Aon Hewitt Limited | Registered in England & Wales No. 4396810 Registered office: 8 Devonshire Square London EC2M 4PL aonhewitt.co.uk Copyright © 2014 Aon Hewitt Limited. All rights reserved. Authorised and regulated by the Financial Conduct Authority. This report and any enclosures or attachments are prepared on the understanding that it is solely for the benefit of the addressee(s). Unless the Scheme Actuary or Aon Hewitt provide express prior written consent no part of this report should be reproduced, distributed or communicated to anyone else and, in providing this report, the Scheme Actuary and Aon Hewitt do not accept or assume any responsibility for any other purpose or to anyone other than the addressee(s) of this report.

Actuarial valuation at 31 March 2013 Scheme funding report Cheshire & Derbyshire Section of the Nationwide Pension Fund

Prepared for The Directors of Nationwide Pension Fund Trustee Limited Prepared by Jeremy Ball FIA Aon Hewitt Date 18 July 2014 Signed

Jeremy Ball FIA Scheme Actuary jeremy.ball@aonhewitt.com

Executive Summary

The key results of the valuation at 31 March 2013 are set out below.

There was a surplus of £13.3M relative to the technical provisions (i.e. the level of assets agreed by the Trustees and the Society as being appropriate to meet member benefits, assuming the C&D Section continues as a going concern).

There was an estimated deficit of £95.7M relative to the solvency liabilities (i.e. the estimated level of assets needed to buy insurance policies for benefits earned to the valuation date).

0

50

100

150

200

250

300

350

Assets (£224.4M) Technical Provisions (£211.1M) Solvency (£320.1M)

Assets

Expenses

Pensioners

Deferreds

Actives

The C&D section closed to future accrual with effect from 1 April 2011; as a result there are no regular contributions payable to the C&D section.

As the C&D Section is in surplus, it has been agreed that the Society will continue to pay zero contributions, subject to the results of future valuations. For the avoidance of doubt, expenses of running the Section (including PPF and other levies) will be met from the assets of the C&D Section.

1

Actuarial valuation at 31 March 2013 Scheme funding report Cheshire & Derbyshire Section of the Nationwide Pension Fund Contents Introduction ....................................................................................................... 2 Update since the previous valuation ................................................................. 3 Membership data .............................................................................................. 5 Benefits valued ................................................................................................. 6 Asset data ......................................................................................................... 7 Funding objective .............................................................................................. 8 Summary of method and assumptions for technical provisions ......................... 9 Technical provisions ....................................................................................... 10 Reasons for change in past service position ................................................... 11 Update since the valuation date ...................................................................... 12 Recovery plan ................................................................................................. 13 Solvency ......................................................................................................... 14 Risks and uncertainties ................................................................................... 15 Agreed contributions ....................................................................................... 17 Next steps ....................................................................................................... 18 Appendix 1: Legal and actuarial framework .................................................... 19 Appendix 2: Membership data......................................................................... 21 Appendix 3: Benefits ....................................................................................... 22 Appendix 4: Assumptions for technical provisions ........................................... 23 Appendix 5: Assumptions for solvency estimate ............................................. 28 Appendix 6: Certificate of technical provisions ................................................ 30 Appendix 7: Glossary ...................................................................................... 31

2

Introduction

This report has been prepared for the Trustees. It sets out the results and conclusions of the valuation as at 31 March 2013.

This is a scheme funding report. It relies on and draws together other pieces of work and advice from throughout the valuation process which are listed in Appendix 1.

Appendix 1 also sets out the legal and actuarial framework within which the valuation has been completed.

Throughout the body of this report, defined contribution (DC) benefits (i.e. AVCs) have been excluded from the valuation results because in my view this provides a clearer picture. In order to comply formally with the legislation, an alternative presentation of the valuation results is shown in Appendix 1 which includes AVC benefits in both the asset and liability measures.

Some shorthand used in this report is explained opposite. Some technical pensions terms are explained in the glossary in Appendix 7.

Shorthand Society

Nationwide Building Society

Trustees

Directors of Nationwide Pension Fund Trustee Limited Fund

Nationwide Pension Fund

C&D Section

The Cheshire & Derbyshire Section of the Fund

Rules

The consolidated Trust Deed and Rules dated 30 March 2012 for the Fund

Snapshot view The report concentrates on the C&D Section's financial position at the valuation date. As time moves on, the C&D Section's finances will fluctuate. If you are reading this report some time after it was produced, the C&D Section's financial position could have changed significantly.

3

Update since the previous valuation

The key results from the previous valuation at 30 June 2010 were: The assets of the C&D Section were £168.0M and the technical provisions were £159.6M, which corresponded to a surplus of £8.4M and a funding level of 105%.

The position took account of a special Society contribution of £15.0M paid in July 2010 which was agreed as part of the terms for the merger between the former Cheshire Building Society Pension and Life Assurance Scheme and the Derbyshire Building Society Staff Pension Scheme.

The C&D Section was 70% funded using a solvency measure.

As a result of the C&D Section being in surplus on the technical provisions basis (after allowing for the £15M contribution described previously) it was agreed that there would be a temporary suspension to Society contributions, starting from 1 April 2011. Expenses of running the Section (including PPF and other levies) will be met from the assets of the C&D Section.

4

Other key developments since the previous valuation

As well as the £15M contribution paid to the C&D Section since the previous valuation and the returns achieved on the C&D Section's assets (which are discussed on page 7), there have been the following main developments since the previous valuation:

Merger

Following the merger on 30 June 2010 with the Cheshire Building Society Pension and Life Assurance Scheme (“the Cheshire Scheme”) and the Derbyshire Building Society Staff Pension Scheme (“the Derbyshire Scheme”), the Fund became sectionalised with two separate sections – the Nationwide Section and the “C&D Section” covering the former Cheshire and Derbyshire schemes. The two sections are completely separate for funding, investment and accounting purposes. The valuation of the Nationwide Section has been covered in a separate report.

Scheme closure

As part of the 2011 benefit changes, the C&D Section of the Fund was closed for future accrual with effect from 31 March 2011. All active members of this Section were transferred to the Nationwide Section for future benefit accrual only.

RPI/CPI

The Government decided in 2010 that statutory pension increases in deferment and payment for private sector occupational pension schemes should in future be determined by reference to the Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI). Following discussions, including obtaining advice from the Fund's legal advisers, it was agreed that:

– Inflationary increases to pensions in deferment (in excess of GMPs) in the C&D Section are linked to the underlying legislation and would therefore be CPI-linked in future.

– Inflationary increases to pensions in payment (for pensions in excess of GMPs) would continue to be linked to RPI.

– Pension increases in payment for GMPs earned since 6 April 1988 are linked to the underlying legislation and so these should be assumed to be CPI linked in future.

An allowance was made for this in the previous valuation.

5

Membership data

This valuation is based on membership data as at 31 March 2013 supplied to us by the Nationwide in-house benefits administration team.

A summary of the membership data is included in Appendix 2.

The chart below shows how the membership profile of the C&D Section has changed since the previous valuation. During this period, the C&D Section has become increasingly mature with the proportion of pensioners increasing from 29% of the C&D Section's membership at 30 June 2010 to 36% at 31 March 2013.

The C&D Section of the Fund was closed for future accrual with effect from 31 March 2011. All active members of this Section (which consisted of ex-Derbyshire Scheme members only before 31 March 2011) were transferred to the Nationwide Section for future benefit accrual and are accruing Career Average Re-valued Earnings (CARE) benefits for service since 31 March 2011.

240

784

420

92*

818

521

I have carried out some general checks to satisfy myself that:

The information used for this valuation is sensible compared with the information used for the previous valuation and also with that shown in the Fund's Trustee Report and Accounts.

The results of this valuation can be traced from the results of the previous valuation.

However, the results in this report rely entirely on the accuracy of the information supplied. If you believe the data I have used may be incomplete or inaccurate, please let me know.

* These 92 members are no longer accruing benefits in the C&D Section but their pre-2011 entitlements under the C&D Section continue to be linked to their subsequent salary levels.

Active Members Deferred Pensioners Pensioners

2010 2013 2010 20132010 2013

6

Benefits valued

Members are entitled to benefits defined in the Rules and a summary of these benefits is also detailed in Appendix 3

RPI/CPI

I have allowed for the impact of the change from RPI to CPI on the Fund's benefits. The background to this change is explained on page 4.

Discretionary benefits

Under the provisions of Rules, there are certain discretionary powers to provide or increase benefits for, or in respect of, all or any of the members of the C&D Section.

In particular, under general Rule 6.9, the Trustees (with the Society’s consent) may provide or increase a member’s benefit at a rate higher than provided under the standard Rules, subject to certain conditions. No allowance is made in the technical provisions for such benefits.

If discretionary increases to benefits are made, the Trustee’s current policy is to request immediate additional contributions to meet the cost of such increases.

GMP equalisation

The Government issued a consultation in 2012 on equalising Guaranteed Minimum Pensions (GMPs) between men and women. However, there remains considerable uncertainty about exactly how this will be carried out in practice. Therefore, at this stage, I have made no allowance for the equalisation of GMPs in the valuation.

7

Asset data

The audited accounts for the Fund for the year ended 31 March 2013 show the assets for the C&D Section were £224.5M of which £0.1M related to AVC assets.

The balance of the assets of £224.4M is invested as follows:

Equities, 30%

Government Bonds, 58%

Non-Government Bonds, 12%

The Trustees’ strategy is to diversify investments and ultimately match investment returns with the C&D Section’s liabilities as they fall due over the long term.

A revised Statement of Investment Principles was adopted by the Trustees in September 2012 to reflect the Trustees’ decision to reduce its exposure to equities and increase its exposure to bonds.

As at 31 March 2013, the C&D Section’s assets were slightly overweight compared to its targets for bonds and credit allocations.

8

Funding objective

Terminology Technical provisions

The funding target for a scheme agreed as part of the actuarial valuation.

Statutory funding objective

To hold sufficient and appropriate assets to meet the technical provisions.

Statement of funding principles

Sets out the Trustees’ policy for meeting the statutory funding objective.

The Trustees’ funding objective is to hold assets which are at least equal to the technical provisions ie to meet the statutory funding objective.

In order to calculate the technical provisions, the benefits paid out by the C&D Section are estimated for each year into the future. The estimated benefit payments are then 'discounted back' to the valuation date using an agreed rate of interest known as the discount rate.

The benefit payments from the C&D Section are expected to be made for a very long period – the chart below shows the cashflow pattern for the C&D Section. Some cashflows will be fixed but the majority will be linked to future levels of inflation.

A key factor in determining the approach to these principles is the Trustees' assessment of the employer covenant. The Trustees carried out a review of the employer covenant in September 2013 and concluded that the employer covenant is medium/strong. Additional advice has been obtained from Aon Hewitt and KPMG. The conclusions from this work have been reflected in agreeing the assumptions to be adopted for Technical Provisions.

0

2

4

6

8

10

12

14

2013 2023 2033 2043 2053 2063 2073 2083 2093 2103

Cas

hflo

ws

(£M

)

Year

Projected Annual Cashflows

Actives

Deferreds

Pensioners

9

Summary of method and assumptions for technical provisions The Trustees have agreed with the Society the assumptions that will be used to calculate the technical provisions and the cost of future benefit accrual. The table below summarises the key assumptions for the C&D Section, together with those used for the previous valuation, and the reasons for any change. Further details of all of the assumptions are set out in Appendix 4.

Assumption This valuation Previous valuation Rationale for change

Pre-retirement discount rate

Gilt Curve plus 1.25% pa

Gilt Curve plus 1% pa

Covenant strength and unusual market conditions at the valuation date.

Post-retirement discount rate

Gilt Curve plus 1% pa

Gilt Curve plus 1% pa

RPI inflation Bank of England breakeven RPI Curve less 0.1% pa

Bank of England breakeven RPI Curve less 0.25% pa

Based on difference between “breakeven” and “consensus opinion” indications of future inflation.

CPI inflation RPI inflation less 0.9% pa

RPI inflation less 0.5% pa

Difference between RPI and CPI adjusted to be in line with Aon Hewitt’s updated best estimate.

Pensionable Salary Increases

RPI inflation plus 0.75% pa

RPI inflation plus 1.25% pa

Updated to partially allow for salary experience since the previous valuation.

Post-retirement mortality assumption – base table

‘S1’ SAPS 'Light' tables with a scaling factor of 110% for males and 105% for females (future pensioners) and a scaling factor of 105% for males and 100% for females (current pensioners)

‘S1’ SAPS 'Light' tables with a scaling factor of 115% for males and 105% for females (Derbyshire) and a scaling factor of 110% for males and 105% for females (Cheshire)

Updated to allow for mortality experience and revised postcode-based analysis since the previous valuation.

Post-retirement mortality assumption – future improvements

CMI 2013 core projections with long-term improvement rate of 1.5% pa for men and women

CMI 2009 core projections with long-term improvement rate of 1.25% pa for men and women

Updated to reflect the latest research.

As for the previous valuation, the technical provisions have been calculated using the projected unit method.

10

Technical provisions

The C&D Section's technical provisions are shown below. They have been calculated using the assumptions in the previous section.

£M

Value of past service benefits for

Actives* 18.2

Deferreds 87.8

Pensioners 105.1

Total i.e. technical provisions 211.1

Value of assets 224.4

Past service surplus (deficit) 13.3

Funding ratio 106%

My statutory certification of the C&D Section's technical provisions is attached as Appendix 6.

* "Active" members of the C&D Section are no longer accruing further benefits in the C&D Section but their pre-1 April 2011 benefit entitlements remain linked to their ongoing salary progression. They have therefore been classified as Active members in the above table.

11

Reasons for change in past service position

At the previous valuation, the C&D Section had a surplus of £8.4M. The funding position has therefore improved by £4.9M over the period.

The chart below shows the key reasons for the change in funding position.

0.5

0.2

60.3

-53.3

-2.9

4.5

-0.2

-1.2

-1.5

-1.5

Interest on surplus

Contributions

Investment returns

Changes to financial conditions

Change to longevity assumption

Change in other assumptions

Salary increases

Deferred revaluations

Pension increases

Miscellaneous (including early leavers)

£M

The analysis shows that the main factors affecting the funding position since the previous valuation have been:

The average investment return on the C&D Section assets has been significantly higher than assumed.

This has been largely offset by a fall in gilt yields, resulting in an increase in liabilities.

The changes to the actuarial assumptions agreed at this valuation have also served to reduce the declared deficit at this valuation.

12

Update since the valuation date

Since the valuation date, the funding position of the C&D Section is estimated to have improved.

This is based on assumptions consistent with those used to calculate the technical provisions, with financial assumptions updated to reflect changes in market conditions. Over the period since 31 March 2013 the C&D Section assets achieved slightly less than assumed investment returns. However, liabilities have also fallen, primarily due to an increase in gilt yields. The combined effect of these factors was a small increase in the funding level over the period. The chart below illustrates how the position has changed in the period to 31 May 2014. It is approximate, for example investment returns have been assumed to be in line with index returns between month ends.

100%

105%

110%

115%

120%

100%

105%

110%

115%

120%

Technical Provisions Funding Level

13

Recovery plan

As the Fund is still in surplus (relative to the technical provisions), a recovery plan is not required.

Terminology Recovery plan

A plan for making good any deficit relative to the technical provisions.

14

Solvency

The solvency estimate below represents the estimated cost of purchasing annuities at the valuation date from an insurance company to meet the benefits of the C&D Section.

The assumptions include an allowance for the expenses of winding-up the C&D Section. Further details and the assumptions used in the solvency estimate are summarised in Appendix 5.

£M

Value of past service benefits for

Actives 32.0

Deferreds 157.5

Pensioners 125.2

Expenses 5.4

Value of liabilities (solvency estimate)

320.1

Value of assets 224.4

Deficit (statutory estimate of solvency)

95.7

Solvency ratio 70%

In practice, if the C&D Section were to be discontinued with no solvent employer then the assets are unlikely to be sufficient to provide the benefits in full. If this were the case then:

Benefits corresponding to those covered by the PPF would be met first (either through the PPF or, if there were sufficient funds, by securing these benefits with an insurance company).

Any remaining assets would be used to secure part of the remaining benefits with an insurance company.

The proportion of full benefits provided will vary from member to member and may be higher or lower than the statutory estimate of solvency ratio quoted above.

15

Risks and uncertainties

The Fund faces a number of key risks which could affect its funding position.

These risks include:

Funding risk – the risk that the technical provisions are set too low and prove insufficient to meet the liabilities (e.g. in the event of discontinuance).

Sponsor covenant risk – the risk that the Society is no longer willing or able to support the Fund, if things go wrong.

Investment risks – the risk that investment returns are lower than assumed in the valuation, and also that the assets are volatile and move out of line with the liabilities, so the funding position is not stable.

Longevity risk – the risk that Fund members live for longer than assumed and that pensions would therefore need to be paid for longer.

Inflation risk – the risk that inflation is higher than assumed, increasing the pensions that need to be paid.

To quantify some of these risks, the chart on the following page shows the approximate impact of the following one-off step changes on the C&D Section's funding position on the technical provisions basis:

Life expectancy at age 65 is three years longer than anticipated (with corresponding increases at other ages).

Yields on both gilts and corporate bonds decrease by 1% p.a. (with no change in equity markets).

Real yields on index-linked gilts decrease by 1% p.a. (with fixed-interest gilt yields, corporate bond yields and equity markets unchanged) - this is equivalent to a 1% p.a. increase in the assumed rate of inflation (measured by both RPI and CPI).

The market value of equities falls by 25% (with no change in bond markets).

Pensionable Salaries increase 1% p.a. faster than assumed.

16

Risks and uncertainties

106%

101%

99%

105%

99%

105%

Initial technical provisions

What if…life expectancy increases by three years

What if…bond yields fall by 1% p.a.

What if…inflation increases by 1% p.a.

What if…equities fall by 25%

What if…Pensionable Salaries increase by 1% p.a. more than assumed

The analysis emphasises that the C&D Section is quite susceptible to:

Equity markets falling or bond yields falling

Members living longer than expected.

The scenarios considered are not 'worst case' scenarios, and could occur in combination (rather than in isolation).

The Solvency measure is also highly sensitive to most of these factors.

17

Agreed contributions

Following discussions, it has been agreed that the Society will continue to make zero contributions to the C&D Section. For the avoidance of doubt, expenses of running the Section (including the PPF and other levies) will be met from the assets of the C&D section.

Terminology Schedule of contributions

Specifies the amounts and dates of contributions payable by the Company and the members over the next five years or the recovery period, if longer. I am required to certify that the contributions in the schedule are expected to maintain the funding level at or above 100% over the period stated based on the agreed assumptions.

18

Next steps

As part of the valuation, the Trustees and the Society have already agreed a statement of funding principles for the C&D Section.

The next steps are:

For the Trustees to provide a copy of this report to the Society within 7 days.

For the Trustees and Society to agree the schedule of contributions as soon as possible. Final stage discussions between the Trustees and the Society have meant that the statutory deadline has not been met. The Pensions Regulator has been informed.

To submit the valuation summary and supporting documentation to the recovery plan to the Pensions Regulator via Exchange.

To provide a summary funding statement (SFS) to members by 30 September 2014 i.e. 18 months from valuation date.

Checklist The valuation process is complete when all of the following have been agreed and are in place:

Statement of funding principles

This scheme funding report

Recovery plan (not required for C&D Section)

Schedule of contributions

Actuarial certification of the schedule of contributions

The statutory deadline for completing the valuation process is 30 June 2014, i.e. 15 months after the valuation date.

19

Appendix 1: Legal and actuarial framework

It is a legal requirement to carry out a full valuation at least once every three years.

This report is produced in compliance with:

Rule 12.2 of the Rules.

Section 224 of the Pensions Act 2004.

The terms of the Scheme Actuary Agreement dated 26 February 2001 between the Trustees and me, on the understanding that it is solely for the benefit of the addressees.

Unless prior written consent has been given by me or Aon Hewitt, this report should not be disclosed to or discussed with anyone else unless they have a statutory right to see it. Notwithstanding such consent, neither Aon Hewitt nor I accept or assume responsibility to anyone other than the addressees of this report.

Actuaries who provide written advice on scheme funding matters are under a professional obligation to ensure that their advice is reviewed by another actuary. This is called a 'compliance review'. The reviewing actuary is required to have the necessary experience to have given the original advice.

This valuation report has been reviewed by another actuary within Aon Hewitt, before it was issued. The reviewer was Isobel Tooley who meets the professional requirements.

This report builds on and draws together the following documents: My terms of reference paper, dated 21 March

2013.

My report entitled "Valuation Advice - Financial Assumptions" dated 22 May 2013

My report entitled "Valuation Advice - Other assumptions" dated 22 May 2013

My report entitled "Valuation Advice - Life expectancy and mortality" dated 14 August 2013

My report entitled "Longevity Analysis" dated 14 August 2013

My report entitled “Actuarial valuation at 31 March 2013 – initial results” (C&D Section) dated 18 September 2013

My papers to the Trustees dated 6 February 2014, 27 March 2014, 28 April 2014, 8 May 2014 and 27 May 2014 setting out proposed assumptions and recovery plan scenarios.

If you require further copies of any of these documents please let me know.

20

Appendix 1: Legal and actuarial framework

The Technical Actuarial Standards on Reporting Actuarial Information, Data, Modelling and Pensions apply to this report, and the work relating to it, and have been complied with.

Alternative presentation including defined contribution benefits Defined contribution benefits (including DC AVCs) amounted to £0.1M at the valuation date. If these benefits are included in the valuation:

The value of the assets is £224.5M.

The technical provisions are £211.2M (funding ratio 106%).

The value of the solvency liabilities is £320.2M (solvency ratio 70%).

21

Appendix 2: Membership data

Active members

Number Average age

Total pensionable salaries (£000 pa)

Average pensionable salaries (£ pa)

Average service (years)

Men 2013 72* 47.6 2,207 30,656 16.7*

2010 180 47.8 5,039 27,994 -

Women 2013 20* 48.0 727 36,323 14.3*

2010 60 47.3 1,661 27,683 -

Total 2013 92 47.7 2,934 31,888 16.2

2010 240 - 6,700 27,917 - * These 92 members are no longer accruing benefits in the C&D Section but their pre-2011 entitlements under the C&D

Section continue to be linked to their subsequent salary levels. The average pensionable service quoted is based on service to 31 March 2011 only.

Deferred pensioners

Number Average age

Total pension (£000 pa)

Average pension (£ pa)

Men 2013 586 46.2 2,360 4,028

2010 548 48.7 1,509 2,754

Women 2013 232 48.3 1,223 5,270

2010 236 48.5 1,162 4,923

Total 2013 818 46.8 3,583 4,380

2010 784 - 2,671 3,407 The 2010 deferred pension amounts for Derbyshire members are included at date of leaving. All other pension amounts shown include revaluations between leaving and the valuation date.

Pensioners Number Average age

Total pension (£000 pa)

Average pension (£ pa)

Men 2013 300 64.4 2,014 6,715

2010 238 63.3 1,443 6,063

Women 2013 221 66.2 2,033 9,200

2010 182 65.0 1,638 9,000

Total 2013 521 65.2 4,048 7,769

2010 420 - 3,081 7,336

The 2013 average ages quoted are unweighted averages.

22

Appendix 3: Benefits Introduction The C&D Section is closed to future accrual after 31 March 2011. Benefits summarised in this Appendix cover service up to 31 March 2011 only. Future benefit accrual after 31 March 2011 is provided in the Nationwide Section. Normal Retirement Age For Cheshire members – Age 60 For Derbyshire members – Age 60 for pre-1 February 2006 service and Age 65 for post-1 February 2006 service Early Retirement Pension A pension is provided on retirement after the age of 55 with Society consent. This is calculated using completed service and is reduced to allow for early payment. Lump Sum A member may exchange some of their pension for a lump sum on retirement. If a member dies after retiring, the following benefits may be paid:

• A lump sum equal to the balance of five years’ pension, if the member dies within five years of drawing their pension.

• A dependant’s pension of 50% of the member’s pension. • Children’s benefits.

Incapacity and Ill Health Pensions In the event of premature retirement due to serious ill health or incapacity, an immediate pension may be paid at the Society‘s discretion. Pension Increases For Cheshire members: The majority of Cheshire members receive pension increases at the fixed rate of 5% per annum. Some members have pension increases in line with RPI inflation increases with a minimum of 0% and a maximum of 5% or 2.5% each year. For Derbyshire members:

• RPI increases with a minimum of 3% and a maximum of 5% each year (for benefits accrued before 1 July 1997)

• RPI increases with a minimum of 0% and a maximum of 5% each year (for benefits accrued from 1 July 1997 to 1 February 2006)

• RPI increases with a minimum of 0% and a maximum of 2.5% each year (for benefits accrued from 1 February 2006).

23

Appendix 4: Assumptions for technical provisions The assumptions used for calculating the technical provisions are summarised below. Different assumptions are used for the solvency estimate, as set out in Appendix 5. Financial Assumptions RPI inflation This has been set as a yield curve structure derived from UK Government

gilt yields appropriate to the date of each of the C&D Section's expected future cash flows (extrapolated for cash flows beyond the longest available gilts) less an inflation risk premium of 0.1% p.a.

CPI inflation In the absence of market data, the CPI inflation assumption is constructed

relative to the RPI inflation assumption. The difference will vary based on market conditions and future outlook for both indices. As at 31 March 2013, CPI inflation was assumed to be 0.9% lower than RPI inflation at all terms.

Discount rate This has been set as a yield curve structure derived from the yield on UK

Government fixed interest gilts appropriate to the date of each of the C&D Section's expected future cash flows (extrapolated for cash flows beyond the longest available gilts).

The yield curve has been adjusted to make a prudent allowance for the expected out-performance (above gilt returns) on the C&D Section's assets by setting it equal to the gilt curve plus 1.25% p.a. in respect of the pre-retirement discount rate and equal to the gilt curve plus 1.0% p.a. in respect of the post-retirement discount rate.

Salary increases Each member’s salary is assumed to increase in line with the assumed

rate of RPI inflation plus 0.75% p.a. (The C&D Section ceased to have any active members on 1 April 2011 but this assumption is still required as some members have earlier benefits that continue to be linked to their salary beyond 1 April 2011).

Increases in pensions in payment

Inflation-linked pension increase assumptions are derived from the RPI inflation assumption allowing for any maximum or minimum annual increase that applies, and the fact that inflation varies from year to year.

Revaluations of deferred pensions in excess of GMP

Increases to deferred pensions in excess of GMP for former Derbyshire members are assumed to be in line with the CPI inflation assumption (see above).

Increases to deferred pensions in excess of GMP for former Cheshire members are fixed 5% p.a.

24

Financial Assumptions for Technical Provisions – summary

The table below shows the forward rates for the financial assumptions used as at 31 March 2013.

Term Pre-Retirement Discount

rate

Post-Retirement Discount

rate

Salary increases

RPI price inflation

CPI price inflation

LRPI pension

increases*

1 1.42% 1.17% 3.89% 3.14% 2.24% 3.13% 2 1.41% 1.16% 3.89% 3.14% 2.24% 3.12% 3 1.81% 1.56% 3.83% 3.08% 2.18% 3.05% 4 2.38% 2.13% 3.67% 2.92% 2.02% 2.88% 5 2.97% 2.72% 3.80% 3.05% 2.15% 2.97% 6 3.51% 3.26% 3.94% 3.19% 2.29% 3.05% 7 4.00% 3.75% 4.06% 3.31% 2.41% 3.11% 8 4.41% 4.16% 4.17% 3.42% 2.52% 3.16% 9 4.75% 4.50% 4.26% 3.51% 2.61% 3.20% 10 5.02% 4.77% 4.32% 3.57% 2.67% 3.23% 11 5.23% 4.98% 4.37% 3.62% 2.72% 3.26% 12 5.40% 5.15% 4.41% 3.66% 2.76% 3.29% 13 5.52% 5.27% 4.45% 3.70% 2.80% 3.31% 14 5.62% 5.37% 4.48% 3.73% 2.83% 3.33% 15 5.69% 5.44% 4.51% 3.76% 2.86% 3.35% 16 5.74% 5.49% 4.55% 3.80% 2.90% 3.37% 17 5.78% 5.53% 4.58% 3.83% 2.93% 3.39% 18 5.81% 5.56% 4.62% 3.87% 2.97% 3.41% 19 5.82% 5.57% 4.65% 3.90% 3.00% 3.42% 20 5.82% 5.57% 4.67% 3.92% 3.02% 3.43% 21 5.81% 5.56% 4.69% 3.94% 3.04% 3.43% 22 5.79% 5.54% 4.70% 3.95% 3.05% 3.42% 23 5.76% 5.51% 4.71% 3.96% 3.06% 3.41% 24 5.72% 5.47% 4.71% 3.96% 3.06% 3.40% 25 5.68% 5.43% 4.70% 3.95% 3.05% 3.38% 26 5.98% 5.73% 4.75% 4.00% 3.10% 3.41% 27 5.92% 5.67% 4.77% 4.02% 3.12% 3.41% 28 5.40% 5.15% 4.81% 4.06% 3.16% 3.43% 29 5.10% 4.85% 4.81% 4.06% 3.16% 3.42% 30 5.27% 5.02% 4.48% 3.73% 2.83% 3.17% 31 5.61% 5.36% 4.05% 3.30% 2.40% 2.86% 32 5.25% 5.00% 4.43% 3.68% 2.78% 3.12% 33 5.25% 5.00% 4.43% 3.68% 2.78% 3.12% 34 5.19% 4.94% 4.43% 3.68% 2.78% 3.11% 35 5.08% 4.83% 4.43% 3.68% 2.78% 3.10% 36 5.07% 4.82% 4.40% 3.65% 2.75% 3.08% 37 5.03% 4.78% 4.38% 3.63% 2.73% 3.06% 38 4.93% 4.68% 4.13% 3.38% 2.48% 2.88% 39 4.94% 4.69% 4.11% 3.36% 2.46% 2.86% 40 4.50% 4.25% 3.83% 3.08% 2.18% 2.66% 41 4.30% 4.05% 3.83% 3.08% 2.18% 2.66% 42 4.30% 4.05% 3.83% 3.08% 2.18% 2.65% 43 4.22% 3.97% 3.84% 3.09% 2.19% 2.65% 44 3.99% 3.74% 3.82% 3.07% 2.17% 2.64% 45 3.99% 3.74% 3.82% 3.07% 2.17% 2.64% 46 3.99% 3.74% 3.82% 3.07% 2.17% 2.63% 47 4.00% 3.75% 3.83% 3.08% 2.18% 2.64% 48 3.99% 3.74% 3.82% 3.07% 2.17% 2.63% 49 3.99% 3.74% 3.82% 3.07% 2.17% 2.63%

50 and above 3.99% 3.74% 3.82% 3.07% 2.17% 2.63%

* A small number of members are entitled to pensions with guaranteed pension increases not equal to RPI capped at 5%. For these members a suitable modified assumption is used.

25

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

2013 2023 2033 2043 2053

Pre-Retirement Discount rate Post-Retirement Discount rate

Salary increases RPI price inflation

CPI price inflation LPI (0,5) pension increases

Expenses In determining the contribution rate an estimate of the future expenses of

running the C&D Section is made (which includes an allowance for PPF and other levies collected by the Pensions Regulator).

If it is clear that there is sufficient surplus in the C&D Section to cover future expenses then these will be met from the assets of the Section without the need for future contributions.

26

Appendix 4: Assumptions for technical provisions Demographic Assumptions Post-retirement mortality

The post retirement mortality assumptions used are:

The ‘S1’ SAPS 'Light' table

With a scaling factor for non-pensioners of 110% for men and 105% for women; and

A scaling factor for pensioners of 105% for men and 100% for women

with an allowance for future improvements in line with the CMI_2013 Core Projections assuming a long-term annual rate of improvement in mortality rates of 1.5% for men and women.

Pre-retirement mortality

Males: 70% of Standard table AM92 Ultimate.

Females: 70% of Standard table AF92 Ultimate.

Sample rates are shown below.

Early retirements (normal health)

An allowance has been made for members to retire within 5 years of their normal retirement date (i.e. an allowance between ages 55 and 60). An early retirement factor is applied where appropriate.

Early retirements (ill-health)

Allowance has been made for members to ill-health retire and these members are assumed to have the same mortality as a non-ill-health retiree who is 10 years older.

Withdrawals Allowance made for withdrawals from service (see sample rates below).

Family Details A man is assumed to be three years older than his wife.

85% of males and 75% of females are assumed to be married (or, if not, have a dependant) at retirement/on death before retirement respectively.

These assumptions include allowance for pensions payable to children or other dependants including civil partners.

Commutation Each member is assumed to commute 24% of their pension on retirement, based on the current conversion terms.

27

Sample rates The tables below illustrate the allowances made for withdrawals, deaths before retirement and retirements from service at various ages.

Men

Percentage leaving the Fund in the next year as a result of

Current Withdrawal from service

Death before retirement

Ill health retirement

Early retirement (normal health)

20 7 0.041 0.050 - 25 7 0.040 0.038 - 30 6 0.041 0.033 - 35 5 0.048 0.037 - 40 4 0.066 0.058 - 45 3 0.103 0.104 - 50 2 0.176 0.189 - 55 - 0.313 0.338 15 60 - - - 100

Women

Percentage leaving the Fund in the next year as a result of

Current Withdrawal from service

Death before retirement

Ill health retirement

Early retirement (normal health)

20 7 0.014 0.039 - 25 7 0.017 0.047 - 30 6 0.024 0.063 - 35 5 0.034 0.090 - 40 4 0.052 0.135 - 45 3 0.082 0.210 - 50 2 0.132 0.335 - 55 - 0.215 0.539 15 60 - - - 100

Sample life expectancies

The assumed improvements in life expectancy are illustrated in the table below:

Current

age Male life expectancy on

reaching age 60 Female life expectancy

on reaching age 60 60 28.7 30.4 45 30.1 31.8

28

Appendix 5: Assumptions for solvency estimate

The solvency estimate has been calculated in line with statutory requirements. However, I have not carried out a detailed analysis of the cost of risks that might apply specifically to the C&D Section and so my estimate is only a guide. In practice, the true position can only be established by completing a buy-out as interest rates and supply and demand affect pricing.

I have taken into account margins that a life assurance company is likely to use in the setting of its premium basis, notwithstanding the fact that limited capacity of the insurance market for a scheme of this size may prevent the C&D Section from being able to buy out all the benefits immediately

I have set the discount rate for this estimate equal to the yield on fixed-interest gilts of appropriate term at the valuation date, less 0.1 % pa for pensioners and less 0.5 % pa for non-pensioners. The allowance for the expenses of winding up is separate.

Solvency estimate This considers the position if:

The C&D Section were discontinued on the valuation date.

Member benefits were crystallised and, for active members, were based on their Pensionable Service and Salary at the valuation date.

Discretionary benefits were suspended permanently.

The assets were used to buy immediate and deferred annuities from an insurance company, with an extra margin needed to cover the expenses of shutting down the C&D Section.

The solvency estimate is a regulatory requirement and also provides a useful benchmark against which the Trustees and others can assess the prudence of other funding measures.

29

Appendix 5: Assumptions for solvency estimate The table below shows the main assumptions used in calculating the solvency estimate, where these are different from those used for the technical provisions.

Pensioner discount rate Gilt yield curve less 0.1% pa

Non-pensioner discount rate (before and after retirement)

Gilt yield curve less 0.5% pa

Increase in RPI Bank of England Breakeven RPI curve

Increase in CPI Equal to RPI

Pension increases Derived from the price inflation assumptions with allowance for caps and floors and with the aim of approximately reflecting the cost of hedging these increases using swaps

Withdrawals All members assumed to immediately withdraw from service with entitlement to deferred pension (assumption needed as some members still have benefits linked to salary whilst in service)

Commutation No allowance

Discretionary benefits No allowance

Pre-retirement mortality same as Technical Provisions

Post-retirement mortality same as Technical Provisions

Expenses The reserve for expenses allows for deductions to allow for the cost of forced sales of assets, an allowance for the management expenses associated with winding up and an estimate of the per member charges expected to be levied by an insurance company on buy-out.

30

Appendix 6: Certificate of technical provisions

Actuarial certificate given for the purposes of Regulation 7(4)(a) of the Occupational Pension Schemes (Scheme Funding) Regulations 2005

C&D Section of the Nationwide Pension Fund

Calculation of technical provisions

I certify that, in my opinion, the calculation of the C&D Section's technical provisions as at 31 March 2013 is made in accordance with regulations under section 222 of the Pensions Act 2004. The calculation uses a method and assumptions determined by the Trustees of the Fund and set out in the statement of funding principles dated 18 July 2014.

Signature

Date 18 July 2014

Aon Hewitt

Verulam Point, Station Way,

St Albans, Hertfordshire

AL1 5HE

Jeremy Ball

Fellow of the Institute and Faculty of Actuaries

31

Appendix 7: Glossary Attained age method This is one of the methods used by actuaries to calculate a contribution rate to the scheme. This method calculates the present value of the benefits expected to accrue to members over their expected remaining membership of the scheme expressed as a percentage of their expected future pensionable pay. It allows for projected future increases to pay through to retirement or date of leaving service. The method is based on the current membership and takes no account of the possibility of further members joining the scheme. If there are no new members, this method would be expected to result in a stable contribution rate, once surpluses or shortfalls are taken into account, and if all the other assumptions are borne out. However, if more members join the scheme to replace older leavers, the contribution rate can be expected to fall.

Cash transfer sum This is a benefit available to early leavers who have between three months and two years of pensionable service. It is calculated in the same way as the cash equivalent transfer value payable to longer serving early leavers, and is calculated at the date of leaving pensionable service.

Deficit This is the funding target less the value of assets. If the value of assets is greater than the funding target, then the difference is called the surplus.

Discount rate This is used to place a present value on a future payment. A 'risk-free' discount rate is usually derived from the investment return achievable by investing in government gilt-edged stock. A discount rate higher than the 'risk-free' rate is often used to allow for some of the extra investment return that is expected by investing in assets other than gilts.

Funding ratio This is the ratio of the value of assets to the funding target.

Funding target An assessment of the present value of the benefits that will be paid from the scheme in the future, normally based on pensionable service prior to the valuation date. Often, the funding target is equal to the technical provisions.

Guaranteed Minimum Pensions (GMPs) Most schemes that were contracted out of the State Earnings Related Pension Scheme (SERPS) before April 1997 have to provide a pension for service before that date at least equal to the Guaranteed Minimum Pension (GMP). This is approximately equal to the SERPS pension that the member would have earned had the scheme not been contracted out. GMPs ceased to build up on 6 April 1997 when the legislation changed.

Limited Price Indexation (LPI) The Pensions Act 1995 required schemes to provide a minimum level of annual increase to pensions in payment. The minimum level is the smaller of 5% and the increase in inflation* and applies to the pension earned from 6 April 1997 to 5 April 2005. With effect from 6 April 2005, the cap for statutorily required LPI for future service was reduced from 5% to 2.5%.

*Until 2010, inflation for the purpose of this minimum was defined with reference to changes in the Retail Prices Index. From 2011, inflation was defined with reference to changes in the Consumer Prices Index.

32

Appendix 7: Glossary (continued) Pension Protection Fund (PPF) The PPF was established with effect from 6 April 2005. The PPF will normally take over the assets of a pension scheme in the event of its employer becoming insolvent and the scheme having insufficient assets to provide the PPF benefits. The PPF will not provide the scheme benefits in full. The PPF is financed by a levy on most defined benefit pension schemes.

The PPF benefits are broadly 100% of benefits for pensioners over normal retirement age and 90% of benefits up to a cap for all other members. Pension increases granted on benefits are at lower levels than apply in many schemes. In particular, benefits earned before 6 April 1997 would not be given any pension increases within the PPF.

Present value Actuarial valuations involve projections of pay, pensions and other benefits into the future. To express the value of the projected benefits in terms of a cash amount at the valuation date, the projected amounts are discounted back to the valuation date by a discount rate. This value is known as the present value. For example, if the discount rate was 6% a year and if we had to pay a lump sum of £1,060 in one year’s time the present value would be £1,000.

Projected Unit Method One of the common methods used by actuaries to calculate a contribution rate to a scheme.

This method calculates the present value of the benefits expected to accrue to members over a control period (often one year) following the valuation date. The present value is usually expressed as a percentage of the members’ pensionable pay. It allows for projected future increases to pay through to retirement or date of leaving service. Provided that the distribution of members remains stable with new members joining to take the place of older leavers, the contribution rate calculated can be expected to remain stable, if all the other assumptions are borne out. If there are no new members however, the average age will increase and the contribution rate can be expected to rise.

Protected Rights Prior to April 2012, schemes could contract out of SERPS/S2P on a protected rights basis. The accumulated National Insurance rebates in respect of each member as a result of being contracted out (known as protected rights) must be applied as an underpin to the member's benefits. Schemes that were contracted out on this basis before 6 April 1997 provided this underpin instead of GMPs.

Prudent Prudent assumptions are assumptions that, if a scheme continues on an ongoing basis, are more likely to overstate than understate the amount of money actually required to meet the cost of the benefits.

Recovery plan Where a valuation shows a funding shortfall against the technical provisions, trustees must prepare a recovery plan setting out how they plan to meet the statutory funding objective.

Schedule of contributions Trustees of pension schemes must prepare and maintain a schedule of contributions. This shows the dates and amounts of contributions due from the employer and members. Under the Pensions Act 2004 the schedule must be put in place within 15 months of the valuation date.

33

Appendix 7: Glossary (continued) Solvency ratio This is the ratio of the market value of a scheme's assets to the estimated cost of securing a scheme's liabilities in the event of the discontinuance of the scheme.

The Statement of Funding Principles The Pensions Act 2004 requires trustees to prepare (and from time to time review and if necessary revise) a written statement of their policy for securing that the statutory funding objective is met. This is referred to as a statement of funding principles.

Statutory estimate of solvency This is the difference between the market value of a scheme's assets and the estimated cost of securing a scheme's liabilities in the event of the discontinuance of the scheme.

Statutory funding objective Under the Pensions Act 2004, every scheme is subject to the statutory funding objective, which is to have sufficient and appropriate assets to cover its technical provisions.

Surplus This is the value of assets less the funding target. If the funding target is greater than the value of assets, then the difference is called a deficit.

Technical provisions This is the present value of the benefits members are entitled to based on pensionable service to the valuation date, assessed using the assumptions agreed between a scheme's trustees and the company. It generally allows for projected future increases to pay through to retirement or date of leaving service.

Transfer value Members generally have a legal right to transfer their benefits to another pension arrangement before they retire. In taking a transfer, members give up their benefits in a scheme, and a sum of money (called the transfer value) is paid into another approved pension scheme; this is used to provide pension benefits on the terms offered in that scheme.