Pensions NewsFor all members and beneficiaries of the UK Power Networks Group of the ESPS

Working with UK Power Networks to ensure that the Scheme is run properly and benefits are paid as promised

ISSUE 15AUTUMN 2018

The new Group Trustees have completed their induction processes.

The Group Trustees paid out £144.5m to members in the year to 31 March 2018.

A key focus for the Group Trustees in the coming months is reviewing their investment strategy.

Work will commence shortly to prepare for the 2019 valuation of the Group.

As at 31 March 2018:

The Group was 84% funded.

8% of the Group’s members were active (current) members of the Group.

400+ members held Money Purchase Additional Voluntary Contributions (AVC) accounts.

02 Who looks after your pension?

At a Glance

03 Welcome

04 Your Scheme

08 Your Pension

10 Your Questions 13 Summary Funding

Statement

WHAT’SINSIDE?...

Appointed Group Trustee DirectorsChris Degg, Chairman formerly UKPN’s HR Director Andrew Kluth, Head of Treasury, UKPNIan Smyth, Director of UKPN Services

Elected Group Trustee Directors (all Pensioner Members)Liz AndersonChristopher BakerRoger BarnardNeil Freeman, Network ManagerBob JacksonTerry Peel

Independent TrusteeWayne Phelan, representing Punter Southall Independent Trustees Limited

WHO LOOKS AFTER YOUR PENSION?

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AT A GLANCE...

02

Chris Degg, ChairmanUK Power Networks Group of the ESPS

Welcome to the Autumn 2018 edition of Pensions News

This time last year, when I welcomed you to the Autumn 2017 newsletter, I commented on how we live in uncertain times both politically and economically, both at home and globally. These comments are still relevant. The Group Trustees’ role remains challenging as we aim to foresee how events will affect the future of your pension Scheme while at the same time being accountable for ensuring that the day-to-day management of the Group is undertaken to a very high standard. We have over 15,000 members who are relying on the Group to provide the retirement benefits promised to them and it is critical that we continue to see this as our main priority.

In this edition of Pensions News, you will find an update on the funding position of the Group as at 31 March 2018, together with an update on the performance of the Group’s investments. Reviewing the Group Trustees’ investment strategy and monitoring the performance of the Group’s investments against this is a key focus for the Group Trustees. This will assume even greater importance over the coming months as we approach the next full actuarial valuation, which is due as at 31 March 2019.

On page 4, you will find a summary from the 2018 Report and Financial Statements. In addition, brief updates are provided on other matters that the Trustee Board is working on and will be progressing over the coming months.

Tell us what you think: It is always valuable to receive members’ views on our communications. If you have any feedback on this edition of Pensions News, please do email the Secretary to the Trustees using the contact details shown on page 9.

Finally, as ever, I would like to thank the Group Trustees, our in-house pensions team, and our advisers for their hard work, support, and diligence over the past year.

Kind regards

Welcome

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The Group’s Annual Report and Financial Statements for the year ended 31 March 2018 were completed and signed in July 2018.

PricewaterhouseCoopers LLP, as the Group’s auditors, have confirmed that the Financial Statements show a true and fair view of the financial transactions during the year, and of the Group’s assets and liabilities at the year end, in accordance with all applicable accounting standards and regulations. A copy of the Annual Report can be obtained from Pension Services, and current employees can view it on the UK Power Networks intranet.

Group Financial Statements for 2018AnnualFunding UpdateA full actuarial valuation of the Group is completed at least once every three years. In the years between valuations, the Group Trustees are required to get an annual update from their Scheme Actuary and to share the results with the Company and members.

The full details of the update are set out in the Summary Funding Statement shown on page 13, but in brief, the overall picture as at 31 March 2018 was:

• The Group’s assets were valued at £3,436m.

• The Group’s liabilities were valued at £4,111m.

• This means the Group has a deficit of £675m.

• The Funding Level was 84%.

A glossary to explain the meaning of some of the key terms highlighted in this edition can be found on page 11.

YOUR SCHEME

YOUR SCHEME

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Group Financial Statements for 2018

Summary of membershipat 31 March

2018

9,361

2,629

2,112 1,215

ContributorsPensionersDependentsDeferred Pensioners*

Total membership 15,317

*Excludes 901 deferred pensioners who are only entitled to a frozen benefit equivalent to the relevant State Graduated Pension Scheme in respect of service prior to 1975.

2018 2017 2016 2015 2014£0.0

£500

£1,000

£1,500

£2,000

£2,500

£3,000

£3,500

Market value of assets in £m over the last five years

Transaction summary of the year to 31 March 2018

What came in £mContributions receivable from employers and members 94.9

Transfers in 0.1

Net increase in investments 33.2

Total 128.2

What went out £mBenefits payable to members 144.5

Transfers to other schemes 16.0

Administrative expenses 0.0

Total 160.5

£3,436.0 £3,468.3 £3,116.5 £3,143.3 £2,735.0

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Financial Position of the Group

YOUR SCHEME

In the Spring 2018 newsletter, we reported that the return on the assets for the year to September 2017 was slightly ahead of the target return. Unfortunately, although the Committee held a slightly more positive outlook on the investment markets, the overall returns have been disappointing compared to the wider investment markets and the target return, which can be seen in the charts (to the right).

At the beginning of 2018, the Committee made an additional asset allocation to emerging market equities by reducing its allocation to hedge funds. There are also some changes being made to the managers responsible for investing in bond markets.

However, the implementation of these changes was not completed by the end of March, too late to have any impact on the performance reported here.

The Group Trustees recognise that while there will be some fluctuations in actual performance compared to the target return, the annualised three year performance number is lower than they would like.

The Funding Committee is working with Cardano to review the current strategy and consider, alongside the current outlook for investment markets, whether any changes should be made to the current asset allocation.

Investment returnsThe target for the Group Trustees’ investment strategy is for the assets to produce a return of 2.7% a year greater than the return on the Group’s pension liabilities.

As Chairman of the Funding Committee, I am pleased to be able to introduce this investment update.

Setting, monitoring, and revising the investment strategy, in conjunction with our investment advisers, is one of the most challenging responsibilities for the Group Trustees. The strategy we set has to take into account our long-term objectives while recognising the short-term volatility that can be experienced in the investment markets.

It has now been just over five years since the Group Trustees appointed Cardano as our investment adviser and four years since we completed the implementation of the revised investment strategy, based upon their

advice. We recognise that the results we share with you in the following section are disappointing. This is mostly because investment markets have performed strongly in the short term, whereas our investment strategy is defensively positioned for the longer term. In other words, the expectation is that when general economic conditions start to deteriorate, our returns will improve relative to the market.

One of the key measures we use to judge the performance of the investments is how well they have performed compared to the liabilities. Over the past 18 months however, the value of both the assets and liabilities has remained relatively constant, which, when also taking the deficit repair contributions into account, is reflected in a stable funding level.

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Financial Position of the Group

0.5 3.10.8

Return onassets

Change inliabilities

Targetreturn

Annual Performanceto March 2018

6.5 9.14.5

Return onassets

Change inliabilities

Targetreturn

Annualised 3-YearPerformance

Return on assets This is the gain/loss in the value of the assets over the year after taking into account the payment of benefits.

Change in liabilitiesThis is the movement in the present day value of the pension cashflows over the year. These are valued using the expectedreturns on government bonds (gilts).

Bob JacksonChairman of the Funding Committee

We would have hoped to have seen a small improvement in the funding level over this period.

As Chris Degg mentioned in his Welcome message, reviewing the Group’s investment performance and the Group Trustees’ investment strategy is a key focus for the Trustee Board over the next few months, and we will keep you informed of any changes we decide to make.

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Group operations

As Chairman of the Operations Committee, I am pleased to be able to introduce this section of our newsletter. I hope it proves informative.

The Operations Committee has a remit from the Group Trustees to oversee the management of all operational activities required to run the Group properly. This includes oversight of the administration and accounting services and making sure that pensions team activities are delivered in accordance with agreed performance levels, as well as ensuring the timeliness and relevance of Trustees’ communications with members.

As you will see from the updates provided on this and the next page, it is a busy time for the Committee and the wider Trustee Board, with a number of projects ongoing in addition to our core work. We will continue to keep you updated on these important matters as they progress.

Member OptionsFollowing recent changes in the pensions industry and the introduction by the government in 2015 of Pensions Freedoms, the Group Trustees have been working closely with the Company to look at the options available to members when taking their pension benefits. This means recognising that different members have different needs and that we need to be flexible and alert to these. Look out for future communications on this as our thinking develops.

AVC reviewIf you are one of the 400 members plus, as at 31 March 2018, who were either paying Money Purchase AVCs (MPAVCs), or who previously paid MPAVC and have not yet retired, you may be interested to know that the Group Trustees are undertaking a review of the MPAVC options currently offered to members to ensure that they remain appropriate. A Working Group of Trustees has been set up to carry out this review, working closely with the Group Trustees’ advisers.

Further updates on this will be provided as appropriate. Meanwhile, information about your current options in relation to AVCs can be found on the Intranet (if you are a current employee) or obtained from Pension Services.

YOUR PENSION

Roger BarnardChairman of the Operations Committee

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Group Trustee CommunicationsThe Group Trustees are keen to hear your views about the communications they issue to members. This includes not just the newsletters produced twice a year, but occasional information letters, notice of pension increases, and communications about the member election process. If you have views on how we are communicating with you, the content of communications, or how they are presented, please do get in touch. You can provide your feedback by emailing the Secretary to the Trustees via PensionCommunications@ukpowernetworks.co.uk

While the Group Trustees cannot guarantee to meet everyone’s wishes, they believe that understanding how they may be able to improve their communications will enable them to consider how their communications can help you to better understand your pension.

GDPR In the Spring newsletter, we updated you on the General Data Protection Regulation (GDPR) that came into effect in the UK from 25 May 2018 and made the biggest changes to our data protection laws for 20 years. We issued an updated Privacy Notice to members to reflect these changes and set out the Group’s privacy policy for all concerned. This was part of the work that had to be undertaken on the provision of privacy information to data subjects, which is more detailed and specific than before and has an emphasis on making privacy notices understandable and accessible.

While the Group Trustees were undertaking this work, so were other Data Controllers and Data Processors including in the rest of the pensions and electricity industries. This included the advisers and service providers that the Group Trustees share your personal data with so that they can manage the Group and pay your benefits as they fall due.

If you would like to access the Privacy Notices of the Scheme Actuary, Willis Towers Watson, or the Company’s Actuary, Aon, who are also categorised as Data Controllers, you will find these on their websites and can access them via the following links:

Willis Towers Watson: http://www.willistowerswatson.com/personal-data

Aon: http://www.aon.com/unitedkingdom/products-and-services/human-capital-consulting/aon-hewitt-actuarial-services-privacy-statement.jsp

Pensions ‘On the Road’The next scheduled dates are shown below and have been publicised throughout UK Power Networks through the usual business channels. Current employees also have the option of arranging a telephone meeting if this is more convenient.

18 October Heathrow and Polegate

14 November St Neots

12 December Lewes and Southern Cross

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National AGM

YOURQUESTIONS

Copies of the AGM minutes will be available upon request from Pension Services in the New Year.

This year’s annual general meeting (AGM) of the national Scheme will be held on Monday 26 November 2018 at the offices of Mayer Brown International LLP, 201 Bishopsgate, London, EC2M 3AF, starting at 1pm.

The purpose of this AGM is to receive the Scheme’s Annual Report and Financial Statements, the Auditor’s report, the report of the Scheme Trustee, and to conduct any business, including the consideration of any resolutions proposed by the Scheme’s members.

As members have up to 28 days before the date of the AGM to submit a written resolution to the Scheme Secretary, the deadline for receiving resolutions this year is 29 October 2018. Details of the agenda, resolutions, and notices may be obtained, in November, nearer the date on request from Pension Services.

Receive Pension communications via emailSome of you have chosen to receive Pensions News by email in the future.

If you would now like to do this with the majority of your pension communications, please let Pension Services know your preferred email address and we will update our records accordingly. Please note that some information will continue to be sent through the post if it contains sensitive or personal data (for example, the annual pension increase letter).

Please email Pension Services at pensionservices@ukpowernetworks.co.uk from your usual email account with ‘ESPS Communications’ as the subject header and with the following information:

• Your full name• Your National Insurance Number or Pension Pay Number• The first line of your address

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Pension ServicesFollowing a restructure of Pension Services, Sarah Reynolds, Pensions Operations Manager, has left UK Power Networks to take on a new opportunity and Hana Crossfield has replaced Chris Baker as the

Actuarial Valuation: A process undertaken by the Scheme Actuary that involves the completion of detailed calculations in order to assess the funding position of the Group, using assumptions that are agreed between the Trustees and the Company.

Additional Voluntary Contributions (AVCs): Contributions that members choose to make to the Group, in addition to those they are required to pay, to help them save more for their retirement.

Assets: The investments (including any cash) held by the Group Trustees to produce income and capital growth to enable the Group Trustees to pay members’ benefits.

Bonds: where money is lent to an entity (i.e. a government or a corporate body) in exchange for interest payments (fixed or variable) and the future repayment of the face value of the bond at a specific date.

Emerging market: Countries where the economy is progressing towards becoming more advanced and so are in a high growth phase. This means that assets invested in these markets offer higher potential returns, though with higher levels of risk, than in more developed countries.

Equities: A security or stock representing an owner-ship interest in a specific company (e.g. shares).

Hedge Funds: An investment fund that invests in a diverse range of markets and strategies and uses a variety of risk management techniques to generate returns for its investors.

Liabilities: The amount that the Group is obliged to pay to members now or in the future.

Money Purchase Additional Voluntary Contributions (MPAVCs): AVCs that are invested into an individual pot for the member on a money purchase basis. This means that the amount of money available in the pot when the member chooses to retire will be based on the contributions paid and any investment returns.

Technical Provisions: Under the Pensions Act 2004, this is the name given to an actuarial calculation of the Group’s assets to ensure provision for the Group’s accrued liabilities.

The Pensions Regulator: The UK regulator of workplace pension schemes. It makes sure that employers put their staff into a pension scheme and pay money into it. It also ensures that workplace pension schemes are run properly so that people can save safely for their later years.

Pensions glossary and Acronyms explainedBelow is an explanation of some of the key terms in this edition of Pensions News.

Secretary to the Trustees. In the next edition, we will provide more information about the in-house team that helps us to manage the Group.

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TOPICALNEWS

31 March 2018 31 March 2017 31 March 2016

Market value of assets £3,436m £3,468m £3,117m

Technical provisions* £4,111m £4,139m £3,606m

Deficit £675m £671m £489m

Funding level 84% 84% 86%

*Technical provisions means the amount required in an actuarial valuation to make provision for the Group’s accrued liabilities.

Summary Funding StatementHow much money does the Group need?Every three years a full actuarial valuation of the Group is completed so the Group Trustees can assess how much money they need to pay all the benefits that members have built up in the Group. The full valuation involves the Scheme Actuary completing detailed calculations in order to assess the funding position of the Group, using assumptions that are agreed between the Group Trustees and the Company. The last full actuarial valuation was undertaken as at 31 March 2016.

How do the Group Trustees monitor changes between valuations?Between valuations, the Group Trustees have to obtain annual actuarial reports to provide estimates of the Group’s funding position and have done so as at 31 March 2017 and 2018. The purpose of this statement is to provide you with a summary of the key results stemming from the most recent annual actuarial report. The results are summarised below and include members’ additional voluntary contribution funds.

What do the results tell me?As can be seen, the Group’s technical provisions as at the valuation date were greater than the market value of the assets, with the funding deficit being £489m and therefore a funding level of 86%. For reference, the funding level at the time of the previous valuation completed at 31 March 2013 was 75%. In order to remove this deficit, the Company has agreed with the Group Trustees that it will make payments of £65m a year payable from 1 April 2016 to 31 January 2024 (in addition to the contributions required to finance the ongoing accrual of current active members).

Over the two years to 31 March 2018, the Group’s technical provisions have increased as a result of the reduction in Government bond yields over the period. The market value of the Group’s assets also increased, partly as a result of the deficit contributions received, although not to the same extent as the technical provisions. Consequently, the Group’s funding level has fallen from 86% to 84% over the period and the deficit has risen by £186m. As you can see, the funding position as at 31 March 2018 is unchanged over the year since 31 March 2017.

Please note that the figures shown above are a snapshot at a particular date and, as you would expect, the Group’s finances fluctuate all the time.

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TOPICALNEWS

31 March 2018 31 March 2017 31 March 2016

Assets £3,436m £3,468m £3,117m

Estimated cost (i.e. the discontinuance level) of buying out liabilities with £5,101m £5,278m £4,711m

an insurance company

Deficit £1,665m £1,810m £1,594m

What would happen if the Group is wound up?The funding levels quoted above are measured on an ongoing basis. In this statement, we are required to set out the position if the Group were to be discontinued (the discontinuance level). There are no plans to discontinue the Group but, by law, we must provide you with this information.

As at the valuation date (31 March 2016), and at the subsequent updates at 31 March 2017 and 2018, if the full benefits of all members had to be provided by an insurance company (i.e. if the Group had been wound up or discontinued at that date), the Group’s assets could not have paid for the full benefits of all members. The results below include members’ additional voluntary contribution funds.

These figures make it clear that, in the unlikely event that the Group were to be wound up without sufficient assets to buy out all the benefits with an insurer, and the Company could not afford to make up the difference, members would be unlikely to receive the full benefits that they are entitled to expect.

The Government created the Pension Protection Fund (PPF) to help UK pension scheme members who find themselves in this kind of situation. The PPF came into effect in April 2005 and pays a prescribed level of benefits to members of eligible UK pension schemes that are wound up when the sponsoring employer is insolvent and the scheme has insufficient assets to cover the cost of benefits for its members.

In the unlikely event that the Group were to be wound up and go into the PPF, the compensation you would receive from it could be less than the full pension that you earned in the Group. The actual outcome would depend on your age and on when your benefits were earned.

Further information is available on the PPF website at www.pensionprotectionfund.org.uk/Pages/homepage.aspx. Alternatively, you can write to the Pension Protection Fund at: Renaissance, 12 Dingwall Road, Croydon, Surrey, CR0 2NA.

If you are thinking of taking any action in relation to your pension as a result of this statement, you should consider taking independent financial advice before making any decisions.

Lastly, we need to tell you whether there have been any payments to the Company from the Group in the previous twelve months or whether the Pensions Regulator has needed to intervene in the running of the Group. We can confirm that no such payments have been made and there has been no intervention by the Regulator.

If you would like a copy of the 2016 valuation report and accompanying documents, or a copy of the 2017 or 2018 actuarial reports, please contact Pension Services.

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Useful websites

Next edition...Meet the Pensions Team.

pensionwise.gov.uk - A free and impartial government service that helps you understand your pension options.

pensionsadvisoryservice.org.uk - A free and impartial guide for workplace and personal pensions.

gov.uk - The official UK government website for citizens. It includes useful information on pensions and retirement planning, money, tax, and benefits.

thesilverline.org.uk - A free and confidential helpline for older people across the UK and is open every day and night of the year.

contact-the-elderly.org.uk - A network of volunteers who organise monthly Sunday afternoon tea parties for small groups of older people aged 75 and over, who live alone, offering a regular friendship link every month.

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Please note that if there is any inconsistency between the information contained in Pensions News and the Trust Deed and Rules or any overriding legislation, the Trust Deed and Rules and/or the legislation will prevail. While the Group Trustees are ultimately responsible for ensuring that your pension benefits are paid correctly and on time, neither they nor UK Power Networks can advise you on your personal financial arrangements. We recommend you to obtain independent financial advice before making any decisions about your entitlements under the Scheme.

UK Power Networks Holdings LimitedRegistered office: 237 Southwark Bridge Road, London SE1 6NPRegistered in England and Wales. Registered number: 7290590

If you have any questions about your pension, or if you are a deferred or pensioner member and need to notify us of a change of contact details, please contact us at:

UK Power Networks Pension ServicesEnergy HouseHazelwick AvenueCrawleyWest Sussex RH10 1EX

Tel: 03330 090007Email: pensionservices@ukpowernetworks.co.uk

Please note that if we are not provided with up to date contact details, we may not be able to provide you with important information about your pension in the Group.

Contact us