www.shepherds.co.uk

31 December 2013

The Shepherds Friendly Society LimitedReport of the Board of Management and Financial Statements

Mutual Solutions. Mutual Benefits. Your Future.

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The Shepherds Friendly Society Limited

Company Secretary: Tim Robertson

Registered Office: Shepherds House, Stockport Road,

Cheadle, Cheshire SK8 2AA

Tel: 0161 428 1212

Fax: 0161 428 3666

Email: info@shepherds.co.uk

Website: www.shepherdsfriendly.co.uk

Actuarial Function Holderand With Profits Actuary: Christopher Critchlow BSc FIA OAC plc

External Auditors: Moore Stephens LLP

Chartered Accountants, Registered Auditors

Internal Auditors: PKF (UK) LLP

(who merged into BDO during the year)

Bankers: The Royal Bank of Scotland Plc

Investment Managers: Legal and General Asset Management Ltd

Royal London Asset Management

Vestra Wealth LLP

Property Managers: Matthews and Goodman, Manchester

Authorised and Regulated by the Prudential Regulation Authority and theFinancial Conduct Authority - Registration number 109997. Incorporatedunder the Friendly Societies Act 1992 - number 240F.

Board:

Joanne Hindle Chairman

Geoffrey Ross Non Executive Director

Julie Meadows Non Executive Director (Appointed 2013)

Nemone Wynn-Evans Non Executive Director (Appointed 2013)

Martin Howard Non Executive Director (Appointed 2013)and Senior Independent Director

Michael Williams Non Executive Director

Roger Oakes Non Executive Director

Geoffrey Spencer Chief Executive Officer

Kim Harris Executive Director

Ann-Marie O’Dea Executive Director

The above Directors served in the year. During the year Roger Oakes

and Michael Williams retired from the Board.

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Contents

� Your Board

� Chairman’s Statement

� Chief Executive’s Review

� Corporate Governance Review

� Directors’ Report on Remuneration

� Independent Auditors’ Report

� Society Income and Expenditure Account for the year ended 31 December 2013

� Group Income and Expenditure Account for the year ended 31 December 2013

� Society Balance Sheet as at 31 December 2013

� Group Balance Sheet as at 31 December 2013

� Notes to the Accounts

� Glossary

� Notes

page 4 - 5

page 6 - 7

page 8

page 9 -12

page 13 - 15

page 16 - 17

page 18 - 19

page 20 -21

page 22 - 23

page 24 - 25

page 26 - 39

page 40

page 41

Your Board

Joanne Hindle - ChairmanJoanne joined the financial services industry in 1986 and has held a

variety of roles. These include being Corporate Services Director for

UNUM, Chair of the trade body ILAG and head of legal and compliance

for part of the AXA Group. She currently works as independent financial

services professional as well as being a Director for the Financial

Services Research Forum.

Julie Meadows - Non-Executive DirectorJulie is a Chartered Accountant who has trained in practice and has

spent most of her career in senior finance and commercial roles in

industry and in managing Family Trusts. She is currently Chairman of

the Chorley and District Building Society and in addition to her current

knowledge of the financial services sector she brings experience of

finance and audit, governance and risk management.

Nemone Wynn-Evans - Non-ExecutiveDirectorNemone has 15 years financial and commercial executive experience

and has held roles at the London Stock Exchange, HSBC Investment

Bank and KPMG Corporate Finance. She has most recently held the role

of Finance Director on the main board of a stock exchange and in

addition her board experience includes corporate governance, corporate

finance, risk and compliance.

Geoffrey Ross - Non-Executive DirectorGeoff has spent his entire career as an actuary in the life assurance

industry holding chief actuary and finance director roles in a number of

insurance companies/friendly societies. His previous roles include

with-profits actuary of Scottish Provident, Scottish Mutual and the Alba

with-profits fund and appointed actuary of Scottish Mutual International.

He is currently the with-profits actuary for the Reliance Mutual Insurance

Society Ltd.

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Availability of Non-Executive DirectorsThe Society undertakes an annual review of the activities of its Non-Executive Directors to establish that they have sufficient time available to attend fully to

the affairs of the Society and that no conflicts of interest may arise from their other activities. The 2013 review raised no concerns on either of these points.

Martin Howard - Non-Executive DirectorMartin Howard has a background in Customer Service and Operations

predominantly in Financial Services. He was formerly Operations Director

at Wesleyan Assurance Society and before that was Customer Services

Director of the Prudential General Insurance business for 10 years.

He is currently Operations Director for Switch Communications Ltd.

Martin is also the Society's Senior Independent Director (SID).

Geoffrey Spencer - Chief ExecutiveFollowing university Geoff commenced his financial services career in

1974 with the NatWest Group and subsequently held senior positions at

the Legal and General Group and Royal and SunAlliance Group. Prior to

becoming Chief Executive of Shepherds in early 2006 he worked for two

years as a Management Consultant and Interim Director. This year he will

complete 40 years in the financial services industry.

Kim Harris - Executive DirectorKim has a long history with the Society, initially as a Non-executive

Director and most recently as MD of the Society. In his role he carries

accountability for the overall strategic and operational direction of the

Society. Prior to joining the Shepherds full time, Kim had a successful

career in the building society sector as well as being the owner of a

financial services recruitment company.

Ann-Marie O’Dea - Executive DirectorAnn-Marie is currently both Marketing Director for the Society and MD for

its subsidiary company, Financial Advice Network Ltd. She has brought

the Society a wealth of marketing experience gained from over 20 years

in the industry. She held senior positions in various advertising and

marketing agencies working on accounts such as Royal Bank of

Scotland, Yorkshire Bank, Parcelforce and the N Brown Group. Since

joining she has overseen the implementation of a 'through the line'

website and is responsible for all communications issues by the Society.

Imageto follow

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Chairman’s StatementIncorporating the Report of the Board of Management

I am pleased to report that we have been able to reduce our operatingcosts both in terms of acquiring new business flows and in theadministrative costs of processing business. Group operating costs havefallen by 26% with most of this caused by a drop in acquisition costs.

At the start of 2013 we made additional liability provisions to cover a worsening claims experience in respect of certain of our incomeprotection policies. This prudent action reduced the free asset ratio of thelong term insurance fund to a lower level than usual. Throughout the yearwe have carefully managed claims being made and through acombination of management actions and investment growth our freeasset ratio at the end of the year had improved to a level of 7.7%.

Membership numbers increased by 0.87% but because new customershave on average larger premiums than maturing customers growth inpremiums is proportionately larger than the growth in number of Members.

Our investment strategy in 2013 remained on the conservative side tomitigate the risks associated with being heavily exposed to what weconsidered to be volatile equity markets. Nevertheless we still achieved asatisfactory result with the overall investment return and reduced operating

Business Objectives, Activities and Business ModelThe principal activity of the Society is to transact long-term assurancebusiness for the benefit of its members.

In accordance with the requirements of the Friendly Societies Act 1992,the Board of Management confirms that all the activities carried out duringthe year by the Society have been carried out within its respective powers.

The Society’s business model remains unchanged although there hasbeen a shift in emphasis during 2013.

The Society has business model objectives which seek to distribute itsown products and the products of other financial services companies toits existing and prospective members. It does this using three distributionchannels and has segmented the consumer market into three broadsegments. It designs products which it believes match the needs ofconsumers in these segments and thereby seeks to put the customer atthe heart of what it does. This diversified strategy is believed by theBoard of Management to be an appropriate way of mitigating the risk ofbeing over reliant on any one product or distribution channel.

In mid-2013 the Board decided to bring a new element into its strategy.This is being developed for launch in 2014 and will involve the Societyoffering a range of membership benefits which will be funded by using asmall amount of money from the Society’s surplus. Benefits included inthis service are preparing a simple will, access to legal guidance anddocuments, guidance on long term care for the elderly and a financialhealth check service. There will be no direct charges to the individualmember taking up this basic package - its availability to membersdemonstrates an aspect of the “mutual advantage”. This newdevelopment is seen as an essential component of “putting ourMembers at the heart of all we do”.

Review of 20132013 was a year which heralded a return to near normal economicconditions. By mid year a sustained economic recovery was underwaywith many of the world’s major economies emerging from recession andshowing an ability to sustain progressive growth. The “Eurozone”remained the slowest improver and even at year end was only justbeginning to show signs of strengthening. Whilst not on an entirely soundfooting, (the future of the Euro and the USA debt level remain seriousconcerns), economically the UK and the much of the rest of the worldhave had a more reassuring feel about their economic positions.

Within Shepherds we have been able to benefit from this improvedscenario in two ways.

Firstly, we have achieved a better than anticipated return on ourinvestments achieving a positive return of 9.4% on our Long TermInsurance Fund (excluding the unit linked Child Trust Fund). The CTF Fund,which is wholly invested in UK equity shares, achieved a return of 20.42%.

Secondly, at Group level we achieved a stable level of new businessrevenue with the fall in new insurance premiums in the Friendly Societybeing compensated for by a rise in the commissions and fee incomeearned by our advisory subsidiary. Overall growth of the in–force regularpremium income was again higher than in 2012 at plus 8.2%.

In 2013 we finally ceased to receive Child Trust Fund allocations from the Government which did cause the expected significant drop in singlepremium business

Overall I believe this is a very good result as our expectations were thatthe country would suffer a continuing recession and that the effects of theRetail Distribution Review introduced by the Financial Services Authoritywould cause many more consumers not to seek financial advice. A combination of these factors caused us to predict a “flat” year forincome and whilst this is what happened there was always a significantrisk that it could have been worse.

In November 2013 we changed our Principles and Practices of FinancialManagement to reflect the changing mix of liabilities within the business.We now follow a “hypothecated” investment strategy whereby the assetswe invest in more closely satisfy the demands for growth or stability of theliabilities they are supporting. For example we invest more heavily in equitiesand property to back the need for investment growth in our savings andinvestment range of products, whereas we invest more heavily in fixedinterest assets to support the liabilities created by protection products.

Your Board also decided that this more complex investment strategyshould be actively managed by an investment management firm ratherthan follow the previous strategy of passive investing in index trackingfunds. Accordingly following a selection process we appointed VestraWealth LLP as our fund manager (except for the Child Trust Fund). TheCTF is a stakeholder product and therefore is more appropriatelyinvested in a very low cost index tracking fund managed by Legal andGeneral Investment Management.

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Our wholly owned subsidiary company, which is changing its name toFinancial Advice Network Ltd, plays a central role in speaking to existingand prospective members about their financial well–being.

The Society is also pursuing a range of activities to enable it to keep intouch with and obtain the views of its Members. We are doing this toreplace the previous approach of seeking members to attend MemberForums as this has not worked well enough to ensure a sufficiently widecontribution. These techniques include independently conductedsatisfaction surveys, market research focus groups, follow upconversations in the period immediately following becoming a member,contact with members about their polices at critical times in the lifecycle ofthe policy, opportunities to feedback using social media and continuingefforts to remain personally in touch with former Social committee leaders.

The Board believes that increasing new business volumes generally,maintaining material volumes of new with–profits business and providinga wider range of benefits to our members, are the key elements enablingthe Society to remain open to new business, and that this is the best wayof delivering the greatest future financial benefit to them.

At the start of the year we awaited the introduction of the RetailDistribution Review (RDR) with some trepidation. One of our mainconcerns was that it would reduce significantly the amount of TheSociety’s investment products distributed by independent intermediaries.We are pleased to report that although this happened, improved volumesfrom our direct distribution activities compensated for this. Overall ourinvestment new business income fell by just under 2%.

However, other expected consequences of the RDR did materialise.Fewer opportunities now exist for many people to access financial adviceon a face to face to basis with qualified advisers and the numbers ofsuch advisers has fallen. The major high street banks generally havewithdrawn from offering their customers advice. The Society is seeking to build on this by remaining able to offer its members and others advicefrom a source they have known and trusted for many years.

Solvency II legislation from Europe which dictates how the Society will need to reserve against the risks it takes has moved closer toimplementation although no absolutely firm date has yet been set.Nevertheless the Society is on course to implement many aspects ofwhat may be required by Solvency II ahead of the implementation dateas it recognises there are benefits in doing so. We are working towards a date of January 2015 to be ready ahead of a possible implementationdate of January 2016.

Solvency and going concernThe Society has maintained the required margin of solvency inaccordance with Financial Conduct Authority/Prudential RegulatoryAuthority regulations. I can confirm on behalf of the directors that thebusiness is a going concern as evidenced in the formal accounts below.In our view this Report and Accounts, taken as a whole, providesinformation which gives a fair, balanced and understandable view of theSociety’s performance, business model and strategy.

MembershipAs at 31st December 2013 the Society had 81,600 members (2012: 80,893).

ComplaintsThe Society has in place clearly documented procedures for the handlingand recording of complaints. The Compliance Officer investigates allcomplaints thoroughly and impartially within a reasonable time. A Memberwho feels dissatisfied with the result of such investigation has the right toraise the matter with our Senior Independent Director and can refer thecomplaint to the Financial Ombudsman Service.

Pension SchemeThe assets of the Society’s defined benefit pension scheme are totallyseparate from the assets of the Society and are invested with independentfund managers. The trustees include both member nominated andemployer nominated trustees. The actuaries of the pension scheme areindependent of those of the Society.

Political and charitable donations£286 to Christie’s Hospital Manchester.

Appointment of AuditorsMoore Stephens were re-elected as Auditors.

Responsibility for Accounts and Statement of Disclosure of Information to AuditorsIt is the responsibility of the directors to ensure that the accounts areprepared in an accurate and timely matter. I can confirm on behalf of theBoard that the directors are satisfied that this is the case in respect of the2013 audited accounts.

The directors who held office at the date of approval of the Report andAccounts confirm that, as far as each of them is aware, there is noinformation relevant to the audit of the Society’s consolidated financialstatements for the year ended 31st December 2013 of which the auditorsare unaware. They have taken all the steps they should have taken asdirectors to make themselves aware of any relevant audit information andto establish that the Society’s auditors are aware of that information.

J HindleChairmanMarch 2014

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Chief Executive’s Review

Operational Review 2013 dawned with the arrival of the Retail Distribution Review (RDR),

an initiative from the Financial Services Authority, designed to remove

commission driven selling when financial advisers recommend a particular

investment product. Instead the customer would pay a fee to the adviser.

Whilst laudable as a concept, many industry practitioners felt the result

would be a reduction in financial advice, historically available to all,

because only the wealthy would remain willing to pay a fee for financial

advice. It is fair to say that this unintended consequence has come to

pass and it remains a worry to politicians and government committees

that this has happened. I am sure we have not seen the end of RDR

change and further amendments into how advice can be delivered and

how it is remunerated are expected in the future.

For the Society we expected RDR to result in a significant fall in the

amount of new with–profits investment products sold on our behalf by

independent financial advisers. This did occur but we mitigated this threat

to our business by intensifying our direct to consumer activity. Success in

this activity meant the fall in new premium sales of with–profits business

was only 1.8%.

Sales of new non–profit products did fall very significantly in 2013 and the

primary reason for this was the withdrawal of the Child Trust Fund product

by Government. Sales of other non–profit products was generally good.

Our Simple Income Protection product showed a new premium increase

of 1.7%. Sales of the Over 50’s Guaranteed Acceptance Plan fell by 49.6%

a drop caused both by the need to re-price so that there is no difference

between male and female rates (a European Union Directive), and a

reduction in our distribution capability caused by the withdrawal from this

product market by one of the most well-known internet comparison sites.

Our subsidiary company Shepherds Network Ltd had an excellent year

despite our initial concerns that it too would be adversely affected by

RDR. In the event it was able to increase its revenue by a significant 34%.

Within this subsidiary we also operate the web–site

www.financialadvice.co.uk and a team of fully qualified advisers using

the trading style Shepherds Mutual Solutions (SMS). An increasingly

important role for SMS is talking to our members on a wide range of

subjects and a strategy decision in 2013 to develop a range of Member

benefits to reflect the added value which can be obtained by being a

Member of a mutual organisation will mean a strengthened role for our

subsidiary going forward.

Investment Performance ReviewIn 2013 we maintained our asset allocations broadly in line with the

previous year.

The Society’s liabilities are changing in their nature as we have now been

writing meaningful volumes of non–profit business for 3 years whilst

seeking to at least maintain existing levels of with–profit business.

For this reason the Society amended its Principles and Practices of

Financial Management in 2013 and going forward will now allocate

assets differently so that they are more closely aligned to the nature

of the liabilities associated with them.

Given this greater degree of complexity the Society also returned to

employing the services of an active fund manager and in this respect

Vestra Wealth LLP were appointed.

Those assets relating to the Child Trust Fund will remain in a passive

tracker fund which is currently managed by Legal and General

Investment Managers.

The investment returns on each of the sub-funds within the long term

insurance fund are shown in the table below -

Asset Class December 2012 December 2013% %

Equity Shares 54% 56%

Commercial Property 13% 12%

Gilts/Bonds 28% 26%

Cash deposits 5% 6%

Policy type Return

Conventional With-Profits 12.21%

Holloway With-Profits 11.46%

Pure Income Protection 1.6%

Whole of Life Protection 1.81%

Surplus 4.18%

The Child Trust Fund achieved a return of 20.42%.

The consolidated breakdown of our investment portfolio by asset class

(including Child Trust Fund) is shown below.

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There was full attendance at Board meetings with the exception of one meeting which G. Spencer was unable to attend through illness. Board membersreceive a full set of Board papers regardless of their availability to attend and therefore are fully aware of issues affecting the Society. The table below showsattendance at the Board and at the sub committees -

2013 was a challenging year in adapting to the changing face of insurance

and investment product distribution. It was also a challenging year

preparing for other regulatory change driven by the predicted arrival of the

European Union Solvency II Directive on 1st January 2016. We have been

working on delivering this initiative since 2008 and will be stepping up

activity even further over the next two years.

During 2013 we introduced an internet based real time Risk Management

System which will be an important element in our successful compliance

with Solvency II.

In summary it is fair to say that much of what the Society did in 2013,

and probably will do in the next 3 years, is being driven not by consumer

demands, Society ideas, or open market forces but by changes brought in

by UK and European legislators in the aftermath of the financial crisis which

started in 2007. Despite this we will not lose sight of putting our Members

at the heart of all we do and seeking to develop ways of providing them

with great service and added financial value by virtue of membership of

their mutual Society.

G Spencer

Chief Executive

March 2014

Corporate Governance ReviewThe Society seeks to comply with The UK Corporate Governance Code as

annotated for Mutual Insurers. This involves the Society meeting a total of

258 corporate governance standards. At the end of this section we explain

the reasons why if we have not complied with any of these standards.

The BoardThe Board meets a minimum of six times a year to conduct the normal

business of the Society and in addition meets to discuss the future strategy

of the business. Its primary responsibilities and decision taking areas are:-

� to set the strategic direction and aims of the Society

� to make appointments to and evaluate the Board

� to provide entrepreneurial leadership

� to monitor and review performance of the Society, the Board and theExecutive Team

� to establish the framework of systems and controls and division of responsibilities

� to monitor risk via the framework of systems and controls

� to ratify and agree the decisions of the Board Committees

� to agree the appointment and remuneration levels of the Board

� to act in the best interests of the Society and its members andaccounting to them

� to set the Society’s values and standards

Direction of the day to day management of the Society is delegated to

the Executive Directors who operate within defined authority limits.

Corporate Governance Review

Name AGM Board Meetings With Profits Audit & Risk Nominations & Remuneration

Joanne Hindle - Chairman 1/1 6/6 - - 6/6

Michael Williams - Vice Chairman 1/1 5/5 5/5 5/5 -

Roger Oakes - Non Executive Director 1/1 5/5 - 3/5 6/6

Geoff Ross - Non Executive Director 1/1 6/6 6/6 6/6 -

Julie Meadows - Non Executive Director - 1/1 - 1/1 -

Martin Howard - Non Executive Director - 1/1 1/1 1/1 -

Nemone Wynn-Evans - Non Executive Director - 1/1 - - 1/1

Geoff Spencer - Chief Executive 1/1 5/6 - - -

Kim Harris - Chief Operating Officer 1/1 6/6 6/6 - -

Ann-Marie O’Dea - Marketing Director 1/1 6/6 - - -

Board Meeting Attendance

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Statement of Responsibilities of the Board of ManagementFriendly Society law and the Rules of the Society require the Board of

Management to prepare financial statements for each financial year which

give a true and fair view of the state of affairs of the Society and its

subsidiary as at the end of each financial year and the income and

expenditure of the Society and its subsidiary for that period. In preparing

these financial statements the Board is required to:

� select suitable accounting policies and apply them consistently;

� make judgements and estimates that are reasonable and prudent;

� state whether applicable accounting standards have been followed,

subject to any material departures disclosed and explained in the

financial statements, and,

� prepare the financial statements on a going concern basis unless it is

inappropriate to presume that the Society will continue in business.

The Board is responsible for keeping proper accounting records which

disclose with reasonable accuracy at any time the financial position of the

Society and its subsidiary and for ensuring that the Society and its

subsidiary establishes and maintains systems of control of its business

and records and of inspection and report in accordance with the Friendly

Societies Act 1992.

It is also responsible for establishing satisfactory systems of control of the

Society’s business and records, and of inspection and report, to enable

the Board and the Society to comply with the Friendly Societies Act 1992

and the Financial Services and Markets Act 2000.

The Board of Management has a general responsibility for taking such

steps as are reasonably open to it to safeguard the assets of the Society

and to prevent and detect fraud and other irregularities.

The directors confirm that they have complied with the above

requirements.

The role of the Board is to operate effectively and assume responsibility for

the success of the Society, and the Board must be able to demonstrate

the measures undertaken to achieve this. In doing so they have the

following collective and personal responsibilities

Collective ResponsibilitiesAll Directors share responsibility for:

� Setting the strategy of the Society and any subsidiary company

� Approving plans to achieve the strategy

� Approving and monitoring budgets necessary to achieve the strategy

� Ensuring that the Society’s internal systems and controls

operate effectively

� Approving the annual accounts

� Establishing and overseeing the framework of delegation to the

Chief Executive

� Approving key decisions in respect of all significant counterparty

relationships and all significant new business ventures.

� Monitoring the Society’s and any subsidiary companies’ performance

in relation to agreed plans, budgets and objectives

� Working effectively with other Directors

� Undertaking a formal evaluation of the Board’s performance in the form

of a questionnaire following each Board meeting, and reporting its

findings to the Chairman. The results of these questionnaires shall

be discussed at each board meeting

� Undertaking an annual assessment of the Board directors

� Presenting a balanced and understandable assessment of both the

Society’s current position and its forecast position in the Board’s

annual report

� Establishing, maintaining and reviewing the Society’s system of

internal financial, management and systems controls

(including risk management)

� Ensuring that the affairs of the Society and any subsidiary company

are conducted solvently, lawfully and in accordance with the Annotated

Combined Governance Code and the rules of the regulators

� Maintaining an understanding of the views of the membership

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Personal ResponsibilitiesEach Director accepts a personal responsibility to:

� Support the mission and values of the Society

� Support all Society policies

� Support the regulators’ Principles

� Be a member of one or more Committees of the Board, when required

� Contribute to the decisions of any Committee of which they are a

member from their skills and experience and share the responsibilities

for all their decisions

� Maintain constructive relationships with Society staff

� Maintain an understanding of the views of the membership

� Attend at least 75% of all Board meetings in a rolling 24 month period

to which they are invited, having previously read all relevant papers

� Not to be absent from two consecutive Board meetings other than for

reasons of serious ill health

� Attend any training sessions provided for Directors

� Register any interest that may have a bearing on the Society’s work

and declare any potential or actual conflicts of interest as and when

they arise

� Represent the Society positively to all external audiences

� Directors may be called on to contribute from their specific skills by

liaison informally with any appropriate member of staff

The directors confirm that they have complied with the above

responsibilities.

In addition to the Board of Management which has over-arching

responsibility for management of the Society a number of Board

Sub-committees operate to provide detailed governance of a range

of issues. The work of these committees is described below -

Nomination and Remuneration CommitteeThe Society’s Nominations and Remuneration Committee is chaired

by Roger Oakes. Its Terms of Reference are published on the

Society’s website.

Historically The Society has not formed a separate Remuneration

committee as the Board does not believe the Society is of a size which

would justify this. However, the Society has reached a size where it may

now be appropriate to have separate committees and this may be

implemented in 2014.

Committee membership during the yearRoger Oakes (Chairman)

Joanne Hindle

Nemone Wynn-Evans

Nasrin Hossain (invited management attendee)

Below are explanations of the main responsibilities and work of

the committee.

Chairman and Chief ExecutiveThere is a clear division of responsibilities between the roles of Chairman

and Chief Executive and they are conducted by different individuals.

The respective roles are documented in the Board Manual.

The Chairman meets the definition of an Independent Director.

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Information and Professional DevelopmentAll Non-Executive Directors have access to all of the senior management

team in the Society and can ask for any information they may require over

and above what is supplied for Board and Committee meetings.

New Directors undergo a formal Induction Programme when appointed

which enables them to meet all the senior managers in the business and

to familiarise them fully with how the Society operates.

All Directors pursue a programme of Continuous Professional

Development and this is appropriately documented and monitored by

a professionally qualified HR specialist.

Board Performance Evaluation and Director AssessmentsThe Board Appraisal process is based on peer group assessment.

Immediately after every Board meeting all Directors independently assess

the effectiveness of the meeting. The data is analysed and reported back

at the next Board along with any proposed improvement actions by the

Nominations and Remuneration Chairman. Once a year a 360 degree

personal assessment of all Board Directors is conducted on a peer

group basis. The Society employs a professionally qualified HR Manager

who plays a key role in analyzing and presenting the outcomes which

are then fed-back to individuals and form the basis for identifying what

knowledge or skills gaps may exist and determines how they will

be overcome.

Each Board sub-committee assesses its own performance against its

Terms of Reference and reports its conclusions back to the main Board.

Re-electionThe Society has moved to annual re-elections for its Non-Executive

Directors. All Executive Directors have notice periods of 12 month or less.

Board Balance As part of the Board’s awareness of succession planning and the need

to refresh itself, the Society recruited three new non executive directors

in 2013. In doing so it was mindful of the need to ensure that the mix of

skills and experience was appropriate to a forward looking assessment of

the Society’s strategy. It was also mindful of the Society’s diversity policy.

The Board currently consists of 4 male and 4 female directors.

The Society’s diversity policy aims to ensure we employ, train and

promote staff on the basis of their experience, abilities and qualifications

without regards to race, religion or belief, pregnancy and maternity, sex,

sexual orientation, gender reassignment, marital status or civil

partnership, age or disability. It does not contain targets or quotas and

is firmly committed to recruitment based upon ability and suitability.

The Society identified that the direction of travel of the regulatory bodies,

both in Europe and the UK, requires both enhanced risk management

skills and a business which puts “the customer at the heart of all we do”.

Accordingly in recruiting new directors in 2013 the Committee sought to

strengthen its Board’s abilities in both these areas.

The names of all directors, the positions they fulfil in the Society and

their short CVs are shown in this Report.

Independence of DirectorsAll Non-Executive Directors meet the definitions of independent directors.

Martin Howard succeeded Michael Williams as Senior Independent

Director in September 2013.

A system is in place for any Director to advise the Chairman if any of

their other business activities may lead to a breach of the independent

director definitions and the risk of there being any conflicts of interest

is assessed.

All four of the Non–Executive Directors do have other business interests

and these are shown later in this Report. All have been assessed as not

giving rise to conflicts of interest and it has also been established that

they have sufficient time availability to fulfil their Shepherds Friendly

roles properly.

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Appointments to the BoardThe Society has adopted a transparent and independently managed

process when making appointments to the Board.

The process to appoint Non-Executive Directors contains the

following elements:-

� An open market search involving professional search agents and/or

national newspaper advertising

� Initial interview by at least two Board Directors

� Second interview and assessment by a further two Board Directors

� Final selection recommendation by Nominations and Remuneration

Committee to full Board

If an Executive Director is appointed from outside the business, a similar

process is followed. If an Executive Director is appointed internally, then

the decision is based on past performance review by the CEO and then

approval by the Board following a recommendation from Nominations

and Remuneration Committee.

Remuneration Policy and Report The Committee recommends remuneration packages to the Board for

all Directors. It does so by reference to what levels of remuneration are

necessary to attract and retain the right calibre of individual in the

context of the financial services market place. It ensures that a

significant portion of overall remuneration of executives is linked to the

achievement of stretching corporate and personal targets. None of the

Executive Directors hold Non-Executive Director positions elsewhere.

Executive Director remuneration is reviewed in the context of a mutual

insurance benchmark study comparing the salary structures of a

significant number of mutual insurers. The Committee is able to confirm

that the remuneration of the executive directors is well within the ranges

paid in such firms of a comparable size and total remuneration is close

to the median level in this peer group of firms.

Nominations and Remuneration Committee are also made aware of the

salary bands applicable to senior managers although individual salaries

within these bands are set by Executive Directors.

Director’s Service AgreementsDirector’s service agreements are as follows -

Non-Executive Director’s service agreements are as follows -

Commencement Re-election Notice period

G Spencer 20/02/2006 Executive Director 12 months

K Harris 01/10/2009 Executive Director 6 months

A-M O’Dea 21/03/2012 Executive Director 6 months

Commencement Re-election

J Hindle 18/10/2008 Annual re-election

G Ross 21/09/2010 Annual re-election

J Meadows 11/09/2013 Annual re-election

N Wynn-Evans 11/09/2013 Annual re-election

M Howard 11/09/2013 Annual re-election

R Oakes 05/06/2004 Retired 2013

M Williams 21/09/2010 Retired 2013

Directors’ Report on Remuneration

14

The performance of the auditors was assessed by reference to their

ability to complete the audit in a timely and effective manner in line

with their audit timetable and letter of engagement. The views of the

Executive are taken into account by the Committee in terms of

conduct of the audit. As a result the Committee were able to

recommend that the auditors continue in their appointment.

In addition to the statutory financial audit, Moore Stephens assist the

Society in its tax computations. The Auditors are asked to give

assurance regarding their objectivity and independence.

The Committee is committed to ensuring that the appointment and

re-appointment of auditors is considered in the context of

independence and that due regard is given to best practice

and regulation on auditor engagement.

Internal AuditorsDuring 2013 the Committee continued to manage the 3 year Internal

Audit Plan in conjunction with our appointed Internal Audit firm. A total

of 5 Internal Auditor reports were received and reviewed all of which

were satisfactory. Ongoing management of any improvements to be

implemented as a result of Internal Audit recommendations is

monitored by the Committee.

The Committee held its annual face to face discussion of progress

and future plans with the internal audit firm.

Risk management and Systems and ControlsThe Committee conducts an ongoing process of reviewing the

Society’s system of internal controls and, where risks of significance

are identified, managing their on-going mitigation. The Committee

reports to the full Board its findings and is assisted in this respect by

the appointed financial auditors and internal auditors.

A major part of the Committees activities in 2013 concerned

overseeing the implementation of a more sophisticated approach to

Risk Management systems and an overhaul of the Society’s

documentation of its policies, processes and procedures. Whilst

previous activities in these fields were satisfactory the advent of major

changes because of the Solvency II Directive, for example the

requirement to produce an “Own Risk Solvency Assessment”, has

generated a need to make a step change in risk management and

control systems going forward.

Audit and Risk CommitteeCommittee membership during the year

M Williams (Chairman)

G Ross

R Oakes

J Meadows

M Howard

J Morrissey (invited management attendee)

S Jones (invited management attendee)

S Johnson (invited management attendee)

The Audit and Risk Committee was chaired by Michael Williams for 5 of

its 6 meetings and the other meeting was chaired by Roger Oakes. In

addition to the members of the committee a number of relevant senior

staff members attend committee meetings by invitation to provide any

additional information the members require.

During the year Roger Oakes and Michael Williams retired. Julie

Meadows is the new Chairman of the Committee and Martin Howard

has joined. (Roger Oakes remained on the Committee in his role as

Non-Executive Director of the Society’s subsidiary, Shepherds

Network Limited).

The Committee’s Terms of Reference are published on the

Society’s website.

The Audit and Risk Committee aims to meet not less than 4 times a year

to conduct its affairs.

Below is a summary of its main activities –

External AuditorsThe Committee meets each year with the External Auditors and at the

2013 meeting reviewed the risk based audit plan, the audited

accounts and any actions arising from the Management letter provided

by them. Part of this meeting is held with-out Executive Directors being

present. Issues raised by the auditors were not significant and the

committee were able to recommend to the main Board acceptance

of the accounts and that no material issues arose in the

Management Letter.

15

Through its own observations of risk processes and the reports of

auditors, both the internal audit function and the external financial audit

function, the Committee was satisfied that risk and management

controls are operating effectively.

Financial StatementsThe Committee reviews the published financial statements of the

Society and also regulatory returns of a financial nature made to the

Prudential Regulation Authority (and its predecessor body) during the

course of the year. It has been satisfied that these statements and

returns are accurate and do give a fair, balanced and understandable

view of the Society’s position.

Solvency II“Solvency II” is a European Union Directive which sets new standards

for managing the Solvency of insurance undertakings. The Committee,

throughout 2013, monitored the Society’s progress to implementing this

Directive and was satisfied that all matters on the journey to

implementation are on target.

With Profits CommitteeCommittee membership during the year

Geoff Ross (Chairman) - Mr Ross is an actuary.

Michael Williams

Kim Harris

Martin Howard

J Morrissey (invited management attendee)

The Committee’s Terms of Reference are published on the

Society’s website.

Committee activitiesThe Committee seeks to ensure the Society meets its obligations as

defined in the Rules of the Prudential Regulation Authority and the

Financial Conduct Authority for the management of the with-profits fund

and the fair treatment of with-profits policyholders. This includes use of

the fund surplus, the level of benefits due to policyholders and the way

the Society communicates with policyholders. In doing so it manages

the relationship with the Society’s actuarial advisers and reviews their

work before expressing its views and recommendations to the whole

Board for approval.

Committee performanceThe committee reviews its performance each year and is able to

confirm that it operated fully in accordance with its Terms of Reference

and dealt with the matters listed in its calendar of events.

Constructive use of the AGM

The Society seeks to ensure the AGM provides an opportunity for open

and transparent communication with its Members.

We distribute notice of the AGM and associated papers at least 21

working days ahead of the meeting.

Separate resolutions are published for each substantive item and the

numbers of proxy votes are independently verified. The numbers of

proxy votes cast for each resolution are announced at the AGM.

The AGM provides an opportunity for directors to understand the views

of Members. However, the number of members attending the AGM

has become very low and therefore the Board has set in hand other

methods for the views of Members to be obtained. These include

independent surveys, internet mail boxes and greater in house

canvassing of member opinion.

Compliance with the UK Corporate Governance Code

(as annotated for mutual insurers).

The Society complied fully with the Code in 2013.

16

Independent Auditor’s Report

Our assessment of risks of materialmisstatementWe identified the following risks that we believe to have had the greatest

impact on our audit strategy and scope:

� the operation and effectiveness of the Society’s Member’s system

during the year;

� the valuation and ownership of the Society’s investments at the year

end and the recording of transactions throughout the year;

� the potential of new business strain given the level of growth in

recent years; and

� the Group’s compliance with applicable regulations.

Revenue recognition and the risk of fraud arising from management

override of internal control have been addressed.

Our application of materialityWe apply the concept of materiality both in planning and performing our

audit, and in evaluating the effect of misstatements on our audit and on

the financial statements. For the purpose of determining whether the

financial statements are free from material misstatement we define

materiality as the magnitude of misstatement that makes it probable that

the economic decisions of a reasonably knowledgeable person, relying

on the financial statements, would be changed or influenced.

We also determine a lower level of performance materiality which we use

to determine the extent of testing needed to reduce to an appropriately

low level the probability that the aggregate of uncorrected and

undetected misstatements exceeds materiality for the financial

statements as a whole.

When establishing our overall audit strategy, we determined a magnitude

of uncorrected misstatements that we judged would be material for the

financial statements as a whole. We determined materiality for the Society

to be £500,000 which is approximately 5% of net assets. We use net

assets to ensure the level of uncorrected misstatements does not

materially impact the Society’s solvency calculations.

On the basis of our risk assessments, together with our assessment of

the overall control environment, our judgement is that performance

materiality should be 70% of materiality, namely £350,000.

INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF SHEPHERDS FRIENDLYSOCIETY LIMITEDWe have audited the financial statements of The Shepherds Friendly

Society Limited for the year ended 31 December 2013 which

comprise the Group and Society Income and Expenditure Accounts,

Group and Society Balance Sheet and the related notes 1 to 15.

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), having regard to the statutory requirement to maintain

equalisation provisions.

This report is made solely for the Society’s members, as a body, in

accordance with the Friendly Societies Act 1992. Our audit work has

been undertaken so that we might state, to the Society’s members,

those matters we are required to state to them in an auditor’s report

and for no other purpose. To the fullest extent permitted by law,

we do not accept or resume responsibility to anyone other than

the Society’s members as a body, for our audit work, for this report

or other opinions we have formed.

Respective responsibilities of directors and auditorAs explained more fully in the Board of Directors’ Responsibilities

Statement set out on page 7, the Board of Directors is responsible

for preparing 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 Boards (APB’s) Ethical Standards

for Auditors.

17

Our approach is designed to have a reasonable probability of ensuring

that the total of uncorrected and undetected audit differences does not

exceed our materiality of £500,000 for the financial statements as a whole.

Scope of the audit of the financial statementsAn audit involves obtaining evidence about the amounts and disclosures

in the financial statements sufficient to give reasonable assurance that

the financial statements are free from material misstatement, whether

caused by fraud or error. This includes an assessment of: whether the

accounting policies are appropriate to the Group’s circumstances and

have been consistently applied and adequately disclosed; the

reasonableness of significant accounting estimates made by the

directors; and the overall presentation of the financial statements.

In addition, we read all of 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.

The way in which we scoped our response to the risks identified above

was as follows:

� In order to address risk around the operation of the Society’s

Members system during the year we have tested the operation of the

controls over membership records and claims paid to members.

� In order to address risk around ownership of the Society’s investments

held at the period end, we confirmed the holdings to independent third

party confirmations provided by the Society’s Custodian.

� In order to address the risk around the valuation of the Society’s

investment we obtained from independent third parties confirmations

of the prices for the purpose of subscription or redemption of interest

in the underlying investments in investee funds as at 31 December

2013 and vouched these on a sample basis.

� In order to address the risk associated with the recording of investment

transactions through the year ended 31 December 2013 we have

tested a sample of transactions to independent documentation.

� In order to address the risk of new business strain we have

considered the adequacy of the Group’s reserves and reviewed the

future business plans.

� In order to address the risk over the Group’s compliance with its

regulatory environment we updated our understanding of the

regulatory requirements and reviewed the Group’s correspondence

with its regulators and statutory filing.

Opinion on financial statementsIn our opinion the financial statements:

� give a true and fair view, in accordance with UK Generally Accepted

Accounting Practice, of the state of the Grup’s and Society’s affairs

as at 31 December 2013 and of the income and expenditure of the

Group and Society for the year then ended; and

� have been propery prepared in accordance with the Friendly

Societies Act 1992.

Opinion on other matters prescribed by theFriendly Societies Act 1992In our opinion the Report of the Board of Directors has been prepared in

accordance with the Friendly Societies Act 1992 and the regulation made

under it, and the information given therein is consistent with the financial

statements for the financial year.

Matters on which we are required to reportby exceptionWe have nothing to report in respect of the following matters where the

Friendly Societies Act 1992 requires us to report to you if, in our opinion:

� proper accounting records have not been kept;or

� the financial statements are not in agreement with the accounting

records;or

� we have not recived all the information and explanations and access

to documents that we require for our audit.

In accordance with our instructions from the Society we review whether

the Corporate Governance Statement reflects the Society’s compliance

with the 8 provisions of the Annotated Combined code specified by the

Association of Financial Mutuals.

M P Burnett

Senior Statutory Auditor

For and on behalf of Moore Stephens

Chartered Accountants & Statutory Auditor

18

Society Income and Expenditure Accountfor the year ended 31 December 2013

INCOME Notes 2013 2013 2012 2012£ £ £ £

Technical account - Long term business

Earned premiums

Gross premiums written 2 6,584,731 8,221,993

Outward reinsurance premiums (7,542) (10,006)

Net premiums 6,577,189 8,211,987

Investment income

Land and buildings 430,122 535,966

Other investments 1,622,670 1,582,449

Gains/Losses on the realisation of investments 3,087,947 347,701

5,140,739 2,466,116

Unrealised gains/losses on investments 4,255,709 5,365,162

Total technical income 15,973,637 16,043,265

19

EXPENDITURE Notes 2013 2013 2012 2012£ £ £ £

Claims incurred

Claims paid - gross amount 7,751,603 8,061,937

Change in the provision for claims 47,651 (15,104)

7,799,254 8,046,833

Changes in other technical provisions

Long term business provision transfer 10 3,312,615 4,326,013

Other expenditureNet operating expenses

Other operating expenses 3 3,847,702 4,130,046

Investment expenses 67,314 114,872

3,915,016 4,244,918

Taxation 7 - -

Actuarial (gain)/loss on pension scheme 14 (6,000) 183,000

Transfer: Fund for Future Appropriations 952,752 (757,499)

Total technical expenditure 15,973,637 16,043,265

Balance on technical account -long term business - -

The attached notes form part of these accounts. All income and expenditure relates to continuing operations of the Society.

There were no recognised gains and losses in 2013 or 2012 other than those shown in the accounts.

20

Group Income and Expenditure Accountfor the year ended 31 December 2013

INCOME Notes 2013 2013 2012 2012£ £ £ £

Technical account - long term business

Earned premiums

Gross premiums written 2 6,584,731 8,221,993

Outward reinsurance premiums (7,542) (10,006)

Net Premiums 6,577,189 8,211,987

Investment income

Land and buildings 430,122 535,966

Other investments 1,490,372 1,582,449

Losses on the realisation of investments 3,087,947 347,701

5,008,441 2,466,116

Unrealised gains/losses on investments 4,255,709 5,365,162

Other technical income 1 988,252 1,061,518

Total technical income 16,829,591 17,104,783

21

EXPENDITURE Notes 2013 2013 2012 2012£ £ £ £

Claims incurred

Claims paid - gross amount 7,751,603 8,061,937

Change in the provision for claims 47,651 (15,104)

7,799,254 8,046,833

Changes in other technical provisions

Long term business provision transfer 10 3,312,615 4,326,013

Net operating expenses

Other operating expenses 3 3,050,273 4,130,046

Investment expenses 67,315 114,872

3,117,588 4,244,918

Other technical charges 1 1,600,103 1,008,881

Taxation 7 - -

Actuarial (gain)/loss on pension scheme 14 (6,000) 183,000

Transfer: Fund for Future Appropriations 10 1,006.031 (704,862)

Total technical expenditure 16,829,591 17,104,783

Balance on technical account

- long term business - -

The attached notes form part of these accounts. All income and expenditure relates to continuing operations of the Society.

There were no recognised gains and losses in 2013 or 2012 other than those shown in the accounts.

22

Society Balance Sheet as at 31 December 2013

ASSETS Notes 2013 2013 2012 2012£ £ £ £

Investments

Land and buildings 8 5,760,000 8,095,000

Other financial investments 8 72,624,512 66,735,892

78,384,512 74,830,892

Debtors

Debtors arising out of direct insurance operations with members 34,035 31,924

Other debtors 200,000 247,596

234,035 279,520

Other assets

Tangible assets 11 197,067 302,431

intangible assets 11 109,200 12,162

Cash at bank and in hand 1,609,191 1,168,219

1,915,458 1,482,812

Prepayments and accrued income

Accrued interest and rent 40,365 29,998

Deferred acquisition expenses 1 708,656 412,115

Other prepayments and accrued income 213,197 87,825

Total prepayments and accrued income 962,218 529,938

Total assets excluding pensions asset 81,496,223 77,123,162

Pension scheme surplus/liability 14 (295,000) (410,000)

Total Assets 81,201,223 76,713,162

23

LIABILITIES Notes 2013 2013 2012 2012£ £ £ £

Fund for future appropriations 10 10,360,288 9,407,535

10,360,288 9,407,535

Technical provisions

Long term business provision 10 69,615,153 66,302,538

Claims outstanding 155,714 108,063

69,770,867 66,410,601

Provisions for other risks and charges

Creditors

Creditors arising from direct insurance operations 150,767 167,777

Other creditors, including taxation & social security 407,035 262,276

557,802 430,053

Accruals and deferred income 512,266 464,973

Total Liabilities excluding pension liability 81,201,223 76,713,162

The attached notes form part of these accounts

Approved by the Board on 25th March 2014

G Spencer Director

J Meadows Director

ASSETS Notes 2013 2013 2012 2012£ £ £ £

Investments

Land and buildings 8 5,760,000 8,095,000

Other financial investments 8 72,124,512 66,235,892

77,884,512 74,330,892

Debtors

Debtors arising out of direct insurance operations with members 34,035 31,924

Other debtors 9 0 47,596

34,035 79,520

Other assets

Tangible assets 11 213,391 309,546

Intangible assets 11 304,200 237,161

Cash at bank and in hand 1,661,536 1,282,558

2,179,127 1,829,265

Prepayments and accrued income

Accrued interest and rent 40,365 29,999

Deferred acquisition expenses 1 708,656 412,115

Other prepayments and accrued income 228,300 99,167

Total prepayments and accrued income 977,321 541,281

Total assets excluding pensions asset 81,074,995 76,780,958

Pension scheme surplus/liability 14 (295,000) (410,000)

Total Assets 80,779,995 76,370,958

24

Group Balance Sheet as at 31 December 2013

25

The attached notes form part of these accounts

Approved by the Board on 25th March 2014

G Spencer Director

J Meadows Director

LIABILITIES Notes 2013 2013 2012 2012£ £ £ £

Fund for future appropriations 10 10,134,749 9,128,716

10,134,749 9,128,716

Technical provisions

Long term business provision 10 69,615,153 66,302,538

Claims outstanding 155,714 108,063

69,770,867 66,410,601

Provisions for other risks and charges

Creditors

Creditors arising from direct insurance operations 150,767 167,777

Other creditors, including taxation and social security 198,726 142,590

349,493 310,367

Accruals and deferred income 524,886 521,273

Total Liabilities excluding pension liability 80,779,995 76,370,958

26

Notes to the Accounts

Claims

Claims are included on the following basis:

� Maturities when they become due

� Deaths when notified to the Society

� Surrenders when the policies cease to be included in the long term

business provision

� Reinsurance receipts are brought into account to match the

recognition of the claim

Investment Income

Investment income includes dividends, interest, rents and realised gains

and losses on investments. They are all included on an accruals basis

except for realised gains and losses, which are included as the difference

between the net sale proceeds and the original cost of purchase.

Unrealised gains and losses are calculated as the difference between the

valuation of the investments at the balance sheet date and the valuation

at the last balance sheet date.

Investments

These are shown on the balance sheet at the following values:

� Land and buildings: at the last independent professional valuation

� Quoted investments: at the mid-market value at the accounting date

� Authorised unit trusts: at the published bid prices at the

accounting date

No deprecation or amortisation is provided in respect of freehold or

leasehold properties. As properties are included in the financial

statements at their open market values the Board consider that no

depreciation is required to give a true and fair view. It would be neither

practical or of real value to determine depreciation or amortisation taken

into account in arriving at open market values.

Accounting policies

Basis of Accounting

The accounts have been prepared in accordance with the Friendly

Societies Act 1992, the Friendly Societies (Accounts and Related

Provisions) Regulations 1994, with applicable accounting standards and

with the Statement of Recommended Practices issued by the

Association of British Insurers "The ABI Sorp" in December 2005 and

revised in December 2006.

Basis of Consolidation

The Group Accounts comprise the assets, liabilities, and income and

expenditure account transactions of the Society and its subsidiary.

The ongoing results of the subsidiary are included with Other Technical

Income and Other Technical Charges. The net results are included in

the Fund for Future Appropriations for the Group. The activities of the

Society and Group are accounted for in the Income and Expenditure

Technical Account.

Premium Income

Premium Income is included in the income and expenditure account on

the basis of premiums due from members during the year. Reinsurance

premiums are included when they are payable.

1

27

Tangible & Intangible Fixed Assets

Tangible and intangible assets are capitalised and depreciated by equal

annual instalments over their estimated useful life. The principal rates use

for this purpose are as follows:

� Computer equipment is depreciated between two and four years

� Other equipment is depreciated over four years

� Intangible Assets are amortised over five years

Technical Provisions

The provisions are determined by the Society’s Actuarial Function

Holder following his annual investigation of the long term business.

The methods and assumptions used in the valuation have been

approved by the Board.

Tax attributable to long term business

Taxes are provided for at the current rates in respect of the taxable

element in the Society’s business. As a registered Friendly Society the

Society is only subject to tax on part of its life and endowment business.

Deferred Taxation

In accordance with Financial Reporting Standard 19 deferred taxation is

provided for in full on all material timing differences that have originated

but not reversed at the balance sheet date.

Deferred tax assets are recognised to the extent that it is considered that

more likely than not they will be recovered.

Deferred Acquisition Expenses

For single premium and Holloway (sickness) policies no acquisition

expenses are deferred. For regular premium assurance policies the

deferred acquisition expenses have been determined using a

Zilmerisation approach and have been calculated on the basis of a

prudential assessment of their recovery from the margins contained in

the future premiums.

Other technical income and technical charges

Other technical income and charges in the Group refers to income and

expenditure incurred by the subsidiary.

Foreign Currencies

During the year the Society continued trading in the Republic of

Ireland. Transactions in Foreign Currencies are recorded at the

average rate for each month. Assets and liabilities held in foreign

currencies are translated at the rate ruling at the balance sheet date.

All differences are recognised in the technical account.

Pensions

The Society operates a defined contribution scheme for the majority of

employees. Employer’s contributions are based on a fixed percentage

of basic salary charged to the technical account.

A defined benefit scheme is also in operation, although now closed to

new entrants. The pension scheme surplus or liability recognised in

the balance sheet is the value of the scheme’s assets less the present

value of the scheme’s liabilities. The liabilities are valued on an

actuarial basis using the Projected Unit Method, requiring estimates of

future cashflows to be made, discounting them to present value using

the discount rate based on AA rated corporate bonds. The overall

expected return assumption is calculated as the weighted average of

the individual expected return assumptions for each of the major

asset classes.

Premium Analysis

All premiums are written in the United Kingdom on a direct basis and relate to individual business.The following note refers to the Society and not the Group.

28

Notes to the Accounts

2

Annualised new business 2013 2012written: Society and Group £ £

Single Premium 116,958 358,510

Regular Premium 959,054 1,289,090

1,076,012 1,647,600

Regular premiums are those where there is a contractual obligation or reasonable expectation to pay on a regular basis.

Single premiums are those relating to products issued by the Society which provide for the payment of one premium only.

The difference in single premium is due to the government's decision to stop the Child Trust Fund accounts.

Long Term Life Business 2013 2013 2012 2012£ £ £ £

Non Profit PoliciesPeriodic premiums 1,610,600 1,204,181

Reinsurance (7,542) (10,006)

1,603.058 1,194,175

With Profit PoliciesPeriodic premiums 3,804,547 3,801,069

Reinsurance - 0

3,804,547 3,801,069

Single premium 1,169,584 3,216,743

1,169,584 3,216,743

6,577,189 8,211,987

29

Society and Group Net Operating Expenses

Also included in the operating expenses are:

3

Society 2013 Group 2013 Society 2012 Group 2012£ £ £ £

Acquisition costs 2,558,110 2,216,177 3,046,403 3,046,403

Changes in deferred acquisition cost (296,541) (296,541) (94,034) (94,034)

Administration expenses 1,586,133 1,130,637 1,177,677 1,177,677

3,847,702 3,050,273 4,130,046 4,130,046

Society 2013 Group 2013 Society 2012 Group 2012£ £ £ £

Auditor’s renumeration and expenses for audit services: 26,500 29,500 26,000 29,000

Non-audit services 780 780 2,559 2,559

27,280 30,280 28,559 31,559

30

Other benefits include contributions to money purchase schemes of £19,015 plus car allowance of £16,220 for executive directors. Non-executive directors

receive expenses for travel to and from Board meetings at Head Office. These are taxed through PAYE and are included under 'Other Benefits'.

Staff Costs4

2013 2012£ £

Wages and salaries 1,655,414 1,353,155

Social security costs 184,037 150,488

Pension costs 115,073 91,365

1,954,524 1,595,008

2013 2012

Average number of employees:

Sales 10 11

Administration 25 24

Board 7 6

42 41

Salary Bonus Other Benefits Total 2013 Total 2012£ £ £ £ £

G Spencer 94,150 60,141 9,971 164,262 139,832

K Harris 80,502 55,773 20,613 156,888 131,093

A O'Dea 64,106 10,500 13,457 88,063 46,136

J Hindle 26,400 6,003 32,403 31,752

R Oakes 26,400 11,168 37,568 27,891

G Ross 22,400 3,897 26,297 27,212

M Williams 22,383 3,326 25,709 25,400

J Meadows 6,806 727 7,533 -

M Howard 6,806 1,104 7,910 -

N Wynn-Evans 1,867 4,812 6,679 -

Total 351,820 126,414 75,078 553,312 429,316

The staff costs for the Group, including directors’ fees, for the year, were:

Board Remuneration5

Notes to the Accounts

31

Related Party Transactions6

Advantage has been taken of the exemption in FRS 8 not to disclose

transactions with entities that are part of the Shepherds Friendly group.

A number of the Society's directors are also members of the Society and

pay annual premiums, all such transactions involving directors are

conducted at arm's length.

Taxation7

The Society has tax losses to carry forward and as such there is no tax

liability for the current year. These losses would normally create a deferred

tax asset but they cannot be recognised under FRS 19 on the basis that

foreseeable recovery cannot be determined with reasonable certainty.

Each property is fully valued at least once every five years on a rotating basis, on an open market existing use basis. In between the full valuations a

'desktop' valuation is undertaken. In 2012 valuations have been undertaken by Matthews and Goodman, Chartered Surveyors.

The full value of the property occupied by the Society is £1,150,000, of which the Society occupies two thirds (2012 - two thirds).

Cost 2013 Market Valuation Cost 2012 Market Valuation£ 2013 £ £ 2012 £

Freehold properties partly occupied by the Society 1,319,540 1,150,000 1,319,540 1,150,000

Other investment properties 4,925,425 4,610,000 4,925,425 4,610,000

Long leasehold 0 0 480,000 2,335,000

6,244,965 5,760,000 6,724,965 8,095,000

Society Investments (Group)8

Land and buildings.

Cost 2013 Market Valuation Cost 2012 Market Valuation £ 2013 £ £ 2012 £

UK and overseas listed shares 40,546,045 44,771,154 35,270,315 40,657,883

UK listed fixed interest securities 22,872,709 23,592,560 21,747,968 23,602,777

UK Property Investment Fund 3,768,191 3,760,798 2,092,398 1,975,232

67,186,945 72,124,512 59,110,681 66,235,892

Other financial investments

32

Movements in Provisions and Appropriations10

Investment in subsidiary.

The Society owns 100% of the ordinary share capital of Shepherds Network Limited.

The Society has made a loan to Shepherds Network Limited which is repayable over three years. Subsequent to the period end the company changed its

name to Financial Advice Network Limited, effective from 21 January 2014.

Shares in subsidiary Loans to subsidiary£ £

As 31 December 2013 500,000 200,000

Fund for Future Appropriations (Group)

2013 2013 2012 2012£ £ £ £

Balance at 1 January 9,128,717 9,833,579

Transfer from/to income and expenditure account 1,006,031 (704,862)

Transfer from/to revaluation reserve - -

1,006,031 (704,862)

Balance at 31 December (Group) 10,134,747 9,128,717

Loss realised in subsidiary 225,541 278,819

Balance at 31 December (Society) 10,360,288 9,407,535

Less pension asset (FRS 17) 295,000 410,000

Balance at 31 December less pension asset 10,655,288 9,817,535

Notes to the Accounts

2013 2012£ £

Other debtors - 47,596

- 47,596

Other Debtors (Group)9

33

The technical provisions were calculated by the Society’s ActuarialFunction Holder, using assumptions as follows:

1 Life and Endowment Fund

The net premium valuation method was adopted using a per annuminterest rate of 2.50% for all With Profits business (2012:2.00%) and2.75% (2012:1.50%) for all non-profit business. Mortality based onA67/70 tables with a four year deduction for female lives was assumed(same as in 2012) other than the Society's Over50s business where anassumption of 175% AXC00 was used (2012:100% A67/70 with a fouryear deduction for female lives). Lapses were assumed to apply at arate of 2.5% a year to Over50s business.

Old table assurances were valued as the maximum sum assuredunder the profit contracts. With profit bonds and ISA were taken atface value as at 31st December 2013 subject to a minimum of theamount payable on death excluding any allowances for final bonus.

Unitised with-profits pension policies were valued at the face value ofthe units allocated at 31st December 2013.

For business valued using the net premium methodology, thedifference between the net and office premium provides an implicitallowance for the future expenses. Net premiums are limited to 90% ofthe office premium to provide a margin for expenses and profits.

For business valued using a net premium methodology a zillmermodification of 3.0%pa of the sum assured was made in 2013 (2012:3.0%pa Zillmer modification).

2 Sickness FundSickness benefits were valued by a gross premium valuation methodusing an interest rate of 2.75% (2012: 2.00%) per annum. Sicknessrates were based in the following proportions applied to the duration ofsickness calculated by reference to 100% inceptions and recoveries ofstandard CMIR12 sickness tables:

2013 2012£ £

Balance at 1 January 66,302,538 61,976,525

Transfer from income and expenditure account 3,312,615 4,326,013

Balance 31 December 69,615,153 66,302,538

Long Term Business Provision

Young Saver 25% (2012: 25%)

Adult Saver 75% (2012: 100%)

SIPP 125% (2012: 175%)

Premier to age 35 (2012: 500%)

Premier to age 35-40 (2012: 250%)

Premier to age 40+ (2012: 200%)

Other income protection 75% (2012: 175%)

For Premier Protect reserves were estimated using case estimates for2013. For 2012, inception rates are based on inceptions as given in thetable above allowing for recoveries at 80% CMIR to age 35, 90% for ages35-40, 100% for ages 40-45 and 110% thereafter.

An allowance for expenses of 15% of each premium was allowed for onAdult Saver contracts and SIPP contracts. 40% of the office premium onPremier Protect and the Society's other income protection contracts(excluding Young Holloway) that were written before 2013 was explicitlyreserved for expenses and profit. On business written since 2013 theallowance has been reduced from 40% to 15%. Lapses were assumed at an annual rate of 15% a year (2012:25%) on the Society's pure incomeprotection business. No lapses were assumed on the Society's Holloway business.

3 Members’ Individual Credit FundsMembers' individual credit funds were taken at face value at 31December 2013 and allowing for members' allocations (but excludinginterest) at that date discounted at a rate of 0.5% to maturity(2012: no discount).

4 Pension FundUnitised with profits pension policies were valued at the face value ofunits allocated at 31st December 2013 including bonuses addedthroughout the 2013.

Case estimates

Case estimates

Case estimates

34

Tangible and Intangible Assets11

Tangible assests cost Motor Vehicles Equipment and Furniture Total Group£ £ £ £

At 1 January 2013 131,214 461,272 592,486 602,853Additions 27,260 71,698 98,958 112,757Disposals (81,713) 0 (81,713) (82,352)At 31 December 2013 76,761 532,970 609,731 633,258

DepreciationAt 1 January 2013 54,025 236,030 290,055 293,307Provided in year 27,224 141,696 168,920 173,510Disposals (46,311) 0 (46,311) (46,950)At 31 December 2013 34,938 377,726 412,664 419,867

Net book value31 December 2013 41,823 155,244 197,067 213,39131 December 2012 77,189 225,242 302,431 309,546

Intangible assests cost Equipment and Furniture Total Group£ £ £

At 1 January 2013 13,031 13,031 253,031Additions 109,700 109,700 109,700Disposals 0 0 0At 31 December 2013 122,731 122,731 362,731

DepreciationAt 1 January 2013 869 869 15,869Provided in year 12,662 12,662 42,662Disposals 0 0 0At 31 December 2013 13,531 13,531 58,531

Net book value31 December 2013 109,200 109,200 304,20031 December 2012 12,162 12,162 237,161

Statement in accordance with Section 77 of the Friendly Societies Act 199212

The following information has been approved in accordance with Section 77 of the Friendly Societies Act 1992:

1 The Actuarial Function Holder and the With Profits Actuary during the year was Mr C Critchlow BSc FIA, an employee of OAC plc. Neither Mr Critchlow, his wife or his children were members of the Society at any time during 2013.

2 Neither Mr Critchlow, his wife or children had any financial interest in any transaction with the Society at any time during 2013, other then as anemployee of OAC plc.

3 The only remuneration was the fee for professional services paid to OAC plc for the services provided by Mr Critchlow and his support team. The amount payable in this respect amounted to £223,783 inclusive of VAT (2012: £186,841). No other benefits, emoluments, pensions orcompensation were paid.

4 Mr Critchlow did not receive, and will not receive, any other financial benefit.

Notes to the Accounts

35

Staff Pension Scheme: Society and Group14

Operating Lease CommitmentsAnnual leases under non-cancellable operating leases are as follows:

13

2013 2012£ £

Annual commitments under operating leases which expire: 27,380 27,380

Between two and five years 27,380 27,380

Final Assumptions Description Year ending 31 December 2013 Year ending 31 December 2012

Discount Rate 4.40% pa 4.30% paRetail price inflation 3.60% pa 2.60% paConsumer price inflation 2.60% pa 2.10% paSalary increases 3.00% pa 4.10% paRate of increases of pensions in payment 3.40% pa 2.60% pa-RPI 5% 2.40% pa 1.85% pa-RPI 2.5% 2.60% pa 2.10% paRate of increase for deferred pensionersExpected return on assests 5.80% pa 4.80% pa

Demographic Assumptions Description Year ending 31 December 2013 Year ending 31 December 2012

Mortality (Pre retirement) AMC00/AFC00 AMC00/AFC00Mortality (Post retirement) S1PA CMI_2013_M/F [1.00%] (yob) S1PA CMI_2011_M/F [1.00%] (yob)

Life Expectations Year ending 31 December 2013 Year ending 31 December 2012Male Female Male Female

Life expectancy for an individual aged 65 in 2013 21.8 years 24.1 years 22.0 years 24.3 yearsLife expectancy at age 65 for an individual aged 45 in 2013 23.2 years 25.6 years 23.4 years 25.9 years

The Society operates a Final Salary defined benefit pension scheme. Pension benefits are linked to the members' final pensionable salaries and serviceat their retirement (or date of leaving if earlier). The Scheme has been closed to new entrants since 1 May 2005. The most recent formal actuarialvaluation was carried out as at 5 April 2012. The results have been updated to 31 December 2013 by a qualified independent actuary. The assumptions used were as follows:

The overall expected return on assets assumption of 5.80% pa as at 31 December 2013 has been derived by calculating the weighted average of theexpected rate of return for each asset class. The following approach has been used to determine the expected rate of return for each asset class:- fixed interest securities, current market yields- equities, Net dividend yield on FTSE all share index plus RPI inflation plus dividend growth assumption of 1.5% less 0.5% investment expenses- cash, current Bank of England base rate.

36

Notes to the Accounts

Amounts recognised in statement of total recognised gains and losses: Year ending 31/12/2013 Year ending 31/12/2012

The actual return on assets over the period was 207 320

Reconciliation to the Balance Sheet

Description

Market Value of assets 3,854 3,797

Present Value of liabilities 4,149 4,207

Surplus/(Deficit) in the scheme (295) (410)

Irrecoverable Surplus 0 0

Pension asset/(liability) recognised in the balance sheet before (295) (410)allowance for deferred tax

Value of liabilities at the start of the year 4,207 4,028

Service cost 20 18

Interest cost 175 182

Member contributions 5 5

Business contributions 0 0

Settlements 0 0

Curtailments 0 0

Past service cost 0 0

Benefits paid (280) (357)

Actuarial (gains)/losses 22 331

Value of liabilities at the end of the year 4,149 4,207

Assets15

The assets of the Scheme are invested in a diversified portfolio.

Year ending 31 December 2013 £’000

Year ending 31 December 2012 £’000

Year ending 31 December 2013 £’000

Analysis of changes in the value of the Scheme liabilities over the year Year ending 31 December 2012 £’000

Year ending 31/12/2013Market Value £’000 % of total Scheme assets Market Value £’000 % of total Scheme assets

Asset Class Year ending 31/12/2012

Equities 1,761 46% 1,547 41%

Bonds 1,576 41% 1,641 43%

Gilts 441 11% 549 14%

Cash 76 2% 60 2%

Other assets 0 0% 0 0%

Total 3,854 3,797

37

Analysis of changes in the value of the Scheme assets over the year

Market value of assets at the start of the year 3,797 3,803

Expected return on Scheme assets 179 172

Actuarial gains/(losses) 28 148

Employer contributions 125 26

Member contributions 5 5

Business combinations 0 0

Settlements 0 0

Benefits paid (280) (357)

Market value of assets at the end of the year 3,854 3,797

Amounts recognised in profit and lossAnalysis of amounts charged to operating profit

Current service cost 20 18

Past service cost 0 0

Previously unrecognised surplus deducted from past service costs 0 0

(Gain)/loss on business combinations 0 0

(Gain)/loss on business settlements 0 0

Previously unrecognised surplus deducted from settlement loss 0 0

(Gain)/loss on curtailments 0 0

Previously unrecognised surplus deducted from past curtailment loss 0 0

Net (gain)/loss charged to P&L account 20 18

Analysis of amounts charged to other financial

Interest on liabilities (175) (182)

Expected return on scheme assets 179 172

Net (charge)/credit to other financial income 4 (10)

Total P&L charge before deduction for tax 16 28

Amounts recognised in Statement of Total Rec

Actuarial gains/(losses) 6 (183)

Limit on recognition of assets 0 0

Total amount recognised in STRGL 6 (183)

Year ending 31 December 2013 £’000

Year ending 31 December 2012 £’000

Year ending 31 December 2013 £’000

Year ending 31 December 2012 £’000

Year ending 31 December 2013 £’000

Year ending 31 December 2012 £’000

Year ending 31 December 2013 £’000

Year ending 31 December 2012 £’000

38

Notes to the Accounts

The cumulative amount of actuarial gains and losses in the STRGL (since 2010) is -£433,000.

Future Funding obligation

The last actuarial valuation of the Scheme was performed by the previous Actuary for the Trustees as at 5th April 2012. The Society agreed to pay annual

contributions of 28.6% of pensionable salaries, along with a lump sum of £100,000 by 5th April 2013 and then £75,000 pa until 5 April 2019. The Society

expects to pay £98,000 to the Scheme during the accounting year beginning 1 January 2014.

History of assets, liabilities, experience Year Ended Year Ended Year Ended Year Ended Year Ended

gains and losses31/12/2013 31/12/2012 31/12/2011 31/12/2010 31/12/2009

£’000 £’000 £’000 £’000 £’000

Market Value of Scheme 3,854 3,797 3,803 4,007 3,672

assets 4,149 4,207 4,028 3,911 3,834

Value of Scheme liabilities (295) (410) (225) 96 (162)

Surplus/(Deficit) in the Scheme

Gains/(losses) arising on Scheme liabilities: 40 (181) (11) 83 34

Due to experience 1% (4)% 0% 2% 1%

% of liabilities (62) (150) (187) 244 N/K

Due to change of basis (1)% (4)% (5)% 6%

% of liabilities

Experience gains/(losses): 28 148 (150) 253 329

Arising on Scheme assets 1% 4% (4)% 6% 9%

% of assets

39

Capital Statement16

Capital resource sensitivities:

The capital position is sensitive to changes in market conditions, which may affect the value of assets and liabilities. The key risks are a fall in equityand/or property values and a sharp rise in interest rates. Following the events of 2012 and 2013 the Society's finances remain strong but the Board of Management remains of the opinion that it has sufficient capital to cope with a sudden fall in asset values, such as a stock market crash, and ifnecessary immediate action would be taken to reduce the impact. These actions may include the immediate sale of higher risk assets or reducing overheads.

The Board of Management is fully aware of the impact of changes in market conditions, and the sensivities have been included in the calculationsmade in arriving at the capital requirement in the Individual Capital Assessment.

Capital Position Statement

The Society adopted Financial Reporting Standard 27 (FRS27), issued in December 2004. The disclosure requirements of the standard largely focuson with-profit funds that fall under the Prudential Regulation Authority realistic reporting regime and the Society is not required to report under suchregime, therefore less detail is required in order to comply with FRS 27 Life Assurance. The Society is required to hold sufficient capital to comply withthe Individual Capital Assessment, as amended by the Individual Capital Guidance.

The Society maintains an efficient capital structure consistent with the Society's risk profile and the regulatory and market requirement of its business.

In reporting our financial strength, capital and solvency is measured using the regulations prescribed by the PRA. These regulatory capital tests arebased upon required levels of solvency capital and a series of prudent assumptions in respect of the type of business written by the society.

Capital Management policies and objectivesThe Company's objectives in managing its capital are;

� To match the profile of its assets and liabilities, taking account of the risks inherent in the business, � To maintain financial strength to support new business growth, � To satisfy the requirements of its policyholders and regulators,

Restrictions on available capital resourcesIt remains the intention of management to ensure that there is adequate capital to exceed the Society's regulatory requirements

2013 2013 2012 2012 £000 £000 £000 £000

Society's reserves 10,360 19,480

Adjustment on regulatory basis:

Inadmissible assets of regulated related undertaking (700) (700)

DAC (709) (412)

Other asset adjustment 295 410

Expense closure reserve and life & sickness bonus and interest surplus not in R&A - -

(1,114) (702)

Total available capital resources 9,246 8,706

40

Glossary

Corporate GovernanceAn internal system encompassing processes, policies and people

by directing management activities with objectivity accountability

and integrity.

Deferred Acquisition Expenses (DAC)Certain costs of acquiring new business are spread over the life

of the policy, and are treated as an asset in the accounts.

FRS 17A Financial Reporting Standard issued by the Accounting

Standards Board. FRS 17 states how a firm’s pension fund

should be accounted for.

Fund for Future Appropriations (FFA)The accumulated profits of the Society. Equivalent to Retained

Profits in a company’s accounts.

Long Term Business Provision (LTBP)An actuarial calculation of the amounts due to policyholders.

It is also known as technical provisions.

Realised and unrealised gains or lossesA realised gain or loss occurs when an asset is sold and is the

difference between the sale proceeds and the cost.

Insurance companies are required to revalue their assets every

year, and the increase or decrease in value since the previous

year is classed as an unrealised gain or loss.

ReinsuranceThe Society pays a premium to a larger insurer to share the risks

for larger sums assured.

SmoothingThe principle of reducing bonuses in good years to prevent lower

bonuses in poor years.

Retail Distribution Review (RDR)RDR is a key part of the FCA consumer protection strategy. It is

establishing a reslient effective and attractive retail investment

market consumers can have confidence and trust in at a time when

they need help and advice with retirement and investment planning.

Solvency IISolvency II Directive is a fundamental review of the capital

adequecy regime for the European insurance industry. It aims to

establish a revised set of EU-wide capital requirements and risk

management standards with the aim of increasing protection for

policyholders.

Valuation methods Note 11 of the Report and Accounts refers to the assumptions that

the actuary uses in calculating the Long Term Business Provision.

The references are to standard actuarial tables for calculating

death and sickness rates.

With Profits FundAll members/policyholders participate in the profits and losses

of the fund.

ZilmerisationThis is an actuarial method of calculating the Deferred Acquisition Cost.

41

Notes

The Shepherds Friendly Society Limited

Registered Office: Shepherds House, Stockport Road, Cheadle, Cheshire SK8 2AA

Phone: 0161 428 1212 Fax: 0161 428 3666

Email: info@shepherdsfriendly.co.uk Website: www.shepherds.co.uk

SHEPHERDS FRIENDLY IS A TRADING NAME OF THE SHEPHERDS FRIENDLY SOCIETY LIMITED WHICH IS AN INCORPORATED FRIENDLY SOCIETY UNDER THE FRIENDLY SOCIETIES ACT. REGISTERED NO 240F.AUTHORISED BY THE PRUDENTIAL REGULATION AUTHORITY AND REGULATED BY THE FINANCIAL CONDUCT AUTHORITY AND THE PRUDENTIAL REGULATION AUTHORITY, FINANCIAL SERVICES REGISTER NO 109997.

The Head office and Registered office of The Shepherds Friendly Society is based in the United Kingdom.

Mutual Solutions. Mutual Benefits. Your Future.