Guide to the proposed changes to the Yorkshire and Clydesdale Bank Pension Scheme

Always thinking – About our future In May, we announced that the Group was reviewing the Yorkshire and Clydesdale Bank Pension Scheme (the Scheme). The purpose of the review was to find ways to make the Scheme sustainable by reducing the volatility, cost and risk associated with it. This review has now been completed and this guide sets out the Group’s proposed changes to the Scheme. It contains important information about your benefits; please take the time to read it. September 2011

Why should I read this guide? We are now entering a 60-day consultation period which gives you the opportunity to have your say on the proposed changes.

We want to make sure you have the information you need to understand what the proposed changes would mean for you. To help, this booklet explains the changes, the reasons for them and, if implemented, the choices you would need to make. The changes are proposed to take effect in April 2012. The benefits you have built up prior to that date would not be affected by the changes. However, the proposed changes would impact the potential pension you receive at retirement, so it’s important that you read and understand this brochure.

Contents Introduction

3

The proposed changes

4 - 5

Questions and answers

6 -7

What happens next?

8

Have your say

8

You can find more information about the proposed changes by visiting pensions pages in the My Career section on brian or our pensions website; www.nagpensions.co.uk/consultation

2

Introduction A review of the Scheme announced in May 2011 has identified that the current structure is no longer financially sustainable and presents a significant risk to the Group. Having considered a wide range of options, the Group, with the assistance of independent specialists, is proposing to make changes that it believes are the most balanced solution to the issues that need to be addressed. These proposed changes aim to:   Support sustainability, security and stability;   Address the fact that members are living longer and hence benefits are paid for longer. Unlike many organisations, including some of our direct competitors, our Scheme remains open for existing members. However, we acknowledge that the proposed changes (set out on pages 4 and 5) are significant and will have a direct financial impact on all active members. So, should the proposed changes go ahead, the following measures have been taken to minimise the impact on members as far as possible:  The measures would be phased in over a three year period;  There is a SMART pensions arrangement option to reduce National Insurance (NI) costs and tax relief concessions to reduce the cost of making contributions; and  A non-contributory option is available for those who wish to maintain their current net pay levels. The 60-day consultation period will end on 28 November 2011. During this period, you should take the time to understand what we’re proposing, ask any questions you have and give us your feedback. Its really important that you understand why we are proposing these changes, how they could affect your benefits and what choices you would need to make. We’ll be providing further information throughout the consultation period, including: A series of seminars and telecalls during September, October and November, so you can find out more and ask questions. A timetable of these events is available on the pensions pages of My Career section on brian;

Q&A

An easy to use online modeller tool so that you can see the impact the proposed changes could have on your benefits. You can access it at www.nagpensions.co.uk/consultation; Regular responses to questions raised by members. We want to hear your feedback. You can give us your comments using the details on the back page of this guide. All feedback received by 28 November 2011 will be considered by the Group after the consultation period ends. No decision will be made about how to proceed with the proposals until after that date.

Please note that this guide does not constitute advice, nor set out the formal legal terms governing the YCB Pension Scheme. In the event of any inconsistency between this and the Scheme’s trust deed and rules, it is the terms of the trust deed and rules which will apply.

3

The proposed changes – There are two change 1) Members begin to pay contributions to the Scheme

We are proposing that from April 2012, you pay contributions to keep the current level of benefit you are building up.

Currently, you don’t contribute to the Scheme for the benefits you receive. We are proposing that from April 2012, you pay contributions to keep the current level of benefit you are building up. These contributions would be phased in over the next three years, as shown in the table below, to lessen the immediate impact of this change, starting at 3% in April 2012 and going up to 9% by April 2014. If you don’t want to pay contributions, you have the option to reduce the level of benefit you are building up. In this case, you would build up benefits at the lower level for the next three years, but after that, you could choose to pay contributions to build up benefits at the higher level.

Contributions paid from: April 2012

April 2013

April 2014

Current level of benefit: 1/60th (for each year)

3%

6%

9%

Reduced level of benefit: 1/80th (for each year)

0%

0%

0%

If you chose to pay contributions, you would benefit from tax relief on your contributions. So, the actual amount you would see your take-home pay reduce by would not be as much as the contribution amount. For example: If your annual salary is £20,000 you are likely to see the following reduction in your take-home pay. April 2012

April 2013

April 2014

£1,666

£1,666

£1,666

Contribution

£50

£100

£150

Tax relief

£10

£20

£30

Actual contribution

£40

£80

£120

£1,626

£1,586

£1,546

Monthly salary

Monthly salary

If you also chose to pay your contributions via the SMART pensions arrangement, you could also make savings on the amount of National Insurance you pay.

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es being proposed 2) The way benefits increase in value each year changes from RPI to CPI While you work for the Group and are an active member of the Scheme, the benefits are increased each year in line with increases in the cost of living (inflation). This is so that the benefits you are building up retain the buying power they have now in retirement. Currently, we use the Retail Prices Index (RPI) as the measure of inflation. From April 2012, benefits built up after that date will be increased in line with the Consumer Prices Index (CPI) instead. This would be capped at 5%. The Government is also now using CPI instead of RPI for public sector pensions and the State Pension. The difference in the way the CPI and RPI measure inflation is a complex subject but since the CPI was introduced, it has on average, produced a measure of inflation which is approximately 1% lower than the RPI.

Currently, we use the Retail Prices Index (RPI) as the measure of inflation. From April 2012, we propose that we start using the Consumer Prices Index (CPI) instead.

The benefits you have built up so far are protected and will not be affected by the proposed changes.

How would the proposed changes affect me personally? The actual effects of the proposed changes depend on your age and number of years to retirement. For example, a member close to retirement is likely to be less affected than a member with many years until retirement. Enclosed with this guide is a set of examples to help you consider your own circumstances. If the proposed changes go ahead, you would need to decide whether to make contributions in order to maintain your current level of benefits. We’ve created an online modeller tool so that you can see the impact that decision could have on your benefits. You can access it via brian or directly at www.nagpensions.co.uk/consultation Note: You will need information contained in your annual benefit statement to enter your own personal details.

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An interview with Arthur Willett HR Director In this section, Arthur explains more about the rationale behind the proposed reforms and the impact on active members. A more detailed set of Q&A is also available on the pensions pages of brian and on www.nagpensions.co.uk/consultation

Q. Why are changes necessary now? T here are short-term and long-term reasons why these changes are being proposed now. In the short-term, regulations are being introduced that place demands on the business to improve its capital position to remain competitive in a turbulent market place. For the long-term, the Scheme exposes the Group to many unknown risks and costs in the future. The Group expects to have to pay contributions to the Scheme of £110 million per year for the foreseeable future. This is a significant increase from the £40 million a year we were paying before.

Q. What other options were considered?  e have considered a wide range of options, including different levels of member contributions, W making contributions compulsory, closing the Scheme entirely, and pushing the full member changes forward to 2012. However, after lengthy consideration and extensive discussions with stakeholders, we believe that the proposed changes are the best available solutions to the challenges we face. We have also tried to lessen the financial impact on Scheme members by proposing to:  Put off the implementation of member contributions for as long as possible;  Phase in contributions over a three year period;  Allow members to pay contributions via a SMART pensions arrangement to reduce the cost of contributions; and  Offer a non-contributory option for those who prefer not to pay contributions at this time.  any businesses have needed to close their pension arrangements like our Scheme in recent M years, but we have chosen to keep the Scheme open and are committed to making it sustainable, secure and stable for the future.

Q. This looks like another cost cutting exercise. Do we need to be concerned about the state of the business?  o. Like many businesses we have been affected by a series of factors that are outside of our control N – people living longer, lower interest rates over recent years, pensions legislation and lower investment returns. Like all other businesses, we monitor our costs to respond to factors such as these.

6

Q. Can’t we delay making these changes for another few years and see if markets improve? T he return on investment is just one of many factors impacting the cost of providing a defined benefit arrangement such as our Scheme. The Group needs a long-term solution that would allow us to provide sustainable and competitive pension benefits, for all UK employees whilst safeguarding the benefits Scheme members have built up to date.

Q. What is a SMART arrangement?  SMART arrangement, often referred to as salary sacrifice, is a more efficient way of making contributions A to a pension scheme, as you may make savings through reduced National Insurance (NI) contributions. It works by you agreeing to reduce your salary by the amount you would have made as a pension contribution. As your monthly salary is reduced, effectively you pay less National Insurance.

Q. Have you been in touch with any other parties, for example the Scheme Trustees? The Trustees have been kept informed throughout the process of the review.

Q. I see the employee contributions will be at 9% in 2014 - will they stay at that level?  e plan to regularly review the costs associated with running the Scheme on an ongoing basis and W will look at the level of employee contributions as part of that process.

Q. What is the difference between the RPI and CPI and how would it affect my benefits?  ell, the basic approach to measuring inflation by the CPI and RPI is the same. Both track the W changing cost of a fixed basket of goods and services over time. The differences arise in the actual goods and services included, who these are purchased by and the formula that is then used to calculate the actual index. T he major difference that is often referred to is that the CPI does not include house prices or mortgage interest payments. Historically, the CPI has calculated a lower rate of inflation than the RPI. This cannot be guaranteed but the assumption used in the Modeller is based on the CPI being 1% lower each year than the RPI.

7

What happens next? We are now entering a 60-day consultation period giving you the opportunity to have your say on the proposed changes. The consultation period will run until 28 November 2011. During the consultation you will also be given the opportunity to attend presentations, either face to face sessions or telecalls, which will explain the proposed changes in more detail. It is important that you make the effort to attend these sessions, as they will help you to understand what the proposed changes mean to you. You are welcome to attend the presentation that is most convenient for you - please remember to arrange this with your manager in advance.

29 September

Consultation period starts

September to November

Roadshows and telephone calls to find out more

29 September to 28 November

You ask questions and give us your feedback

28 November

Consultation period ends

December

Feedback considered by the Bank

December

Announcement of final reforms

April 2012

Implementation of final reforms

Have your say Your views are important to us and throughout the consultation you can give us your comments by attending a presentation, joining one of our calls, or by emailing us at [email protected] Please remember, we cannot give you personal advice about how you should act as a result of the proposed changes. You should speak to an Independent Financial Adviser for personal advice. Details of advisers in your local area can be found at www.unbiased.co.uk.