pointTalking

Otto UK Pension SchemeSeptember 2008

Talking

My word!

companybenefit that Otto UK gives its employees (unlike the greatshopping discounts we get!), but research done earlier thisyear showed that a workplace pension is still consideredthe most important perk an employer can offer.

However, while three-quarters (75%) of employees believe itis important to have a pension that comes with their job,less than half (48%) have confidence in pensions whencompared with other forms of retirement savings. A lot of itis down to the fact that pensions just seem SO complicated,and also the industry has had a lot of bad press in recentyears. So, how do we close the gap? Well, a newsletter suchas this one is a start.

Say goodbye to ‘pensions speak’:Talkingpoint aims to cut through the jargon to help youunderstand how your pension works and what you need todo to stay on track for a financially secure retirement.

As well as giving our active members some ideas on howthey can grow their pension (page 10), we’ve also included a section dedicated to pensioners, highlighting ways they may be able to get more benefits from the State.

I hope you find it an interesting read. Please let us knowwhat you think (our contact details are on the back page).

Norman FinniganChairman of Trustees

OK, so I know a company pension scheme may not be the most exciting

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what’s inside

Money matters 4Investments

Changes to our investment strategy 6Your pension and the credit crunch 9

Top up your pension 10Update to funding position 12Pensioners’ pages 14Contact us 16

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Every year, the trustees have to produce a full set of accounts showing how muchmoney has been paid into the scheme, and how much has been paid out…

giving you peace of mind that your pension savings are being accurately and correctly recorded.

We get our auditors (highlyqualified accountants) to checkthat everything is ship-shape,

Moneymatters

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Do you want to see

the full report or

any other scheme

documents? Ask us

for a copy - contact

details are on page 16.

MembershipThe Grattan and Freemans sections of the scheme areclosed funds, so the number of active members in thosesections will gradually fall as people leave the company or retire.

The Money Purchase Section (which was introduced in2003) is open to all new Otto employees. In the past year159 new active members have joined the Otto UK Pension Scheme.

Grattan Freemans section section

£’000 £’000Money inThe company paid in… 9,532 10,199Members paid in… 176 82Transfers in from other funds… 6 -Other income... 56 -

TOTAL INCOME 9,770 10,281

Money outPayments to members... 7,606 8,857Other payments... 153 47Administrative costs... 571 527

TOTAL EXPENSES 8,330 9,431

Value of scheme at 6 April 2007 £362 millionValue of scheme at 5 April 2008 £354 million

0 1000 2000 3000 4000 5000 6000 7000 80000 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8, 000

Active members 2,957

Pensioners 3,386

Deferred members 7,199

Other beneficiaries 381

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MMeemmbbeerrss ooff tthhee MMoonneeyy PPuurrcchhaassee sseeccttiioonnare sent an annual statement showing the current value of theirindividual retirement account, payments into it over the year, andan illustration of their projected pension at retirement.

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InvestmentsThe money paid into the scheme is invested bydifferent investment managers across different‘asset classes’, so for example company shares(equities), and fixed-interest investments (bondsand gilts).

The money paid in on behalf of members of the Grattanand Freemans sections is held in a pool (one for eachsection) from which all benefits are paid. Money Purchasemembers have their own individual retirement accounts inthe scheme and use their pot of money to buy ‘units’ indifferent investment funds.

Hands off !

New strategy to reduce risk in the pension schemeThe trustees, on the advice of their investment consultants,have started to switch some of the assets that are held inequities (company shares) into corporate bonds and gilts.More details will be provided in next year’s newsletter.

The assets in the scheme are kept totally separate from thecompany’s assets

Bonds & giltsThese are loans to companies or governments who

need to raise money to finance projects. (Bonds issued

and backed by the UK government are called gilts.) The

amount of the loan is paid back on a specific date, and

interest payments are made throughout the duration

of the bond, giving a guaranteed stream of income to

the investor. For index-linked bonds, the rate of interest

is linked to inflation – so it increases when inflation is

on the rise and decreases when inflation goes down.

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Split of assetsDuring the year under review, the assets of the three sections were invested in the following asset classes:

UK equities 28.6%Overseas equities 34.1%Fixed interest 17.7%Index linked 9.5%Property 10.1%

0 1000 2000 3000 4000 5000 6000 7000 8000

0 1000 2000 3000 4000 5000 6000 7000 8000

Grattan Section

UK equities 23.6%Overseas equities 34.5%Fixed interest 24.9%Index linked 6.8%Property 10.2%

0 1000 2000 3000 4000 5000 6000 7000 8000

0 1000 2000 3000 4000 5000 6000 7000 8000

UK & overseas equities 88.9%Index linked 8.9%Cash 2.2%

0 1000 2000 3000 4000 5000 6000 7000 8000

0 1000 2000 3000 4000 5000 6000 7000 8000

0 1000 2000 3000 4000 5000 6000 7000 8000

Freemans Section

Money Purchase Section

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Equitable Life AVCsSome members still have contributionsinvested in Equitable Life’s With-ProfitsFund, which closed to new business in 2000. The latest developmentis a proposal from the PensionsOmbudsman to set up a compensationfund for Equitable Life policyholders.We are expecting the Government torespond in the autumn and will sendyou further information once theresults are known.

Who are the investment managers?Grattan Section: Legal & General, Marathon AssetManagement, AllianceBernstein and Black Rock.Freemans Section: Legal & General, Barclays GlobalInvestors and Black Rock.Money Purchase Section: Legal & General.

One and three-year returns (annualised)1 year 3 years (annualised)

Grattan Section -2.8% 9.4%

Freemans Section -2.9% 8.4%

Money Purchase SectionEquity fund -5.1% 10.1%Index-linked gilt fund 13.4% 8.2%Cash fund 5.8% 5.1%

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The credit crunch is not all bad news however –especially if you are a member of the Money Purchasesection. Annuity rates (which govern how much pensionyou are able to buy with your retirement account) are attheir highest levels in five years. That means you getmore pension for your money – and it’s all thanks to thecredit crunch.

Why? The credit crisis caused financial institutionsworldwide to stop lending to one another. With theresulting shortage of funds, big investors have sold allsorts of assets, including bonds issued by qualitybusinesses. This has depressed corporate bond prices,but lifted their yields.

The full impact of the credit crunch on economicgrowth cannot yet be assessed, but it will take sometime before we return to ‘normal’ market conditions.

It is important to remember that pension fundinvesting is for the medium to long term and any short-term fluctuations should not be viewed as having a significant impact on the scheme’s long-termfinancial position.

Creditsqueeze?

Equity markets performed well in the first half of the yearset against a generally sound economic background.

in share prices as investor confidence evaporated. Whatseemed, at first, to be a local problem with US sub-primemortgage lenders, soon spread across global creditmarkets. As the crisis unfolded, inter-bank lending (the ‘lubricant’ of the financial system) became moreexpensive and liquidity problems emerged. Northern Rockwas not the only victim of the lending drought, though it was certainly the most visible in the UK.

July and August saw the first sharp falls

The year 2007 will be remembered for the global

‘credit crunch’ and, in the UK, for the sight of anxious

customers waiting in line outside Northern Rock

branches to withdraw their savings, in the first run

on a UK bank for over a century.

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for topping up

your pension

Through the companyCompany pension schemeThe big advantage of the company pension scheme is thetax relief you get on your contributions – a basic ratetaxpayer pays just 80p for each £1 in their pension fund.Plus, Otto makes contributions to your pension, too.

Additional Voluntary Contributions (AVCs) This is a pension top-up arrangement run by Otto, whichallows you to make additional retirement savings into an individual AVC account.When you retire, you use your AVC fund to provide extra benefits. Your AVCs arededucted from your pay before tax is calculated

The average British pensioner is paid a statepension which is worth just a sixth (17%) ofaverage earnings.

You’ve joined the Otto UK Pension Scheme, so you’re notgoing to be one of those pensioners with nothing to live onbut the state pension, right? Well… yes. But even so, onaverage, the average person can expect a 53% fall inincome, even when state pension and other benefits aretaken into account. Simply put: the more you can put asidefor retirement, the better.

When you’re young, other things take priority: paying off yourstudent debt, building up a deposit for a mortgage, buying anice car. But as you hit your 40s (and especially if you were lategetting into the pension game or had a career break in themiddle), you may want to think about making up any shortfallin your pension.We spell out some of the options here.

Top tips

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(so you pay less tax), plus any money you make frominvesting them also attracts tax relief.

They are flexible – you can stop and start them at any time,and you can also make lump sum payments when you findyourself with a bit of spare cash. You can also choose howthe money in your AVC account is invested. Ask the PensionsDepartment to send you more information about AVCs.

Personal plans

Freestanding AVCs (FSAVCs)Similar to an AVC plan except that it is completelyindependent of the Otto UK Pension Scheme. You chooseyour own provider and make your own arrangements topay contributions to your FSAVC plan. This means yourcontributions will not be deducted through payroll and youwill not receive tax relief at source. Instead you will have toclaim the tax relief from HM Revenue & Customs yourself.

Stakeholder or personal pension planThese private pension schemes are run by banks,investment companies and building societies. You makeyour own arrangements to pay contributions to the plan.

Other savingsThere are, of course other ways to save for your retirementother than by paying more pension contributions e.g.savings accounts, ISAs, unit trusts, etc. You could put moneyaside in a high interest savings account, but you will paytax on the interest earned. The interest earned from cashISAs is tax-free, but you are limited as to how much you caninvest each year (£3,600 for 2008/2009).

??live on ££90.70 a week? That’s the current basic statepension for a single person butyou’ll get even less because thetaxman takes his share, too!

Could YOU

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Funding update(This only applies to the Grattan andFreemans sections, as members in theMoney Purchase Section have theirown individual retirement pots.)

The actuary has to consider thingslike future investment returns,inflation rates, and longevity (ie, howlong members are expected to live,as longer average lifespans mean that pensions will be paid for longer).

The last such investigation (oractuarial valuation) looked at thefunding position as at 5 April 2006,and showed that the scheme had a shortfall of £106.1 million (£70.8m – Freemans Section;£35.3m – Grattan Section).

Every three years, the scheme’s actuary (a specialist in the mathematics of risk) mustcalculate whether the Otto UK Pension Scheme has enough money to pay all the benefits promised to its members...

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However, three years is a long time in the pensions world,so the trustees also ask the actuary to carry out a lessdetailed ‘actuarial check’ every year, to see how the fundingposition has changed over the past 12 months.

The latest update (up to 5 April 2008) showed the positionto be as follows:

Freemans shortfall: £65.5mGrattan shortfall: £52.5mCombined shortfall: £118m

The main reason for the larger shortfall has been poorinvestment returns coupled with higher liability valuesresulting mainly from concerns about higher inflation.

The company currently pays the following amount into the scheme:

Freemans: £8.5m a year until February 2016, towards payingoff the shortfall and meeting running costs, plus 12.7% ofpay for future benefits for current employees

Grattan: £4.5m a year until February 2016, towards payingoff the shortfall and meeting running costs, plus 11.2% ofpay for future benefits for current employees

Both sections: the company also pays member contributionsfor those employees who participate in SMART pensions.

By law, the trustees also have to report on the hypotheticalscenario that the scheme had been wound up on 5 April2008. In this case, the shortfalls would have been £161.5m(Freemans) and £164.1m (Grattan). These figures wouldnormally only matter if the company became insolvent,which is not expected to happen. The shortfalls onwinding-up assume that members’ pensions are providedby an insurance company, and so they allow for insurerstaking a very cautious view of the future and the fact thatthey need to make a profit. Our funding plan, with itscombined shortfall of £118m at 5 April 2008, assumes thatthe company will continue and carry on supporting thepension scheme.

Trustees of all pension schemes are required to informmembers that the Pension Protection Fund (PPF) has beenestablished to pay compensation to members of eligibledefined benefit schemes in the event that an employer isno longer able to meet the pension liability.

The trustees are also required to confirm that there havenot been any payments to the company out of the pensionscheme since the last funding statement was issued, norhas the Pensions Regulator intervened in the funding ofthe scheme or the benefits provided by it.

Pensioners’ pagesAre you claiming pension credits?A recent newspaper report claimed that four out of 10 pensioners fail to claim pension credits, worth an estimated £2.5bn every year.

You might think you’re not eligible for this top-up to the statepension because you’re already receiving a personal pension fromthe Otto scheme, but you may be pleasantly surprised. It’s worthfinding out, because it could put an extra £19.71 into your pocket

each week if you’re a single pensioner aged 65+(£26.13 per week for couples).

If you find you’re eligible, you may receive up to three months’ backdated payments. Call the

pension credit claim line: 0800 99 1234.Lines are open Monday to Friday

between 8am-8pm.

Useful numbersThe Pension Service 8am-8pm,Monday to Friday 0845 60 60 265 (or textphone 0845 60 60 285)www.thepensionservice.gov.uk

Winter Fuel Payment Helpline8.30am-4.30pm, Monday to Friday0845 915 1515 (or textphone 0845 601 5613)

Pension Credit claim line: 0800 99 1234

Age Concern0800 00 99 66www.ageconcern.org.uk

Help the Aged020 7278 1114www.helptheaged.org.uk

Citizens Advice Bureauwww.citizensadvice.org.uk

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Age Concern reckons that manypensioners simply do not realisethey can get financial help from theState and other organisations, sohere are some of the ways you canmake your money go further…

Attendance allowance: if you’re 65 orover and have a disability or illnessthat means you need help withpersonal care (eg, dressing andwashing) and/or supervision, you can get £43.15 to £64.50 a week.

Cold Weather Payments: this benefithelps cover the costs of extra heatingduring periods of very cold weather;you do not have to pay tax on, orrepay, any Cold Weather Payments.

Winter Fuel Payments: these are tax-free payments of up to £200

per household as soon as the eldestperson in the home reaches age 60,with up to an extra £100 for peopleaged 80 or over.

Help with health costs: depending onyour personal circumstances you may,from age 60, be able to get free NHSeyesight tests and a voucher towardsthe cost of glasses or contact lenses,free NHS prescriptions, free NHSdental treatment, free NHS wigs andfabric support, and repayment oftravel costs to hospital.

Free television licences: if you areaged 75 or over, you are entitled to afree TV licence for your main home,although you will still need to register.

Free travel: if you’re over 60, you may beentitled to free or half-price travel on

public transport (check with your localcouncil). Also, if you buy a Senior Railcard(currently £24), you receive a third off thecost of most train tickets for a year.

Free cavity wall/loft insulation:British Gas will offer to install this freeof charge if you’re aged 70 or over, evenif you’re not a British Gas customer.

AAnndd wwhhaatt’’ss mmoorree……

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From April next year, over-60s inEngland will be able to swim for free. The Government plans to givelocal authorities £80 million to makepublic swimming pools free to use for over-60s. (Wales already offersfree swimming for over-60s, while in Scotland individual localauthorities are responsible for theirown pricing policies.)

Splash!Splash!

Contact usMembersGrattan Section: 01274 624 638 / 625 957

Freemans Section: 01274 624 087

Money Purchase section: 01274 624 638 / 625 957

Pensioners (pension payment queries)Grattan Section: 01737 241 144 (Watson Wyatt Ltd)

Freemans Section: 01274 625 300 (option 4)

We welcome your feedback on this newsletter – pleaseemail a member of the Pensions Team with your comments:

Julia Warren ( julia.warren@otto-uk.com)

Anne Robertson (anne.robertson@otto-uk.com)

Ann Moorhouse (ann.moorhouse@otto-uk.com)

Keep in touchPlease remember to keep us informed if your homeaddress changes, so that you can be kept up to date about your pension scheme and your retirement benefits.

Pensioners are also reminded to let us know of anychanges to your bank or building society details promptlyso that there is no disruption to the payment of yourmonthly pension instalments.