Report and Accounts 2009 - Wesleyan · 5,412. Strong equity performance and a falling gilt-edged market are a near-ideal combination for the Wesleyan with profit fund. Total funds

Insight n Performance n Trust

The Board of Directors with members of staff in front of Head Office, March 2010

Report and

Accounts 2009

The Board of Directors & Professional Advisors

Non-Executive

2

Highlights of 2009

Against a backdrop of challenging market conditions, Wesleyan Assurance Society has remained financially strong, has increased funds under management and overall produced a strong set of results for 2009.

20.1%Gross investment return for with profits policyholders. This is believed to be the

best investment return in the sector

10/10The only life office to achieve the rating in 5 consecutive years. Cazalet Consulting 2008 with profits survey issued in 2009

74,000 Policyholders were given a £100 voucher as part of the Mutual Rewards scheme

+ 10%Overall quality of product and service is 10% above the industry average The Association of British Insurers - Customer Impact Survey 2009/10

43.6% Payouts on the Society’s 25 year endowment policies are 43.6% higher than the average of those of our competitors Based on Society’s research

3

Financial summary of 2009

31 December

Society New Business (APE)1 2009 2008

Total £30.7m £27.6m

Society Premium Income - Gross

Insurance Contracts £176m £195m

Investment Contracts £58m £62m

Investment Returns

With Profits Policyholders 20.1% -21.0%

Life Managed Fund 21.9% -20.6%

Pensions Managed Fund 18.7% -18.8%

Fund Size Total Funds Under Management £4.2bn £3.8bn

Long-Term Fund £2.7bn £2.6bn

Investment Mix - With Profits Policyholders

Equity Shares 67% 60%

Property 11% 15%

Fixed Interest 10% 10%

Cash & Other 12% 15%

With Profits Realistic Balance Sheet

Assets £2,196m £1,912m

Liabilities £1,714m £1,566m

Working Capital £482m £346m

Awards and Recognition

10 out of 10 – With Profits rating – Cazalet Consulting

Life Insurer of the Year Award, British Insurance Awards 2008 and Finalist in 2009

Best Use of IT in Insurance – Financial Sector Technology Awards 2009

1 The above is stated in terms of Annual Premium Equivalent (APE), being twelve months premium for regular business plus 10% of single premiums.

4

This will be my last report to you as Chairman of the Society. At the AGM in May I will retire after 23 years, the last 10 years as your Chairman. It has been a privilege to have been involved with the Society and I look back on my time since 1987 as the most rewarding and enjoyable period of my career in business, spanning nearly 50 years.

What has been most pleasing is to have seen the Society change and develop when faced with significant challenges, both from volatile markets and regulatory demands while still holding true to its core values. Those companies that can handle change will survive and prosper and the Wesleyan, unlike many others in the sector over the last decade or more, has demonstrated its ability to define a sustainable business model and then implement it. The Society has always seen itself as a long term and independent player in the sector, aiming to deliver results which benefit all those who depend on us.

2009 BackgroundAfter the financial turbulence of 2008, the Board gave considerable thought to how the economic climate affected both the Society’s operational and strategic plans for 2009. With analysts expecting the recession to last for some time, much effort was applied to ensure the Society adopted a measured and appropriate response to both the current and predicted market conditions. Whilst it could be argued that most of our markets were relatively recession-proof (principally doctors, dentists and teachers), they were not immune to falling house prices or weak equity markets and, like many others, were deferring significant financial decisions whilst the prevailing market conditions continued.

As it turned out, 2009 proved a much better year than might have been expected for the Society. The Chief Executive and his team, with the support of every member of staff, are to be congratulated. Further details about operational activity across the Society in 2009 are given in the Chief Executive’s Review.

ResultsI am pleased to report a strong set of results for the full year 2009.

• 20.1%investmentreturnforourwithprofitspolicyholders,believed to be the best in the industry and longer term a cumulative 86.4% for the period 2003 to 2009 inclusive.

• Anincreaseof£133mto£520mintheFundfor Future Appropriations.

• 51%increaseinpremiumincomefromtheSociety’s With Profits ISA product.

• Continuingtoprovidepolicyholderswithbonuseswhichconsistently demonstrate strong comparative performance, a consequence of impressive investment returns over a long period.

• Theawardof10outof10intheCazaletConsulting’slatestWith Profits Survey, the only life office to have achieved this rating over 5 consecutive years.

• 74,000policyholdersweregivena£100voucheraspartofthe Mutual Rewards scheme.

• The Association of British Insurers in their Customer Impact Survey for 2009-10 reported that Wesleyan’s customer service standards are significantly above the industry benchmark.

Strategic FocusThe Society’s strategy is based around the delivery of clearly and positively differentiated customer branded propositions for each of our markets, medical and dental, legal and teachers. These brands come under the broad designation of Wesleyan for Professionals.

During the first half of the year the Board again debated the Society’s ongoing commitment to growth and resolved not to rein back on its plans for the future, recognising the huge business opportunities these affinity groups represent, if serviced and provided for appropriately. The financial consequences of pursuing this business model are also proving to be positive. RegulationMembers will be aware that, in common with others in the financial services sector, the Society faces increasing regulatory and compliance demands. The Society takes great care, and has made significant investment, to ensure that its financial consultants and Head Office servicing teams demonstrate appropriate and professional behaviours in relationships with customers. The Board receives regular updates on regulatory issues and compliance monitoring results. Furthermore, the Board and management team recognise that controls over the sales process must be supplemented by the regular testing of actual outcomes for customers. The Board believes that the FSA value the Society’s open style and respects its intent “always to do the right thing”, true to our mutual heritage. Reflecting the recommendations of the Walker Report, the Society’s Board established a separate Risk function and a Risk Committee during 2009 in addition to the existing Audit Committee.

Chairman’s Statement

5

Lowry Maclean Chairman

MutualityThe financial turmoil since 2007 has thrown into greater perspective the role and value of Mutuals in the sector and the contrast with proprietary companies. The Society’s Board believes that there are considerable advantages in the mutual model as it focuses entirely on serving its members, without the distraction brought by outside shareholders and the need to maximise profit for their benefit. That focus changes the way that an organisation thinks about itself and the way in which it operates. Mutuality has served the Society well over the last 170 years.

Directors and StaffDuring 2009 Andrew Doman, who joined the Board in 2008 following his retirement from McKinsey’s Financial Services Practice, had to stand down from the Board on taking up an executive appointment overseas. Also Derek Zissman stood down from the Board on 31 December 2009. We were sorry to lose them but greatly valued their contributions to the Society’s affairs.

Following a successful nomination process, we were pleased to appoint two replacement Non-Executive Directors:- Keith Nicholson, who recently retired as a partner in the Insurance Practice of KPMG LLP with over 25 years of experience in the insurance and retail banking sectors, and Philip Green, who also has 30 years of UK and international experience working within the insurance sector. Together they will add current knowledge, practical experience and different points of view to the Board’s task of refining and delivering the Society’s strategic direction in these challenging times. David Tyrrell will retire from the Board at the AGM after many years of excellent service. His place on the Board will be taken by Chris Brinsmead, an Independent Non-Executive Director (Note below). He has extensive knowledge of our principal markets and of Board process.

My successor, as Chairman, Bryan Jackson, has great business experience and I wish him and his colleagues on the Board every success as they take the Society forward.

The economic background is still fragile but I believe the Society is in capable hands and well placed to respond to the challenges it may face and to its commitments to all those who depend on us. Finally, I should like to pay tribute to all members of staff for all they do and the support they have given me over the years. Thank you for having made my tenure such an enjoyable and interesting one, I have been very privileged.

Lowry MacleanChairman30 March 2010

Note: Chris Brinsmead BSc, MScChris Brinsmead, aged 51, joins the Society’s Board as an independent Non-Executive Director on 1 April 2010. He is currently Chairman of AstraZeneca Pharma UK and President of the Association of the British Pharmaceutical Industry. From 2001 until 2008 Chris was President of AstraZeneca UK Ltd. Chris joins the Society with extensive knowledge of the Society’s principal markets.

6

Chief Executive’s ReviewIntroductionThe Chairman in his statement refers to the Society’s strategy of delivering distinct customer propositions into our chosen markets – doctors, dentists, lawyers and teachers. The Society’s Vision, Mission and Values have been developed to capture the essence of these propositions and the commitment required by the Society and its staff in order to deliver them.

They are as follows: -

underpinned by a strong Risk and Governance framework

My 2009 review will focus on the progress made against the high level objectives of the Society and the key initiatives that will further advance our cause in 2010.

A strong and profitable businessInvestment PerformanceAt the beginning of March 2009 the FTSE 100 reached an intra-day low of 3,460 and investors looked into the abyss. Thankfully, this proved to be the darkness before the dawn, with the index rebounding by more than 50% to a year-end level of 5,412. Strong equity performance and a falling gilt-edged market are a near-ideal combination for the Wesleyan with profit fund. Total funds under management rose by £422.8m to over £4 billion and the investment return of 20.1% gross for with profits policyholders should top the industry league table again and would thus mark the Society’s sixth appearance of the decade in top spot. It would also recoup most of the 21.0% negative return in the credit crunch year of 2008.

There was further good news from the outperformance of the main fund’s equities against the All Share index benchmark (for the eighth time in the last ten years). Longer term, the gross investment return for with profits policyholders over the period 2003-09 inclusive is a cumulative 86.4%.

BonusesAgainst this background of strong investment performance we again expect the Society’s with profits payouts, already at or near the top of the industry tables, to remain very competitive in 2010. To demonstrate how our payouts compare with major competitors, we have analysed a 25-year Wesleyan Endowment Plan and its return.Example based on a 30 year old male (next birthday) at outset and contributions of £50 per month:

Financial StrengthThe investment returns in 2009 had a very positive impact on our financial strength with the Fund for Future Appropriations increasing by £133m. This, coupled with a new capital management framework, leaves the Society in a very strong position we believe when compared to others. Financial strength is fundamental to our long term strategic objectives and underpins our investment strategy of holding a higher than average equity exposure, which we continue to believe will deliver long term benefits to policyholders. The strength of our with profit fund was recognised in the Cazalet annual review with the Society once again receiving a 10 out of 10 rating and being the only organisation to have achieved this in each of the last 5 years.

Ernst & Young rank the Society as one of the financially strongest life offices in their 2008 Capital and Solvency Review.

Life and Pensions New BusinessOur 2009 new business Annual Premium Equivalent (APE) grew by 11%. This is considered a strong performance given the prevailing market conditions and compares very well to industry averages. As our business model matures following previously reported changes, we expect to see further improvements in 2010 and 2011.

CostsNormal operating costs (including subsidiaries) continued to increase as a result of growing our sales force. Given the economic climate and an uncertainty as to its impact on new business volumes during the year, we decided to apply a prudent approach to expenditure and carried out a cost review exercise. Its implementation resulted in significant savings against budget. It is pleasing to report that this was achieved without job losses, as we considered it vital to our long term objectives to maintain a robust infrastructure on which to grow our business. Longer term the Society expects to achieve reductions in acquisition cost ratios from the delivery of the growth strategy.

Companies 2010

LV= £51,754

Wesleyan £51,081

CGU (GA to 1998) £36,979*

Prudential £35,834*

Legal & General £35,603

Commercial Union £30,679*

Friends Provident £29,966

Standard Life £28,139

Norwich Union £27,884*

Scottish Widows £27,802

Average payout £35,572

Vision - To be the best in our chosen markets

To be a strong and profitable business

To be the provider of choice, with tailored financial products and services to meet the personal, professional and business needs of our target markets

To be an employer of choice for staff

Mission - Through continuous improvement

£30m

£25m

£20m

£15m

£10m

£5m

02006†* 2007

£20.5m

£29.2m

2008

£27.6m

2009

£30.7m

2005†

£10.4m

† Excludes Annuity Business * 2006 Excludes £24.8m Bulk Annuity Contract.

Values

Insight - Specialist, expert, unique

Performance - Market leading, customer focused, progressive

Trust - Financially strong, principled, caring, fair

* Mortgage endowment policy Source: Society’s own research Please remember that past performance is not a guide to future performance.

7

Salesforce Income As the Chairman has stated 2009 was a challenging year for all businesses, with the Society no exception. However the salesforce did particularly well in response to the weak external conditions and came close to achieving the sales target set for 2009. Salesforce income, which is on an embedded value basis and includes the sale of third party products, showed a 24% increase on 2008. This is due to both expansion and increased familiarity with the new point-of-sale system. As new recruits grow in confidence and capability we anticipate further significant growth.

General Insurance BrokingOur General Insurance broking business continued to increase sales, achieving a significant increase on the previous year. This however only represents a fraction of the opportunity available to it and we will be looking for ways to significantly increase penetration into our target markets.

Wesleyan BankThe Bank had another good year with sales of personal loans showing a substantial increase. It also achieved an embedded value profit well in excess of budget. However the scale of the Bank remains very modest and there are plans in place to take the Bank forward, both in terms of its customer offering and income generation.

Customer Proposition - provider of choice

Point of Sale TechnologyMy review of 2008 referred to our success in providing each Financial Consultant (FC) with industry-leading financial planning technology to use in face-to-face discussions with policyholders. 2009 was therefore a year of consolidation during which all FCs gained more confidence and capability in using, and gaining the benefits from, the technology which is now firmly embedded in the Society’s sales process.

A recent survey showed that 90% of customers were delighted with this method of delivering advice and we expect this to grow as we start to see its real long term value. Over time we will gather a comprehensive picture of the individual customers financial position and this will allow us to provide the very best advice that we can in a timely manner.

Product RangeThe Society has made significant additions to its product range in recent years, examples being the With Profits ISA, the SIPP, an improved inheritance tax proposition and personal loans. Specific additions in 2009 included the launch of Practice Protector Plus (group locum insurance) and a Private Clients General Insurance offering.

Customer ServiceThe Society participates in the annual ABI Customer Impact Scheme and it is pleasing to report that the Society’s scores for key questions were significantly above the industry and peer group averages; including ‘overall customer service’, ‘product purchased’ and for several customer commitment scores. Importantly, this was also reflected in scores amongst both longstanding customers and recent purchasers.

Given that the Society’s products are specifically targeted to certain professions (doctors, dentists, teachers and lawyers), it is reasonable to assume that this heightened positivity is generated in part by a greater understanding of needs between the Society and its customers compared to the industry. This could well reflect the benefits of being a mutual society.

FSA’s Retail Distribution ReviewThe Society supports the objectives of the Retail Distribution Review, in particular its objective to improve the skill levels of Financial Advisers, provide clarity to consumers over the type of advice being provided and the charges associated with this, and the desire to remove commission bias.

Our own values and business model are closely aligned to this initiative and work has already begun on training our people to the new standards. We expect to complete this well in advance of the industry 2012 deadline.

Employer of ChoiceTo support the Society’s mission ‘to be the Employer of choice for staff’ significant focus has been given to a ‘People Development Strategy’ covering a wide range of initiatives impacting on staff across the business. It is very pleasing to report that staff engagement as measured in the Society’s annual Employee Opinion Survey continues to improve year on year and in 2009 reached 77%.

Taking the business forwardAs I stated last year the financial crisis has done great damage to the trust in which the financial services sector is held and this has shown no signs of improving in 2009. Against this difficult background the Society is working to take the business forward with the focus on customers’ outcomes as demonstrated by:• The achievement of our financial objectives including further growth

in new business volumes and improved cost ratios and the delivery of market leading long term payouts for our policyholders.

• Sound financial management with further strengthening of our capital position which provides the foundation for our investment strategy.

• Theprovisionofhighqualityfinancialadvicewithfurtherdevelopment of our tailored products and services to meet the high expectations of our current and future customers.

• Developmentofintegratedsalesandservicechannelsthatprovide a more convenient and effective method of interacting with the Society.

• TheidentificationanddeliveryofgrowthstrategiesforboththeBank and General Insurance business.

• Introductionofatotaldevelopmentframeworktoensureallstaff have the opportunity to improve their own skills and be successful within the organisation.

There has been a lot of change at the Society over recent years and more is expected with the demands of both the Retail Distribution Review and the European driven Solvency II regime required to be implemented by 2012. Despite these challenges the Society resolves never to lose its focus on its customer and will strive to deliver market-leading value and service at all times. I would like to thank all of our members for their continued support and all of our staff for their outstanding contribution in 2009.

Craig ErringtonChief Executive30 March 2010

Craig ErringtonChief Executive

8

The Board of DirectorsNon-Executive Directors

Lowry Maclean, MA (a) (b) (c) (d) (f) (g)ChairmanLowry Maclean, aged 70, was appointed Chairman of Wesleyan Assurance Society in 1999. He was appointed to the Wesleyan Board in 1987, as an independent Non-Executive Director and served as Chief Executive from 1992 to 1999. He is Chairman of the Society’s Investment Committee and of the Society’s subsidiary companies. He is also Chairman of the Medical Sickness Advisory Board and of Aston Reinvestment Trust, a community development finance institution. He was formerly Chairman of Tomkinsons Plc, John Smedley Ltd and President of the Birmingham Chamber of Commerce. He has a Masters Degree from Cambridge University and is a graduate of the Massachusetts Institute of Technology Senior Executive Program. Lowry will retire immediately following this year’s AGM.

David Rutter, BSc, FIA (a) (b) (c) (d) (e) (f) (g)Vice-Chairman and Chairman of the Risk CommitteeDavid Rutter, aged 57, was appointed as a Non-Executive Director in 2004, having spent his entire career at the Society. Prior to his retirement David was the Society’s Appointed Actuary and later Finance Director. David was a Director of the Society from 1990 and, in 1997, he oversaw the merger with Medical Sickness Society. David became Vice-Chairman of the Society in May 2007.

Philip Green, (b) (d) (e)Philip Green, aged 57, joined the Society’s Board on 1 January 2010. He is Chief Executive Officer of the Life Insurance Market Research Association (LIMRA) Europe, the world’s largest insurance association. He is also Chairman of an international consultancy which focuses on developing performance, management, training and salesforce distribution. Philip has extensive experience working within the insurance sector having been Senior Vice President Marketing and Distribution at Alico and Executive Vice President, Chief Agency Officer for AIA, both part of the American International Group (AIG) of companies until 2005. He also worked for Sun Life of Canada for 18 years in a number of roles.

Bryan Jackson, OBE (a) (b) (d)Bryan Jackson, aged 63, is a Non-Executive Director appointed to the Board in May 2007. He was the MD of Toyota Motor Manufacturing (UK) Limited until his retirement in 2004. Between 2004 and 2009 he was an adviser to Toyota in Europe. He is also Chairman of East Midlands Development Agency, appointed by the Prime Minister to head this regional development agency. He is also Chairman of Total Motivation, a company specialising in lean manufacturing and motivational training techniques and Deputy Chairman of Unipart Manufacturing Group, a first tier automotive supplier. Bryan will become Chairman of the Society’s Board immediately following this year’s AGM.

Keith Nicholson, FCA (a) (g)Chairman of the Audit Committee Keith Nicholson, aged 60, joined the Society’s Board in September 2009. He retired from his role as Partner at KPMG LLP earlier in 2009 with over 25 years of experience in the insurance and retail banking sectors. He has extensive knowledge in global client relationship management having worked with a range of banks and insurance companies. For the last 15 years Keith was heavily involved in serving FTSE 100 and other global retail financial services clients.

David Tyrrell (d) (e)

David Tyrrell, aged 67, is a Non-Executive Director appointed to the Board in September 2003 and Chairman of the Open Fund With Profits Committee. He joined us after a distinguished career with Pearl Assurance and from April 1995 until his retirement in March 2000 he was the Society’s Sales Director responsible for both the Wesleyan and Medical Sickness salesforces. He was also responsible for Marketing, Sales Operations, the Call Centre and Customer Services for the Group. David will retire immediately following this year’s AGM.

Steve Deutsch, Joe Roderick, Michael Lewis, Bryan Jackson, David Tyrrell, Philip Green, Lowry Maclean, Tim Pindar, Martin Howard, Craig Errington, Matthew Rodhouse, David Rutter, Keith Nicholson

Registered Office: Colmore Circus Birmingham B4 6ARRegistered Number: ZC000145

Key to membership of principalBoard Committees(a) Audit

(b) Remuneration

(c) Investment

(d) Nominations

(e) With Profits Committee(s)

(f) Capital Management

(g) Risk

Professional Advisers

SolicitorsColey & Tilley, Neville House, Waterloo Street, Birmingham B2 5UF

Independent AuditorsPricewaterhouseCoopers LLP, Cornwall Court, 19 Cornwall Street, Birmingham B3 2DT

BankersLloyds Banking Group plc, 25 Gresham Street, London EC2V 7HN

Chief Medical OfficerProfessor Robert Allan, MD, FRCP Wesleyan Assurance Society, Colmore Circus, Birmingham B4 6AR

9

Craig Errington, CDir, FIoD (c) (d) (f)Chief ExecutiveCraig Errington, aged 46, joined the Wesleyan in 1991 as a Financial Consultant and was appointed to the Board as Group Sales Director in 2002 having been top Adviser, top Sales Manager and top Regional Manager. In April 2005 Craig was appointed Chief Executive. He is Chairman of the Society’s Executive Committee, a Director of Wesleyan Financial Services Limited, Wesleyan Unit Trust Managers Limited and Wesleyan Bank Limited and serves on the Medical Sickness Advisory Board. He is the current Chairman of the LIMRA Europe Executive Committee (Life Insurance Market Research Association). He is also a Director of the Association of Financial Mutuals and Regional Chairman of the National Skills Academy for Financial Services.

Michael Lewis, MA, FIA (c) (f)Investment DirectorMichael Lewis, aged 57, joined the Society as Investment Director in 1992. He is a mathematics graduate of Magdalen College, Oxford and qualified as an actuary in 1980. He is a 30-year industry veteran and began his career at NFU Mutual. During his 18 years at the Wesleyan he has further developed a contracyclical and long-term investment style, focusing new investment on asset classes, sectors and stocks that are currently out of favour with other investors. The track record of the Society’s Investment team has been excellent. Michael is the Independent Investment Adviser to the Greater Gwent (Torfaen) Local Authority Pension Fund.

Steve Deutsch, BEng, ACIBCommercial DirectorSteve Deutsch, aged 46, joined Wesleyan in October 2005 following 19 years in a variety of roles at Lloyds TSB. A member of the Society’s Board since 2007, (he was previously Operations Director), Steve was appointed Commercial Director in September 2008. In this role he has overall responsibility across the Group for the Salesforce, General Insurance, the Wesleyan Bank, internet and direct sales. In addition he is a Director of Wesleyan Bank Limited and Wesleyan Financial Services Limited.

Martin Howard, CMICS Operations DirectorMartin Howard, aged 50, joined Wesleyan in January 2006 as Director of Customer Services and brings over 25 years of front-line customer service and change management experience across a number of industries. He has worked for IBM UK, Prudential Life and Pensions, Prudential General Insurance, South West Trains and as a Customer Service Consultant. He is a Companion Member (Fellow) of the Institute of Customer Services. He was appointed

Operations Director in September 2008. As a member of the Executive Board, Martin had overall responsibility throughout 2009 for Customer Services, HR and IT across the Wesleyan Group.

Matthew Rodhouse, ACA (f)Risk and Finance DirectorMatthew Rodhouse, aged 52, joined Wesleyan in 1991 as Corporate Audit Manager and was appointed to the Board from 1 May 2004. He had previously worked as an auditor at Coopers & Lybrand (now PricewaterhouseCoopers LLP), specialising in the financial services industry. Matthew reports regularly on current performance issues, ensuring that the Group operates strong cost control, based on a detailed understanding of the business. Matthew is also responsible for the maintenance of the Society’s risk processes, including responsibility for the Risk function and oversight of compliance with FSA regulations, and, with Joe Roderick as Company Secretary, for the Society’s Corporate Audit function and the maintenance of the Society’s corporate governance arrangements. He is also a Director of Wesleyan Unit Trust Managers Limited and Wesleyan Financial Services Limited. Matthew was appointed to the Investment Committee with effect from 1 January 2009 and resigned on 31 March 2009 due to further high-level consideration of the role of the Investment Committee.

Tim Pindar, BA, FIA (c) (f)Chief ActuaryTim Pindar, aged 49, qualified as an actuary in 1988. He joined Medical Sickness Society in 1989 and moved into the Wesleyan Group upon the merger of the two Societies in 1997. Since 2004 Tim has been responsible for the provision of all actuarial and technical services to the Society and is the Actuarial Function holder. He is also the Society’s With Profits Actuary, and in this role is not able to be a member of the Board. However he does attend all Board meetings. Tim has served on several actuarial working parties and co-authored a number of actuarial papers.

Joe Roderick, FCA, ACIICompany SecretaryJoe Roderick, aged 58, qualified as a chartered accountant in 1975 and joined Medical Sickness Society in 1980 from Coopers & Lybrand (now PricewaterhouseCoopers LLP). He held the positions of Company Secretary and Financial Accountant with Medical Sickness and upon the merger of the two Societies in 1997 assumed these positions in the enlarged group. In addition to company secretarial and statutory accounting roles Joe is also responsible for taxation, corporate audit, staff pensions and assists Matthew Rodhouse in dealing with corporate governance issues.

Executive Directors, Chief Actuary and Company Secretary

Steve Deutsch, Joe Roderick, Michael Lewis, Bryan Jackson, David Tyrrell, Philip Green, Lowry Maclean, Tim Pindar, Martin Howard, Craig Errington, Matthew Rodhouse, David Rutter, Keith Nicholson

1. IntroductionThe Society continues to aim to meet the highest standards in corporate governance. The Board is responsible to the Society’s policyholders for good corporate governance.

The Annotated Version for Mutual Insurers of the Combined Code on Corporate Governance (“the Annotated Code”) was issued in July 2005 by the Association of Mutual Insurers (“AMI”) and Association of Friendly Societies (“AFS”), now both merged into the Association of Financial Mutuals (“AFM”). In February 2008, AMI and AFS reissued the Annotated Code to take account of the changes to the Combined Code on Corporate Governance made by the Financial Reporting Council in June 2006, and we continue to comment on our compliance with the 2008 version. The Board has reconfirmed its intention to adopt the relevant provisions provided that they are in the interests of current and future policyholders.

This report summarises the Society’s governance arrangements and continued enhancements and, in accordance with the Annotated Code, explains those areas of the Combined Code where the Society does not comply.

2. Companies Act 2006 and Society’s RulesSections of The Companies Act 2006 applied from 1 October 2009 (the Society falls into the category of an unregistered company). Recommendations to amend the Rules in the light of the new legislation are being made to the Society’s 2010 AGM; members should note that parts of the existing rules were overridden by the new Act from 1 October 2009. More information will be posted on our website in advance of the Society’s 2010 AGM, to be held on 7 May 2010.

3. Governance by DirectorsThe BoardThe Board meets regularly to lead, control and monitor the overall performance of the Society, including high-level consideration of succession planning. Senior management provides the Board with appropriate and timely information and is available to attend meetings and answer questions. The Chief Actuary attends all Board meetings. There is a formal schedule of matters reserved for the Board’s decision. The roles of Chairman and Chief Executive are separated and the Chairman has primary responsibility for the effective functioning of the Board; authority is delegated to the Chief Executive for implementing strategy and managing the Society. The most recent evaluation of Board process, including the performance of the Chairman, was carried out in 2007 in line with industry guidance. All members of the Board contributed to the evaluation, as did the Chief Actuary and the Company Secretary.

In line with the agreed three-year cycle the next evaluation willbe carried out later in 2010.

The Chief Actuary makes recommendations on bonus and payout levels in relation to the different classes and generations of policyholders. It is the Board’s responsibility, based on these recommendations, to seek to achieve fairness between these different classes and generations, a key issue regarding the FSA’s initiative on Treating Customers Fairly.

The Chief Actuary also provides advice on other matters relating to obligations to the policyholders. In addition, he reports on the financial position of the Society and on regulatory returns to the FSA. The Chief Actuary acts as the Reporting Actuary for the purposes of these Accounts.

Nine scheduled meetings were held during 2009. At all but four of these meetings all the Directors attended, the absentees being Bryan Jackson for one meeting and Derek Zissman for two meetings and Andrew Doman also for two meetings. The current Board members are described on Pages 8 and 9. All Directors hold policies with the Society in accordance with the Rules of the Society. The Remuneration Report on Pages 15 to 17 explains the basis of remuneration of the executive and non-executive Directors.

Taking adviceThe Board and its Committees take advice from professional advisers to enable them to manage the risks and issues arising from the Society’s affairs. Each Director has access to the Company Secretary and Chief Actuary. They may also obtain independent professional advice, at the Society’s expense, about any matter concerning the Society relevant to their duties.

The ChairmanThe Chairman of the Board is Lowry Maclean. In addition to his responsibilities with the Society and its subsidiaries, his other significant commitment is the Chairmanship of Aston Reinvestment Trust, a community development finance institution.

Executive DirectorsThe Board had five Executive Directors throughout 2009, including the Chief Executive.

Non-executive DirectorsThere are six non-executive Directors on the Board.

Andrew Doman resigned from the Board on 31 July 2009 due to taking up an executive appointment overseas and Derek Zissman resigned on 31 December 2009. In their place Keith Nicholson was appointed with effect from 8 September 2009 and Philip Green from 1 January 2010. Together their diverse experience, skills and independent perspective provide an effective review and challenge of the Society’s activities.

10

Corporate Governance

The Chairman, Lowry Maclean, and the Vice Chairman, David Rutter, are elected by the Board. The Board considers all non-executive Directors to be independent of the Society in all matters notwithstanding their policies, their fees and, in the case of Lowry Maclean, David Rutter and David Tyrrell, their pensions derived from previous employment with the Society. Furthermore where non-executive Directors have served for more than nine years, in the case of Lowry Maclean, the Board does not consider this impairs his independence and the 2007 evaluation of Board process reaffirmed this. These assessments are based on the character of the individuals in respect of independent mindedness when it comes to the raising of relevant issues and the rigorous process of assessment, judgement and follow through. Great emphasis is also placed on their knowledge and experience of the industry. In spite of all the focus on the independence of individuals it is important, ultimately, that the Board is generally cohesive. The Board does not believe it is appropriate to appoint a Senior Independent Director, in view of the fact it has a Vice Chairman in office.

Appointments to the BoardAll appointments are subject to review by the Board, as advised by the Nominations Committee. Directors must retire and seek re-election at the first Annual General Meeting following appointment. All Directors must submit themselves for re-election by rotation at an Annual General Meeting at least every three years. Directors follow an induction programme on joining the Board and further training on specific subjects is undertaken as necessary.

Board CommitteesThe Board formally delegates specific responsibilities to a number of Board Committees, supported by senior management.

The Audit CommitteeDavid Rutter chaired the Audit Committee until 8 May 2009, from which date Derek Zissman chaired the Committee until Keith Nicholson was appointed as Chairman of the Committee from 1 December 2009.

The Committee currently comprises four non-executive Directors, one of whom is the Society’s Chairman. It meets at least four times a year and assists the Board in fulfilling its responsibilities in respect of the Annual Accounts and Regulatory Returns to the FSA and keeps under review the Society’s arrangements for its employees to raise concerns, in confidence, about possible wrongdoing in financial reporting or other matters. It also reports to the Board on the valuation methods and assumptions, accounting policies, systems of internal control, conclusions from internal control reports and the effectiveness of the Society’s risk management processes. The external auditors attend key meetings and, in addition to the Corporate Audit Manager and Chief Actuary, have direct access to the Chairman of the

Committee. The Committee keeps the relationship between the Society and its auditors under review and considers their independence, including the extent of their fees from non-audit services. Of the five meetings held during 2009, Derek Zissman was absent for one meeting and Andrew Doman for two meetings. The Board is satisfied that at least three members of the Committee in 2009 had recent and relevant financial experience.

The Committee’s Terms of Reference are available on request and from the Society’s website – www.wesleyan.co.uk.

The Risk CommitteeAs part of adopting the three lines of defence model to risk management, a Risk Committee of the Board was established in July 2009. The purpose of this Committee is to provide independent oversight of the Group’s risk management framework and its outputs by reviewing the quality, independence and effectiveness of the Group’s Risk function and reviewing reports on the Group’s risk management framework and reports that assess the nature and extent of risks facing the Group.

The Risk Committee is chaired by David Rutter and currently comprises two other non-executive Directors, one of whom is the Society’s Chairman and the other is the Chairman of the Society’s Audit Committee. The Committee met twice in 2009 and is expected to meet at least four times in 2010. All members of the Committee attended the two meetings held in 2009.

The Committee’s Terms of Reference are available on request and from the Society’s website – www.wesleyan.co.uk.

The Capital Management Board Sub-CommitteeThis sub-committee, whose purpose is to make recommendations and report to the Board, was established in 2008 to deal expeditiously with topical issues regarding management of the Society’s capital assets against the background of extreme market volatility.

The sub-committee is chaired by the Society’s Chairman and includes the Vice Chairman, the Chief Executive, the Investment Director, the Risk and Finance Director and the Chief Actuary. It meets as deemed necessary. The Committee’s Terms of Reference are available on request and from the Society’s website www.wesleyan.co.uk

The Investment CommitteeLowry Maclean, Chairman, chairs the Investment Committee, currently comprising one other non-executive Director, the Chief Executive, the Investment Director, the Chief Actuary, the Investment Manager, the Fund Manager – UK Equities, the Director of Marketing and an external independent specialist. The Risk and Finance Director was appointed to the Committee with effect from 1 January 2009 but resigned from the Committee on 31 March 2009 to prevent a conflict of interest in his new role as Risk and Finance Director.

11

The Board sets policy for strategic asset allocation for the with profits, non-profit, unit-linked funds and the Society’s free capital delegating implementation to the Investment Director. The Committee monitors adherence to these asset allocations and makes comments to the Board as necessary. Four scheduled meetings were held during 2009. At all but two of these meetings, all the members of the Committee attended, the absentees being the Investment Manager for two meetings and the Chief Executive for one meeting. The Committee’s Terms of Reference are available on request and from the Society’s website – www.wesleyan.co.uk.

The Remuneration CommitteeLowry Maclean, Chairman, chairs the Remuneration Committee. The 2008 version of the Annotated Code allows the Chairman to be a member of, but not chair, the Remuneration Committee if he or she was considered independent when appointed. The Board believes that it is appropriate for the Chairman of the Society to chair the Committee as an essential part of ensuring the effective functioning of the Board. It comprises two other non-executive Directors with the Chief Executive in attendance as required. The Committee is responsible for the terms of remuneration for executive Directors, other members of the Executive Committee and non-executive Directors, including incentive arrangements for bonus payments. The Chairman takes no part in the setting of his own remuneration. All members of the Committee attended the three meetings held in 2009, apart from Bryan Jackson who was absent for one meeting. The Committee’s Terms of Reference are available on request and from the Society’s website – www.wesleyan.co.uk.

The Nominations CommitteeLowry Maclean, Chairman, chairs the Nominations Committee, comprising the Chief Executive and two non-executive Directors. At least two members of the Committee are considered to have the relevant skills and experience in respect of any finance appointment. The Committee meets as necessary to consider and make recommendations to the Board regarding the appointment of Directors. All Members of the Committee attended the three meetings held in 2009, apart from Bryan Jackson who was absent for two meetings. Other Board members with particular skills relevant to the nomination of external advisers may be invited to attend for all or part of any meeting, as and when appropriate. Lowry Maclean, as Chairman of the Society’s Board, does not chair the Committee when it is dealing with the matter of succession to the Chairmanship of the Society. The Committee’s Terms of Reference and the terms and conditions of appointment of non-executive Directors are available on request and from the Society’s website – www.wesleyan.co.uk.

With Profits CommitteesThe Board established in 2004 two With Profits Committees to ensure compliance with the two Principles and Practices of Financial Management documents (“PPFMs”) regarding the management of with profits business. One Committee covers the Medical Sickness Society Fund, which is closed to new business and, in addition to a non-executive Director, includes a former member and both of the current members of the MSS Fund Monitoring Committee which was established at the time of the 1997 merger with Medical Sickness Annuity & Life Assurance Society Limited. The other Committee covers the Open Fund on which all new with profits business has been issued since the date of the merger. It is also their role to advise the Board on any issues arising as to the management of the Society’s Open Fund with profits business. Members of the Committees are appointed by the Board and are made up of non-executive Directors and external appointees. The Committees’ Terms of Reference and the PPFMs are available on request and from the Society’s website – www.wesleyan.co.uk.

Subsidiary company governanceThe Society’s main subsidiaries are as set out in Note 19 on Page 60 of these Accounts. The Group is managed as far as possible as an integrated whole. The Boards of Wesleyan Financial Services Limited and Wesleyan Administration Services Limited comprise the Society’s Board of Directors with the addition of the Chief Actuary.

The Board of Wesleyan Bank Limited comprises the Chairman of the Society as Chairman and includes two independent non-executive Directors with significant experience of the banking industry.

The Board of Wesleyan Unit Trust Managers Limited comprises the Chairman of the Society as Chairman, the Investment Director as Chief Executive, the Chief Executive of the Society, the Risk and Finance Director, the Investment Manager and the Society’s Director of Marketing.

Each of these Boards of Directors meets as appropriate to consider the matters relevant to those companies.

4. Management of SocietyIn accordance with the Society’s Rules, the Board has delegated authority to the Chief Executive for implementing strategy and managing the Society. The Chief Executive has formed the Executive Committee to assist him in carrying out his responsibilities. The Executive Committee comprises the Chief Executive, the other Executive Directors and senior management and meets regularly, usually fortnightly, to manage business activities. In January 2010 the Board delegated to the Committee the power to make changes to

12

Corporate Governance continued

13

with profits payouts during the year to increase the Society’s responsiveness to changes in the markets. Papers are prepared and presented to the Board after agreement by the Executive.

A number of sub-committees of the Executive Committee also meet to consider issues in more depth. Minutes are considered by the Executive Committee at its next meeting.

5. Accountability and AuditThe Board of Directors is ultimately responsible for the Society’s system of internal control and for reviewing its effectiveness, including any outsourced activities. This system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable, not absolute, assurance against material loss or misstatement.

The Board actively seeks to minimise the exposure to unnecessary risks and, in doing so, takes into consideration the materiality of the risks to be managed and the cost effectiveness of the relevant aspects of the necessary risk mitigation (including the use of derivatives and internal control) in light of the particular environment in which the Society operates.

The effectiveness of the Society’s system of internal control, including financial, operational and compliance controls and risk management processes, is reviewed by the Audit Committee on behalf of the Board and the Audit Committee has reported on the outcome of its review to the Board. The principal components of the Society’s system of internal control and developments in 2009 are detailed below.

Control environmentThe Society is committed to the highest standards of business ethics and conduct, and seeks to maintain these standards across all of its operations. The governance manual is subject to regular review, confirming the governance structure for the business and the guiding policies for the organisation.

An appropriate organisational structure for planning, executing, controlling and monitoring business operations is in place in order to achieve the Society’s objectives. The structure is reviewed and updated on a regular basis, taking into account the pressures and conflicting priorities on the Society’s business, to ensure that it provides clear responsibilities and control for key areas. Separate internal functions have been established for internal audit, risk management and change programme management. Through this structure the Board receives an overall summary and recommendation of control effectiveness based on the risk assessment report and the Corporate Audit report in order that it may sign the Directors’ Certificate attached to the annual return to the FSA.

Control proceduresThe Society operates a number of control procedures to safeguard the policyholders’ assets and investments, including:

• ARiskandBusinessControlsForum,chairedbytheHeadof Risk, to consider issues in more depth on behalf of the Executive Committee, including the work of the Controls Design Specialist and of Corporate Audit and the timely resolution of actions agreed as a result of their work and that of the external auditors.

• Ariskassessmentmethodology(seebelow).

• Physicalcontrols,segregationofdutiesandreviewsbymanagement.

• ReviewscarriedoutbyCorporateAudit(refertosectionheaded “Internal Audit”).

• The Society’s Compliance Officers monitor the compliance with the FSA’s Conduct of Business Rules on a day-to-day basis.

• AComplianceForum,chairedbytheRiskandFinanceDirector, to consider issues regarding compliance with Sales and Marketing Rules in more depth on behalf of the Executive Committee.

• Preparationandmonitoringofdetailedbudgetsforfunctional business segments.

• Achangeprogrammemanagementfunctiontostructure,co-ordinate, monitor and report on the very significant projects that the Society is undertaking.

Information and communicationRegular management information in respect of financial performance, customer service, complaints handling and investment performance is prepared and reviewed by senior management, the Executive and the Board. Additionally, projects have their own management information processes.

The Society prepares an annual business plan and budget to assist in the monitoring of results. Actual performance against these plans is actively monitored and, where appropriate, corrective action is agreed and implemented.

The Board receives regular reports on compliance with FSA regulation over its sales and marketing functions.

Risk managementThe Board is responsible for setting policy on and monitoring risk management. The Society has adopted the three lines of defence model to risk management. Under this model, line managers are responsible for day to-day risk management and they identify and assess risks in their areas of responsibility. A register of significant risks that could impact the achievement of the Society’s objectives and related internal controls is maintained. This register is updated by senior management and the Executive and is subject to review by the Risk

Monitoring and corrective actionThe Risk function reports to the Risk and Business Controls Forum, the Executive, the Risk Committee and the Board on the results of the risk assessment and other significant changes in the risk register, including specific reports on elements of risk and their management as required.

Assurance is provided to the Audit Committee on the effectiveness of the key controls through:

• ReportingbytheSociety’sinternalauditfunctiononthekeycontrols reviewed.

• Theworkofotherindependentadviserscommissionedtoreport on specific aspects of internal control.

• ReportsprovidedbytheSociety’sexternalauditors.

The Audit Committee monitors the status of corrective actions for the improvement of the effectiveness of the system of internal control.

6. (a) Policyholder CommunicationsThe Board is committed to a policy of openness in its communications with policyholders. During the year, the Board has sought to keep all relevant stakeholders informed on all major issues. At its Annual General Meeting, the members of the Board are available to answer questions. Separate resolutions are proposed on each issue so that they can be given proper consideration. The Society published the results of the valid proxy votes received for its 2009 Annual General Meeting on its website. This complies with the 2008 version of the Annotated Code. Policyholders can gain access to the Society’s Annual Report and Accounts and further information on the website at www.wesleyan.co.uk.

6. (b) Member RelationsDespite the Society’s Rules restricting notice of general meetings to advertisements in national newspapers, the Society forwards notice of general meetings to members, together with a proxy form and a summary financial statement. All other relevant information will be made available on the website in the “Member Relations” section of the main website. The Board is always interested to hear members’ views and these should be channelled through the Company Secretary ([email protected]).

7. Going ConcernThe Directors consider the adoption of the going concern basis to be appropriate in the preparation of the Accounts.

Committee on a regular basis. Significant internal and external risks are identified and evaluated and accountability for their management is allocated to appropriate individuals. The Risk function challenges the assessments put forward by line managers and monitors control effectiveness, reporting to the Risk and Business Controls Forum and the Risk Committee. Corporate Audit provide independent assurance on the design and effectiveness of the overall system of internal control, including risk management and compliance, reporting to the Audit Committee.

A clear risk management framework and methodology has been established which includes:

• ThecalculationoftheFSA’sIndividualCapitalAssessment.

• AFinancialConditionReportfocusingonthequantificationof market, credit and insurance risk with the application of detailed modelling to assess the sensitivity of the Society’s position to economic and business scenarios.

• Ariskidentification,categorisationandassessmentmethodology focusing particularly on operational risk.

• Theimplementationofriskidentificationandmanagementprocedures for major projects.

• Regular,organisation-widereviewsofsignificantinternalandexternal risks and their management, including the related internal controls.

• Thedetailedreviewofandreportingoncertainmaterialrisks, including those that have an impact on the financial position of the Society.

Outputs are reviewed by the Risk Committee which is tasked by the Board with providing independent oversight of the risk management framework.

The employment contract of each member of the Executive includes a clause placing a duty on the individual to identify, assess and report to the Board in a timely manner on all significant risks in their area of responsibility, whether strategic or operational, and when appropriate to implement a risk mitigation plan to resolve any weakness.

Internal auditThe Society has an internal audit capability (Corporate Audit) to provide assurance over the operation of the system of internal control. It carries out reviews on a risk-based cycle. The programme of internal audit reviews is based on the Society’s risk register and is designed to provide assurance that the risk mitigating actions identified by management and the risk register are working effectively. All internal audit reviews are reported to the Risk and Business Controls Forum, Executive Committee and Audit Committee.

14


8. Directors’ Remuneration ReportIn accordance with the Annotated Version for Mutual Insurers of the Combined Code on Corporate Governance (‘the Annotated Code’) an advisory vote on the Remuneration Report will be sought from the members at the AGM. The result of this vote at the Society’s 2009 AGM was 94.7% in favour (2008: 96.9% in favour). The Remuneration Committee’s decisions are made on the basis of rewarding individuals for the scope of their responsibilities and a rigorous and regular review of their individual performance. The Committee seeks to instil discipline and meet the highest standards. Proper regard is paid to the need to retain good quality, highly-motivated staff and the remuneration being paid by competitors of the Society is taken into consideration. In this respect the Committee receives external information benchmarking data where required.

The remuneration of the Chairman and the non-executive Directors is determined by the Remuneration Committee. The principles adopted in determining the fees are that they should be competitive, appropriate to attract and retain directors of the necessary calibre, and reflect the responsibilities and time involved in Society matters.

Non-Executive Directors’ remuneration comprises a specified fee, which includes extra amounts for specific additional responsibilities, as set out below.

The Remuneration Committee has determined that its approach to remuneration for executive directors and senior executives should be based on:

(i) The salary element, reflecting market rates and individual performance and not automatic annual increases in line with inflation;

(ii) Performance-related remuneration, to influence and encourage high levels of performance;

(iii) Senior executives being regularly assessed on their performance and contribution;

(iv) Ensuring that bonuses reflect individual performance and the performance of the Society, measured against its business objectives and targets, and

(v) The design and monitoring of a bonus scheme that discourages excessive risk taking and reflects the longer term interests of the Society.

15

* The bonus scheme is payable in one third amounts over a 3 year period and the figure shown in this column represents the full amount.

The total emoluments of the Directors, excluding pension benefits, comprise: 2009 2008 £ £

Non-Executive Directors

Lowry Maclean, Chairman 95,700 93,800

David Rutter, Vice-Chairman 39,700 38,900

Michael Christophers (retired 9 May 2008) - 15,167

Andrew Doman (appointed 1 July 2008, resigned 31 July 2009) 21,000 17,650

Bryan Jackson 36,000 35,300

Keith Nicholson (appointed 8 September 2009) 12,000 -

David Tyrrell 36,000 35,300

Derek Zissman (appointed 9 May 2008, resigned 31 December 2009) 36,000 26,475

Total for Non-Executive Directors 276,400 262,592

Salaries Benefits Bonus* Total 2009 Total 2008

£ £ £ £ £

Executive Directors

Craig Errington (Chief Executive) 278,460 13,291 84,842 376,593 345,193

Steve Deutsch 173,400 11,891 39,721 225,012 206,063

Martin Howard 158,100 7,042 36,328 201,470 91,156

Ian Lazenby (resigned 29 August 2008) - - - - 116,486

Michael Lewis 214,200 16,970 43,594 274,764 256,407

Matthew Rodhouse 163,353 11,891 45,679 220,923 203,305

Total for Executive Directors 987,513 61,085 250,164 1,298,762 1,218,610

Directors’ Remuneration (audited)

16

Results in 2009 exceeded the targets and objectives set. Accordingly the annual discretionary bonus scheme (details of which are provided below) paid out entitlements to individual executives. While reflected in full in the 2009 results, these entitlements are payable in three annual instalments. Details of the individual figures for the Executive Directors are provided in the table on Page 15.

Benefits and executive bonus entitlementsExecutive Directors’ benefits include either a car allowance or the provision of an office car (including all running costs), and private medical cover. The Society operates an annual discretionary bonus scheme for Executive Directors and other members of the Executive Committee, the benefits from which are not pensionable. The Society’s policy is to ensure that there are appropriate short-term and medium-term incentives to meet the objectives of the business. To this end, the bonus scheme is split into short-term payments, which represent 1/3 of the total bonus earned and are payable immediately and medium-term payments, which represent 2/3 of the total bonus and are payable over a two-year period. This retained element of the bonus is treated as though it were invested in a with profits bond.

In this way, the medium-term incentive bonus paid under the scheme reflects exactly the experience of customers holding the with profits bonds.

No benefits are paid to Non-Executive Directors.

Service contractsEach Executive Director has a rolling service contract of one year with the Society, which is considered appropriate for the requirements of the Group. Compensation payable upon early termination (other than under the payment in lieu of notice provisions) would be based upon the contractual entitlement to salary and benefits subject to mitigation.

No Non-Executive Director has a service contract.


Long-term benefitsNo share options are available. Other than the retention element of the bonus scheme, the Society does not operate a long-term benefits scheme.

Pension arrangementsEach Executive Director is a member of the Society’s pension scheme with the addition, where the lifetime allowance is exceeded, of unfunded pension benefits provided by the Society.

These pension arrangements provide for a pension on retirement of 1/60th of basic annual salary for each year’s membership of the Scheme and, depending on the date of joining the Society, is either based on final salary or career average revalued earnings.

No other payments to Executive Directors are pensionable. The Scheme also provides 4 x pensionable salary death-in-service benefit cover to all its active members.

No pension benefits are accrued by Non-Executive Directors.

The pension entitlement shown below is that which would be paid annually on retirement based on service to 31 December 2009. Transfer values shown are calculated in accordance with the transfer value basis that applied as at 31 December 2009 and 31 December 2008 respectively. The transfer values of the person’s accrued benefits under the Scheme at the end of the relevant financial year have been calculated in accordance with regulations 7 to 7E of the Occupational Pension Schemes (Transfer Values) Regulations 1996.

The values represent actuarial liabilities of the Scheme and Society, not sums due to Directors. Members of Wesleyan Staff Pension Scheme have the option to pay additional voluntary contributions to secure additional pension. These are not included in the table below.

Age at 31.12.2009

Years of Pensionable

service at 31.12.2009

Accrued entitlement

at 31.12.2009

Additional accrued

benefits earned in the year*

Transfer value of pension at 31 Dec.

Changes in transfer value attributable

to increase in entitlement†*2009 2008

£,000 £,000 £,000 £,000 £,000

Craig Errington 46 18 84 2 1,475 1,244 17

Steve Deutsch 46 4 12 3 173 109 32

Martin Howard 50 4 9 2 140 89 29

Michael Lewis 56 26 93 1 2,137 1,905 4

Matthew Rodhouse 52 18 49 2 992 836 29

* The increase in the Director’s accrued entitlement which is valued is net of the inflationary increase which would have applied during the period had the Director left the Scheme on 31 December 2008.

† The value shown is also net of the contribution that the Director made to the Scheme during the period towards the cost of providing the benefit.

Directors’ Pensions (audited)

17

Of the pensions payable to Lowry Maclean and David Tyrrell £98,275 and £29,453 respectively (2008: £93,561 and £28,050) are payable by the Society, the balance being payable by Wesleyan Staff Pension Scheme.

BY ORDER OF THE BOARD

Joe RoderickCompany Secretary30 March 2010

2009

£2008

£

Lowry Maclean 173,447 165,153

David Rutter 100,279 95,504

David Tyrrell 103,136 98,224

In addition, annual pensions are payable to the following Non-Executive Directors in respect of previous full-time employment:

Directors’ Report

The Directors present their annual report and audited consolidated financial statements for the year ended 31 December 2009.

StatusThe Society is a mutual society incorporated in England (Registered Number: ZC000145) by Private Act of Parliament, with the Registered Office at Colmore Circus, Birmingham B4 6AR, England. It has no shareholders and its members, who have the right to vote at general meetings, are defined in Note 23 to these accounts. Principal ActivitiesThe principal activities of the Group during 2009 were the transaction of long-term insurance business in the UK, namely life assurance, pensions and income protection insurance in the form of reviewable, with profits and unit-linked contracts. Other financial services undertaken included mortgage broking, retail banking, unsecured lending, unit trust management and acting as a financial adviser and a general insurance broker. Review of Business and Future DevelopmentsThe Society’s business is reviewed by the Chairman and the Chief Executive on Pages 4 to 7. The level of business was close to expectations in 2009 and the year-end financial position is considered satisfactory notwithstanding the volatility of markets and general outlook. As set out in those statements, the Society is projecting further growth in 2010 and beyond, based on expansion and further improvements in its current method of operation. Although we do not publish accounts on the European Embedded Value basis used by our quoted competitors due to the costs involved, we do track performance internally using embedded value principles. The Key Performance Indicators, on which the Board and Management principally focus, are discussed in the Chairman’s Statement and Chief Executive’s Review on Pages 4 to 7 inclusive and summarised in the Financial Summary on Page 3. These include the Society’s new business, investment returns, with profits payouts and the level of working capital. In addition, management closely monitor the financial strength of the business as mentioned in the section on management of risk. Results and Bonus DeclarationThe financial statements and accompanying notes on Pages 23 to 66 show the results for the year ended 31 December 2009 and the financial position at that date. The financial results are presented in accordance with the Companies Act 2006. In accordance with the Society’s Rules and Insurance Company legislation, the Society’s Chief Actuary carried out a valuation of the Society’s assets and liabilities as at 31 December 2009.

The Directors, having taken advice from the Chief Actuary following his annual investigation of the long-term fund, have declared rates of bonuses which are shown on Page 20. Management of RiskDetails of the Society’s approach to risk management are set out in the Corporate Governance Statement and in Note 2 to these accounts, with market risk considered the most significant risk to the Society. The Chief Executive also mentions the benefits of financial strength in his Statement on Pages 6 to 7. Further details, including quantification where relevant of the principal financial risks and how these are managed are as follows: -

- Market risk (Page 31) - Insurance risk (Page 32) - Credit risk (Page 34) - Liquidity risk (Page 36) - Operational risk (Page 36) The adequacy of the Society’s financial strength is monitored using the principles of the Individual Capital Assessment (“ICA”) set out by the Financial Services Authority. The actuarial team stochastically project the Society’s realistic balance sheet and ICA into future years to further improve monitoring of market risk in the Financial Condition Report. This is further discussed in Note 13. DirectorsThe Directors of the Society are as set out on Pages 8 and 9. Andrew Doman and Derek Zissman resigned from the Board on 31 July 2009 and 31 December 2009 respectively. Keith Nicholson and Philip Green joined the Board on 8 September 2009 and 1 January 2010 respectively and will be subject to re-appointment at the Annual General Meeting (AGM).

Lowry Maclean and David Tyrrell are retiring from the Board at the AGM. The Directors retiring by rotation are Steve Deutsch, Craig Errington and David Rutter who, being eligible, offer themselves for re-election. None of the Directors has an interest in the shares of the Society’s subsidiaries. Social Responsibility (SR)As a mutual, the Society’s principal focus is on its members and policyholders. However, the importance of having responsible policies for staff, customers and the community is recognised and the potential impact of key SR issues is considered within the overall risk management framework.

18

Disabled Persons

It is the Society’s policy to give full consideration to suitable applications for employment by disabled persons. Opportunities also exist for employees of the Society who become disabled to continue in their employment or to be trained for other positions in the Society’s employment. Employee InvolvementDuring the year, the policy of providing employees with information about the Society has been continued through employee briefings and an employee opinion survey in which employees have also been encouraged to present their suggestions and views on the Society’s performance. Regular meetings are held between management and employees to

allow a free flow of information and ideas.

Equal OpportunitiesThe Society is fully committed to equal opportunities in its

human resource practices, regardless of age, sex, ethnic origin

or disability.

Charitable DonationsCharitable donations amounted to £78,142 (2008: £90,033).

The Society’s main charitable recipient was the Alzheimer’s

Society. A number of charitable events were supported by

employees when their personal contribution was matched £1

for £1 by the Wesleyan Charitable Committee.

Supplier Payment PolicyIt is the Society’s policy to agree the terms of payment on

commencement of business with all suppliers and to abide by

these terms. The proportion of trade creditors included in the

Balance Sheet to total invoices in the year represents 12 days’

supplies (2008: 18 days’ supplies).

Independent AuditorsA resolution to reappoint PricewaterhouseCoopers LLP as

auditors to the Society will be proposed at the AGM.


Joe Roderick

Company Secretary30 March 2010

19

Valuation and Bonus Declarations

20

The Directors, having taken advice from the Chief Actuary following his annual investigation of the long-term fund, have declared bonuses for the year ended 31 December 2009 which in value total £39,455,000 (2008 : £41,042,000)

Ordinary life assurance businessStandard with profits policies 1.75% of basic sum assured (2008: 1.75%) and 3.00% of existing bonuses (2008: 3.00%)

Unitised with profits policies(Gross of management charge) 2.75% of existing bonuses (2008: 2.75%)

Pension business Conventional with profits policies 0.30% of capital amount (2008: 0.30%) and(including paid-up policies) 0.50% of existing bonuses (2008: 0.50%)Unitised with profit policies (Series 1)(Gross of management charge) 3.75% of value of units (2008: 3.25%) Unitised with profit policies (other Series) (Gross of management charge) 3.25% of value of units (2008: 3.25%)

Industrial life assurance business 1.50% of basic sum assured (2008: 1.50%)

With Profits ISA (Gross of management charge) 4.00% of value of units (2008: 4.00%)

Examples of amounts payable on maturity on 1 July 2010 and 1 July 2009 are as follows:

Age Term Premium 2010 2009 per month

Ordinary life assurance business 30 10 years £50 £6,864 £7,029 30 25 years £50 £51,081 £56,569

Pensions business 55 10 years £200 £28,669 £29,584 50 15 years £200 £48,418 £51,128

Industrial life assurance business 45 20 years £12 £5,595 £6,025 4-weekly

Age Term Single 2010 2009 premium

Guaranteed Growth Bond n/a 5 years £5,000 £6,000 n/a

In addition the following rates of bonus are declared for life and pensions business in the Medical Sickness Society Fund.

Ordinary life assurance business 0.75% of basic sum assured (2008: 0.75%) and 2.00% of existing bonuses (2008: 2.00%)

Pensions business Pure endowments 0.75% of the cash sum secured and the existing bonuses (2008: 0.75%)

This is an extract of the full declaration.

Statement of Directors’ Responsibilities in respect of the Annual Report and the Financial Statements

The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). The financial statements are required by law to give a true and fair view of the state of affairs of the Society and the Group and of the Group's results for that period.

In preparing those financial statements, the Directors are required to:• Selectsuitableaccountingpoliciesandapplythem

consistently;

• Makejudgementsandestimatesthatarereasonable and prudent;

• StatewhetherapplicableUKAccountingStandardshavebeen followed, subject to any material departures being disclosed and explained in the financial statements;

• Preparethefinancialstatementsonthegoingconcernbasisunless it is inappropriate to presume that the Society and the Group will continue in business, in which case there should be supporting assumptions or qualifications as necessary and

• Ensureandmaintaintheintegrityofthewebsite.

The Directors confirm that they have complied with the above requirements in preparing the financial statements. The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Society and the Group and to enable them to ensure that the financial statements comply

with the Companies Act 1985. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the Society’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

In addition, in respect of each person who was a Director at the time the Directors’ Report was approved:(a) so far as the Director is aware, there was no relevant audit information of which the Group’s auditors are unaware; and (b) he has taken all the steps that he ought to have taken as a Director to make himself aware of any relevant audit information and to establish that the Group’s auditors are aware of that information.


Joe Roderick Company Secretary30 March 2010

Note: The Society is incorporated by Private Act of Parliament, Wesleyan Assurance Society Act 1989, and sections of the Companies Act 2006 are applied by the Unregistered Companies Regulations 2009. Under these Regulations, the accounts requirements of the Companies Act 2006 first apply to the Society’s financial statements for the year ended 31 December 2010.

21

Independent Auditors’ Report to the Members of Wesleyan Assurance Society

22

We have audited the Group and Society financial statements (the ‘‘financial statements’’) of Wesleyan Assurance Society for the year ended 31 December 2009 which comprise the Consolidated Profit and Loss Account, the Group and Society Balance Sheets, the Group Statement of Total Recognised Gains and Losses and the related notes. The Group financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).

Respective responsibilities of directors and auditors As explained more fully in the Directors’ Responsibilities Statement the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.

This report, including the opinions, has been prepared for and only for the Society’s members as a body in accordance with Section 235 of the Companies Act 1985 and for no other purpose. We do not, in giving these opinions, 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.

Scope of the audit of the financial statementsAn audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and Society’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements.

Opinion on financial statements In our opinion the financial statements:

• give a true and fair view of the state of the Group’s and the Society’s affairs as at 31 December 2009 and of the Group’s profit for the year then ended;

• have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and

• have been properly prepared in accordance with the requirements of the Companies Act 1985.

Opinion on other matter prescribed by the Companies Act 1985 In our opinion the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements.

Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 1985 requires us to report to you if, in our opinion:

• proper accounting records have not been kept by the Society, or

• the Society financial statements are not in agreement with the accounting records and returns; or

• certain disclosures of directors’ remuneration specified by law are not made; or

• we have not received all the information and explanations we require for our audit.

Other mattersThe Directors have requested that we review the parts of the Corporate Governance Statement relating to the Society’s compliance with the eight provisions of the Annotated Combined Code on Corporate Governance for Mutual Insurers (2008) specified for our review by the Association of Mutual Insurers. We have nothing to report in respect of this review.

David Roper (Senior Statutory Auditor)

For and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Birmingham 30 March 2010

Consolidated Profit and Loss AccountFor the year ended 31 December 2009

23

2009 2008 Note £,000 £,000

Technical Account – Long-term Business

Earned Premiums, Net of Reinsurance 3(a) Gross premiums written 175,709 194,521Outward reinsurance premiums (19,815) (20,653)

Net premiums written 155,894 173,868 Investment income 4 191,665 251,120 Unrealised gains on investments 4 214,754 - Other technical income 5(a) 7,107 7,598

Total Technical Income 569,420 432,586

Claims Incurred 6Claims paid – gross amount (199,642) (288,720) – reinsurers’ share 29,211 30,952

– net of reinsurance (170,431) (257,768)Change in provision for claims 3,086 5,690

(167,345) (252,078)

Change in other Technical Provisions 14Long-term business provision – gross amount (109,546) 259,343 – reinsurers’ share (11,476) (39,300)

Net change in technical provisions (121,022) 220,043

Net operating expenses 7 (46,135) (33,181)Investment expenses and charges 4 (2,747) (2,759)Unrealised losses on investments 4 - (800,669)Allocation of net investment return to investment contracts 14 (102,456) 191,823Other technical charges 5(b) - (18,202)Tax attributable to long-term business 9 (21,870) 33,352Change in value of in-force non-profit business 50,451 (30,196)Actuarial loss on pension scheme 22 (25,200) (21,800)Transfers (to)/from the Fund for Future Appropriations 13 (133,096) 281,081

(281,053) (400,551)

Total Technical Charges (569,420) (432,586)

Balance on the Technical Account – Long Term Business – –

The whole of the above results derive from continuing operations.

The Society has no recognised gains and losses other than those stated above and, therefore, no separate statement of total recognised gains and losses has been presented.

Balance Sheetsas at 31 December 2009

24

Group Society 2009 2008 2009 2008 Note £,000 £,000 £,000 £,000

Assets

InvestmentsLand and buildings 10 230,829 253,629 230,829 253,629Group undertakings and participating interests 19 - - 29,730 27,389Other financial investments 10 2,698,324 2,436,190 2,581,926 2,318,306

2,929,153 2,689,819 2,842,485 2,599,324

Value of in-force non-profit business 14 210,685 160,234 210,685 160,234

Assets held to cover liabilities on investment contracts 10 803,056 687,234 803,056 687,234

Reinsurers’ share of technical provisionsLong-term business provision 14 169,760 181,236 169,760 181,236Claims outstanding 1,279 874 1,279 874

171,039 182,110 171,039 182,110

DebtorsDebtors arising out of direct insurance operations – policyholders 2,598 3,107 2,598 3,107Debtors arising out of reinsurance operations 6,843 6,338 6,843 6,338 Deferred tax asset 11(a) 148 352 - -Other debtors 11(b) 7,052 10,778 7,109 17,372

16,641 20,575 16,550 26,817

Other assetsTangible fixed assets 12 13,407 13,516 13,407 13,516Cash at bank and in hand 12,366 24,132 5,372 18,111

25,773 37,648 18,779 31,627

Prepayments and Accrued IncomeAccrued interest and rent 24,152 26,218 24,152 26,218Other prepayments and accrued income 3,004 2,314 503 38

27,156 28,532 24,655 26,256

Total Assets (excluding pension asset) 4,183,503 3,806,152 4,087,249 3,713,602

Pension Asset 22 8,413 5,870 8,413 5,870

Total Assets (including pension asset) 4,191,916 3,812,022 4,095,662 3,719,472

The notes on Pages 26 to 66 form an integral part of these financial statements.

25

The notes on Pages 26 to 66 form an integral part of these financial statements.

The financial statements on Pages 23 to 66 were approved by the Board of Directors on 30 March 2010 and signed on its behalf by:

Lowry Maclean David Rutter Craig ErringtonChairman Vice-Chairman Chief Executive

Group Society

2009 2008 2009 2008 Note £,000 £,000 £,000 £,000

Liabilities Non-current liabilities:Fund for Future Appropriations 13 520,367 387,271 520,367 387,271

Technical ProvisionsLong-term business provision 14 2,682,580 2,573,034 2,682,580 2,573,034Claims outstanding 9,862 12,949 9,862 12,949

2,692,442 2,585,983 2,692,442 2,585,983

Liabilities on Investment Contracts 14 803,056 687,234 803,056 687,234

Provisions for other Risks and Charges 15 56,372 44,801 53,126 41,253

Derivative Financial Instrument 2 2,589 – 2,589 –

Current liabilities: CreditorsCreditors arising out of direct insurance operations 68 99 68 99Creditors arising out of reinsurance operations 540 529 540 529Other creditors including taxation and social security 16 17,332 14,951 17,607 10,598Customer bank accounts 2 84,364 74,764 – –

102,304 90,343 18,215 11,226

Accruals and Deferred Income 14,786 16,390 5,867 6,505

Total Liabilities 4,191,916 3,812,022 4,095,662 3,719,472

Balance Sheetsas at 31 December 2009

Notes to the AccountsFor the year ended 31 December 2009

26

1. Accounting PoliciesBasis of presentation and consolidationThe Group financial statements have been prepared under

the provision of the Large and Medium-sized Companies

and Groups (Accounts and Reports) Regulations 2008

(“SI2008/410”) relating to insurance groups and in accordance

with the Statement of Recommended Practice on Accounting

for Insurance Business issued by the Association of British

Insurers (‘the ABI SORP’) in December 2005 and as amended

in December 2006.

The financial statements have been prepared in the United

Kingdom in accordance with applicable accounting standards.

A summary of the more important Group accounting policies is

set out below, together with an explanation of where changes

have been made to previous policies on the adoption of new

accounting standards in the year. Compliance with Statement

of Standard Accounting Practice (SSAP) 19 “Accounting for

Investment Properties” requires departure from the requirements

of the Companies Act 2006 relating to depreciation and an

explanation of the departure is given in the accounting policy

note relating to investments.

The consolidated accounts include the assets, liabilities and

results of the Society and its subsidiary undertakings drawn

up to 31 December each year.

Classification of contractsThe Society classifies its products for accounting purposes

as insurance, investment or investment with discretionary

participation features. Insurance contracts are those contracts

that transfer significant insurance risk. Such contracts may also

transfer financial risk. Contracts that do not transfer significant

insurance risk are investment contracts. As a general guideline,

the Society defines significant insurance risk as the possibility

of having to pay benefits on the occurrence of an insured event

that are at least 10% more than the benefits payable if the

insured event did not occur.

A discretionary participation feature is a contractual right held

by a policyholder to receive additional payments as a supplement

to guaranteed benefits. Such contracts are more commonly

known as “with profits” or “participating” contracts and are

accounted for as insurance contracts. Hybrid contracts are

those where the policyholder can invest in and switch between

both unit-linked (non-participating) and unitised with profits

(participating) investment mediums at the same time. For

practical reasons certain hybrid contract types are treated as if

they were investment contracts with discretionary participation

features when accounting for premiums, claims and other

revenue.

Amounts received in respect of unit-linked investment contracts,

which principally involve the transfer of financial risk, are accounted

for using deposit accounting, under which amounts collected are

credited directly to the Balance Sheet, as an adjustment to the

liability to the policyholder. Financial liabilities in respect of

unit-linked investment contracts are carried in the Balance Sheet

as “Liabilities on Investment Contracts.”

(i) Insurance contracts and investment contracts with discretionary participating features (DPF) Premiums

Long-term business premium income is accounted for when

due for payment or, in the case of linked business, when the

liability is established.

Reinsurance

Outwards reinsurance premiums are accounted for in

accordance with the contract terms when due, reflecting the

period in which risk is transferred.

Claims

Death claims are accounted for on the basis of notifications

received. Disability claims are accounted for on the basis

of individual claim assessments. Maturities and annuity

payments are accounted for when due. Surrenders are

accounted for on the earlier of the date when paid or when

the policy ceases to be included within the long-term business

provision and/or the liabilities on investment contracts.

Claims include bonuses payable on with profits or

participating contracts. Claims payable include all related

internal and external claims handling costs. Reinsurance

recoveries are accounted for in the same period as the

related claim.

27

Liabilities The insurance risks have been unbundled from the

investment contracts and reserves continue to be provided

within the Long-Term Business Provision.

(ii) Investment contracts

As noted above, amounts received in respect of unit-linked

investment contracts, which principally involve the transfer

of financial risk, are accounted for using deposit accounting,

under which amounts collected are credited directly to the

Balance Sheet, as an adjustment to the liability to the

policyholder. Financial liabilities in respect of unit-linked

investment contracts are carried in the Balance Sheet as

“Liabilities on Investment Contracts”.

Fees receivable from investment contracts (included in

“Other technical income”) are recognised in the Profit and

Loss Account in the year they are assessed, unless they relate

to services to be provided in future years, in which case they

are deferred and recognised as the service is provided.

Investments

(i) Land and buildings

The valuation of land and buildings including those

occupied by the Society is determined by a professionally

qualified valuer, Charles Barratt, who is an employee of

Wesleyan Administration Services Limited and a Fellow of

the Royal Institution of Chartered Surveyors. This is normally

performed either annually or on a three-year rolling basis.

This year, in view of economic conditions, all properties

have been individually valued. The basis of valuation used

is open market value net of sales costs referenced to

comparable properties.

The Companies Act 2006 requires that land and buildings

be depreciated over their expected useful economic lives.

However, in accordance with SSAP 19, no depreciation

is provided on investment properties and the Directors

consider that this accounting policy is necessary for the

accounts to give a true and fair view. Depreciation is only

one of the factors reflected in the valuations, and the

amount that might otherwise have been shown cannot

reasonably be separately identified or quantified.

(ii) Investments in Group undertakings

In the Society’s Balance Sheet, investments in Group

undertakings are stated at fair value, based on the net

asset value of each individual subsidiary company.

(iii) Other financial investments

The Society classifies its financial assets into the

following categories:

– Shares and other variable-yield securities and units in

unit trusts – at fair value through profit or loss;

– Debt securities and other fixed-income securities –

at fair value through profit or loss;

– Deposits with credit institutions – loans and receivables

at fair value through profit or loss; and

– Loans to customers - at amortised cost.

Management determines the designation of its investments at

initial recognition and re-evaluates this at every reporting date.

Shares and other variable-yield securities and units in

unit trusts, and debt securities and other fixed interest

securities – at fair value through profit or loss –

are classified into this category at inception if they are

acquired principally for the purpose of selling in the short

term, if they form part of a portfolio of financial assets in

which there is evidence of short-term profit-taking, or if so

designated by management to minimise any measurement

or recognition inconsistency with the associated liabilities.

Financial assets designated as at fair value through profit

and loss at inception are those that are managed and whose

performance is evaluated on a fair value basis. Information

about these financial assets is provided internally on a fair

value basis to the Society’s key management personnel.

The Society’s investment strategy is to invest in listed

and unlisted equity securities and fixed interest rate debt

securities, and derivatives designated upon initial

recognition at fair value through profit or loss.

28

The fair values of listed investments are based on current bid

prices on the balance sheet date. Unlisted investments for

which a market exists are also stated at the current bid price

on the balance sheet date or the last trading day before the

date. The fair values of other unlisted investments, for which

no active market exists, are established by the Directors

using valuation techniques which have prudent regard to the

likely realisable value. These include use of recent arm’s

length transactions, reference to other instruments that are

substantially the same, discounted cash flow analysis and

other pricing models.

Net gains or losses arising from changes in the fair value

of financial assets at fair value through profit or loss are

presented in the Profit and Loss Account within “Unrealised

gains on investments” or “Unrealised losses on investments”

in the period in which they arise.

Unrealised gains and losses represent the difference

between the fair value of financial assets at the balance

sheet date and the original cost, or if they have been

previously valued, that valuation at the last balance sheet

date. The movement in unrealised gains and losses

recognised through profit and loss in the year also includes

the reversal of unrealised gains and losses recognised

in earlier accounting periods in respect of investment

disposals in the current period.

Deposits with credit institutions – loans and receivables –

are non-derivative financial assets with fixed or determinable

payments that are not quoted in an active market other than

those that the Society has designated as at fair value through

profit or loss. Receivables arising from insurance contracts

are also classified in the category and are reviewed for

impairment as part of the impairment review of loans and

receivables. This basis of valuation is viewed by the Directors

as having prudent regard to the likely realisable value.

(iv) Investment income and expenses

Dividends are recorded on the date on which the shares are

quoted ex-dividend. Other investment income and expenses

are included on an accruals basis.

(v) Investment gains and losses

Realised gains and losses on investments are calculated as

the difference between net sales proceeds and the original

cost/carrying value.

Derivative financial instruments Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at their fair value. Changes in the fair value are recognised immediately in the Profit and Loss Account. Fair values are obtained from quoted market prices in active markets, including recent market transactions and using valuation techniques, including discounted cash flow models and options pricing models, as appropriate. All derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. The best evidence of the fair value of a derivative at initial recognition is the transaction price (i.e. the fair value of the consideration given or received) unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (i.e. without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets.

Assets held to cover investment contracts Assets held to cover investment contracts reflect the terms of the related policies and are valued on a bid basis consistent with the related liabilities.

Impairment charge of credit losses Specific impairment provisions are made against advances by Wesleyan Bank Limited (“the Bank”) for which recovery is considered to be doubtful and represent the quantification of actual and expected losses. The amount of the specific impairment provision raised is assessed on a case by case basis. To cover impaired advances which have not yet been identified a collective impairment provision is made against the unsecured loan portfolio. This has been calculated at 1.3% of the outstanding loan balances. In accordance with best practice, the collective provision has been monitored against historic collection rates. The impairment charge for credit losses is deducted from loans and advances in the balance sheet. The impairment provisions made during the year are charged to the profit and loss account and impact on the Society’s results through the net asset value of the Bank as a wholly-owned subsidiary.

Loans are written off when there is no realistic prospect of recovery.

Notes to the Accounts continued

29

Tangible fixed assets The cost of tangible assets is their purchase cost, together with

any incidental costs of acquisition. Depreciation is calculated

so as to write off the cost of tangible assets on a straight-line

basis over the expected useful economic lives of the assets

concerned, having regard to expected residual values.

The periods generally applicable are:

– Computer equipment and software – 3 to 8 years

– Furniture and fittings – 10 years

– Motor vehicles – 3 years

Where, in the opinion of the Directors, there has been

impairment in the value of fixed assets to below their net

book value, additional depreciation is charged to reduce the

carrying value of the assets to their net realisable value.

Fund for Future Appropriations (FFA) The FFA is the excess of assets over the aggregate of policy

and other liabilities. It is the Society’s capital. Transfers to and

from the FFA reflect the excess or deficiency of income over

claims, expenses and tax and changes in the technical

provisions in each accounting period. A small proportion of

the FFA is for the future benefit of the policyholders in the

Medical Sickness Society Fund.

Long-term business provision

The long-term business provision is determined by the

Directors, having taken advice from the Chief Actuary following

his annual investigation of long-term insurance business.

(i) Insurance contracts and participating investment contracts

Insurance and participating investment contract liabilities are

determined annually in accordance with regulatory require-

ments. For with profits (participating) contracts, provision is

made for all bonus payments (declared and future, reversion-

ary and terminal) estimated, where necessary, in a manner

consistent with the Principles and Practices of Financial

Management. The liability includes an allowance for the time

and intrinsic value of options and guarantees granted to

policyholders and for possible future management actions.

The realistic liabilities are based on the aggregate value of

policy asset shares reflecting the premiums, investment

return, expenses and charges applied to each policy.

Allowance is also made for policy-related liabilities such as

guarantees, options and future bonuses, typically calculated

using a stochastic model simulating future investment returns,

asset mix and bonuses.

Pension costs The Group operates a defined benefit pension scheme, which was closed to new members with effect from 1 October 2009. The pension asset recognised in the Balance Sheet is the value of the scheme’s assets less the present value of the scheme’s liabilities. The pension cost for the scheme is analysed between current service cost, past service cost and net return on pension scheme. Current service cost is the actuarially calculated present value of the benefits earned by the active employees in each period. Past service costs, relating to employee service in prior periods arising in the current period as a result of the introduction of, or improvements to, retirement benefits, are recognised in the Profit and Loss Account on a straight-line

basis over the period in which the increased benefits vest.

Net expected return on the pension asset comprises the

expected return on the pension scheme assets less interest on

scheme liabilities.

The actuarial gains and losses which arise from a valuation

and from updating the latest actuarial valuation to reflect

conditions at the balance sheet date being directly attributable

to policyholders are taken to the technical account. They

are included as a separate line in the technical account for

long-term insurance business immediately above the line for

transfer to or from the Fund for Future Appropriations.

Value of in-force non-profit businessThe excess value of future profits from non-profit business

written by the Society over any value taken into account in

calculating the realistic liabilities for with profits business is

recognised as an asset, and allows for the repayment of

initial expenses incurred on this business that have not yet

been recouped.

The value assigned to this asset is calculated in accordance

with the FSA’s “realistic” liability regime. The methodology and

assumptions involve reasonable adjustments to reflect risk and

uncertainty, and are based on current estimates of future

experience and current market yields.

Reinsurers’ share of technical provisions

The reinsurers’ share of technical provisions is calculated

on a basis consistent with the calculation of the

corresponding liabilities.

30

In determining the realistic value of with profits liabilities the

value of non-profit business written in the With Profits fund

is accounted for as part of the calculation.

For conventional non-profit liabilities, a gross premium

valuation method is used, which brings into account the

full premiums receivable under contracts written by the

Society, estimated renewal and maintenance cost and

contractually guaranteed benefits.

The estimation techniques and assumptions are periodically

reviewed with any changes in estimates reflected in the Profit

and Loss Account as they occur.

(ii) Options and guarantees

Some with profits policies contain options and guarantees

that can increase the benefits payable to the policyholder.

As noted above, a market-consistent stochastic model is

used to determine the potential liability for these options

and guarantees. The most significant options and

guarantees are:

• Thesumassuredanddeclaredreversionarybonuses

on with profits policies;

• Withprofitsdeferredannuitypolicieswheretheannuity

is at a guaranteed rate;

• Withprofitspolicieswithminimumsurrendervalues;and

• Unitisedwithprofitspoliciescontainingguarantees

that market value adjustments will not be applied at

specified times.

Liabilities on investment contractsThe financial liabilities for these contracts are designated at

inception at fair value through profit or loss. The fair value of

a unit-linked financial liability is determined using the current

unit values that reflect the fair values of the financial assets

contained within the Society’s unitised investment funds linked

to the financial liability, multiplied by the number of units

attributed to the contract holder at the balance sheet date.

If the investment contract is subject to a surrender option, the

fair value of the financial liability is never less than the amount

payable on surrender, discounted for the required notice

period, where applicable.

Deferred taxation

Deferred tax assets and liabilities are recognised in accordance with provisions of FRS 19 “Deferred Tax”. The Society has chosen to apply the option available under FRS 19 of recognising certain assets and liabilities on a discounted basis to reflect the time value of money. The discount rates used are the post-tax yields to maturity that could be obtained at the balance sheet date on government bonds with maturity dates similar to those of the deferred tax assets or liabilities. Except as set out in FRS 19, deferred tax is recognised in respect of all timing differences that have originated but not reversed by the balance sheet date. Deferred tax on changes in the fair value of investments is recognised in the Profit and Loss Account. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered. Deferred tax relating to unrealised gains on linked assets is included in the technical provisions for linked liabilities. Provisions A provision is recognised in the Balance Sheet when there is a legal or constructive obligation as a result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. No provision is established where a reliable estimate of the obligation cannot be made. Leases Finance leasing agreements transfer to the Group substantially all the benefits and risks of ownership of an asset. Accordingly they are treated as if the asset had been purchased outright. Payments in respect of operating leases are charged to the Profit and Loss Account in the period to which they relate. Appropriate provisions are held when operating leases are considered to be onerous contracts (as defined under FRS 12 “Provisions, contingent liabilities and contingent assets”). Foreign currencies Foreign currency assets and liabilities are translated at year-end exchange rates and foreign currency revenue transactions are translated at the appropriate rates prevailing during the year. Segmental reporting In the opinion of the Directors, the Group operates in one

business segment.


31

2. Risk Management General As the Society is a mutual life assurer, details of the

management of all risks are set out in the PPFMs for each

fund, which are available on the Society’s website. The following

is a summary of the Society’s more detailed risk policies.

Risks are managed on the basis that the Group is an

integrated entity.

Each year, the Board sets the Society’s risk appetite. This is

an overall assessment of the degree of risk to which it is willing

to be exposed. Any new exposure is considered before being

accepted in the light of this risk appetite.

The most significant risk facing the Society is considered to be

market risk. The Society’s capital is actively managed and

equity option contracts are currently used to provide protection

of the Society’s capital from significant market falls.

With profits insurance and investment contracts and the Fund for

Future Appropriations in the Ordinary and Industrial Long-Term

Business Fund (OILTBF) are exposed to the risks arising from

the operation of long-term insurance itself. In the event that the

Medical Sickness Society Fund (MSSF) was unable to pay its

guaranteed liabilities, support would be provided by the OILTBF.

Derivatives are used in MSSF to reduce exposure to fluctuations

in interest rates. The principal derivatives currently used for this

purpose are interest rate swaptions.

Market risk

(i) Overview

Market risk is the risk that the fair value of, or future cash

flows from the Society’s assets and liabilities fluctuate

because of changes in market prices. The key components

of market risk are interest rate risk, currency risk and

equity risk. Investments are split into the Non-Profit Pool

and the With Profits Pool, the overall strategies for which

are as follows:

(a) The Non-Profit Pool is established by matching specific

fixed interest assets to the non-profit liabilities; and

(b) The overall investment strategy of the With Profits Pool

is to maximise the investment return achieved by the

assets allowing for income and capital growth and the

effects of taxation. This is subject to an acceptable level

of risk and any actuarial constraints.

The investment strategy may also be constrained by the need to treat policyholders fairly which includes striking the right balance between achieving good returns for policyholders and maintaining solvency. Separate investment strategies are therefore maintained for the assets backing policy asset shares and for the rest of the assets in the With Profits Pool, some of which back other liabilities such as guarantees and options. The With Profits Pool includes some assets which would not normally be traded, including the Head Office building and the investments in subsidiary companies. The Chief Actuary carries out investigations to explore the financial impact of a range of market stresses and reports them annually in the Financial Condition Report and through the Individual Capital Assessment. The separate responsibilities of the Board and Investment Committee are set out in the Corporate Governance Statement.

(ii) Interest rate risk Interest rate risk arises primarily from investments in fixed interest securities. Both claims costs and liabilities to policyholders are exposed to interest rate risk. Similarly, insurance and non-profit investment contracts have benefit payments that are fixed and guaranteed at the inception of the contract. Fair value interest rate risk is the risk that the fair value of a financial instrument will vary as market rates of interest vary. For example, an increase in market rates of interest decreases the market value of a fixed interest asset. Movements in the fair value of fixed interest assets are broadly matched by an equivalent movement in the related policyholder liabilities. Fixed interest investments are held principally for the fixed stream of income that they provide, which is matched to the expected cash outflows arising from the guaranteed policy payments of certain of the Society’s non-linked liabilities. This is discussed further below. Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. For example, an increase in the level of market rates of interest will increase the level of income received on floating rate investments. By contrast, the cash flows arising from fixed interest rate investments are unaffected by changes in market rates of interest. The Society’s exposure to cash flow interest rate risk principally arises from the outflows required to meet

32


guaranteed policy payments which are fixed and, therefore, are not affected by changes in market rates of interest. One method that could be used to mitigate this risk would be to back these guaranteed cash outflows as closely as possible with fixed interest assets giving equivalent cash inflows. This method is used for certain product types. However, backing all policy guarantees with fixed interest assets would restrict the Society’s investment choices and prevent the Society investing in other asset classes, which may be expected to provide higher investment returns over the longer term. Therefore, for most product types, including all with profits contracts, the Society seeks to partially match the guaranteed payments with fixed interest bearing assets. The remaining outflow is backed by other assets, principally equities.

(iii) Currency risk Currency risk is defined as the risk that the value of an asset or liability will change as a result of a change in foreign exchange rates. As the Society operates in the UK its liabilities are denominated in sterling. However, for invested assets, the Society’s investment management policies and procedures allow for an exposure to overseas markets, via both equities, fixed interest securities and foreign currency. The resulting currency risk is managed by the use of exposure limits and authorisation controls operated within the risk management framework outlined above. Of the £280.2m (2008: £257.0m) non linked assets held in other currencies, £70.9m (2008: £76.9m) is held in US denominated assets, £122.2m (2008:£121.8m) is held in Euro-denominated assets, £52.8m (2008: £35.2m) in Far Eastern assets and £34.3m (2008: £23.1m) in assets denominated in other currencies.

(iv) Equity risk The Society is exposed to price risk as a result of its holdings in equity investments, classified as financial assets at fair value through profit or loss. Exposures to individual companies and to equity securities in aggregate are monitored in order to ensure compliance with the relevant regulatory limits for solvency purposes. Investments held are listed and traded on the UK and other recognised Stock Exchanges (primarily in Europe and North America). The Society has a defined investment policy which sets limits on the Society’s exposure to equities both in

aggregate terms and by geography, industry and counterparty.

This policy of diversification is used to manage the Society’s

price risk arising from its investments in equity securities.

Sensitivity analysis for equity risk is undertaken to illustrate

how changes in the fair value of equity securities will

fluctuate because of changes to market prices, whether

those changes are caused by factors specific to the

individual equity issuer or factors affecting all similar equity

securities traded in the market.

Further information is provided within Note 13.

Insurance risk

(i) Overview

Insurance risk refers to the fluctuations in the timing,

frequency and severity of insured events, relative to the

expectations of the Society at the time of underwriting.

The exposure of the Society depends to a significant extent

on the value of claims to be paid in the future, relative to the

assets accumulated to the date of claim. The amount of such

future obligations is assessed by reference to assumptions

with regard to future mortality and/or morbidity rates,

persistency rates, expenses, investment returns, interest

rates and tax rates. Sensitivity to the main assumptions

underlying insurance risk can be seen in note 14.

The Board, having taken advice from the Chief Actuary,

sets limits on business volumes, including the maximum

volumes of specific products with particular risks.

The risks are monitored through the Individual Capital

Assessment as defined in the Corporate Governance

Statement on Pages 10 to 17.

(ii) Overview of insurance and investment contracts issued by the Society

The level of insurance and financial risk assumed by the

Society varies with the type of business written. Additional

risks also arise from the financial options and guarantees

within contracts. The main insurance and investment

contract types and an overview of the financial options and

guarantees are set out below.

With profits insurance and investment contracts

Key terms and conditions

With profits endowment assurance and deferred annuity

contracts (including both conventional and unitised with

profits policies) contain a guaranteed benefit on maturity,

death or surrender at certain specified dates.

This guaranteed benefit may be increased by the addition

of annual bonuses and a final bonus may also be applied

when the policy becomes a claim. The Society can vary the

amount of future bonuses paid, including reducing future

bonus additions to zero, although some mortgage

33

endowment policies contain a guarantee that the maturity

value will not be less than the original mortgage amount. The

Society also has contractual discretion to vary the amount

payable on early surrender of the contract. The setting of

bonus rates and surrender terms are subject to the Society’s

PPFM. All discretionary actions must be consistent with the

overriding principle that customers be treated fairly.

Key risk factors

• Mortality:

The guaranteed payments on death generally exceed the

value of the assets held to back the policy, giving rise to

mortality risk. Assumptions regarding the rate of

mortality are taken into account when determining the

bonus payments to be added to with profits contracts.

The level of these bonus additions can be varied to

mitigate differences between expected and actual

mortality experience. With profits deferred annuity

contracts are also subject to longevity risk (see the

section ‘Non-participating insurance contracts –

Non-profit annuities’ for an explanation of this risk).

• Guarantees: With profits contracts are subject to the risk that the market value of assets held to back the liabilities is depressed at the time that the guaranteed payments specified in the contract fall due to be paid. The Society’s contractual right to vary future bonus additions can mitigate this risk. This is considered further below.

• Persistencyandexpenses: The most significant costs associated with writing insurance contracts are the commission and other costs incurred to acquire the policy. These expenses, together with the ongoing costs of maintenance, are recovered over the policy’s lifetime. If the policy is terminated early, the expense deductions made to the point of termination may be less than the costs incurred. This risk is mitigated by the Society’s contractual ability to vary the amount payable on surrender. The Society also controls its maintenance expenses on an ongoing basis, and the Society’s right to vary future bonus additions can be used to mitigate this risk.

Non-participating insurance contracts – Protection contracts Key terms and conditions These policies contain a guaranteed payment on death or disability or illness depending on the terms of the contract. Protection contracts may also be attached to with profits or unit-linked policies. For most policies the level of benefits payable is determined at the start of the contract and hence the ability of the Society to reduce the level of insurance risk accepted by varying terms and conditions may be limited. However, many contracts include a premium review clause and for some contracts the policyholder has the option to reduce benefits in lieu of a premium increase.

Key risk factors

• Mortalityandmorbidity: The Society has mitigated these risks principally through varying the premium rates charged and through the use of reinsurance to transfer part of the mortality and morbidity risk to third-party reinsurers.

• Persistencyandexpenses: The Society mitigates these risks by ensuring that the premium rates charged are both competitive for the

protection provided and are sufficient to meet expenses.

Non-participating insurance contracts – Non-profit annuities Key terms and conditions

For non-profit annuities, the level of annuity payments is

determined at the start of the contract and these payments

continue until the death of the annuitant and in certain cases

the later death of their dependants. Hence the ability of the

Society to reduce the level of insurance risk accepted by

varying terms and conditions is limited.

Key risk factors

• Longevity:

The contractual stream of payments made until the death

of the annuitant gives rise to longevity risk. An increase in

life expectancy will increase the payments that have to be

made. The ability of the Society to reduce the level of

insurance risk accepted is limited. However, the Society

seeks to reduce cash flow interest rate risk by matching the

expected cash outflows from the annuities with cash

inflows from its fixed interest investments.

34

Non-participating investment contracts – Unit-linked policies Key terms and conditions For unit-linked investment business most of the risks (particularly market and credit risk) are borne by the policyholders. The principal benefit payable is the value of the underlying assets and therefore the Society generally has the ability to apply penalties on early surrender or early cessation of regular premiums. The ability to increase charges or apply penalties may be constrained by regulatory or market pressures and by the obligation to treat customers fairly.

Key risk factors • Persistencyandexpenses:

Acquisition and maintenance costs are recovered by management charges deducted over the policy’s lifetime. If the policy is terminated early, the expense deductions made to the point of termination may be less than the costs incurred. Expenses may also exceed expense deductions for continuing policies. These risks are mitigated by the Society’s ability to increase charges or apply penalties on early surrender. The Society also controls its maintenance expenses on an ongoing basis.

(iii) Financial options and guarantees within insurance contracts Contracts issued by the Society have three principal types of financial option and guarantee:

• Guaranteed lump-sum payments due on specified dates These mainly comprise the sum assured together with annual bonuses added onto with profits contracts, the option to surrender certain unitised with profits bonds on specified dates without a market value reduction (MVR) applying, and the guarantee that an MVR will not be applied at the planned retirement date under unitised with profits pension policies. Although the Society invests in a broad spread of asset types, there is still a risk that assets held to back any individual policy may be depressed at the time that the guaranteed payment at maturity falls due to be paid. The potential cost of honouring these guarantees is quantified as part of the liability for with profits contracts.

• Guaranteed annuities These primarily arise in connection with pension business and occur in one of two forms:

– a guaranteed income specified in the contract

– guaranteed terms for converting lump-sum maturity benefits into an income at maturity.

These guarantees expose the Society to both insurance risk (longevity) and financial risk (cash flow interest rate). An increase in life expectancy will increase the liability arising under the guarantees as it extends the period over which the guaranteed rate must be paid. A reduction in market

interest rates (or an increase in the volatility of interest rates) also increases the liability as it results in an increase in the gap (or the risk of a gap) between the future expected cash inflows from the Society’s assets and the outflows from the guarantees, which remain fixed. For the MSSF the financial risk is mitigated by the portfolio of swaptions (interest rate derivatives).

• Guaranteed investment return Some pension policies in the MSSF provide a minimum invest-ment return, and there is a risk that assets held to back any individual policy may be insufficient to meet this guarantee at the time that the maturity payment falls due to be paid.

The costs of financial options and guarantees are measured using a market-consistent stochastic model, and the management of the risks associated with these forms part of the Group’s overall Capital Management strategy as set out in Note 13.

(iv) Concentrations of insurance risk Note 14 shows the value of liabilities held by the Group and the Society, and the impact on those liabilities of changes in key assumptions and the sensitivity of the liabilities to those assumptions. These tables demonstrate the concentration of insurance risk accepted and the exposure of the Group and Society to the major factors underlying insurance risk.

Credit risk Credit risk is the risk of loss if another party fails to fulfil its financial obligations to the Society. The main credit risks arise in relation to some types of investment such as corporate bonds, and the risk of failure of a reinsurer. The processes for the management of market risk in the Society also apply to credit risk in respect of cash, deposits and fixed interest securities. The Board receives specific reports comparing the position to the Board-approved limits so that its oversight role can be fulfilled. The Society’s wholly owned subsidiary, Wesleyan Bank Limited, offers unsecured personal loans to existing medical, dental, teaching and legal clients of the Society. All loans are subject to credit scoring guidelines. This calculates the level of risk for each applicant based on the information obtained. If the level of acceptable risk is exceeded the application is not accepted. Stringent control measures and procedures are in place to monitor bad debt levels and recovery. The level and occurrences of bad and doubtful debts are monitored daily and reported on a monthly basis to the Board of Wesleyan Bank Limited. No specific limits have been set on exposure to reinsurer risk. Where possible, new reinsurance should be diversified to avoid over-concentration on a single reinsurer. The Chief Actuary monitors the risk with reports to the Board as required.


35

Other than risk of failure of a reinsurer, the Society’s exposure to credit risk arises principally from its investment portfolio and from its holdings in equities, bonds and cash in particular. The investment policies and procedures stipulate approved counterparties, permitted investments and exchanges as well as detailing specific counterparty ratings and exposure limits. For derivatives, the policy also details legal, collateral and valuation requirements. Significant counterparty exposure, in the case of derivatives, is mitigated by the use of collateral and at 31 December 2009 the Society’s custodians held collateral represented by AAA-rated assets valued at £19.6m (2008: £80.4m). Other areas where the Society is exposed to credit risk include amounts due from intermediaries and insurance contract holders. An analysis of the risk profile of the Group’s credit assets is provided in the table on Page 43.

There is no significant difference between the credit risk profile of the Society’s and the Group’s assets and, therefore, no separate table has been prepared for the Society-only position.

Fair Value

FRS 29 ‘Financial Instruments Disclosure’ (Amendment) requires enhanced disclosures about fair value measurement and liquidity risk.

The Society has adopted the amendment to FRS 29 with effect from 1 January 2009.

(a) FRS 29 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources; unobservable inputs reflect the Group’s market assumptions. These two types of inputs have created the following fair value hierarchy:

• Level1–Quotedprices(unadjusted)inactivemarketsforidentical assets or liabilities. This level includes listed equity securities and debt instruments on exchanges (e.g, London Stock Exchange, Frankfurt Stock Exchange, New York Stock Exchange) and exchange traded derivatives such as futures and options.

• Level2–InputsotherthanquotedpricesincludedwithinLevel 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). This level includes the majority of the OTC derivative contracts, traded loans and issued structured debt. The sources of input parameters such as LIBOR yield curve or counterparty credit risk are Bloomberg and Reuters.

• Level3–Inputsfortheassetorliabilitythatarenotbasedon observable market data (unobservable inputs). This level includes equity investments and debt instruments with significant unobservable components.

This hierarchy requires the use of observable market data when available. The Group considers relevant and observable market

prices in its valuations where possible.

Derivative

Equity collar (Note below) - 2,589 - 2,589

TOTAL LIABILITIES - 2,589 - 2,589

Level 1 £,000

Level 2 £,000

Level 3 £,000

Total

£,000

Financial Assets designated at fair value

Shares and other variable yield securities 1,624,381 - 252 1,624,633

Debt and other fixed income securities 717,438 - 2,235 719,673

Deposits with credit institutions - 282,529 - 282,529

Derivatives

Swaptions - 23,653 - 23,653

Equity put option - 105 - 105

TOTAL ASSETS 2,341,819 306,287 2,487 2,650,593

Financial Assets at fair value through profit and loss

At 31 December 2009

Note: A zero cost ‘cap and collar’ derivative financial instrument was purchased through the Royal Bank of Scotland plc in December 2009 based on a notional value of £100m of equities in the FTSE 100 index - the instrument’s expiry date is in March 2015. The instrument has been fairly valued at the year end with any movement in its value accounted for in the Profit and Loss account.

Financial Liabilities at fair value through profit and loss

36

Liquidity risk

Liquidity risk is the risk that adequate liquid funds are not available to settle liabilities as they fall due. The Society’s liquidity risk in normal circumstances is limited. The level of liquidity is monitored from day to day with available funds held at levels considered appropriate to meet anticipated liabilities and unexpected levels of demand. Due to the nature of the Society’s investment and with-profits insurance contracts the Directors consider that the contractual terms do not fairly represent the liquidity risk to the business, as these are repayable on demand by the policyholders without notice. In the case of annuity and protection contracts there are no contractual maturity dates. Of the customer bank accounts totalling £84.4m (2008: £74.8m), £52.9m (2008: £59.3m) is repayable on demand and a further £13.9m (2008: £7.8m) is repayable within one year. Details of the derivative financial instrument is disclosed on Page 35 and has a contractual maturity of 5 years. Approximately £3.5bn (2008: £3.1bn) of the Group’s assets are either highly liquid or readily realisable and therefore available to support the Group’s liabilities at limited notice. Having considered the above, the Directors believe that a maturity analysis of the contractual maturities of the Society’s financial liabilities, as required by Paragraph 39 of FRS 29 would be misleading.

Operational risk Operational risk is the risk of loss resulting from inadequate or failed processes, people and systems or from external events Wesleyan Bank Limited (the Bank) has approved a specific policy as regards its operations which is disclosed in its financial statements as follows: “Operational Risk: It is the policy of the Bank to protect its staff, customers, and its own reputation and assets from physical risk and financial loss through fraud or avoidable error. The Bank maintains a strong culture. The Bank’s policies and procedures are designed to prevent irregularities arising from human error or misconduct, systems failure or inadequate procedure and controls. In addition the Bank has in place a business disaster recovery plan.” The MSSF is operated in accordance with the merger Scheme and is only exposed to risks arising from policies in MSSF itself. The OILTBF is exposed to the business risks of subsidiary companies as well as the business risks arising from the operation of long-term insurance itself. The Board decides whether to undertake a particular business risk and has the responsibility for reviewing and setting a limit on the scale of such risks. Where appropriate, limits will be set for individual risks. It is also exposed to risks arising from weaknesses in internal controls over operations and costs in excess of those allowed for in premium rates. The Society undertakes a thorough risk assessment and management process each year as described in the Corporate Governance Statement.


Total

Equity Securities £,000

Debt Securities £,000

£,000

At 1 January 2009 252 2,017 2,269

Transfers into Level 3 - 218 218

At 31 December 2009 252 2,235 2,487

(b) Reconciliation of Level 3 Items

Financial assets at fair value through profit and loss

Debt securities have been valued by discounting future cash flows, using rates of discount in the range 9-12%. No stock has been valued above par and any stock in arrears has been valued at £nil.

The Society holds 2 unquoted equities with a total value of £0.25m, in one case (£0.04m) at half net asset value and in the other case (£0.21m) at a discount to the take out price offered by the company in 2009.

There were no gains or losses included in the profit or loss. Of the total of £2.2m for debt securities at 31 December 2009 £2.0m relates to a single unquoted fixed interest stock with an interest rate of 9.3% per annum. This stock is redeemable in 2017 with the rate of interest payable increasing by 1% if the stock is not redeemed in 2012. Given the information and the relative immateriality of the amounts involved no sensitivity of Level 3 measurements to reasonably possible alternative assumptions has been undertaken.

Financial Assets Designated at Fair Value

2009 2008

£,000 £,000

Life – regular 5,379 6,485Life – single 2,567 1,700Pension – regular 32,646 30,172Pension – single 14,484 20,772Income Protection – regular 3,203 3,255

58,279 62,384

37

3(a). Earned Premiums

The premiums received for investment contracts and therefore omitted from the above figures were as follows:

2009 2008

Gross Reinsurance Net Gross Reinsurance Net

£,000 £,000 £,000 £,000 £,000 £,000

Earned Premiums – Society

Premiums written Life ordinary business Non-linked regular 14,141 (2,143) 11,998 17,050 (2,054) 14,996Non-linked single 56,109 - 56,109 80,769 - 80,769

70,250 (2,143) 68,107 97,819 (2,054) 95,765

Pension business Non-linked regular 15,983 (2) 15,981 18,585 (2) 18,583Non-linked single 7,649 - 7,649 6,853 - 6,853

23,632 (2) 23,630 25,438 (2) 25,436Industrial business Non-linked regular 1,182 - 1,182 1,426 - 1,426

Income Protection Insurance Non-linked regular 49,570 (17,670) 31,900 49,250 (18,597) 30,653

With Profits ISARegular 7,484 - 7,484 4,453 - 4,453Single 23,591 - 23,591 16,135 - 16,135

31,075 - 31,075 20,588 - 20,588

175,709 (19,815) 155,894 194,521 (20,653) 173,868

38

3(b). New Business Premiums

2009 2008 £,000 £,000

Regular premiums 17,241 11,766

Single premiums 13,429 15,859

30,670 27,625

Life ordinary business 7,866 9,064 Pension business 6,874 6,447 Income protection insurance 3,844 2,834 ISAs/Unit trusts* 8,692 5,455

27,276 23,800

Annuities** 3,394 3,825

30,670 27,625

* Represents the APE of investments in the Society’s With Profits ISA and in the unit trusts managed by its subsidiary company, Wesleyan Unit Trust Managers Limited.

** The annuities amount represents the pension funds retained by the Society on the vesting of pensions during the year.

The above is stated in terms of Annual Premium Equivalent (APE), being twelve months’ premium for regular business plus 10% of single premiums.

In classifying new business premiums, the following bases of recognition have been adopted: - Recurrent single premium contracts are included as new business single premiums. - Increments under existing group pension schemes are classified as new business premiums.

Where regular premiums are received other than annually, the reported regular new business premiums are on an annualised basis.


2009 2008

£,000 £,000

Regular 3,547 1,787Single 1,705 2,247

5,252 4,034

Life ordinary business 513 219Pension business 4,739 3,815

5,252 4,034

As set out in note 3(a), the Society does not account for the amount received as premiums in relation to investment contracts as premium income in the consolidated profit and loss account; such amounts are accounted for as deposits received and added to the investment contract liabilities in the balance sheet. The amounts included above in respect of investment contract new business are as follows:

39

3(c). Reassurance

4. Investment Activity Account

2009 2008

£,000 £,000

Investment income:Income from land and buildings 21,600 22,104Income from other investments 120,191 153,923Net gains on the realisation of investments 49,274 71,693 Net return on pension schemes (Note 22) 600 3,400

191,665 251,120

Investment expenses (2,185) (2,338)Investment charges (562) (421)Net unrealised gains/(losses) on investments 214,754 (800,669)

Investment return 403,672 (552,308)

5(a). Other Technical Income

2009 2008

£,000 £,000

Net profit from non-insurance subsidiaries 346 -Other commissions 560 826Fee income in respect of investment contracts 6,201 6,772

7,107 7,598

5(b). Other Technical Charges

2009 2008

£,000 £,000

Net loss from non-insurance subsidiaries - (18,202)

The reassurance balance amounted to a charge to the Technical Account - Long-term Business at 31 December 2009 of £6.6m (2008: a charge of £21.9m).

40

6. Claims Incurred

2009 2008

Gross Reinsurance Net Gross Reinsurance Net

£,000 £,000 £,000 £,000 £,000 £,000

Claims paid 197,461 (29,211) 168,250 286,221 (30,952) 255,269Claims handling expenses 2,181 - 2,181 2,499 - 2,499

199,642 (29,211) 170,431 288,720 (30,952) 257,768

Change in provision for claims (3,086) - (3,086) (5,690) - (5,690)

196,556 (29,211) 167,345 283,030 (30,952) 252,078

Analysed by type of benefit:Death claims 12,670 18,763 Maturities 58,176 101,436Surrenders 43,456 83,515Annuities 41,036 36,557Income protection claims 12,007 11,807

167,345 252,078

Notes to the Accounts cont.

Claims relating to linked investment business and therefore omitted from the figures for claims incurred were as follows:

2009 2008

£,000 £,000

Death claims 2,022 1,883Maturities 5,001 2,519Surrenders 31,689 40,581

38,712 44,983

7. Net Operating Expenses

2009 2008

£,000 £,000

Acquisition costs 21,745 23,572

Administrative expenses* 29,359 10,709

Exceptional costs** 3,802 5,595

Reassurance commission (4,097) (2,585)

Reassurance profit share (4,674) (4,110)

46,135 33,181

* Administrative expenses include a fee of £17.5m (2008: £nil) payable to the group distribution company to cover inforce policy servicing costs. This fee has been reflected in the net asset value of Wesleyan Financial Services Limited.

** Exceptional costs represent the implementation costs in the year of the Society’s strategy.

Auditors’ remuneration (including expenses) amounted to:

Audit fees – Society 119 115

Audit fee – other Group entities 97 90

Regulatory compliance 292 230

Taxation compliance 81 36

Taxation advice 83 159

Other fees 14 14

Administrative expenses for the Society also include:

Contract purchase finance charges – motor vehicles 837 371

Operating lease rentals – land and buildings 646 545

Depreciation of tangible assets 3,714 3,567

41

42


9. Taxation - Society only

2009 2008

£,000 £,000

Analysis of tax in the year: Current tax: UK corporation tax on income and gains (6,172) (5,431) Group relief receivable (2,761) -Foreign tax (1,109) (1,145)Adjustments in respect of previous years 301 (524)

Total current tax (9,741) (7,100)

Deferred tax: Origination and reversal of timing differences (11,590) 43,963Decrease in discount (283) (4,488)

Total deferred tax (Note 15) (11,873) 39,475

Movement on deferred tax on pension scheme (256) 977

(Charge)/credit for taxation – Society (21,870) 33,352

The tax charge for UK corporation tax is provided at rates between 20% and 28% (2008: 20% and 28.5%) computed in accordance with the rates applicable to life assurance companies whereby no tax is charged on pension business profits.

8. Staff Costs – Group

2009 2008

£,000 £,000

Salaries and wages 36,909 36,484Social security costs 3,600 3,426Pension cost charge (note 22) 6,307 4,567

46,816 44,477

The monthly average number of employees, including executive 2009 2008 directors, during the year was comprised as follows: Number NumberSales 340 289Administration 588 582

928 871

Note: Details of Directors’ Remuneration are given in the Directors’ Remuneration Report on Pages 15 to 17.

43

10. Investments

2009 £m

Non-linked assets subject to credit risk:

AAA 748.6 823.5

AA 46.0 61.5

A 150.4 121.9

BBB 41.9 30.8

Below BBB or not rated 50.5 31.7

Total assets bearing credit risk 1,037.4 1,069.4

Derivative financial instruments 23.8 85.6

Debt securities 1,013.6 983.8

Total assets bearing credit risk 1,037.4 1,069.4

2009 £m

2008 £m

Current Value Cost

2009 2008 2009 2008 £,000 £,000 £,000 £,000

Land and buildings: – Group and Society Freehold properties occupied by the Society 25,590 29,880 29,915 29,780Other freehold properties 188,339 203,644 117,079 117,936Long leasehold properties 16,900 20,105 14,605 14,605

230,829 253,629 161,599 162,321

Other financial investments: – Group Shares and other variable yield securities 1,624,633 1,396,121 734,800 724,046Debt and other fixed income securities 719,673 690,902 677,313 652,699Swaptions 23,653 85,598 20,648 30,038 Equity put option 105 - 15,520 -Loans secured by mortgage 51 51 51 51Other loans* 47,680 32,484 47,680 32,484Deposits with credit institutions 282,529 231,034 271,898 211,096

2,698,324 2,436,190 1,767,910 1,650,414

Other financial investments: – Society Shares and other variable yield securities 1,624,633 1,396,121 734,800 724,046Debt and other fixed income securities 717,574 689,114 675,214 650,911Swaptions 23,653 85,598 20,648 30,038 Equity put option 105 - 15,520 -Loans secured by mortgage 51 51 51 51Other loans 44 37 44 37Deposits with credit institutions 215,866 147,385 205,235 127,447

2,581,926 2,318,306 1,651,512 1,532,530

Other loans include loans secured on policies issued by the Society amounting to £2.1m (2008: £2.4m).The value of unlisted investments included in shares and other variable yield securities and debt and other fixed incomesecurities for the Group and Society amounted to £2.5m (2008: £2.3m).The cost of assets held to cover linked liabilities amounted to £633.3m (2008: £606.0m). The market value of these assets amounted to £803.1m (2008: £687.2m).

* Apart from £44,000, Other Loans represent unsecured loans issued to customers by Wesleyan Bank Limited.

44

12. Tangible Fixed Assets – Group and Society


11(b). Other Debtors Group Society

2009 2008 2009 2008 £,000 £,000 £,000 £,000

Amounts owed by subsidiary undertakings - - 388 6,561Other debtors 7,052 10,778 6,721 10,811

7,052 10,778 7,109 17,372

11(a). Deferred Tax Asset Group Society

2009 2008 2009 2008 £,000 £,000 £,000 £,000

As at 1 January 2009 - - - - Credited during the year 148 352 - - As at 31 December 2009 148 352 - -

Analysed as follows: Timing differences 148 64 - - Losses on ordinary activities in subsidiary companies - 288 - -

148 352 - -

Total Computer Furniture and Motor Equipment Fittings Vehicles and Software £,000 £,000 £,000 £,000

Cost

At 1 January 2009 26,958 18,926 2,288 5,744Additions 3,867 832 517 2,518Disposals (1,214) (1,214) - -

At 31 December 2009 29,611 18,544 2,805 8,262

Accumulated Depreciation

At 1 January 2009 13,442 11,821 518 1,103 Charge during the year 3,714 2,568 303 843Disposals (952) (952) - -

At 31 December 2009 16,204 13,437 821 1,946

net book amount

At 31 December 2009 13,407 5,107 1,984 6,316

At 31 December 2008 13,516 7,105 1,770 4,641

The cost of motor vehicles held under contract purchase agreements amounted to £8.2m (2008: £5.7m). The aggregate depreciation of these assets amounted to £1.9m (2008: £1.0m).

The Society’s wholly-owned subsidiary company, Wesleyan Financial Services Limited, has tax losses that it does not expect to be able to utilise in the foreseeable future. The tax effect of these losses, if they were recognised, would be £2.7m (2008: £5.0m).

13. Fund for Future Appropriations and Capital Management

2009 2008 £,000 £,000

At 1 January 387,271 668,352

Transfer from/(to) Profit and Loss Account 133,096 (281,081)

At 31 December * 520,367 387,271

*Includes the General Business Fund in the amount of £2.7m (2008:£2.7m) referred to in note 21.

Capital Management(i) Overview In reporting the Society’s financial strength, capital and

solvency are measured using the regulations prescribed by the FSA. These regulations include a number of “regulatory” and “realistic” capital tests, as described below. The Society is able to meet all of these capital requirements and has significant resources and financial strength.

(ii) Capital management policies and objectives The Society’s main objectives in managing its estate (which

represents its capital) are:

• Tomeetregulatorycapitalrequirements; • Tosupportthewritingofnewbusiness; • Tomaintaininvestmentfreedom; • Tosmoothpayoutstowithprofitspolicyholders;and • Toprovidefinanceforbusinessdevelopments.

(iii) Restrictions on available capital resources The Society is required to hold sufficient capital to meet the

FSA’s capital requirements.

Pillar 1: The pillar 1 capital requirement is reported in the publicly

available FSA Return. Under the FSA’s realistic reporting regime, the pillar 1 capital requirement for with profits business is determined using the “twin peaks” approach, such that the capital resources must be sufficient to cover the greater of regulatory and realistic liability and capital requirements. The realistic capital requirement is broadly equivalent to the capital needed by an “average” life insurance company with good risk controls, to cover adverse experience likely to occur once in every two hundred years. For non-profit business, the capital requirement is calculated on the regulatory basis, which is based on EU Directives.

Pillar 2: The pillar 2 capital requirement is based on the Society’s

Individual Capital Assessment (ICA), which is reported privately to the FSA. It is broadly equivalent to the capital needed to cover the Society’s actual portfolio of risks at the same ‘one in two hundred year’ risk level, but having regard to the Society’s own risk controls. The Board uses this as the basis for its Capital Management.

(iv) Available Capital Resources The Society has two with profits funds, the OILTBF and the

MSSF, which are shown separately in the capital position statement. The MSSF was set up under the terms of the Scheme for the merger with Medical Sickness Annuity and Life Assurance Society Limited on 1 July 1997. It contains all the with profits policies of Medical Sickness Society on that date and is maintained as a separate account within the Society’s Long-Term Business Fund. The OILTBF contains all of the business of the Society other than the business in the MSSF.

Under the merger Scheme, the whole of the surplus in the MSSF is progressively and equitably distributed to the policies in that fund. This means that for the purpose of the capital statement there are no excess assets in the fund. However, some surplus is being held back in the fund to provide support under stressed financial conditions.

Available capital resources are calculated in accordance with the FSA’s realistic balance sheet, and can be broadly described as placing a market value on the net assets including the value of future profits on all acquired in-force long-term business as well as on non-participating business issued by the Society (see overleaf).

45

Fund for Future Appropriations

13. Fund for Future Appropriations continued

46

The table above shows key elements of the movements in realistic capital. The impact from assumption changes includes:

• Economic,persistency,mortality,expenseandregulatory valuation assumption changes; and

• Theireffectsonthecostsofguarantees,optionsandsmoothing, the value of in-force business and the with profits benefit reserve.

The most significant factor affecting both funds is the high investment return in 2009, which has decreased the value of policy guarantees and results in the positive investment variance shown in the OILTBF. The MSSF investment variations also include the impact of changes in the value of guaranteed annuity rate liabilities and the matching swaption assets, and of enhancements to asset shares to keep this fund in balance.

There were no changes in management policy assumed for determining the cost of guarantees, options and smoothing and no significant changes in regulation or other similar external developments.

Realistic Balance SheetRealistic available capital is determined in accordance with the Capital Management policies described above.

With profits liabilities comprise asset shares plus the costs of smoothing plus the value of guarantees and options, which have been granted to policyholders. When calculating these liabilities, allowance has been made for actions that management would be expected to undertake on key assumptions, for example future bonus policy in varying market conditions, in line with the Society’s PPFM.

The Risk Capital Margin (RCM) represents the level of capital that the Society is required to hold in the Pillar 1 stress event. The RCM is calculated assuming that risk free yields fall (2008: risk yields fell), that Equity and Property Markets fall (2008: Markets fell), persistency improves (2008: persistency improved) and credit risk increases (2008: credit risk increased) as per the regulations. Credit risk is allowed for by assuming an immediate and permanent widening in yield spreads on Corporate Bonds over risk free rates, calculated on a stock-by-stock basis.


Available capital resources

OILTBF MSSF Total business OILTBF MSSF Total business

2009 2009 2009 2008 2008 2008

£m £m £m £m £m £m

Fund for Future Appropriations 519.2 1.1 520.3 386.0 1.3 387.3 Adjustments to assets (19.5) - (19.5) (23.9) - (23.9)

Other adjustments (17.5) (1.1) (18.6) (16.6) (1.3) (17.9)

Total available capital resources 482.2 - 482.2 345.5 - 345.5

Risk Capital Margin 46.6 - 46.6 122.0 - 122.0

Cover for Risk Capital Margin 10.4 times - 10.4 times 2.8 times - 2.8 times

(v) Movements in available capital resources

OILTBF MSSF Total business £m £m £m

Balance at 1 January 2009 346 - 346

Modelling improvements (2) - (2)Effect of method changes 42 - 42Effect of investment variations 123 (4) 119Effect of experience variations (15) 4 (11)Effect of assumption changes (4) - (4)New Business (4) - (4)Other factors (4) - (4)

Balance at 31 December 2009 482 - 482

47

(v) Movements in available capital resources continued

2009 2008

£,000 £,000

Total regulatory with profits assets 1,955,529 1,721,304 Value of in-force business on a realistic basis 240,172 190,793

Total Realistic With Profits Assets 2,195,701 1,912,097

Realistic with profits liabilities - With profits benefit reserve 1,391,275 1,172,886 - Costs of smoothing (1,907) 1,133 - Guarantees 109,289 186,841 - Options (guaranteed annuities) 36,858 54,059 - Other (incl. current liabilities) 178,020 151,673

Total Realistic With Profits Liabilities 1,713,535 1,566,592

Total Realistic Available Capital 482,166 345,505

Risk Capital Margin 46,564 121,960

Total Realistic Excess Capital 435,602 223,545

2009 2008

£,000 £,000

With profits insurance contract liabilities 1,376,045 1,280,905 With profits investment contract liabilities with DPF 248,539 214,755 Non-participating insurance contract liabilities - Non-linked liabilities 888,236 896,138 Non-participating investment contract liabilities - Unit-linked 803,056 687,234

Total Contract Liabilities 3,315,876 3,079,032

Analysis of Liabilities


A summary Realistic Balance Sheet is shown below.

48


Sensitivity of CapitalThe capital position of the Society is sensitive to changes in economic conditions and financial markets; both through the impact on asset values and also the effect that changes in interest rates and investment returns may have on liability valuations. The liabilities are also sensitive to the other assumptions that have been used in their calculation, such as mortality and persistency. The Society’s approach to managing these risks is detailed in Note 2.

(i) Economic Conditions and Financial Markets The liability valuation will include assumptions about

interest rates and investment returns. An adverse change in either variable will increase liabilities and hence reduce the available capital, depending upon the extent to which assets with similar anticipated cash flows match the liabilities.

To the extent that it cannot be reflected in reductions in payments to policyholders because of the presence of guarantees and options in the underlying contracts, an adverse change in the markets for the Society’s investment assets will reduce the available capital.

(ii) Other Assumptions The Society monitors actual experience in mortality,

morbidity and persistency rates against the assumptions used, and applies that outcome to refine its long-term assumptions. Amounts paid will inevitably differ from estimates, particularly when the expected payments do not occur until well into the future. Liabilities are evaluated at least half yearly, allowing for changes in the assumptions used, as well as for the actual claims experience. If actual claims experience is less favourable than the underlying assumptions, or if it is necessary to increase provisions in anticipation of a higher rate of future claims, then available capital will be reduced.

(iii) Main Sensitivities The most significant potential causes of a worsening of the

Society’s capital position arise from the following four risks:

• Marketriskinrelationtowithprofitsbusiness,which would arise if adverse changes in the value of the assets supporting this business could not be fully reflected in payments to policyholders because of the effect of guarantees and options, particularly guaranteed annuity options. The capital position of this business would also deteriorate if increases to the market cost of derivatives resulted in an increase in the market-consistent liability for guarantees and options in the realistic balance sheet.

• Mortalityriskinrelationtoannuitybusiness,whichwould arise if the mortality of annuitants improved more rapidly than the assumptions used for reserving.

• Morbidityriskinrelationtoincomeprotectionbusiness,which would arise if morbidity of the lives insured was heavier than that assumed.

• Creditriskinrelationtoreassuredliabilities,particularlyincome protection liabilities, which would arise if the credit rating of the reassurers or their ability to meet their liabilities were to deteriorate.

The timing of any impact on capital would depend on the interaction of past experience and assumptions about future experience. In general, if experience had deteriorated or was expected to deteriorate and management actions were not expected to reduce the future impact, then assumptions relating to future experience would be changed to reflect it. In this way, liabilities would be increased to anticipate the future impact of the worse experience with immediate impact on the capital position. Examples of possible management actions include changes to with profits bonus rates and changes to discretionary surrender terms.

A sensitivity analysis reflecting the impact of changes to mortality, morbidity, persistency, expense and market assumptions on the Society’s realistic available capital is provided in Note 14. During 2009 the Society implemented a differentialinvestment strategy. Previously the Society had invested its capital in the same way as the assets backing policy asset shares and the rest of the With Profits Pool, which includes other liabilities such as guarantees and options. This change enables a lower market risk strategy to be adopted for capital without impacting on the long-term investment returns for with profits policyholders. Subsequent capital management activity has meant that the capital position of the Society is now less sensitive to changes in economic conditions and financial markets. This is reflected in the significantly lower Risk Capital Margin.


14. Long-term Business Provision and Liabilities on Investment Contracts

49

Change in technical provisions on investment contracts

2009 2008

£,000 £,000

The change in liabilities on investment contracts comprises:Premiums received (Note 3(a)) 58,279 62,384Claims paid (Note 6) (38,712) (44,983)Fee income deducted (Note 5(a)) (6,201) (6,772)

13,366 10,629

Allocation of net investment return 102,456 (191,823)

Increase/(decrease) in liabilities on investment contracts 115,822 (181,194)

Liabilities on

Investment Investment

Insurance Contracts Contracts

Contracts with DPF Total

£,000 £,000 £,000 £,000

Gross provisionAt 1 January 2009 2,358,279 214,755 2,573,034 687,234

Change in technical provisions 75,762 33,784 109,546 115,822

At 31 December 2009 2,434,041 248,539 2,682,580 803,056

Reinsurers’ shareAt 1 January 2009 181,236 - 181,236 -Change in technical provisions (11,476) - (11,476) -

At 31 December 2009 169,760 - 169,760 -

Long-term Business Provision

50

Society 2009 2008

£,000 £,000

Bonuses paid as claims (including terminal bonus) 38,860 76,764

Bonuses allocated to policies in force at 31 December 6,273 6,958

Total 45,133 83,722


14. Long-term Business Provision and Liabilities on Investment Contracts continued

Liability Analysis (net of reinsurance)

OILTBF MSSF Total business OILTBF MSSF Total business 2009 2009 2009 2008 2008 2008 £m £m £m £m £m £m

With profits liabilities on realistic basis Options and guarantees 96.8 49.4 146.2 153.1 87.8 240.9 Other policyholder obligations 1,003.3 475.1 1,478.4 828.2 426.5 1,254.7

Total with profits liabilities 1,100.1 524.5 1,624.6 981.3 514.3 1,495.6

Non-profit life assurance 881.9 6.3 888.2 891.4 4.8 896.2

Total long-term business provisions 1,982.0 530.8 2,512.8 1,872.7 519.1 2,391.8

Linked provisions 803.1 - 803.1 687.2 - 687.2

Technical provisions in Balance sheet 2,785.1 530.8 3,315.9 2,559.9 519.1 3,079.0

BonusesBonuses allocated to in-force with profits policies increase the liabilities for with profits insurance and investment contracts and represent an allocation of surplus. The total bonus attributable to the year consisted of the following amounts:

51

Mortality

Product Class Sex 2009 2008

Open Fund

Ordinary business:

With Profits Endowments Male 100% AMC00 100% AMC00 Female 90% AFC00 90% AFC00

Guaranteed Bonds Male 77% of AM80 77% of AM80 Female 90% of AF80 90% of AF80

With Profits Pensions in deferment Male 77% RMV92 77% RMV92 Female 77% RFV92 77% RFV92

With Profits Pensions post vesting Male 125% RMV92 medium cohort, 120% RMV92 medium cohort, 1.5% minimum improvement 1.5% minimum improvement Female 90% RFV92 medium cohort, 90% RFV92 medium cohort, 1.25% minimum improvement 1.25% minimum improvement

Unitised With Profits ISA Male 65% AM92 65% AM92 Female 65% AF92 65% AF92

Unitised With Profits Life, Male 95% AM92 95% AM92 Unit Linked Life Female 95% AF92 95% AF92

Unitised With Profits & Male 100% AM92 100% AM92 Unit Linked Pensions Female 100% AF92 100% AF92

Industrial assurance business Endowments Male 45% ELT14M 45% ELT14M Female 45% ELT14M 45% ELT14M

Whole Life Male 110% ELT14M – 4 yrs 110% ELT14M – 4 yrs Female 110% ELT14M – 4 yrs 110% ELT14M – 4 yrs

MSS Fund With Profits Endowments Male 50% AM80 50% AM80 Female 50% AF80 50% AF80

With Profits Pensions in deferment Male 77% RMV92 77% RMV92 Female 77% RFV92 77% RFV92

With Profits Pensions post vesting Male 85% RMV92 medium cohort, 85% RMV92 medium cohort, 1.5% minimum improvement 1.5% minimum improvement Female 75% RFV92 medium cohort, 75% RFV92 medium cohort, 1.25% minimum improvement 1.25% minimum improvement

Valuation basis(i) With Profits and Unit-Linked business As described in Note 2, some of the Society’s policies contain

options and guarantees that can increase the benefits payable to the policyholder. No provision has been made for compensation arising from complaints relating to endowment mortgage policies not covered by the guarantee mentioned in Note 2, as the compensation paid in 2009 has fallen to a very low level.

Unit-linked policies have been valued at the face value of the units, using unit prices derived from the valuation of the underlying assets. Provisions are also held to cover non-unit cash flows which use prudent estimates of mortality and future expenses.

The principal assumptions in determining the cost of options and guarantees in the long-term business provision in respect of with profits business and in determining the long-term provision for non-profit insurance contracts attached to unit-linked business are as follows:

52



Valuation basis continued

ExpensesPer policy expenses (quoted gross of any tax relief)

2009 £

2008 £

Description

Open Fund

Ordinary business

Life and Pensions – Premium Paying 47.25 33.25

Life and Pensions – Annuities 31.50 33.25

Life and Pensions – Single Premium/Paid Up 31.50 22.17

Income Protection 47.25 33.25

Industrial assurance business

Premium Paying 7.50 6.00

Paid Up 1.88 1.50

MSS Fund

Pensions – Premium Paying 60.00 60.00

Income Protection 45.00 45.00

Life – Premium Paying, Pensions – Single Premium/Paid Up 30.00 30.00

% of Premium expenses – pre 1/1/2000 entry date Note: For ordinary business, % of premium expenses are no longer applied with consequent increases in some of the Per Policy expenses shown above.

2009 %

2008 %

Open Fund

Ordinary business (Note above)

Life, Pensions With Profits - Regular Premium 0.00 4.25

Life, Pensions Unit-Linked - Regular Premium 0.00 7.00

Life, Pensions With Profits - Single Premium 0.00 2.83

Life, Pensions Unit-Linked - Single Premium 0.00 4.67

Annuities 0.00 1.50

Industrial assurance business

Premium Paying/Premium Loan 40.00 20.00

53

Investment Expenses – % of fund

2009 %

2008 %

Open Fund 0.072 0.072

MSS Fund 0.080 0.080

Other significant assumptions impacting the cost of options and guarantees are investment volatility and correlation. Expected returns on assets and volatilities have been calibrated to ensure consistency with market values at an appropriate term for our anticipated liability profile. The cost of guarantees will be higher with higher investment volatility. The correlation of investment returns assumed has been based on management’s view of historic equity and gilt returns.

In calculating liabilities, allowance has been made for the impact of future management actions consistent with those set out in the PPFM. The most significant of these management actions are those that result in changes to assumed levels of bonus depending on market conditions. Management reserve the right to change the investment strategy in extreme conditions but this has not been reflected in these calculations.

Guarantee costs arise as a result of providing benefits at a level equal to the guaranteed sum assured and any accrued reversionary bonus under a contract, where this exceeds the policy asset share, whether on death, maturity or guaranteed surrender.

Providing benefits in accordance with formula based surrender scales which take into account sums assured and accrued bonuses may also give rise to guarantee costs where the resulting surrender value exceeds the policy asset share.

Unitised with profits business has low initial guarantees and almost all policies support a terminal bonus at 31 December 2009. No market value reductions (MVRs) applied on early surrender or transfer at that date, although these were applied during much of 2009 due to poor equity values.

Option costs arise from the cost of providing guaranteed annuity options at retirement for pension contracts where the annuity provided is on more favourable terms than those implied by market interest rates. Guaranteed annuity options are generally considerably in the money but apply to relatively few policies, except in the MSSF where derivative assets are held to hedge the interest rate risk.

Smoothing represents costs (which may be positive or negative) associated with smoothing with profits payouts such that benefits payable, after applying agreed bonus scales, differ from the with profits benefit reserve for the contract.

All options and guarantees were measured at fair value using a market-consistent stochastic model. Expense assumptions were based upon analysis of experience during 2009. These experience assumptions were also compared against previous valuation assumptions. As a result of this analysis, some premium-related expense allocations were discontinued and per policy expenses increased accordingly. Expense inflation was assumed to be constant at 4.15% per annum; being 0.5% per annum above the implied price inflation from UK government long dated index-linked and conventional gilts. Assumptions for future mortality, morbidity and persistency are intended to represent a best estimate of future experience. Investigations are undertaken on a regular basis to assess the experience of the business.

Where appropriate, the Society’s mortality experience was analysed over 2009 and over previous years. The results of these analyses were considered relative to UK industry-standard tables with adjustments where appropriate.

54


(i) With Profits and Unit-Linked business continued Persistency rates are assumed to vary according to policy duration and by broad class of policy. Raw rates experienced were smoothed, after considering the significance of the data. In particular, smoothing is required where there are only few policies and lapse experience is limited.

(ii) Non-participating insurance business (other than contracts attached to unit-linked business)

Certain conventional non-profit policies and individual income protection policies have been valued using the net premium method. Annuities in payment have been valued by discounting future annuity payments and expenses.

The assumptions used in the valuation of non-profit policies are prudent estimates of likely future experience. The interest rates used for discounting were established by considering the expected yields obtainable on the assets backing each class of policy. These yields were adjusted to allow for credit risk in line with the rules and guidance issued by the FSA and the Society’s own judgement of the extent of the risk.

The mortality rate assumptions used are the Society’s assessment of prudent levels of current mortality and, for annuities, the future rate of improvement. For income protection policies, the assumed level of morbidity is set at a prudent margin above the Society’s own recent experience, the margin being sufficient to allow the possible future deterioration in experience but also for the Society’s right to review premiums for many policies if morbidity experience changes.

Premiums are assumed to be paid in line with the policy conditions.

For non-participating business which is written in the OILTBF, the long-term insurance liabilities were calculated on a prudent prospective basis determined as the present value of future benefits payable to policyholders plus the present value of future expenses less the present value of future premiums. An adjustment of £210.7m (2008: £160.2m) was then applied to these liabilities to allow for the present value of future profits on non-participating business (PVFPNP).


Valuation basis continued

55

The principal assumptions made for non-profit business were as follows:

2009 2008 % %

Rates of Interest Ordinary business Life assurances 3.05 2.70 Deferred pensions 3.85 3.40 Pension term assurances 3.85 3.40 Pensions in payment 3.85 3.55 Industrial assurance business Life assurances (paid-up) 3.05 2.80

Mortality Ordinary business Life assurances 105% AM/F92 S 105% AM/F92 S

UL ISA 70% AM/F92 U 70% AM/F92 U

Deferred pensions None in deferment None in deferment 112%/81% RMV/RFV92 108%/81% RMV/RFV92 (medium-long cohort (medium-long cohort with min. 1.75%/1.50% pa with min. 2%/1.75% pa improvement) after vesting improvement) after vesting

ASW Deferred pensions 75% AM/AF92 U in deferment; 75% AM/AF92 U in deferment; Male/Female: 117%/144% Male/Female: 120%/120% PMA/PFA92 (medium-long cohort with PMA/PFA92 (medium-long cohort with min. 1.75%/1.50% pa improvement) min. 2%/1.75% pa improvement) after vesting after vesting

Pension term assurance 110% AM/F92 U 110% AM/F92 U

Pensions in payment Male/Female 112%/81% Male/Female 108%/81% RMV/RFV92 (medium-long RMV/RFV92 (medium-long cohort with min. 1.75%/1.50% cohort with min. 2%/1.75% pa improvement) pa improvement)

MSS Pensions in payment 76%/67% RMV/RFV92 76%/67% RMV/RFV92 (medium-long cohort with (medium-long cohort with min 1.75%/1.50% min 2%/1.75% pa improvement) pa improvement)

ASW Pensions in payment Male/Female: 117%/144% Male/Female: 120%/120% PMA/PFA92 (medium-long PMA/PFA92 (medium-long cohort with min. cohort with min. 1.75%/1.50% pa improvement) 2%/1.75% pa improvement)

Industrial assurance business Life assurances 20% ELT14M-4 20% ELT14M-4

A prudent assessment was made of persistency in calculating the liabilities for non-participating business. Withdrawals or cessation of premiums are assumed where this would lead to an increase in the provision.

56

Rates of interest used are set according to a prudent assessment of the future returns available from the investments backing the Fund. Mortality assumptions are set by reference to publicly available tables, adjusted and validated against actual experience. Future expenses are based on recent expense experience, adjusted for inflation and with a margin for prudence.

The amount of the provision is dependent upon interest rates assumed. A reduction in the interest rate would reduce the impact of discounting and hence raise the long-term business provision. A reduction in risk discount rate would increase the value of in-force business. This in turn would cause a reduction in the long-term provision. The provision is also dependent upon the mortality experience assumed. A reduction in future mortality assumed would increase the provision for annuity business and decrease the provision for assurances. The long-term business provision makes allowance for any future valuation strain. Sufficient assets are allocated to cover future strain where it is deemed that this will arise.

Key SensitivitiesThe table at the end of this section shows sensitivities to movements in the assumptions used at 31 December 2009. The sensitivities are shown separately for:

• Realistic available capital; and

• Value of in-force non-profit business.

The impacts of the value of in-force non-profit business are more significant than the changes in realistic available capital. This is because, this year, much of the emerging losses from non-profit and unit-linked business in the stressed conditions would be charged to with profits policyholders and hence would reduce the Society’s liabilities.

For the demographic and expense assumptions, sensitivities are only shown in one direction as an equal and opposite movement in the variable would, for the majority of business, have a similar but opposite impact on the value of insurance and investment contract liabilities.

For the economic assumptions, we have shown the effect of both a parallel upwards and downwards shift in the interest rate yield curve because the impact on liabilities is not symmetrical. However, we have only shown a decrease in capital values of property and equity because an increase in these values would result in a similar but opposite effect being observed.

(i) Demographic Annuitant Mortality 10% proportionate decrease in base mortality rates. This sensitivity demonstrates the effect of a decrease in the

rate of deaths. For annuity business and policies that contain a guaranteed annuity option a decrease in mortality rates will increase the liability, as the average period over which annuity payments have to be made will be extended. This will also reduce the non profit value of in-force.

Assurance Mortality 10% proportionate decrease in base mortality rates. This sensitivity demonstrates the effect of a decrease in the

rate of deaths. For life assurance business a decrease in mortality rates will typically decrease the liabilities and increase the non profit value of in-force, as there will be fewer payouts for early death.

Morbidity 10% proportionate decrease in base morbidity rates. This sensitivity demonstrates the effect of a decrease in

the rate of serious illness.

Persistency 10% proportionate decrease in lapse rates. This sensitivity reflects a single, downward movement in

lapse rates. This means that fewer policies are being surrendered or terminated early, with the result that more policies are assumed to remain in force. For non-participating business a decrease in lapse rates will tend to increase the value of in force business. However, for participating business, a decrease in lapse rates will increase the liability as more policies are assumed to remain in force to exercise guarantees and options.



57

(ii) Expenses 10% decrease in maintenance expenses, the ongoing cost

of administering contracts. This sensitivity is applied to the projected level of expenses.

There is no change to the assumed rate of future expense inflation. A reduction in expenses will increase the value of in force business for non-participating business.

(iii) Economic Interest Rates A reduction of 17.5% and an increase of 17.5% in

interest rates. This sensitivity is designed to show the impact of a sudden

parallel shift in the risk-free yield curve. A reduction in interest rates increases the current market value of fixed interest assets but reduces future reinvestment rates. The value of liabilities is also increased when the interest rates fall as the discount rate used in the calculation will be reduced. An increase in rates will have the opposite effect. The sensitivity test for interest rates is market related and this can give rise to non-symmetrical increases and decreases. The test is consistent with the market related test required to calculate the Risk Capital Margin, which is disclosed in the Society’s FSA Returns.

Equity Capital Values and Property Capital Values 20% decrease in equity and 12.5% decrease in property

capital values at the valuation date, without a corresponding fall or rise in dividend yield.

This sensitivity shows the impact of a sudden change in the market value of assets. The value of liabilities will decrease when asset values fall, but other than for unit-linked business, the decrease will be less than the fall in asset values. Consequently, the realistic available capital will be reduced by a fall in asset values. The test is consistent with the market related test required to calculate the Risk Capital Margin, which is disclosed in the Society’s FSA Returns.

Description of sensitivityImpact on realistic

available capital £m

Impact on value of in-force non-profit business

£m

Demographic

10% reduction in annuitant mortality 1 14

10% reduction in assurance mortality (0) (2)

10% reduction in morbidity (1) (16)

10% reduction in lapses 1 (3)

10% reduction in expenses (1) (6)

Economic

0.78% increase in interest rates (6) 13

0.78% fall in interest rates 11 (13)

20% equity fall, 12.5% property fall 78 8

(iv) Fall in value due to change in variable

15. Provision for Other Risks and Charges

58

2009 2008

Group and Society £,000 £,000

Timing differences in respect of investment values 75,155 63,579Deferred acquisition costs (5,201) (5,164)Other timing differences (308) (359)Discount (16,520) (16,803)

53,126 41,253

In determining the provision, the cash flows have been discounted on a pre-tax basis using an appropriate interest rate.

The provision for deferred tax on unrealised gains on linked assets is included in technical provisions for linked liabilities and amounts to £1.1m (2008: £nil).

The Society has an unrecognised deferred tax asset of £17.7m (2008: £14.0m) which is made up predominantly of pension business tax losses that the Society does not expect to be able to utilise in the foreseeable future. The tax effect of this asset, if it was recognised, would be £3.5m (2008: £2.8m).


Vacant Deferred Other Total Properties Tax

Group £,000 £,000 £,000 £,000

At 1 January 2009 336 41,253 3,212 44,801Charged/(Utilised) during the year 5 11,873 (307) 11,571

At 31 December 2009 341 53,126 2,905 56,372

Vacant Deferred Other Total Properties Tax

Society £,000 £,000 £,000 £,000

At 1 January 2009 - 41,253 - 41,253Charged during the year (Note 9) - 11,873 - 11,873

At 31 December 2009 - 53,126 - 53,126

Following restructuring, the Group has a number of vacant and partly-let leasehold properties. Provision has been made for the residual lease commitments, together with other outgoings, after taking into account existing and future sub-tenant arrangements.

Included in ‘Other’ in the Group figures is a provision for £nil (2008: £0.9m) in respect of potential redress and associated costs that may be required in respect of past sales of certain endowment products brokered by Wesleyan Financial Services Limited (note 20). In view of the low level of claims in 2009 the provision has been eliminated and future claims will be taken in the year in which they are agreed.

Deferred tax provided in the financial statements in respect of the total liability is as follows:

17. Capital Commitments

59

Commitments authorised or contracted for but for which no provision had been made at the balance sheet date totalled £0.7m (2008: £0.4m).

16. Other Creditors Including Taxation and Social Security Payable Within Five Years

Group Society

2009 2008 2009 2008

£,000 £,000 £,000 £,000

Taxation and social security - - - 416Contract purchase agreements 6,313 4,632 6,313 4,632Amounts payable to subsidiary undertakings - - 4,225 -Other creditors 11,019 10,319 7,069 5,550

17,332 14,951 17,607 10,598

Contract purchase agreements Amounts are payable as follows:Under one year 1,682 1,039 1,682 1,039In the second to fifth years inclusive 4,631 3,593 4,631 3,593

6,313 4,632 6,313 4,632

18. Financial Commitments

At 31 December 2009, the Group had annual commitments under non-cancellable operating leases relating to land and buildings expiring as follows:

2009 2008

£,000 £,000

Within one year - 19Within two to five years 47 29After five years 455 473

502 521

60

19. Investment in Subsidiaries

Proportion of capital Society

held by the Society Cost/Value of Investment

% 2009 2008

£ £

The subsidiaries of the Society, all of which are incorporated and registered in England, are:

Wesleyan Trustees Limited 100.00 100 100

Wesleyan Unit Trust Managers Limited 100.00 1,000,000 1,000,000

Wesleyan Bank Limited 100.00 10,500,000 8,500,000

Wesleyan Administration Services Limited 100.00 100,000 100,000

Wesleyan Financial Services Limited 100.00 58,761,900 58,761,900

Medical Sickness Limited 100.00 2 2

Medical Sickness Financial Planning Limited 100.00 1 1

Medical Sickness Annuity and Life Assurance Society Limited 100.00 - -

Medical Sickness Society Limited 100.00 - -

Insurecheer Limited 100.00 2 2

John Wesley Bank Limited 100.00 2 2

J Wesley Bank Limited 100.00 2 2

Wesleyan SIPP Trustees Limited 100.00 2 2

Cost of shares held in subsidiaries 70,362,011 68,362,011Difference in cost and net asset value (40,632,327) (40,972,922)

Shares held in subsidiaries – net asset value 29,729,684 27,389,089

The Directors believe that the carrying value of the investments is supported by their net asset value. All subsidiaries have only one class of issued ordinary shares and the voting rights are equal to the percentage holdings.

Company Principal ActivitiesWesleyan Trustees Limited To provide nominee services to the trustees of the Wesleyan Staff

Pension Scheme.

Wesleyan Unit Trust Managers Limited To act as the operator of the Wesleyan range of unit trusts.

Wesleyan Bank Limited To provide banking and unsecured lending services.

Wesleyan Administration Services Limited To provide administrative services to members of the Group.

Wesleyan Financial Services Limited To act as the distribution arm of the Group’s insurance andinvestment activities.

Wesleyan SIPP Trustees Limited To act as bare trustee of the Wesleyan SIPP.

The remaining subsidiaries are dormant.


The balance sheet of Wesleyan Bank Limited (“the Bank”)

includes loans to customers amounting to £2.1m (2008: £2.4m),

which are secured on life policies taken out with Wesleyan

Assurance Society. The Society has guaranteed these loans.

The Society, by an agreement dated 2 July 1998 as amended,

has placed at the disposal of the Bank an irrevocable overdraft

facility not exceeding £10m to cover any liquidity risk issues. The

Society has confirmed to the FSA that, whilst noting that its legal

liability is limited to the face value of its shareholding, it recognises

a moral responsibility to ensure that the Bank continues at all

times to meet its obligations.

In addition the Society has guaranteed the repayment of the

mutual gold fixed term bonds issued by the Bank up to a

maximum sum of £250,000 for an individual or £500,000

for a joint account in the event that the Bank fails to repay

such amounts. The total value of these bonds at 31 December

2009 was £16.5m (2008: £9.8m).

Under a Trust Deed approved by HMRC dated 4 April 2006

as amended, the Society has covenanted to accept the

ultimate responsibility for the funding of the Wesleyan Staff

Pension Scheme.

The Society has absolutely, irrevocably and unconditionally

agreed to provide sufficient capital resources to Wesleyan Unit

Trust Managers Limited, Wesleyan Financial Services Limited,

Wesleyan Administration Services Limited and Wesleyan

SIPP Trustees Limited to enable them to meet their individual

liabilities in order to protect and enhance its investments in

these subsidiary companies.

20. Contingent LiabilitiesBoth the Society and Wesleyan Financial Services Limited have continued to experience complaints in respect of mortgage endowment business. The Society has guaranteed that any policy held in the Society’s Open Fund will repay the mortgage amount it was taken out to cover. A provision held by the Medical Sickness Society’s Fund within the long-term business provision which, at 31 December 2009, was £nil (2008: £0.2m). Claims in the future for redress are not considered to be significant.

Included within provisions for other risks and charges is a provision for £nil (2008: £0.9m) to meet the cost of redress of complaints in Wesleyan Financial Services Limited. In 2009, the cost of redress was negligible and the cost of any future claims is not considered to be significant.

21. General BusinessThe Society has retained the risk in respect of any industrial disease claims arising on the book of general insurance policies sold to General Accident (now part of Aviva plc) in 1995. To date claims received have been negligible and management consider the possibility of future claims to be remote. No claims have been received in the years 2003 to 2009 inclusive.

In order to comply with the EC Directive 2002/13 and FSA GENPRU 2.1.30 the Society holds capital of £2.7m (2008: £2.7m) to meet a base capital resources requirement of Euros 2.625m (2008: Euros 2.4m) in a separately designated interest bearing account.

61

62


The principal assumptions used by the independent qualified actuary to calculate the liabilities under FRS 17 are set out below:

Main financial assumptions (details of mortality assumptions shown on Page 65)

31 December 2009 (% p.a.)



Inflation 3.60 2.65 3.40

Rate of general long-term increase in salaries 4.60 3.65 4.90

Pension increases 3.40 2.65 3.40

Discount rate for Scheme liabilities 5.70 6.10 5.80

Expected return on assets

Long-term rate of return

expected at 31 December

2009 (% p.a.)*

Value at 31 December

2009

£m



2008 (% p.a.)*


2008

£m



2007 (% p.a.)*


2007

£m

Equities 7.00 146.8 6.75 142.0 7.50 171.4

Bonds 4.50 - 5.25 106.5 3.90 - 5.40 78.6 4.50 – 5.25 82.0

Cash and other assets 0.75 - 7.50 40.7 2.75 - 6.25 11.5 5.75 – 7.00 34.0

Total market value of assets 294.0 232.1 287.4

Average rate of return 5.45 5.95 6.60

*The Society employs a building block approach in determining the long-term rate of return on pension scheme assets. Historical markets are studied and assets with higher volatility are assumed to generate higher returns consistent with widely accepted capital market principles. The assumed long-term rate of return on each asset class is set out within this note. The overall expected rate of return on assets is then derived by aggregating the expected return for each asset class over the actual asset allocation for the Scheme at 31 December 2009.

22. Pension SchemesThe Society operates a defined benefit pension scheme – Wesleyan Staff Pension Scheme, which with effect from 1 October 2009 is closed to new entrants. It is fully funded with the assets of the scheme held in a separate fund administered by the Trustees.

The most recent valuation of the Scheme was as at31 December 2006. The valuation used the projected unit method and was carried out by a qualified Actuary employed by Hewitt Associates Limited.

63

Reconciliation of funded status to balance sheet

Value at31 December

2009£m

Value at31 December

2008£m

Value at31 December

2007£m

Total market value of assets Present value of Scheme liabilities Present value of unfunded liabilities

294.0(282.6)

(2.3)

232.1(223.9)

(1.9)

287.4 (260.7)

(2.1)

Surplus in Scheme 9.1 6.3 24.6

Related deferred tax liability (0.7) (0.4) (1.4)

Net pension asset recognised on balance sheet 8.4 5.9 23.2

Analysis of surplus

Year ending 31 December

2009 £m


2008 £m

Surplus in Scheme at beginning of year 6.3 24.6

Current service cost (3.2) (4.5)

Past service cost - -

Contributions 30.6 4.6

Other finance income 0.6 3.4

Actuarial loss recognised in profit and loss (25.2) (21.8)

Surplus in Scheme at end of year (gross) 9.1 6.3

Analysis of profit and loss charge

Year ending Year ending 31 December 31 December 2009 2008 £m £m

Current service cost (3.2) (4.5)


Recognised in Note 7 (3.2) (4.5)

Interest cost (13.6) (15.1)

Expected return on assets 14.2 18.5

Finance income recognised in Note 4 0.6 3.4

Total expense recognised in profit and loss (2.6) (1.1)

64

22. Pension Schemes continued


Changes to the present value of the defined benefit obligation during the year

For year ending 31 December

2009 £m


2008 £m

Opening defined benefit obligation 225.8 262.8

Current service cost 3.2 4.5

Interest cost 13.6 15.1

Contributions by participants 1.7 1.4

Actuarial losses/(gains) on liabilities* 52.0 (46.9)

Net benefits paid out (11.4) (11.1)


Closing defined benefit obligation 284.9 225.8

*Includes changes to the actuarial assumptions.

Changes to the fair value of Scheme assets during the year


2009 £m


2008 £m

Opening fair value of assets 232.1 287.4


Actuarial gains/(losses) on assets 26.8 (68.7)

Contributions by the employer (Note 8) 6.3 4.6

Additional contributions by the employer 24.3 -

Contributions by participants 1.7 1.4

Net benefits paid out (11.4) (11.1)

Closing fair value of assets 294.0 232.1

Actual return on assets


2009 £m


2008 £m


Actuarial gains/(losses) on assets 26.8 (68.7)

Actual return on assets 41.0 (50.2)

65

History of asset values, defined benefit obligations, surpluses and experience gains and losses

31 December

2009 £m

31 December 2008

£m

31 December 2007

£m

31 December 2006

£m

31 December 2005

£m

Fair value of assets 294.0 232.1 287.4 282.1 257.2

Defined benefit obligation (284.9) (225.8) (262.8) (270.1) (249.7)

Surplus 9.1 6.3 24.6 12.0 7.5


2009 £m


2008 £m


2007 £m


2006 £m


2005 £m

Experience gains/(losses) on assets

26.8 (68.7) (7.1) 10.7 25.6

Experience gains/(losses) on liabilities#

5.6 (1.7) (7.4) (1.6) (0.5)

#This item consists of gains/(losses) in respect of liability experience only – and excludes any change in liabilities in respect of changes to the actuarial assumptions used.

The mortality assumptions used for FRS 17 purposes were as follows:

Pre-retirement mortality:

• 2009 and 2008 - 70% of standard AMC/AFCOO tables.

Post-retirement mortality:

• 2009 - 100% of standard PNA00 ‘year of birth’ tables, with the medium cohort projection, and with a minimum rate of longevity improvement of 1.5% per annum for males and 1.25% per annum for females.

• 2008 - 100% of standard PNA00 `year of birth’ tables, with the medium cohort projection, and with a minimum rate of longevity improvement of 1.5% per annum.

The future life expectancies at age 65 implied by these mortality assumptions are as follows:

2009 Years

2008 Years

Male current pensioner 23 23

Female current pensioner 25 25

Male future pensioner (member currently aged 45) 26 26

Female future pensioner (member currently aged 45) 28 28

66

23. Membership of the SocietyIn order to be a member of the Society, a person must be a policyholder of a qualifying policy of insurance or have made additional voluntary contributions after 1 May 2006 under the Wesleyan Assurance Society Group AVC policy.

A qualifying policy is any subsisting policy issued in the ordinary life department, any policy issued after 28 April 1998 or any policy issued prior to 29 April 1998 where, on or after this date, premiums payable are increased by £25 per month or more, or additional benefits are allocated as a result of an additional single premium (other than a single premium received from the Contributions Agency). These are basic requirements of membership but they do not necessarily confer membership as there are various exceptions included in the Rules of the Society. Holders of Industrial Assurance policies are not members of the Society. Holders of policies which have been transferred to the Society under Schedule 2C of the Insurance Companies Act 1982 are also not members. For policies issued from 28 April 2000, a qualifying policy requires to have been in force for two years before membership is conferred unless the new policy was issued within a period of not more than one month after the date of cessation of another qualifying policy.

Any policy issued by the Society to the Trustees in respect of annuity business effected within the Society by the Trustees of an occupational pension scheme to secure all or part of the accrued rights of 100 or more members of that scheme in a single transaction shall not confer any rights of membership in the Society nor shall any policy issued subsequently by the Society to the individual members of that scheme under that arrangement.

Any person who is an employee of the Society or of one of its wholly-owned subsidiary companies and makes additional voluntary contributions after 1 May 2006 for pension entitlements under the Wesleyan Assurance Society Group AVC Policy shall forthwith be a member of the Society, even though no qualifying policy is issued direct to such person and the trustees of such scheme shall not be a member of the Society.

Members are not liable for any debts or sums of money due or to become due by the Society, apart from policy premiums and/or as separately contracted.

24. Related Party TransactionsThe Directors of the Society and its subsidiaries are related parties of the Society. Total premium income received from Directors for the year ended 31 December 2009 was £40,436 (2008: £78,305). Claims paid amounted to £nil (2008: £nil). All such transactions are on terms which are no better than those available to all employees of the Group.

Banks are obliged by law to observe a strict duty of confidentiality to their customers and the Directors of Wesleyan Bank Limited do not consider it appropriate to make disclosures relating to balances and transactions with Directors. All such transactions and balances arise in the normal course of business and on terms which are available to all staff of the Group.

Wesleyan Staff Pension Scheme is also a related party. Two Directors (Messrs Maclean and Errington) were Trustees of the Scheme throughout the year, with Martin Howard a Trustee of the Scheme until 22 July 2009.

All executive Directors are members and thus are potential beneficiaries of the Scheme. The Scheme’s assets are administered by the Society and no charge is made for this service.

Details of pensions payable by the Scheme to three Directors (Messrs Maclean, Rutter and Tyrrell) are included in the Directors’ Remuneration Report within the Corporate Governance Statement.

Full disclosure of transactions and balances with subsidiaries of the Society, which are eliminated on consolidation, are not made in these financial statements. Classification of such transactions and balances in other notes to these financial statements are disclosed as appropriate.


What we believe in and want to be known for

n InsightUnderstanding our customers’ needs in order to offer tailored product solutions, specialist advice and customer care.

n PerformanceFounded on an enviable record for excellent financial performance, industry leading financial strength, superior returns for our customers and a commitment to continuous improvement in all aspects of our operations.

n TrustAiming to earn our customers’ trust through financial security as well as a commitment to doing the right thing, true to our mutual heritage. This means being principled, caring, honest and fair. In a word, integrity.

Our Values

67

For all your financial needs:

• Savings and Investments•Retirement Planning and Pensions•Life and Income Protection•Mortgages and Insurance•Banking services Advice is provided by Wesleyan Financial Services Limited through its brand names including Wesleyan Medical Sickness, Wesleyan for Teachers and Wesleyan for Lawyers.

For further information:Please call: 0800 107 4924Or fax: 0121 200 2971Or visit: www.wesleyan.co.uk Head OfficeWesleyan Assurance SocietyColmore CircusBirmingham B4 6AR

Incorporated by Private Act of Parliament (No. ZC000145). Wesleyan Assurance Society is authorised and regulated by the Financial Services Authority. Telephone calls may be recorded for monitoring and training purposes.

If you would like this document in Braille, large print audio tape or email please contact 0800 107 4924. WG-REP-2-04/10 Printed on 100% recycled paper.

Documents

Report and Accounts 2009 - Wesleyan · 5,412. Strong equity performance and a falling gilt-edged market are a near-ideal combination for the Wesleyan with profit fund. Total funds