point Talking Talking - PRAG

Talking
point
Otto UK Pension Scheme
September 2008

My word!
OK, so I know a company
pension scheme may not be
the most exciting
Say goodbye to ‘pensions speak’:
company Talkingpoint aims to cut through the jargon to help you
benefit that Otto UK gives its employees (unlike the great understand how your pension works and what you need to
shopping discounts we get!), but research done earlier this do to stay on track for a financially secure retirement.
year showed that a workplace pension is still considered
As well as giving our active members some ideas on how
the most important perk an employer can offer.
they can grow their pension (page 10), we’ve also included
However, while three-quarters (75%) of employees believe it a section dedicated to pensioners, highlighting ways
is important to have a pension that comes with their job, they may be able to get more benefits from the State.
less than half (48%) have confidence in pensions when
I hope you find it an interesting read. Please let us know
compared with other forms of retirement savings. A lot of it
what you think (our contact details are on the back page).
is down to the fact that pensions just seem SO complicated,
and also the industry has had a lot of bad press in recent
years. So, how do we close the gap? Well, a newsletter such Norman Finnigan
as this one is a start.
Chairman of Trustees
2

what’s inside
Money matters 4
Investments
Changes to our
investment strategy 6
Your pension and
the credit crunch 9
Top up your pension 10
Update to funding position 12
Pensioners’ pages 14
Contact us 16
3

Money
matters
4
Every year, the trustees have to produce a full set of accounts showing how much
money has been paid into the scheme, and how much has been paid out…
Do you want to see
the full report or
any other scheme
documents? Ask us
for a copy - contact
details are on page 16.
We get our auditors (highly
qualified accountants) to check
that everything is ship-shape,
giving you peace of mind that your pension savings
are being accurately and correctly recorded.

Grattan Freemans
section
section
£’000 £’000
Money in
The company paid in… 9,532 10,199
Members paid in… 176 82
Transfers in from other funds… 6 -
Other income... 56 -
TOTAL INCOME 9,770 10,281
Money out
Payments to members... 7,606 8,857
Other payments... 153 47
Administrative costs... 571 527
Membership
The Grattan and Freemans sections of the scheme are
closed funds, so the number of active members in those
sections will gradually fall as people leave the company
or retire.
The Money Purchase Section (which was introduced in
2003) is open to all new Otto employees. In the past year
159 new active members have joined the Otto UK
Pension Scheme.
Active members 2,957
Pensioners 3,386
TOTAL EXPENSES 8,330 9,431
Value of scheme at 6 April 2007 £362 million
Value of scheme at 5 April 2008 £354 million
Other beneficiaries 381
Deferred
members 7,199
Members of the Money Purchase section
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8, 000
are sent an annual statement
showing the current value of their
individual retirement account,
payments into it over the year, and
an illustration of their projected
pension at retirement.
5

Investments
The money paid into the scheme is invested by
different investment managers across different
‘asset classes’, so for example company shares
(equities), and fixed-interest investments (bonds
and gilts).
The money paid in on behalf of members of the Grattan
and Freemans sections is held in a pool (one for each
section) from which all benefits are paid. Money Purchase
members have their own individual retirement accounts in
the scheme and use their pot of money to buy ‘units’ in
different investment funds.
6
Hands off !
The assets in the scheme are
kept totally separate from the
company’s assets
New strategy to reduce risk
in the pension scheme
The trustees, on the advice of their investment consultants,
have started to switch some of the assets that are held in
equities (company shares) into corporate bonds and gilts.
More details will be provided in next year’s newsletter.
Bonds & gilts
These 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.

Split of assets
During the year under review, the assets of the three sections were invested in the following asset classes:
0 1000 2000
Grattan Section
Money Purchase Section
0 1000 20
Freemans Section
UK equities 28.6%
Overseas equities 34.1%
Fixed interest 17.7%
Index linked 9.5%
Property 10.1%
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
UK & overseas equities 88.9%
Index linked 8.9%
Cash 2.2%
0 1000 2000 3000 4000 500
7

Who are the investment managers?
Grattan Section: Legal & General, Marathon Asset
Management, AllianceBernstein and Black Rock.
Freemans Section: Legal & General, Barclays Global
Investors 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%
Equitable Life AVCs
Some members still have contributions
invested in Equitable Life’s With-Profits
Fund, which closed to new business
in 2000. The latest development
is a proposal from the Pensions
Ombudsman to set up a compensation
fund for Equitable Life policyholders.
We are expecting the Government to
respond in the autumn and will send
you further information once the
results are known.
Money Purchase Section
Equity fund -5.1% 10.1%
Index-linked gilt fund 13.4% 8.2%
Cash fund 5.8% 5.1%
8

Credit
squeeze?
Equity markets performed well in the first half of the year
set against a generally sound economic background.
July and August saw the first sharp falls
in share prices as investor confidence evaporated. What
seemed, at first, to be a local problem with US sub-prime
mortgage lenders, soon spread across global credit
markets. As the crisis unfolded, inter-bank lending
(the ‘lubricant’ of the financial system) became more
expensive and liquidity problems emerged. Northern Rock
was not the only victim of the lending drought, though
it was certainly the most visible in the UK.
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.
The credit crunch is not all bad news however –
especially if you are a member of the Money Purchase
section. Annuity rates (which govern how much pension
you are able to buy with your retirement account) are at
their highest levels in five years. That means you get
more pension for your money – and it’s all thanks to the
credit crunch.
Why? The credit crisis caused financial institutions
worldwide to stop lending to one another. With the
resulting shortage of funds, big investors have sold all
sorts of assets, including bonds issued by quality
businesses. This has depressed corporate bond prices,
but lifted their yields.
The full impact of the credit crunch on economic
growth cannot yet be assessed, but it will take some
time before we return to ‘normal’ market conditions.
It is important to remember that pension fund
investing 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-term
financial position.
9

Top tips
for topping up
your pension
The average British pensioner is paid a state
pension which is worth just a sixth (17%) of
average earnings.
You’ve joined the Otto UK Pension Scheme, so you’re not
going to be one of those pensioners with nothing to live on
but the state pension, right? Well… yes. But even so, on
average, the average person can expect a 53% fall in
income, even when state pension and other benefits are
taken into account. Simply put: the more you can put aside
for retirement, the better.
When you’re young, other things take priority: paying off your
student debt, building up a deposit for a mortgage, buying a
nice car. But as you hit your 40s (and especially if you were late
getting into the pension game or had a career break in the
middle), you may want to think about making up any shortfall
in your pension. We spell out some of the options here.
10
Through the company
Company pension scheme
The big advantage of the company pension scheme is the
tax relief you get on your contributions – a basic rate
taxpayer 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, which
allows 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 are
deducted from your pay before tax is calculated

(so you pay less tax), plus any money you make from
investing 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 find
yourself with a bit of spare cash. You can also choose how
the money in your AVC account is invested. Ask the Pensions
Department to send you more information about AVCs.
Personal plans
Freestanding AVCs (FSAVCs)
Similar to an AVC plan except that it is completely
independent of the Otto UK Pension Scheme. You choose
your own provider and make your own arrangements to
pay contributions to your FSAVC plan. This means your
contributions will not be deducted through payroll and you
will not receive tax relief at source. Instead you will have to
claim the tax relief from HM Revenue & Customs yourself.
Stakeholder or personal pension plan
These private pension schemes are run by banks,
investment companies and building societies. You make
your own arrangements to pay contributions to the plan.
Other savings
There are, of course other ways to save for your retirement
other than by paying more pension contributions e.g.
savings accounts, ISAs, unit trusts, etc. You could put money
aside in a high interest savings account, but you will pay
tax on the interest earned. The interest earned from cash
ISAs is tax-free, but you are limited as to how much you can
invest each year (£3,600 for 2008/2009).
?
live on ££90.70 a week?
Could YOU
That’s the current basic state
pension for a single person but
you’ll get even less because the
taxman takes his share, too!
11

Funding update
Every three years, the scheme’s actuary
(a specialist in the mathematics of risk) must
calculate whether the Otto UK Pension Scheme
has enough money to pay all the
benefits promised to its members...
12
(This only applies to the Grattan and
Freemans sections, as members in the
Money Purchase Section have their
own individual retirement pots.)
The actuary has to consider things
like future investment returns,
inflation rates, and longevity (ie, how
long members are expected to live,
as longer average lifespans mean
that pensions will be paid for longer).
The last such investigation (or
actuarial valuation) looked at the
funding 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).

However, three years is a long time in the pensions world,
so the trustees also ask the actuary to carry out a less
detailed ‘actuarial check’ every year, to see how the funding
position has changed over the past 12 months.
The latest update (up to 5 April 2008) showed the position
to be as follows:
Freemans shortfall: £65.5m
Grattan shortfall: £52.5m
Combined shortfall: £118m
The main reason for the larger shortfall has been poor
investment returns coupled with higher liability values
resulting 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 paying
off the shortfall and meeting running costs, plus 12.7% of
pay for future benefits for current employees
Grattan: £4.5m a year until February 2016, towards paying
off the shortfall and meeting running costs, plus 11.2% of
pay for future benefits for current employees
Both sections: the company also pays member contributions
for those employees who participate in SMART pensions.
By law, the trustees also have to report on the hypothetical
scenario that the scheme had been wound up on 5 April
2008. In this case, the shortfalls would have been £161.5m
(Freemans) and £164.1m (Grattan). These figures would
normally only matter if the company became insolvent,
which is not expected to happen. The shortfalls on
winding-up assume that members’ pensions are provided
by an insurance company, and so they allow for insurers
taking a very cautious view of the future and the fact that
they need to make a profit. Our funding plan, with its
combined shortfall of £118m at 5 April 2008, assumes that
the company will continue and carry on supporting the
pension scheme.
Trustees of all pension schemes are required to inform
members that the Pension Protection Fund (PPF) has been
established to pay compensation to members of eligible
defined benefit schemes in the event that an employer is
no longer able to meet the pension liability.
The trustees are also required to confirm that there have
not been any payments to the company out of the pension
scheme since the last funding statement was issued, nor
has the Pensions Regulator intervened in the funding of
the scheme or the benefits provided by it.
13

Pensioners’ pages
Are 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 state
pension because you’re already receiving a personal pension from
the Otto scheme, but you may be pleasantly surprised. It’s worth
finding 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 numbers
The Pension Service 8am-8pm,
Monday to Friday 0845 60 60 265
(or textphone 0845 60 60 285)
www.thepensionservice.gov.uk
Winter Fuel Payment Helpline
8.30am-4.30pm, Monday to Friday
0845 915 1515 (or textphone 0845
601 5613)
Pension Credit claim line: 0800 99 1234
Age Concern
0800 00 99 66
www.ageconcern.org.uk
Help the Aged
020 7278 1114
www.helptheaged.org.uk
Citizens Advice Bureau
www.citizensadvice.org.uk
14

And what’s
more…
Age Concern reckons that many
pensioners simply do not realise
they can get financial help from the
State and other organisations, so
here are some of the ways you can
make your money go further…
Attendance allowance: if you’re 65 or
over and have a disability or illness
that means you need help with
personal care (eg, dressing and
washing) and/or supervision, you
can get £43.15 to £64.50 a week.
Cold Weather Payments: this benefit
helps cover the costs of extra heating
during periods of very cold weather;
you do not have to pay tax on, or
repay, any Cold Weather Payments.
Winter Fuel Payments: these are
tax-free payments of up to £200
per household as soon as the eldest
person in the home reaches age 60,
with up to an extra £100 for people
aged 80 or over.
Help with health costs: depending on
your personal circumstances you may,
from age 60, be able to get free NHS
eyesight tests and a voucher towards
the cost of glasses or contact lenses,
free NHS prescriptions, free NHS
dental treatment, free NHS wigs and
fabric support, and repayment of
travel costs to hospital.
Free television licences: if you are
aged 75 or over, you are entitled to a
free TV licence for your main home,
although you will still need to register.
Free travel: if you’re over 60, you may be
entitled to free or half-price travel on
Splash!
From April next year, over-60s in
England will be able to swim for
free. The Government plans to give
local authorities £80 million to make
public swimming pools free to use
for over-60s. (Wales already offers
free swimming for over-60s, while
in Scotland individual local
authorities are responsible for their
own pricing policies.)
public transport (check with your local
council). Also, if you buy a Senior Railcard
(currently £24), you receive a third off the
cost of most train tickets for a year.
Free cavity wall/loft insulation:
British Gas will offer to install this free
of charge if you’re aged 70 or over, even
if you’re not a British Gas customer.
15

Contact us
Members
Grattan 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)
Keep in touch
Please remember to keep us informed if your home
address 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 any
changes to your bank or building society details promptly
so that there is no disruption to the payment of your
monthly pension instalments.
We welcome your feedback on this newsletter – please
email 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)