Portman Reports and Accounts 20062007

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ANNUAL REPORT
PORTMAN BUILDING SOCIETY PENSION AND ASSURANCE SCHEME
FOR THE YEAR ENDED 5 APRIL 2007

Scheme Registration Number: 101500944

Portman Building Society Pension and Assurance Scheme Annual Report For the year ended 5 April 2007

Contents

Page

Scheme Advisers and Principal Employer

1-3

Trustee's Report

4 - 12

Statement of Trustee's Responsibilities

13

Independent Auditors' Report

14 - 15

Financial Statements

16 - 17

Notes to the Financial Statements

18 - 27

Actuarial Certificate

28

Compliance Statement

29 - 31

Independent Auditors' Statement about Contributions

32 - 33

Statement of Trustee's Responsibilities in respect of Contributions

34

Summary of Contributions payable

35

Portman Building Society Pension and Assurance Scheme Annual Report For the year ended 5 April 2007

Scheme Advisers and Principal Employer
Scheme Actuary
Christian Hardy F.I.A. (appointed 24 August 2006) Mercer Limited (formerly Mercer Human Resource Consulting Limited) 1 Tower Place West Tower Place London EC3R 5BU Anne H Craig F.F.A (resigned 28 June 2006) Mercer Limited (formerly Mercer Human Resource Consulting Limited)

Independent Auditors
KPMG LLP Dukes Keep Marsh Lane Southampton SO14 3EX

Investment Managers
Legal & General Investment Management Limited Bucklersbury House 3 Queen Victoria Street London EC4NH Pacific Investment Management Company 103 Wigmore Street London W1U 1QS

Additional Voluntary Contribution (AVC) Providers
Royal & Sun Alliance Insurance Group plc Executive Pensions Newhall Place Liverpool L69 3HS Prudential Assurance Company Limited 25 Cannon Street London EC4M 5TA

Page 1

Portman Building Society Pension and Assurance Scheme Annual Report For the year ended 5 April 2007
Nationwide Building Society Nationwide House Pipers Way Swindon SN38 1GN Norwich Union Life & Pensions limited Colegate Bussiness Centre P O Box 520 Norwich NR3 1BH Schroder Hermes Limited 31 Gresham Street London EC2V 7QA Fidelity Investment Management Limited 25 Cannon Street London EC4M 5TA

Legal Adviser
Cameron McKenna LLP Mitre House 160 Aldersgate Street London EC1A 4DD

Scheme Administrator
Mercer Limited (formerly Mercer Human Resource Consulting Limited) Westgate House 52 Westgate Chichester West Sussex PO19 3HF

Scheme Consultants
Mercer Limited (formerly Mercer Human Resource Consulting Limited) 1 Tower Place West Tower Place London EC3R 5BU

Page 2

Portman Building Society Pension and Assurance Scheme Annual Report For the year ended 5 April 2007
Investment Custodian
JP Morgan Chase Bank, N.A. 125 London Wall Street London EC2Y 5AJ

Bank
National Westminster plc 5 East Street Chichester West Sussex PO19 1HH

Secretary to the Trustee
David Cook

Principal Employer
Nationwide Building Society Nationwide House Pipers Way Swindon SN38 1GN

Contact for further information and complaints about the Scheme
David Cook Pensions Department Nationwide House Pipers Way Swindon SN38 1GN

Page 3

Portman Building Society Pension and Assurance Scheme Trustee's Report For the year ended 5 April 2007

Introduction
The Trustee of the Portman Building Society Pension and Assurance Scheme is pleased to present its Report together with the financial statements for the year ended 5 April 2007. The Scheme is a defined benefit scheme. The Scheme has been closed to new members since 1 October 2001.

Management of the Scheme
In accordance with the Occupational Pension Schemes (Member-nominated Trustees and Directors) Regulations 1996, two of the Trustee Directors are nominated by the members under the rules notified to the members of the Scheme, to serve for a period of three years. With effect from 14 September 2006 the Trustee of the Scheme has been Portman Pension Trustees Limited whose Directors are: M P Nicholls R Sharp P Howard P M Vaz A R James D L Smy S J Peters A Lakin M Wade M Rennison R Walther J Wrighthouse J Wood Member-nominated Chair from 28 August 2007 Member-nominated Chair until 28 July 2006 (resigned 28 July 2006) (resigned 28 July 2006) (appointed 6 April 2006) (resigned 28 August 2007) (resigned 28 August 2007)

Chair until 28 August 2007 Pensioner-nominated Member-nominated

(resigned 20 December 2006) (appointed 28 July 2006) (resigned 28 August 2007) (appointed 28 July 2006) (resigned 28 August 2007) (appointed 11 May 2007) (appointed 28 August 2007) (appointed 28 August 2007) (appointed 28 August 2007) (appointed 28 August 2007)

The Member-nominated Trustee Directors may be removed before the end of their three year term only by agreement of all the remaining Trustee Directors, although their appointment ceases if they cease to be members of the Scheme. In accordance with the trust deed, the Principal Employer, Nationwide Building Society, has the power to appoint and remove the other Trustee Directors of the Scheme. Trustee Directors are invited to attend Trustee meetings; decisions require the majority support of those Trustee Directors present. During the year under review, five Trustee meetings were held. The way the Scheme Trustees were structured changed during the year. On 14 September 2006, a Trustee Company (Portman Pension Trustees Limited) was formally created and replaced the existing Trustee management structure. The Trustee Directors remained largely the same and are described above.

Page 4

Portman Building Society Pension and Assurance Scheme Trustee's Report For the year ended 5 April 2007
New MNT Regulations Under the Pensions Act 2004, from 6 April 2006 scheme trustees, including those whose sponsoring employers opted out of the 1996 Member-nominated Trustee requirements, are required to ensure that at least one third of trustees, or directors of a trustee company, are nominated by and selected by the members. Schemes with an opt out in place under the 1996 Regulations will have to comply with these new requirements by October 2007 at the latest. Further information about the Scheme is given in the explanatory booklet which is issued to all the relevant members. Governance and Risk Management Following on from the work started last year, the Trustee has in place a business plan which sets out its objectives in areas such as administration, investment, funding and communication. This, together with a list of the main priorities and timetable for completion, helps the Trustee run the Scheme efficiently and serves as a useful reference document. The Trustee has also focused on risk management. A risk register is in place which sets out the key risks to which the Scheme is subject along with the controls in place to mitigate these. Trustee Knowledge and Understanding The Pensions Act 2004 requires trustees to have sufficient knowledge and understanding of pensions and trust law and be conversant with the Scheme documentation. The Pensions Regulator has published a Code of Practice on Trustee Knowledge and Understanding to assist trustees on this matter which became effective from 6 April 2006. The Trustee has agreed a training plan to enable it to meet these requirements.

Principal Employer
The Scheme is provided for all eligible employees of the Principal Employer. On 27 August 2007, Portman Building Society merged with Nationwide Building Society. From this date, Nationwide became the Principal Employer to the Scheme. The Principal Employer's registered address is Nationwide Building Society, Nationwide House, Pipers Way, Swindon, SN38 1GN.

Page 5

Portman Building Society Pension and Assurance Scheme Trustee's Report For the year ended 5 April 2007

Financial development and actuarial status
The financial statements on pages 16 to 27 have been prepared and audited in accordance with the Regulations made under Sections 41 (1) and (6) of the Pensions Act 1995. They show that the value of the fund increased from £194,331,401 at 5 April 2006 to £210,062,636 at 5 April 2007. An actuarial valuation was carried out as at 5 April 2006 and the related Summary Funding Statement has been issued to all members. The actuarial certificate certifying the schedule of contributions is shown on page 28 of the Annual Report.

Actuarial position of the Plan
An actuarial valuation of the Plan was carried out with an effective date of 5 April 2006. This was the first valuation carried out under the scheme specific funding requirements of the Pensions Act 2004. The key assumptions used for calculating the technical provisions and future contribution requirement for the Plan were: Principal actuarial assumptions for valuation as at 5 April 2006 6.75% p.a. 4.75% p.a. 2.75% p.a. 3.75% p.a. 2.75% p.a. PA92 mc year of birth tables PA92 mc year of birth tables

• • • • • • •

Investment return pre-retirement Investment return post-retirement RPI price inflation Salary increases Pension increases in payment * Non-retired members’ mortality Retired members’ mortality

* where 5% LPI applies The valuation assessed that the technical provisions were 98% covered by the market value of the assets at the effective date. As a result of the valuation, employer contributions to the Plan were set at 22.4% of pensionable salaries from 1 January 2007.

Page 6

Portman Building Society Pension and Assurance Scheme Trustee's Report For the year ended 5 April 2007

Membership
Details of the membership of the Scheme are given below: 2007 2006 699

Active members
Active members at the end of the year 627

Pensioners
Pensioners at the end of the year 441 396

Members with preserved benefits
Members with preserved benefits at the end of the year 1,516
2,584

1,517
2,612

Total membership at the end of the year

Pensioners include individuals receiving a pension upon the death of their spouse. In addition to the above, there were 2,029 (2006:1,057) members included in the Scheme for life assurance benefits only. These membership figures do not include movements notified to the Administrator after the completion of the annual renewal.

Subsequent year end event
On 24 August 2007, the assets and liabilities of the Lambeth Building Society Pension & Assurance Scheme were transferred into the Scheme. the Trustees of both schemes took independent professional advice to ensure the transfer was in the best interests of the members before agreeing to the transfer. The benefits of the ex-Lambeth Scheme members will not change as a result of the merger.

Page 7

Portman Building Society Pension and Assurance Scheme Trustee's Report For the year ended 5 April 2007

Investments
General
All investments, with the exception of the AVC assets, have been managed during the year under review by Legal & General Investment Management Limited and Pacific Investment Management Company. There is a degree of delegation of responsibility for investment decisions. The investment strategy is agreed by the Trustee after taking appropriate advice. Subject to complying with the agreed strategy, which specifies the target proportions of the fund which should be invested in the principal market sectors, the day-to-day management of the Scheme's asset portfolio, which includes full discretion for stock selection is the responsibility of the investment managers.

Investment principles
The Trustee has produced a Statement of Investment Principles in accordance with Section 35 of the Pensions Act 1995. A copy of the Statement is available on request. The main priority of the Trustee when considering the investment policy is to ensure that the promises made about members' pensions may be fulfilled.

The Myners Review and Code of Best Practice
During the year, the Trustee, in conjunction with its professional advisers, has continued its work of reviewing the Scheme's level of compliance with the recommendations contained in the Government's Code of Best Practice. This ongoing review is aimed at benchmarking the Scheme's level of compliance with these recommendations and identifying any actions that still need to be taken. The Trustee understands that the primary purpose of the Code of Best Practice is to ensure that the Trustee has the right skill set and decision-making structures and also that it has clear objectives for the Scheme and an appropriate and well-documented strategy in place for achieving these objectives. In a similar vein, the Trustee knows that it should set explicit goals for the fund managers used by the Scheme. Progress has continued to be made against the principles set out in the Code. The Trustee has complied with the requirements for setting clear objectives and making strategic asset allocation decisions for the Scheme. The Trustee has agreed explicit mandates, appropriate benchmarks and performance targets with each of the investment managers. The Statement of Investment Principles is reviewed regularly and is available to all members on request. Continued compliance with these principles is monitored by the Trustee. In addition, the Trustee Directors undertake appropriate training developed from a review of their training needs and skills to ensure effective decision-making. The Trustee has established a training log that records the training the Trustee Directors have received and highlights possible future training that would be of use. Where appropriate, it takes independent expert advice.

Page 8

Portman Building Society Pension and Assurance Scheme Trustee's Report For the year ended 5 April 2007

The Trustee now awaits the publication by the Government of a revised Code. It will consider what changes are required in the light of the new recommendations

Review of investment performance
Economic Background The Bank of England’s Monetary Policy Committee (“MPC”) increased interest rates by 0.25% to 5.25% in January 2007, their highest level in five years, having also increased rates in August and November 2006. The Consumer Price Index increased to 3.1% in March 2007 and as a result the Governor has had to write to the Chancellor explaining why inflation has fallen outside its target range (currently 1% to 3%). Commentators are widely predicting that interest rates are likely to increase by a further 0.5% during 2007. Interest rates in the Eurozone rose over the year from 2.5% to 3.75%. The Euro area economy has continued to grow at above its trend rate, with annualised growth reaching 3.3% in the last quarter of 2006. Cheaper oil (relative to mid-2006) and the strength of the Euro mean that inflation has been contained, increasing only slightly in January. However, with the level of unemployment in the Euro area falling, the reduction in spare capacity could put upward pressure on inflation. In the US, the Federal Reserve Board (“the Fed”) held interest rates at 5.25% for the third quarter in succession, having begun the year at 4.75%. Despite concerns over slowing housing markets and in particular lending in the subprime mortgage sector, the Fed announced that its “predominant concern remains the risk that inflation will fail to moderate as expected”. The Bank of Japan (“BoJ”) increased interest rates to 0.25% in July 2006 ending its long held near zerorate policy and in February of this year increased rates once again by 0.25% to 0.5% making it the highest level in more than a decade. This was attributed to a “moderately” expanding economy. However it is widely predicted that without significant inflationary pressures, the BoJ is unlikely to raise interest rates further in the short term. Sterling appreciated against all the major currencies over the year, in particular the US Dollar and the Yen. Shortly after the end of the year Sterling broke through the $2:£1 barrier. At the end of the first quarter of 2007, Brent crude oil prices went above the $68 per barrel mark from just over $60 per barrel this time last year. Oil prices rose above $70 in April last year and eventually hit a high of $78.78 per barrel for Brent crude oil on 14th July, due to strong global demand. Since then there has been a general decline in oil prices, despite OPEC’s decision to further cut its output from February 2007.

Page 9

Portman Building Society Pension and Assurance Scheme Trustee's Report For the year ended 5 April 2007

Equities In the UK, the FTSE All Share Index rose by 11.4% over the year. Mid cap stocks (FTSE Mid 250 Index) and small cap stocks (FTSE SmallCap) outperformed the wider market over the year, returning 22.9% and 13.6% respectively. Large cap stocks (FTSE 100) however underperformed the FTSE AllShare Index, returning 9.4%. The FTSE W USA Index returned 12.4% in local currency terms but fell by 0.3% in Sterling terms due to the strong appreciation of Sterling over the year. The Europe (ex UK) stock market was the best performing market globally, with the FTSE W Europe (ex UK) Index returning 13.7% to the Sterling investor and 17.6% in local currency terms. The FTSE W Japan Index returned -10.8% and 1.3% to Sterling and local investors respectively and was the worst performing market to the Sterling investor The Asia Pacific (ex Japan) region returned 12.6% to Sterling investors and 20.7% in local currency terms over the year. Bonds Over the year, UK bond markets generally produced marginally positive returns, albeit lagging behind equity returns. The FTSE A Over 15 Year Gilts Index however fell by 1.6% over the year, whilst the FTSE A Over 5 Year index-linked Gilts Index returned 2.2% and the Merrill Lynch Sterling Non Gilts Index returned 0.9%. Overseas bonds fell by 5.0% in Sterling terms, but rose by 3.2% in local currency terms. Investment Performance The total fund and benchmark returns to 31 March 2007 (the nearest reportable date that figures are available) are as follows:
1 Year (%) 3 Year (% p.a.) Since Inception* (% p.a.)

Total Scheme

7.4

13.2 13.1

6.2 5.9

Benchmark 7.2 * Since inception is taken to be 1 July 2001. All returns are quoted gross of fees.

Total fund returns are estimated by Gissings to 31 December 2003 and Mercer Investment Consulting thereafter.

Page 10

Portman Building Society Pension and Assurance Scheme Trustee's Report For the year ended 5 April 2007
Total fund returns include Fidelity and Schroder to December 2005, Barclays Global Investor from January 2004 to December 2005 and Legal & General and PIMCO from December 2005.
Market Value of Assets as at 31.03.07 (£m) (%) 70.1 28.3 1.6 100.0 Market Value of Assets as at 31.03.06 (£m) 132.6 61.1 3.5* 197.2 (%) 67.2 31.0 1.8 100.0

Investment Manager

Legal & General PIMCO Annuity Policy Total Scheme Source: Investment Managers. * As at 30 May 2005.

149.3 59.9 3.5* 212.7

The table below shows the asset allocation of the Scheme versus the benchmark as at 31 March 2007 and 31 March 2006.
Asset Distribution as at 31 March 2007 % Benchmark Allocation as at 31 March 2007 % Asset Distribution as at 31 March 2006 % Benchmark Allocation as at 31 March 2006 %

Asset Class

UK Equities Overseas Equities* North America European (ex UK) Japanese Pacific Basin (ex Japan) UK Fixed Income Annuity Policy**

34.7 35.4 11.3 12.4 5.5 6.2 28.3 1.6

32.5 32.5 11.0 11.0 5.3 5.2 35.0 -

33.7 33.5 11.2 11.7 5.3 5.3 31.0 1.8 100.0

32.5 32.5 11.0 11.0 5.3 5.2 35.0 100.0

Total Scheme 100.0 100.0 Source: Investment Managers. * Overseas equities are 75% hedged back to sterling. ** As at 30 May 2005.

As at 5 April 2007, the total value of the Scheme was £212.7m equating to a 70%:30% equity:bond split. Page 11

Portman Building Society Pension and Assurance Scheme Trustee's Report For the year ended 5 April 2007

Custodial arrangements
The custodian is responsible for the safekeeping of share certification and other documents related to the ownership of listed investments. For the Scheme’s segregated holdings (bond assets), the Trustees are responsible for the appointment of the custodian and, with effect from December 2005, have appointed JPMorgan Chase Bank as the custodian. The investments with Legal & General are invested in pooled funds. The Trustees have no direct ownership of the underlying assets of the pooled funds. The safekeeping of the assets within the pooled funds is performed on behalf of Legal & General by custodian banks specifically appointed to undertake this function. PFT Limited have been appointed by the Trustee as custodian of the cash held in connection with the administration of the Scheme. The Trustee is responsible for ensuring the Scheme's assets continue to be securely held. They review the custodian arrangements from time to time. Signed on behalf of the Trustee Company on __________________

- - - - - - - - - - - - - - - - - - - - - -Trustee Director

- - - - - - - - - - - - - - - - - - - - - -Trustee Director

Page 12

Portman Building Society Pension and Assurance Scheme Statement of Trustee's Responsibilities For the year ended 5 April 2007

The financial statements are the responsibility of the Trustee. Pension scheme regulations require the Trustee to make available to Scheme members, beneficiaries and certain other parties, audited financial statements for each Scheme year which: •

show a true and fair view of the financial transactions of the Scheme during the Scheme year and of the amount and disposition, at the end of that year, of the assets and liabilities, other than liabilities to pay pensions and benefits after the end of the Scheme year, in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), and contain the information specified in the Schedule to the Occupational Pension Schemes (Requirement to obtain Audited Accounts and a Statement from the Auditor) Regulations 1996, including a statement as to whether the financial statements have been prepared in accordance with the Statement of Recommended Practice, "Financial Reports of Pension Schemes" (Revised November 2002).



The Trustee has supervised the preparation of the financial statements and has agreed suitable accounting policies, to be applied consistently, making any estimates and judgements on a prudent and reasonable basis. The Trustee is also responsible for making available certain other information about the Scheme in the form of an Annual Report. The Trustee is responsible under pensions legislation for ensuring that there is prepared, maintained and from time to time revised a schedule of contributions showing the rates of contributions payable towards the Scheme by or on behalf of the Employer and the active members of the Scheme and the dates on or before which such contributions are to be paid. The Trustee is also responsible for keeping records in respect of contributions received in respect of any active member of the Scheme and for monitoring whether contributions are made to the Scheme by the employer 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 the members. 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 them to safeguard the assets of the Scheme and to prevent and detect fraud and other irregularities, including the maintenance of appropriate internal controls.

Page 13

Portman Building Society Pension and Assurance Scheme Independent Auditors' Report to the Trustee of the Portman Building Society Pension and Assurance Scheme For the year ended 5 April 2007

We have audited the financial statements of Portman Building Society Pension and Assurance Scheme for the year ended 5 April 2007 which comprise the fund account, the net assets statement and the related notes. These financial statements have been prepared under the accounting policies set out therein. This report is made solely to the Scheme Trustee, in accordance with the Pensions Act 1995 and Regulations made thereunder. Our audit work has been undertaken so that we might state to the Scheme Trustee those matters we are required to state to them in an auditors' report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Scheme Trustee, for our audit work, for this report, or for the opinions we have formed. Respective Responsibilities of Trustee and Auditors As described in the Statement of Trustee Responsibilities on page 13, the Scheme Trustee is responsible for obtaining an Annual Report, including audited financial statements prepared in accordance with applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice). Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the financial statements show a true and fair view and contain the information specified in the Schedule to the Occupational Pension Schemes (Requirement to obtain Audited Accounts and a Statement from the Auditor) Regulations 1996 made under the Pensions Act 1995. We also report to you if, in our opinion, we have not received all the information and explanations we require for our audit. We read the Trustee Report and other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by or on behalf of the Trustee in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Scheme's circumstances, consistently applied and adequately disclosed.

Page 14

Portman Building Society Pension and Assurance Scheme Independent Auditors' Report to the Trustee of the Portman Building Society Pension and Assurance Scheme For the year ended 5 April 2007
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Opinion In our opinion, the financial statements: • show a true and fair view, in accordance with UK Generally Accepted Accounting Practice, of the financial transactions of the Scheme during the Scheme year ended 5 April 2007 and of the amount and disposition at that date of its assets and liabilities (other than liabilities to pay pensions and benefits after the end of the Scheme year); and contain the information specified in Regulation 3 of and the Schedule to the Occupational Pension Schemes (Requirement to obtain Audited Accounts and a Statement from the Auditor) Regulations 1996 made under the Pensions Act 1995.



KPMG LLP Chartered Accountants Registered Auditor Southampton

Date:

Page 15

Portman Building Society Pension and Assurance Scheme Financial Statements For the year ended 5 April 2007

FUND ACCOUNT
2007 Note £ £ £ 2006 £

Member related transactions
Additions Contributions Transfers in Other income Withdrawals Benefits Payments to and on account of leavers Other payments Administrative expenses 3 4 5 8,116,880 25,945 8,142,825 6 7 8 9 (4,526,215) (825,070) (484,749) (766,033) (6,602,067) Net additions from member related transactions 1,540,758 10 11 12 2,644,850 (340,084) 11,885,711 14,190,477 2,370,024 (206,982) 28,555,785 30,718,827 (3,325,383) (1,543,045) (476,508) (482,120) (5,827,056) 53,675,721 31,874,637 27,545,004 83,136 59,502,777

Returns on investments
Investment income Investment management expenses Change in market value of investments Net returns on investments Net increase in the fund during the year Net Assets at 6 April 2006

15,731,235 194,331,401 210,062,636

84,394,548 109,936,853 194,331,401

Net Assets at 5 April 2007

The notes on pages 18 to 27 form part of these financial statements.

Page 16

Portman Building Society Pension and Assurance Scheme Financial Statements As at 5 April 2007

NET ASSETS STATEMENT
2007 £ 12 13 209,945,158 117,478 210,062,636 2006 £ 194,487,882 (156,481) 194,331,401

Note Investments Net current assets/(liabilities)

Net Assets at 5 April 2007

The notes on pages 18 to 27 form part of these financial statements.

The financial statements on pages 16 to 27 were approved on behalf of Portman Pension Trustees Limited on __________________ Signed on behalf of the Trustee Company

- - - - - - - - - - - - - - - - - - - - - -Trustee Director

- - - - - - - - - - - - - - - - - - - - - -Trustee Director

Page 17

Portman Building Society Pension and Assurance Scheme Notes to the Financial Statements For the year ended 5 April 2007

1.

Basis of preparation
The 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, and with the guidelines set out in the Statement of Recommended Practice, "Financial Reports of Pension Schemes" (revised November 2002). 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 does take account of such obligations, is dealt with in the actuarial valuation carried out as at 5 April 2006 and the related Summary Funding Statement has been issued to all members.

2.

Accounting policies
The principal accounting policies are set out below. 2.1 Accruals concept

The financial statements have been prepared on an accruals basis. 2.2 Valuation of investments

Quoted securities have been valued at the middle market price at the close of business at the year end. The market values of fixed interest and index-linked securities exclude interest accrued between the last interest payment date and the year end. The market value of pooled investment vehicles is taken as the average of the bid and offer prices at the accounting date, as advised by the investment managers. The AVC investments include building society accounts and insurance policies with Royal & Sun Alliance Insurance Group plc, Prudential Assurance Company Limited, Nationwide Building Society, Norwich Union Life & Pensions limited, Schroder Hermes Limited and Fidelity Investment Management Limited. The market value of the policies of assurance has been taken as the surrender values of the policies at the year end, as advised by the AVC providers.

Page 18

Portman Building Society Pension and Assurance Scheme Notes to the Financial Statements For the year ended 5 April 2007
Investments in overseas currencies are translated into Sterling at the exchange rates ruling at the year end. Stock index futures contracts are valued at market prices at the year end and have been reflected in the financial statements on the basis of associated economic exposure. Any corresponding liability is included in the other investment liabilities. The associated economic exposure of a futures contract is the value of an amount of securities which if held as an alternative to the futures contract, would provide a similar return in the market to that obtained on the futures contract. All gains and losses on contracts (including transaction costs) are included in the change in market value of investments. 2.3 Contributions and benefits

Contributions and benefits are accounted for in the period in which they fall due. Normal contributions received during the year have been in accordance with the schedule of contributions. Augmentations relate to the cost of augmenting benefits of certain retiring members, as advised by the Actuary. The Scheme has purchased annuity policies to cover certain pensions in payment. The cost of acquiring these policies is included in the fund account in the year of purchase and represents the cost of discharging the obligations of the Scheme to the relevant members at the time of purchase. 2.4 Transfers

Individual transfers are accounted for when the transfer has been agreed by both parties and the receiving scheme has accepted liability for the transfer. Group transfers are accounted for on the accruals basis where the Trustee has agreed to accept the liability for members' benefits. 2.5 Investment and other income

Dividends on securities are accounted for when the securities are quoted ex-dividend. Interest on fixed interest and index-linked securities is accounted for as it accrues. Interest on bank deposits is accounted for as it accrues. Income from investments includes the related tax credits. Income from foreign currency holdings is translated into sterling at the rate applicable on the date of the transaction. 2.6 Administrative expenses and investment management expenses

Administration expenses and investment management expenses are met by the Scheme.

Page 19

Portman Building Society Pension and Assurance Scheme Notes to the Financial Statements For the year ended 5 April 2007

3.

Contributions
2007 £ Contributions from employer: Normal Special Augmentations Contributions from members: Normal AVCs 3,113,583 2,611,280 1,740,000 7,464,863 631,257 20,760 652,017 8,116,880 2006 £ 2,361,130 28,833,721 1,750 31,196,601 664,228 13,808 678,036 31,874,637

The employer special contributions consist of monthly amounts of £170,000 until December 2006, changing to £291,667 per month from January 2007, plus an amount of £206,279 representing the remaining unallocated assets transferred to the DB section upon the closure of the DC section last year.

4.

Transfers in
2007 £ Group transfers in from other schemes 2006 £ 27,545,004

The group transfer in 2006 was in respect of retained benefits transferred into the Scheme from the Staffordshire Building Society Pension and Assurance Scheme.

5.

Other income
2007 £ Claims on term insurance policies Interest on cash deposits held by the Trustee 25,945 25,945 2006 £ 62,788 20,348 83,136

Page 20

Portman Building Society Pension and Assurance Scheme Notes to the Financial Statements For the year ended 5 April 2007

6.

Benefits
2007 £ 3,509,992 934,499 17,906 63,818 4,526,215 2006 £ 2,818,679 410,632 73,464 22,608 3,325,383

Pensions Commutations and lump sums on retirement Lump sums on death in service Death benefits Purchase of annuities

The value of pensions is arrived at after netting off annuity income of £21,100 (2006: £18,803) from the annuity policies referred to in note 12.

7.

Payments to and on account of leavers
2007 £ Refunds to members leaving service Payments for members joining state scheme Group transfers to other schemes Individual transfers to other schemes 2,079 822,991 825,070 2006 £ 11,181 1,003,894 527,970 1,543,045

The group transfer out in 2006 related to the wind up of the DC section of the Scheme.

8.

Other payments
2007 £ 484,749 2006 £ 476,508

Premiums on term insurance policies

Term insurance is secured by policies underwritten by Canada Life, Norwich Union, Legal & General and Scottish Equitable.

Page 21

Portman Building Society Pension and Assurance Scheme Notes to the Financial Statements For the year ended 5 April 2007

9.

Administrative expenses
2007 £ 628,756 19,975 66,420 6,312 44,570 766,033 2006 £ 376,376 18,571 37,510 29,112 20,551 482,120

Administration Audit Legal PPF levy Miscellaneous expenses

10. Investment income
2007 £ 2,595,696 49,154 2,644,850 2006 £ 2,333,564 1,037 9,975 25,448 2,370,024

Fixed interest Index-linked Interest on cash deposits AVCs

11. Investment management expenses
2007 £ 340,084 2006 £ 206,982

Administration management and custody

Page 22

Portman Building Society Pension and Assurance Scheme Notes to the Financial Statements For the year ended 5 April 2007

12. Investments
2007 £ Quoted securities Fixed interest - UK Public sector - Overseas Public sector - Forward currency contracts sold 2006 £

46,001,560 13,184,736 (6,674,533) 52,511,763

43,413,116 15,812,296 (11,973,284) 47,252,128

Pooled investment vehicles Managed funds - other - UK - Overseas

73,884,546 75,433,110 149,317,656

66,468,594 66,149,025 132,617,619 1,120,984 11,888,602 13,009,586 720,904 193,600,237 887,645 194,487,882

Cash deposits - Sterling - Cash backing forward currency

(55,188) 6,523,281 6,468,093

AVC investments

729,673 209,027,185

Income receivable

917,973 209,945,158

Page 23

Portman Building Society Pension and Assurance Scheme Notes to the Financial Statements For the year ended 5 April 2007
The movements in total investments during the year were as follows: Market value at 6 April 2006 £ 59,225,412 Cost of Proceeds of investments sales of purchased investments £ £ 539,450,707 (535,313,250) Change in Market value market at 5 April value 2007 £ £ (4,176,573) 59,186,296

Fixed interest Pooled investment vehicles - managed funds Forward currency contracts sold AVC investments Sub total Cash deposits Cash backing forward currency Income receivable

132,617,619

702,000

-

15,998,037 14,697 49,550 11,885,711

149,317,656 (6,674,533) 729,673 202,559,092 (55,188) 6,523,281 917,973 209,945,158

(11,973,284) 303,930,742 (298,646,688) 720,904 70,865 (111,646) 180,590,651 1,120,984 11,888,602 887,645 194,487,882 844,154,314 (834,071,584)

The Trustee holds insurance policies that secure pensions payable to specified beneficiaries. These policies remain assets of the Trustee but, as is permitted under current regulations and accounting practice, the Trustee has decided that these policies need not be valued in the net assets statement. The Fixed Interest investments figure includes values representing the position of futures, swaps and options at the year end. PIMCO enter into foreign currency contracts in order to hedge the exchange rate risk on the underlying foreign currency investments. The liability for the Forward Currency contracts sold at the year end is covered by the Cash backing forward currency at the year end. PIMCO also use derivatives to both hedge interest rate risk and for investment purposes.

Page 24

Portman Building Society Pension and Assurance Scheme Notes to the Financial Statements For the year ended 5 April 2007

Concentration of investments The following investments account for more than 5% of the Scheme's net assets as at 5 April 2007 or 5 April 2006: 2007 % 35.2 9.5 8.8 2006 % 34.1 8.8 8.5

Legal & General UK Equity Index Legal & General European Equity Index Legal & General North American Equity Index AVC investments

The Trustee holds assets which are separately invested from the main fund, in the form of individual building society accounts and insurance policies. These secure additional benefits, on a money purchase basis, for those members who have elected to pay AVCs. Members participating in this arrangement receive an annual statement made up to 5 April each year, confirming the amounts held to their account and the movements during the year. The total amount of AVC investments at the year end is shown below.

2007 £ Royal & Sun Alliance Insurance Group plc Prudential Assurance Company Limited Nationwide Building Society Norwich Union Life & Pensions limited Schroder Hermes Limited Fidelity Investment Management Limited Legal & General 1,812 341,647 126,506 119,684 31,429 108,595 729,673

2006 £ 20,700 1,760 306,786 155,241 96,575 20,967 118,875 720,904

Page 25

Portman Building Society Pension and Assurance Scheme Notes to the Financial Statements For the year ended 5 April 2007

13. Net current assets/(liabilities)
2007 £ Current assets Claim on term insurance policies Interest on cash deposits Pensions paid in advance Cash deposits held with Scheme Administrator 780 238,406 526,339 765,525 62,788 200,429 364,556 627,773 2006 £

2007 £ Current liabilities Contributions received in advance Lump sums on retirement Death benefits Purchase of annuities Taxation State scheme premiums Administrative expenses Investment management expenses Sundry creditors 115,208 10,542 8,242 44,072 116,209 118,774 235,000 648,047

2006 £ 206,279 4,566 73,395 8,242 44,727 114,305 97,740 235,000 784,254

Net current assets/(liabilities)

117,478

(156,481)

Sundry creditors relate to a provision made for outstanding rectification issues in the final accounts of the Staffordshire Pension and Assurance Scheme.

Cash deposits This amount represents the balance applicable to the Scheme on the PFT Limited Clients' Trust Account. The account is held with the National Westminster plc.

Page 26

Portman Building Society Pension and Assurance Scheme Notes to the Financial Statements For the year ended 5 April 2007

14. Related party transactions
A R James and P M Vaz, who are not employed by Portman Building Society, received fees during the year for acting as Trustee Directors of the Scheme. These payments are included within the miscellaneous expenses. Of the six Trustee Directors, one is an active member of the Scheme and one is a pensioner.

Page 27

Actuarial Certificate
given for the purposes of Section 227 of the Pensions Act 2004 (Certification of Schedule of Contributions)

Name of Scheme: Portman Building Society Pension and Assurance Scheme

Adequacy of Rates of Contributions
1. I certify that, in my opinion, the rates of the contributions shown in this schedule of contributions are such that the statutory funding objective can be expected to be met by the end of the period specified in the recovery plan dated 31 January 2007.

Adherence to statement of funding principles
2. In hereby certify that, in my opinion, this schedule of contributions is consistent with the Statement of Funding Principles dated 31 Janury 2007. The certification of the adequacy of rates of contributions for the purposes of securing that the statutory funding objective can be expected to be met is not a certification of their adequacy for the purpose of securing the Scheme's liabilities by the purchase of annuities, if the Scheme were wound up.

Signature Name Date of signing Address

Christian Hardy Christian Hardy 31 January 2007 Mercer Human Resource Consulting Limited 1 Tower Place West Tower Place London EC3R 5BU Fellow of the Institute of Actuaries

Qualification

Page 28

Portman Building Society Pension and Assurance Scheme Compliance Statement For the year ended 5 April 2007

Constitution
The Scheme was established by an interim trust deed and is governed by a definitive trust deed dated 18 August 1999, with subsequent amendments.

Taxation status
In accordance with the provisions of Schedule 36 of the Finance Act 2004, the Scheme became a registered pension scheme under Chapter 2 of part 4 of the Finance Act 2004 with effect from 6 April 2006. The Trustee knows of no reason why this approval may be prejudiced or withdrawn.

A-Day Changes
The Trustee and the Employer have been working together to assess the impact of the Pensions Act 2004 and Finance Act 2004 on the Scheme. An announcement has been issued to members which outlines the impact of this legislation and the Rules of the Scheme have been updated to reflect these changes.

Matters relating to the Scheme's Advisers
With effect from 28 June 2006 Anne H Craig resigned as Actuary to the Scheme and Christian Hardy was subsequently appointed. The following statement has been received from Anne H Craig: "I can confirm that, in my opinion, there are no circumstances connected with my resignation which significantly affect the interest of the members of, prospective members of, or beneficiaries under, the Scheme".

Pension increases
Any pensions payable which relate to Pensionable Service on or after 1 August 2000 (1 May 2000 for exStaffordshire Scheme members) shall be increased annually by the increase in the Retail Price Index or, if less, 5%. Pensions in payment for service prior to 1 August 2000 (1 May 2000 for ex-Staffordshire Scheme members) will be increased by 5% per annum. Preserved pensions were increased in accordance with statutory requirements.

Calculation of transfer values
Transfer values paid during the year were calculated and verified in the manner required by the Regulations. None of the transfer values paid was less than the amount required by the Regulations.

Page 29

Portman Building Society Pension and Assurance Scheme Compliance Statement For the year ended 5 April 2007

Employer-related investment
There was no employer-related investment at any time during the year.

The Pensions Regulator
The statutory body that regulates occupational pension schemes is the Pensions Regulator and can be contacted at: The Pensions Regulator Napier House Trafalgar Place Brighton BN1 4DW Telephone: 0870 6063636 Email: [email protected] Website: www.thepensionsregulator.gov.uk

Pension tracing
A pension tracing service is carried out by the Department for Work and Pensions. This service can be contacted as follows: Pension Tracing Service The Pension Service Tyneview Park Whitley Road Newcastle upon Tyne NE98 1BA Telephone: 0845 6002537 Website: www.thepensionservice.gov.uk

Page 30

Portman Building Society Pension and Assurance Scheme Compliance Statement For the year ended 5 April 2007

The Pensions Advisory Service
Any concerns connected with the Scheme should be referred to David Cook, Secretary, who will try to resolve the problem as quickly as possible. Members and beneficiaries of pension schemes who have problems concerning their scheme which are not satisfied by the information or explanation given by the administrators or the trustees can consult with The Pensions Advisory Service. A local advisor can usually be contacted through a Citizen's Advice Bureau. Alternatively the Service can be contacted at: The Pensions Advisory Service 11 Belgrave Road London SW1V 1RB Telephone: 0845 6012923 Email: [email protected] Website: www.pensionsadvisoryservice.org.uk

Pensions Ombudsman
In cases where a complaint or dispute cannot be resolved, normally after the intervention of The Pensions Advisory Service, an application can be made to the Pensions Ombudsman for him to investigate and determine any complaint or dispute of fact or law involving occupational pension schemes. The address is: Pensions Ombudsman 11 Belgrave Road London SW1V 1RB Telephone: 0207 8349144 Email: [email protected] Website: www.pensions-ombudsman.org.uk Pension Protection Fund The Pension Protection Fund (“PPF”) came into being on 6 April 2005 and its first levy for 2005/2006 was based on membership numbers. The PPF levy for 2006/2007 will consist of two parts: a schemebased levy (20%) based on the Scheme’s PPF liabilities, and a risk-based levy (80%) based on the level of underfunding in the Scheme and the risk of the sponsoring employer becoming insolvent. Schemes which are more than 125% funded will not have to pay the risk-based levy. The total levy which the PPF expects to raise in respect of UK pension schemes in 2006/2007 is estimated at £575 million.

Page 31

Portman Building Society Pension and Assurance Scheme Independent Auditors' Statement about Contributions
made under Regulation 4 of the Occupational Pension Schemes (Requirement to obtain Audited Accounts and a Statement from the Auditor) Regulations 1996, to the Trustee of the Portman Building Society Pension and Assurance Scheme

For the year ended 5 April 2007

We have examined the Summary of Contributions payable under the schedule of contributions to the Portman Building Society Pension and Assurance Scheme in respect of the Scheme year ended 5 April 2007 which is set out on page 35. This statement is made solely to the Scheme Trustee, in accordance with the Pensions Act 1995 and Regulations made thereunder. Our work has been undertaken so that we might state to the Scheme Trustee those matters we are required to state to them in an auditors' statement about contributions and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Scheme Trustee, for our work, for this statement, or for the opinions we have formed. Respective Responsibilities of Trustee and Auditors As described on page 34, the Scheme Trustee is responsible, under the Pensions Act 2004, for ensuring that there is prepared, maintained and from time to time revised a schedule of contributions which sets out the rates and due dates of certain contributions payable towards the Scheme by or on behalf of the Employer and the active members of the Scheme. The Trustee has a general responsibility for procuring that contributions are made to the Scheme in accordance with the schedule of contributions. It is our responsibility to provide a statement about contributions paid to the Scheme and to report our opinion to you. We read the Trustee's Report and other information in the Annual Report and consider whether it is consistent with the Summary of Contributions. We consider the implications for our statement if we become aware of any apparent misstatements or material inconsistencies with the Summary of Contributions. Basis of Statement about Contributions We planned and performed our work so as to obtain all the information and explanations which we considered necessary in order to give reasonable assurance that contributions reported in the Summary of Contributions have been paid in accordance with the relevant requirements. For this purpose, the work that we carried out included examination, on a test basis, of evidence relevant to the amounts of contributions payable to the Scheme and the timing of those payments. Our statement about contributions is required to refer to those exceptions which come to our attention in the course of our work.

Page 32

Portman Building Society Pension and Assurance Scheme Independent Auditors' Statement about Contributions
made under Regulation 4 of the Occupational Pension Schemes (Requirement to obtain Audited Accounts and a Statement from the Auditor) Regulations 1996, to the Trustee of the Portman Building Society Pension and Assurance Scheme

For the year ended 5 April 2007

Statement about Contributions payable under the schedule In our opinion contributions for the Scheme year ended 5 April 2007 as reported in the Summary of Contributions and payable under the schedule have, in all material respects, been paid at least from 6 April 2006 to 30 January 2007 in accordance with the schedule of contributions certified by the Actuary on 20 December 2005, and subsequently, in accordance with the schedule of contributions certified by the Actuary on 31 January 2007.

KPMG LLP Chartered Accountants Dukes Keep Marsh Lane Southampton SO14 3EX Date:

Page 33

Portman Building Society Pension and Assurance Scheme Statement of Trustee's Responsibilities in respect of Contributions For the year ended 5 April 2007

The Scheme's Trustee is responsible under pensions legislation for ensuring that there is prepared, maintained and from time to time revised a schedule of contributions showing the rates of contributions payable towards the Scheme by or on behalf of the Employer and the active members of the Scheme and the dates on or before which such contributions are to be paid. The Scheme's Trustee is also responsible for keeping records of contributions received in respect of any active member of the Scheme and for procuring that contributions are made to the Scheme in accordance with the schedule.

Page 34

Portman Building Society Pension and Assurance Scheme Summary of Contributions payable For the year ended 5 April 2007
During the year ended 5 April 2007, the contributions payable to the Scheme by the Employer were as follows: 5 April 2007 £ Contributions payable under the schedule of contributions: Contributions from employer: Normal Special Augmentations 3,113,583 2,611,280 1,740,000 7,464,863 Contributions from members: Normal Contributions payable under the schedule (as reported on by the Scheme auditor) Other contributions payable AVCs Contributions reported in the financial statements 631,257 8,096,120 20,760 8,116,880

Signed on behalf of the Trustee Company on __________________

- - - - - - - - - - - - - - - - - - - - - -Trustee Director

- - - - - - - - - - - - - - - - - - - - - -Trustee Director

Page 35

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