the royal bank of scotland group pension fund annual ... pension... · the royal bank of scotland...

The Royal Bank of Scotland Group Pension Fund

Annual Report for the year ended 31 March 2014

Registration number 100140634

Table of contents

CHAIRMAN’S REPORT.......................................................................................................................... 1

TRUSTEE, ADMINISTRATION AND ADVISERS .................................................................................. 2

REPORT OF THE TRUSTEE.................................................................................................................. 6

INVESTMENT REPORT ....................................................................................................................... 13

ACTUARIAL CERTIFICATES AND CERTIFICATIONS ...................................................................... 18

INDEPENDENT AUDITOR’S REPORT................................................................................................ 22

INDEPENDENT AUDITOR’S STATEMENT ABOUT CONTRIBUTIONS............................................ 23

SUMMARY OF CONTRIBUTIONS....................................................................................................... 24

CONSOLIDATED FUND ACCOUNT.................................................................................................... 25

CONSOLIDATED NET ASSET STATEMENT ..................................................................................... 26

NOTES TO THE FINANCIAL STATEMENTS...................................................................................... 27

Chairman’s Report

I am pleased to present the Annual Report for The Royal Bank of Scotland Group Pension Fund (The Fund) for the year ended 31 March 2014. The Fund is one of the largest pension schemes in the UK and the Trustee Board keeps the financial health of the Fund under constant review. I am pleased to report that the value of the net assets increased during the year by £0.5 billion to £26.2 billion at 31 March 2014.

We continue to work effectively with the Principal Employer as scheme sponsor to review the funding strategy for the Fund.

The Trustee has also kept under review relevant legal and regulatory developments affecting the Fund. During the year the Trustee has engaged with The Bank as Principal Employer and Her Majesty’s Treasury in respect of the implications for the Fund, and the action required, of the Banking Reform Act and the European Resolution and Recovery Directive.

Board and Committee meetings

The Trustee Board met four times during the period. In addition the Board and Funding and Monitoring Committee met representatives of the Group on a number of occasions to discuss the actuarial valuation as at 31 March 2013 and the funding strategy of the Fund. There were also regular scheduled meetings of the Trustee Board’s Administration and Benefits Committee, Funding and Monitoring Committee, Risk and Audit Committee and Investment Committee, together with a number of additional meetings as required. Changes to the Board There are several changes to the Trustee Board to report. Peter Easton, Graham Halstead and Colin Wilson all resigned on 25 March 2014 having completed their terms of office as member-nominated Trustee Directors I would like to thank Peter, Graham and Colin for their valuable contributions during their terms of office. We noted with sadness the death, following a lengthy illness, of Peter Boyd in October 2013. Peter was a valued member of The Board and made a substantial and important contribution to the governance of the Fund. Our condolences go to his family and friends. Following the member-nominated Trustee Director elections in January 2014, the Board welcomed Stephen Fallowell, Malcolm Groves, Marie Kiernan and Ian Purves as new member-nominated Trustee Directors. Finally, I would like to thank my fellow Trustee Directors and our internal and external advisors for their commitment and support throughout the year. Miller McLean Chairman – RBS Pension Trustee Limited 27 June 2014

The Royal Bank of Scotland Group Pension Fund Page 1

Trustee, Administration and Advisers

Principal Employer National Westminster Bank plc

Corporate Trustee RBS Pension Trustee Limited 1 Princes Street London EC2R 8PB Company registration number 2726164

Miller McLean * ~ (Chairman)

Bank appointed Trustee Director Chairman of Investment Committee Chairman of Funding and Monitoring Committee

Peter Boyd # ~ Member nominated Trustee Director Deceased 17 October 2013

Ronald Bowie ~ ^ Independent Trustee

Stephen Boyle*# Bank appointed Trustee Director Chairman of the Administration & Benefits Committee

Fiona Davis * # ^ Bank appointed Trustee Director Chairman of the Risk and Audit Committee

Peter Easton # ^ Member nominated Trustee Director Resigned 25 March 2014

Stephen Fallowell # ^ Member nominated Trustee Director Appointed 25 March 2014

George Graham * ^ Bank appointed Trustee Director

Malcolm Groves* Member nominated Trustee Director Appointed 25 March 2014

Graham Halstead # Member nominated Trustee Director Resigned 25 March 2014

Marie Kiernan # Member nominated Trustee Director Appointed 25 March 2014

Ian Purves * ~ Member nominated Trustee Director Appointed 25 March 2014

Colin Wilson*~ Member nominated Trustee Director Resigned 25 March 2014

Trustee Directors

Donald Workman* ~ (Deputy Chairman)

Bank appointed Trustee Director

* Member of the Investment Committee # Member of the Administration and Benefits Committee ~ Member of the Funding and Monitoring Committee ^ Member of the Risk and Audit Committee

Secretary to the Trustee Wendy Tavendale

Scheme Actuary Andy Cox FIA AonHewitt 10 Devonshire Square London EC2M 4YP



Administrator Administration is carried out by Pension Services, a unit within HR People Services, The Royal Bank of Scotland Group plc. Any member who has questions about the Fund, their pension benefits or who would like more information should e-mail [email protected] or contact:

Pension Services The Royal Bank of Scotland Group plc Citylink House 4 Addiscombe Road Croydon CR9 5PB

Independent Auditor Deloitte LLP 19 Bedford Street Belfast BT2 7EJ

Legal Adviser Dentons UKMEA LLP One Fleet Place London EC4M 7WS

Banker National Westminster Bank plc City of London Office PO Box 12258 1 Princes Street London EC2R 8PA

Consultants Investment

RBS Investment Executive Limited 24/25 St Andrew Square Edinburgh EH2 1AF

AonHewitt 10 Devonshire Square London EC2M 4YP

Tax

Deloitte LLP Hill House 1 Little New Street London EC4A 3TR

Employer Covenant

Penfida Limited 1 Carey Lane London EC2V 8AE

Investment Custodian Bank of New York Mellon One Canada Square London E14 5AL


mailto:[email protected]


Investment Managers Listed below are all the organisations who acted as an investment manager for part or all of the year covered by this Annual Report. Further details regarding the investment strategy are included in the Investment Report. Main Fund Section Investment Managers Aalto Invest LLP * Altrinsic Global Advisors LLC AQR Capital Management, LLC Axa Real Estate Investment Managers SGP * Axiom International Investors LLC Baillie Gifford & Co Brevan Howard Asset Management LLP Bridgewater Associates LP Brockton Capital LLP Brookfield Holding Canada Inc. * Cantab Capital Partners COMAC Global Macro Fund Limited Comgest Asset Management International Limited DSM Capital Partners LLC Epoch Investment Partners Inc Genesis Asset Mangers LLP Global Thematic Partners, LLC (‘GTP’) * GMO UK Limited Gramercy Advisors LLC Fore Research & Management, LP * Fulcrum Asset Management Limited * Hastings Funds Management (UK) Limited Hermes Investment Limited JP Morgan Chase and Co LaSalle Investment Management Ltd Leadenhall Capital Partners LLP Legal & General Assurance (Pensions Management) Limited Lindsell Train Ltd Lothbury Investment Management Limited M&G Investment Management Limited MFS International (UK) Limited Millburn Ridgefield Corp. MKP Capital Management LLC Navis LLC Nephila Capital Ltd New Forests Asset Management Pty Ltd * Och Ziff Capital Management Group LLC Oldfield Partners LLP Old Mutual Global Investors (UK) Limited * Orion Capital Managers LP Partners Group (UK) Ltd Pathway Capital Management LLC PIMCO Europe Limited Pramerica Investment Management Prologue Capital LLP * Pzena Investment Management LLC Rogge Global Partners Sankaty Advisors LLC Southeastern Asset Management Inc Standard Life Investments Limited Tufton Oceanic Limited * Veritas Asset Management (UK) Limited




Investment Managers (continued)

RBS AA Section Investment Managers Aviva Investors Global Services Limited Capital International Limited# Gramercy Advisors LLC * JP Morgan Alternative Asset Management Legal & General Assurance (Pensions Management) Limited MFS International (UK) Limited Nephila Capital Ltd New Forests Asset Management Pty Ltd * * appointed during the year # removed during the year

Derivatives Clearing Brokers

J.P. Morgan Securities plc

HSBC Bank plc

Report of the Trustee

Introduction

The Directors of RBS Pension Trustee Limited (the Trustee) have pleasure in submitting the report of The Royal Bank of Scotland Group Pension Fund (the Fund) which covers the year ended 31 March 2014. The purpose of the report is to describe how the Fund has been managed during the year and to advise members of any significant changes that have been introduced during the year.

Following the merger of the final salary section of the RBS AA Pension Scheme with the Fund on 31 March 2012 a new section was created within the Fund known as the ''RBS AA Section”. This section is financially separate from the remainder of the Fund and is referred to separately, where appropriate, throughout this report.

Constitution and Management of the Fund

The Trustee Board has four standing committees: the Investment Committee, the Administration and Benefits Committee, the Funding and Monitoring Committee and the Risk and Audit Committee.

Operating within Terms of Reference agreed by the Trustee Board, the Investment Committee meets regularly with the Fund’s advisers to monitor performance of the Fund’s investments and to make recommendations to the Trustee Board on investment strategy. The Investment Committee and Trustee Board are supported in their oversight of the investments by RBS Investment Executive Limited and other advisors. The Trustee Board has delegated certain responsibilities for the management if the Fund’s investments to the RBS Investment Executive Limited. The Committee met four times during the period.

The Administration and Benefits Committee meets regularly with the Fund’s advisors, including its legal adviser, Dentons UKMEA LLP. The Committee is responsible for considering changes to the Fund’s Rules as they affect benefits and exercising the Trustee’s discretion in connection with the payment of benefits. Other responsibilities include monitoring the administration of the Fund and communication to members of the Fund. The Committee held four scheduled meetings during the period. In addition, six meetings were held by means of audio or email to consider a number of time critical matters.

The Funding and Monitoring Committee considers all aspects of the funding and covenant monitoring of the Fund, particularly the formal actuarial valuation. Between formal actuarial valuations, the Committee monitors the funding position of the Fund and reviews the financial covenant of the employers. The Committee is supported in this role by Penfida Limited as advisors on Employer Covenant. The Committee met ten times during the year.

The Risk and Audit Committee is responsible for all aspects of financial and risk management of the Fund, including reviewing the Annual Report and Letter of Representation before presentation to the Trustee Board for approval. The Committee oversees the budgetary process and the Fund’s system of financial authorities. The Committee is also responsible for establishing the Fund’s risk appetite and reviewing the risk register. The Committee met five times during the year.

The power to appoint or remove the Trustee of the Fund rests with National Westminster Bank plc. The power of appointing and removing Trustee Directors is contained in the Articles of Association of RBS Pension Trustee Limited. Six directors are appointed by The Royal Bank of Scotland Group plc and four directors are selected by and from the membership of the schemes of which RBS Pension Trustee Limited is the Trustee.

The Trustee Board concluded the process of appointing new Member Nominated Directors (MNDs) in February 2014. For the first time, the process was a two stage one, where member nominations were followed by a selection procedure and then an election where all members were eligible to vote. It was also agreed that MNDs will serve either a four or six year term of office to avoid large changes to the Trustee Board due to coterminous terms of office.

The members of the Fund have been contracted out on the “Reference Scheme Test” basis from the State Second Pension (S2P) since 1 April 1999.



Tax Status

The Fund was approved by the Commissioners of the Inland Revenue as a retirement benefits scheme for the purposes of Chapter I, Part XIV, of the Income and Corporation Taxes Act 1988 and is treated as an “exempt approved scheme” for the purposes of the Act. The Fund was registered under the Finance Act 2004.

Trustee Training

During the year, training sessions were held for Trustee Directors covering a number of areas including the Banking Reform Bill, actuarial valuations, the implications of Scottish independence and recent legal and regulatory developments. These training sessions were facilitated by RBS Investment Executive Limited. In addition, an Investment Conference for Trustee Directors took place on 24 and 25 April 2013 when the Trustee Directors reviewed three year investment performance and received a number of presentations from fund managers on the investments the Fund has made.

Financial Review

The 2014 Financial Statements set out on pages 25 to 43 provide an overview of the income, expenditure and net assets of the Fund. The Financial Statements have been prepared and audited in accordance with the regulations made under sections 41(1) and (6) of the Pensions Act 1995.

During the year under review the net assets of the Fund increased from £25.7bn to £26.2bn. The Fund received contributions of £648m (2013: £820m), paid benefits of £829m (2013: £813m), administrative expenses of £29m (2013: £23m) and achieved net returns on investments of £672m (2013: £2,962m).

Ownership of the Royal Bank of Scotland Group plc

The Principal Employer, National Westminster Bank plc, is a wholly-owned subsidiary of The Royal Bank of Scotland plc, which is in turn wholly owned by The Royal Bank of Scotland Group plc. As at 31 March 2014, HM Treasury owns 63.52% of the ordinary shares of The Royal Bank of Scotland Group plc. Due to the issue of 51 billion B Shares to HM Treasury in December 2009, HM Treasury’s economic interest is 79.92%.

Additional Member Contributions

Arrangements for members to contribute to secure additional benefits in the Fund were revised from October 2007. A range of investment options are available covering UK and international equities, fixed-interest and index-linked bonds, cash and property.

The Trustee Board agreed to participate in a common investment fund jointly with other pension schemes of the RBS Group. The investment options referred to above are provided by The Royal Bank of Scotland Group Common Investment Fund. Two of the Fund’s Trustee Directors are Trustee Directors of the Common Investment Fund. The Trustee Board retains overall responsibility for the investment options made available to members and could at any time withdraw funds from the Common Investment Fund.

The facility for members to pay contributions is now only available through the Bank’s flexible benefit choice programme, RBSelect. From April 2014 members are able to start, stop or change their contributions on a monthly basis.



Statement of Funding Principles

The Trustee has prepared Statements of Funding Principles (SFP) for the Main Fund Section and the RBS AA Section respectively. These statements set out the Trustee’s policy for securing that the Statutory Funding Objective is met. The Statutory Funding Objective is defined in section 222 of the Pensions Act 2004, which states that every scheme must have sufficient and appropriate assets to cover its Technical Provisions. Further Information about the funding of the Fund is set out on pages 8 and 9, and pages 18 to 21. Copies of the SFPs are available from the Fund’s administrator, Pension Services, at the address on page 3.

Actuarial Certificate and Certification Main Fund Section The Actuarial Certificate in respect of the Main Fund Section's Technical Provisions is included on page 18. The Actuarial Certificate in respect of the adequacy of contribution rates to meet the Statutory Funding Objective for the Main Fund Section is included on page 19. The Main Fund Section's most recent actuarial valuation was completed as at 31 March 2013. This actuarial valuation showed that the funding level was 81% as at 31 March 2013, and the corresponding size of the funding shortfall of the assets relative to the liabilities was £5,652 million. To address the shortfall of £5,652 million, the Bank has agreed to pay the following lump sum cash contributions into the Main Fund Section.

Year Amount £million

Payment Due Date

2014 400 31 March 2014 125 30 June 2014 125 30 September 2015 650 31 March 2016 650 31 March 2017 450† 31 March 2018 450* 31 March 2019 450* 31 March 2020 450* 31 March 2021 450* 31 March 2022 450* 31 March 2023 450* 31 March

† Increased from £450M by the increase in Retail Prices Index for the twelve months ending 31 January 2017, subject to a minimum increase of 0%.

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



Actuarial Certificate and Certification (continued) If experience from 31 March 2013 is line with the assumptions adopted for the 2013 actuarial valuation, these contributions together with investment returns are expected to remove the shortfall by 31 March 2023. The Trustee and the Bank have agreed that the Bank will pay contributions to meet administration expenses and the cost of future benefits being earned by active members at the following rates:

For members accruing service in the Retiring Age 65 Schedule, 23.9% of members' basic salaries less any member contributions payable

For all other active members, 31.1% of members' basic salaries less any member contributions payable

Since 31 March 2013 experience has been more favourable than assumed, and there has been a rise in the funding level and an equivalent reduction in the shortfall. The Actuary's latest update for the Main Fund Section showed that the funding level was 86% as at 31 March 2014. RBS AA Section The Actuarial Certificate in respect of the RBS AA Section's Technical Provisions is included on page 20. The Actuarial Certificate in respect of the adequacy of contribution rates to meet the Statutory Funding Objective for the RBS AA Section is included on page 21. The RBS AA Section's most recent actuarial valuation was completed as at 31 March 2013. The actuarial valuation showed that the funding level of the RBS AA Section was 98% as at 31 March 2013, and the corresponding size of the funding shortfall of the assets relative to the liabilities was £15.4 million. To address the funding shortfall of £15.4 million, the Bank has agreed to pay lump sum cash contributions of £5.2 million per annum in quarterly instalments until 31 March 2016. If experience from 31 March 2013 is in line with the assumptions adopted for the 2013 actuarial valuation, these contributions together with expected investment returns are expected to remove the funding shortfall by 31 March 2016. The Trustee and the Bank have agreed that the Bank will pay contributions to meet the cost of future benefits being earned by active members at the following rates:

At least 32.6% of pensionable salary for employees who are active members of the RBS AA Section: Retiring Age 65 Schedule (Schedule 1B)

At least 42.1% of pensionable salary for other active members (Schedule 1A) Since 31 March 2013 experience has been more favourable than assumed, and there has been a rise in the funding level such that the RBS AA Section has moved into a surplus. The Actuary's latest update for the RBS AA Section showed that the funding level was 104% as at 31 March 2014.

Transfer Values

Cash equivalents and other individual transfer payments made during the year were calculated and verified on the basis recommended by the Scheme Actuary and in accordance with Regulations under the Pension Schemes Act 1993. No cash equivalents, guaranteed cash equivalents or transfer payments were paid on a reduced basis during the year. In calculating transfer values, the Trustee Directors included an allowance for discretionary benefits that may be awarded in respect of discretionary increases to pensions in payment and deferment, on a basis recommended by the Scheme Actuary.



Pension Increases

Once in payment, most pensions in excess of the Guaranteed Minimum Pension (GMP) are guaranteed to increase annually by the lesser of 5% and the change in the UK Retail Prices Index for the twelve months to the preceding January. There are some exceptions, mainly former members of The Royal Bank of Scotland Staff Pension Scheme for whom the guaranteed increase in respect of their pension for service prior to 6 April 1997 is the lesser of 3% and the change in the UK Retail Prices Index for the twelve months to the preceding January.

There is also a legal requirement to increase GMPs earned as a consequence of being contracted out of the State Second Pension (S2P) between 6 April 1988 and 5 April 1997, by the lesser of 3% and the increase in the UK Retail Prices Index during the twelve months to the preceding September.

With effect from 1 April 2013, GMPs in payment earned after 5 April 1988 were increased by 2.2% (2012: 3.0%) and most pensions other than GMPs in payment were awarded the guaranteed increase of 3.3% (2012: 3.9%). For former members of The Royal Bank of Scotland Staff Pension Scheme the increase in respect of their pension for service prior to 6 April 1997 was 3.3%. Different increases applied in some cases where members retired overseas or where members had service in old schemes with historically different pension increase arrangements.

Deferred pensions accrued prior to 1 January 1985 by members who left service prior to 1 January 1991 are increased before the attainment of normal retiring age on a discretionary basis, with the exception of some members whose service was entirely with schemes with historically different practices which have now been merged into the Fund. The award at 1 April 2013 was 2.6% (2012: 3.0%). For service accrued after 1 January 1985 or by members who left service after 31 December 1990, deferred pensions were increased in accordance with current legislation.

Investments and Custodians

Responsibility for the administration and management of the Fund’s assets is vested in the Trustee who has responsibility for the overall investment policy of the Fund. The Trustee has established an Investment Committee with responsibility to oversee all aspects of the investment arrangements of the Fund. Day to day investment decisions are delegated to the Fund’s investment managers under formal legal agreements between the Fund and each investment manager.

In accordance with the Pensions Act 1995, subsequently amended by the Pensions Act 2004, the Trustee maintains a Statement of Investment Principles that describes the Fund's investment policy.

The majority of the Fund’s assets are held in custody by the Bank of New York Mellon. The investments are held in the name of BNY (OCS) Nominees Limited. The remaining investment assets are pooled funds and private market assets and these are held externally but are registered in the name of the Trustee. The Investment Report is included on pages 13 to 17 of this report.

Controlling Interests in Subsidiaries

During the year the Fund invested in three entities in which it subsequently held controlling interests as at 31 March 2014. West Granite Homes invests in residential property in the US and is 99.9% owned by the Fund although the Fund has 100% of the voting rights. Albemarle Shipping Ltd invests in shipping assets and is 100% owned by the Fund. Phoenix Natural Gas is a Northern Irish Natural Gas Distributor and is 50% owned as part of a joint venture. West Granite Homes and Albemarle Shipping Ltd have been fully consolidated into the Financial Statements set out on pages 25 to 43. Phoenix Natural Gas has been consolidated into the financial statements using the Gross Equity Method of accounting in accordance with the applicable accounting treatment for joint ventures.



Responsible investment and corporate governance

The Trustee believes that environmental, social, economic and governance performance are fundamental to a company’s enduring success and therefore to its long-term financial returns. The Trustee also believes that the goal of any company should be to generate and deliver sustainable long-term financial value, which will be helped by having long-term owners to whom the company is accountable and by having owners that are clear about their expectations. The Trustee seeks to invest in companies which embrace these objectives and are able to demonstrate that they do so.

It is the Trustee’s policy to implement Responsible Ownership in its investment approach. The Trustee is a signatory to the UK Stewardship Code as a framework for its interaction with companies in which it invests, and as a framework for its expectations of how its investment management processes will take into consideration relevant environmental, social and governance issues. The Trustee acknowledges the role of the Fund as an asset owner under the Stewardship Code and therefore seeks to hold to account its fund managers and service providers in respect of their commitments to the Code. The Trustee has adopted the UN Global Compact Principles as a framework for its expectations as to the behaviours and approach of the Fund’s underlying assets.

In order to give effect to this policy, the Trustee has employed a recognised third party service provider, Hermes Equity Ownership Services Ltd (‘EOS’) to assist in its implementation. There are three major elements to this: monitoring of Fund investments, engagement with investee companies as appropriate and also with regulators and standard-setters, and voting of Fund shares.

The Trustee’s high-level investment policies, including the policies on voting and engagement are set out in the Statement of Investment Principles. The Statement of Investment Principles, the Responsible Ownership Policy and the Annual Voting and Engagement Report are available online at http://www.rbselect.rbspeople.com/uk/4.2.final-salary-pension-plan.php?loc=package_information

Membership Statistics

The following table shows the changes in the membership of the Fund during the year ended 31 March 2014:

At 31 March 2013 Changes in year At 31 March 2014RBS Main Fund Section Active members 35,290 (3,005) 32,285Deferred pensioners 122,116 319 122,435Pensioner members 62,006 1,327 63,333 219,412 (1,359) 218,053RBS AA Section Active members 62 (7) 55Deferred pensioners 2,134 (52) 2,082Pensioner members 664 33 697 2,860 (26) 2,834 Total members 222,272 (1,385) 220,887

Active members are employees accruing benefits. Deferred pensioners are those who have left the Fund with preserved pensions. Pensioner members are all those (including dependants) in receipt of a pension.

Registration

All the relevant details of the Fund and the Trustee Directors have been passed to the Pension Tracing Service, The Pension Service, Tyneview Park, Whitley Road, Newcastle upon Tyne NE98 1BA, which may be able to help anyone trying to trace pension rights under a previous pension scheme.


http://www.rbselect.rbspeople.com/uk/4.2.final-salary-pension-plan.php?loc=package_information


Statement of the Trustee’s Responsibilities

The Financial Statements, which are prepared in accordance with UK Generally Accepted Accounting Practice, are the responsibility of the Trustee. Pension scheme regulations require the Trustee to make available to Fund Members, beneficiaries and certain other parties, audited Financial Statements for each Fund year which:

• show a true and fair view of the financial transactions of the Fund during the Fund year and of the amount and disposition at the end of that year of the assets and liabilities, other than liabilities to pay pensions and benefits after the end of the Fund year; and

• contain the information specified in the Schedule to the Occupational Pension Schemes (Requirement to obtain Audited Accounts and a Statement from the Auditor) Regulations 1996, including a statement whether the Financial Statements have been prepared in accordance with the Statement of Recommended Practice "Financial Reports of Pension Schemes".

The Trustee has supervised the preparation of the Financial Statements and has agreed suitable accounting policies, to be applied consistently, making any estimates and judgments on a prudent and reasonable basis. The Trustee is also responsible for making available certain other information about the Fund in the form of an Annual Report. The Trustee is responsible for the maintenance and integrity of the Fund’s financial information available on the Bank’s intranet website. The Trustee is responsible under pensions legislation for ensuring that there is prepared, maintained and from time to time revised a Schedule of Contributions showing the rates of contributions payable towards the Fund by or on behalf of the employer and the active members of the Fund and the dates on or before which such contributions are to be paid. The Trustee is also responsible for keeping records in respect of contributions received in respect of any active member of the Fund and for monitoring whether contributions are made to the Fund by the employer in accordance with the Schedule of Contributions. Where breaches of the schedule occur, the Trustee is required by the Pensions Acts 1995 and 2004 to consider making reports to The Pensions Regulator and the members. The Trustee also has a general responsibility for ensuring that adequate accounting records are kept and for taking such steps as are reasonably open to them to safeguard the assets of the Fund and to prevent and detect fraud and other irregularities, including the maintenance of an appropriate system of internal control.

Approval of the Trustee Report

Approved by the Directors of RBS Pension Trustee Limited and signed on behalf of RBS Pension Trustee Limited by:

Miller McLean

Fiona Davis

Chairman - RBS Pension Trustee Limited Director - RBS Pension Trustee Limited 27 June 2014


Investment Report

Investment Governance The Investment Committee (“the Committee”) oversees the management of the Fund within the framework of objectives and policies set out by the Trustee.

The Committee is supported by RBS Investment Executive Limited (“RIEL”). The RIEL team comprises investment specialists led by the Chief Investment Officer, Robert Waugh. RIEL is responsible for advice and oversight of the Fund’s investment strategy. AonHewitt are also employed to advise on strategic investment matters and provide a second opinion to the Committee and Trustee Board.

Investment Activity

Increasing diversification

> The Fund continued to expand into a range of new asset classes to pick up a broader set of return streams including:

• Real estate debt

• Settled annuity obligations

• Infrastructure debt

• Infrastructure equity

• US residential property

• Shipping

• Forestry

The Fund continued to diversify to achieve a reduced concentration of risk in equities. The purpose of this diversification is to give the Fund a more balanced portfolio which should generate more consistent returns. RIEL screens new asset classes and investment opportunities on an ongoing basis.

Liability hedging

> The Fund increased the amount of the liability interest rate risk being hedged while inflation hedging remained broadly unchanged.

The liability hedging programme allows the Fund to offset the effect of changes in the value of the liabilities arising from unexpected movements in interest rate and inflation.

Central clearing and collateral management infrastructure for derivatives

> The Fund designed and implemented a new operational infrastructure for the “central clearing” of derivatives through exchanges and centralised management of derivatives collateral. The benefits of this operational infrastructure are:

1. Superior risk management by ensuring a common approach across all portfolios which use derivatives

2. More efficient management of collateral and therefore lower overall trading costs

3. Full compliance with new European and US derivatives regulations

Derivatives have grown in importance, primarily as a risk management tool which allows the Fund to offset “unwanted risks”.


Investment Report


Investment Performance

In the year to 31 March 2014 the Fund outperformed the strategic benchmark by £313m. Over three years to 31 March 2014 the Fund outperformed the strategic benchmark by £385m. Over the full period starting 1 January 2010, when the Trustee put in place its new investment oversight arrangements and set up RIEL, to 31 March 2014 the Fund outperformed the strategic benchmark by £1,136m.

Performance to 31 March 2014

1.5%

8.5%

12.5%

2.9%

9.3%

13.8%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1 Year to 31 March 2014 3 Years to 31 March 2014 5 Years to 31 March 2014

Perf

orm

ance

, % p

er a

nnum

Strategic Benchmark

Fund

Asset Allocation and Strategic Benchmark

Diversification is an ongoing theme of the investment programme. RIEL continues to actively pursue and evaluate potential new asset categories for suitability.

The asset mix in place as at 31 March 2014 is illustrated in the chart below:

Main Fund Section - Asset Portfolio 31 March 2014

Quoted equity - UKQuoted equity - EuropeQuoted equity - North AmericaQuoted equity - JapanQuoted equity - Asia pacificQuoted equity - Emerging marketsPrivate equityRegulated utilitiesInfrastructure equity *Shipping *Timber and forestryGlobal creditEmerging markets creditSyndicated loansDistressed debt *Real estate debt *Infrastructure debtUK propertyEuropean propertyUS residential property *Global propertyReinsurance - LifeReinsurance - Non-lifeHedge fundsIndex linked Gilts and swapsCash and liquidity

* New asset classes added in the year to 31 March 2014.

Investment Report

The Strategic Benchmark for the Main Fund Section as at 31 March 2014 is set out in the table below:

Asset class Sub asset class Investment Managers Strategic Benchmark exposure at 31 March

2014 Quoted equity Altrinsic

Axiom Baillie Gifford Comgest DSM Epoch Genesis GMO GTP LGIM Lindsell Train Oldfield Pzena Southeastern Veritas

Private equity Hermes GPE JP Morgan Navis Pathway

Regulated utilities MFS Infrastructure equity Hastings Shipping Tufton

Equity

Timber and forestry LGIM New Forests

£9,478m

Global credit LGIM M&G Pimco Pramerica Standard Life

Emerging markets credit Gramercy Syndicated loans Sankaty Distressed debt Brookfield Real estate debt Axa

Credit

Infrastructure debt Hastings

£5,707m

UK Brockton Lothbury Standard Life

Europe La Salle Orion

US residential Aalto

Property

Global Partners

£1,510m

Hedge funds Hedge funds AQR Brevan Howard Bridgewater Cantab Comac Fore Fulcrum Millburn MKP Capital

£687m


Investment Report

Och Ziff Old Mutual Prologue Rogge

Non-life risks Nephila Reinsurance Life risks Leadenhall

£450m

Liability hedging LGIM Cash & liquidity LGIM

Liability hedging

Collateral management LGIM

55% of liability interest rate risk, implemented by a combination of UK government bonds and swaps, with additional hedging via swaptions 70% of liability inflation

risk

The assets of the RBS AA Section are managed on a ring-fenced basis. AA runs a simplified version of the strategy adopted within the Main Section allowing for the particular liability profile of members within the RBS AA Section.

The asset mix in place as at 31 March 2014 for the AA Section is illustrated in the chart below:

RBS AA Section - Asset Portfolio 31 March 2014

Quoted equity - UK

Quoted equity - Europe

Quoted equity - North America

Quoted equity - Japan

Quoted equity - Asia pacific

Quoted equity - Emerging markets

Regulated utilities

Timber and forestry

Global credit

Emerging markets credit

Property

Reinsurance - Non-life

Index linked Gilts and swaps

Cash and liquidity

The Strategic Benchmark for the RBS AA Section as at 31 March 2014 is set out in the table below:

Asset class Sub asset class Investment Managers Strategic Benchmark exposure at 31 March

2014 Equity Quoted equity LGIM £225m

Global credit LGIM Credit Emerging markets credit Gramercy

£141m

Property Property funds Aviva £36m Regulated utilities MFS Timber and forestry New Forests

Alternative equity + Reinsurance

Non-life risks Nephila

£25m

Liability hedging LGIM Liability hedging Cash & liquidity LGIM

70% of liability interest rate risk

70% of liability inflation risk


Investment Report

Principal Investments

Ten largest equity issuer exposures

£64m

£63m

£54m

£53m

£52m

£44m

£44m

£43m

£43m

£75m

£0m £50m £100m £150m £200m

Phoenix Natural Gas (infrastructure equity)

Roche (quoted equity)

Microsoft (quoted equity)

Oracle (quoted equity)

Samsung Electronics (quoted equity)

Google (quoted equity)

Hewlett Packard (quoted equity)

GlaxoSmithKline (quoted equity)

Chesapeake (quoted equity)

Citigroup (quoted equity)

Ten largest bond issuer exposures

£5,862m

£980m

£110m

£97m

£90m

£60m

£56m

£45m

£40m

£40m

£0bn £1bn £2bn £3bn £4bn £5bn £6bn £7bn

UK government

Network Rail

US Treasury

German government

Phoenix Natural Gas

Verizon Communications

General Electric

Anheuser-Busch

Connect Plus (M25)

Associated British Ports UK

Ten largest pooled fund investments

£2,198m

£335m

£294m

£260m

£207m

£206m

£126m

£117m

£96m

£94m

£0bn £1bn £2bn £3bn

LGIM Sterling Liquidity Fund (cash)

Hermes GPE III (private equity)

Lothbury Property Trust (property)

Hermes GPE II (private equity)

Pathway (private equity)

Nephila Cronus Fund (reinsurance)

LGIM Emerging Market Equity (passive equity)

West Granite Homes (US residential property)

Hermes GPE I (private equity)

RBS US Dollar Liqudity Fund (cash)


Actuarial Certificates and Certifications


Independent Auditor’s Statement about Contributions to the Trustee of the Royal Bank of Scotland Group Pension Fund

We have audited the Financial Statements of the Royal Bank of Scotland Group Pension Fund for the year ended 31 March 2014 which comprise the consolidated fund account, consolidated net assets statement and the related notes 1 to 16. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).

This report is made solely to the Trustee, as a body, in accordance with regulation 3 of the Occupational Pension Schemes (Requirement to obtain Audited Accounts and a Statement from the Auditor) Regulations 1996 made under the Pensions Act 1995. Our audit work has been undertaken so that we might state to the Trustee those matters we are required to state to it in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Trustee as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of the Trustee and Auditor

As explained more fully in the Trustee’s Responsibilities Statement, the Fund’s Trustee is responsible for the preparation of Financial Statements which give a true and fair view. Our responsibility is to audit and express an opinion on 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.

Scope of the audit of the Financial Statements

An 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 Fund’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Trustee; and the overall presentation of the Financial Statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited Financial Statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Opinion on the Financial Statements In our opinion the Financial Statements:

• show a true and fair view of the financial transactions of the Fund during the year ended 31 March 2014, and of the amount and disposition at that date of its assets and liabilities, other than the liabilities to pay pensions and benefits after the end of the year;

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

• contain the information specified in Regulation 3 of, and the Schedule to, the Occupational Pension Schemes (Requirement to obtain Audited Accounts and a Statement from the Auditor) Regulations 1996, made under the Pensions Act 1995.

Deloitte LLP Chartered Accountants and Statutory Auditor Belfast United Kingdom 27 June 2014


Independent Auditor’s Statement about Contributions to the Trustee of the Royal Bank of Scotland Group Pension Fund

We have examined the summary of contributions to the Royal Bank of Scotland Group Pension Fund for the year ended 31 March 2014 as set out on page 24.

This statement is made solely to the Trustee, as a body, in accordance with regulation 4 of the Occupational Pension Schemes (Requirement to obtain Audited Accounts and a Statement from the Auditor) Regulations 1996 made under the Pensions Act 1995. Our work has been undertaken so that we might state to the Trustee those matters we are required to state to it in an auditor’s statement about contributions and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Trustee as a body for our work, for this statement, or for the opinion we have formed.

Respective responsibilities of the Trustee and Auditor

As explained more fully in the Trustee’s Responsibilities Statement, the Fund’s Trustee is responsible for ensuring that there is prepared, maintained and from time to time revised a Schedule of Contributions showing the rates and due dates of certain contributions payable towards the Fund by or on behalf of the employer and the active members of the Fund. The Trustee is also responsible for keeping records in respect of contributions received in respect of active members of the Fund and for monitoring whether contributions are made to the Fund by the employer in accordance with the Schedule of Contributions.

It is our responsibility to provide a Statement about Contributions paid under the Schedule of Contributions and to report our opinion to you.

Scope of work on Statement about Contributions

Our examination involves obtaining evidence sufficient to give reasonable assurance that contributions reported in the attached summary of contributions have in all material respects been paid at least in accordance with the Schedule of Contributions. This includes an examination, on a test basis, of evidence relevant to the amounts of contributions payable to the Fund and the timing of those payments under the Schedule of Contributions.

Statement about Contributions payable under the Schedule of Contributions

In our opinion contributions for the Main Fund Section for the year ended 31 March 2014 as reported in the summary of contributions have in all material respects been paid at least in accordance with the Schedule of Contributions certified by the Actuary on 27 September 2012.

In our opinion contributions for the RBS AA Section for the year ended 31 March 2014 as reported in the summary of contributions have in all material respects been paid at least in accordance with the Schedule of Contributions certified by the actuary on 27 September 2012.

Deloitte LLP Chartered Accountants and Statutory Auditor Belfast United Kingdom 27 June 2014


Summary of Contributions

During the year ended 31 March 2014 the contributions payable to the Fund by the employer under the Schedules of Contributions were as follows:

Main Fund Section

£000

RBS AA Section

£000

Total 2014 £000

2013£000

Employers’ normal contributions 209,571 1,619 211,190 251,094Employers’ additional contributions 27,392 1,189 28,581 138,238Employers’ augmentations 2,948 174 3,122 5,135Deficit funding contributions 400,000 5,200 405,200 425,300Members’ normal contributions 34 - 34 48

Total contributions payable under the Schedule of Contributions (as reported on by the auditors) 639,945 8,182 648,127 819,815 In addition, further contributions were payable:

Members’ additional voluntary - 64 64 71Age-related rebates 15 - 15 4

Contributions included in the Financial Statements 639,960 8,246 648,206 819,890 Approved by the Directors of RBS Pension Trustee Limited and signed on behalf of RBS Pension Trustee Limited by: Miller McLean

Fiona Davis

Chairman - RBS Pension Trustee Limited Director - RBS Pension Trustee Limited 27 June 2014


Consolidated Fund Account for the Year Ended 31 March 2014

Notes

Main Fund Section

£000

RBS AA Section

£000

Total 2014 £000

2013£000

Contributions and benefits Contributions 4 639,960 8,246 648,206 819,890Transfers in 5 1,235 - 1,235 13,228Other income - - - 3 641,195 8,246 649,441 833,121 Benefits 6 741,970 13,473 755,443 749,620Leavers 7 68,690 5,325 74,015 63,585Administrative expenses 8 28,193 415 28,608 23,182 838,853 19,213 858,066 836,387 Net withdrawals from dealings with members (197,658) (10,967) (208,625) (3,266) Returns on investments Investment income 9 863,756 12,771 876,527 921,791Investment management expenses

10 (57,589) (1,077) (58,666) (52,746)

Change in market value of investments

11 (157,764) 12,244 (145,520) 2,093,322

Net returns on investments 648,403 23,938 672,341 2,962,367 Net increase in the fund during the year 450,745 12,971 463,716 2,959,101 Net assets of the Fund at beginning of year 24,950,783 766,574 25,717,357 22,758,256 Net assets of the Fund at end of year 25,401,528 779,545 26,181,073 25,717,357 The accompanying notes on pages 27 to 43 are an integral part of these Financial Statements.


Consolidated Net Asset Statement for the Year Ended 31 March 2014

Notes

Main Fund Section

£000

RBS AA Section

£000

Total 2014 £000

2013 £000

Investment assets 26,348,411 781,312 27,129,723 26,942,693 Joint Venture assets 352,055 - 352,055 - 26,700,466 781,312 27,481,778 26,942,693 Investment liabilities (974,383) (1,391) (975,774) (1,215,936) Joint Venture liabilities (302,084) - (302,084) - (1,276,467) (1,391) (1,277,858) (1,215,936) Total Investments 11 25,423,999 779,921 26,203,920 25,726,757 Current assets 12 2,327 1,468 3,795 10,114 Current liabilities 13 (24,798) (1,844) (26,642) (19,514) Net assets of the Fund at end of year 25,401,528 779,545 26,181,073 25,717,357

The Financial Statements summarise the transactions of the Fund during the year and deal with the net assets at the disposal of RBS Pension Trustee Limited as at 31 March 2014. They do not take account of obligations to pay pensions and benefits which fall due after the end of the Fund year. The actuarial position of the Fund, which does take account of such obligations, is dealt with on page 8 and 9 in the Report of the Trustee and the Actuarial Certificates, on pages 18 to 21, of the Annual Report and these Financial Statements should be read in conjunction with them.

These Financial Statements were approved by the Directors of RBS Pension Trustee Limited and signed on behalf of RBS Pension Trustee Limited by: Miller McLean

Fiona Davis

Chairman - RBS Pension Trustee Limited Director - RBS Pension Trustee Limited 27 June 2014 The accompanying notes on pages 27 to 43 are an integral part of these Financial Statements.


Notes to the Financial Statements

1 Basis of preparation

The Financial Statements have been prepared in accordance with the Occupational Pension Schemes (Requirement to obtain Audited Accounts and a Statement from the Auditor) Regulations 1996 and with the guidelines set out in the Statement of Recommended Practice (SORP), “Financial Reports of Pension Schemes” (revised May 2007).

2 Basis of consolidation

Subsidiaries are entities over which the Fund has the power to govern the financial and operating policies of that entity. These powers generally accompany an interest in an entity of over 50%. Subsidiaries are fully consolidated from the date on which control is transferred to the Fund. The results of the subsidiary undertakings are derived from their latest unaudited financial statements at the year end.

Joint ventures are subsidiaries where the power to govern is shared jointly with other partners in an undertaking. Joint ventures are accounted for using the Gross Equity method of accounting. Under this method the Funds proportionate share of assets and liabilities are taken up in the Net Assets Statement and the proportionate share of Profit or Loss is included in the Fund Account.

3 Accounting Policies

3.1 Valuation of investments

Quoted securities are valued at fair value using the closing bid price as notified by the relevant stock exchange or closing prices if these are not available.

Unquoted securities can consist of a range of different investment types. The valuation methods used in relation to these investments are set out below:

• Investments in private equities are valued at fair value by the Fund’s investment managers in accordance with International Private Equity and Venture Capital (IPEVC) guidelines based on the latest information from investment managers.

• Corporate loans are carried at fair value using the latest available price in the market. Loans advanced for other investment activities are carried at cost less any provision for impairment.

• Investments in pooled investment vehicles are valued at fair value utilising the stated closing published bid price or single price as determined by the investment manager.

• Properties are valued at fair value at the year end date on the basis of open market value by CBRE Ltd, Knight Frank LLP and Cushman & Wakefield. Certain US Properties have been valued at cost. These properties were purchased within 6 months of the year end. The Trustee does not consider that any subsequent change to the value of these properties would materially impact these Financial Statements. The Trustee intends for independent valuations to be sought at the next year end date.

• Open future contracts are included in the net asset statement at fair market value, which is the unrealised profit or loss at the current bid or offer market quoted price of the contract.

• The fair value of swaps is calculated using pricing models where inputs are based on market data at the year end.

• Options are shown at fair value, which is their mark to market value.



3 Accounting Policies (Continued)

3.1 Valuation of investments (continued)

• Forward foreign exchange contracts outstanding at the year end are stated at fair value which is determined as the gain or loss that would arise if the outstanding contract was matched at the year end with an equal and opposite contract.

• The fair value of Special Purpose Vehicles is calculated as the current value of future cash flows arising from the agreements in place, determined by discounted cash flow models.

• Shipping assets, included within other investments, are valued at the year end date on the basis of open market value derived from recent transactions of a similar nature.

• Joint ventures are accounted for using the Gross Equity method of accounting. Under this method the Funds proportionate share of assets and liabilities are taken up in the Net Assets Statement.

3.2 Foreign exchange

Transactions in foreign currencies are translated into sterling at the rate ruling at the date of the transactions. Investments and current assets and liabilities denominated in foreign currencies are translated into their sterling equivalents at the rates ruling at the Fund’s year end. Differences arising are dealt with in change in market value within the Fund Account.

3.3 Investment income

Investment income is accounted for on an accruals basis. All investment income is stated inclusive of any related recoverable taxation but net of any irrecoverable tax, including overseas withholding taxes and the costs of collection.

Accrued income includes outstanding dividend entitlements, accrued interest income and recoverable withholding tax.

3.4 Contributions and Benefits

Normal contributions from the employer have been made at the rate set out in the Schedule of Contributions in force for the Fund year. Normal contributions relating to wages and salaries earned in the Fund year have been recognised in the Financial Statements. Additional contributions from the employer and Additional Voluntary Contributions (AVCs) from members are accounted for on an accruals basis. Augmentations from the employer are accounted for when paid.

Age-Related Rebates payable to the Fund by the National Insurance Contributions Office (NICO) are accounted for when received. This is a departure from the SORP as they are not accounted for on an accruals basis but the Trustee does not consider the difference in accounting treatment to materially impact these Financial Statements.

Pensions in payment and other benefits are accounted for on an accruals basis.

3.5 Transfers to and from the scheme

Individual transfer values are accounted for at the time of receipt or payment. Bulk transfers are accounted for on an accruals basis where the value has been agreed in principle by the parties involved.

3.6 Administrative, Investment Management and Other Expenses

All Administrative, Investment Management and other expenses are accounted for on an accruals basis.



4 Contributions Main Fund Section

£000

RBS AA Section

£000

Total 2014 £000

2013 £000

Employers: Normal 209,571 1,619 211,190 251,094 Additional 27,392 1,189 28,581 138,238 Deficit funding 400,000 5,200 405,200 425,300 Augmentations 2,948 174 3,122 5,135 Age-related rebates 15 - 15 4 Members: Normal 34 - 34 48 Additional voluntary - 64 64 71 639,960 8,246 648,206 819,890 Employers’ additional contributions in respect of the Main Fund Section includes the

reimbursement of Pension Protection Fund levies and contributions received under the Bank’s “RBSelect” employee benefit election arrangement. In respect of the RBS AA Section, the Employers’ additional contributions include the reimbursement of Pension Protection Fund levies and other expenses from the Employer.

To address funding shortfalls arising from the respective 2010 valuations of the Main Fund Section and the RBS AA Section, the Bank has agreed to pay lump sum cash contributions into the Fund. During the year £400 million (2013: £400m) was received from the Bank in relation to the Main Fund Section and £5.2 million (2013: £25.3) was received in relation to the RBS AA Section. Further details can be found on pages 8 and 9.

5 Transfers in Main Fund Section

£000

RBS AA Section

£000

Total 2014 £000

2013 £000

Individual transfers from

other schemes 1,235 - 1,235 1,518 Bulk transfers in - - - 11,710 1,235 - 1,235 13,228 The bulk transfer in for 2013 reflects the assets of the National Westminster Bank Retirement

Benefits Scheme and the NatWest Defined Contribution Scheme which transferred into the Fund on 13 August 2012.

6 Benefits Main Fund Section

£000

RBS AA Section

£000

Total 2014 £000

2013 £000

Pensions 665,527 11,651 677,178 653,099 Commutations and lump

sums on retirement 71,221 1,210 72,431 91,394 Lump sum death benefits 5,222 612 5,834 5,127 741,970 13,473 755,443 749,620



7 Leavers Main Fund Section

£000

RBS AA Section

£000

Total 2014 £000

2013 £000

Refunds to members

leaving service - - - 3 Individual transfers to other

schemes 68,690 5,325 74,015 63,582 68,690 5,325 74,015 63,585

8 Administrative expenses Main Fund Section

£000

RBS AA Section

£000

Total 2014 £000

2013 £000

Trustee Directors’ fees (see

below) 193 - 193 159 Trustee Directors’ expenses 3 - 3 5 Pension Protection Fund

Levy 13,656 20 13,676 10,081 Administration and

professional fees including irrecoverable VAT 14,341 395 14,736 12,937

28,193 415 28,608 23,182

Included within employer contributions remitted to the Fund are amounts used to offset administrative costs. The Trustee has agreed that the Fund will reimburse The Royal Bank of Scotland Group plc for its administration costs incurred by Pension Services and RBS Investment Executive. It also reimburses the employer for costs incurred in processing the pensioner payroll. For the year ended 31 March 2014 this amounted to £3.9m (2013: £3.8m).

Trustee Directors who are not current employees of the Bank are paid a fee to compensate them for their time. Details of the fees paid in fulfilling their duties as a Trustee Director are detailed in the table below.

Trustee Director 2014 £

2013 £

Miller McLean 84,288 84,317Colin Wilson 14,871 14,899David Morrison - 30,262Peter Easton 14,871 14,899Peter Boyd 8,674 14,899Ronald Bowie (Independent Trustee) 70,027 -

192,731 159,276

Trustee director’s fees include Employer’s National Insurance contributions.



9 Investment income Main Fund Section

£000

RBS AA Section

£000

Total 2014 £000

2013 £000

Fixed interest 480,323 364 480,687 512,741 Index-linked securities 184,983 8,444 193,427 179,001 Equities 132,086 541 132,627 150,483 Pooled investment vehicles 61,013 1,798 62,811 54,212 Interest on cash deposits 8,099 443 8,542 8,965 Property 25,634 - 25,634 22,656 Annuity income 88 1,196 1,284 1,278 Other investment Income (775) - (775) - Joint Venture Income (20,247) - (20,247) - 871,204 12,786 883,990 929,336 Irrecoverable withholding

tax (7,448) (15) (7,463) (7,545) 863,756 12,771 876,527 921,791

10 Investment management expenses

Main Fund Section

£000

RBS AA Section

£000

Total 2014 £000

2013 £000

Investment managers fees 56,166 991 57,157 51,275 Custody fees 1,423 86 1,509 1,471 57,589 1,077 58,666 52,746



11 Investment assets

11.1 Market value reconciliation

Value at

1 April 2013 £000

Purchases at cost and

derivative payments

£000

Sales proceeds

and derivative

receipts£000

Change in Market

Value £000

Value at 31 March

2014£000

Main Fund Section Fixed interest

securities 5,525,766 4,972,230 (4,684,838) (391,648) 5,421,510

Index-linked securities

7,517,163 678,215 (941,498) (524,040) 6,729,840

Equities and convertibles

5,465,552 3,564,768 (3,951,299) 321,477 5,400,498

Pooled investment vehicles

2,471,054 1,308,968 (553,767) (15,180) 3,211,075

Derivative contracts

846,118 1,275,069 (1,704,060) 389,050 806,177

Property 655,017 296,472 (60,559) 59,861 950,791 Cash

Instruments 2,190,263 18,782,005 (18,314,453) (7,666) 2,650,149

Other Investments

8,135 56,415 (1,080) 1,038 64,508

Investment in Joint Ventures

- 70,218 (20,247) - 49,971

AVC & similar investments

198,939 22,378 (16,532) 15,887 220,672

24,878,007 31,026,738 (30,248,333) (151,221) 25,505,191 Cash deposits (31,815) (2,476) (190,685) Accrued

income 114,351 (4,067) 109,493

Main Fund Section Total

24,960,543 (157,764) 25,423,999



11 Investment assets (continued)

11.1 Market value reconciliation (continued)

Value at

1 April 2013 £000

Purchases at cost and

derivative payments

£000

Sales proceeds

and derivative

receipts£000

Change in Market

Value £000

Value at 31 March

2014£000

Main Fund Section b/f 24,960,543 (157,764) 25,423,999

RBS AA Section

Fixed interest securities

12,566 - - (640) 11,926

Index-linked securities

365,563 64,250 (933) (19,726) 409,154

Equities and convertibles

12,547 4,977 (3,814) (240) 13,470

Pooled investment vehicles

206,840 40,488 (22,561) (10,484) 214,283

Derivative contracts

820 12,021 (53,510) 42,494 1,825

Cash Instruments

135,782 246,984 (274,378) 2 108,390

AVC & similar investments

15,568 141 (522) 1,267 16,454

749,686 368,861 (355,718) 12,673 775,502

Cash deposits 15,235 (423) 3,185

Cash in transit 75 - -

Accrued income

1,218 (6) 1,234

RBS AA Section Total

766,214 12,244 779,921

Fund Total 25,726,757 (145,520) 26,203,920 The change in market value of investments during the year include all increases and

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

Transaction costs are included in the cost of purchases and sale proceeds. Transaction costs include costs charged directly to the Fund such as commissions, stamp duty and other fees. Transactions costs during the year amounted to £7,502,112 (2013: £6,544,016).

In addition to the transaction costs disclosed above, indirect costs are incurred through the bid-offer spread on investments within pooled investment vehicles. The amount of indirect costs is not separately provided to the Fund.

The change in market value for cash and near cash assets is due to net foreign exchange gains and losses.




11.2 Fixed interest securities

Main Fund Section

£000

RBS AA Section

£000

Total 2014 £000

2013 £000

UK public sector quoted 148,278 11,926 160,204 106,438 UK corporate quoted 1,233,486 - 1,233,486 1,289,651 UK quoted – other 134,988 - 134,988 116,840 UK unquoted 90,304 - 90,304 - Overseas public sector

quoted 305,040 - 305,040 470,604 Overseas corporate quoted 2,988,762 - 2,988,762 3,107,658 Overseas quoted - other 520,652 - 520,652 447,141 5,421,510 11,926 5,433,436 5,538,332

11.3 Index-linked securities

Main Fund Section

£000

RBS AA Section

£000

Total 2014 £000

2013 £000

UK corporate quoted 970,968 - 970,968 987,842 UK public sector quoted 5,758,872 409,154 6,168,026 6,894,884 6,729,840 409,154 7,138,994 7,882,726

11.4 Equities and convertibles

Main Fund Section

£000

RBS AA Section

£000

Total 2014 £000

2013 £000

UK quoted 560,126 1,522 561,648 596,697 Overseas quoted 4,840,372 11,948 4,852,320 4,881,402 5,400,498 13,470 5,413,968 5,478,099




11.5 Pooled investment vehicles

Main Fund Section

£000

RBS AA Section

£000

Total 2014 £000

2013 £000

Managed funds – non

property 2,789,645 180,567 2,970,212 2,344,571 Units trusts – property 421,430 33,716 455,146 333,323 3,211,075 214,283 3,425,358 2,677,894 Fund managers operating pooled investment vehicles are registered as follows:

Main Fund Section

£000

RBS AA Section

£000 UK 1,519,997 186,072 Overseas 1,691,078 28,211 3,211,075 214,283

11.6 Derivative contracts Main Fund Section

£000

RBS AA Section

£000

Total 2014 £000

2013 £000

Futures contracts 24,322 1,715 26,037 7,934 Options 51,641 - 51,641 107,199 Swaps 703,425 - 703,425 793,779 FX forward contracts 26,789 110 26,899 (61,974) 806,177 1,825 808,002 846,938




11.6 Derivative contracts (continued) 11.6.1 Analysis of futures

No of

contracts Expiration Dates

Underlying Investment

Economic Exposure

£000Asset £000

Liability

£000

27,759 29/04/2014 - 20/06/2014

Overseas Equities 985,920 23,715 -

14,146 26/06/2014 UK Equities 925,644 4,441 -

1,271 06/06/2014 - 30/06/2014

Overseas Bonds 106,644 487 -

472 26/06/2014 UK Bonds 46,393 305 -

95 18/06/2014 UK Interest Rates 11,811 - (2)

523 16/06/2014 Overseas Interest Rates

90,569 - (5)

622 26/06/2014 UK Bonds 68,128 - (315)

2,179 06/06/2014 - 30/06/2014

Overseas Bonds 186,738 - (1,239)

1,504 12/06/2014 Overseas Equities 105,382 - (1,350)

28,948 (2,911)

Futures facilitate more efficient portfolio management and are used to manage exposures and for hedging. All Futures detailed above are Exchange Traded.




11.6 Derivative contracts (continued) 11.6.2 Analysis of options

No of contracts

Expiration Dates

Underlying Investment

Notional amount of

outstanding contract

000Asset £000

Liability£000

30 16/07/2014 - 01/04/2043

Interest Rate Swaps (ET)

6,398,600 GBP 163,199 -

1 16/04/2014 Equity Market Volatility (ET)

13,000 USD 1,301 -

1 16/05/2014 EU Equities (ET) 122,500 EUR 1,089 -

2 19/04/2014 - 21/06/2014

US Equities (ET) 1,168 USD 207 -

28 16/07/2014 - 01/04/2043

Interest Rate Swaps (ET)

5,798,600 GBP - (114,155)

165,796 (114,155)

Options allow the Fund to benefit from potentially greater returns or reduced risk through efficiently increasing or reducing exposure to bond and equity markets. ET – Exchange traded




11.6 Derivative contracts (continued) 11.6.3 Analysis of swaps

No of

contracts Expiration Dates

Nature of Swap

Notional principal

£000Asset £000

Liability

£000

283 18/11/2014 - 24/09/2063

Interest Rate 14,067,326 1,305,585 -

86 28/10/2016 - 24/05/2062

Inflation 4,509,462 195,971 -

15 23/10/2014 - 23/07/2016

Currency 894,275 24,278 -

43 20/09/2015 - 17/02/2051

Credit Default Swaps

311,480 5,556 -

5 15/01/2016 - 30/10/2018

Total Return 205,000 1,141 -

5 30/09/2014 - 30/04/2015

Currency 305,173 - (1,540)

49 20/12/2017 - 20/03/2024

Credit Default Swaps

1,571,900 - (19,421)

38 27/02/2017 - 20/11/2063

Inflation 2,620,147 - (175,740)

224 04/04/2014 - 09/01/2062

Interest Rate 15,353,356 - (632,405)

1,532,531 (829,106)

Swaps are used to offset the sensitivity of the liability to changes in interest rates, inflation rates and currency exchange rates.




11.6 Derivative contracts (continued) 11.6.4 Analysis of forwards

No of

contracts Settlement Dates

Currency bought

000 Currency sold

000Asset £000

Liability

£000

151 01/04/2014 - 30/06/2023

4,708,747 GBP 7,766,130 USD 48,467 -

50 07/04/2014 - 19/03/2019

658,825 GBP 787,949 EUR 6,763 -

4 11/04/2014 - 02/05/2014

157,667 GBP 26,985,295 JPY 443 -

7 22/04/2014 -26/03/2015

9,264 GBP 96,000 SEK 392 -

4 11/04/2014 17,454 GBP 222,676 HKD 234 -

3 02/04/2014 - 02/05/2014

183,701 USD 110,110 GBP 81 -

5 02/04/2014 - 02/05/2014

14,238 USD 101,684 EUR 60 -

1 09/09/2014 1,032 AUD 1,800 GBP 41 -

17 Various contracts with values less than £10,000 20 (23)

1 09/02/2017 7,865 USD 29,000 AED - (18)

4 02/04/2014 - 02/05/2014

124,447 EUR 171,611 USD - (55)

1 27/05/2014 27,000 USD 76,809 PEN - (77)

2 02/04/2014 - 02/05/2014

43,673 USD 48,364 CAD - (78)

1 30/04/2014 14,266 CAD 26,428 GBP - (89)

4 02/04/2014 - 02/05/2015

172,666 USD 125,851 EUR - (473)

5 11/04/2014 - 02/05/2015

27,428 GBP 50,624 AUD - (692)

24 02/04/2014 - 28/01/2020

461,177 GBP 769,833 USD - (727)

17 11/04/2014 - 15/12/2014

286,981 EUR 240,156 GBP - (2,866)

18 01/04/2014 - 07/02/2019

668,075 GBP 812,150 EUR - (3,706)

45 01/04/2014 - 12/01/2021

2,383,809 USD 1,451,273 GBP - (20,798)

56,501 (29,602)

The Fund uses forward currency contracts to manage the currency risk which arises from holding investments which are not denominated in Sterling.




11.7 Property Main Fund Section

£000

RBS AA Section

£000

Total 2014 £000

2013 £000

UK 643,826 - 643,826 451,350 Overseas 306,965 - 306,965 203,667 950,791 - 950,791 655,017

11.8 Other investments Main Fund Section

£000

RBS AA Section

£000

Total 2014 £000

2013 £000

Special purpose vehicles 8,436 - 8,436 8,135 Shipping assets 56,072 - 56,072 - 64,508 - 64,508 8,135

11.9 Investments in Joint Ventures

Main Fund Section

£000

RBS AA Section

£000

Total 2014 £000

2013 £000

Share of Joint Venture

assets 352,055 - 352,055 - Share of Joint Venture

liabilities (302,084) - (302,084) - 49,971 - 49,971 - The Fund has a 50% holding in a joint venture investing in Phoenix Natural Gas, a Northern

Irish Gas distributor. Joint ventures are accounted for using the Gross Equity method of accounting. Under this method the Fund’s proportionate share of assets and liabilities are taken up in the Net Assets Statement and the proportionate share of Profit or Loss is included in the Fund Account. The Trustee Directors have appointed an independent consultant to value the Fund’s investment in the Joint Venture for investment appraisal purposes. The independent consultant used a discounted cashflow methodology to value the investment which differs to the Gross Equity method used for accounting. Based on the discounted cashflow approach the investment has been valued at £75,399,000.




11.10 AVC and similar investments

Main Fund Section

£000

RBS AA Section

£000

Total 2014 £000

2013 £000

Fidelity Investments Life

Assurance Limited* 186,422 9,179 195,601 175,180 Standard Life Assurance

Limited* 24,935 4,568 29,503 27,079 Scottish Widows’ Fund and

Life Assurance Society 4,208 - 4,208 4,428 Clerical Medical Investment

Group Limited * 3,161 - 3,161 3,081 The Equitable Life

Assurance Society * 987 2,707 3,694 3,746 Norwich Union Life &

Pensions Limited * 949 - 949 984 London Life 6 - 6 6 The Prudential Assurance

Company Limited 4 - 4 3 220,672 16,454 237,126 214,507 * These managers hold assets derived from RBSelect contributions and AVCs.

The Trustee holds assets invested separately from the main Fund in the form of individual accounts securing additional benefits on a money purchase basis for those members electing to pay additional voluntary contributions. Members participating in this arrangement each receive an annual statement confirming the amounts held to their account and the movements in the year.

The AVC and similar Fund assets are valued at 31 December 2013 with cash movements to 31 March 2014. In the opinion of the Trustee Directors, the value of the assets at 31 March 2014will not be materially different to these values. The Fidelity assets are valued as at 31 March 2014.

11.11 Concentration of investment The following investments represent more than 5% of the net asset value of the Fund as at 31 March 2014.

2014 Market Value

£000% of Net

Assets

2013 Market Value

£000

% of Net

Assets LGIM Sterling Liquidity Fund 2,198,249 8.04 862,601 3.35

11.12 Stock lending Certain Investment Managers of the Fund are authorised to release stocks to a third party under a sale and repurchase arrangement (Repo). At the year end there were no Fixed Interest assets on loan. Stock lending may be undertaken within pooled investment vehicles as part of normal investment activities.



12 Current assets Main Fund Section

£000

RBS AA Section

£000

Total 2014 £000

2013 £000

Cash balances 1,415 1,468 2,883 4,553 Employer contributions due 27 - 27 2,288 Other debtors and

prepayments 885 - 885 3,273 2,327 1,468 3,795 10,114 All contributions due at the year end have been paid in accordance with and within the

timescales required by the Schedule of Contributions.

13 Current liabilities Main Fund Section

£000

RBS AA Section

£000

Total 2014 £000

2013 £000

Employer contributions

prepaid (576) (1,300) (1,876) (1,677) Unpaid benefits (4,899) - (4,899) (341) Accrued expenses (15,533) (544) (16,077) (13,536) Sundry creditors (3,790) - (3,790) (3,960) (24,798) (1,844) (26,642) (19,514)

14 Employer related investments There were no material employer related investments in the current or prior year.

15 Capital commitments The following capital commitments held at the year end are in relation to the Funds

investments in Private Equity Funds, Property Funds and shipping assets. These assets are disclosed under pooled investment vehicles and other investments respectively in note 11.

2014 £m

2013 £m

Brockton Capital Fund II L.P 13.0 16.5 Hermes Private Equity 219.9 233.1 JP Morgan Private Equity* 56.5 85.9 Navis Private Equity Fund* 9.4 16.8 Orion European Real Estate Fund III C.V* 22.5 25.0 Partners Group Real Estate Secondary 2009 (Euro) S.C.A* 8.0 17.8 Pathway Private Equity* 47.1 64.9 Albemarle Shipping Ltd* 125.9 - 502.3 460.0 * Commitments denominated in overseas currencies which have been converted into Sterling

at an exchange rate ruling at the respective year end.




16 Related party transactions The following information is provided in accordance with Financial Reporting Standard 8,

"Related Party Disclosures": a) Certain Directors of RBS Pension Trustee Limited are active or pensioner members of the

Fund. Contributions received and pensions paid in respect of these Trustee Directors are made in accordance with the Schedule of Contributions and Trust Deed and Rules.

b) Directors and Executives of The Royal Bank of Scotland Group plc and senior managers within areas of the Bank responsible for pensions administration, policy and Trustee support were active members of the Fund during the year.

c) The cost of the services of RBS Pension Trustee Limited has been charged directly to the Fund. The fees and expenses payable to the Directors for the year to 31 March 2014 are disclosed in note 8.

d) Certain costs of administering the Fund were borne directly by The Royal Bank of Scotland Group plc during the year.

e) The Fund operates bank accounts held with The Royal Bank of Scotland Group plc. At 31 March 2014 these balances amounted to £2.9m (2013: £4.0m).

f) The Fund invests in Treasury Funds operated by The Royal Bank of Scotland Group plc. At 31 March 2014 these balances amounted to £126.3m (2013: £170.3m)

g) The Fund operates certain interest rate and inflation swaps as part of the Legal & General swaps portfolio where The Royal Bank of Scotland Group plc. acts as counterparty, these transactions are on commercial terms and carried out on an arms length basis.

h) On 1 December 2008, the UK Government through HM Treasury became the ultimate controlling party of The Royal Bank of Scotland Group plc. The UK Government’s shareholding is managed by UK Financial Investments Limited, a company wholly owned by the UK Government. As a result, the UK Government and UK Government controlled bodies became related parties of the Fund. The Fund had transactions with UK Government bodies on an arms’ length basis and investments in government securities (either held directly or as part of a pooled fund) during the year, and are included in note 11. The volume and diversity of such transactions in the Fund is such that disclosure of their amounts in the year ended 31 March 2014 is impractical.

the royal bank of scotland group pension fund annual ... pension... · the royal bank of scotland...

Documents