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The RBS Group Pension Fund Message from the Chairman Welcome to the 2011 members newsletter Members Newsletter 2011 The RBS Group Pension Fund 01
The RBS Group Pension Fund Members’ Newsletter 2011 Message from the Chairman Welcome to the 2011 members’ newsletter In last year’s newsletter, I told you that we were working on the valuation of the Fund as at 31 March 2010. The purpose of a valuation is to review how the assets of the Fund compare with the amount required to pay all benefits in the future, and to decide the level of contributions that should be paid to the Fund by RBS. I’m pleased to say that the Trustee and RBS recently agreed the results and outcome of the valuation and full details are included on pages 2 and 3 of this newsletter. The valuation showed that the assets of the Fund fell short of the amount required to meet future benefits (the liabilities) by £3.5 billion. The funding level, which measures assets as a percentage of liabilities, was 84%. Although worse than the position at the time of the previous valuation, this is a big improvement on the situation at the height of the recent financial crisis when in 2009 the funding level fell below 70%.

RBS has agreed to pay additional contributions with the aim of making the Fund fully funded by March 2019. These contributions will start this year at £375 million and increase in 2013 to £400 million. I also mentioned last year the establishment of an Investment Executive which would support the Trustee in all aspects of investing the Fund’s assets. The Executive is now fully operational and has made a major contribution to the excellent performance of the Fund over the past year, with investment income and capital growth adding almost £2 billion to the value of the Fund over the year. More details of the Fund’s assets and the work of the Investment Executive are on pages 4 to 6. The Fund continues to be one of the largest in the UK with over 220,000 members and assets of almost £19.5 billion.

R  BS has agreed to pay additional contributions with the aim of making the Fund fully funded by March 2019.

Contents > 01 Message from the Chairman > 02 Funding report at 31 March 10 > 03 2011 update > 04 Investment report > 05 Performance > 06 Distribution of assets > 06 The Fund’s finances > 06 Our Fund membership > 07 Pension news > 08 Your pension team

There has been a number of changes to the Trustee Board since last year’s newsletter. Graham Halstead and Ian Purves have stood down. I would like to thank them both for their hard work and dedication during their time on the Board and welcome Stephen Fallowell who was appointed a Trustee Director in April 2011. Finally I would like to thank all my fellow Trustee Directors and our professional advisers for their hard work throughout another challenging year. The past few years have been difficult for the Fund, and many other pension funds. With the agreement on the valuation and the establishment of the Investment Executive I believe members can look forward with confidence. Miller McLean, Chairman RBS Pension Trustee Limited August 2011

The RBS Group Pension Fund 01

Funding report as at 31 March 2010 Financial health of the Fund - Keeping you in the know

The 2010 valuation showed that the Fund’s financial position had improved significantly.

The Trustee and RBS have recently agreed the results and outcome of the 31 March 2010 funding valuation.

The purpose of a funding valuation is to consider: a) t he financial position of the Fund on a ‘going concern’ basis, comparing the actual assets held against a target amount planned to be sufficient to pay the benefits (known as the ‘liabilities’); b) t he planning or budgeting of contributions required to bring the assets in line with the liabilities and to pay the extra benefits being earned by current members in respect of their future membership of the Fund.

These ‘going concern’ calculations require a number of assumptions about the future such as the rate of pension increases, the rate of return that will be achieved on the Fund’s assets and how long pensioners will live. In practice, actual experience is likely to be different from that assumed and the contributions required will need to be adjusted at the next valuation. As well as full funding valuations every three years, the Trustee receives interim updates every year. In the rest of this article, we summarise the result of the actuarial valuation at 31 March 2010 (‘2010 valuation’) and the annual interim update at 31 March 2011 (‘2011 update’).

Summary of financial position In previous newsletters, we have reported on the financial position of the Fund as at 31 March 2009. The calculations by the Actuary as at 31 March 2009 showed that the Fund’s assets fell short of the amount needed to provide members’ benefits. The funding level – which measures assets as a percentage of liabilities – was 69%.

Results from the 2010 actuarial valuation The 2010 valuation showed that the Fund’s financial position had improved significantly. The Actuary calculated the Fund’s funding level to be 84% as at 31 March 2010, and the corresponding size of the shortfall of the assets relative to the liabilities was £3.5 billion. The improvement in the funding position to 31 March 2010 was mainly due to the strong recovery in global investment markets which led to increases in the Fund’s assets. In addition to this, in August 2009 RBS introduced a cap on future increases in pensionable salary for current members of the Fund. This change to the Fund’s benefits served to lower the amount of the liabilities. Both these effects had a positive impact on the funding level reflected in the results of the 2010 valuation. The positive impact was offset slightly by changes to financial conditions and updates to the assumptions agreed by the Trustee and RBS. To address the shortfall of £3.5 billion arising from the 2010 valuation, RBS has agreed to pay the following lump sum cash contributions into the Fund. If experience from 31 March 2010 is in line with the assumptions adopted for the 2010 valuation, these contributions together with anticipated investment returns are expected to remove the shortfall by 31 March 2019. The Trustee and RBS have agreed that RBS will pay contributions to meet the cost of future benefits being earned by current members at the rate of 22.2% of members’ total salaries less any member contributions payable. These contributions currently amount to around £300 million a year.


The RBS Group Pension Fund


Amount £million

Payment Due Date



30 September



31 March



31 March



31 March



31 March



31 March



31 March



31 March

* Increased from the contribution paid in the previous year by the increase in the Retail Prices Index for the 12 months ending on 31 January immediately preceding the date of payment, subject to a minimum increase of 0%

2011 update Since 31 March 2010 experience has been more favourable than assumed, and there has been a further rise in the funding level and an equivalent reduction in the shortfall. Over the year to 31 March 2011, investment markets continued to perform well and the Fund’s assets increased by a further £1.7 billion. The Actuary’s latest formal report of the Fund showed that the funding level was 88% at 31 March 2011. The graph below shows the changes in the funding level of the Fund since the 2010 valuation. 120.0%


Funding level






50.0% 31 March 2010

30 June 2010

30 September 2010

31 December 2010

31 March 2011

Payments to the RBS Group We are required to tell you if there have been any payments made to the RBS Group from the Fund in the previous 12 months, and we can confirm that there have been none.

Intervention by the Pensions Regulator The Pensions Regulator can make changes to a scheme, give directions on working out its liabilities, or impose a schedule of contributions. We are pleased to say that it has not needed to use its powers in this way for the Fund.

Full solvency The above figures assume the Fund will keep going as it is. As part of the valuation, the Actuary also considers what the position would be if the Fund came to an end and no longer had support from RBS. For this scenario, the Actuary estimates the cost of buying insurance policies to cover the benefits members have already earned. This is known as the ‘full solvency’ liability. Insurance companies have to invest in ‘low risk’ assets, which usually give low returns, and their prices include allowances for costs and profits. Consequently the amount needed to buy policies is likely to be far more than the total assets of the fund. The 2010 valuation showed a solvency level of 46%.

Where can I find out more? If you have any questions, or would like to see a copy of the latest Actuarial Valuation report, the current Schedule of Contributions, the Trustee’s Statement of Funding Principles or the Trustee’s Statement of Investment Principles, please contact Group Pension Services.

The RBS Group Pension Fund 03

Investment report Investment Executive: In 2010 the Investment Executive (IE) was set up to support the Trustee in developing its investment strategy and in the wider management the Fund. IE is a team of investment professionals led by Robert Waugh, the Chief Investment Officer.

Specialist skills to improve the investment programmes

> IE brings the benefits of a range of specialist skills and experience including equity and bond expertise as well as accounting and actuarial. > Working exclusively for the Trustee ensures the IE is fully aligned with the interests of the Fund. > Increasing internal resource has allowed the Fund to make substantial savings on external consulting fees.

The specialist investment expertise has assisted the Trustee in managing increasingly sophisticated investment programmes.

Clear remit for IE with a Strategic Benchmark

> IE is responsible for managing the investment and hedging programmes against a Strategic Benchmark set by the Trustee. > The Strategic Benchmark prescribes the permitted assets and maximum exposures to those assets, as well as the target liability hedge; this provides a robust set of parameters to manage risk. > IE is overseen by, and reports regularly to, the Investment Committee and the Trustee.

Day-to-day management of the assets remains outsourced to external investment managers but the direct oversight provided by IE has allowed the Fund to run its investment programme more efficiently. The Fund outperformed the Strategic Benchmark by £640 million in 2010/11.

Activity: After a considerable amount of restructuring through 2008 and 2009, activity since then has focussed on refining the existing strategies and on developing the liability hedging programme.


Refining the existing asset investment strategies

> Implementing a new equity rebalancing programme to increase overall efficiency. > Appointing a new emerging markets equity manager to bring the allocation to emerging markets up to benchmark. > A review of the property strategy resulting in a decision to diversify into prime office and commercial properties in Europe.

These changes reduce risk versus the Strategic Benchmark.

Developing the liability hedging programme

> Increased the liability hedge target to 50% of the sensitivity of the liability to changes in interest rates and inflation. > Extended the range of permitted instruments in order to implement the liability hedge more efficiently.

Liability hedging involves holding investments which offset the impact of changes in interest rates and inflation on the value of liabilities.

The RBS Group Pension Fund

Performance Strong performance over the year


A second year of strong growth in the Fund’s assets reflected continued improvement in all asset classes as the global economy continued its recovery.


Performance over the year was 3.2% (£640 million) ahead of the benchmark target. 70% of this outperformance came from the bond and hedging portfolios. The remaining 30% came from equity, property and hedge funds. Performance is marginally behind target over 3 and 5 year periods mainly due to weak returns in the second half of 2008.


11.4% 8.2%

8 5.0%


5.6% 4.3%


4 2 0 1 Year

3 Years

5 Years

Fund Return ReturnReturn Returns quoted are annualised Fund Return Benchmark Benchmark

Market commentary: The global economy has continued to recover through 2010/11 providing conditions for positive returns on most asset classes. However, substantial economic imbalances will take time to resolve. Gradual economic recovery

> Despite a slowdown last summer the global economy continued to recover in the year to 31 March 2011, led by strong growth in emerging markets.

The recovery has been slow in developed economies amid concerns around high levels of sovereign debt in Europe and subdued growth in the US.

Improving economic conditions and government support measures

> Global demand gained momentum, with a particularly strong pick up in emerging markets. > Mixed economic signals from the US economy, spurred the US Federal Reserve to embark on more quantitative easing (‘QE2’). This process involves buying up government bonds to add cash to the financial system, supporting economic activity.

Equities in developed markets rose by 8.2% (FTSE World Index) while emerging markets rose by 11.9% (FTSE All World All Emerging Index).

Competition for resources

> Rapid growth in emerging markets such as China, India and Brazil has been the driving force behind the strength of commodity markets. > Political unrest in the Middle East and North Africa has added to upward pressure on energy prices.

Increasing prices of raw materials and energy are driving higher inflation; high inflation poses a risk to economic stability.

Uncertainties remain

> Government bond markets have generally weakened in the face of stubbornly high inflation and prospects of higher interest rates. > The European Central Bank has raised interest rates to curb inflation which is running at a 2-year high. Other central banks will likely follow suit if their recovery remains on track. > Emerging economies and the US may well see continued growth through 2011. Conditions in Europe are complicated by ongoing sovereign debt concerns, while the UK economy has to deal with the near-term impact of spending cuts. > Geo-political tensions remain and the Japan earthquake/tsunami/nuclear disaster provides a reminder of the fragility of markets to unpredictable events.

The 2008 recession looks different to previous downturns; the economic recovery could well be prolonged and may not follow a smooth path.

The RBS Group Pension Fund 05

Distribution of assets As at 31 March 2011 (clockwise from the top)


Asset class

Index-Linked Bonds £5,368m Corporate Bonds £5,115m Direct Global Equity £5,149m Private Equity £1,133m Property £669m Hedge Funds £627m Cash & Other £1,262m Total Fund £19,323m


3.5% 27.8%




At 31 March 2011 the Fund had additional exposure to equity markets through futures contracts of £5,017m (equivalent to 26% of Fund assets).


14 12


The Fund’s finances 10 8.2% This is a summary of the financial statements contained in the Trustee Annual Report for the year 14 5.6% 8

5.0%statements from 4.4% ended 11.4% 31 March 2011. The full financial which these figures have been taken have 6 4.3% 12 been independently audited by Deloitte LLP. 4



£ million


8Opening Fund value at 1 April 2010 1 Year 6Income:

Fund5.0% Return

3 Years Benchmark Return

Contributions and transfers in 4 Investment returns 2 Expenditure: 0 Benefit payments 1 Year 3 Years Member transfers out Fund Return Benchmark Return Expenses


5 Years




433.6 1,961.7


5 Years

36.3 21.1

Closing Fund value at 31 March 2011


Our Fund membership 31 March 2011

31 March 2010

Current members



Deferred members



Pensioner/Dependant members







The RBS Group Pension Fund

Pension news State Pensions

The amount of pension saving that members can make in a year and receive full tax relief has been reduced substantially to £50,000 from April 2011

The Government has said it intends to bring forward the dates at which the State Pension Age increases. Subject to approval by Parliament, the State Pension will be payable from age 66 for both men and women with effect from April 2020. The Government is also considering whether to advance the dates at which the State Pension Age increases further to 67 and then to 68. These changes do not affect the age at which current and deferred members can claim their pension from the Fund.

Taxation of pension saving For most people, being a member of a pension fund is a tax efficient way to save for retirement. In most cases, members are not taxed on the value of the employer provided pension and they receive tax relief on any voluntary contributions.

However, the amount of pension saving that members can make in a year and receive full tax relief has been reduced substantially to £50,000 from April 2011. Pension saving includes any contributions you or your employer makes to a pension scheme. For current members, but not deferred members, it also includes the increase in the value of your Fund pension because of extra service and higher pensionable salary. If you are a current member and have any concerns that you might breach this limit, you should contact Group Pension Services. Deferred members should contact their current employer. Pensioners will not be impacted unless they are continuing to make pension savings to another scheme. There is also a limit on the total value of pension saving that can be built up without incurring extra tax liability (the lifetime allowance). This is reducing from £1.8 million to £1.5 million with effect from April 2012. RBS intends to contact any current members of the Fund who it thinks may be impacted. If you are a pensioner of the Fund, you will not be impacted unless you have another pension that comes into payment after March 2012.

National Employee Savings Trust (NEST) Starting in late 2012, all eligible workers will be automatically enrolled into either their employer’s pension scheme or a new savings vehicle, known as NEST, unless they are in a good quality workplace scheme already. Employees will be able to opt-out of membership if they wish. To encourage participation, employees’ pension contributions will be supplemented by contributions from employers and by tax relief. This will benefit the millions of employees in the UK who have inadequate pension savings. We do not expect this new scheme will affect current members of the Fund. If you are a deferred member and want to know how this may impact you, please contact your employer.

F  or most people, being a member of a pension fund is a tax efficient way to save for retirement.

APeC Fund Changes Some changes are being made to the Growth Fund and Property Funds in respect of members who have additional contribution (APeC) savings. Members who have assets in these funds will receive a letter outlining the changes, which are due to take place later this year.

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Your pension team The Trustee Board is responsible for operating the Fund in line with its formal rules and pensions law. We also have a duty to protect the interests of all our Fund members, including our pensioners and those who are no longer employed by RBS, but who still have benefits in the Fund [our deferred members]. Your current Trustee Directors are:

Company Selected Miller McLean [Chairman] Stephen Boyle John McGuire [Deputy Chairman] David Morrison Donald Workman

Member elected Peter Boyd Peter Easton Stephen Fallowell Colin Wilson

Changes during the year Ian Purves and Graham Halstead resigned from the Trustee Board on 31 March 2011 and 6 May 2011 respectively. Stephen Fallowell joined the Trustee Board as a member nominated Trustee on 1 April 2011. Stephen joined National Westminster Bank in 1970 and has worked in Group Treasury, Retail Banking and Retail Regional Risk. He is currently seconded to UNITE as a Senior Workplace Representative. James Rawlingson joined the Trustee Board on 6 May 2011 as a Bank nominated Trustee. James joined RBS as Finance Director, Coutts & Co in November 2006 and was additionally appointed to the Board of Adam & Company in September 2009. He became the Finance Director for Wealth Management in January 2011. James resigned from the Trustee Board on 29 June 2011 following his resignation from RBS.

The Royal Bank of Scotland Registered in Scotland No. 45551 Registered Office: 36 St. Andrew Square Edinburgh EH2 2YB


The RBS Group Pension Fund

Find out more The following documents are available on request: > Latest Actuarial Valuation Report Contains details of the Fund’s financial position as at 31 March 2010. > Latest Annual Report and Accounts Shows the Fund’s income and expenditure in the 12 months to 31 March 2011. > Current Schedule of Contributions Shows how much money is being paid into the Fund. > Trustee’s Statement of Funding Principles Explains how we plan to make sure enough money is paid into the Fund to provide the benefits that members have built up. > Trustee’s Statement of Investment Principles Explains how we invest the money paid into the Fund. > Latest Engagement & Voting Report

Contact us If you want a copy of any of these documents, or have a question, please email Group Pension Services: Current members External – [email protected] Internal – ~RBS Staff pension queries Deferred members [email protected] Pensioners [email protected]

Alternative formats This communication is available in large print, Braille or audio on request from Group Pension Services.

Group Pension Services HR Shared Services The Royal Bank of Scotland Group PO Box 1390 Croydon CR9 1YB