FOR MEMBERS OF THE SCOTTISH WIDOWS RETIREMENT BENEFITS SCHEME

SCOTTISH WIDOWS PENSION UPDATE 2015/16

IN THIS ISSUE

WELCOME 3

SUMMARY FUNDING STATEMENT 4 - 8

FINANCIALS AND MEMBERSHIP 9 - 10

INVESTMENT PERFORMANCE UPDATE 11

PENSION FLEXIBILITIES 12 - 13

CHANGES TO THE LIFETIME ALLOWANCE (LTA) 14

COMING SOON – WEBSITE CHANGES 14

WHAT IS PENSION WISE? 15

THE ANNUAL ALLOWANCE (AA) 16

PENSION SCAMS 17

CHANGES TO STATE PENSIONS AND CONTRACTING OUT 18

CHANGES TO THE SCHEME 18

IS YOUR NOMINATION FORM UP TO DATE? 19

HOW YOU COULD INCREASE YOUR PENSION 20

WHAT DOES THE TRUSTEE BOARD DO? 21

MEET THE TRUSTEE BOARD 22

SCHEME ADVISERS 23

CONTACTS 24

Welcome to Pension Update, the Trustee newsletter for members of the Scottish Widows Retirement Benefits Scheme (the Scheme).

We’ve included important Scheme information, as well as updates on what has changed in the pensions industry that may affect you and your retirement.

Pensions can be complicated and with the government making regular changes to pensions, we’ve provided an overview of the most relevant and important updates that we think you should know about.

We’d also like you to get involved and let us know what you think. We welcome any suggestions on ways you think we can improve the newsletter or ideas on what you’d like to see in future issues. You can email us at swfeedback@lloydsbankingpensiondocuments.com. Any feedback you leave will be anonymous, unless you wish otherwise, for the purpose of improving our communications to you.

We hope you find Pension Update useful and informative.

Richard Wohanka Chairman of the Trustee Board

WELCOMEIN THIS ISSUE

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SUMMARY FUNDING STATEMENT

The Trustee Board works closely with the Employer to ensure your benefits are adequately funded, secured and governed. Each year the Trustee Board is required by law to provide you with a Summary Funding Statement, which describes the level of funding that supports your pension.

Actuarial valuation

A formal actuarial valuation is usually carried out every three years by the Scheme Actuary. The most recent actuarial valuation, at 1 July 2013, showed a funding position of 88%, meaning that the Scheme’s assets covered 88% of its liabilities at that time.

88% FUNDING

LEVEL

SHORTFALLASSETS

LIABILITIES

£140M£1,007M

£1,147M

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What’s being done to address the shortfall?

Since the valuation as at 1 July 2013 was completed, the change in the Pensionable Pay Cap to 0% had the effect of reducing the funding shortfall. The Trustee Board agreed a recovery plan with the Employer for the remaining shortfall.

Under this recovery plan, the Employer paid additional contributions of £93.2 million and a further £14.5 million at the end of November 2014, which would have cleared the funding shortfall on the assumptions made.

In certain circumstances, the Pensions Regulator has powers to intervene in a scheme’s funding plan, by changing the future accrual of benefits, setting the level of the funding target along with the terms of the recovery plan and/or imposing a schedule of contributions. The Pensions Regulator has not used any of these powers in relation to the Scheme.

There has also been no payment to the Employer out of the Scheme during the past year.

82% FUNDING LEVEL

£260MSHORTFALL

£1,172M

£1,432M1 JULY 2015

SCHEME FUNDING UPDATE

Following the triennial valuation as at 1 July 2013, the Trustee Board has carried out annual funding updates as at each 1 July. The results of the 2013 valuation and the 2014 and 2015 updates are shown in the table below.

Since the valuation of 1 July 2013, the funding position of the Scheme has worsened. The main reason for this is the fall in gilt yields which has caused an increase in the liabilities. This has been offset to some extent by the additional contributions paid by the Employer under the recovery plan and positive investment returns.

The next triennial valuation is due to take place as at 1 July 2016 and in the event the Scheme continues to have a funding shortfall at that time, the Trustee Board and the Employer will agree a revised recovery plan.

88% FUNDING LEVEL

£140MSHORTFALL

£1,007M

£1,147M1 JULY 2013

94% FUNDING LEVEL

£74MSHORTFALL

£1,134M

£1,208M1 JULY 2014

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LIABILITIES

LIABILITIES

LIABILITIES

ASSETS

ASSETS

ASSETS

WHAT PROTECTION IS THERE FOR MEMBERS?

It is normal for the funding position of a pension scheme to fluctuate as market conditions change. If the funding shortfall shown by the latest annual update remains at the next valuation of 1 July 2016 then the Trustee Board and the Employer would agree on what additional payments might need to be made.

The ability of the Employer to make any additional payments, as well as the normal ongoing funding payments, is clearly of importance to members. The amount of capital the Employer holds to cover business risks is therefore an important factor. The Employer manages its business by reference to its capital and risk appetite policy. Under this policy, the Employer holds enough capital to cover both regulatory solvency requirements, which are assessed on the basis of 1-in-200 adverse events, and a further buffer on top of that capable of absorbing 1-in-10 year adverse events.

In the event that the Employer became insolvent, the Pension Protection Fund (PPF) may be able to take over responsibility for payment of benefits. However, the PPF is unlikely to provide benefits at the full levels accrued under the Scheme and generally provides, for members below their normal retirement age, for 90% of the Scheme benefit to be paid (with a cap). Further information of PPF levels of protection can be found on their website at pensionprotectionfund.org.uk

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FUNDING POSITION IF THE SCHEME IS WOUND UP

The Trustee Board is required to provide you with an indication of what the funding position would be if the Scheme was terminated and wound up. This information is purely for legislative purposes – Scottish Widows has no plans to wind up the Scheme.

If the Scheme had wound up on 30 June 2013, its assets would have been sufficient to fund around 57% of the estimated cost of securing the Scheme’s benefits. In the unlikely event of the Scheme winding up, the Employer would be legally required to finance the shortfall, by paying enough into the Scheme to enable benefits to be completely secured by individual policies with an insurance company.

The funding level of the Scheme, assuming it is wound up, is significantly less than the funding level disclosed as part of the triennial valuation and annual updates as shown on the previous page. This is because the triennial valuation (and annual updates) assumes the Scheme will continue as an ongoing entity. Consequently, while the assumptions do include some prudence, they make some allowance for future anticipated returns from the growth assets held, such as equity market shares, above the returns that would be obtained from investments that carry little, or no, risk.

In contrast, when assessing the liabilities for the purposes of winding-up the Scheme, a more prudent view, such as would be taken by an insurance company in pricing individual policies, is taken. This leads to a higher value being placed on the Scheme liabilities. This prudent view incorporates factors such as making no allowance for future anticipated additional returns from the growth assets, assuming members live longer lives and incorporating an expense and profit margin within the liabilities. The funding level of the Scheme when assessed on a winding-up measure is therefore lower.

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FINANCIALS

A summary of the Trustee’s Annual Report and Financial Statement, for the 12 month period to 30 June 2015, is shown below:

The Trustee’s full Annual Report and Financial Statement for the year ended 30 June 2015 is available to read in the Scheme documents section of the Group Pensions website at lloydsbankinggrouppensions.com/swschdocs

Alternatively, you can request a copy from the Pensions Department (you can find contact details on the back page).

Figures are shown in thousands (£000s)

£34,856TOTAL INCREASE FOR THE PERIOD

£000s Total

INCOME

Contributions 44,415

Other income 8

EXPENDITURE

Pensions in payment (22,779)

Payments to and on account of leavers

(42,485)

Administrative expenses (675)

Other payments (224)

RETURN ON INVESTMENT

Investment income 6,844Change in market value 53,438

Investment management expenses (3,686)

£44,423

–

£56,596

=

+

£66,163

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CHANGE IN VALUE OF THE SCHEME’S ASSETS

The graph below shows the change in the value of the Scheme’s assets over the last three years.

30 June 2014 30 April 2013

£1,141,237 £1,047,90630 June 2015

£1,176,093

Figures are shown in thousands (£000s)

SCHEME MEMBERSHIP

30 JUNE 2014

1,259 4,046* 1,384ACTIVE DEFERRED PENSIONER

6,689TOTAL

30 JUNE 2015

1,124 3,988* 1,455ACTIVE DEFERRED PENSIONER

6,567TOTAL

*These figures include deferred members who have passed normal retirement age but not yet taken benefits.

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INVESTMENT PERFORMANCE UPDATE

At 30 June 2015, the Scheme’s assets were invested as follows:

LIABILITY MATCHING ASSETS41.28%

UK CORPORATE BONDS

UK EQUITIES

INTERNATIONAL EQUITIES

PROPERTY

EMERGING MARKET EQUITIES

PRIVATE EQUITYCASH

17.97%

17.04%

13.05%

5.16%

4.52%

0.76%

0.22%

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PENSION FLEXIBILITIES

As we mentioned in Pension Update 2014, the government has brought in big changes to pensions from April 2015 which could impact you if you are an active or deferred member of the Scheme.

Pension schemes are now able to offer members with defined contribution (DC) pension benefits greater flexibility in how they can take their benefits (usually from age 55). This could include additional voluntary contributions (AVCs), Pension Extra and any other DC savings. They can still take 25% of their pension pot as a tax-free cash lump sum, but may be offered more choice over what to do with the rest of the money. Possible options include buying an annuity, taking the whole fund as cash (subject to tax), or taking part of the fund whilst the rest remains invested. This is known as income drawdown.

It is up to each pension scheme to decide whether to offer these new flexible options. The Trustee has decided to offer members with DC benefits under the Scheme (i.e. AVCs) the ability to take some or all of their AVC fund as a one-off taxable lump sum on retirement, instead of using it to purchase additional income in retirement.

Other options, such as income drawdown, are not currently available through the Scheme. Members wishing to take up these other options would need to transfer their benefits to a different arrangement. Further information about your options will be sent to you when you are nearing retirement.

There have also been changes to the rules on requesting a transfer of benefits from the Scheme. Members can now transfer their benefits in any of the following ways:

• Transfer DC (AVC) benefits only, and keep their defined benefit (DB) benefits in the Scheme;

• Transfer DB benefits only, and keep their DC (AVC) benefits in the Scheme;

• Transfer both DB and DC (AVC) benefits together.

These options are now available at any time up to retirement. Members who wish to transfer DB benefits to a DC arrangement are subject to additional requirements, including the requirement to obtain independent financial advice if the value of their DB benefits is greater than £30,000. Further information about transfer options is available from the Scheme administrator. Contact details can be found on the back page.

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The government provides access to free and impartial guidance for anyone taking DC benefits after April 2015 to help members navigate the changes. This service is called Pension Wise, visit pensionwise.gov.uk to find out more.

Please note that if you take advantage of the greater pension freedoms available from 6 April 2015 and access any DC funds flexibly, your Annual Allowance (AA) in respect of DC pension savings will reduce to £10,000. Read page 16 for more details.

What is an annuity?

An annuity is a regular income, or pension, paid for the rest of your life, which can be bought from an insurance company with pension savings. How much income/pension depends on the rate offered by the annuity provider and which type of annuity is chosen.

There are various optional features of annuities that will influence the level of income that you may receive, such as:

ANNUAL INCREASES - LINKED TO INFLATION OR A FIXED RATE

DIFFERENT LEVELS OF SPOUSE’S PENSION PAID IN THE EVENT OF YOUR DEATH

GUARANTEED PAYMENT PERIOD LUMP SUMS

HIGHER RATES FOR IF YOU HAVE A REDUCED LIFE EXPECTANCY

CHANGES TO THE LIFETIME ALLOWANCE (LTA)

The LTA is the maximum value of pension benefits that members can build up over their lifetime without triggering an extra tax charge.

The LTA applies to the total value of all the pension benefits you have built up including DB and DC arrangements, but it doesn’t include your State Pension. The LTA is measured at the point at which your pension benefits start being paid.

The LTA is £1.25 million in the 2015/16 tax year. However, the government announced that the LTA will reduce to £1 million from 6 April 2016.

If your total pension savings at 5 April 2016 are in excess of £1 million, you may be able to apply for tax protection. Visit gov.uk/tax-on-your-private-pension/lifetime-allowance for more information.

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COMING SOON – WEBSITE CHANGES

The Group Pensions website is having a facelift with a new, simpler layout and fresher look!

You’ll see improved functionality and enhanced features to help you get the most out of the website.

We’ll keep you updated with developments and when you can expect to see the changes.

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What is Pension Wise?

Pension Wise is a free and impartial advice service, provided by the government, designed to provide DC pension scheme members with information and guidance as a result of the new pension flexibilities. Pension Wise was originally only available to those aged 55 and above, but it has now been extended to those aged 50 and above.

Pension Wise offers telephone or face-to-face appointments where you can find out more information about your options on retirement, how to shop around and what to look out for, with regard to taxes and fees. You can find more information at pensionwise.gov.uk or telephone 0800 138 3944 to book a telephone or face-to-face appointment.

Pension Wise won’t recommend any products or tell you what to do with your money, so you may also want to think about taking financial advice as well. You can find an independent financial adviser in your area by visiting unbiased.co.uk

THE ANNUAL ALLOWANCE (AA)

The AA limits the pension savings you can make each tax year that benefit from tax relief. For the 2015/16 tax year (6 April to 5 April), the AA was £40,000, however other changes to the AA were announced in the summer budget in July 2015 as follows:

The 2015/16 AA was £80,000 (rather than £40,000) based on the tax year being split into two periods; the first from 6 April 2015 to 8 July 2015 had an AA of £80,000 and the second from 9 July 2015 to 5 April 2016 had an AA of nil initially.

Unused allowance from the first period up to a maximum of £40,000 could be carried forward for the period from 9 July 2015 to 5 April 2016 giving you a total AA of up to £80,000. The £80,000 AA applied to the 2015/16 tax year only.

You could also carry forward any unused allowance from the previous three tax years.

If your pension savings from all arrangements exceeded the 2015/16 AA in addition to any carry forward, you would pay income tax at your highest rate on the excess. If your pension savings in the Scheme exceeded the AA in the 2015/16 tax year, we’ll send you a separate communication, by October 2016, outlining what this means for you. You can use the HM Revenue and Customs AA tool by visiting hmrc.gov.uk/tools/pension-allowance

For higher earners, changes in tax relief are taking place from 6 April 2016. For those earning £150,000 and over, there will be a tapered reduction in the AA of £1 for every £2 of income over £150,000, with a minimum AA of £10,000 for those with earnings of £210,000 or more.

Earnings include all taxable income and company pension contributions. However, the reduction will only apply to those individuals who have incomes, excluding pension contributions, over £110,000.

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PENSION SCAMS

As a result of the new pension changes, DB members may be more likely to be contacted by fraudsters who make promises of one-off investments, pension loans, and upfront cash or government loop-holes. But in reality, the consequences can often result in financial loss and significant tax charges.

If you are under the age of 55, you cannot release your pension savings unless you have ill health or are terminally ill. In all other circumstances, unless you have a protected minimum pension age confirmed by the Scheme, you cannot access your pension fund until age 55 at the earliest.

If you think you have been targeted by a pension scam, do not sign anything and contact The Pensions Advisory Service on 0300 123 1047.

Remember never be rushed into making a decision about your pension, arm yourself with the facts and give your investment the best protection from scammers.

Before making any decisions about transferring your DB benefits, seek independent advice. Visit unbiased.co.uk to find an adviser in your area.

For more information you can read ‘Protect yourself against pension scams’ which can be found at thepensionsregulator.gov.uk/individuals/dangers-of-pension-scams

HOW TO SPOT A PENSION SCAM

The warning signs…

• Cold calls, text messages, website pop-ups or someone coming to your door offering you a ‘free pension review’, ‘one-off investment opportunity’ or ‘legal loophole’.

• Convincing marketing materials that promise you returns of over 8% on your investment.

• Claims that you can access your pension before age 55.

• Offers to transfer your money overseas.

• Paperwork delivered to your door by courier that requires immediate signature.

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CHANGES TO STATE PENSIONS AND CONTRACTING OUT

Lloyds Banking Group (the Group) has communicated with active members regarding the forthcoming changes to the State Pension and the abolition of contracting out for DB schemes. Active members’ employment under the Scheme will cease to be contracted out from 6 April 2016.

The main effect of the changes will be an increase in National Insurance (NI) contributions both for the Employer and for active members from April 2016. The Employer is not proposing to make any changes to the Scheme to offset the impact of this increase in its pension costs.

You can read the Group’s communication lloydsbankinggrouppensions.com/assets/generic/changes_to_the_state_pension_and_contracting_out-2c23a12cf30dcb6e902aafbd90562c71.pdf, which explains the changes in greater detail.

CHANGES TO THE SCHEME

Some changes have been made to the Scheme’s rules since Pension Update 2014. These were introduced to reflect changes in legislation relating to shared parental leave and same-sex marriage.

Following the government’s introduction of shared parental leave, which offers parents more flexibility in deciding which parent will take leave and when, the Scheme’s rules were amended so that leave can be taken in line with the Group’s parental leave policy, subject always to the minimum legal requirements. Further details of the Group’s policy can be accessed on the Group Interchange in the Policies and Procedures section.

The rules were also amended in light of the Marriage and Civil Partnership (Scotland) Act 2014. Under the Scheme, same-sex spouses are now entitled to the same benefits as civil partners and opposite-sex spouses.

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IS YOUR NOMINATION FORM UP TO DATE?

A nomination form lets the Trustee know who you’d like to receive any benefits that may become payable in the event of your death. Therefore, it’s important to keep your nomination form up to date as your circumstances change. For example, if you get married or divorced, updating your nomination form will ensure that your beneficiaries are recorded correctly. The Trustee Board is not legally bound by your nomination form, but will take your wishes into account when deciding who should receive any benefits due.

Under the current UK tax laws, any lump sum to a dependant can be paid free of Inheritance Tax.

WHY IS IT IMPORTANT TO KEEP US UP TO DATE?

An illustrative case study

Michelle completed a nomination form when she joined the Scheme, naming her husband at the time to receive any death benefits. Michelle unexpectedly passed away, after having recently gone through a divorce.

Despite her circumstances changing substantially, she hadn’t updated her nomination form. The Trustee Board learned Michelle had a young daughter, so had the difficult task of deciding whether to pay benefit’s to Michelle’s ex-husband, daughter, or to split the benefits between them.

It took longer to pay out the benefits, as the Trustee Board first had to seek further information to understand Michelle’s circumstances at the time of her death and then decide who the benefits should go to.

If Michelle had kept her nomination form up to date, the benefits might have been paid out differently or sooner.

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Consider thisIf you’ve not yet completed a form (or you need to update it), you can download a nomination form from lloydsbankinggrouppensions.com/swforms

HOW YOU COULD INCREASE YOUR PENSION

If you’re an active member of the Scheme you could increase your retirement income by making contributions through Pension Extra.

Pension Extra is a tax-efficient way to boost your pension. Instead of you making direct contributions to your account, Scottish Widows makes contributions on your behalf. In exchange, your pay is reduced by the value of those contributions, resulting in Income Tax and NI savings.

On top of this, Scottish Widows contributes a further 5% of this amount.

You choose how your Pension Extra fund is invested from a range of options.

For more information visit the Flex website at lloydsbankinggroupflex.com

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WHAT DOES THE TRUSTEE BOARD DO?

The Trustee Board is legally responsible for looking after the investments in the Scheme and for ensuring that benefits are paid out as they become due.

Key duties include ensuring that:

• Appropriate investment options are in place, regularly monitoring their performance.

• Contributions are received and are invested in the correct funds, on behalf of members.

• The correct benefits are paid out to members or beneficiaries at the right time, including at retirement, on death, or on leaving service.

• The Scheme complies with all relevant legislation, regulations and recognised best practice.

On a practical level, some of these responsibilities are delegated to other parties including the investment managers. However, the Trustee Board is still legally responsible so has to make sure that the delegations are being carried out correctly. The Trustee Board usually meets four times a year to oversee these activities.

WHAT SKILLS ARE REQUIRED?

The Pensions Regulator requires that all Trustee Directors must have a minimum level of knowledge and expertise appropriate for their role. The Trustee Board is responsible for producing an annual statement which confirms (amongst other things) how particular knowledge and understanding have been achieved. Trustee Directors have to ensure that their knowledge remains up to date as legislation and best practice change. In addition to the usual Trustee Board and sub-committee meetings, the Trustee Board also holds a training and strategy day at least once a year.

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MEET THE TRUSTEE BOARD

As at 1 January 2016 the Trustee Board was:

Vicky Paramour Independent Trustee

Director The Law Debenture Pension

Trust Corporation plc

Colin Liddell Member-Nominated

Trustee Director

Kevin Doerr Employer-Appointed

Trustee Director

Ronnie Dow Member-Nominated

Trustee Director

Catriona Herd Employer-Appointed

Trustee Director

Richard Wohanka Employer-Appointed

Trustee Director (Chairman)

SCHEME ADVISERS

The Trustee Board has appointed professional advisers and managers to assist with running the Scheme. As at 30 June 2015 the advisers were:

Donald Duval, FFA

Scottish Widows Pensions Department

PricewaterhouseCoopers LLP

Lloyds Bank Scotland plc

Hymans Robertson

Aberdeen Asset Management Limited

Shepherd and Wedderburn LLP

Group Pensions Finance & Investments, Lloyds Banking Group

Steve Fellows, Group Pensions, Trustee Services, Lloyds Banking Group

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Actuary

Administrator

Auditor

Banker

Investment adviser

Investment manager

Legal adviser

Report and Accounts

Secretary to the Trustee Board

CONTACTS

Scottish Widows Retirement Benefits Scheme Administration Team

If you have any questions regarding your benefits under the Scottish Widows Retirement Benefits Scheme, or would like a printed copy of this newsletter, contact the Scheme administrator:

Scottish Widows plc Pensions Department PO Box 28069 15 Dalkeith Road Edinburgh EH16 5XD

0131 655 6860

swstaff.pensions@scottishwidows.co.uk

lloydsbankinggrouppensions.com

Independent financial advice

If you would like to talk to a financial adviser in your area, visit unbiased.co.uk

Disclaimer The full terms and conditions of the Scheme are contained in the Trust Deed and Rules. The Trust Deed and Rules are formal documents that are the legal basis of the Scheme and will prevail in the event of any disagreement. Nothing in this document confers any entitlement to benefits.

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This update is also available in large print, Braille or audio format on request

from the Scheme administrator.