jocelyn Blackwell (from 9 October 2017)

Employer appointed:

Richard Wohanka (Chair) (until 31 October 2017) Catriona M Herd (until 15 September 2017) Kevin M Doerr John Hope (appointed 22 January 2018) Member nominated:

Colin Liddell Bruce Macdonald Secretary Steve Fellows (until 14 September 2017)

Lucy Roach (from 15 September 2017) Alder Castle House, 10 Noble Street, London, EC2V 7ED Group Pensions Lloyds Banking Group – Pensions Department

Alder Castle House, 10 Noble Street, London, EC2V 7ED E-mail: [email protected] Scheme administrator* Scottish Widows Limited – Final Salary Pensions Department 15

Dalkeith Road, Edinburgh, EH16 5BU E-mail: [email protected] Actuary* Donald Duval FIA

Aon Hewitt Limited 114 Morrison Street, Edinburgh, EH3 8EX Investment adviser* Hymans Robertson

Exchange Place One, 1 Semple Street, Edinburgh, EH13 8BL Independent auditors* PricewaterhouseCoopers LLP

2 Glass Wharf, Bristol, BS2 0FR Legal advisers* Shepherd and Wedderburn LLP

1 Exchange Crescent, Conference Square, Edinburgh, EH3 8UL Covenant adviser* Ernst & Young LLP

1 More London Place, London, SE1 2AF

Investment managers* Aberdeen Asset Management Limited (“Aberdeen”) 10 Queens Terrace, Aberdeen, AB10 1XL Legal & General Investment Management Limited (“LGIM”) One Coleman Street, London, EC2R 5AA LGT Capital Partners (Ireland) Limited (“LGT”) (until January 2017) Third floor, 30 Herbert Street, Dublin 2, Ireland AEW UK (“AEW”) (from November 2016)

33 Jermyn Street, London, SW1Y 6DN

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Trustee Directors, advisers and service providers (continued) Investment gateway provider* Scottish Widows Limited

69 Morrison Street, Edinburgh, EH3 8YF Custodian* The Bank of New York Mellon – Asset Servicing

1 Canada Square, Canary Wharf, London, E14 5AL

Nominee company* BNY Mellon Nominees Limited Bankers* Lloyds Bank PLC

City Office, PO Box 72, Bailey Drive, Gillingham Business Park, Kent, ME8 0LS

* There are written agreements in place between the Trustee and the Scottish Widows Retirement Benefits Scheme's

(the “Scheme”) advisers and service providers.

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Trustee’s annual report On behalf of the Trustee Directors, I am pleased to present the Scheme's annual report and financial statements for the year ended 30 June 2017.

As you may be aware, the Trustee has responsibility for looking after the assets of the Scheme, which are completely separate from those of the Employer. Constitution of the Scheme

The Scheme provides retirement and death benefits under a Trust Deed dated February 1960, as amended by supplementary Trust Deeds and updated Rules. The solvency of the Scheme is guaranteed by the Employer. The Scheme is approved by HMRC as a registered Scheme, and to the Trustee’s knowledge there is no reason why approval should be prejudiced or withdrawn. The Scheme provides defined benefits (“DB”) based on a member’s pensionable salary and length of service. The DB section of the Scheme was closed to new entrants from 1 January 2003. The Scheme was closed to all new entrants from 1 August 2011. All new employees now join the Lloyds Banking Group Your Tomorrow pension arrangement. The Trustee continues to look after the future accrual of active DB members’ benefits and the benefits of deferred DB members and the single Pension Investment Plan (“PIP”) member, who is provided with defined contribution (“DC”) benefits. The Scheme allows members to pay additional voluntary contributions (“AVCs”) or make extra contributions through flexible benefits to enable DB members to acquire additional benefits on a money purchase basis. Rule changes

During the year, the following changes to the Rules were agreed: 1. A Deed of Amendment was signed (dated 19 and 21 December 2016) – this deed changed the definition of

Principal Employer to Scottish Widows Limited (with an additional amendment changing Scottish Widows PLC to Scottish Widows Limited where it had been specifically referenced) and also amended the Rules to allow for lifetime allowance excess lump sum payments.

2. A Deed of Cessation of Lloyds Bank PLC as a Participating Employer was signed on 14 June 2017, to take effect from 5 October 2016. As a consequence of the withdrawal a Section 75 contribution was determined, by the Scheme Actuary, amounting to £210,000. This debt was settled by the Employer during the Scheme year and is reflected within the financial statements on page 29.

Management of the Scheme

The Scheme is managed by a Corporate Trustee, whose role, exercised through its Board, is to ensure that the Scheme is administered in accordance with the Scheme Rules, and to safeguard the assets in the best interests of all members and beneficiaries.

The Trustee has responsibility for ensuring that the benefits are provided to members in accordance with the Trust Deed and Rules and relevant legislation. The assets of the Scheme are separate from those of the Employer, though we rely on the Employer to contribute to the Scheme in respect of future service benefits and any deficits relating to accrued benefits. The Trustee has a duty to act in the best interests of Scheme beneficiaries. The Scheme’s Trust Deed and Rules and the Articles of Association of the Trustee contain provisions for appointment and removal of the Trustee Directors. Under these provisions the power of appointment and removal of the Trustee is vested in the Employer of the Scheme. There must be a minimum of six Trustee Directors. One third of the Trustee Directors must be selected by members (“Member nominated”), in accordance with arrangements made by the Trustee Directors under the Pension Act 2004. The remaining Trustee Directors are appointed by the Employer.

The Trustee Directors, who served during the year and to the date of approval of this report, are listed on page 1. The Trustee Board meets quarterly, with additional meetings as required. During the year the Trustee Board met five times, consisting of four quarterly meetings and one extraordinary meeting. All decisions are taken by a simple majority with the Chair having the casting vote. Additionally there are two working groups, comprising members of the main Trustee Board: one of these is concerned with the Scheme Actuarial Valuation and the other with investment matters.

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Trustee’s annual report (continued) Management of the Scheme (continued)

Trustee Directors are not paid additionally by the Scheme for their services, except for Independent Trustee Directors, who are paid in accordance with the written agreement in place with the Trustee. The Trustee has agreed a business plan to support its governance arrangements. This includes periodic review of registers of risks and conflicts to ensure that appropriate internal controls are put in place and remain effective. The Trustee has the support of the Lloyds Banking Group Pensions Department and the Lloyds Banking Group Pensions Investment and Finance Team and has appointed professional advisers and other organisations to support it in delivering the Scheme’s objectives. These individuals and organisations are listed on pages 1 and 2. Requests for additional information about the Scheme generally, or queries relating to member benefits, should be made to the Scheme’s administrator, Scottish Widows Services Limited, using the contact details on page 1. Any issue about the running of the Scheme, or for the Trustee Board, should be addressed to Lloyds Banking Group Pensions Department, whose address is on page 1 of this report. Financial development of the Scheme

The financial statements of the Scheme for the year ended 30 June 2017, as set out on pages 24 to 42 are the accounts required by the Pensions Act 1995. They have been prepared and audited in compliance with the regulations made under section 41(1) and (6) of the Act and in accordance with the Occupational Pension Schemes (Requirement to obtain Audited Accounts and a Statement from the Auditor) regulations 1996, Financial Reporting Standard 102 – The Financial Standard applicable in the UK and Republic of Ireland issued by the Financial Reporting Council (“FRS 102”) and the guidance set out in the Statement of Recommended Practice “Financial Reports of Pension Schemes” (revised November 2014) (“the SORP”). In adopting FRS 102, the Trustee has adopted the provisions of ‘Amendments to FRS 102, The Financial Reporting Standard applicable in the UK and Republic of Ireland – Fair value hierarchy disclosures (March 2016)’ early. A summary of the Scheme’s financial statements is set out in the table below:

Year ended Year ended

30 June 30 June

2017 2016

£’000 £’000

Member related income 14,607 15,431

Member related payments (130,556) (98,444) ───────────── ─────────────

Net withdrawals from dealings with members (115,949) (83,013)

Net returns on investments 146,304 76,938 ───────────── ─────────────

Net increase /(decrease) in the fund 30,355 (6,075)

Net assets at the start of the year 1,170,018 1,176,093 ───────────── ─────────────

Net assets at the end of the year 1,200,373 1,170,018 ═════════════ ═════════════

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Trustee’s annual report (continued) Report on actuarial liabilities

A formal Scheme valuation is carried out every three years by the Scheme Actuary. Discussions with the Employer regarding the Scheme valuation at 1 July 2016 (the valuation date) are underway .The previous Scheme valuation , performed by the former Scheme Actuary, Bruce Macdonald BSc FFA, was completed as at 1 July 2013 and the Actuary’s report was published on 27 November 2014. This valuation was prepared in line with the requirements of Section 223 of the Pensions Act 2004 and used the Projected Unit Credit Method. The main purpose of the valuation is to examine the financial position of the Scheme at the valuation date relative to the Scheme’s funding objective, in order to determine an appropriate level of contributions to be paid by the Employers on an ongoing basis. The funding objective is that the Scheme should have sufficient and appropriate assets at a given date to cover, on agreed assumptions, the prospective benefits arising from service up to that date, including allowance for the effect of capped future pensionable salary increases, known as the Scheme’s “technical provisions”. Following discussions with the Employer acting on behalf of all Employers participating in the Scheme, and the Actuary, the Trustee agreed the assumptions to be used to calculate the technical provisions. The technical provisions are calculated by projecting the benefits (which are mostly pension payments) expected to be paid in each year after the valuation date and then discounting the resulting cash flows to obtain a present value. Benefits accrued in respect of service only up to the valuation date are taken into account in this calculation (although an allowance is made for an assumed level of future pensionable earnings increases for employed members). The projections allow for benefit payments being made from the Scheme over the next 90 or so years. Most of these payments depend on future increases in price inflation statistics subject to specified limits. The main assumptions underlying the 1 July 2013 valuation calculations were: Returns and inflation: For members after retirement the investments backing the technical provisions are

assumed to yield 0.4% more than the total return on the UK FTSE Actuaries over-15 years gilts price index. In the period to retirement the investments are assumed to yield 2.25% more than the total return index. The associated returns used to discount the cash flows to obtain the technical provisions will be the annualised redemption yield on the index, with the same adjustments as above before and after retirement. It is assumed the additional 1.85% yield reduces uniformly to 0% in the 10 year period to normal retirement. The discount rates will change from time to time as these long-term yields change. At the 1 July 2013 assessment this gave discount rates of 3.9% after retirement and 5.75% before retirement. In all cases the returns are assumed to be after investment expenses are deducted. The rate of Retail Prices Inflation (“RPI”) assumed is found by taking the annualised redemption yield on index-linked gilts (UK FTSE Actuaries index with term over five years – an average of 0% and 5% inflation) from conventional gilt yields (UK FTSE Actuaries index with term over fifteen years) and deducting 0.1%. At the 1 July 2013 assessment this resulted in RPI of 3.4% pa. The Consumer Prices Inflation (“CPI”) rate is assumed to be RPI less 0.8%. This was 2.6% at 1 July 2013. Pensions that increase once in payment at the RPI with a minimum of 0% are assumed to increase at RPI plus 0.1%, giving 3.5% at the assessment date. Guaranteed minimum pensions accrued after 1988 increase in payment in line with S109 orders. At the assessment date this is assumed to be 2.2% per annum. Future revaluation on leaving service benefits at CPI capped at 5% is assumed to be the CPI rate. Salary increases: Pensionable salaries were assumed to increase by 2% pa. State factors: The Basic State Pension assumed to increase in line with CPI.

Mortality: Mortality will be in line with the published mortality table known as S1PA, using 80% of the base table

with CMI_2013 mortality improvements but with 75% of the mortality improvements occurring after the mid point of the convergence period, and with a long term improvement rate of 1.75%. For each individual, the set of mortality rates used shall be those applicable to that individual’s year of birth.

Withdrawals: 5% are assumed to leave each year. Revaluation of leavers’ pensions is in line with statutory

requirement. Price-linked revaluation has been taken to be in line with inflation, as explained above. Revaluation of GMPs for new leavers is assumed to be at 4.75%.

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Trustee’s annual report (continued) Report on actuarial liabilities (continued)

Funding position

A summary of the funding position at the valuation date is as follows:

Valuation date: 1 July 2013

Market value of assets: £1,007m

Technical provisions: £1,147m

Past service deficit: £140m

Funding ratio: 88%

If the Scheme had no surplus (or shortfall) and its assets were exactly equal to the technical provisions, contributions would normally still be required to cover the cost of benefits expected to accrue to members in the future. Recovery plan

As there were insufficient assets to cover the Scheme’s technical provisions at the valuation date, the Trustee and the Employer agreed deficit contributions as follows:

Between 1 July 2013 and 31 October 2014 an additional contribution of £93.2m was paid to help reduce the funding shortfall.

To eliminate the funding shortfall an additional recovery contribution of £14.5m was paid to the Scheme in November 2014.

The funding shortfall was expected to be eliminated by 30 November 2014. A Schedule of Contributions reflecting these agreed contributions dated 27 November 2014 was adopted by the Trustee and the Employers. Annual funding update

Following completion of the actuarial valuation as at 1 July 2013 the Trustee of the Scheme is required (under Section 224 of the Pensions Act 2004) to obtain either:

A full actuarial valuation each year; or

An annual “actuarial report” covering factors affecting the funding position, with a full actuarial valuation every three years.

An actuarial report was completed by the current Scheme Actuary, Donald Duval of Aon Hewitt Limited, on 3 September 2015, to provide an update of the funding position of the Scheme at 1 July 2015, as instructed by the Trustee. Donald Duvall of Aon Hewitt Limited replaced Bruce Macdonald of Scottish Widows Services Limited with effect from 1 March 2015.

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Trustee’s annual report (continued) Annual funding update (continued)

The Scheme’s funding position at 1 July 2015 has been estimated from the position at the valuation date using approximate methods. The update allows for the broad relative movements in the Scheme’s assets and technical provisions (liabilities) due to the passage of time and economic and stock market movements over that period. It does not allow for the changes in the membership profile of the Scheme and demographic experience (e.g. actual scheme mortality rates). These changes will be picked up at the next actuarial valuation. As the period from the valuation date increases, the accuracy of this approximate method to update the financial position of the Scheme will decrease. The following table compares the updated estimate of the technical provisions with the market value of the Schemes assets. For reference the table below also includes the results of the triennial valuation as at 1 July 2013 and the annual actuarial report as at 1 July 2014 and 1 July 2015.

1 July 2013 1 July 2014 1 July 2015

Market value of assets: £1,007m £1,134m £1,172m

Technical provisions: £1,147m £1,208m £1,432m

Past service deficit: £140m £74m £260m

Funding level: 88% 94% 82%

It can be seen that there has been deterioration in the Scheme funding position since the triennial valuation dated 1 July 2013. The deterioration in funding position is mainly due to the fall in gilt yields which have caused an increase in the value of the liabilities.

The 1 July 2016 full triannual valuation is currently underway. Any queries on the valuation of the Scheme, or for the Trustee Board, should be addressed to Lloyds Banking Group – Pensions Department on page 1.

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Trustee’s annual report (continued) Membership

The membership of the Scheme at the beginning and end of the year and changes during the year are set out below:

Active members DB DC

At the start of the year 1,009 1

Leavers to deferred (38) -

Opted out with deferred benefits (68) -

Retirements (19) -

At the end of the year 884 1

Deferred members DB

At the start of the year 3,840

New deferred members 106

Transfers-out (250)

Deaths in deferment (1)

Retirements (49)

Trivial commutations (8)

At the end of the year 3,638

Deferred members passed NRD but not taking benefits DB

At the start of the year 9

Retirements (1)

Transfers (1)

At the end of the year 7

Pensioners DB

In payment at the start of the year 1,517

New pensioners 68

New pensioners (spouse) 15

Deaths in retirement (41)

At the end of the year 1,559

Total Scheme membership: 6,088 1

There were 159 spouses and dependents pensions in payment as at 30 June 2017 (2016: 152).

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Trustee’s annual report (continued) Transfers

Preserved pensioners have the option of transferring the value of their pension benefits to either an HMRC registered occupational pension scheme, an insurance scheme ‘buy-out’ policy or to a personal pension plan. Transfer values are calculated and verified in the manner set out by the Pension Schemes Act 1993 and subsequent regulations. They are based on assumptions set by the Trustee. Those transfers paid during the year were not reduced below the cash equivalent value and no allowance was made for discretionary benefits. Pension increases

Annual increases to pensions in payment are given in accordance with the provisions of the Scheme Rules. Different provisions may apply according to which membership category of the Scheme pensioners belong to. For the majority of members, pensions increase each January by the rate of the change in RPI at the previous September. The rate applicable as at 1 January 2017 was 2.0% (2016: 0.8%). None of the increases were discretionary.

Each pensioner is informed individually in writing of the increase applicable to his or her Scheme pension. Deferred pensions increases are in accordance with the Scheme Rules and relevant statutory requirements. Investment management

The Trustee sets the investment strategy for the Scheme after taking advice from the Scheme’s investment adviser. The Trustee has put in place investment mandates with its investment managers which implement this strategy. Appropriate guidelines and restrictions have been agreed with the investment managers, and these are set out in their respective investment management agreement. Where the Scheme’s investment is in a pooled fund, the Trustee has reviewed the investment guidelines and restrictions, as summarised in the pooled fund’s offering documentation. Within the guidelines and restrictions, the Trustee has delegated the selection and retention of appropriate assets to the investment managers. The appointment of investment managers will be reviewed by the Trustee, from time to time, based on the results of their monitoring of performance and the managers’ compliance with the requirements in the Pensions Act concerning diversification and suitability, where relevant. The Trustee representatives hold regular meetings with the investment managers to satisfy themselves that the investment managers continue to carry out their work competently and have the appropriate knowledge and experience to manage the investments of the Scheme. Custody

Where assets are held in segregated accounts, custody of the assets is provided by a Global Custodian and Master Record Keeper selected by the Trustee (currently Bank of New York Mellon (“BNYM”)). The investments are held in a designated account at BNYM in the name of BNY Mellon Nominees Limited. Fees are paid to the Global Custodian based on the value of assets, number of securities, volume of transactions processed and the range of services provided. Where assets are held within pooled investment vehicles, the selection, appointment, monitoring and termination of the custody arrangements is the responsibility of the investment managers of these vehicles. In relation to these pooled investment vehicles, BNYM provide bookkeeping and performance measurement services to the Scheme. Social, environmental and ethical issues

The Trustee has delegated responsibility for the selection, retention and realisation of investments to the investment managers (within certain guidelines and restrictions). The investment managers have discretion to consider the extent to which social, environmental, ethical or sustainability considerations are taken into account in the selection, retention and realisation of investments, in the context that the Scheme is a long term investor.

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Trustee’s annual report (continued) Rights attaching to investments

The Trustee’s policy is to delegate responsibility for the exercising of rights (including voting rights) attaching to investments to the investment managers.

The Trustee supports the Financial Reporting Council’s UK Stewardship Code (of July 2010), the objective of which, is to enhance the quality of engagement between institutional investors and companies. The Trustee has considered the policies of the Scheme’s investment managers in the context of the Code and is comfortable that they are appropriate. The Trustee aims to review periodically the investment managers’ policies with regard to voting and engagement and its compliance with the Code. Statement of investment principles

A Statement of Investment Principles (“SIP”) has been prepared by the Trustee which incorporates the investment strategy. A copy of the SIP has been appended to this report. Investments DB section

Investment objective

The main investment objective of the DB section is the acquisition of suitable assets of appropriate liquidity which will generate income and capital growth to meet, together with new contributions from members and the Employer, the cost of current and future benefits which the Scheme provides, as set out in the Trust Deed and Rules. Investment strategy

The Trustee’s policy is to seek to achieve the objectives through investing, directly or indirectly, in a range of suitable assets, including equities, property and bonds. The Trustee recognises that the returns on some of these assets can be volatile over the short to medium term but expected to deliver return over the long term. A mixture across asset classes, along with any contributions paid by the Employer, should nevertheless provide the level of returns required by the Scheme to meet its liabilities at an acceptable level of risk for the Trustee and an acceptable level of cost for the Employer. The Trustee has decided on a scheme specific strategic asset allocation (“SAA”). The Trustee considers that the assets are appropriately diversified and will provide a reasonable expectation of meeting the objectives. The Trustee is currently considering the implementation approach of the SAA and expects it to be implemented over the coming months. The Scheme’s DB assets are invested in two portfolios:

A Matched Portfolio, comprising assets which broadly match the liabilities of the Scheme. These include Liability Driven Investments (“LDI”), UK corporate bonds and credit default swaps

An Unmatched Section, comprising growth assets including: equities, property and private equity. The Scheme also held investments in a multi asset strategy fund.

The following changes were made during the year to increase the liquidity and diversification of the Scheme’s investment portfolio:

An investment was made into a UK core property fund managed by AEW in November 2016. The investment was funded by a full redemption of the Pensions Managed UK Equity Fund managed by Aberdeen.

The multi asset strategy fund managed by LGT was fully redeemed in January 2017 in order to provide liquidity to the Scheme for pension payments.

A partial disinvestment was made over the year to June 2017 from the Pensions Managed Corporate Bond Fund and the Emerging Markets Equity Fund managed by Aberdeen. These were made in order to provide liquidity to the Scheme for pension payments.

The Trustee also enhanced the liability matching portfolio by increasing the level of interest rate hedging to 37.5% and inflation hedging to 67.5% of the Scheme’s liability as measured on the technical provision basis.

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Trustee’s annual report (continued) The actual asset allocation of the Scheme’s combined investment portfolio at the year end is shown below: Asset Class

Marketability of

Investments

Pooled investment

vehicles £’000

Segregated funds £’000

Market value total

£’000

Market value total

%

SIP target

SAA %

Index linked & fixed coupon gilts

1-3 - 461,407 461,407 38.7 -

Swaps (excluding credit default) & FX

3 - 14,084 14,084 1.2 -

Credit default swaps 3 - 7,369 7,369 0.6 -

Cash 1 16,415 43,176 59,591 5.0 -

LDI assets 16,415 526,036 542,451 45.5 44.0

Global equities 4 200,098 - 200,098 16.9 -

Emerging market equities 4 45,770 - 45,770 3.8 -

UK corporate bonds 4 222,210 - 222,210 18.6 -

Property 5 118,847 - 118,847 10.0 -

Private equity 6 6,037 - 6,037 0.5 -

Cash 4 - 56,229 56,229 4.7 -

Non LDI assets 592,962 56,229 649,191 54.5 56.0

Total assets 609,377 582,265 1,191,642 100.0 100.0

The table above is used by the Trustee to monitor the asset allocation of the Scheme against the SAA, as set out in the SIP. The SIP also includes permitted ranges, within which, the assets may deviate from target and these ranges are monitored by the Trustee. During the year there was a technical breach in the SIP, due to disinvestment in UK equities and an increased allocation to property, further changes to the Scheme’s asset allocation will be made as the Trustee move to a revised target SAA. The SIP is in the process of being updated to reflect the revised target SAA. This table excludes AVCs and flexible benefit assets which are invested in respect of each member on a DC basis. Marketability of Investment (“MOI”)

Investments possess different levels of marketability which can change in different market conditions. The following table shows the Scheme’s classification of each asset class’s marketability, excluding AVC’s and certain other investment related balances, as at the year end. The asset allocation table above includes a column for MOI which can be referenced back to this table.

Type of Investment Marketability

1 Cash Immediate

2 Quoted securities Readily marketable at short term basis

3 Swaps Readily marketable on a short term basis

4 Equity and fixed income pooled vehicles Marketable dependent on notice periods and trading dates

5 Property Illiquid- when a buyer is found and the sale is completed

6 Private equity Illiquid- marketability constrained by minimum term investments

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Trustee’s annual report (continued)

The table below provides further information on the distribution of assets between the investment managers appointed by the Scheme.

Fund manager

Asset class

Market value total

£’000

Market value total

%

Aberdeen Index linked & fixed coupon gilts 461,407 38.7

Aberdeen Interest, inflation and total return swaps & FX

14,084 1.2

Aberdeen Credit default swaps 7,369 0.6

Aberdeen Cash (liability matching) 59,591 5.0

Aberdeen Emerging market equities 45,770 3.8

Aberdeen UK corporate bonds 222,210 18.6

Aberdeen Private equity 6,037 0.5

Aberdeen Property 61,780 5.2

Aberdeen Cash 56,229 4.7

LGIM Global equities 200,098 16.9

AEW Property 57,067 4.8

Total 1,191,642 100.0

Investment performance

The investment performance is measured against the benchmarks agreed for each assets class, typically over a 3 year period, although shorter term performance and general market condition are also considered as part of the review process. The table below sets out the annualised investment returns for the Scheme: Year to

30 June 2017 3 years to


30 June 2017 % % %

Non LDI assets 12.2 7.9 9.8 Non LDI assets benchmark 12.6 10.1 11.6 During the year to 30 June 2017, the non LDI assets have marginally underperformed versus the benchmark. The primary driver for this underperformance was the UK corporate bonds fund. Further information can be found on page 13, which details the performance of each underlying fund against its respective benchmark. The following table compares the annualised investment return of the LDI portfolio over a 1, 3 & 5 year time period. The LDI portfolio is not subject to any benchmark target as the objective of the portfolio is to match the liability profile of the Scheme.

Year to


30 June 2017 5 Years to

30 June 2017

% % %

LDI portfolio 12.0 17.5 12.1

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Investment performance (continued)

The table below compares the investment return for the each asset class against the agreed benchmark for the year ended 30 June 2017:

Fund: Benchmark: Actual Benchmark

% %

Index linked and inflation swaps

No benchmark n/a n/a

Credit default swaps iTraxx main (85%) iTraxx financial senior debt (15%)

8.9 8.4

UK corporate bonds 98% iBoxx £ non-gilts >15 years, 2% cash 5.2 7.3

Global equities FTSE RAFI All world 3000 QSR 24.5 24.6

Global equities FTSE All world equity 22.9 22.9

Emerging market equities MSCI Emerging Markets 27.9 27.8

Aberdeen Property IPD monthly index 6.5 6.3

AEW Property IPD monthly index *16.3 5.8

Private equity No benchmark 21.9 n/a

Multi asset 3 month GBP Libor +4% p.a. **3.7 2.6

Cash 7 day LIBID index 0.6 0.2

*As the investment manager was appointed over the year to June 2017, actual performance represents performance from inception to date. **As the investment manager was removed over the year to June 2017, actual performance represents performance to the termination date. Over the year to 30 June 2017, the majority of investments performed in line with their benchmarks. However there was an underperformance in UK corporate bonds. The largest factors behind this were: security selection in the utilities and industrial sectors, an underweight position to the residential sector and an underweight to interest rate duration. The LDI portfolio has no formal benchmark, as this is determined by liability matching requirements of the Trustee and sponsor. The level and the structure of the liability hedging have been agreed by the Trustee and are governed by the investment management agreement (“IMA”) in place with the investment manager. There is no formal benchmark for the private equity holding fund.

14



Investments DC section

The Trustee’s investment objective for the DC PIP section is to make available a range of investments via pooled funds which seeks to generate income and capital growth which will provide a fund at retirement which the member can use to purchase a pension, take a cash lump sum or transfer to another external arrangement to drawdown an income. The Trustee is responsible for selecting the underlying funds for the DC PIP section of the Scheme. The Trustee Board received advice and recommendations from specialist independent investment advisers before approving the fund choices. The investment structure offers a range of fund options. The options available are broadly consistent across the Lloyds Banking Group staff pension arrangements and a Defined Contribution Investment committee (“DCI”) has been set up to consider investment strategy and monitor investment performance for the arrangements. The Scheme does not have formal representation on the committee, however, the DCI will raise any concerns regarding the performance of, or any proposed changes to, the investment options which are the same with the Trustee as and when they arise. Whilst the investments are viewed as long term the DCI has decided to review performance and the investment process regularly to ensure the investment managers are following the correct investment principles for which the funds were designed. As such, during the year the DCI received quarterly updates. In addition, the DCI receive quarterly reports from an independent investment adviser, Towers Watson Limited.

The investment choices include fourteen investment funds under two investment approaches; LifePlan and PersonalChoice. The same funds are available to DB members who pay Pension Extra AVCs. LifePlan

The LifePlan approach splits the investment choices between Growth Funds and Approaching Retirement Funds. Investments will initially be invested in accordance with the member’s chosen Growth Fund and will then be switched to the Approaching Retirement Fund in accordance with the member’s chosen switching period. The LifePlan investment funds and the underlying fund managers are as follows: LifePlan Growth Funds

• Your Journey (Managed by BlackRock) • Your Journey Extra (Managed by BlackRock) • Global Journey (Managed by Legal & General) LifePlan Approaching Retirement Funds

• Your Destination - Increasing Income (Managed by Legal & General) • Your Destination - Level Income (Managed by Legal & General) • Destination Cash (Managed by Legal & General) PersonalChoice

The PersonalChoice approach offers members complete control of their investment choices with decisions on fund choice and switching not being pre-defined. Members utilising the PersonalChoice approach can choose from the six funds offered under LifePlan and an additional eight funds. The PersonalChoice funds and the underlying fund managers are as follows: PersonalChoice Additional Funds

• UK Equity Fund • North America Equity Fund • Continental Europe Equity Fund • Japan Equity Fund • Asia Pacific Equity Fund • Emerging Markets Equity Fund • Property Fund • Corporate Bond Fund All of the PersonalChoice additional funds are managed by Legal & General. All of the underlying funds are well-established pooled funds, with the exception of Your Journey and Your Journey Extra which are bespoke diversified growth funds created for the Scheme and for other DC arrangements elsewhere in the group (but are based on similar pooled funds already offered by the fund manager). The units are priced with reference to the daily prices of the underlying funds provided by the investment manager.

15



Investments DC section (continued)

Annual management charges (“AMCs”) are calculated as a percentage of the value of the investment funds and reflected in the prices provided by the investment manager. The AMCs applicable to each fund are shown below.

Fund AMC

%

Your Journey 0.37

Your Journey Extra 0.45

Global Journey 0.049

Your Destination – Increasing Income 0.03

Your Destination – Level Income 0.0425

Destination Cash 0.05

UK Equity Fund 0.0275

North America Equity Fund 0.04

Continental Europe Equity Fund 0.0425

Japan Equity Fund 0.045

Asia Pacific Equity Fund 0.0475

Emerging Markets Equity Fund 0.30

Property Fund 0.55

Corporate Bond Fund 0.0425

The table below shows the performance of the DC PIP options over 1, 3 and 5 years (annualised) to 30 June

2017.

Fund 1 years 3 years 5 years

Fund Benchmark Fund Benchmark Fund Benchmark

% % % % % %

Your Journey 5.2 3.1 2.3 1.8 3.5 2.2

Your Journey Extra 6.4 3.1 2.2 1.8 4.6 2.2

Global Journey 20.3 20.1 9.6 9.5 13.0 12.9

Your Destination – Increasing Income 7.9 7.9 16.6 16.6 11.6 11.6

Your Destination – Level Income 3.8 3.7 9.6 9.5 7.6 7.5

Destination Cash 0.4 0.1 0.5 0.3 0.5 0.3

UK Equity Fund 18.5 18.1 7.6 7.4 10.7 10.6

North America Equity Fund 21.3 21.3 19.1 19.0 18.3 18.3

Continental Europe Equity Fund 28.7 28.7 11.4 11.3 15.7 15.6

Japan Equity Fund 24.0 24.0 16.8 16.7 14.6 14.6

Asia Pacific Equity Fund 27.9 27.7 12.3 12.1 11.1 11.0

Emerging Markets Equity Fund 23.9 23.8 11.0 10.9 8.2 8.0

Property Fund 8.6 6.0 8.3 9.5 8.5 8.3

Corporate Bond Fund 4.0 3.9 7.0 6.9 6.0 6.1

Fund performance and benchmark data shown above have been sourced from the underlying investment managers. It should be noted that fund performance may vary from actual unit price movement due to bid/offer swings; timing of pricing point valuations and fund charges.

16



Market commentary – Summary year to 30 June 2017

The principal economic factors which have affected the investment performance of the DB investments and the investments of the DC PIP member and DB members with AVCs were as follows: General

The focus of political uncertainty moved from Europe to the US at the start of the period. As with the UK referendum result, the US election of President Trump in November 2016 defied conventional wisdom and did disrupt financial markets. Once again, the disruption proved to be relatively brief. The aftershocks of the referendum vote faded, too. The most significant sustained reaction had been the plunge in sterling after the referendum vote. It fell another 9% in trade-weighted terms between end-June 2016 and mid-October 2016, but recovered subsequently to finish the period down only 4%. As so often, economic developments had the more lasting influence on markets. The global economic growth was improving. Year-on-year growth in the US, Eurozone and China was on a rising trend over the period, although the momentum of UK growth slowed in 2017. Global inflation remained well-behaved. True, headline inflation in the US, UK and Eurozone was rising for much of the period, but this mainly reflected a rise in oil prices from early 2016 after the collapse of the previous 18 months. However, underlying inflation was more stable and actually turned down in the US after January. Sterling’s earlier weakness did push UK inflation (headline and underlying) above the Bank of England’s 2% p.a. target. That did not stop the Bank of England’s Monetary Policy Committee, concerned about the risk of a post-referendum downturn, from cutting interest rates from 0.5% p.a. to 0.25% p.a. and extended its quantitative easing (“QE”) programme in August. The Committee hinted at a further cut, but the speed of inflation’s rise and the buoyancy of the UK economy ruled that out. Bonds

Gilt yields took their cue from economic and monetary policy developments. 10-year gilt yields fell to all-time lows of 0.6% p.a. when rates were cut in August rose with the buoyant UK economy over the rest of 2016 and drifted lower as the economy slowed in the new year. Over the period as a whole, 10-year yields rose from 1.0% p.a. to 1.3% p.a. Index-linked gilts outperformed conventional gilts, reflecting investors’ growing concerns about higher inflation resulting from sterling weakness in the first half of the period. In general, non-government bonds outperformed government bonds. In sterling investment-grade markets, yield spreads relative to gilts had fallen to their lowest levels for over 10 years by the end of June 2017. Equity

Equity markets had dipped in advance of the US presidential election. Just before polling day, global indices were barely higher than they were at the start of the period. But initial doubts about a Trump regime were quickly replaced, in developed markets at least, by growing economic optimism and markets rallied. Emerging markets fell sharply after the election amid fears of rising protectionism, but they recovered strongly in the first half of 2017. The FTSE All-World Index returned 17% over the period in local currency terms, 20% in sterling terms. Property

UK commercial property values fell in the wake of the EU referendum and some property funds (particularly those aimed at retail investors) had to make substantial sales quickly to meet redemption requests. As measured by the widely-followed IPD Monthly Index, values recovered towards the end of the period, but still finished a little lower than they started. The total return on the Index was positive, as income was sufficient to offset the modest capital falls. In aggregate, rents continued to rise over the period, but the rate of growth was falling throughout, particularly in the office sector. Employer related investment

Details of employer related investments are given in note 26 to the financial statements.

17


Trustees’ annual report (continued)

Statement of Trustee's responsibilities Trustee's responsibilities in respect of the financial statements

The financial statements, which are prepared in accordance with United Kingdom Generally Accepted Accounting Practice, including the Financial Reporting Standard applicable in the UK and Republic of Ireland (“FRS 102”), are the responsibility of the Trustee. Pension scheme regulations require, and the Trustee is responsible for ensuring that those financial statements:

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 its assets and liabilities, other than liabilities to pay pensions and benefits after the end of the Scheme year; and

contain the information specified in Regulation 3A of the Occupational Pension Schemes (Requirement to obtain Audited Accounts and a Statement from the Auditor) Regulations 1996, including making a statement whether the financial statements have been prepared in accordance with the relevant financial reporting framework applicable to occupational pension schemes.

In discharging the above responsibilities, the Trustee is responsible for selecting suitable accounting policies, to be applied consistently, making any estimates and judgements on a prudent and reasonable basis, and for the preparation of the financial statements on a going concern basis unless it is inappropriate to presume that the scheme will continue as a going concern.

The Trustee is also responsible for making available certain other information about the Scheme in the form of an annual report.

The Trustee also has a general responsibility for ensuring that adequate accounting records are kept and for taking such steps as are reasonably open to it to safeguard the assets of the Scheme and to prevent and detect fraud and other irregularities, including the maintenance of an appropriate system of internal control.

The Trustee is also responsible for information provided on the Scheme’s section of the Lloyds Banking Group Pension Scheme website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Trustee's responsibilities in respect of contributions

The Trustee is responsible under pensions legislation for preparing, and from time to time reviewing and if necessary revising, a Schedule of Contributions showing the rates of contributions payable to the Scheme by or on behalf of Employers 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 in respect of contributions received in respect of any active member of the Scheme and for adopting risk-based processes to monitor whether contributions that fall due to be paid are paid into the Scheme in accordance with the Schedule of Contributions. Where breaches of the Schedule occur, the Trustee is required by the Pensions Acts 1995 and 2004 to consider making reports to the Pensions Regulator and to members. The Trustee’s annual report was approved by the Trustee and is signed on its behalf by:

18


Annual Statement Regarding DC Governance

This statement has been prepared by the Board of Trustee Directors of Scottish Widows Pension Trustees Limited (the “Trustee”), the Trustee of the Scottish Widows Retirement Benefits Scheme (the “Scheme”). It explains how the Scheme has complied with statutory governance regulations in respect of the money purchase benefits that it offers. The Scheme, which is primarily a defined benefit scheme, offers the following money purchase benefits:

Defined contribution (“DC) benefits in respect of one deferred member in the Pension Investment Plan;

Additional voluntary contribution (“AVC”) benefits for members participating in the “Pension Extra” salary sacrifice arrangement; and

AVC benefits for other members, including those in legacy AVC arrangements.

This statement has been prepared in respect of scheme year 1 July 2016 to 30 June 2017, and has been approved by the Interim Chair of the Trustee on the date shown below. Default investment option

The following investment option is the Scheme’s “default arrangement”, which means members who have not made an active investment decision of their own are invested in this option:

Fund

Your Journey Extra switching over the 10 years before retirement to Your Destination (Increasing Income) and Cash

Statement of investment principles

A copy of the Scheme’s latest Statement of Investment Principles governing decisions about investments that are held to provide DC benefits to members, including the aims and objectives of the default arrangement and other funds available to members, is appended to this report. Changes to the funds

Changes have been made to two of the funds. There was a change made to the Investment Manager for the Your Journey Extra fund, and the Your Journey fund was closed, during November 2017. Requirements for processing financial transactions

"Core financial transactions" include, amongst other things:

investment of contributions in the Scheme.

transfers in or out of the Scheme.

switches between funds in the Scheme.

payments out of the Scheme to members or other beneficiaries. Between 1 July 2016 and 30 June 2017, the Trustee made sure that "core financial transactions" were processed promptly and accurately by monitoring the administrator's service levels, carrying out qualitative sampling of certain transactions and continued monitoring of the investment of contributions for AVC members. No issues with the administrator’s performance were identified.

19


Annual Statement Regarding DC Governance (continued) Assessment of member-borne charges and transaction costs Level of member-borne charges and transaction costs

The Trustee calculated the “charges” and, where possible, “transaction costs” borne by members of the Scheme for the period 1 July 2016 to 30 June 2017. During the period 1 July 2016 to 30 June 2017, the level of charges applicable to the default arrangement was as follows:

Funds Minimum and maximum annual management charges (depends on the asset allocation for each member)

Your Journey Extra switching to Your Destination (Increasing Income) and Cash

0.035% to 0.45%

The range of charges applicable to the ‘Pension Extra’ range of funds which are not part of the default arrangement and in which some members are invested was as follows:

Funds Annual Management Charges

Your Journey Extra 0.50%

Your Journey 0.37%

Global Journey 0.049%

Your Destination Increasing Income 0.03%

Your Destination Level Income 0.0425%

Destination Cash 0.05%

UK Equity Fund 0.0275%

North American Equity Fund 0.04%

Continental Europe Equity Fund 0.0425%

Japan Equity Fund 0.0445%

Asia Pacific Equity Fund Excluding Japan 0.0475%

Emerging Markets Equity Fund 0.30%

Property Fund 0.55%

Corporate Bond Fund 0.0425%

The range of charges applicable to funds under legacy AVC arrangements are detailed below:

Funds Annual Management Charges

The Managed Fund 0.35%

The Property Fund 0.40%

The Stock Exchange Equity Fund 0.40%

The Cash Fund 0.20%

The Pension Protection Fund 0.12%

The Consensus Fund 0.15%

Emerging Markets Equity Fund 0.55%

UK Index Fund 0.12%

Index-linked Gilt Tracker 0.12%

20

Scottish Widows Retirement Benefits Scheme Annual Statement Regarding DC Governance (continued)

Assessment of member-borne charges and transaction costs (continued) Level of member-borne charges and transaction costs (continued)

Funds (Policy P56235) Annual Management Charges

Property Fund 1.05%

Mixed Fund 1.00%

Consensus Fund 1.00%

Funds (Policy MG15) Annual Management Charges

Scottish Widows Cash 0.875%

Scottish Widows Fixed Interest 0.875%

Scottish Widows Indexed Stock 0.875%

Scottish Widows International 0.876%

Scottish Widows Mixed 0.891%

With-profits n/a*

The calculation and disclosure of transaction costs is an area that is currently under development generally across the investment management industry. Therefore, the Trustee was unable to obtain information in respect of transaction costs as these are implicit within the unit price of the funds and are not currently quantified and disclosed separately by the investment managers. The Trustee is liaising with its investment platform provider who in turn is working with investment managers to understand the progress that is being made towards disclosure in future. *Fund charges and other costs associated with with-profits funds are taken into account in the calculation of annual bonuses and, due to their variable nature, are not usually expressed in the form of annual management charges.

Value for members assessment

The Trustee has assessed the extent to which the charges and transaction costs set out above represent good value for members. In terms of the cost sharing between members and the employers:

In respect of the Pension Extra range of funds, members pay investment related charges and transaction costs.

In respect of the Pension Extra range of funds, the employers pay for all other costs and charges incurred by the Scheme.

In relation to the legacy AVC funds, the annual management charges as set out above cover both investment and administration costs.

The Trustee’s assessment of the member-borne charges against the benefits attributable to those charges included:

a high level review of the performance of the Scheme’s investment funds in the context of their investment objectives.

a comparison of the Scheme with other similar schemes in the market. The Trustee’s assessment looked wider than this by considering a qualitative assessment of the AVC arrangements focussing on the range of funds offered to members and their ongoing appropriateness for the AVC membership.

On this basis of the assessment, the Trustee concluded that the Scheme represents good value for members in respect of the charges and transaction costs set out above.

21


Annual Statement Regarding DC Governance (continued) Value for members assessment (continued)

The Trustee plans to undertake the following actions to improve value for members during the next 12 months:

Continue to assess the Scheme’s governance against the Pensions Regulator’s Code of Practice 13 for DC (and AVC) schemes;

Review the provision of information on transaction costs and considering how they may be assessed following the introduction of new Regulations;

Review the scope for monitoring member activity, including members making active investment choices/switching, and benefit choices at retirement/transfers-out near retirement and prioritise and initiate a review of funds in light of that review.

Regulatory information, reliances and limitations

During the next 12 months the Trustee intends to undertake the following work to refine the way in which the Scheme is assessed for value for members.

The Trustee acknowledges that at this point, limited data is available on industry wide comparisons and the Trustee has relied heavily on the market knowledge of its advisers;

The Trustee has been unable to obtain information on transaction costs during the period covered by this Statement. The Trustee will seek to obtain information on transaction costs for the default lifestyle, other lifestyle and self-select funds for future assessments.

Trustee knowledge and understanding

The combined knowledge and understanding of the board of the Trustee, together with the advice available to it from its advisers, enables it to properly exercise its function as the Trustee of the Scheme. The Directors of the Trustee include individuals who are professional independent trustees with a long and broad experience of the pensions industry, and individuals who outside of the trustee role either worked or still work for the Scheme’s Participating Employers in various different business areas, including actuarial and pension administration, therefore bringing a broad range of technical knowledge that is relevant to the Scheme. In addition, during the period to 30 June 2017 the Trustee received advice on investment, legal and other matters relating to DC benefits from a number of advisers including:

Shepherd & Wedderburn LLP – legal advice

Hymans Robertson LLP – investment advice

Ernst & Young LLP – bank ring-fencing advice Between 1 July 2016 and 30 June 2017, the Trustee has met its statutory obligations relating to knowledge and understanding by receiving training within Trustee meetings covering investment issues, legal developments, bank ring-fencing and valuation and funding issues. The training was delivered by the Trustee’s investment, actuarial, covenant and legal advisers and by the Lloyds Banking Group Pensions team. In addition, some Trustee Directors attended seminars run by external organisations such as Institute and Faculty of Actuaries.

22


Independent auditors’ report to the Trustee of the Scottish Widows Retirement Benefits Scheme

Report on the audit of the financial statements Our opinion

In our opinion, Scottish Widows Retirement Benefits Scheme’s financial statements:

show a true and fair view of the financial transactions of the Scheme during the year ended 30 June 2017, 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 year;

have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards comprising FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland”, and applicable law); and

contain the information specified in Regulation 3A of the Occupational Pension Schemes (Requirement to obtain Audited Accounts and a Statement from the Auditor) Regulations 1996.

We have audited the financial statements, included in the annual report, which comprise:

the statement of net assets available for benefits as at 30 June 2017;

the fund account for the year then ended; and

the notes to the financial statements, which include a summary of significant accounting policies. Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence

We remained independent of the scheme in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which includes the FRC’s Ethical Standard, and we have fulfilled our other ethical responsibilities in accordance with these requirements. Conclusions relating to going concern

We have nothing to report in respect of the following matters in relation to which ISAs (UK) require us to report to you when: • the Trustee’s use of the going concern basis of accounting in the preparation of the financial statements is

not appropriate; or • the Trustee have not disclosed in the financial statements any identified material uncertainties that may

cast significant doubt about the scheme’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue.

However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Scheme’s ability to continue as a going concern. Reporting on other information

The other information comprises all the information in the annual report other than the financial statements, our auditors’ report thereon and our auditors’ statement about contributions. The Trustee is responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or any form of assurance thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities.

23


Independent auditors’ report to the Trustee of the Scottish Widows Retirement Benefits Scheme (continued) Responsibilities for the financial statements and the audit Responsibilities of the Trustee for the financial statements

As explained more fully in the statement of Trustee’s responsibilities, the Trustee is responsible for ensuring that the financial statements are prepared in accordance with the applicable framework and for being satisfied that they show a true and fair view. The Trustee is also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Trustee is responsible for assessing the scheme’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Trustee either intend to wind up the scheme, or have no realistic alternative but to do so. Auditors’ responsibility for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors’ report. Use of this report

This report, including the opinion, has been prepared for and only for the Trustee as a body in accordance with section 41 of the Pensions Act 1995 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

24


Fund account for the Year ended 30 June 2017 Year ended

30 June 2017 DB

Year ended 30 June 2017

DC


Total


Total

£’000 £’000 £’000 £’000

Employer contributions 14,438 - 14,438 15,274

Employee contributions 112 - 112 146 ────────── ─────────── ────────── ───────────

Total contributions 4 14,550 - 14,550 15,420

Other income 5 57 - 57 11 ─────────── ─────────── ─────────── ───────────

14,607 - 14,607 15,431

Benefits 6 (23,633) - (23,633) (23,673)

Transfers to other plans 7 (105,575) - (105,575) (73,548)

Administrative expenses 8 (1,147) - (1,147) (1,043)

Other payments 9 (201) - (201) (180) ─────────── ─────────── ─────────── ───────────

(130,556) - (130,556) (98,444)

─────────── ─────────── ─────────── ─────────── Net (withdrawals) from dealings with members

(115,949) - (115,949) (83,013)

─────────── ─────────── ─────────── ───────────

Returns on investments

I Investment income 10 6,737 - 6,737 7,675

Investment management expenses 11 (2,860) - (2,860) (3,214)

Change in market value of investments 12 142,419 8 142,427 72,477 ────────── ─────────── ────────── ──────────

Net returns on investments 146,296 8 146,304 76,938 ─────────── ─────────── ────────── ───────────

Net increase / (decrease) in the fund 30,347 8 30,355 (6,075)

Opening net assets of the Scheme 1,169,982 36 1,170,018 1,176,093 ─────────── ─────────── ─────────── ─────────── Closing net assets of the Scheme 1,200,329 44 1,200,373 1,170,018 ═══════════ ═══════════ ═══════════ ═══════════

The notes on pages 26 to 42 form part of these financial statements

25


Statement of Net Assets Available for Benefits As at 30 June 2017

As at

30 June 2017 As at

30 June 2017 As at

30 June 2017 As at

30 June 2016

DB DC Total Total

£’000 £’000 £’000 £’000

Investment assets

Bonds 12 459,344 - 459,344 460,805

Pooled investment vehicles 14 609,377 - 609,377 711,810

Derivatives 15 53,163 - 53,163 48,522

Cash deposits 16 112,426 - 112,426 24,474

Other investment balances 16 6,422 - 6,422 4,629

──────────── ──────────── ──────────── ────────────

1,240,732 - 1,240,732 1,250,240

AVC investments 17 9,123 - 9,123 8,515

DC investments 18 - 44 44 36 ──────────── ──────────── ──────────── ──────────── 9,123 44 9,167 8,551

Investment liabilities

Derivatives 15 (31,709) - (31,709) (70,465)

Cash instruments 16 (17,381) - (17,381) (19,150)

──────────── ──────────── ──────────── ──────────── (49,090) - (49,090) (89,615)

───────────── ───────────── ───────────── ─────────────

Net investment assets 12 1,200,765 44 1,200,809 1,169,176

───────────── ───────────── ───────────── ─────────────

Current assets 23 7,437 - 7,437 12,218

Current liabilities 24 (7,873) - (7,873) (11,376)

───────────── ───────────── ───────────── ─────────────

Total net assets available for benefits

1,200,329 44 1,200,373 1,170,018 ═════════════ ═════════════ ═════════════ ═════════════

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 Scheme, which takes into account such obligations for the DB section, is dealt with in the report on actuarial liabilities on pages 5 to 7 of the annual report and these financial statements should be read in conjunction with this report. The notes on pages 26 to 42 form part of these financial statements The financial statements on pages 24 to 42 were approved by the Trustee on and are signed on its behalf by:

26


Notes to the financial statements for the year ended 30 June 2017 1. General Information

The Scheme is an occupational pension scheme established under trust. The Scheme was established to provide retirement benefits to certain groups of employees within Lloyds Banking Group. The Scheme has a DB section which is no longer open to new members but existing members continue to accrue benefits, and a DC section which is also no longer open to new members. The Scheme is a registered pension scheme under the Chapter 2, part 4 of the Finance Act 2004. The Scheme is therefore exempt for taxation except for certain withholding tax relating to overseas investment income.

2. Basis of preparation

The individual financial statements have been prepared in accordance with the Occupational Pension Schemes (Requirement to obtain Audited Accounts and a Statement from the Auditor) regulations 1996, Financial Reporting Standard (FRS) 102 – The Financial Standard applicable in the UK and Republic of Ireland issued by the Financial Reporting Council (“FRS 102”) and the guidance set out in the Statement of Recommended Practice “ Financial Reports of Pension Schemes” (revised November 2014) (“the SORP”).

In adopting FRS 102, the Trustee has adopted the provisions of ‘Amendments to FRS 102, The Financial Reporting Standard applicable in the UK and Republic of Ireland – Fair value hierarchy disclosures (March 2016)’ early.

3. Accounting policies

The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated.

Currency

The Scheme’s functional currency and presentational currency is sterling (GBP).

Assets and liabilities in foreign currencies are expressed in sterling at the rates of the exchange ruling at the year end. Foreign currency transactions are translated into sterling at the spot exchange rate at the date of the transaction. Gains and losses arising on conversion or translation are dealt with as part of the change in market value of investments.

Contributions

Employers’ normal contributions are accounted for on an accruals basis on the date the payroll is run. Contributions made by the Employer are based upon pensionable salaries.

Employers’ augmentation contributions are accounted for in accordance with the agreement under which

they are paid, or in the absence of such an agreement, on a receipts basis. Employers’ flexible benefits contributions are accounted for on an accruals basis on the date the payroll is

run and are made by members under the guidelines set out in the pensions section of Flex.

Employers’ deficit funding contributions are accounted for in accordance with the agreement under which they are paid, or in the absence of an agreement, on a receipts basis.

Employers’ contribution in respect of Section 75 debt is accounted for when paid or when determined by the

actuary whichever is earlier. Members’ AVCs are accounted for on an accruals basis on the date the payroll is run.

27


Notes to the financial statements for the year ended 30 June 2017 (continued)

3. Accounting policies (continued) Benefits

Pensions are accounted for on an accruals basis on the date the payroll is run.

Commutation & lump sum retirement benefits are accounted for on an accruals basis on the later of the date of retirement or the date the member exercises their option to take a lump sum with reduced pension.

Lump sum death benefits are accounted for on an accruals basis on the date of death. Transfers to other plans

Individual transfers to other pension schemes represent the capital sums payable in respect of individual members transferring to other pension schemes. They are accounted for on an accruals basis on the date the trustee of the receiving scheme accepts the liability. The liability normally transfers when a payment is made, unless the trustee of the receiving scheme agrees to accept the liability in advance. Administration expenses

Administration expenses are accounted for on an accruals basis. Other payments

Other payables are accounted for on an accruals basis. Investment income

Income from bonds is accounted for on an accruals basis and includes income bought and sold on purchases and sales of bonds. Interest on cash deposits is accounted for on an accruals basis.

Income distributed from pooled investment vehicles is accounted for on an accruals basis. All other income generated by pooled investment vehicles which is not distributed, is retained within the fund and reflected in the market value of units. Income from derivatives is accounted for on an accruals basis. Income payable is reflected within the market value of the derivative contract and included within the statement of net assets available for benefits until the date of payment. Other investment income is accounted for on an accruals basis. Investment management fees

The basis on which fees paid to investment managers are measured and disclosed is as follows:

The fees paid to the investment managers are borne by the Scheme and are charged as a percentage of the market value of the fund. Some investment managers also receive a performance fee, the calculation of which is set out in each investment management agreement. Investment management expenses are accounted for on an accruals basis.

Management fees for pooled investment vehicles are incorporated in the unit price and are reflected within change in market value of investments in the fund account. Custody charges are accounted for on an accruals basis. Investment assets and liabilities

Investment assets and liabilities are included in the financial statements at fair value. The methods of determining fair value for the principle classes of investments are: Bonds are valued at bid price at the year end, as advised by the investment manager. Market value excludes interest accrued, which is included as income receivable.

28


Notes to the financial statements for the year ended 30 June 2017 (continued) 3. Accounting policies (continued)

Investment assets and liabilities (continued)

Units held in pooled investment vehicles are stated at bid price at the year end, as advised by the investment manager. Where the fund is single priced, the fund is stated at this single price at the year end, as advised by the investment manager. Resultant gains and losses are reflected in the change in market value of investments in the fund account. Unquoted pooled investment vehicle valuation policy per asset class is as follows:

Property investments are valued at fair value of the assets and liabilities of the fund as calculated by the investment manager at the latest quarterly valuation. The asset values of the underlying properties are determined using property values assessed by independent valuers, primarily determined by discounted rental values. Resultant gains and losses are reflected in the change in market value of investments in the fund account.

Private equity, infrastructure and mezzanine debt funds are valued at fair value as determined by the underlying individual fund managers with whom the investment managers have invested. These are adjusted to reflect annual audited financial statements when available and by monthly management accounts that take account of further drawdown, distributions and management fees. Resultant gains and losses are reflected in the change in market value of investments in the fund account.

Multi asset fund value is primarily driven by the fair value of its underlying assets; the net asset value as advised by the fund manager is considered a suitable approximation to fair value.

Swaps contracts are marked to market individually using the latest rate curves available at the valuation date. Resultant gains and losses are reflected in the change in market value of investments in the fund account. Swaps are reflected within the derivatives category of investments.

Forward foreign exchange contracts are over the counter (“OTC”) contracts and are valued by determining the gain and loss that would arise from closing out the contract at the reporting date.

Acquisition and disposal costs are included within purchases and sales in the year they arise. Realised and unrealised capital gains and losses on investments are dealt with in the fund account in the year in which they arise.

Collateral pledged to third parties at the yearend has been included in the valuation of the investments as this remains an asset of the Scheme. Collateral held at the year end which has been received from third parties has not been included in the valuation of investments these assets are not assets of the Scheme until the end of the contracts to which they relate.

29



4. Contributions

2017 2017 2017 2016

DB DC Total Total

£’000 £’000 £’000 £’000

Employers:

Normal 12,325 - 12,325 13,527

Flexible benefits 517 - 517 560

Augmentations 416 - 416 218

Section 75 debt 210 - 210 -

Additional 970 - 970 969

Employee:

AVCs 112 - 112 146 ───────────── ─────────── ───────────── ─────────────

14,550 - 14,550 15,420

Employer’s augmentations are paid in respect of benefits to certain individuals; this is subject to formal agreement by the Trustee.

Flexible benefit contributions relate to employees who choose to invest a monthly cash sum on a salary sacrifice basis under the Flexible Benefits Scheme “Flex”. Members choosing to make flexible benefit contributions invest on a money purchase basis into the fund choices available to the DC PIP member.

In accordance with the Schedule of Contributions, dated 27 November 2014, the bank paid an additional contribution of £950k, in respect of the normal annual expenses of running the Scheme, including administration, investment and audit. In addition, the bank paid an additional contribution of £20k relating to the reimbursement of levies paid by the Scheme. AVCs relate to DB members who elect to make these contributions in accordance with the Trust Deed and Rules. These contributions are invested in Scottish Widows AVC funds in line with the members fund selection. The Scheme receives the proceeds from these investments on maturity and uses them for the benefit of the individual members. Lloyds Bank PLC withdrew from the Scheme, as a Participating Employer on 5 October 2016. The Section 75 debt determined amounted to £210k. This debt was settled by the Employer during the Scheme year.

There were no contributions received in respect of DC members for the year ended 30 June 2016.

5. Other income

2017 2017 2017 2016

DB DC Total Total

£’000 £’000 £’000 £’000

Other income

57 - 57 11

───────── ───────── ───────── ─────────

57 - 57 11

The income above consists of several Limited Revaluation Premiums receivable from HM Revenue & Customs in respect of Scheme members leaving contracted-out employment.

There was no income received in respect of DC section for the year ended 30 June 2016.

30



6. Benefits

2017 2017 2017 2016

DB DC Total Total

£’000 £’000 £’000 £’000

Pensions 20,183 - 20,183 19,692

Commutations & lump sum retirement 3,450 - 3,450 3,912

Lump sum death benefits - - - 69 ───────── ───────── ───────── ─────────

23,633 - 23,633 23,673

There were no benefits payments paid to the DC member for the year ended 30 June 2016. 7. Transfers to other plans

2017 2017 2017 2016

DB DC Total Total

£’000 £’000 £’000 £’000

Individual transfers to other schemes 105,575 - 105,575 73,548 ───────── ───────── ───────── ─────────

105,575 - 105,575 73,548

Individual transfers to other schemes for the year ended 30 June 2017 includes £nil (30 June 2016: £135,000) in respect of DC members.

8. Administrative expenses

2017 2017 2017 2016

DB DC Total Total

£’000 £’000 £’000 £’000

Administration and processing fees 80 - 80 138

Audit fees 53 - 53 44

Legal and professional fees 949 - 949 801

PPF general levy 20 - 20 19

Trustee fees 45 - 45 41 ───────── ───────── ───────── ───────── 1,147 - 1,147 1,043

In addition to the above Trustee fees of £30k (2016: £30k) and the PPF levy of £268k (2016: £201k), were paid during the year by the Employer.

There were no administrative expenses paid in respect of the DC section for the year ended 30 June 2016. 9. Other payments

2017 2017 2017 2016

DB DC Total Total

£’000 £’000 £’000 £’000

Charge from Scottish Widows Services Limited

201 - 201 180

───────── ───────── ───────── ───────── 201 - 201 180

Further information can be found within the related party transaction note on page 41. There were no other payments in respect of the DC section for the year ended 30 June 2016.

31



10. Investment income

2017 2017 2017 2016

DB DC Total Total

£’000 £’000 £’000 £’000

Income from bonds 6,557 - 6,557 4,328

Interest on cash deposits 38 - 38 7

Income from pooled investment vehicles 1,310 - 1,310 767

Income from derivatives (1,179) - (1,179) 2,573

Other investment income 11 - 11 - ───────── ───────── ───────── ─────────

6,737 - 6,737 7,675

There was no investment income received in respect of the DC section for the year ended 30 June 2016.

11. Investment management expenses

2017 2017 2017 2016

DB DC Total Total

£’000 £’000 £’000 £’000

Investment managers’ fees 2,589 - 2,589 2,847

Custodian fees 62 - 62 29

Investment consultancy fees 209 - 209 338 ───────── ───────── ───────── ─────────

2,860 - 2,860 3,214

There was no investment management expenses paid in respect of DC section for the year ended 30 June 2016.

12. Reconciliation of net investments

Value at 30

June 2016 Purchases at

cost and derivative payments

Sales proceeds and

derivative receipts

Change in market value

Value at 30 June 2017

£’000 £’000 £’000 £’000 £’000

Bonds 460,805 20,983 (31,295) 8,851 459,344

Pooled investment vehicles 711,810 337,118 (523,275) 83,724 609,377

Derivative contracts (21,943) 17,862 (22,443) 47,978 21,454

AVC investments 8,515 1,127 (1,608) 1,089 9,123

──────────── ──────────── ──────────── ──────────── ────────────

1,159,187 377,090 (578,621) 141,642 1,099,298

Cash deposits 5,324 777 95,045

Other investment balances 4,629 - 6,422 ──────────── ──────────── ────────────

Total DB net investments 1,169,140 142,419 1,200,765 ──────────── ──────────── ────────────

DC investments 36 - - 8 44

──────────── ──────────── ──────────── ──────────── ────────────

Total net Investments 1,169,176 142,427 1,200,809

32



12. Reconciliation of net investments (continued)

The change in market value of investments during the year comprises all increases and decreases in market value of investments held at any time during the year, including profits and losses realised on sales of investments during the year.

The change in market value applicable to DC investments amounted to £1k for the year ended 30 June 2016.

13. Transaction costs

Transaction costs include costs charged directly to the Scheme such as fees, commission, stamp duty and

other fees. Direct transaction costs incurred during the year amounted to £nil (2016: £nil). In addition to the transaction costs disclosed above, indirect costs are incurred through the bid-offer spread

on investments within pooled investment vehicles. 14. Pooled investment vehicles

The Scheme’s holdings of pooled investment vehicles are analysed below:

2017 2016

£’000 £’000

Bonds 222,210 241,298

Equity 245,868 276,592

Private equity 6,037 8,352

Property 118,847 58,163

Liquidity funds 16,415 36,804

Multi asset fund - 90,601 ───────────── ─────────────

609,377 711,810 15. Derivatives

The Trustee has authorised the use of derivatives by their investment managers as part of their investment strategy for the Scheme. At the year end the Scheme held the following derivatives:

As at 30 June 2017 As at 30 June 2016

Asset Liability Total Asset Liability Total

£’000 £’000 £’000 £’000 £’000 £’000

Swaps 53,163 (31,533) 21,630 48,522 (69,672) (21,150) Forwards - (176) (176) - (793) (793) ───────────── ───────────── ────────── ──────────── ──────────── ──────────

53,163 (31,709) 21,454 48,522 (70,465) (21,943)

The main objectives for the use of derivatives and the policies followed during the year are summarised below: Swaps: In entering into swaps, the Trustee aim is to match as far as possible the Scheme’s long term

liabilities with corresponding assets, particularly in relation to sensitivities to interest rate movements and the impact of inflation. The Trustee aim in asset allocation is to provide a broadly based and diversified pool of assets that will, in combination with the swaps and other liability matching instruments, ensure sufficient funds to meet liabilities as they fall due. Credit default swaps are held to gain exposure to underlying corporate bond markets. Forwards: A currency hedging programme, using forward currency contracts has been put in place to

reduce the currency exposure of overseas investments to a targeted level. In order to maintain appropriate diversification of investments within the portfolio and take advantage of overseas investment returns a proportion of the underlying investment portfolio is invested overseas.

33



15. Derivatives (continued)

Outstanding derivative financial instruments at the year end are summarised as follows:

Swap Contracts at 30 June 2017:

Type Nominal

£’000 Maturity (Years)

Number Asset value £’000

Liability value £’000

Interest rate swaps 1,115,897 <5 years 25 766 (848)

Interest rate swaps 138,970 5>10 years 15 81 (1,446)

Interest rate swaps 342,818 10>30 years 56 4,023 (3,874)

Interest rate swaps 332,033 >30 years 43 16,798 (583)

Total return swaps 603,620 <5 years 53 19,011 (13,209)

Inflation swaps 28,478 <5 years 2 - (1,235)

Inflation swaps 15,488 5>10 years 2 - (749)

Inflation swaps 87,725 10>30 years 32 2,618 (2,350)

Inflation swaps 74,927 >30 years 22 1,846 (6,588)

Credit default swaps 402,600 <5 years 10 8,020 (651)

────── ──────

53,163 (31,533)

All swap contracts are OTC. A total of £37,417k (2016: £16,710k) was held as collateral under the swap contracts as at 30 June 2017, this consisted of £21,036k (2016: £nil) of securities and £16,381k (2016: £16,710k) held in cash. In addition there was £19,816k cash collateral pledged against the derivative contracts held as at 30 June 2017 (2016: £29,428k).

Forward foreign exchange contracts at 30 June 2017:

Number of contracts

Settlement date

Currency payable

Value of currency payable £’000

Currency receivable

Value of currency receivable £’000

Asset value £’000

Liability Value £’000

1 September 2017

Euro (22,976) Sterling 22,800 - (176)

Forward foreign exchange contracts are OTC contracts.

34



16. Cash deposits and other investment balance

2017 £’000

2016 £’000

Cash sterling 97,102 18,200

Cash foreign currency 15,324 6,274

───────────── ─────────────

112,426 24,474 Obligation to return collateral (17,381) (19,150)

───────────── ─────────────

Cash deposits 95,045 5,324 ───────────── ─────────────

Amounts due from brokers 4,360 2,618

Income receivable from bonds 2,062 2,011

───────────── ─────────────

Other investment balances 6,422 4,629 ───────────── ─────────────

17. AVC investments

The Trustee holds assets invested separately from the main fund to secure additional benefits on a money purchase basis for those DB members electing to pay AVCs. Members participating in this arrangement each receive an annual statement confirming the amounts held to their account and the movements in the year.

The aggregate amounts of AVC investments are as follows:

2017 £’000

2016 £’000

Scottish Widows Limited 5,485 5,173 Scottish Widows Limited (Flexible Benefits) 3,638 3,342 ───────────── ─────────────

9,123 8,515

Included within AVC investment are Flexible Benefits which allow DB members to make extra contributions under a salary sacrifice arrangement.

18. DC investments

2017 £’000

2016 £’000

Scottish Widows Limited pooled funds designated to members

44

36

───────────── ─────────────

44 36

Money purchase assets purchased by the Scheme that are allocated to provide benefits to individuals on whose behalf corresponding contributions were paid are classed as designated to members. The investment manager holds the investment units on a pooled basis for the Trustee.

The value of units held on behalf of the DC members are analysed below:

Fund Type 2017 £’000

2016 £’000

Global Journey Equity 44 36

35



19. Fair value determination

The fair value of financial instruments has been estimated using the following fair value hierarchy: Level 1 Unadjusted quoted price in an active market for the identical instruments that the entity

can access at the measurement date. Level 2 Inputs (other than quoted prices) that are observable for the instrument, either directly

or indirectly. Level 3 Inputs are unobservable, i.e. for which market data is unavailable. The Scheme's investment assets and liabilities have been fair valued using the hierarchy categories above

as follows:

2017 Level 1 Level 2 Level 3 Total

£’000 £’000 £’000 £’000

Investment assets

Bonds - 459,344 - 459,344

Pooled investment vehicles 16,415 468,077 124,885 609,377

Derivative contracts - 53,163 - 53,163

Cash deposits 112,426 - - 112,426

Other investment balances 6,422 - - 6,422

AVC investments - 5,227 3,896 9,123

DC investments - 44 - 44


Derivative contracts - (31,709) - (31,709)

Cash Instruments - (17,381) - (17,381) ──────── ────────── ────────── ───────

135,263 936,765 128,781 1,200,809

2016 Level 1 Level 2 Level 3 Total

£’000 £’000 £’000 £’000

Investment assets

Bonds - 460,805 - 460,805

Pooled investment vehicles 36,804 517,890 157,116 711,810

Derivative contracts - 48,522 - 48,522

Cash deposits 24,474 - - 24,474

Other investment balances 4,629 - - 4,629

AVC investments - 4,866 3,649 8,515

DC investments - 36 - 36


Derivative contracts - (70,465) - (70,465)

Cash Instruments - (19,150) - (19,150)

──────── ────────── ────────── ───────

65,907 942,504 160,765 1,169,176

36



20. Investment risks

Financial Reporting Standard 102 (“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: this is 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 the investment

strategies of the DB and DC sections, as described in the Trustee’s Report. The Trustee manages investment risks associated with the Scheme’s investment portfolio, including credit

risk and market risk, within agreed risk limits which are set taking into account the Scheme’s strategic investment objectives. These investment objectives and risk limits are implemented through the investment management agreements in place with the Scheme’s investment managers and monitored by the Trustee by regular reviews of the investment portfolios, as supported by regulated investment advisors.

Credit risk

The Scheme is subject to credit risk due to its investments in bonds, OTC derivatives and cash deposits.

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 risk arising on the financial instruments held by the pooled investment vehicles.

Analysis of direct credit risk

Non- 2017

Investment grade

investment grade Unrated Total

£’000 £’000 £’000 £’000

Bonds 459,344 - - 459,344

Pooled investment vehicles - - 609,377 609,377

OTC derivative contracts:

Asset 53,163 - - 53,163

Liability (31,709) - - (31,709)

Cash deposits 112,426 - - 112,426

Other investment balances 6,422 - - 6,422 ───────────── ───────────── ───────────── ─────────────

599,646 - 609,377 1,209,023

37



20. Investment risks (continued)

Credit risk (continued)

Non- 2016

Investment grade

investment grade Unrated Total

£’000 £’000 £’000 £’000

Bonds 460,805 - - 460,805

Pooled investment vehicles : - - 711,810 711,810

OTC derivative contracts

Asset 48,522 - - 48,522

Liability (70,465) - - (70,465)

Cash deposits 24,474 - - 24,474

Other investment balances 4,629 - - 4,629 ───────────── ───────────── ───────────── ─────────────

467,965 - 711,810 1,179,775

Credit risk arising on bonds held directly is mitigated by investing in government bonds where the credit risk

is minimal. As shown by the tables above, all of the bonds are classified as investment grade. Credit risk arising on other instruments is mitigated by investment mandate agreements setting minimum credit rating exposure of underlying issuers.

Credit risk arising on derivatives depends on whether the derivative is exchange traded or OTC. OTC

derivatives 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 in place between the investment managers and counterparties as disclosed in note 15. Credit risk is also mitigated by the investment mandates detailing permitted counterparties with who contracts may be held. All the permitted counterparties are at least investment grade rated.

Credit risk also arises on forward foreign currency contracts. There are no collateral arrangements for these

contracts but all counterparties are required to be at least investment grade.

Cash is held with financial institutions which are at least investment grade.

The Scheme's holdings in pooled investment vehicles are unrated, as the ratings only apply to the underlying investments. Direct credit risk is mitigated by the underlying assets of the pooled arrangements being ring fenced from the pooled investment managers, the regulatory environment in which the pooled investment managers operate and diversification of investment 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, monitors any changes to the regulatory ad operating environment of the pooled manager.

The Scheme is also subject to indirect credit risk in relation to underlying investments held in the bond and liquidity funds. The managers of these pooled investment vehicles manage the risk by having a diversified exposure to bond issuers, conducting thorough research and assessing probability of default and limiting their exposure to issuers rated below investment grade. The magnitude of the indirect credit risk will vary over time as the pooled investment manager’s change their underlying investments.

Currency risk

The Scheme’s investment portfolio is subject to currency risk because some of the Scheme’s investments

are held in overseas markets, either as segregated investment or via pooled investment vehicles. The Trustee limits overseas currency exposure through diversification of currency blocs and setting guidelines for the investment managers to set currency exposure limits, by entering into forward contracts. A currency hedging policy is in place for the CDS portfolio to hedge the euro exposure arising from profits and losses back to sterling.

38


Notes to the financial statements for the year ended 30 June 2017 (continued) 20. Investment risks (continued) Currency risk (continued)

The Scheme's total net unhedged exposure by major currency at the year end was as follows:

2017 2016 Currency £’000 £’000

EUR 33,194 30,149

USD 92,149 75,545

JPY 19,124 19,833

Other 91,557 101,508 ──────────── ────────────

236,024 227,035

Interest rate risk

The Scheme is subject to interest rate risk because some of the Scheme’s investments are held in bonds

and swaps, either as segregated investments or via pooled investment vehicles, and cash. The Trustee has set a benchmark for total investment in bonds and interest rate swaps of 40% of the total investment portfolio, as part of their LDI strategy. Under this strategy, if interest rates fall, the value of the LDI investments will rise, offsetting the increase in actuarial liabilities arising from the fall in the discount rate. Similarly, if interest rates rise, the LDI investments will fall in value, as will the actuarial liabilities due to the corresponding increase in the discount rate.

At the year end the main asset classes subject to interest rate risks were:

2017 2016

£’000 £’000 Direct

Bonds 459,344 460,805

OTC derivatives 21,454 (21,943) ───────────── ─────────────

480,798 438,862

2017 2016

£’000 £’000 Indirect

Bonds 222,210 241,298 ───────────── ─────────────

222,210 241,298

39


Notes to the financial statements for the year ended 30 June 2017 (continued) 20. Investment risks (continued)

Other price risk

Other price risk arises principally in relation to the Scheme’s non-LDI assets which include equities,

property, corporate bonds and private equity held in pooled vehicles. As the Scheme’s non-LDI assets are held within pooled investment vehicles, the Scheme has no direct exposure to other price risk.

The Trustee has implemented a strategic asset allocation which includes 60% allocation to non-LDI assets.

The Scheme manages the indirect 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:

2017 2016

£’000 £’000 Indirect via Pooled funds

Corporate bonds 222,210 241,298

Equity 245,868 276,592

Property 118,847 58,163

Private equity 6,037 8,352

Multi asset fund - 90,601 ───────────── ─────────────

592,962 675,006

DC section

Direct risk

Members are directly exposed to credit risk in relation to the investments they make through the investment gateway provider, Scottish Widows Limited. The investment gateway arrangement means that the underlying funds are “wrapped” within an insurance policy agreement between Scottish Widows Limited and the Trustee. This insurance policy wrapper provides the Trustee, and ultimately the members, with protection in the event that the platform provider becomes insolvent. This protection is provided by the Financial Services Compensation Scheme (“FSCS”).

The investment platform provider, Scottish Widows Limited, and the underlying investment managers, Legal

& General and BlackRock, are authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority.

The DC investments are held in pooled investment vehicles which are unrated as the ratings only apply to

the underlying investments. Direct credit risk arising from the investments made through the investment gateway provider, Scottish Widows Limited, is mitigated by the underlying assets being ring-fenced from those of the investment gateway provider.

Indirect risk

Members are also subject to indirect credit risk, currency risk, interest rate risk and other price risk arising from the underlying investments held in the funds managed by Scottish Widows Limited. Member level risk exposures will be dependent on the funds in which they invest. The fund and the associated indirect risk exposures are listed in the table below: Fund 2017

£’000 2016

£’000 Credit

Risk Currency

Risk Interest

Rate Risk

Other Price Risk

Global Journey 44 36

40



21. Concentration of investments

The Scheme held the following investments that were greater than 5% of the total net assets of the Scheme as at the Scheme year ended: 2017 2016

Fund Manager Market Value % of Total Market Value % of Total

£’000 £’000

UK long dated corporate bond fund 222,210 18.5 241,298 20.6

UK capped equity fund - - 59,487 5.1

Global equity fund 200,098 16.7 161,769 13.8

Aberdeen property fund 61,780 5.1 - -

Multi asset fund - - 90,601 7.7

22. Commitments

Fund Manager Currency 2017 2017 2016 2016

Total commitment

Amount remaining to

drawdown

Total commitment

Amount remaining to

drawdown

£’000 £’000 £’000 £’000

Aberdeen private equity

Euro 15,800 4,400 15,800 4,400

23. Current assets

2017 2017 2017 2016

DB DC Total Total

£’000 £’000 £’000 £’000

Cash balances 7,232 - 7,232 12,214

Other debtors 200 - 200 -

Prepayments 5 - 5 4 ─────────── ─────────── ───────── ─────────

7,437 - 7,437 12,218

There were no current assets in respect of the DC section as at 30 June 2016.

24. Current liabilities

2017 2017 2017 2016

DB DC Total Total

£’000 £’000 £’000 £’000

Contributions received in advance 7,083 - 7,083 8,053

Pensioner payroll contributions - - - 1,328

PAYE due to HMRC 325 - 325 623

Investment management fees 274 - 274 215

Lump sums on death due - - - 27

Transfers out due - - - 738

Other creditors 191 - 191 392 ─────────── ─────────── ───────── ─────────

7,873 - 7,873 11,376

There were no current liabilities in respect of the DC section as at 30 June 2016.

41


Notes to the financial statements for the year ended 30 June 2017 (continued) 25. Related party transactions

In accordance with the requirements of Financial Reporting Standard 102, disclosure is made below of the transactions with related parties who are part of the Lloyds Banking Group. Lloyds Bank PLC and Scottish Widows Limited are subsidiaries of Lloyds Banking Group. In addition to contributions received from employees and payments made to the Scheme, the Scheme undertook the following transactions:

Trustee Directors:

At the Scheme year ended 30 June 2017, three of the Trustee Directors, Catriona Herd, Colin Liddell and Bruce Macdonald were active members of the Scheme. Also, two of the Trustee Directors Kevin Doerr and Bruce Macdonald were pensioner members of the Scheme. All benefits and contributions in respect of the above individuals are in line with the Scheme Trust Deed and Rules.

Trustee fees:

Trustee fees of £30k (2016: £30k) were paid during the year by Scottish Widows Limited.

Support services:

Administrative, secretarial, investment management and accounting support services are provided to the Scheme by the Lloyds Banking Group Pensions Department and Pensions Investment and Finance Team. These services were provided at nil cost to the Scheme.

Investments:

The Scheme holds investments with Scottish Widows Limited for final salary members taking part in flexible benefit arrangements with a market value of £3,638k at 30 June 2017 (2016: £3,342k). The Scheme also holds investments with Scottish Widows Limited for the DC PIP section with a market value of £44k to 30 June 2017 which is entirely designated to members (2016: £36k).

The Scheme holds AVC investments with Scottish Widows Limited with a market value of £5,485k at 30 June 2017 (2016: £5,173k). The Scheme’s investments includes two properties which are leased by Lloyds Banking Group, with a total market value of £24,500k as at 30 June 2017 (2016: nil).

Banking:

The Scheme holds bank accounts with Lloyds Bank PLC. The combined balances of these accounts as at 30 June 2017 were £7,232k (2016: £12,214k).

Administration and actuarial services:

Fees of £201k (2016: £180k) were payable to Scottish Widows Limited for administration and actuarial services during the period, this charge is paid by the Final Salary section. The Scheme Rules allow the Trustee to agree that expenses of administration and management of the Scheme will be met from Scheme assets. These fees encompass all activities performed on behalf of the Scheme. Donald Duval of Aon Hewitt Limited held the position of Scheme Actuary during the year ended 30 June 2017. Donald Duval is a deferred member of the Scheme and benefits would be calculated in accordance with the Trust Deeds and Rules.

26. Employer related Investments

During the year no segregated assets were held in employer related investments. The Scheme held an investment in the UK capped equity fund which tracks the FTSE All- share index

capped 5%. This index includes an exposure to Lloyds Banking Group and the Scheme’s share of this exposure was £nil as at 30 June 2017 (2016: £1,068k). This represents 0% (2016: 0.09%) of the total net assets of the Scheme.

The Scheme holds Lloyds Banking Group debt securities through the PM UK long dated corporate bond

fund. The holdings equated to £2,311k at 30 June 2017 (2016: £2,811k), which represents 0.19% (2016: 0.25%) of the total net assets of the Scheme.

The Scheme held an investment in Lloyds 7.625% perpetual junior bond with an exposure of £nil at 30 June

2017 (2016: £4,446k). This represents 0% (2016: 0.4%) of the total net assets of the Scheme.

42



26. Employer related Investments (continued)

The total exposure to employer related investments was £2,311k as at 30 June 2017 (2016: £8,420k) which equated to 0.19% (2016: 0.74%) of the net assets of the Scheme. The maximum exposure permitted by UK regulations is 5% of the net assets of the Scheme.

27. Contingent liabilities

In the opinion of the Trustee, other than the liability to pay pensions, there are no contingent liabilities at the

Scheme year end (2016: £nil) requiring recognition on the statement of net assets available for benefits.

28. Subsequent events

There were no subsequent events requiring disclosure in these financial statements.

43


Independent auditors’ statement about contributions to the Trustee of the Scottish Widows Retirement Benefits Scheme

Statement about contributions Opinion

In our opinion, the contributions required by the payment Schedule of Contributions for the Scheme year ended 30 June 2017 as reported in Scottish Widows Retirement Benefits Scheme’s summary of contributions have in all material respects been paid in accordance with the Schedule of Contributions certified by the Scheme actuary on 27 November 2014. We have examined Scottish Widows Retirement Benefits Scheme’s summary of contributions for the Scheme year ended 30 June 2017 which is set out on the following page. Basis for opinion

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 in accordance with the relevant requirements. This includes an examination, on a test basis, of evidence relevant to the amounts of contributions payable to the scheme under the Schedule of Contributions and the timing of those payments. Responsibilities for the statement about contributions Responsibilities of the Trustee in respect of contributions

As explained more fully in the statement of Trustee’s responsibilities, the Scheme’s Trustee is responsible for preparing, and from time to time reviewing and if necessary revising, a Schedule of Contributions and for monitoring whether contributions are made to the Scheme by the Employer in accordance with relevant requirements. Auditors’ responsibilities in respect of the statement about contributions

It is our responsibility to provide a statement about contributions and to report our opinion to you. Use of this report

This report, including the opinion, has been prepared for and only for the Trustee as a body in accordance with section 41 of the Pensions Act 1995 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

44


Trustee Summary of Contributions payable under the Schedule of Contributions in respect of the Scheme year ended 30 June 2017 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 Schedule of Contributions in respect of the Scheme year ended 30 June 2017. The Scheme Auditor reports on contributions payable under the Schedule in the Independent Auditors’ Statement about Contributions.

Contributions payable under the Schedule in respect of the Scheme year DB DC

£’000 £’000

Employer

Normal contributions 12,325 -

Additional contributions 970 -

Contributions payable under the Schedule (as reported on by the Scheme auditor)

13,295 -

Reconciliation of contributions payable under the Schedule of Contributions to total contributions reported in the financial statements

DB DC

£’000 £’000

Contributions payable under the Schedule (as above) 13,295 -

Contributions payable in addition to those due under the Schedule (and not reported on by the Scheme auditor):

Flexible benefit arrangements 517 -

AVCs 112 -

Augmentation contributions 416 -

Section 75 debt 210 -

Total contributions reported in the financial statements 14,550 -

Approved by the Trustee Board and signed on its behalf by:

45

Scottish Widows Retirement Benefits Scheme Actuary’s certification of the Schedule of Contributions

Name of Scheme: Scottish Widows Retirement Benefits Scheme Adequacy of rates of contributions

I certify that, in my opinion, the rates of the contributions shown in this Schedule of Contributions are such that the statutory funding objective could have been expected to be met by the end of the period specified in the recovery plan dated 31 October 2014.

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 31 October 2014.

The certification of the adequacy of the rates of contributions for the purpose of securing that the statutory funding objective could have been 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.

Signature: ____________________ Date 27 November 2014

Name: Bruce Macdonald Qualification: Fellow of the Institute Faculty of Actuaries

Address: Scottish Widows Employer: Scottish Widows 15 Dalkeith Road EH16 5XA

Scottish Widows Retirement Benefits Scheme 30 June 2017 ......E-mail:...

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