Annual Report 2007 - The Co-operative

co.operative.coop

Annual Report 2007 - The Co-operative

Doing good by

..being better…

The Co-operative Group


Key results

2007

£m

Gross sales including VAT and Travel agency sales Up 14.9% 9,076 7,895

Revenue before premiums ceded to reinsurers Up 13.4% 8,290 7,312

Operating profit before significant items Up 8.7% 432 397

Operating profit after significant items Down 30.9% 250 361

Profit before payments to and on behalf of members Down 45.6% 196 359

Payments to and on behalf of members Up 44.3% 46 32

Members’ funds Up 16.1% 3,798 3,272

Capital expenditure Up 6.2% 410 386

Highlights of the year

2006

£m

• On 29 July, The Co-operative Group and United

Co-operatives merged to form the largest consumer

co-operative in the world.

• In 2007, over 100,000 members endorsed

the adoption of our new Food Ethical Policy –

our member-led commitment to maintain and

strengthen our position as the UK’s leading

responsible retailer.

The Co-operative Pharmacy went global, with the

announcement of a joint venture in China that

is expected to start supplying a range of wellestablished

prescription drugs within two years.

• During the course of the year, we raised £2.9m for

our charities of the year, The Children’s Society and

Diabetes UK, providing vital support for communities

and demonstrating our co-operative difference of

caring for others.

• Having refurbished over 800 stores and branches to

the new brand concept, we committed to a £200m

refit programme to accelerate the brand roll-out in

2008, ahead of a major national campaign in 2009.

• As a result of the increased profits and an

improvement to the Group’s distribution strategy,

we are proposing a record dividend to members

of £100m, up from £46m the year before.

Contents

02 The Co-operative Group at a glance

03 Chair’s statement

04 Group Board

08 Trading Group review

22 CFS review

28 Financial review

32 Key performance indicators

35 Data protection, business continuity,

health and safety

38 Principal risks and uncertainties

41 UK combined code on corporate governance

46 Report of the Board of Directors

49 Remuneration report

56 Financial section


Our competitive advantage comes

from our different way of doing business. Fundamental

to our approach is a strong commitment to ethical

trading and meeting social goals.

…doing better by

being good.

We’re proud to have been championing this approach

for decades, leading the market where others are

only now beginning to follow.

The Co-operative Group Annual Report and Accounts 2007 1


The Co-operative Food

www.co-operative.coop/food

We are the largest

independent convenience

store operator in the UK.

The Co-operative

Pharmacy

www.co-operative.coop/

pharmacy

We are the third largest

pharmacy in the UK.

The Co-operative

Funeralcare

www.co-operative

funeralcare.co.uk

We are the UK’s largest

funeral director.

End of Life Planning

www.co-operative

funeralcare.co.uk

We are the Group’s end of life

planning business.

pg 09

pg 10

pg 11

pg 12

The Co-operative Bank

www.co-operativebank.co.uk

We are a bank, famous for our

ethical stance and our standards

of customer service.

The Co-operative

Insurance

www.cis.co.uk

We are a major life assurance and

general insurance business with over

five million customers.

Smile

www.smile.co.uk

We are an award-winning,

full-service internet bank.

Sunwin Services Group

We provide Cash & Valuables in

Transit solutions for external

customers as well as the Movement.

pg 22

pg 22

pg 22

pg 16

The Co-operative Travel

www.co-operative.coop/travel

We are the UK’s largest independent

travel services provider.

The Co-operative

Legal Services

www.co-operative.coop/

legalservices

We are the Group’s legal

services business.

The Co-operative Farms

www.co-operative.coop/farms

We are the UK’s largest farmer.

Sunwin Motor Group

www.sunwin.co.uk

We are the Group’s car dealership.

pg 11

pg 12

pg 13

pg 16

The Co-operative Group

better all round

The Co-operative Estates

We are the Group’s property

business.

www.coopbedshop.co.uk

We are the Group’s innovative online

bedshop.

www.coopelectrical

shop.co.uk

We are the Group’s market-leading

online electrical shop.

The Co-operative Clothing

www.co-operativeclothing.co.uk

We are the Group’s corporate

clothing business.

pg 12

pg 13

pg 13

pg 16

2 The Co-operative Group Annual Report and Accounts 2007


Chair’s statement

Len Wardle, Chair, The Co-operative Group

Welcome to the Annual Report and

Accounts for The Co-operative Group

for the year ended 12 January 2008.

There has been a great deal of change

since the last report.

First of all, The Co-operative Group

and United Co-operatives merged to

form a much larger organisation: more

businesses, more stores and branches,

more staff, more customers, more

members – and, crucially, more sales,

profit and investment in delivering our

social goals.

In the wake of the merger, a huge project

has been underway to integrate the two

businesses successfully and great progress

has been made to date. The plan is to take

the best of the best from both organisations

in order to fashion a business that is

equipped to move confidently into the future.

As part of the merger, we have a temporarily

enlarged Board including eight directors

from the former United Board – an

introduction to the Group’s new Board is

over the page. We are now the world’s

largest consumer co-operative and we

need a governance structure that is fit for

purpose. We are reviewing the structure

of the Board, and a great many other

governance issues, as part of the

Constitutional Review.

At the heart of everything we do are our

co-operative values & principles. The merger

has provided us with an opportunity to

re-examine and refresh these to ensure that

they are just as relevant to the 21st century

as they have been for the 19th and 20th.

This reinvigorated approach has seen the

launch of a revolutionary Food Ethical Policy

driven by responses from over 100,000

members that will ensure many of the

Group’s ethical decisions are determined

by what our members think. In addition,

we have revitalised our commitment to

education, with the announcement of

the first ‘co-operative trust school’ and

the sponsorship of the first co-operative

academy, in Manchester. The brand rollout

programme is going from strength

to strength, with clear results that indicate

rebranded stores are delivering better

financial results. You can read more

about these and many of our other ethical

initiatives throughout the Annual Report.

This year’s Annual Report is a little different

from previous years. We have taken a good

look at the information we provide and done

our best to remove unnecessary repetition

and improve the way in which the

information is presented.

£8.3bn

Revenue before premiums ceded

to reinsurers.

This is in keeping with our aim of being

direct, being dynamic and putting the

needs of our members and customers first.

On the subject of putting the needs of our

members first, it's also worth pointing out

another benefit of the recent merger. We

now have a bigger platform from which to

trumpet the advantages of Co-operative

Group membership. Our business is

committed to delivering increased economic

rewards to our members through our share

of profits payment. Our membership scheme

is unique in that our members have a

genuine incentive to see the business do

well as it results in a cash benefit to them.

We have ambitious plans for growing our

membership base in the future and

increasing the number of members who

trade with more than one of our businesses.

It is an incredibly exciting time to be part

of The Co-operative Group and membership

will continue to be at the heart of everything

we do.

Len Wardle Chair, The Co-operative Group

The Co-operative Group Annual Report and Accounts 2007 3


Joyce Baruch (r)

Age 64. Occupation – Retired

Teacher. Member of the United

Regional Board. First elected to

the Board in 2007.

Graham Bennett (c)

Age 57. Chair of The Co-operative

Bank plc. Occupation – Chief

Executive and Secretary, Southern

Co-operatives Limited. First elected

to the Board in 1984. Non-Executive

Director of Co-operative Financial

Services Limited, Co-operative

Insurance Society Ltd and CIS

General Insurance Limited.

Duncan Bowdler (r)

Age 49. Occupation – Trade Liaison

Manager. Member of the United

Regional Board. First elected to

the Board in 2007.

Allen Brett (r)

Age 61. Occupation – Local

Councillor. Member of the United

Regional Board. First elected to

the Board in 2007.

Bob Burlton (c)

Age 59. Chair of Co-operative

Financial Services Limited.

Occupation – Strategic Projects

Executive. First elected to the

Board in 1992. Non-Executive

Director of The Co-operative

Bank plc, Co-operative Insurance

Society Ltd and CIS General

Insurance Limited.

Simon Butler (r)

Age 53. Chair of Co-operative

Insurance Society Ltd. Occupation

– Photographer. Member of the

Central & Eastern Regional Board.

First elected to the Board in 1996.

Non-Executive Director of

Co-operative Financial Services

Limited, The Co-operative Bank plc

and CIS General Insurance Limited.

Eric Calderwood (r)

Age 55. Occupation – Retail

Consultant/University Teacher

and Researcher. Member of the

Scottish Regional Board. First

elected to the Board in 2006.

Good performance

is not solely about what

is achieved but also about

how it is achieved.

The Co-operative Group Board of Directors

is elected from and represents the membership.

David Doyle (r)

Age 65. Occupation – Self-employed

Book Publisher and IT Consultant.

Member of the South West Regional

Board. First elected to the Board in

2006.

John Fitzgerald (c)

Age 55. Occupation – Chief

Executive, Midlands Co-operative

Society. First elected to the Board

in 2005.

Douglas Fletcher (c)

Age 52. Deputy Chair of The

Co-operative Group. Occupation

– Chief Executive and Secretary,

Plymouth and South West

Co-operative Society. First

elected to the Board in 1998.

John George (r)

Age 55. Occupation – Local

Councillor. Member of the Northern

Regional Board. First elected to the

Board in 2000.

Patrick Grange (r)

Age 65. Occupation – Farmer and

Business Consultant. Member of the

United Regional Board. First elected

to the Board in 2007.

Mike Harling (r)

Age 46. Occupation – Carer. Member

of the South East Regional Board.

First elected to the Board in 1998.

4 The Co-operative Group Annual Report and Accounts 2007


Bill Hoult (r)

Age 63. Deputy Chair of The

Co-operative Group. Occupation –

Retired Trade Union Official. Member

of the United Regional Board. First

elected to the Board in 2002.

Bob Jamieson (c)

Age 55. Occupation – Chief

Executive, Lothian Borders & Angus

Co-operative Society. First elected to

the Board in 2005.

Frank Jones (r)

Age 63. Occupation – Retired

Design Engineer. Member of the

South West Regional Board. First

elected to the Board in 2004.

John Macbeth (r)

Age 60. Occupation – Retired

Co-op Official. Member of the

United Regional Board. First

elected to the Board in 2007.

Ian Mason (r)

Age 65. Occupation – Retired

Head Teacher. Member of the

United Regional Board. First

elected to the Board in 2007.

Terry Morton (r)

Age 62. Occupation – Retired

Engineer. Member of the North

Eastern & Cumbrian Regional Board.

First elected to the Board in 1997.

Non-Executive Director of

Co-operative Financial Services

Limited, The Co-operative Bank plc,

Co-operative Insurance Society Ltd

and CIS General Insurance Limited.

Bertie Murray (r)

Age 50. Occupation – Diesel Fitter

and Part-time Supervisor. Member of

the Northern Ireland Regional Board.

First elected to the Board in 2004.

David Pownall (r)

Age 50. Occupation – Plastering

Contractor. Member of the United

Regional Board. First elected to the

Board in 2007.

Russell Porteous (r)

Age 59. Occupation – Certified

Accountant. Member of the North

Eastern & Cumbrian Regional Board.

First elected to the Board in 2003.

Alban Rees (r)

Age 67. Occupation – Retired Head

Teacher. Member of the Wales &

Borders Regional Board. First elected

to the Board in 2000.

Brian Rees (r)

Age 64. Occupation – Business

Management Consultant. Member of

the Wales & Borders Regional Board.

First elected to the Board in 2001.

Ben Reid (c)

Age 53. Occupation – Chief

Executive, The Midcounties

Co-operative. First elected

to the Board in 2000.

Richard Samson (c)

Age 54. Occupation – Chief

Executive, East of England

Co-operative Society. First

elected to the Board in 2005.

Allan Smith (c)

Age 60. Occupation – Chief

Executive, The Channel Islands’

Co-operative. First elected to the

Board in 2003.

John Smith (r)

Age 53. Occupation – Credit Union

Development Officer. Member of

the Northern Regional Board.

First elected to the Board in 2000.

Kathryn Smith (r)

Age 48. Occupation – Public

Relations Consultant. Member of

the South East Regional Board.

First elected to the Board in 1997.

Non-Executive Director of

Co-operative Financial Services

Limited, The Co-operative Bank plc,

Co-operative Insurance Society Ltd

and CIS General Insurance Limited.

Robin Stewart (r)

Age 58. Occupation – Retired

Deputy Head Teacher. Member of

the Scottish Regional Board. First

elected to the Board in 1989.

Jeanette Timmins (r)

Age 62. Occupation – Information

and Training Co-ordinator. Member

of the Scottish Regional Board.

First elected to the Board in 2004.

Len Wardle (r)

Age 63. Chair of The Co-operative

Group. Occupation – University

Fellow. Member of the South East

Regional Board. First elected to

the Board in 1992. Non-Executive

Director of Co-operative Financial

Services Limited, The Co-operative

Bank plc, Co-operative Insurance

Society Ltd and CIS General

Insurance Limited.

Stephen Watts (r)

Age 55. Deputy Chair of The

Co-operative Group. Occupation –

Business Studies Lecturer. Member

of the Central & Eastern Regional

Board. First elected to the Board in

2000. Non-Executive Director of

Co-operative Financial Services

Limited, The Co-operative Bank plc,

Co-operative Insurance Society Ltd

and CIS General Insurance Limited.

(c) = Corporate representative

(r) = Regional representative

Clockwise (from bottom left)

Joyce Baruch, Graham Bennett,

Ian Mason, Allen Brett, Frank Jones,

Simon Butler, John Macbeth, John

George, Douglas Fletcher, John

Fitzgerald, Jeanette Timmins, Ben

Reid, Brian Rees, John Smith, Len

Wardle, Patrick Grange, Alban Rees,

Eric Calderwood, Terry Morton,

Kathryn Smith, Bob Burlton, Allan

Smith, Bob Jamieson, David Doyle,

Richard Samson, Russell Porteous,

Bertie Murray, Bill Hoult, Mike

Harling, Stephen Watts, Duncan

Bowdler, Robin Stewart and

David Pownall.

The Co-operative Group Annual Report and Accounts 2007 5


‘Nowadays people like to know where their

food comes from. We pack a big range of

potatoes here that are grown by us, from

Charlotte to King Edward. So it’s nice to

know where the potatoes come from, and

they’re good potatoes, too. The quality is

very important to me because it reflects

all the hard work that my team and I do

to achieve the best results.’

David Andrews, Langley Brook potato pack house


We strive for

consistent quality…

that’s why we go further

than other high street

retailers to guarantee the

quality of our food.

High street retailers are working harder than

ever to guarantee the provenance of the food

you buy – but none of them has gone as far

as The Co-operative Group.

During 2007, we extended the range of foods supplied by our

farms to our Food business and we launched a whole range

of new products specially labelled ‘Grown by us, Britain’s

largest farmer’.

Potatoes, flour, strawberries, onions, garden peas, apples,

pumpkins – even cereal bars – all have been grown, or contain

ingredients that have been grown, by The Co-operative Farms

across the 70,000 acres farmed by the Group in England

and Scotland.

In response to increasing customer interest, our food business

also launched a campaign championing British food, with an

offering that included own-label fresh meat and poultry sourced

from British farmers. All our fresh beef, pork and duck are already

British, but in 2007 we selected a small group of British farmers

to embrace our ‘Elmwood’ standard for fresh whole chickens

(which means that the birds are nurtured for longer in more

enriched environments).

With the ‘Grown by us’ range extending during the course of

2008 (look out for our honey in store!), we continue to provide our

customers in Scotland, Wales, England and Northern Ireland with

the best foods sourced from their nation.

Tea’s up

The Co-operative 99 Tea topped the Hot

Beverages category at the Quality Food & Drink

Awards 2007.

Good eggs

We were presented with the Retailer of the Year

award by the British Free Range Egg Producers

Association, in recognition of our commitment

to selling free-range eggs.

Fine wines

Our Fairtrade wine range won the prestigious

‘Own-Label Range of the Year’ Award in the

annual Drinks Retailing Awards – and our

Fairtrade Cape Sauvignon Blanc 2005 won

an equally prestigious Q (Quality Food) Award.

The Co-operative Group Annual Report and Accounts 2007 7


Business review – Trading Group

Peter Marks, Chief Executive

Trading Group contents

08 Financial overview

09 The Co-operative Food

10 The Co-operative Pharmacy

11 The Co-operative Funeralcare

11 The Co-operative Travel

12 The Co-operative Legal Services

12 End of Life Planning

12 The Co-operative Estates

13 The Co-operative Farms

13 E-Store

16 The Co-operative Clothing

16 Sunwin Services Group

16 Sunwin Motor Group

16 Federal services

16 Sustainable development

19 2008 priorities

19 Trading Group Executive

I am sure that when, in years to come,

we look back on 2007, we will see it

as one of the most significant years in

the history of both The Co-operative

Group and the Co-operative Movement.

On 29 July, the UK’s two largest

co-operatives, The Co-operative Group

and United Co-operatives, came

together to form the world’s largest

consumer co-operative. I believe that

this historic merger provides the

foundation for the reinvigoration and

renaissance of the whole co-operative

sector in the UK.

The combined Group’s performance in 2007

clearly demonstrates the progress we have

made to date. It is perhaps an under -

statement to say that for many of us the last

few months have been a pretty hectic time.

Bringing two successful businesses together

is never straightforward and inevitably there

are stresses and strains along the way as

teams across the Group have come

together. We have had to say goodbye

to many colleagues who have served the

business well, and that too has been a

necessary part of the process. But, as we

settle in to 2008, I am confident that the

right people have been appointed into the

right jobs to deliver a successfully merged

business.

‘Stronger Together’ – the merger

prospectus.

A great deal has been achieved since last

summer and not only in creating new teams.

Across Food, Travel, Pharmacy and

Funeralcare we have already seen major

progress in aligning operations, integrating

systems and harmonising marketing and

pricing – the key elements that will produce

a truly unified business. We are on target to

deliver 50% of our integration projects by

mid-2008, and 80% by the end of the year.

The savings from merging the two

businesses are also significant, an

expected £50m by the end of 2008.

£50m

Savings expected by the end of 2008

as a result of the merger.

Financial overview

From a financial perspective, the Group

made good progress in 2007, with both

improved profitability and a strong balance

sheet confirming the choices we have made

to date. Group revenue before reinsurance

premiums was £8.3bn compared to £7.3bn

in 2006. Income in the Trading Group was

up £1bn, boosted by strong trading in our

Food business, where like-for-like sales

were up 4.6%. Our operating profit before

significant items rose by 8.6% to £431.6m,

an increase of £34.2m. Trading Group

borrowings increased to £563m from

£155m, reflecting the impact of the merger

and significant investment in acquisition and

refits. This resulted in a net debt to earnings

8 The Co-operative Group Annual Report and Accounts 2007


atio of 1.5 compared to 0.8 at 2006 yearend.

During the course of 2007, members’

funds rose by 16.1% to £3.8bn, mainly

as a consequence of the merger and a

retained profit of £113.6m.

£432m

The Group’s operating profit before

significant items.

The Co-operative Food

Our Food business had another very

successful year driven by the continued

focus on the fundamentals of ‘better shops,

better products, better service and better

execution’ (our ‘four betters’ strategy).

The merger brought together two successful

and growing food businesses with common

goals and strategies, focused on serving

the local communities in which they operate.

The store estates are entirely complementary

in terms of geography, size and format –

ie convenience stores and small/medium

supermarkets between 2,000 and 15,000

sq ft sales areas. The estate now comprises

2,223 stores with 542 already in the new

brand format. We plan to complete the

refurbishment and branding of the entire

combined estate over the next two years,

with 700 refits already planned for 2008.

Within the enlarged Food business, significant

operating and management synergies have

already been captured and these will increase

further into 2008 and beyond.

Financial performance

Operating profit before significant items

increased by 50.5% to £139.2m. Stripping

out the impacts of the merger, the business’

underlying operating profit increased by

35%. Continuing like-for-like sales growth

was the key driver with full year growth at

4.6%, a full 1% higher than the IGD quoted

market growth. We have now delivered eight

consecutive quarters of like-for-like growth

in a fiercely competitive market place. Our

convenience stores continued to perform

The Corporation Street store in Manchester

is an exemplar of the new brand.

well with like-for-like growth of 6.9%. Store

contribution improved by 0.54% of sales.

Investment

We increased the pace and scale of our refit

programme, investing £86.3m in 379 refits,

bringing approximately 25% of the estate up

to our new brand standard by the end of the

year. The main emphasis of our investment

in 2007 has been on convenience stores,

typically less than 3,000 sq ft in size. We now

have a very successful convenience format

and our refitted convenience stores delivered

like-for-like sales growth of 13.7%.

In addition, in the early part of 2007 we

launched a new format trial in five market

town supermarkets with an average sales

area of 12,180 sq ft. These stores achieved,

on average, 12.3% sales uplifts and we

received outstanding response and

feedback from our customers. Increased

sales of fresh foods have been a particular

highlight and this was demonstrated over

Christmas where these stores averaged

an 11.1% sales increase in the three weeks

to 5 January. Following the success of

these trials we are increasing the pace

of refits for stores of a similar size in

2008 and beyond.

Fifty new stores were acquired or developed

during the year, including 14 by United

Co-operatives in the first half of the year

Our regional distribution centre in Thurrock

is now operating at full capacity.

prior to the merger. United Co-operatives

successfully trialled an innovative approach

to new build stores using prefabricated

building methods, whereby semiconstructed

store shells are ‘dropped in’

to a prepared site. This method has now

been adopted by the Group and will help

control costs and reduce build times, and

is seen as a key enabler to achieving

ambitious plans for new space over the

next few years. We continued to address

underperforming stores and closed or

disposed of 75 stores during 2007. At the

year-end we had 2,223 stores with 7.6m

sq ft of selling space.

The investments we have made in our

logistics network are delivering increasing

benefits. Our state-of-the-art composite

distribution centre in Thurrock, which

opened in May 2006, is now operating

near its pre-planned capacity levels and

is providing excellent and efficient service

to our store portfolio in the South East. We

have plans for further investment in logistics

in 2008 and beyond, both in infrastructure

and rolling out new systems.

The Co-operative Group Annual Report and Accounts 2007 9


Business review – Trading Group (continued)

£139m

The Co-operative Food’s operating

profit before significant items.

Good with Food

Our product development teams have a

passion for product and during 2007 we

made major progress in developing new and

exciting products to meet the demands of

our increasingly discerning customers. We

launched 1,235 new products and have now

redeveloped and rebranded 1,500 of our

own-label products, accounting for 60%

of own-label sales, into new, impactful

packaging. Customer response has been

overwhelmingly positive.

A highlight of 2007 was the total relaunch

of our premium range – Truly Irresistible. The

A sample from our premium Truly

Irresistible range.

range increased from 90 to 270 lines,

increasing our sales penetration in the

premium sector. Sales grew by over 150%

and we now have a premium brand with

annual sales of over £80m. At the beginning

of the year we relaunched our Healthy Living

range comprising 120 products of which 40

were new. Sales have grown by over 60%

and we were awarded the IGD Wellness

Award for best healthy range.

1,235

Number of new products launched

by our Food business in 2007.

We continue to increase the sales of

produce grown on our own farms, which

is a unique point of difference for us (see

page 7). Sales of our own strawberries

and potatoes were a particular highlight.

Our commitment to Good with Food is

much more than an advertising strapline;

it represents our philosophy and is a

statement of what we are and how we

want to be seen. In 2007 we brought this

to life with a new and inspiring advertising

campaign that highlighted some of the

specific ways in which we are Good

with Food.

A key part of the rebranding of our stores is

the training we give to our store colleagues.

Improving customer service remains a top

priority and is an essential part of our Good

with Food journey.

2008 outlook

The new senior management team in Food

has been in place since August 2007 and all

structures were finalised before the year-end.

Product ranges and prices for the newly

merged business have been aligned from

The Co-operative Pharmacy has

continued its strategy of working

with GPs and health centres.

January 2008 and operating systems and

process integration is progressing well.

The ‘four betters’ strategy, so successful

in the last two years, remains key to our

success. Our ambitious plans for the new

brand roll-out and refit programme are set

to continue with 700 more stores planned

for refit in 2008. Targets have been set for

new space via acquisitions and/or new

builds, aiming for a run-rate of over 100

stores each year, by the end of 2008.

Product and range development will

continue to be at the heart of our Good

with Food journey and will continue to take

account of consumer concerns and trends

together with the feedback from our

members regarding our Food Ethical

Policy. Fairtrade, animal welfare and the

environment are particularly important

to us and will remain key priorities.

Although the market place will remain

very competitive, we are confident that the

strengths of our enlarged food business,

coupled with our record investment

programme and our customer-led Good

with Food initiatives, will stand us in good

stead for further significant sales and

profitability growth in 2008.

The Co-operative Pharmacy

The Group’s newly combined Healthcare

business delivered a creditable result in

2007, with an operating profit before

significant items up by 9.6% from £28.1m

in 2006 to £30.8m. The result was affected

in the fourth quarter by the Department of

Health’s attempts to recoup something in

the region of £400m from the pharmacy

market as a whole. In our case, this resulted

in an unexpected additional claw-back of

£11.2m. With like-for-like growth, however,

the combined business has kept pace with

the market. In the wake of the merger, our

Healthcare business is now the third largest

pharmacy group in the UK, by quite some

margin.

10 The Co-operative Group Annual Report and Accounts 2007


The year has been characterised by

significant growth, both prior to the merger

and since, with notable highlights including

the acquisition of PCT Healthcare, itself the

largest single transaction with which either

of the pre-merged businesses had ever

been involved. Our operational teams

have been focused on maximising our

participation in the new Pharmacy Contract

by supporting the delivery of medicine usage

reviews. We have been investing in the

estate, rebranding and refurbishing the

stores and have completed 141 stores in

the new The Co-operative Pharmacy livery.

The intention is to have the majority of the

estate completed by the end of 2008. We

have continued with our strategy of aligning

locations with those of health centres and

GP surgeries and there are a number of

examples of health centre development

projects.

We have also taken a major step by

investing in a new business in China, in

a joint venture with one of that country’s

leading traditional herbal medicine and

pharmaceutical manufacturers. It will

employ up to 200 people and is expected

to begin production of a range of wellestablished

generic prescription drugs

within two years of launch. These will

be supplied by Sants, our pharmaceutical

warehouse, to over 600 Co-operative

Pharmacy outlets in the UK and marketing

opportunities will be sought across the

wider European Union. This is both our

first manufacturing venture and our first

overseas venture. We are confident that this

will bring a significant boost to the business.

Our strategy in 2008 is to continue to drive

business efficiency to improve margins and

operating performance, although the fact

that there isn’t likely to be an immediate

change in legislation means that 2008

may prove to be a difficult year with the

Department of Health’s enduring pressure

on pharmacy margins.

A new fleet of funeral vehicles for

South London, an investment of nearly

£1m, pictured with The Co-operative

Funeralcare staff at the Royal Artillery

Barracks in Woolwich.

The Co-operative Funeralcare

2007 was a very positive year for The

Co-operative Funeralcare with an operating

profit before significant items of £31.5m

compared to £19m in 2006.

Over the course of the year, great progress

was made against the business’ strategic

priorities, with over £9m invested in the

fleet and over £3m invested in refurbishing

branches. The business has also explored

a wide range of new marketing initiatives to

raise awareness of the Funeralcare brand,

such as the sponsorship of the World Bowls

Tournament televised live on Sky Sports 2.

We are also proud to report that wages are

now set well above the industry average,

which demonstrates our commitment to our

people and illustrates just one way in which

we are leading the way. The business has

also delivered outstanding improvements

on debt control. Having made an excellent

start, there will be continued work on

integration across all business areas

throughout 2008.

Specialist Retail Businesses

There are three businesses within our

Specialist Retail Businesses Division,

The Co-operative Travel, The Co-operative

Legal Services and End of Life Planning.

The interior of our recently rebranded Travel

branch in Rothwell.

44%

Amount of sales increase in our

Travel business.

The Co-operative Travel

Prior to the merger, neither the Group’s

travel business nor United’s travel business

was performing well. Post-merger, following

the recruitment of the new Travel Executive

team, a full strategic review was carried out,

covering every aspect of the business and

across the diverse channels to market in

which the Travel business operates. On

the back of the strategic review, The

Co-operative Travel’s new Executive team

made a number of key decisions: firstly, a

plan was put in place to exit from the leased

premises at Trafford Plaza as a Head Office

base and relocate the support functions to

The Co-operative Group Annual Report and Accounts 2007 11


Business review – Trading Group (continued)

Burslem, Stoke-on-Trent where a new Head

Office has been established. In addition

Escape, the wholesale and tour operating

division, relocated to the Manchester

complex; and the Stockport-based Cheapest

Flights call centre was closed, with some

departments moving to Manchester and

others relocating to the Rotherham call

centre. In the Retail shops division, 55

loss-making high street branches were

also closed. These changes have saved the

business in the region of £5.1m, and will

allow the merged business to operate with

a much lower cost base that will augur well

for significant profitability in 2008, despite

a relatively flat market as a whole. Although

sales increased by £66.6m (44%) to

£216.6m, the business incurred an

operating loss of £4.7m. However, the

actions taken to turn the business around

Cruises prove a big hit with Travel

customers.

since the merger have started to have a

positive impact. In the hectic peak booking

period post-Christmas, for example, the

business recorded double-digit growth for

the first time in a number of years. Many

new key initiatives are being implemented,

including: the consolidation of systems;

the roll-out of The Co-operative Travel

brand across many parts of the business;

and a fundamental review of the tour

operating strategy which is expected to

improve margins. All of which will build the

foundations for a profitable Travel business

in 2008 and the years ahead.

The Co-operative Legal Services

The Co-operative Legal Services was

established in August 2006 to seize the

opportunity created by changes in the legal

sector, coupled with the natural fit of legal

service provision with the Group’s other

offerings and with the fact that there are

no other established household brands in

the market. It was also recognised that

as a result of the regulatory review being

undertaken in the legal services industry,

a unique opportunity existed for us to

achieve a first mover advantage in the

market. The business has experienced

good growth in 2007 and introduced a

raft of innovative new services including

will-writing and probate, delivering an

operating profit before significant items

of £1.7m, compared to a £0.2m loss in

2006. The Co-operative Legal Services will

be looking to grow still further in 2008 on

a platform of cross-selling across the family

of businesses.

End of Life Planning

End of Life Planning’s operating profit before

significant items in its first full trading year

was £0.3m. This is especially pleasing when

considered alongside the extent to which

End of Life Planning has grown our prepayment

business since its inception: this

year we sold almost 22,000 plans, an

increase of 40% year-on-year. As far as the

funeral pre-payment market is concerned,

End of Life Planning has improved its market

share from 25% in 2006 to 32% in 2007.

This has been achieved by capturing most

of the growth in the market. If this rate of

growth continues, we expect End of Life

Planning to be number one in the market

by the end of 2008.

The Co-operative Estates

Formerly known as our Property Division,

The Co-operative Estates had something

of a mixed year in 2007. The first half of the

year for both the pre-merger Group and the

former United Co-operatives was strong;

post-merger, however, the credit crunch and

the slide in the property market as a whole

had an adverse effect on the end result. In

spite of the industry benchmark for property

showing negative returns for only the

second time in 30 years, The Co-operative

Estates still managed to retain a positive

return of 0.75%, so we were actually ahead

of the market. Trading profit was £52.9m.

The valuation on the windfarms resulted in

a profit of £2.1m. Capital loss on the

investment portfolio was £18.3m. In

addition, The Co-operative Estates delivered

profits on disposals of £49.8m, which was

ahead of target. Post-merger, both the

Group’s and United’s investment portfolios

(Far left) The new End of Life Planning

promotional material.

(Left) Colleagues from CLS, our legal

services business based in Bristol.

12 The Co-operative Group Annual Report and Accounts 2007


were merged giving us a total portfolio of

£385.6m.

The last six months of 2007 saw us

withdraw from leased buildings in and

around Manchester, which will deliver

savings of at least £2m a year and will

help concentrate people on the

Manchester complex, fully utilising that

site. Subsequently, we have also decided

to vacate our ageing Manchester offices.

We have run a competition to find a

masterplanner to draw up long-term plans

for the entire 20-acre site owned by the

Group and the long-term business fund.

A team of companies led by Arup was

appointed at the beginning of March. We

are also searching for a new location for the

Group’s headquarters, within the Greater

Manchester area. We expect to be able to

make an announcement about this later

in the year.

The Group’s bid for an Eco-Town on

farmland at Stoughton in Leicestershire

has progressed through the latter half of

the year. By mid-year we expect to know

whether we have been shortlisted for the

next stage of the process. The idea is that

we will build up to 15,000 houses on land at

Stoughton whilst continuing to farm the land

around and within the Eco-Town. We are

also at the end of the first year of a five-year

Group plan on energy savings. Food has

saved nearly 5% in 2007, and is on track

to reach 20% by 2010.

£53m

The Co-operative Estate’s

operating profit before

significant items.

The Co-operative Farms

The Co-operative Farms experienced

difficulties in 2007 as a result of incredibly

adverse weather conditions from Yorkshire

across to Hampshire. In these areas yields

We produced around 650 tonnes

of strawberries in 2007.

and quality of cereal crops and potatoes

were down: we lost 50% of the vining pea

crop because the fields were too wet to get

the harvesting equipment in. Cereal prices

rose dramatically through the year but due

to forward selling and cost increases, this

did not offset the yield shortfalls. The

Langley Brook potato pack house made

lower profits than expected because of

having to pay high potato prices for quality

product in England, though the new

Carnoustie pack house exceeded targets as

supply was better in Scotland. The business

appeared as part of the Group’s Food

advertising campaign for the first time, with

a spotlight on our premium strawberries.

We produced a record 650 tonnes of

strawberries in 2007. The business’ overall

result at £2.4m profit was £0.6m (21.3%)

down year-on-year. Encouragingly, 50% of

our turnover went to The Co-operative Food,

with new products such as pumpkins and

cereal bars, made with oats from our farms,

launched. There are also many new

products planned for 2008.

Specialist Commercial

Businesses

There are four businesses within our

Specialist Commercial Businesses Division:

E-Store, The Co-operative Clothing, Sunwin

Services Group and Sunwin Motors.

A Sunwin Motors dealership in Guiseley.

E-Store

For a number of years E-Store had been

a joint venture between The Co-operative

Group and United Co-operatives. E-Store

is an online retailer of electrical items and

beds, predominantly through two websites,

www.coopelectricalshop.co.uk and

www.coopbedshop.co.uk. The electrical

side of the business has performed

exceptionally well in the current year, with

an increase in sales of 44% to £27.3m

due to improvements made to the range,

particularly the development of the brown

goods range. Although the Co-op bed shop

has also seen an increase in sales, up 54%

to £0.8m, major investment has been made

to improve navigation and accessibility on

the website, to provide a solid platform for

further improved performance in 2008.

Together these businesses have generated

an operating profit before significant items

of £0.9m, an increase of 70% on a like-forlike

basis. E-Store also functions as a buying

group for a number of other co-operative

societies to ensure that, working together,

we can benefit from economies of scale.

The business prides itself on its in-house

distribution function, an operation which

means we can offer customers a marketleading

delivery service. Both businesses

have tremendous potential and are expected

to continue to grow in 2008.

The Co-operative Group Annual Report and Accounts 2007 13


We aim to be trustworthy…

that’s why we are delighted

to be considered the UK’s

most ethical brand.

The Co-operative Legal Services was established just

over mid-way through 2006 – roughly the same time

that The Co-operative Group was voted the most

trusted brand in the eyes of consumers, according

to research carried out by AccountAbility on behalf of the National

Consumer Council.

It’s that trust which makes The Co-operative Legal Services such

a unique proposition.

Before the business was launched, we undertook extensive research

to see what the popular view of the legal industry was. Perhaps

unsurprisingly, we learned that there was no national, trusted legal

brand. More importantly, our focus groups told us that many people

would be happy to receive advice from a brand that they knew and

trusted – a brand like The Co-operative.

Which goes some way toward explaining why The Co-operative

Legal Services is going from strength to strength, with a broad range

of services including will-writing, probate and conveyancing already

available and ambitious plans for 2008, including a second office

in Bristol and a raft of new products and services, in motion.

14 The Co-operative Group Annual Report and Accounts 2007


The Co-operative Legal Services is a

perfect fit for the Group – we’re a legal

business you can trust, we have a solid

ethical base and all of our services are

geared towards helping our customers.’

Andrew Richards, Marketing Manager (left).

Also pictured Scott Bradshaw, Training Manager (right).

Good advice

Travel agent Kerry Kitto (pictured above)

demonstrated customer care when she was able

to reassure a couple that it would be safe to go

ahead with their once-in-a-lifetime holiday in

Kenya, after researching the devastating effect of

the recent crisis on the Kenyan holiday industry.

Building relationships

Funeralcare staff arrange open days and

seminars so that people can visit funeral homes

to learn about the work of a funeral director, to

help demystify the industry.

Balanced diets

The Co-operative Healthy Living range was

re-launched with the Food Standards Agency

traffic light labelling designed to help customers

understand the nutritional value of foods and

their contribution to a balanced diet.

The Co-operative Group Annual Report and Accounts 2007 15


Business review – Trading Group (continued)

All our own-brand toiletries are accredited

by the BAUV, assuring our customers we

don’t test cosmetics on animals.

The Co-operative Clothing

The business formerly known as Mandate

has a long history within The Co-operative

Group, stretching back almost 100 years

and has, historically, lacked investment –

however there is strong potential to grow the

business. Sales in 2007 were down £0.2m

to £5.8m although volume was up 6%,

and profits were down by £0.4m to £0.2m.

The Co-operative Clothing specialises in

supplying distributors with corporate wear

(such as business and protective clothing,

healthcare and children’s wear etc),

although 20% of the business is generated

by supplying the Group and other

co-operative societies with staff uniforms.

Relocating during 2008 to larger bespoke

facilities and introducing new IT systems

and processes, The Co-operative Clothing

will be looking to develop the business-tobusiness

market, intending to become the

UK’s preferred ethical supplier of corporate

wear.

Sunwin Services Group

Sunwin Services Group (SSG) is an

enormously busy area of the Group,

comprising five smaller businesses:

CIT Services, ATM Support, E-Solutions,

Sunwin Security and Aegis Guarding.

On the back of acquiring the contract to

service the whole of The Co-operative

Bank’s ATM network, CIT/ATM Support has

developed from a regional operator into a

UK national business, requiring a significant

investment and additional one-off set-up

costs. Our E-Solutions business has also

played a major part in the roll-out of

upgraded EPOS to our Food and Pharmacy

businesses. Whilst the overall operating profit

before significant items was £0.5m in the

period since the merger, on a full year likefor-like

basis, profit before significant items

was £2.1m, in line with our expectation. SSG

is a very valuable business for the Group in

terms of profit contribution and, with the

foundations in place for this to become a

truly national business, we expect positive

results in 2008.

Sunwin Motor Group

Sunwin Motors has experienced an

extremely difficult year and has recorded a

loss of £1.7m in the period since the merger.

The performance is, unfortunately, indicative

of various trends in the market, ranging from

pressure on dealers from manufacturers

to the fortunes of certain of the franchises

supported by the business. Steps taken

during the latter part of 2007 should allow

the Group to make a marked improvement

during 2008, however this cannot be

guaranteed in the tough trading environment

in which the business finds itself.

Over 100,000 members responded

to the Group’s Food Ethical Policy

consultation.

Federal services

As a federal organisation for the

Co-operative Movement, The Co-operative

Group provides a range of services to other

societies. Through CRTG, the Group provides

buying, marketing and distribution services

on behalf of its corporate members. We will

also continue to support the development

of CTTG, a buying group for co-operative

travel businesses.

Sustainable development

We have a proud history of running our

business in a responsible manner. Unlike

most of our competitors, we can trace our

ethical roots back to the 19th century, when

the Rochdale Pioneers established a valuesled

business that was about more than just

the pursuit of profit. This pioneering spirit

still resonates strongly within our business

and we still lead the way on many of

the issues that matter.

We have just undertaken the world’s largest

consumer poll on ethics, and now have a

clear mandate from members to continue to

pursue initiatives within our Food business

on issues as diverse as animal welfare,

labour standards, and packaging reduction.

The launch of our Food Ethical Policy

led to a series of headline-grabbing

announcements. We have banned the sale

of eggs from caged hens from our stores,

converted our own-brand hot beverages

to Fairtrade, reduced the glass used on

26 different wines thereby saving a total of

450 tonnes of glass per annum, and added

a further 66 pesticides that we prohibit our

produce suppliers from using.

This characterises the approach we’ve been

taking for many years across all the Group’s

businesses, and which was rewarded by

a series of prestigious accolades in 2007.

Most notably, we received a Queen’s

Award for Enterprise in the Sustainable

Development category – significantly,

we’re the only major national food retailer

or financial services business to have ever

won this award across its operations.

16 The Co-operative Group Annual Report and Accounts 2007


Our guiding co-operative values &

principles include ‘concern for community’.

Back in 2006, we launched a Group-wide

community and campaigns strategy,

focusing on: climate change, social

inclusion, tackling crime, food ethics, and

modern co-operation. In line with these

goals, the Group contributed a total of

£10.4m to the community in 2007 – a 47%

increase on the previous year and equivalent

to 6.9% of our pre-tax profit.

£10.4m

Amount the Group contributed to

the community in 2007.

Such is the wealth of our community

investment programme that it’s only possible

to highlight a few examples here. As well

as our innovative partnership with Street-

Games (see page 27), particular highlights

in 2007 included strong progress with our

£2m project to install roof-mounted solar

panels at 100 schools in the UK; and the

extension of our From Farm to Fork project

to two further farms, with the promise of

more to follow. We also threw open the

doors of The Co-operative Recycling Centre

to schoolchildren for the first time. The

Waste Works Education Project offers free,

hands-on environmental educational

programmes primarily for schools groups.

Over 1,000 people have visited the centre

since the launch in September, with

excellent feedback received to date.

It’s a big claim, but we think we’re doing as

much as any other business to reconcile our

climate change impact. This is about more

than just buying green electricity – it’s about

using our land to support large-scale

electricity generation; it’s about considering

the impact of the products we sell, such as

our move to become the first travel agent

to sell carbon offset on the high street; and

it’s about mobilising our customers and

members to challenge government on

The Group’s educational initiative From Farm

to Fork gives schoolchildren the opportunity

to learn about where food comes from.

this most pressing issue. These efforts

contributed to the Group taking the Pioneer

Award at the Renewable Energy Awards

2007 and the award for environmental

leadership from Business Commitment to

the Environment. In pursuit of our other

key environmental priority – waste and

packaging reduction – we introduced the

world’s lightest whisky bottle, and we’re now

focusing on ‘light-weighting’ our own-brand

wine bottles and other packaging.

In line with the co-operative principles of

openness and honesty, we are committed to

a robust programme of accounting, auditing

and reporting on our performance in relation

to a host of co-operative, social and ethical

performance indicators, and aim to have

world-class sustainability reporting. We

believe it’s important to provide our

stakeholders with a balanced view of our

performance – not shying away from areas

where issues still need to be addressed – so

a much fuller disclosure of how we’ve done

in 2007 is provided in The Co-operative

Group’s annual Sustainability Report.

Our sustainability performance is key to the

attainment of our vision for the Group, and

we are passionately committed to ensuring

our continued leadership in this area.

Rt Hon Hazel Blears MP and children from

Lark Hill Community Primary School at the

opening of Waste Works in Manchester.

Conclusion

Having brought together two of the most

successful co-operative societies in the UK

to form the largest consumer co-operative

in the world, we can now crack on and start

pushing The Co-operative Group as the truly

significant business it really is. This will be

the year when, strategically, everything

comes together. This will be the year when

we lay the foundations for a truly revitalised

business that will be admired and respected

by our members, our customers and our

competitors. We are already seeing signs

that the work we have started is paying off.

There is clearly much to be done but the

important thing is that we know what that is

and how we will go about making it a reality.

I have every faith that working together we

can achieve every goal we set ourselves

and, in doing so, fashion a Co-operative

Group that is fit to take its competitors on –

and beat them. In so doing, we will create

a co-operative business that rewards its

members, meets its customers’ needs

and delivers on its social goals.

The Co-operative Group Annual Report and Accounts 2007 17


Business review – Trading Group (continued)

I would like to conclude this section of the

Annual Report by offering my thanks to

some of the people who have made this

year's performance what it is, starting with

the people who work for the Group. I would

not be able to talk about great results if we

did not have great people throughout the

business making those results possible.

Particular thanks go to the people who

have been involved with the integration,

both those who have been overseeing the

integration of the two organisations and

those people who have been affected. To

those people who have, for one reason or

another, left the Group as a result of the

merger, I would like to reaffirm our gratitude

for all the hard work undertaken to create

the strong platform we now have to work

from.

My final thanks go to the Boards and

members of both former Societies whose

far-sighted views and overwhelming support

for the merger will help inform the entire

Co-operative Movement from here on in.

As I said right at the start of this business

review, we have now laid the foundations for

a momentous change, the renaissance of

the entire Co-operative Movement in the UK,

and my thanks go to all those who have

made that possible. Our challenge now is to

grasp that opportunity and make it a reality.

I know we are up to that task and have the

right people to succeed and I look forward

to reporting our progress in future years.

Peter Marks Chief Executive, Trading Group

18 The Co-operative Group Annual Report and Accounts 2007


Trading Group Executive

2008 priorities

Our strategy for the coming year revolves around a number of key priorities:

• Deliver a successful integration programme

• Maintain like-for-like sales growth in Food Retail

Continue to build profitable market share growth and maximise supply

chain value in Healthcare

• Turn around performance in the Travel business

• Deliver target refit programme in readiness for 2009 brand launch

to consumers

• Encourage commitment and engagement of our people.

It is key that we deliver on the promise of integration, making sure that the

merged business is fit to start delivering the kinds of results we know it is

capable of and fulfilling our three-year plan to double the Group’s trading

profit. As far as The Co-operative Food is concerned, the imperative is to

make sure not only that sales and profits continue to rise but also that,

year-on-year, we can demonstrate growth in market share.

Similarly, with Healthcare, we have to keep a keen eye on the challenges

presented by the pharmacy market and do our utmost to drive improvements.

On the Travel front, we’re in a much better position than we were 12 months

ago but we need to make the most of the work already undertaken to

reorganise the business and thereby reap real rewards. We have ambitious

targets for the refit programme and even more ambitious plans for 2009 – but

one guarantees the other so we have to make sure all of our targets are met.

Our final priority centres on the engagement and commitment of our people.

It has now been demonstrated, in businesses all over the world, that the

more engaged your workforce, the more productive it will become. That is

why we make great efforts to keep morale high, efforts that we continue to

build upon in 2008.

Peter Marks

Chief Executive

Trading Group

Mike Austin

Managing Director

Specialist Commercial

Businesses

Neil Braithwaite

Managing Director

Specialist Retail

Businesses

Tim Hurrell

Managing Director

Food Designate

Guy McCracken

Chief Executive

Food

Patrick Allen

Director of Marketing

Richard Bide

Director of HR

David Hendry

Managing Director

Funeralcare

Moira Lees

Group Secretary

John Nuttall

Managing Director

Healthcare

Lynda Shillaw

Managing Director

Estates

Martyn Wates

Chief Financial Officer

The Co-operative Group Annual Report and Accounts 2007 19


The Co-operative’s groundbreaking

work on climate change has been second

to none over the last 10 years, and is

something staff, members and customers

can rightly take great pride in.’

Paul Monaghan, Head of Ethics & Sustainability


The Co-operative has

long championed

sustainable development.

No surprise then that, outside of the renewables

industry, you’ll struggle to find a business

doing as much as us to tackle its climate

change impacts.

We’ve got a lot to shout about.

We’re one of the largest purchasers of wind and water power in

Europe, with 98% of our electricity coming from renewable sources.

We have our own wind farm on one of our Cambridgeshire farms,

which generates enough electricity to power 9,000 homes, whilst

the head office of our insurance business in Manchester houses the

UK’s largest solar project. We were also the first UK supermarket

to cease stocking energy-inefficient white goods.

And we’re helping our customers do their bit too – having

incorporated carbon offset features into a range of mortgage and

motor insurance products, and making offset available to our travel

customers. These support rainforest reforestation, renewable energy

and energy-efficiency projects in the developing world.

We know climate change is an issue that motivates our customers

and members. How Because 22,000 of them lobbied their MP to

call for a strong climate change bill as part of our campaign with

Friends of the Earth.

Realising potential

We were given a Gold rating by Opportunity Now

for our commitment to realising the full potential

of women colleagues across the business.

Employer champions

We were awarded ‘Employer Champion’ status

by Age Positive, the Department for Work and

Pensions’ initiative and the Employers’ Forum on

Age Best Private Sector Award for promoting age

diversity in the workplace.

Innovative sustainability

We received a Queen’s Award for Enterprise

in the Sustainable Development category

in recognition of our innovative sustainability

initiatives. We are still the only financial

services provider or major food retailer

to have achieved this across all operations.

The Co-operative Group Annual Report and Accounts 2007 21


Business review – CFS

David Anderson, Chief Executive CFS

2007 was not an easy year for CFS.

The significant external influences of an

international banking crisis, a weakened

national economic climate and extreme

weather events have proved challenging.

Despite this difficult backdrop, I am pleased

to report that CFS has made satisfactory

progress on our journey to become the UK’s

most admired financial services business

and our investments in the future are

beginning to reap rewards.

A significant factor in our progress has

been the bank's well-balanced approach

to growth, maintaining the strength of our

balance sheet in the current environment.

Our funding is overwhelmingly from retail

and corporate deposits, rather than from

the financial markets and our reliance on

wholesale funding is lower than most other

banks. The quality of our mortgage book

remains high and we have continued to

reduce our exposure to unsecured assets.

Our capital position remains substantially

higher than the regulatory requirements

laid down by the Financial Services

Agency (FSA).

CFS profit before significant items was

£151.5m, against £134.7m in 2006,

an increase of 12.5%. Total shareholder

profit before tax, short-term investment

fluctuations, significant items and

membership dividends was £155.4m

compared to £146.2m in 2006.

This positive result is a reflection of the

commitment to change and investment that

has been a key feature for CFS during 2007.

Our commitment to strip out £100m of

expenditure in the business by June 2008

was announced in the summer. This meant

facing the challenge head-on and taking

tough decisions to put us in a better place to

succeed. One of the toughest decisions we

made was to lose 1,000 roles under a major

change programme, ‘Transformation 07’,

reducing duplication and improving the

structure of the organisation to improve

efficiency and effectiveness. This

programme was a difficult time for CFS

but was a much needed part of the

bigger picture and was linked to a £250m

investment for the business, agreed

by the Board, to grow our business.

As part of this cost reduction agenda,

CFS launched an Operational Effectiveness

Programme in January, tasked with

delivering £25m of savings. By the end

of the year, £30m of savings had been

achieved through 62 initiatives in the

business.

Partnerships

Part of our drive for change involved the

implementation of three key outsourcing

partnerships during 2007. In March a

significant partnership extension was agreed

with Xansa to provide a model of delivery

Customers remain our priority.

that will give us the ability to develop new

customer propositions and improved service

to our customer base in a fast changing

financial services market. The five-year

partnership agreement will also give us

a year-on-year reduction in the cost of

application development and support

services. The partnership continues with

Steria which acquired Xansa in October

2007.

In November, our Life and Savings division

completed the negotiation of a £250m

outsourcing contract with Capita. Capita

will provide existing and new business

administration services and reduce ongoing

maintenance costs. Access to more flexible

administration platforms will enable a range

of new product solutions for customers and

reduce operational risk.

Finally, towards the end of the year, CFS

also entered a five-year partnership deal

with Communisis, to operate our unified

print and mail service. The partnership will

improve customer front-end print, mail and

fulfilment operations and save the business

£1.3m a year.

Our customers

Our customers remain our priority across

CFS and this year saw the establishment

of a new Direct Propositions Division, pulling

together the customer contact centres, back

office support areas and direct sales areas

under a single director to help provide

22 The Co-operative Group Annual Report and Accounts 2007


improved customer experience. We also

opened four new Corporate Banking Centres

as part of our plan to double representation

by mid-2009 for the convenience of our

customers.

Transformation

The transformation in our distribution,

underwriting and marketing strategies

gathered pace in 2007. On distribution,

the proportion of our new business that is

transacted outside our ‘traditional’ Financial

Advisor channel has now grown to 80%

from a standing start in 2003. The majority

of this business is placed with us direct,

although we do have a small number of

broker arrangements and have also

commenced writing business via

‘aggregators’ – price comparison websites.

The growth in the direct channel has been

facilitated by both increased marketing

spend, growing marketing efficiency and

excellent performance from our call centres.

Looking forward, we plan for the majority of

our business to come to us direct but for our

Financial Advisor channel to remain a viable

and unique distribution route for many

general insurance products.

Performance

Before tax and investment write-downs,

the bank recorded an improved profit of

£82.2m in 2007, compared to £76.3m in

2006. However, profitability was impacted

by £31.8m of investment write-downs as

a result of the banking industry’s ‘credit

crunch’, leading to an operating profit of

£50.4m in 2007 compared with £76.3m in

2006. In turn we have seen bad debt levels

reduced by £3.3m and we performed well

in areas such as average loan values and

current accounts and we exceeded our

targets and produced a record performance

in sales of our new mortgage two-year

tracker product.

Within our General Insurance business, the

2007 profit position has been impacted by

this year’s weather events – approximately

The CIS tower and its landmark solar

panels demonstrate our commitment

to the renewable energy sector.

4,500 weather-related claims were

received during June/July 2007 – but in

spite of this there has continued to be an

excellent improvement in our profitability,

with operating profit before significant

items of £67.1m, up £30.1m on 2006. In

particular, our motor insurance business

has continued to demonstrate positive

trends. I am delighted to report that we

have achieved a continuous improvement

in the claims ratio during 2007, largely due

to the implementation of a programme to

modernise our claims handling as well as

better underwriting and pricing strategies.

We have also invested considerable time

and effort in improving the quality of the

business we underwrite on our motor

account. Although our premium income has

fallen during 2007 following the completion

of our exit from ‘Any Driver’ business, our

customer numbers broadly stabilised from

mid-year and we anticipate moderate

growth in 2008.

Looking at our financial results in detail,

we can see that the present value of Life

and Savings New Business Premium was

£466.3m, a reduction of 6% on 2006,

reflecting the decline in the number of

Financial Advisors authorised to advise

on Life and Savings products. Our gross

2007 saw us extending our support to

Microfinance by some £25m.

Life and Savings premium income in 2007

was £534.2m compared to £548.4m in

2006. The fall reflects a reduction in regular

premium income from endowment policies

as they reach maturity.

In a significant step towards managing

long-term risk for our life fund, The

Co-operative Insurance signed a major

transaction in November to reinsure

approximately £1.8bn of deferred annuity

business and annuity in payment business.

Our CIS Sustainable Leaders Trust has

delivered a first-class performance and

our CIS UK Income with Growth Trust has

also firmly upheld its position, earning

Co-operative Investments the title of

‘Best Ethical Investment Provider’ and

‘Best Ethical Provider’ and gaining Mike Fox,

Fund Manager of the Sustainable Leaders

Trust, the accolade of ‘Fund Manager of

the Year’.

Other key new product launches in 2007

include our innovative think credit card, the

first in the world aimed at ethical shoppers,

and our market-leading fixed-rate 25-year

mortgage.

Since March 2006, CFS has been a

member of the Association of British

The Co-operative Group Annual Report and Accounts 2007 23


Business review – CFS (continued)

Insurers’ Customer Impact Scheme. A total

of 32 companies take part in this initiative

to make sure customers’ needs are at the

heart of everything we do in the life and

savings industry.

Customer satisfaction remains key to us

as an organisation and we have delivered

month-on-month improvements in customer

satisfaction since the start of 2007. At the

end of the year a survey told us that 62.5%

of our customers at CFS were either

‘extremely’ or ‘very’ satisfied with our

service and products. This has meant

corresponding improvements in customer

retention, which has demonstrated a similar

month-on-month trend. Benchmarking

through consumer intelligence reports

shows that we are exceeding the scores

our customers are giving competitors.

Our new brand is being rolled out across

the country.

We are proud to be able to say that all CFS

customer contact centres remain UK-based.

Our people

Central to the success of our overall

change programme is the need to develop a

high-performing culture within the business.

The journey towards this goal was started

by our People Programme, concentrating

on six key areas aimed at developing a highperformance

culture across the business to

support the other far-reaching changes

and investment we are making: leadership,

management capability, performance

development, recognition, people

communication and measurement. 2007

also saw the development of our new

‘university for all’ bringing interactive and

comprehensive learning resources for CFS

colleagues under one roof.

Our identity

This year we have begun to introduce

The Co-operative’ branding. We have

started to use our new ‘Good with Money’

brand to bring us increased recognition

and further commercial success.

Sustainable development

In 2007, I was proud to see CFS emerge,

once again, in the Platinum Group of

leading companies who benchmark their

management and integration of corporate

responsibility via Business in the

Community’s Corporate Responsibility Index,

particularly as our performance in the Index

is one of our KPIs of business success.

Our 2007 boasts also include the fact

that we remain the only financial services

provider to secure total business ISO

14001 certification for our environmental

management system across all of our

activities, products and services, after

we achieved re-certification in August.

2007 was the 15th anniversary of our

famous Ethical Policy.

Furthermore, 2007 marked the 15th

anniversary of the bank’s unique, customerled

Ethical Policy. Since its launch, £700m

of loans have been turned away due

to conflicts with policy statements. In 2007,

of the 348 finance opportunities assessed

by our Ethical Policy Unit, 32 were found

to be in conflict with the Ethical Policy and

were, therefore, declined. During 2007,

Co-operative Investments continued to

demonstrate its activism as an institutional

investor, voting on 8,834 UK resolutions,

of which 1,053 (12%) were votes in

opposition to management.

It’s important to ensure that we get the

fundamentals of responsible business

practice right, not least of all because it’s

clear that the market for ethical goods and

services is on the rise. The bank’s latest

Ethical Consumerism Report, which provides

insight into the ethical spending patterns of

the general public, revealed that £32.3bn

was spent by UK consumers in line with

their values during 2006. This translates

to an average of £664 for every household.

Our new think credit card better rewards

ethical purchasing by offering a lower rate

of interest for purchases from designated

ethical partners, and a package of other

benefits. In addition, use of the card

generates monies for rainforest protection.

2007 also saw us extending our

commitment to Microfinance by some

£25m. Microfinance is the means by which

financial institutions in the West can build

funds that are used to provide low-value

loans to some of the world’s working poor.

We continue to be bold in our consideration

of how we can make a difference. That’s

why, for example, we’re piloting a scheme

to provide basic bank accounts to prisoners

and also working with prisoners to help them

better understand money matters. Having a

bank account and budgeting skills can be the

difference between being able or unable to

hold down a job or accommodation once

24 The Co-operative Group Annual Report and Accounts 2007


CFS Executive

someone has left prison – and these, in turn,

are factors seen as key to the reduction of

re-offending.

Our commitment to the community has

always extended beyond financial support.

In 2007, more than 600 CFS employees

registered that they had taken part in

volunteering activities in work time,

contributing a total of 5,681 hours.

Throughout 2006 and 2007, the bank joined

forces with Friends of the Earth to campaign

on the theme of climate change. Among

other things, this call to action saw more

than 22,000 customers lobby their MPs

on the Climate Change Bill, which is now

set to become law in 2008. Our new

Customers Who Care campaign will

see the bank working in partnership with

Amnesty International on the campaign

theme of ‘defending human rights’.

Our Climate Change campaign

coincided with what was, without doubt,

unprecedented media and public interest

in the issue in 2007. CFS led the switch to

green energy back in 1998, and we now

source 99% of our electricity from good

quality renewable sources, such as wind and

water. We’ve created the UK’s largest solar

tower at our Manchester head offices, and

the UK’s largest-ever commercial application

of wind turbines on another Manchester

office – and it gives me great pride to say

that we’ve reduced our CO 2 emissions by

72% since 2002.

lost sight of our need to operate in

a sustainable manner. We will keep

addressing our impacts and exploring the

opportunities that sustainable development

presents, in the hope that we will continue

to push the boundaries of responsible

business practice.

Conclusion

Last year, I anticipated that 2007 would

bring CFS a ‘challenging and exciting’ time.

This certainly proved to be the case and we

have started to see the emergence of CFS

from its chrysalis of radical change and high

investment. We are still on a journey and

there is no denying there is a distance to go

yet, but I am confident that 2008 will be a

year that competitors find us a true market

force to be reckoned with. The key to our

success remains our fundamental

commitment to the best deal for the

customer and to the principles of value,

fairness and social responsibility.

David Anderson Chief Executive, CFS

David Anderson

Chief Executive

CFS

Stephan Pater

Chief Operating Officer

Gerry Pennell

Chief Information Officer

Cathy Wilcher

Director

Human Resources

Mike Fairbairn

Director

Compliance

Dick Parkhurst

Director

Strategy and Change

John Reizenstein

Managing Director

Corporate and Markets

In March 2007, we became the first major

organisation to go ‘beyond carbon neutral’.

This means that we not only offset the

small amount of energy not sourced from

renewables, along with other emissions,

we also add an extra 10% in order to cover

legacy issues.

It’s been a challenging few years for CFS,

as we’ve sought to transform our operating

model, but throughout this we have never

The Co-operative Group Annual Report and Accounts 2007 25


‘It’s fantastic to be involved in projects

that really make a difference to the

communities in which we operate

and bring our Social Goals to life.’

Melanie Phillips, Community & Campaigns Manager


Being part of

the local community

matters to us…that’s

why we get involved

with a whole range

of initiatives.

For several years The Co-operative Group has been

working to significantly reduce its own carbon impact

and we have campaigned heavily on the important issue

of climate change.

But that’s not all.

As the UK’s largest consumer co-operative we believe it is

important to educate the next generation about climate change

and renewable energy.

That’s why, in 2007, we invested £1m to fund the installation of free

photovoltaic (PV or solar) panels in 100 UK schools. Our £1m fund –

which matches the funding from the Government’s Low Carbon

Buildings Programme – enables 100 schools to be fitted with roofmounted

photovoltaic panels worth over £20,000. The panels

generate around 3,300 kWh of electricity each year, enough to power

a school computer for 33,000 hours or to make 180,000 cups of tea

for thirsty teachers – saving around two tonnes of carbon dioxide.

In addition to clean, sustainable renewable power, it is also planned

that schools will receive education and teaching materials on

renewable energy and climate change.

Committed to change

We have committed over £200,000 between

2007-09 to the national charity Street-Games

to develop a new sports volunteering programme

for young people aged 16-25 who are living in

regeneration areas.

Community investment

In 2007, we invested £10.4m – a staggering

6.9% of pre-tax profit – in communities in the

UK and overseas.

Improving access to clean water

Sales of Co-operative Fairbourne Springs

water helped raise £203,340 for The One

Foundation, which will be used to fund

26 PlayPumps in South Africa, improving

the lives of over 60,000 people.

The Co-operative Group Annual Report and Accounts 2007 27


Financial review

The financial statements for 2007

reflect an excellent year for the Group

with underlying growth in sales and

profits, despite the challenges posed

by the merger. The Group balance sheet

reflects the coming together of two

strong Societies and provides a solid

platform for future growth.

Revenue

Group revenue before reinsurance

premiums was £8.3bn in 2007, an increase

of 13.4% on 2006. Income in the Trading

Group was up by £1bn of which a large

proportion was due to the merger. However,

strong performances were achieved by the

Food business where like-for-like sales were

up by 4.6% in the year. In Pharmacy,

prescription volumes increased by 4.9%

(like-for-like) and sales were further

enhanced by acquisitions of over £161m.

Despite a fall in the death rate, like-for-like

sales in Funerals were up 12%, while in

Travel, like-for-like sales were up 10%,

despite tough trading conditions.

Within our Financial Services business,

revenues before reinsurance premiums

were down 1.1%. Bank income was up 8%

but Group General Insurance income was

down 16.1%.

Net revenue for the Group was £6.5bn,

11% below the prior year although this

is impacted by a significant increase in

premiums ceded to reinsurers of £1.8bn,

which is netted against revenue.

The Long-Term Insurance Business

significantly reduced its levels of longevity

risk as The Co-operative Insurance signed

a major reinsurance transaction with

Swiss Re. Approximately £1.8bn of deferred

annuity business (Option 32) and annuity

in payment business was reinsured.

Operating profit

Group operating profit before significant

items of £431.6m was £34.2m, 8.6%

higher than 2006. Trading Group profits

of £304.4m were £21.0m up on the prior

year. This increase was mainly due to the

merger; however, year-on-year profit

suffered due to a downturn in the property

market which saw profits reduced by

£16.2m as a result of a reduction in the

value of the investment property portfolio.

2006 has seen profits increase by £44.5m

due to an increase in the investment

property portfolio on the back of a rising

property market. Stripping out the distorting

effects of the merger and the property

market, underlying trading profits were up

20.5% year-on-year on a like-for-like basis.

Food operating profit at £139.2m was 50%

above last year, boosted by significant likefor-like

sales and favourable margin mix.

Pharmacy was 10% up with the merger

increases mitigated by the adverse effects

of the government contract. Funerals’

operating profit was up by 66% on last year,

reflecting strong sales growth outlined above

and volume growth created by the merger.

Travel showed signs of a strong recovery in

the second half of the year, particularly retail

shops. A new commercial agreement with

Thomson helped the business improve its

performance overall by £2.2m. Property

and Farms reduced year-on-year by 49%

due to the fall in investment property

valuations and the poor harvest. Of the other

businesses, E-Store, End of Life Planning,

The Co-operative Legal Services and The

Co-operative Clothing continue to improve,

all making profits; however, Sunwin Motor

Group has struggled in a competitive market

place faced by eroding margins and

increasing costs.

Co-operative Financial Services (CFS)

shareholder profit before tax, short-term

investment fluctuations, significant items

and membership dividends, was £155.4m

compared to £146.2m in the previous year.

2007 saw CFS commit to a significant

investment in its future through the

implementation of initiatives to improve

operational performance and efficiency.

The General Insurance result has improved

from a profit of £37.0m in 2006 to £67.1m,

reflecting ongoing and one-off benefits from

improved claims handling processes offset

by exceptional weather-related claims of

approximately £38m. The banking business

recorded an increased profit of £82.2m

before structured investment write-downs,

tax and significant items compared to

£76.3m in 2006. Balance sheet growth

was achieved in both lending and deposit

balances particularly in the corporate sector.

Bad debt levels have fallen in 2007 and

costs have been controlled to offset inflation

and achieve a 0.4% improvement in the

cost/income ratio. The bank’s profitability

was impacted by structured investment

write-downs of £31.8m from the ‘credit

crunch’ as experienced across the banking

industry.

Significant items totalled £182.0m in 2007

compared with £36.4m in 2006. £67.5m

was in the CFS business due to the

continued implementation of the new

operating model for our insurance business

and the subsequent redundancy costs.

The Trading Group balance of £114.5m

was principally driven by: merger costs of

£96.9m, goodwill impairment of £16.5m

and fixed asset impairment of £10.3m.

Merger costs were in the main due to

redundancies and asset write-offs where

systems and other resources were

duplicated. Finally, there was a £26m

credit due to pension curtailment arising

from redundancies. Group operating profit

after significant items was £249.6m, a

decrease of £111.4m on 2006.

28 The Co-operative Group Annual Report and Accounts 2007


Financial income and expense

Net financial expense is £31.4m, compared

with £21.8m in 2006.

This principally reflects higher interest rates

and increased borrowings across the year,

caused by the merger and acquisitions. The

fair value movement in 2007 is a charge of

£23m compared to a credit of £19.9m in

2006. Exchange losses were £10.3m

(2006: £4m gain), fair value movement on

quoted debt was a £0.8m charge (2006:

£18.7m credit). In addition, there was a

charge of £16.4m reflecting an adjustment

to the discount rate at which funeral bond

liabilities are estimated.

Payments to and on behalf

of members

The amounts included within the income

statement comprise a payment of £40.6m

during the year, and an interim dividend for

2007 of £5m approved at the October 2007

half year AGM.

The £40.6m payment in respect of profits

earned in 2006 comprised: a payment of

£15.1m to corporate members at a rate

of 89p per £100 of qualifying purchases;

an individual member dividend of £17.1m;

Community Fund of £2.1m; and an

employees’ dividend of £6.3m based

on employee membership of the Society.

The interim distribution of £5m was paid

to individual members with amounts based

on their trade with the Group.

Payments in respect of profits earned

during 2007 are anticipated to be £99.7m

including the £5m interim dividend already

paid. This represents £24.9m proposed to

corporate members, an individual dividend

of £44.9m, Community Fund of £10m

and employees’ dividend of £19.9m. This

is subject to the approval of members at

our AGM on 17 May 2008.

Discontinued operations

The discontinuing operations relate principally

to Shoefayre which was sold in September,

two former Co-operative Group department

stores that ceased trading in early February

2007 and the Sheffield department stores

of the former United Co-operatives that were

announced for sale in November 2007. The

loss of £11.2m included trading losses after

significant items of £11.7m and disposal

losses of £4.3m mainly relating to the

Shoefayre disposal and a tax credit of £4.8m.

Taxation

The tax charge of £39.1m (2006: £107.3m)

includes £14m (2006: £8.9m) relating to

tax attributable to Co-operative insurers

policyholders’ returns. The charge excluding

tax relating to policyholders is £25.1m

(2006: £98.4m). The effective tax rate is

16.7% compared to a standard rate of 30%.

A reconciliation of the standard rate of tax

is shown in Note 13.

Balance sheet, capital

and reserves

The strength of the Group balance sheet

has been enhanced by the integration

of the former United balance sheet.

Members’ funds increased from £3.3bn

to £3.8bn, 16.1% during the year.

Within the Trading Group, goodwill and

intangibles have grown by £328.3m,

driven by the Pharmacy business where

£196.1m of licences arose on the transfer

of engagement of United, with a further

£166.1m due to other Pharmacy

acquisitions. The largest element of

additions to property, plant and equipment

is refit activity within The Co-operative Food

stores. Working capital levels have fallen

during the year despite the increased trading

of the former United stores and acquisition

activity. The key liquidity ratio is the net

debt/EBITDAP which is earnings before

interest, tax, depreciation, amortisation

and property investment growth (excluding

significant items). At the year-end, net

debt/EBITDAP was 1.5 compared to 0.8 in

2006, with the main reason for the increase

being the merger and increased acquisition

activity without a full year of earnings.

The bank has maintained a strong balance

sheet with consistent robust liquidity and

capital ratios. The Basel 1 risk asset ratio

was 13.5% with a Tier 1 ratio of 8.8%,

substantially higher than the regulatory

requirements laid down under Basel 1 by

the Financial Services Authority (FSA). The

Basel 2 solvency ratio was 143%. The bank

has a very strong retail deposit base with

customer deposits higher than customer

lending, such that its reliance on wholesale

funding is lower than most other banks.

At 12 January 2008, the realistic working

capital within The Co-operative Insurance

long-term business fund, being the excess

of the realistic value of assets over the

realistic value of liabilities, stood at £1,009m

compared to £1,130m at the start of the

financial year. This figure represents a cover

ratio of 11.7 times the risk capital margin

(RCM) of £86m, which is the minimum

capital requirement applicable to the longterm

business fund under the FSA’s realistic

solvency regime. In addition to the realistic

working capital within the fund, a further

£200m of Co-operative Insurance

shareholder capital is allocated to support

the solvency of the long-term business.

The Co-operative Group Annual Report and Accounts 2007 29


Financial review (continued)

Summary of realistic liability results and capital position

as at 12 January 2008 – Insurance

2007 2006

£m £m

Realistic value of assets (net of repo liabilities) of with-profits business (A) 17,667.1 17,546.6

Realistic liabilities (excl. repo liabilities) of with-profits business (B) 16,657.8 16,416.2

With-profits fund working capital (A-B) 1,009.3 1,130.4

Risk Capital Margin (RCM) (C) 86.4 100.6

Excess working capital 922.9 1,029.8

Allocated part of general reserve (D) 200.0 200.0

Total excess working capital 1,122.9 1,229.8

Working capital ratio (A-B)/A 5.7% 6.4%

Working capital ratio including general reserve (A-B+D)/A 6.9% 7.6%

RCM Cover Ratio (A-B)/C 11.7 11.2

RCM Cover Ratio including general reserve (A-B+D)/C 14.0 13.2

Cash flow and borrowings

Summary of cash movement –

Trading and Corporate activities

2007 2006

£m £m

Operating cash flow 92 237

Cash flow from investing activities (184) (170)

Cash flow from financing activities (19) (16)

Net (decrease)/increase in cash and cash equivalents (111) 51

Cash and cash flow equivalents

decreased by £111m during the year,

reflecting significant investment in the

business. Operating cash flow was £145m

down on the previous year as a result of

significant items and corporation tax,

which offset positive trading cash flows.

The significant items relate to the merger

and principally redundancies. Year-on-year

tax cash flows were £79m adverse with the

2007 payment of £65m comparing to a net

receipt of £15m in 2006. Cash outflow from

investing activities was £14m higher than

last year, including £191m of Pharmacy

acquisitions and significant capital spend

on food store refits and brand roll-out.

Summary of cash movement –

Financial Services

2007 2006

£m £m

Operating cash flow (8) 904

Cash flow from investing activities 739 (568)

Cash flow from financing activities (145) 26

Net (decrease)/increase in cash and cash equivalents 586 362

30 The Co-operative Group Annual Report and Accounts 2007


Pension costs

In 2007 there is a £49.8m credit to the

income statement, mainly due to a £26m

credit relating to curtailment gains from

redundancies and a reduction in service

cost of £14m caused by a net increase

in the differential of discount over inflation

rate of 0.2%. The net of expected returns

on pension scheme assets and interest

on scheme liabilities is broadly similar.

The Group has elected under IAS19 to

recognise the full amount of any actuarial

gain and losses through the Statement of

Recognised Income and Expense (SORIE).

The income statement charge or credit is

based on the actuarial assumptions at the

start of the year.

Actuarial gains on liabilities of £41.1m

(all schemes) have arisen from an increase

in the discount rate during the year, offset

by higher inflation. These gains have been

offset by actuarial losses on assets of

£26.3m that relate to lower than expected

asset returns, broadly reflecting the fall in

stock market value during the year. The

above factors in the profit and loss account

and the SORIE have combined to move the

opening surplus in the Group balance sheet

of £287.1m to a closing surplus of £299.7m.

The Co-operative Group Annual Report and Accounts 2007 31


Key performance indicators

Key performance indicators

The Trading Group and Co-operative

Financial Services (CFS) have a common set

of strategic priorities focusing on profitability,

customer and employee satisfaction, and

social and corporate responsibility.

Growing and engaging

membership

Increase in active members

The Co-operative Group is jointly owned and

democratically controlled by its members.

Members of our co-operative enjoy a share

in our profits and can exercise their

democratic control, with equal rights and

benefits. The importance of growing a strong

and committed membership base is integral

to our vision and beliefs and is an integral

part of our brand. Growing engagement with

our customers via membership is a key

element in delivering competitive advantage

and social goals.

Whilst we are committed to growing our

membership base, we recognise the

importance of ensuring that our members

are engaged with The Co-operative. True

engagement will be reflected in both

transactional and democratic participation.

The focus of 2008 is therefore to drive

active engagement from our members. This

will be demonstrated by increasing

participation rates across the diverse range

of businesses offered by The Co-operative

Group, so that individual members transact

with multiple businesses. Inevitably, this type

of activity will also attract new members.

Growth in total points earned

A key element of the brand and membership

programmes has been the introduction of

true dividend where members receive a

share of our profits by way of a cash

dividend, the scale of which is directly

determined by the value of trade that they

have carried out across our various

businesses.

As part of our aim to grow and engage

membership, therefore, we track the total

value of points earned by members through

their trade across our businesses. Members

earn points for every £1 they spend with all

of our businesses, from holidays and food

to insurance and banking. The total points

earned by members are captured within

our dividend system and determine, for each

individual member, the size of their share of

our profits.

The different nature of the markets in which

the Trading Group and CFS operate means

that the measures developed to track their

strategic objectives are slightly different and

therefore are considered separately. The one

exception to this is in the area of growing

and engaging membership.

The remaining measures for CFS and the

Trading Group are set out below.

Trading Group

The key performance indicators (KPIs) of

the Trading Group are constructed around

the key elements of its strategic direction,

focusing on competitive advantage,

commercial success and social goals,

and specifically target the six key aims of:

COMMERCIAL SUCCESS

Growing

& engaging

membership

Growing

business

Growing

customer

loyalty

COMPETITIVE ADVANTAGE

Growing

profit

Growing

corporate

reputation

Growing

colleague

engagement

SOCIAL GOALS

Growing profit

Underlying profit from operations

This is a key internal measure of financial

performance for the Trading Group. The

measure tracks the underlying financial

performance from trading operations, but

excludes the impact of significant items,

property disposals, investment property

growth and items relating to the performance

of the Group pension scheme.

The result of £182m can be reconciled to

the Trading Group segmental analysis of

operating profit on page 74 as follows:

2007

£m

Trading Group operating profit

before significant items 305

Less:

Property disposal gains (50)

Investment property revaluation 16

Pension scheme adjustments (89)

Underlying profit from operations 182

This represents an improvement of 53% on

the 2006 underlying profit of £119m and

was also 9.8% above the target set in the

2007 budget.

Return on Capital Employed

Return on Capital Employed (ROCE) is

the second key measure of growing profit

and commercial success. This provides a

measure of how effective the Trading Group

is at earning a return on the members’

funds that are invested in its business.

The measure is calculated by expressing the

trading profit of the Group as a percentage

of the average capital employed in the

business over the year.

The Group has set itself a target of achieving

a minimum 12% ROCE and this is targeted

to be achieved in 2009. The result achieved

for 2007 was 11.4% compared to 9% in

32 The Co-operative Group Annual Report and Accounts 2007


the previous year, and 0.9 percentage points

higher than the financial target approved

by the Board under the business plans for

2007.

Growing business

Achieving sales growth is clearly a key

element of growing business. The Trading

Group aims to increase its share of its

customers’ spend year-on-year, such that

The Co-operative Group takes an increasing

share of the markets across which it

operates. Within each of the business areas,

like-for-like sales and market share are

tracked and these are referred to in the

business review on pages 8 to 31.

Growing employee engagement

The Group has measured employee

engagement for the last four years, using an

annual survey conducted by an independent

research company. The survey measures the

level of employee engagement whilst also

painting a rich picture of the overall

employee experience.

High levels of engagement are consistently

and reliably related to positive outcomes for

both business performance and employee

experience, and analysis of the Group’s own

data has now delivered strong evidence to

confirm the existence of these relationships.

In 2007 all employees across the enlarged

Group were surveyed. The results showed

that engagement was comparably high

across the two individual former societies.

Over 4,500 managers and teams were

provided with engagement scores and

feedback, to enable a discussion about

the results and to agree actions that

when implemented will further improve

engagement.

The engagement measure is expressed as

a score between 0 and 100 and the 2007

score for the combined society was 74,

maintaining the score achieved in 2006

despite a year of very significant

organisational change.

Growing corporate reputation

There are three key elements to the

corporate reputation monitor that the

Group uses to measure corporate

reputation – Leadership and Reliability,

Public Responsibility and Caring Company.

The measure is based on a survey of our

customers and the index indicates how

we perform relative to other UK companies

including competitors. A score of zero is

the average of the participating companies.

The Co-operative Group scores very

highly on Public Responsibility and we are

targeting improvements in Leadership and

Reliability. The score of 18 achieved in 2007

shows strong improvement on the 2006

score of 4.

Growing customer loyalty

The key measures for growing customer

loyalty are the overall customer satisfaction

index, based on a survey of the customers of

three of our key customer-facing businesses

and the percentage of our members who

cross-trade.

A standard measure of customer

satisfaction has recently been developed

and rolled out across our Food, Pharmacy

and Travel businesses that will allow an

overall Trading Group measure to be

calculated and monitored in future. A key

benefit of growing customer loyalty to the

Group and its brand is to tap the huge

potential for cross-trade. During 2007,

the portion of our members who trade

with more than one business increased to

12.4%, compared to less than 8% in 2006.

Key performance indicators in

incentive plans

The Executive incentive schemes agreed

by the Remuneration Committee employ a

range of measures which are set out in the

Remuneration report on pages 49 to 55.

CFS

The CFS key performance indicators are

derived from the success measures on the

journey towards its aspirational vision ‘to be

the UK’s most admired financial services

business’ and the performance criteria in

staff and Executive incentive schemes.

Profit generation to create

sustainable model

The three key financial performance

measures are:

• Shareholder profitability

• Life and Savings new business profit

• Life and Savings maintenance

expenses.

Profitability is defined as profit before

significant items and tax, primarily for the

Banking and General Insurance businesses,

and the key financial performance measure

in the Group.

In arriving at our profit for incentive

purposes of £150.8m, the reported result

of pre-investment fluctuations of £155.4m

is adjusted primarily for profits of the bank

subsidiary, Unity Trust Bank.

This was marginally below our target

levels of £153.6m primarily because of

improvements in the claims area of the

General Insurance business being offset

by investment write-downs in the Banking

business.

New business profit is the value of new

Life and Savings business written during the

year, allowing for the cost of capital. Our Life

and Savings business is written solely for the

benefit of our Life and Savings customers.

Our aim, therefore, is to provide products

and services at a price that passes the

benefits of writing the business back to

customers. In these circumstances, our

target for 2007 was broadly to break even.

Our 2007 performance was slightly adverse

to our plans due to the number of financial

advisors being below planned levels.

Maintenance expenses are the costs of

servicing activities for the in-force Life

and Savings business. In 2007, our costs

of £77.2m were substantially better than

our targets of £86.3m.

Market-leading colleague

satisfaction

We measure colleague satisfaction using a

core set of questions via our annual survey

of all colleagues, called the ECHO survey

(Every Colleague Has Opinions).

These questions measure three key

elements of colleague opinion:

• Emotional attachment to the

organisation

• Willingness to stay with the

organisation

The Co-operative Group Annual Report and Accounts 2007 33


Key performance indicators (continued)

• Discretionary effort (how much

colleagues are motivated to go

beyond their normal duties to help

the organisation achieve its aim).

Sometimes known as ‘Say, Stay and Strive’,

these are standard measures used across

many businesses and organisations to

measure engagement. They have two clear

advantages as key people measures. Firstly,

because they are used generally across

many other organisations, we can easily

benchmark our organisation’s performance

in engaging colleagues against others.

Secondly, they measure outcomes within

an organisational culture, such as pride and

advocacy. They are, therefore, very difficult

to influence by specific or short-term

activities – for example, if response rates

were used, this could be incentivised in

some areas, skewing the figures. The score

for colleague engagement is determined by

reviewing the responses to the engagement

questions asked in the ECHO survey. The

average proportion of favourable responses

(eg ‘Agree’ or ‘Strongly Agree’) across the

whole of the organisation provides our

Engagement Index, which was 52% in

2007. Our strategic target is to improve

this figure year-on-year until we reach the

High Performance Norm Level of 73% by

2010/11.

Market-leading customer

satisfaction

Our current measurement of overall

customer satisfaction is derived from GFK

NOP’s syndicated Financial Research Survey

(FRS). The FRS is the largest survey in

the market place (with 60,000 Financial

Services customers interviewed each year)

Customers register their satisfaction levels

with their providers at product level on a

seven-point scale: Extremely Satisfied,

Very Satisfied, Fairly Satisfied, Neither/Nor

Satisfied, Fairly Dissatisfied, Very

Dissatisfied, Extremely Dissatisfied, Product

level scores (based on ‘Extremely Satisfied’

and ‘Very Satisfied’ responses) are then

weighted by customer numbers to produce

business unit level scores and an overall

measure for CFS. To ensure a statistically

robust sample per CFS product area, and to

even out any seasonal variations in scores,

a rolling 12 months’ worth of data is used.

A target measure of 60.5% was set at

the start of 2007 against which CFS has

performed well with an out-turn of 62.5%

at the end of December.

The trend of improvement in the overall

CFS satisfaction score has been reflected

in the General Insurance and Retail bank

product categories, although there has been

a trend of decline for our Life and Savings

products. Our General Insurance and Retail

bank business units maintain a gap ahead

of the market (Top Five by Market Share for

General Insurance and Retail bank) while our

Life and Savings business unit has dropped

below the score achieved for the ‘Rest of

the Market’.

Our ultimate aim is to have the UK’s most

satisfied customers.

Market-leading social

responsibility approach

In 2007, CFS measured its progress

towards its goal of a market-leading social

responsibility approach using the following

CFS December 07

‘Extremely Satisfied’

or ‘Very Satisfied’

Market (Top 5 by

Market Share,

Rest of Market)

General Insurance 75.4% 70.7%

Retail bank 79.4% 65.3%

Life and Savings 40.3% 42.9%

three indicators. Two of the three targets set

for attainment in 2007 have been achieved,

and one has been partially achieved.

The first indicator looks at unprompted public

awareness of the bank and The Co-operative

Insurance as financial services businesses

that take social responsibility into account.

This measure derives from an independent

survey of 1,000 members of the general

public, which in 2007 was undertaken in

February. Targets set for 2007 sought a

number one ranking for the bank and

number two ranking for The Co-operative

Insurance. Against these, the bank retained

the number one ranking, with a score of 11%

(2006:12%) and The Co-operative Insurance

fell to number three, recording unprompted

awareness of 3% (2006: 6%). In 2008, the

bank is seeking to maintain its position,

whilst The Co-operative Insurance is seeking

to regain its number two positioning.

The second and third indicators look at

performance in Business in the Community’s

Corporate Responsibility Index and

Environment Index. The indexes are voluntary

self-assessment surveys that benchmark

corporate responsibility and environmental

strategy (and their integration), management,

reporting and performance across a range

of issues. The 2007 targets were to seek a

Platinum (leading group) ranking for CFS by

achieving a score of 95% or more in both

indexes. In the Corporate Responsibility Index

2006, which was published in May 2007,

CFS achieved a Platinum Group ranking

and attained a score of 98%, emerging as

a sector leader. In the Environment Index,

Co-operative Financial Services achieved

a Platinum ranking, attaining a score of

99.8%. In 2008, CFS will be seeking to

maintain its Platinum rankings in both

indexes by achieving a score of 95%

or above.

34 The Co-operative Group Annual Report and Accounts 2007


Data protection

The Group is committed to the protection

of all personal information being processed

and recognises the importance of keeping

all member, employee and customer

information secure and confidential. The

primary aim is to ensure that all parts

of the Trading Group are aware of their

responsibilities to enable them to comply

with the Data Protection Act 1998. The

data protection function is developing a

consistent and co-ordinated management

programme incorporating recognised

industry best practice, based around the

eight principles of the Act. Data Protection is

managed centrally from within the

Operational Risk Department, by a dedicated

Data Protection Manager, with plans to

recruit a Data Protection Support Manager

in 2008.

Business continuity

The Co-operative Group’s Business

Continuity programme works with key

business areas to assess, plan, test and

continually review the processes currently

in place, together with the relevant

documentation to reduce the risk of

disruption in the event of a sudden,

unplanned occurrence that could seriously

harm employees, business operations

and/or reputation.

Using guidance from best practice, Trading

Group business areas are continually

updated to ensure key processes are

risk-assessed together with the associated

IT infrastructure. The results of the

assessments are then captured within the

Business Continuity plans that follow a

specific template which was updated in

2007 to include better reference data.

In 2007, a Business Continuity Analyst

was recruited to work with colleagues in

The Co-operative Food and the members of

CRTG to assess the level of preparedness

in both teams, highlight dependencies and

make recommendations to improve

the resilience of both organisations.

Following the merger, a comprehensive

update of our business continuity

management is being undertaken to

identify any gaps in our processes and

make recommendations in five separate

areas ensuring the best possible awareness

of the solutions and plans in place and

increase the level of preparedness for

critical areas.

Health and safety

The Co-operative Group Health & Safety

Policy confirms the commitment of the

Society and its subsidiaries to comply

with the standards demanded by current

legislation in respect of workplace health

and safety and the Society’s vision and

values. The health and safety objectives

of the Society are to:

• Safeguard the health, safety and

welfare of all employees when they

are at work

• Protect non-employees from any

hazard created by the Society’s

operations.

All management and employees must be

involved in achieving these objectives as far

as reasonably practicable. Health and safety

risk must be assessed within all Society

operations and suitable working standards

developed, implemented and monitored to

minimise such risk.

The prime legislative change underpinning

health and safety-related activity in 2007 and

into 2008, has been the review and, where

necessary, the revision of the Group’s fire risk

assessment policies and procedures in line

with the Fire Safety Reform Order 2005,

which came into force in October 2006.

The Corporate Manslaughter and Corporate

Homicide Act 2007 is a landmark in law. For

the first time, companies and organisations

can be found guilty of corporate

manslaughter as a result of serious

management failures resulting in a gross

breach of a duty of care. The Act, which will

come into force on 6 April 2008, clarifies the

criminal liabilities of companies including

large organisations where serious failures in

the management of health and safety result

in a fatality.

The Co-operative Group Annual Report and Accounts 2007 35


There are so many reasons why it’s

better to shop with The Co-operative

Group – the share of the profits is just

a nice added extra!’

Tina Chapman, Customer, Member


We want doing business

with us to be rewarding…

whether it’s giving something

back to all our members,

or paying a fair price for

goods and services.

In 2007, we gave £19.9m of our profits back to our members

– one of whom was Tina Chapman (pictured left). The share of

the profits is just one of the many reasons Tina likes shopping

at the recently refurbished food store in Portishead.

Membership is our genuine point of difference. It sets us apart

from other retailers – our members have a real incentive to see the

business do well, as it results in a direct economic benefit to them

– a share of our profits.

The Co-operative, which re-launched its membership scheme in

2006, will pay an annual share of profits equivalent to 1.43p for

each point earned across our family of businesses.

The success of the membership scheme is one of the fundamental

drivers of the success of the Group. It helps us achieve our financial

objectives through trade and our wider social objectives through

member involvement.

In 2008 our aim is simple – to encourage our members to use our

family of businesses to meet their needs – whether it’s travel, food

shopping, financial services or healthcare advice. As Group Chair

Len Wardle said at the beginning of this report, ‘It is an incredibly

exciting time to be part of The Co-operative Group and membership

will continue to be at the heart of everything we do.’

Going bananas

The Co-operative Food became the only retailer

in the UK to sell Fairtrade bananas in every store

every day of the year – and sales increased by

a staggering 77% as a result!

Making a difference

The Co-operative Pharmacy’s Community Health

Fund donated over £120,000 to 85 local health

projects, making a truly positive difference to

people’s health in the communities in which

we operate.

Saving the planet

The Co-operative Bank launched think, the

first credit card designed to reward the ethical

consumer, offering a lower rate of interest for

ethical purchases, whilst also helping to save

the rainforest.

The Co-operative Group Annual Report and Accounts 2007 37


Principal risks and uncertainties

Principal risks and uncertainties

Like every business we face challenges and

potential threats, as well as opportunities.

Taking and managing risk is the very

essence of business survival and growth. A

key challenge for any business is to identify

the principal risks and to develop and

monitor appropriate controls. A successful

risk management process balances risks

and rewards and relies on a sound judgment

of their likelihood and consequence.

Our approach to risk management

The Group is a complex mixture of financial

services and consumer-facing businesses.

The risk management process has been

defined for several years requiring an

assessment of risks in the categories of

external, strategic, operational, information,

people and financial.

Each business faces a variety of risks that

may compromise its performance and its

ability to meet its strategic objectives. Our

risk management committees play a leading

role, monitoring our overall risk profile and

regularly reporting to the Management

Executive and Group Board through the

Audit Committee. In addition, the Executive is

responsible for providing clear guidelines on

what the Group considers to be acceptable

levels of risk.

These guidelines seek to enable employees

throughout our businesses to use their

expertise both to identify risks that could

undermine our performance and to devise

ways of bringing them within acceptable

levels. Where we identify risks that are not

acceptable, we develop and agree action

plans with clear allocation of responsibilities

and timescales for completion. We try to

ensure that management and the Risk

Management Committees monitor the

progress of our action plans. Reports of key

risks are made to the Risk Management

Committees who report at least four times

a year to the Group Audit & Risk Committee.

Risks to be managed

The Group operates in regulated financial

services markets and is subject to significant

governmental regulation. As a retailer,

especially one in the field of food retailing

and production, pharmacy and funerals,

the Group is subject to competition reviews,

health and safety and a variety of legislation.

This relates not only to the products we buy

and sell, but also to virtually every area of

our business, from packaging, labelling,

pharmacy dispensing and food hygiene.

Regulatory changes may occur at any time,

which may have cost implications for the

Group or may otherwise adversely affect

our business.

In addition to the regulations mentioned

above, our business is subject to

increasingly stringent laws relating to

pollution, health and safety, packaging,

labelling, product safety and protection

of the public and the environment. Failure

to comply with relevant laws could have

damaging consequences for our business,

including fines and harm to our reputation.

1. Changes and trends in consumer

spending

Changes and trends in retail and consumer

spending and preferences in our markets

can have a substantial impact on

performance of the businesses operated

by the Group. We seek to understand and

respond to the needs of our customers,

offering a broad appeal to all customers in

our different markets in order to minimise

the potential adverse impact of economic

downturn.

2. Damage to our reputation or brand

Our continued success depends on our

reputation and the strength of our ethical

stance, brand and membership. Anything

that could damage that reputation – for

example, a failure in maintaining our ethical

policies or an issue in product quality and

safety – could impact on the future size of

our customer base and hence financial

performance. An active brand reinvigoration

programme is currently underway which will

create a more unified customer experience

across the different businesses. We monitor

our corporate reputation and brand

standards as part of the Group’s Balanced

Scorecard measurement.

3. Competition and regulation

The Group operates in highly competitive

and strongly-regulated UK environments

with significant attention from the OFT

and Competition Commission. The Group

competes with a wide range of retailers and

financial services providers of varying sizes.

Failure to compete effectively on such areas

as product range, pricing, service and quality

could impact on the Group’s financial

results. The Group seeks to work positively

with the regulators and also ensure we

remain competitive in the key areas that

customers judge us.

4. Operational problems

Business continuity sets out to take the

appropriate steps to minimise the risk

of disruption in the event of a sudden,

unplanned occurrence that could seriously

harm employees, business operations

and/or reputation.

Embedding continuity into the day-to day

functions continues to be a significant

challenge for the team to ensure the safety

and security of people, prevent significant

business disruption and deliver an

appropriate level of business continuity

awareness throughout the Group.

If major disruption occurred – for example,

a serious interruption to the supply of food

to our stores or extreme equipment failure

– our results and cash flow could be

adversely affected.

The Business Continuity team works with

colleagues across all business areas to

deliver the business continuity programme

and increase levels of preparedness for

critical areas.

38 The Co-operative Group Annual Report and Accounts 2007


5. Pension risks

The Group’s pension arrangements are

an important part of our employees’ overall

benefits package and regarded as a key

element in the attraction and retention of

our people. Prior to the merger with United

Co-operatives, the Group operated a single

defined benefit pension scheme based on

career average earnings (PACE). Postmerger,

the Group also operates a number

of final salary schemes, but these are closed

to new members.

Since the implementation of IAS19 there

is a risk that the accounting valuation will

give rise to a deficit within the financial

statements if returns on corporate bonds

are higher than the investment return on

the pension schemes’ assets.

The Group and the schemes’ trustees

continue to carefully monitor the pension

risks – taking action when necessary to

adjust contributions to the schemes and

revising the schemes’ investment strategy

to mitigate risks.

6. Value of the property investment

portfolio

The capital investment property value

is £386m and has seen significant rises

in value over the last few years. However,

property values have recently come under

pressure, particularly commercial property

which has seen a reduction in value. Should

there be a property market downward

adjustment requirement on the Group’s

portfolio, then under IFRS standards any

reduction in property values will flow directly

to the income statement.

The investment portfolio is made up

of quality marketable properties with

a geographical and sector spread and

remains under continuing review.

7. Change management

Change management is a key business

activity for all large organisations: the

challenge is balancing the degree of change

necessary to achieve business objectives

with the organisation’s capacity for change.

The Group is currently undergoing major

change programmes with the merger

integration in the Trading Group and a

large transformation programme in CFS.

The Group seeks to minimise risks from

these changes by adaptation of discipline

project and programme management

processes, use of experienced resources

and close monitoring by Executive

Management.

Financial Services risks

CFS operates in regulated markets and is

subject to significant government regulation.

The bank, CIS and CISGIL boards are

responsible for approving entity strategy,

their principal markets and the level of

acceptable risks articulated through their

respective statements of risk appetite.

The boards are also responsible for overall

corporate governance which includes

ensuring that there are adequate systems

of risk management and that the level of

capital held in each entity is consistent with

the risk profile of the respective business.

Board Committees and Senior Management

Committees oversee and challenge the risk

management process, identifying the key

risks facing each business and assessing

the effectiveness of planned management

actions.

Market risk

Market risk is managed separately in

respect of CIS, CISGIL and bank entities.

CIS and CISGIL market risk arises from

the mis-matching of assets and liabilities.

CIS with-profits policyholders have an

expectation that a proportion of their

savings will be invested in equities and

property to maximise returns and provide

some protection of their savings against

future inflation. However, with-profits policies

have traditionally also included a minimum

guaranteed benefit to provide a minimum

return to the policyholder, which requires

investment in a substantial proportion of

fixed-interest securities. These conflicting

investment objectives inevitably lead to a

degree of mis-matching of assets and

liabilities, and, as a result, market risk is a

major potential risk to the solvency of the

long-term business fund.

There is no longer any equity exposure in

the CISGIL fund, and this has reduced the

extent of market risk faced by the General

Insurance business. However, there

remains the risk that interest rates increase

unexpectedly with an adverse impact on the

market value of assets available to meet

General Insurance liabilities.

Bank market risk arises from the effect

of changes in market prices of financial

instruments, on income derived from the

structure of the balance sheet, execution

of customer and inter-bank business and

proprietary trading. The majority of the risk

arises from changes in interest rates as

the bank does not trade in equities or

commodities and has limited foreign

currency activities.

Credit risk

Credit risk arises from exposure to the risk

of loss if a counterparty fails to perform its

financial obligations to CFS.

For CIS and CISGIL, this includes issuers of

corporate bonds, counterparties to financial

transactions and reinsurers.

For the bank, this could arise out of

exposure to individuals, corporates, financial

institutions and sovereigns. Reasons for

bank counterparty default include general

economic or sector-specific downturns and

structural changes such as increased

personal indebtedness.

Insurance and business risk

Insurance risk refers to fluctuations in the

timing, frequency and severity of insured

events relative to the expectations of the

firm at the time of underwriting.

The principal risk that CIS and CISGIL

face under its insurance contracts is that

the actual claims and benefit payments

exceed the carrying amount of the insurance

liabilities.

In CIS, a significant potential risk is of

increases in the cost of annuities in

payment, the guaranteed benefits under

deferred annuity contracts and Guaranteed

Annuity Options (GAOs) costs on personal

pensions arising from further improvements

to pensioner longevity above those assumed

in provisioning.

In CIS there is a persistency risk, where

more policies than expected reach their

investment guarantee dates resulting in

an increase in the expected costs of

guarantees. In particular, there is a risk that

more personal pension policyholders reach

their normal retirement date which is the

date on which GAOs become available.

There is also the risk that profits from nonprofit

business fail to materialise as a result

of more policies lapsing than expected.

The Co-operative Group Annual Report and Accounts 2007 39


Principal risks and uncertainties (continued)

Expense risk also exists in CIS. Although

most of the long-term business expenses

can be charged directly to policyholders,

there is a financial effect from higher

expense charges to asset shares leading

to a reduction in asset shares and so an

increase in the cost of providing guaranteed

benefits. In addition, for products written on

fixed terms or on a fixed-charge basis, such

as non-profit business and stakeholder

pensions, higher expenses will result in

reduced profitability.

In CISGIL, insurance risk is made up of risks

that arise in respect of claims that have

already occurred and for which reserves are

already held (reserving risk) and of claims

that are yet to occur (underwriting risk).

The key insurance risks to CISGIL are

the risk that there is a natural catastrophe

which is above the limit of the reinsurance

programme on the property account, and

the risk that motor bodily injury claims are

worse than expected.

Business risk arises from changes to the

bank business, specifically the risk of not

being able to carry out the bank’s business

plan and desired strategy, including the

ability to provide suitable products and

services to customers. In a narrow sense

business risk is the risk that the bank suffers

losses because income falls or is volatile

relative to the fixed-cost base. However, in

a broader sense it is the bank’s exposure

to a wide range of macro-economic,

geo-political, industry, regulatory and

other external risks.

Operational risk and business continuity

Operational risk is defined within CFS as

the risk of loss resulting from inadequate

or failed internal processes, people and

systems, or external events. This

encompasses the effectiveness of risk

management techniques and controls

to minimise these losses.

Examples of such include internal and

external fraud, loss of key personnel, system

capacity issues or program failure, process

failures affecting payment settlement and

external events over which CFS has limited

controls such as terrorist attack, floods and

contagious disease.

Operational risks are identified, managed

and mitigated through ongoing risk

management practices including risk

assessments; formal internal control

procedures; training; segregation of duties;

delegated authorities; and contingency

planning. Operational risks are formally

reviewed on a regular basis. Significant

operational risks are regularly reported to

Executive Directors, the Operational Risk

Committee, and the Risk Management

Committee (a formal Board subcommittee).

These meet regularly to monitor the

suitability of the risk management

framework and management of significant

risks within CFS.

Business continuity is managed from

within the Operational Risk team and sets

out to take appropriate steps to minimise

the risk of disruption in the event of a

sudden, unplanned occurrence that could

seriously disrupt customer service, harm

employees, business operations and/or

reputation.

CFS also has a corporate insurance

programme to transfer specific risks to

insurers as part of its risk management

approach.

Change management risk

Projects and programmes involve change

to processes, systems and people within

defined costs and timescales to deliver

pre-determined benefits. Projects therefore

inherently carry some degree of risk:

• Failure to deliver the expected changes

to time/cost or quality

• Failure to realise expected benefits,

implementation of the projects failing

or impacting on normal business

operations

• Increasing the risk profile of the

business into which change has

been implemented through weakened

controls or inefficient processes.

Identification and management of changerelated

risks is therefore integrated into

day-to-day management of projects and

programmes and is fully embedded within

the Risk Management Framework.

Effective governance structures have

been established to evaluate the capacity

and prioritisation of the change portfolio.

Reviews of each programme are undertaken

on a regular basis, considering resource

requirements, progress and risks.

A Business Implementation Management

function has been established in Change

Management to manage the release of

change and provide clear sight of

implementation dependencies between

programmes.

Liquidity risk

Liquidity risk arises from the timing of cash

flows generated from CFS’ assets, liabilities

and off-balance sheet instruments. Treasury

and Investment Management manage CFS’

entities liquidity with guidelines laid down by

the Asset & Liability Committee (ALCO) and

in accordance with the standards established

by regulators. For further details refer to Note

52 on page 135.

Reputational risk

CFS reputational risk is the current or

prospective risk to earnings and capital

arising from adverse perception of CFS

or another member of The Co-operative

Group’s reputation on the part of customers,

counterparties, shareholders, investors,

regulators or other stakeholders.

40 The Co-operative Group Annual Report and Accounts 2007


UK combined code on

corporate governance

The Co-operative Group is an Industrial and

Provident Society that is jointly owned and

democratically controlled by its members.

It is unusual amongst other UK consumer

co-operatives in that it has both corporate

members (ie independent retail co-operative

societies) and individual members. As a

co-operative society, it is not mandatory for

The Co-operative Group to comply with the

combined code; however, we are committed

to the highest standards of corporate

governance and recognise that good

governance helps the business to deliver

its strategy, strengthen member confidence

and safeguard the long-term interests of

the Society.

The Society also adheres to a Corporate

Governance Code of Best Practice that

applies to consumer co-operatives

within the UK and was published by

Co-operatives UK in May 2005. The Society

will be reporting compliance on this direct to

Co-operatives UK , as appropriate. Full copies

of the report will be made available on

request from the Group Secretary.

The following paragraphs describe the key

governance mechanisms operating within

the Society, through which the Group aims

to conform to the spirit of the combined

code in a manner which recognises its

unique member-owned and democratically

controlled structure.

Constitutional Review

The merger of The Co-operative Group with

United Co-operatives in July 2007 provided

some challenges but also an opportunity to

create an appropriate governance structure

which would serve the new enlarged Society

into the future. Therefore, immediately

following the merger, work began on a

Constitutional Review. This work is ongoing

and many of the arrangements described

below have been established for the interim

period until the Constitutional Review is

complete.

Board composition

and independence

The Board currently comprises 33 nonexecutive

directors, 25 representing the

individual members and eight representing

the corporate members. This is a transitional

arrangement and the Board size will reduce

in 2009. There are four professional nonexecutive

directors serving on the boards of

Co-operative Financial Services (CFS), The

Co-operative Bank (the bank), Co-operative

Insurance Society (Co-operative Insurance)

and CIS General Insurance (CISGIL) who are

appointed by the Group Board and who may

be invited to attend the Group Board

meetings as appropriate.

The corporate member directors are elected

by the corporate member societies. The

number of votes of each corporate member

is based on their level of trade with the

Society. The individual membership structure

comprises nine regions, each represented

by a regional board which is elected from

members within the region. The 25 directors

representing the individual members are

elected from the regional boards.

Each director is elected for a three-year

term. Elections have been suspended until

the conclusion of the Constitutional Review

when all elected members will step down

and elections for the new structures will

be held.

Board directors are expected to exercise

their judgement when making decisions in

the best interests of the Society as a whole,

mindful of their responsibilities to members

and other stakeholders. Directors are

required to declare any conflicts of interest.

In the case of the directors elected by

corporate members, as explained above,

those corporate members enter into material

transactions with the Society. In addition, the

corporate members carry out similar trading

activities to the Society; whilst this is

inherent in the federal role and constitution

of the Society, conflicts of interest are

declared where appropriate during Board

business and necessary safeguards are put

in place.

The Board believes that all of its directors

make valuable contributions to the operation

of the Society. There is no senior independent

director as the Group Board is wholly made

up of non-executive directors. It is the

Board’s view that this role is not appropriate

in the Group Board.

The role of the Chair

and Chief Executives

The Chair, Len Wardle, is elected by the

Board and is a non-executive. He has

primary responsibility for leading the Board.

The Chief Executives, Peter Marks (Trading)

and David Anderson (CFS), have executive

responsibilities for the operations of the

Society and are accountable to the Board.

Clear divisions of accountability and

responsibility exist, have been approved

by the Board and operate effectively for

these positions.

Board responsibilities

The Board meets at least 11 times a year

and annually devotes two days, with senior

executives, to performance and long-term

planning, giving consideration both to the

opportunities and risks of future strategy.

The responsibility of the Board is to direct

the business of the Society, in particular:

• Ensuring that the Society’s affairs are

conducted and managed in accordance

with its purpose and objects as set out

in its rules, and in accordance with the

best interests of the Society and its

individual and corporate members

• Determining the vision and strategy

of the Society in consultation with

the Chief Executives and their

management teams

The Co-operative Group Annual Report and Accounts 2007 41


UK combined code on corporate governance (continued)

• Overseeing the Chief Executives and

their management teams in the dayto-day

management of the business

of the Society.

In addition, the Board is responsible

for setting strategic aims, monitoring

performance against key financial and nonfinancial

indicators, overseeing the system

of risk management and setting standards

in governance matters. The Board also

receives regular reports from the boards

of its key subsidiaries, including those of

its financial services businesses.

All directors have access to the services

of the Society Secretary who is subject to

appointment and dismissal by the Board.

The Society provides insurance cover and

indemnities for its directors and officers.

Board committees

The Board governs through clearly identified

Board committees to which powers are

delegated. These are the Audit & Risk

Committee, Performance Committee,

Remuneration & Appointments Committee,

Values & Principles Committee and Chairs

Committee. Each committee is properly

authorised under the constitution of the

Society to take decisions and act on behalf

of the Board within the guidelines and

delegations laid down by the Board. The

Board is kept fully informed of the work of

these committees. Any issues requiring

resolution will be referred to the full Board.

A summary of the operations of the principal

committees is set out below and details

of membership are included in the table

on page 44.

Audit & Risk Committee

The Committee comprises 11 members

including one member who possesses what

the Smith Report describes as recent and

relevant experience. The description of the

main role and responsibilities includes the

extent of compliance with the principal

recommendations of the Smith Report. The

Audit & Risk Committee reviews and reports

on internal controls in accordance with the

Co-operatives UK Code of Best Practice and

the Turnbull guidance, insofar as applicable

to an Industrial and Provident Society.

Under its terms of reference, the Committee:

• Monitors the integrity of the Society’s

financial statements and any formal

announcements relating to the

Society’s performance, together with

any significant financial reporting

judgements contained in the

financial statements

• Monitors the effectiveness of the

external audit process and makes

recommendations to the Board

in relation to the appointment,

reappointment and remuneration

of the external auditor

• Ensures that an appropriate

relationship between the Society and

the external auditor is maintained,

including reviewing non-audit services

and fees

• Reviews annually the Society’s systems

of internal controls and the processes

for monitoring and evaluating the risks

facing the Society

• Reviews the effectiveness of the Internal

Audit function and is responsible for

approving, upon the recommendation

of the Chief Executive, the appointment

and termination of the head of that

function

Annually reviews its terms of reference

and recommends to the Board any

changes required as a result of the

review.

The Committee meets with Executive

management, as well as privately with the

external auditor. The Chair meets privately

with the Head of Internal Audit.

Remuneration & Appointments

Committee

The Committee comprises 13 members

and is chaired by the Group Chair. The

Committee’s role in respect of Executive

management is to determine remuneration

and employment policy, oversee contractual

arrangements, review salaries, approve

incentive schemes and make any payments

under such schemes, and recommend

appointments to the Board.

In respect of directors, the Committee

makes recommendations to the Board on

director remuneration, which in turn makes

recommendations to members in a general

meeting for a decision. The Committee

also makes recommendations on the

appointment of independent professional

non-executive directors and appointments

to Board committees. The Committee is

supported by the CFS Remuneration &

Appointments Committee in ensuring

consistency, where appropriate, across

the wider Group.

The Committee met 10 times during

the year and its report can be found

on pages 49 to 51.

Values & Principles Committee

The Committee comprises 16 members and

is responsible for developing and monitoring

the Society’s strategies on membership,

community and corporate social

responsibility within a co-operative context.

Board training and development

Each director has undergone a skills audit

to identify their individual strengths and

areas of development. Training is offered

on a regular basis to strengthen skills on

all elected bodies. Additionally all newly

appointed directors receive an induction to

familiarise them with the Board processes

and the responsibilities of directorship.

A Board Development Plan, including

individual director appraisals and training,

42 The Co-operative Group Annual Report and Accounts 2007


will be implemented at the conclusion

of the Constitutional Review.

Membership involvement

Members of the Society exercise

democratic control by becoming involved

in the democratic structures themselves

or by participating in elections.

The Society regularly communicates with

active members using magazines, mailings

and the web. Additionally, the Society

encourages members to share their views

and influence policies and standards

through local area meetings, web chats

and surveys.

Internal control

The Group Board has overall responsibility

for the Society’s system of internal controls

which aim to safeguard the Society’s assets,

ensure that proper accounting records are

maintained and that the financial information

used within the business and for publication

is accurate, reliable and fairly presents the

financial position of the Society and the

results of its business operations.

The Board is also responsible for reviewing

the effectiveness of the system of internal

controls. This has been in place for the year

under review and is regularly reviewed by

the Board. The system is designed to

provide reasonable assurance of effective

operations and compliance with laws and

regulations, although any system of internal

controls can only provide reasonable, not

absolute, assurance against material misstatement

or loss, and can only mitigate

rather then eliminate the risk of failure to

achieve business objectives.

Since the publication in September 1999

of the Turnbull Report, ‘Internal Control:

Guidance for Directors on the Combined

Code by the Institute of Chartered

Accountants in England and Wales’, the

directors have continued to review the

effectiveness of the Society of non-financial

as well as financial controls, including

operational controls, risk management and

the Society’s high level internal control

arrangements.

The Society has adopted an internal control

framework that contains the following key

elements.

Control environment

The Society’s control environment is

designed to create an attitude of taking

acceptable business risk within clearly

defined limits. The control environment

includes:

• An organisational structure with clear

lines for responsibility, delegation of

authority and reporting requirements

Co-ordinated activity across the whole

Society through Executive meetings

that include Executives from Trading

and Corporate

• Clearly defined policies for capital and

revenue expenditure. Larger capital and

revenue expenditure requires Board

authorisation

Comprehensive systems of financial

reporting. The annual budget and longterm

plans of the Society and of each

Division are reviewed and approved by

the Board. Results are reported against

budget and prior year. The relevant

Executives consider any significant

changes and variances, and remedial

action is taken where appropriate.

Group tax, treasury and insurance

activities are co-ordinated centrally

• A Code of Business Conduct covering

relations with customers, members,

employees, suppliers, community

and competitors. The code provides

procedures to allow any employee

to report, in confidence, suspected

serious malpractice

• Internal audit and compliance functions

that review the system of internal

control, including a financial control

self-assessment process.

Risk management

The Group Board and Management

Executive teams have the primary

responsibility for identifying the key

business risks facing the Society.

The Group operates a risk management

process that identifies the key risks facing

each business. Each business has a risk

register which identifies the likelihood and

impact of those risks occurring and the

actions being taken to manage them. Risk

assessments are updated on a quarterly

basis and reported to the appropriate

Risk Management Committee and Audit

Committee. The information is consolidated

for the Risk Management Committee which

provides reports, at least twice a year, to the

Audit & Risk Committee on how the key

risks are being managed.

The Group’s Risk Management Committee

has responsibility for establishing a coherent

framework for the Group to manage risks.

The object of the Committee is to assist the

Board in carrying out its responsibility to

ensure effective risk management and

a system of control. The specific

responsibilities of the Committee are

currently as follows:

• Defining and maintaining the policy,

methodology and standards for risk

management

• Identification of significant risks

affecting the Group as a whole,

communicating these to the businesses

and corporate departments to ensure

progress and action plans to address

the identified risk

• Oversight of the business risk

management committees, including

ensuring that progress is made on

action plans reported

• Ensuring the systems of risk

management are operating

throughout the year

• Providing regular reports to the

Board and Audit & Risk Management

Committee that explain the significance

and likelihood of the risks and the

necessary actions being taken by

management to manage those risks.

Following the merger there have been

changes in management attendees at the

Risk Management Committee which now

comprises the Chief Executive, the Chief

Financial Officer, the Group Secretary, the

CFS Chief Financial Officer, the CFS Director

of Capital, Pricing & Risk, Director of

Strategic Planning and Change (Secretary to

Committee), Director of Group Pensions, the

Head of Ethics and Sustainable Development

and the Group Head of Internal Audit. The

Committee met four times during 2007.

The Co-operative Group Annual Report and Accounts 2007 43


UK combined code on corporate governance (continued)

Audit & Risk Committee

Graham Bennett

Allen Brett Appointed 29 July 2007

Duncan Bowdler Appointed 29 July 2007

Doug Fletcher Appointed 20 June 2007

John George

John Macbeth Appointed 29 July 2007

Terry Morton

Brian Rees

Ben Reid

Allan Smith

Graham Stow

Remuneration & Appointments Committee

Graham Bennett

Allen Brett Appointed 29 July 2007

Simon Butler

Bob Burlton

Patrick Grange Appointed 29 July 2007

Bill Hoult

Bob Jamieson Appointed 20 June 2007

Frank Jones Appointed 20 June 2007

Ben Reid

Kathryn Smith

Robin Stewart

Len Wardle

Steve Watts

Values & Principles Committee

Joyce Baruch Appointed 29 July 2007

Graham Bennett

Simon Butler

John George Appointed 20 June 2007

Frank Jones

Ian Mason Appointed 29 July 2007

Bertie Murray

Russell Porteous

David Pownall Appointed 29 July 2007

Alban Rees

Ben Reid

Allan Smith

Kathryn Smith

John Smith Retired 20 June 2007

Jeanette Timmins

Len Wardle

Steve Watts

44 The Co-operative Group Annual Report and Accounts 2007


Control procedures

The Society’s control procedures are

designed to ensure complete and accurate

accounting for financial transactions and to

limit the potential exposure to loss of assets

or fraud.

Manuals are maintained in relation to the

Society’s Rules, accounting policies and

procedures, insurance, employees and

Code of Business Conduct. These manuals

are issued to appropriate management who

are trained in the procedures.

Information and communication

Communication takes place with all key

stakeholders though a variety of media

including the Group’s Sustainability Report.

Employees receive and provide information

on strategy and objectives though their

reporting lines and a formal performance

measurement process. Newsletters,

magazines, bulletins, events and electronic

media communicate other information.

Monitoring

The operation of the system of internal

control is the responsibility of line

management. It is subject to independent

internal audit review and, where appropriate,

by the Society’s external auditors and

external regulators. The Audit & Risk

Committee, on behalf of the Board,

reviews the reports of the Society on internal

control. Full details of the operation of the

Committee can be found on page 42.

A key part of the process in assessing

internal control by the Audit & Risk

Committee is an annual ‘letter of assurance’

process by which the Executive confirm they

have assessed the effectiveness of their

systems of internal financial and nonfinancial

controls, their compliance with

Society policies (including those relating

to safety, health and the environment),

local laws and regulations (including the

industry’s regulatory requirements) and

reporting any key control improvements

required. The outcome of these letters is

reported to the Audit & Risk Committee. The

directors are then able to review the system

of internal controls and believe it complies

with the Turnbull Report guidance. The

Committee considers that there have been

no weaknesses that have resulted in any

material losses or contingencies that have

not been disclosed.

External audit

One of the duties of the Audit & Risk

Committee is to make recommendations

to the Board in relation to the appointment

of the external auditors. A tender for the

external audit of the Society was undertaken

in 2003 at which KPMG Audit Plc was

successful. Consideration of whether a

further tender is necessary was scheduled

to take place in 2008 but following the

merger will be deferred until 2009.

Details of the amounts paid to the external

auditors during the year for audit and other

services are set out in the notes to the

financial statements (see Note 3 on

page 78).

The Committee has put in place safeguards

to ensure that the independence of the audit

is not compromised, including a policy on

the conduct of non-audit services from the

external auditor. The external auditors are

permitted to provide some non-audit

services that are not, and are not perceived

to be, in conflict with their independence.

At each meeting, the Committee receives

a report providing details of assignments

and related fees carried out by the external

auditors, in addition to their statutory audit

work. The pre-approval of the Committee

is required for services above certain

thresholds determined by the Committee.

In addition, the following assignments are

prohibited from being performed by the

external auditors:

• Book-keeping or other services related

to the accounting records or financial

statements

• Financial information, systems design

and implementation

• Actuarial services

• Internal audit outsourcing services

• Management functions or human

resources

• Any other services that the Audit & Risk

Committee may determine.

The performance of the external auditors is

regularly monitored to ensure it meets the

needs of the Society and the results are

reported to the Committee.

Internal Audit

Internal Audit is an independent appraisal

function which derives its authority from the

Board through the Audit & Risk Committee.

Its primary role is to provide reasonable and

objective assurance about the adequacy

and effectiveness of the Society’s financial

control framework and risk management.

Internal Audit seeks to discharge the

responsibilities set down in its charter by

reviewing the processes which ensure that

business risks are effectively managed;

reviewing the financial and operational

controls which help to ensure compliance

with corporate objectives, policies and

procedures and external legislation (other

than those relating to safety, health and

the environment and product regulatory

compliance, which are the responsibility

of other audit functions); and, on an ad hoc

basis, reviewing that value for money

is obtained.

Internal Audit also acts as a source of

constructive advice and best practice,

assisting senior management with its

responsibility to improve the process by

which business risks are identified and

managed and to report and advise on

the proper and effective use of resources.

Statement on going concern

After making all appropriate enquiries,

the directors have reasonable expectation

that the Society has adequate resources

to continue in operational existence for the

foreseeable future. For this reason, they

continue to adopt the going concern basis in

preparing the Society’s financial statements.

The Co-operative Group Annual Report and Accounts 2007 45


Report of the Board of Directors

The directors submit their report, business

review and audited financial statements,

for the year ended 12 January 2008.

Business review

A full business review of the development

and performance of the Society and its

operating subsidiaries during the financial

year are set out on pages 8 to 31 of this

report. This review also sets out the key

financial and non-financial performance

indicators on pages 32 to 34. In addition,

the principal risks and uncertainties facing

the Society are set out on pages 38 to 40.

Note 51 of the financial statements on

page 127 provides details of the Society’s

principal subsidiaries and the nature of each

organisation’s business.

Principal activities

The major activities of The Co-operative

Group include food retailing, healthcare,

funerals, travel and other services. It is

the parent organisation of Co-operative

Financial Services, whose operating

subsidiaries – The Co-operative Bank Plc,

Co-operative Insurance Society Ltd and

CIS General Insurance Ltd – provide an

extensive range of banking and insurance

products.

Changes to the Board

The names of the current members of

the Board, their biographies and details

of length of service are set out on pages

4 and 5. As a result of the merger with

United Co-operatives, the following seven

directors were appointed to the Board on

29 July 2007:

Joyce Baruch

David Pownall

Allen Brett

Ian Mason

Duncan Bowdler

Patrick Grange

John Macbeth

All were previously directors of United

Co-operatives and now represent the

United region.

Peter Marks retired from the Board on

29 July 2007 due to his appointment as

Chief Executive of the enlarged Society.

Results and distributions

The profit before taxation was £149.9m

(2006: £327.5m). A more detailed review

of the business is contained in the business

review on pages 8 to 31.

The directors recommended the following

distributions in respect of 2007 profits: a

payment of £24.9m to corporate members

at the rate of 206p per £100 of qualifying

purchases from the Society during the year

to 12 January 2008; individual payment

of £39.9m; community distributions of

£10m; and employee distribution of

£19.9m based on employee membership

of the Society. This was in addition to the

interim dividend of £5.0m, which was

approved at the half-year meeting in

October 2007.

Directors and their interests

Due to the nature of the Society, directors

are elected through the democratic process

by both individual and corporate members.

Directors elected by individual members

hold shares directly in the Society, whilst

those directors elected by the corporate

members have an interest in the Society

by virtue of their respective corporate

members’ shareholdings. It is not

considered appropriate to detail the

interests of each director in this report as

they are not material. As a key role of the

Society is to provide a federal service to its

corporate members, material transactions

are conducted with these members, some

of whom are represented on the Board.

Other than this, no director had a material

interest at any time during the year in any

contract of significance, with the Society

or any of its subsidiary undertakings.

Directors and Officers’

Indemnity Insurance

The Society maintains appropriate directors’

and officers’ liability insurance cover in

respect of legal action against its directors.

The arrangements for this were reviewed

during the year.

Employees

The Society and its subsidiary undertakings

employed 81,385 persons at 12 January

2008 (2006: 65,006) and their aggregate

remuneration for the year was £1,191.2m

(2006: £1,033.2m).

46 The Co-operative Group Annual Report and Accounts 2007


Provision of information

and consultation with, and

involvement of, employees

The Society has a long-established policy

to inform and consult its employees and

trade union representatives about business

issues and matters that affect them at work.

Over time, a flexible framework has been

constructed, through which information is

shared with, and opinions sought from,

employees and trade union representatives.

Internal communications are designed to

ensure that employees are well informed

about the business; these include a staff

magazine called Us and a management

magazine, mag:ma.

Developing people

Talent within the Society is a critical success

factor contributing to how the organisation

achieves as a business. The Society is

moving towards providing all employees with

the skills and knowledge to perform their job

and work together to constantly improve

performance. The Society will ensure that

there is a shared understanding and

agreement on career planning and personal

development tailored to meet the challenges

of the future.

Managing and rewarding

performance

The Society recognises that one of the

keys to success is objective and effective

performance management. Good

performance is not solely about what is

achieved but also about how it is achieved.

Diversity

The Society’s Diversity Policy underpins its

commitment to valuing the attributes and

experiences of every individual. The Diversity

Policy is available to all staff and further

guidance and information on disability

issues is available through the Human

Resources function and on the Society’s

intranet.

The Society aims to employ people who

reflect the diverse nature of society, and

seeks to provide easy access to goods,

services and facilities for customers,

employees and members. The Society is a

member of the Employers’ Forum on Age;

the Employers’ Forum on Disability; the

Employers’ Forum on Belief; Opportunity

Now for Gender equality; Race for

Opportunity and Stonewall for sexual

orientation.

On age legislation, the Society has worked to

ensure that all policy and practice was fully

compliant with the Government’s new age

discrimination legislation, as at October

2006. The Society’s approach has been to

position itself as a best practice employer,

including the removal of the retirement age

for employees.

The Society is currently positioned at gold

status in the external Opportunity Now

benchmark for gender equality and silver

status in the Race for Opportunity (RfO)

benchmark and additionally won the RfO

Business Impact award for expansion into

ethnic minority funerals. The Society has

also received recognition in its employment

of gay, lesbian and bisexual employees by

remaining the only retailer in the Stonewall

Top 100 Companies for three years running

and currently positioned at 29th place.

Employees with disabilities

The Society has included within its Diversity

Policy provisions to consider employment

applications from people with disabilities

and to match vacancies with an individual’s

particular aptitudes and abilities.

Supporting customers

with disabilities

The programme to ensure that we

were compliant for the introduction of

the Disability Discrimination Act Part III in

providing goods and services to customers

was satisfactorily completed. A review is

now underway to ensure that compliance

is being maintained at the right level.

Corporate responsibility

and the environment

The sustainable development section can

be found within the business review on

pages 8 to 31. In addition, the Society’s

Sustainability Report, which will be

published towards the latter half of the

2008 financial year, describes how the

Society manages its social, ethical and

environmental impact.

Political and charitable donations

In 2007, an overall financial contribution of

£646,103 was made to the Co-operative

Party in respect of the annual subscription

and support for Party Councils. This includes

payment of £546,377 by The Co-operative

Group and a further £99,726 made directly

by United Co-operatives prior to the

amalgamation. These donations have been

reported by the Co-operative Party to the

Electoral Commission in accordance with its

reporting obligations as a registered political

party under the Political Parties, Elections

and Referendums Act 2000. An in-kind

donation of £1,250 was also made by the

Group to the Party, reflecting office space

and use of telephone. In addition,

miscellaneous expenditure was incurred

in support of the Labour Party at a

constituency and regional level, amounting

to £4,829.50. This expenditure is approved

by the Group’s Regional Values & Principles

committees.

Like many other businesses of a comparable

size, The Co-operative Group undertakes an

annual programme of activity designed to

showcase our corporate credentials to a

wide audience of political opinion formers.

This work is led by the in-house Public

Affairs team. The most significant financial

element of this activity is the Group’s

presence at party political conferences

and in 2007, the Group was represented

at the conferences of the Co-operative

The Co-operative Group Annual Report and Accounts 2007 47


Report of the Board of Directors (continued)

Party, Liberal Democrats, Labour Party, the

Conservative Party and the Scottish National

Party. Overall expenditure incurred was

£80,000 (excluding staff time).

Market value of land and buildings

Freehold and leasehold land and buildings

held by the Society (excluding investment

properties and farmland held for

development) are held on the balance sheet

at historic cost and have not been revalued.

Supplier payment policy

and practice

The Society does not impose standard

payment terms on its suppliers but agrees

terms separately with each of them.

Every effort is made to pay suppliers in

accordance with the terms that have been

agreed. At 12 January 2008, trade creditors

expressed as number of days outstanding

was 36 days (2006: 32 days) for the Society.

Statement of directors’

responsibilities in respect of

the directors’ report and the

financial statements

The directors are responsible for preparing

the directors’ report and the Society financial

statements in accordance with applicable

law and regulations. Industrial and Provident

Society law requires the directors to prepare

financial statements for each financial year.

Under that law they have elected to prepare

the financial statements In accordance with

IFRS as adopted by the EU.

The Society financial statements are

requested by law to present fairly the

financial position and the performance of

the Society. In preparing these financial

statements, the directors are required to:

• Select suitable accounting policies

and then apply them consistently

• Make judgements and estimates that

are reasonable and prudent

• State whether they have been prepared

in accordance with IFRS as adopted by

the EU

• Prepare the financial statements on

the going concern basis unless it is

inappropriate to presume that the

Society will continue in business.

The directors are responsible for keeping

proper accounting records that disclose

with reasonable accuracy at any time the

financial position and the performance of

the Society and enable them to ensure that

its financial statements comply with the

Industrial and Provident Societies Acts. They

have general responsibility for taking such

steps as are reasonably open to them to

safeguard the assets of the Society and

to prevent and detect fraud and other

irregularities.

Under applicable law, the directors are also

responsible for preparing a directors’ report

that complies with those Acts. The directors

are responsible for the maintenance and

integrity of the corporate and financial

information included on the Society’s

website. Legislation in the UK governing the

preparation and dissemination of financial

statements may differ from legislation in

other jurisdictions.

Financial statements

So far as the directors are aware, there is

no relevant information that has not been

disclosed to the Society’s auditor, and the

directors believe that all steps have been

taken that ought to have been taken to make

them aware of any relevant audit information

and to establish that the Society’s auditor

has been made aware of that information.

A statement by the directors as to their

responsibilities for preparing the financial

statements is included in the statement of

directors’ responsibilities set out above.

The directors’ statement on going concern

is included on page 45.

Auditor

In accordance with Section 4 (5) of the

Friendly and Industrial and Provident

Societies Act 1968, a resolution for the

reappointment of KPMG Audit Plc as auditor

of the Society and a resolution to authorise

the directors to fix their remuneration are

to be proposed at the next Annual General

Meeting.

By Order of the Board

Moira Lees

Group Secretary

9 April 2008

48 The Co-operative Group Annual Report and Accounts 2007


Remuneration report

As a Co-operative, the Society is required to

produce its accounts in accordance with the

Industrial and Provident Societies Act 1965

to 2002, the Industrial and Provident

Societies (Group Accounts) Regulations

1969 and applicable accounting standards.

In the interests of best governance practice,

as a guideline for its disclosure in relation to

remuneration, the Society uses the

disclosure requirements applicable to listed

companies, as set out in the Directors’

Remuneration Report Regulations 2002

(incorporated into the Companies Act 1985).

The Co-operative Group Board is entirely

non-executive, the directors being elected

from its membership. The day-to-day

management of the Society falls to

Executives. For completeness, this report

provides details of both Executives’ and

directors’ remuneration.

This report will be put to an advisory vote

of the Society’s members at the AGM on

17 May 2008.

Introduction

The remuneration report is presented by the

Board and contains the following information:

• A description of the role of the

Remuneration & Appointments

Committee (the ‘Committee’)

• A summary of the Society’s

remuneration policy, including

statements of policy on Executives’

and directors’ remuneration

• Details of the terms of the service

contracts and the remuneration

of each Executive for the 2007

financial year

• Details of the current terms of office

and the remuneration of each

director for the 2007 financial year.

Role of the Remuneration

& Appointments Committee

The Committee’s principal terms of

reference are to:

• Determine policy on remuneration

and other main terms and conditions

of employment

• Oversee contractual arrangements for

Executives and approve the principal

terms and conditions of employment

of such Executives

• Review remuneration using

comparisons against the agreed

market policy for the Executives

• Approve any relevant incentive

schemes and ensure that they are

in line with current market practice

and authorise payments under

any incentive schemes in line with

their rules

• Receive, review and decide on issues

raised in relation to The Co-operative

Group Pension (Average Career

Earnings) Scheme and any other

retirement benefit scheme within

the Group, and advise the Board of

them as appropriate.

At the end of 2007, the Committee

comprised Len Wardle (the Chair of the

Board) as Chair, together with Graham

Bennett, Allen Brett, Simon Butler, Bob

Burlton, Patrick Grange, Bill Hoult, Bob

Jamieson, Frank Jones, Ben Reid, Kathryn

Smith, Robin Stewart and Stephen Watts.

The Board believes that all members of the

Committee are independent for the purpose

of reviewing remuneration matters. The

Combined Code provides that the Chair

of the Board may be a member of the

Remuneration Committee but not chair it,

unless he is considered independent on

appointment as Chair. The Group seeks to

comply with the Code where appropriate

and the arrangements for chairing the

Remuneration & Appointments Committee

are being reviewed in 2008 as part of the

Constitutional Review. The Chief Executive,

the Group Secretary and the Director of

Human Resources also attended the

meetings of the Committee, except

when their own remuneration was being

considered. Other individuals are invited

to attend for specific agenda items when

necessary.

The Committee members are all nonexecutive.

They have no personal financial

interests in the Committee’s decisions and

they have no involvement in the day-to-day

management of the Society. The Committee

met 10 times in the period under review.

To ensure that it receives independent

advice on remuneration matters, the

Committee retained New Bridge Street

Consultants LLP as its adviser during the

year. New Bridge Street supplied survey

data and advised on market trends and

other general remuneration issues including

a post-merger review of Executive salaries

and the structure of future incentive plans.

Other than specialist advice in relation to

the Group’s remuneration issues, New

Bridge Street does not provide other

services to the Society. Addleshaw Goddard

was also retained to provide legal advice

with respect to Executives’ service contracts.

Policy on Executive members’

remuneration

In determining the remuneration policy for

Executives, the Committee has considered

a number of factors including:

The importance of attracting, retaining

and motivating senior management of

the appropriate calibre to further the

success of the Society

The linking of reward to individual

and business performance and the

strengthening of co-operative values

• Ensuring that the interests of the

Executives are aligned with those

of the Society and its members.

The Co-operative Group Annual Report and Accounts 2007 49


Remuneration report (continued)

The current policy is to pay base salaries

at a level around the market median, when

compared with other organisations of

comparable size and complexity, and also

organisations in the same business sector.

The Committee supports the principle of

performance-related pay and operates both

an annual bonus plan and a long-term

incentive plan, but does not consider it

appropriate to follow the quantum available

in Plcs. Accordingly, the amounts payable

under these plans are lower than in

comparable Plcs.

The Committee considers that a successful

remuneration policy needs to be sufficiently

flexible to take account of future changes in

the Society’s business environment and in

remuneration practice. The enlarged Society

remains in a state of transition and as a part

of this process the Committee will continue

to keep under review an appropriate

remuneration policy covering all major

components of the remuneration package.

The main components of Executive

remuneration are:

Basic salary

It is the Committee’s policy to ensure

that the basic salary for each Executive

is appropriate and competitive for the

responsibilities involved. Basic salaries

for Executives are reviewed by the

Committee, normally annually, having

regard to competitive market practice (in

particular, salary levels for similar positions

in comparable companies), the level of

salary increases elsewhere in the Society

and individual performance for the financial

year. The normal month for salary review is

January. Basic salary is the only element of

remuneration that is pensionable. Salaries

received by Executives in respect of 2007

are set out in Table 1.

Annual incentive plan

Each Executive is eligible to participate in

an annual performance-related bonus plan.

The Committee reviews and sets bonus

targets and levels of eligibility annually.

Each Executive is eligible to receive a bonus

of up to 60% of salary. Due to the merger

with United Co-operatives, bonuses for the

period up to 28 July were calculated on

financial measures alone and were paid to

Executives. As a transitional measure, any

bonus earned for the period from 29 July

up to the end of the financial year will also

be based on financial performance alone.

Following a review of incentives led by New

Bridge Street, the maximum bonus for 2008

for each Executive remains at 60% of salary.

Bonus is only payable for achieving or

exceeding agreed performance targets.

Bonus up to 45% of salary will be measured

on financial performance. For Group

Executives it will all be based on Group profit

before tax. For Executives with business unit

responsibilities, 15% of salary will be based

on Group profit before tax and 30% of salary

on Divisional profit before tax. Going forward,

profit before tax rather than a combination

of profit and return on capital employed is

being used for the annual bonus, as return

on capital employed (Return On Net

Operating Assets) is being used for the longterm

incentive plan. The remaining 15% of

salary will be measured using non-financial,

co-operative value measures using the

Group’s Balanced Scorecard which includes

customer satisfaction, growing colleague

engagement and growing corporate

reputation. David Hendry, whose

incentivisation is based solely on the

successful growth of the Funeralcare

business, does not participate in either the

annual or long-term incentive plans, under

the terms of his service agreement.

Long-term incentive plan

A long-term incentive plan, employing

cumulative targets across a three-year

period, was introduced for Executives

in 2003. The fifth three-year period of

operation of the plan is financial years

2007-2009. Due to the merger with United

Co-operatives, the long-term incentive plans

for 2005-2007, 2006-2008 and 2007-

2009 were vested early, calculated on

performance achieved against targets set for

each plan pro rata up to the date of merger,

and paid to Executives. For the scheme

2007-2009, pro rata bonus earned was

based on financial performance alone.

Following a review of incentives led by

New Bridge Street, a new long-term

incentive plan has been approved for 2008

and beyond. In order to provide a longerterm

dimension to Executives’ reward and to

ensure that a sustainable business is being

developed, the new plan will be measured

on the achievement of specified Return On

Net Operating Assets targets as well as the

Group’s Balanced Scorecard, ie growing

colleague engagement and growing

corporate reputation over a three-year

period, starting 2008-2010 with potential

payment in 2011. For Executives the

threshold payment level, subject to

performance conditions being met, is 16.7%

of salary, with a maximum payment of up to

50% of salary for substantially exceeding

targets. The first award covering the period

2008-2010 will, for those members of the

Executive previously participating in a longterm

incentive scheme, be enhanced to

reflect bonus opportunity lost from prorating

payments of awards at merger.

Service contracts

It is the Society’s policy for the notice

period in Executives’ service contracts not

to exceed one year. All the Executives have

contracts, which are terminable by one

year’s notice. In the event of termination,

any payments due to an Executive would

be based on the value of one year’s notice,

together with the value of other contractual

benefits. In the circumstances of the United

merger, termination payments for Executives

leaving the business were enhanced, as

were the termination payments for other

employees leaving the Group due to the

merger. Dates of appointment are disclosed

in Table 1.

In normal circumstances, it is the

Committee’s policy to design service

contracts for any newly recruited Executive

in a similar form to the model which has

been developed for existing Executives.

50 The Co-operative Group Annual Report and Accounts 2007


Share options

Because of the co-operative nature of the

business, The Co-operative Group does not

operate a share option scheme.

Non-executive directorships

The Committee has determined that

Executives may accept one non-executive

directorship, or similar, with an external

organisation, believing that this represents

an important opportunity for professional

development. Any fees received for such a

role would normally be paid to the Society.

Pensions

The Group offers defined benefit pension

arrangements to all employees. These are

provided mainly through the Co-operative

Group Pension (Average Career Earnings)

Scheme (the PACE Scheme). However,

following the merger with United

Co-operatives on 29 July 2007, employees

who, at that date, were members of one of

the United final salary pension schemes

(ie the Leeds Co-operative Society Limited

Employees’ Pension Fund, the Sheffield

Co-operative Society Limited Employees’

Superannuation Fund, the United Norwest

Co-operatives Employees’ Pension Fund

or the Yorkshire Co-operatives Limited

Employees’ Pension – the ‘United Schemes’)

continue in membership of the relevant

scheme.

The PACE Scheme, which is a registered

occupational pension scheme, provides

pensions based on 1/60th of average

pensionable earnings, re-valued for inflation

for each year of pensionable service from

6 April 2006 (the date the PACE Scheme

was implemented). Accrued benefits as at

5 April 2006 continue to be linked to final

pensionable salary at a member’s date of

leaving or retirement, whichever is earlier.

Pensions are also payable to dependants

on death and a lump sum is payable if

death occurs in service.

The United Schemes, which are also

registered occupational pension schemes,

broadly provide pensions of two-thirds of

final pensionable salary after 40 years’

pensionable service. Pensions are also

payable to dependants on death and a lump

sum is payable if death occurs in service.

Executives who are members of one of

the United Schemes on retirement may

be offered a supplementary pension by

the employer from the United Norwest

Co-operatives Limited 1989 Discretionary

Early Retirement Benefits Scheme, subject

to meeting the qualifying conditions. This

scheme is an unregistered, unfunded

arrangement and benefits are provided at

the employer’s discretion. During the last

year, no Executives were provided with a

benefit under this arrangement.

Members of the PACE Scheme currently

contribute 6% of their pensionable salary

whilst members of the United Schemes

contribute between 6% and 10.5% of

their pensionable salary, depending on

the relevant scheme, towards the cost

of providing benefits, with the employer

paying the balance.

The Group offers Executives the facility of

opting out of future pension accrual under

the relevant registered pension scheme

when the value of their accrued pension

reaches the lifetime allowance under the tax

rules, in favour of a non-pensionable salary

supplement of 16% of basic salary.

David Anderson, Guy McCracken, Paul

Hewitt and Bryan Portman were paid a

salary supplement of 16% of basic salary in

lieu of pension provision. David Hendry does

not receive a salary supplement. From the

date of the merger, Peter Marks was paid a

salary supplement of 16% of basic salary in

lieu of pension provision. All other Executives

were members of either the PACE Scheme or

one of the United Schemes during the year.

Supplementary life cover is provided to

Executives, apart from David Hendry, in

order to provide total life cover of four x

salary when aggregated with benefits from

the PACE Scheme or the relevant United

Scheme, as appropriate.

For Patrick Allen, Mike Austin and John

Nuttall, a contribution of 5% of basic salary

as at 31 December each year is paid on

1 April in the following year, into a defined

contribution top-up scheme provided by

Scottish Widows. A non-pensionable

supplement of 5% of basic salary less

employer’s national insurance is paid to

Martyn Wates in lieu of this benefit.

Additional details are available in Tables 2

and 3.

Directors

The directors do not have service contracts.

The years of their first election are shown

in Table 4. Each director is subject to reelection

every three years. However, due

to the merger and ongoing Constitutional

Review all elections have been temporarily

suspended. It is envisaged that at the

conclusion of the Constitutional Review in

2008, all directors will step down and be

subject to re-election.

Directors’ fees are determined by the

Society’s members. The current fee levels

were recommended to the membership and

approved by them following a detailed

review in 2003 chaired by John Monks,

General Secretary, European Trade Union

Confederation and advised by Watson Wyatt.

The fee levels were determined after taking

account of the need to attract suitable

candidates, the time commitment of Board

members, comparator organisations’ fees

and the responsibilities undertaken by the

Board. A full review of directors’ fees is to

be undertaken as part of the Constitutional

Review. In addition, at the Half Yearly

Meeting in October 2007, members

approved an increase of fees for the Group

Chair and CFS Chair to £100,000 per

annum and agreed to their use of a Society

vehicle. The directors do not, by virtue of

their Board position, participate in any of the

Group’s incentive plans or pension schemes.

The fees received by each director are set

out in Table 4.

The Boards of the Group’s Financial Services

subsidiaries include four independent

professional non-executive directors and

one professional non-executive director

appointed by the Group. Each of these

directors receives a payment of £52,000 per

annum. It is the normal policy of the Board

not to allow an independent professional

non-executive director to serve for more

than nine years in aggregate. The senior

independent non-executive Director of

Co-operative Financial Services (David

Davies) receives an additional payment of

£5,000 per annum. An additional payment

of £10,000 per annum to the Chair of the

CFS Audit & Risk Committee (Graham Stow)

was introduced in November 2007. Graham

Stow also receives £25,000 for service on

The Co-operative Group’s Food Retail Board.

By order of the Board

Len Wardle

Chair

9 April 2008

Stephen Watts

Deputy Chair

The Co-operative Group Annual Report and Accounts 2007 51


Remuneration report (continued)

Table 1 – Executive members’ emoluments

Date of appointment

(Note 1)

Basic salary

£000

Other

supplements

(Note 2)

£000

Performance

related bonus

(Note 6)

£000

Benefits

in kind

(Note 3)

£000

2007 Total

emoluments

(Notes 4 & 5)

£000

2006 Total

emoluments

(Note 4)

£000

Peter Marks 29 July 2007 334 54 217 5 609 0

Patrick Allen 29 July 2007 85 56 8 149 0

David Anderson (Notes 7, 8 & 9) 1 June 2005 307 51 323 7 688 844

Mike Austin 29 July 2007 81 13 5 99 0

Richard Bide 15 September 2003 257 219 12 488 384

Neil Braithwaite 29 July 2007 97 15 5 116 0

David Hendry (Note 11) 29 July 2007 162 – – 162 0

Moira Lees 28 November 2007 26 15 2 43 0

Guy McCracken 16 May 2005 471 76 575 33 1,155 786

John Nuttall 29 July 2007 111 18 8 136 0

Gerry Pennell (Notes 7, 8 & 9) 8 August 2005 124 1 108 9 242 360

Lynda Shillaw 29 July 2007 106 64 5 174 0

Martyn Wates 24 September 2007 116 75 5 196 0

Martin Beaumont (Note 8) 9 September 2002 398 459 15 872 1,031

Nick Eyre (Note 8) 4 January 1999 157 162 13 331 435

Paul Hewitt (Note 8) 31 March 2003 293 39 275 8 615 803

Zoë Morgan (Note 8) 1 November 2004 195 196 8 398 522

Bryan Portman (Note 8) 1 December 2005 227 37 323 11 599 503

Note 1 Date of appointment may differ from date service commenced with Society.

Note 2 The figures for David Anderson, Paul Hewitt, Guy McCracken, Bryan

Portman and Peter Marks include a salary supplement in lieu of certain

pension benefits.

Note 3 Benefits in kind include car or car allowance, fuel card and life assurance

and (in relation to Guy McCracken) relocation costs.

Note 4 Excludes pension values (see Table 2).

Note 5 2007 total emoluments exclude the following termination payments:

Martin Beaumont: £734,160

Nick Eyre: £570,533

Paul Hewitt: £848,873

Zoë Morgan: £505,538

Bryan Portman: £536,250

Note 6 Bonus payments include early vesting of annual and long-term incentive

plans due to the merger with United Co-operatives.

Note 7

Note 8

Note 9

Note 10

Note 11

Bonus payments relate in part to the performance of the financial services

businesses.

Emoluments represent part-year payments.

David Anderson and Gerry Pennell ceased to be members of the Group

Executive on 28 July 2007.

Executives who were members of the former United Co-operative

Management Executive received the following bonus payments due to the

early vesting of United annual and long-term incentive plans upon merger:

Peter Marks: £370,824

Patrick Allen: £39,783

Mike Austin: £80,442

John Nuttall: £122,501

Martyn Wates: £201,005

As referred to on page 50, David Hendry participates in separate incentive

arrangements. Any payments made under these will be calculable in 2010.

52 The Co-operative Group Annual Report and Accounts 2007


Table 2 – Pension details of the Executive

Years of service

Total accrued

pension at

12 January

2008

£000

Increase in

accrued

pension

during

the year

£000

Increase in

accrued

pension

during

the year

(net of inflation)

£000

Transfer value

of previous

column at

12 January

2008 net

of members’

contributions

£000

Transfer value

of total

accrued

pension at

13 January

2007

£000

Transfer value

of total

accrued

pension at

12 January

2008

£000

Increase in

transfer values

net of

members’

contributions

£000

Peter Marks (Note 6) 40 – – – – – – –

Patrick Allen (Note 12) 3 18 13 13 71 32 120 72

David Anderson (Note 4) 2 – – – – – – –

Mike Austin (Note 12) 24 43 7 5 22 263 307 30

Richard Bide 4 12 4 4 35 91 145 39

Neil Braithwaite (Note 12) 10 34 6 5 27 245 291 34

David Hendry (Note 7) 1 – – – – – – –

Moira Lees (Note 10) 26 70 30 28 241 364 627 253

Guy McCracken (Note 4) 2 – – – – – – –

John Nuttall (Note 12) 20 57 15 13 97 372 499 108

Gerry Pennell 4 17 3 2 18 154 191 30

Lynda Shillaw (Note 12) 1 4 4 4 9 – 23 9

Martyn Wates (Note 12) 12 77 19 17 62 325 426 72

Martin Beaumont (Note 11) 4 216 50 46 977 2,842 4,642 1,791

Nick Eyre (Note 9) 8 88 24 22 246 711 1,021 301

Paul Hewitt (Note 5) 4 6 – – 1 65 73 7

Zoë Morgan (Note 8) 2 10 3 3 18 61 96 25

Bryan Portman (Note 4) 3 – – – – – – –

Note 1

Note 2

Note 3

Note 4

Note 5

The total accrued pension is that which would be paid annually on retirement

at normal retirement age based on service to 12 January 2008 and includes

any transferred-in benefits as appropriate. Under the terms of their contracts,

existing Group Executives at 17 January 2007 may take these benefits from

age 60 and new Executives after 17 January 2007 may take these benefits

from age 65. The transfer values in column 7 above have been calculated on

this basis. Years of service includes, where appropriate, pre-merger service

with United.

Members have the option of paying additional voluntary contributions

to their respective pension scheme. Neither these contributions nor

the benefits arising from them are shown in the above Table.

All transfer values have been calculated in accordance with Actuarial

Guidance Note GN11.

David Anderson, Guy McCracken and Bryan Portman have chosen not to join

an occupational pension scheme and were paid a non-pensionable salary

supplement of 16% of basic salary in lieu of pension provision.

Paul Hewitt opted out of the occupational pension scheme in the previous

year when he became entitled to a deferred pension under the PACE Scheme

rules. He was paid a non-pensionable salary supplement of 16% of basic

salary in lieu of pension provision until he left the Group on 28 July 2007.

Deferred pensions are revalued under the PACE Scheme rules but

no account has been taken of this in the above figures.

Note 6 Peter Marks was appointed Chief Executive – Trading Group on 29 July

2007. He was paid a non-pensionable salary supplement of 16% of

basic salary from that date in lieu of pension provision from the relevant

occupational pension scheme.

Note 7 David Hendry became a member of the Executive on 29 July 2007. He

is not a member of an occupational pension scheme and does not receive

a salary supplement.

Note 8 Zoe Morgan left the Group on 28 July 2007 and the above figures are

calculated to that date when she became entitled to a deferred pension

under the PACE Scheme rules.

Note 9 Nick Eyre left the Group on 28 July 2007 and the above figures are

calculated to that date when he became entitled to a deferred pension

under the PACE Scheme rules. On leaving, Mr Eyre opted to be provided

with an augmentation of his deferred pension in lieu of termination monies

and other emoluments to the value of £700,000.

Note 10 Moira Lees became a member of the Executive on 28 November 2007.

Note 11 Martin Beaumont retired from the Group on 31 July 2007 and the above

figures are calculated to that date. On retirement, Mr Beaumont’s pension

was augmented as part of the termination arrangements. The value of the

employer-funded pension arrangement of £2,801,235 was taken as a

taxable lump sum on retirement rather than as pension.

Note 12 Patrick Allen, Mike Austin, Neil Braithwaite, John Nuttall and Lynda Shillaw

became members of the Executive on 29 July 2007. Martyn Wates became

a member of the Executive on 24 September 2007.

The Co-operative Group Annual Report and Accounts 2007 53


Remuneration report (continued)

Table 3 – Defined contributions paid for Executives

Name

Patrick Allen 4,650

Mike Austin 7,400

John Nuttall 9,000

Amount

£

Table 4 – Directors’ remuneration

Year first elected

Term expires

(Note 13)

2007

Remuneration

£000

2006

Remuneration

£000

Joyce Baruch (Notes 3, 5, 7 & 8) 2007 2008 27 N/A

Graham Bennett 1984 2008 32 30

Duncan Bowdler (Note 5) 2007 2008 7 N/A

Allen Brett (Notes 3, 5, 7 & 8) 2007 2008 28 N/A

Bob Burlton (Notes 1, 2 & 7) 1992 2008 53 40

Simon Butler (Note 3) 1996 2008 35 32

Eric Calderwood (Note 3) 2006 2008 19 9

David Doyle (Note 3) 2006 2008 19 10

John Fitzgerald (Note 1) 2005 2008 16 15

Douglas Fletcher (Notes 1 & 10) 1998 2008 20 15

John George (Note 3) 2000 2008 19 17

Patrick Grange (Note 5) 2007 2008 7 N/A

Mike Harling (Note 3) 1998 2008 19 17

Bill Hoult (Notes 3, 7 ,8 & 11) 2002 2008 48 15

Bob Jamieson (Note 1) 2005 2008 16 15

Frank Jones (Note 3) 2004 2008 19 17

John Macbeth (Note 5) 2007 2008 7 N/A

Peter Marks (Notes 1 & 9) 2000 N/A 8 15

Ian Mason (Note 5) 2007 2008 7 N/A

Terry Morton (Notes 3 & 10) 1997 2008 33 34

Bertie Murray (Notes 3 & 4) 2004 2008 20 19

Russell Porteous (Note 3) 2003 2008 17 16

David Pownall (Notes 4 & 5) 2007 2008 8 N/A

Alban Rees (Note 3) 2000 2008 19 17

Brian Rees (Note 3) 2001 2008 19 17

Ben Reid (Note 1) 2000 2008 16 15

54 The Co-operative Group Annual Report and Accounts 2007


Table 4 – Directors’ remuneration (continued)

Year first elected

Term expires

(Note 13)

2007

Remuneration

£000

2006

Remuneration

£000

Richard Samson (Note 1) 2005 2008 16 15

Allan Smith (Note 1) 2004 2008 16 15

John Smith (Note 3) 2000 2008 19 17

Kathryn Smith (Notes 3 & 4) 1997 2008 31 28

Robin Stewart (Note 3) 1989 2008 19 26

Jeanette Timmins (Note 3) 2004 2008 19 17

Len Wardle (Note 3) 1992 2008 51 24

Stephen Watts (Notes 3 & 6) 2000 2008 52 41

Note 1

Note 2

Note 3

Note 4

Note 5

Note 6

The remuneration of some directors is paid, at their request, direct to their

employers who release them to act as directors of the Group.

In addition to his remuneration as a director and Chair being paid to his

employer, the sum of £127,289 (2006: £196,864) was paid to The

Midcounties Co-operative in recognition of the time spent as Group and

CFS Chair.

Includes Board and Area Committee fees.

Includes payments for loss of earnings.

Joyce Baruch, Duncan Bowdler, Allen Brett, Patrick Grange, John Macbeth,

Ian Mason and David Pownall were appointed to the Board on 29 July 2007

as a result of the merger with United Co-operatives.

Includes payments made to directors’ employers in respect of

reimbursement for allowing them to act as directors.

Note 7 Includes Society cars.

Note 8 Includes losses of status payments paid as a result of the merger.

Note 9 Peter Marks retired from the Board on 28 July 2007.

Note 10 Terry Morton was Deputy Chair until 19 July 2008 at which point Douglas

Fletcher took up the position.

Note 11 Bill Hoult was appointed Deputy Chair on 29 July 2007 as a result of the

merger with United Co-operatives.

Note 12 Bob Burlton was Chair until 27 October 2007 at which point Len Wardle

took up the position.

Note 13 All elections were temporarily suspended for the period of the Constitutional

Review and terms of office have been extended until its conclusion. It is

envisaged that upon its conclusion all directors will step down and be

subject to re-election in 2009.

The Co-operative Group Annual Report and Accounts 2007 55


Contents of the financial section

57 Consolidated income statement

58 Consolidated balance sheet

60 Consolidated cash flow statement

61 Consolidated statement of recognised income

and expense

62 Independent auditors’ report

63 Accounting policies

Notes to the financial statements

74 Segmental analysis

77 Premiums – Financial Services

78 Operating expenses

80 Claims paid and benefits – General Insurance

and Long-Term Business

80 Fees and commissions – Financial Services

81 Operating income

81 Investment income

81 Gains less losses arising from financial assets

82 Financial income

82 Financial expenses – interest payable

82 Financial expenses – fair value movement

82 Payments to and on behalf of members

83 Income tax expense

84 Losses on sale or termination of activities

85 Emoluments of directors

85 Property, plant and equipment

87 Intangible assets

88 Investment properties – Trading and Corporate activities

89 Investments – Trading and Corporate activities

90 Financial instruments and derivatives

92 Employee benefits and retirement benefit obligations

99 Deferred taxation

99 Inventories

100 Trade and other receivables – Trading and Corporate activities

100 Non-current assets held for sale and discontinued operations

101 Loans and advances to banks – Financial Services

101 Loans and advances to customers – Financial Services

103 Investments – Financial Services

104 Insurance contracts liabilities and reinsurance assets

– Financial Services

112 Prepayments and other receivables – Financial Services

113 Share capital

114 Reserves and retained earnings

115 Movements in equity

115 Interest-bearing loans and borrowings – Trading and

Corporate activities

116 Trade and other payables – Trading and Corporate activities

116 Provisions – Trading and Corporate activities

117 Amounts owed to credit institutions – Financial Services

117 Customer accounts – Financial Services

117 Debt securities in issue – Financial Services

118 Investment contracts – Financial Services

118 Unallocated divisible surplus – Financial Services

119 Other borrowed funds – Financial Services

120 Other liabilities and accruals – Financial Services

120 Provisions – Financial Services

121 Reconciliation of operating profit to net cash inflow from operating

activities – Trading and Corporate activities

122 Reconciliation of operating profit to net cash inflow from operating

activities – Financial Services

123 Transfer of engagements of United Co-operatives Limited

124 Acquisitions

125 Commitments and contingent liabilities

126 Related party transactions and balances

127 Principal subsidiary and associated undertakings

128 Risk management

146 Capital resources

147 Post balance sheet events

148 Analysis of profits from regional business activities

(unaudited)

56 The Co-operative Group Annual Report and Accounts 2007


Consolidated income statement

for the year ended 12 January 2008

Restated

52 weeks ended 12 January 2008 52 weeks ended 13 January 2007

Before After Before After

significant Significant significant significant Significant significant

items items items items items items

Notes £m £m £m £m £m £m

Gross sales 9,075.5 9,075.5 7,895.2 7,895.2

Less:

Value Added Tax (376.6) (376.6) (300.5) (300.5)

Agency share of sales (408.9) (408.9) (282.3) (282.3)

Revenue 8,290.0 8,290.0 7,312.4 7,312.4

Premiums ceded to reinsurers (1,836.2) (1,836.2) (62.8) (62.8)

Net revenue 1,2 6,453.8 6,453.8 7,249.6 7,249.6

Operating expense 3 (6,605.4) (182.0) (6,787.4) (8,057.3) (36.4) (8,093.7)

Operating income 6 583.2 583.2 1,205.1 1,205.1

Operating profit 431.6 (182.0) 249.6 397.4 (36.4) 361.0

Financial income 9 4.1 3.4

Financial expenses – interest payable 10 (35.5) (25.2)

Financial expenses – fair value movement 11 (23.0) 19.9

Financial expenses – total (54.4) (1.9)

Share of profit of associates and joint ventures 19 0.3 –

Profit before payments to and 195.5 359.1

on behalf of members

Payments to and on behalf of members 12 (45.6) (31.6)

Profit before tax 149.9 327.5

Income tax expense (39.1) (107.3)

Less: tax attributable to policyholders’ returns 14.0 8.9

Total taxation 13 (25.1) (98.4)

Profit after tax but before

loss on discontinuing operations 124.8 229.1

Loss on sale of discontinuing operations,

net of tax 14 (11.2) (7.5)

Profit for the year 113.6 221.6

Attributable to:

Equity holders of the parent 32 109.7 218.8

Minority interests 3.9 2.8

Profit for the year 113.6 221.6

The Co-operative Group Annual Report and Accounts 2007 57


Consolidated balance sheet

at 12 January 2008

2007 2006

Notes £m £m

Assets

Trading and Corporate assets

Property, plant and equipment 16 1,710.6 1,160.5

Intangible assets 17 737.4 409.1

Biological assets 0.2 0.3

Investment property 18 385.6 277.8

Investments in associates and joint ventures 19 13.5 1.6

Other investments 19 3.9 5.4

Financial instruments and derivatives 20 0.6 1.5

Retirement benefits 21 303.2 290.2

Deferred tax assets 22 78.2 36.9

Total Trading and Corporate non-current assets 3,233.2 2,183.3

Inventories 23 388.2 274.5

Biological assets 2.6 2.3

Income tax receivable 28.4 0.4

Trade and other receivables 24 472.3 311.8

Cash and cash equivalents 160.3 153.9

Assets classified as held for sale 25 6.8 67.1

Total Trading and Corporate current assets 1,058.6 810.0

Total Trading and Corporate assets 4,291.8 2,993.3

Financial Services assets

Cash and balances at central banks 172.9 225.0

Financial instruments and derivatives 20 633.9 719.6

Loans and advances to banks 26 1,204.0 1,367.0

Loans and advances to customers 27 8,986.1 8,163.3

Investments 28 24,463.0 28,163.5

Reinsurance contracts 29 3,135.8 1,070.0

Income tax 3.3 101.5

Intangible assets 17 81.0 85.1

Property, plant and equipment 16 143.2 163.5

Deferred tax assets 22 1.7 4.7

Prepayments and other receivables 30 967.3 771.2

Total Financial Services business assets 39,792.2 40,834.4

Total assets 44,084.0 43,827.7

58 The Co-operative Group Annual Report and Accounts 2007


2007 2006

Notes £m £m

Liabilities

Trading and Corporate liabilities

Interest-bearing loans and borrowings 34 315.8 279.2

Trade and other payables 35 236.5 164.2

Derivatives 20 7.7 11.8

Provisions 36 199.7 117.8

Deferred tax liabilities 22 462.8 313.9

Total Trading and Corporate non-current liabilities 1,222.5 886.9

Interest-bearing loans and borrowings 34 333.9 107.9

Income tax payable – 29.5

Trade and other payables 35 971.7 695.0

Provisions 36 20.2 18.4

Liabilities classified as held for sale 25 0.6 28.1

Total Trading and Corporate current liabilities 1,326.4 878.9

Total Trading and Corporate liabilities 2,548.9 1,765.8

Financial Services liabilities

Amounts owed to credit institutions 37 3,649.7 6,417.4

Customer accounts 38 10,312.5 9,340.5

Financial instruments and derivatives 20 98.3 140.3

Insurance and participation contracts 29 18,487.6 19,122.0

Debt securities in issue 39 535.8 1,113.3

Investment contracts 40 220.1 192.6

Unallocated divisible surplus 41 1,045.6 1,155.4

Other borrowed funds 42 354.3 377.3

Income tax payable 68.4 18.6

Other liabilities and accruals 43 2,645.9 509.5

Deferred tax liabilities 22 287.9 370.2

Retirement benefit obligations 21 3.5 3.1

Provisions 44 28.1 30.2

Total Financial Services business liabilities 37,737.7 38,790.4

Total liabilities 40,286.6 40,556.2

Equity

Members’ share capital 31 67.2 55.7

Retained earnings 32 3,612.2 3,228.2

Other reserves 32 90.4 (36.5)

Total equity attributable to equity holders of the parent 3,769.8 3,247.4

Minority interests 27.6 24.1

Total equity 33 3,797.4 3,271.5

Total equity and liabilities 44,084.0 43,827.7

Board’s certification The financial statements on pages 57 to 146 are hereby signed on behalf of the Board pursuant to Section 3(a)(1) of the Friendly and

Industrial Provident Societies Act 1968.

Len Wardle Chair, Stephen Watts Deputy Chair, Peter Marks Group Chief Executive, Co-operative Trading Group, Moira Lees Group Secretary

9 April 2008

The Co-operative Group Annual Report and Accounts 2007 59


Consolidated cash flow statement

for the year ended 12 January 2008

2007 2006

Trading &

Trading &

Financial Corporate Financial Corporate

Services activities Total Services activities Total

Notes £m £m £m £m £m £m

Net cash from operating activities 45,46 (7.8) 91.7 83.9 904.0 237.2 1,141.2

Cash flows from investing activities

Acquisition of property, plant and equipment (24.6) (182.5) (207.1) (76.4) (124.6) (201.0)

Proceeds from sale of property, plant and equipment 1.2 144.4 145.6 37.3 82.6 119.9

Purchase of intangible assets (11.2) – (11.2) (33.4) – (33.4)

Proceeds from sale of investment – – – – 0.6 0.6

Acquisition of investment – (0.1) (0.1) – (3.4) (3.4)

Interest received – 4.5 4.5 0.2 9.2 9.4

Internal dividends (paid)/received (30.1) 30.1 – (21.5) 21.5 –

Disposal of business 14 – (14.6) (14.6) – (4.4) (4.4)

Acquisition of business net of cash acquired 48 – (191.2) (191.2) – (151.9) (151.9)

Cash and cash equivalents arising on

transfer of engagements 47 – 25.9 25.9 – – –

Proceeds from sale and maturity of debt securities 11,108.6 – 11,108.6 6,791.3 – 6,791.3

Purchase of debt securities (10,304.5) – (10,304.5) (7,265.5) – (7,265.5)

Net cash from investing activities 739.4 (183.5) 555.9 (568.0) (170.4) (738.4)

Cash flows from financing activities

Interest paid on borrowings (19.3) (33.4) (52.7) (17.8) (24.1) (41.9)

Repayment of share capital 31 – (11.6) (11.6) – (0.2) (0.2)

Repayment of subordinated loan stock (30.0) – (30.0) (100.0) – (100.0)

Issue of subordinated loan stock – – – 150.0 – 150.0

(Decrease)/increase in corporate investor loans 34 – (17.0) (17.0) – 25.6 25.6

Preference dividends paid (5.6) – (5.6) (5.6) – (5.6)

Dividends paid to minority shareholders

in subsidiary undertaking (0.9) (0.5) (1.4) (0.9) (0.3) (1.2)

Payments to and on behalf of members – (42.1) (42.1) – (29.5) (29.5)

(Repayment)/issue of short-term borrowings (90.0) 85.8 (4.2) – 12.7 12.7

Finance leases repaid – (0.6) (0.6) – (0.5) (0.5)

Net cash from financing activities (145.8) (19.4) (165.2) 25.7 (16.3) 9.4

Net increase/(decrease) in cash

and cash equivalents 585.8 (111.2) 474.6 361.7 50.5 412.2

Cash and cash equivalents at beginning of year 1,627.5 307.9 1,935.4 1,265.8 257.4 1,523.2

Cash and cash equivalents at end of year 2,213.3 196.7 2,410.0 1,627.5 307.9 1,935.4

Analysis of cash and cash equivalents

Cash and balances with central banks 172.9 – 172.9 225.0 – 225.0

Loans and advances to banks 26 1,204.0 – 1,204.0 1,222.0 – 1,222.0

Short-term investments 836.4 – 836.4 180.5 – 180.5

Cash and cash equivalents per balance sheet – 160.3 160.3 – 153.9 153.9

Cash invested intercompany – 36.4 36.4 – 137.7 137.7

Cash included in assets held for sale 25 – – – – 16.3 16.3

2,213.3 196.7 2,410.0 1,627.5 307.9 1,935.4

The intercompany cash relates to Trading Group cash balances held with The Co-operative Bank.

Cash and cash equivalents include deposits of £75.1m (2006: £75.5m) held in trustee-administered bank accounts of the Society, which can only be utilised

to meet liabilities in respect of funeral bonds issued. Provisions for these liabilities are included in creditors (see Note 35).

60 The Co-operative Group Annual Report and Accounts 2007


Consolidated statement of recognised income and expense

for the year ended 12 January 2008

2007 2006

£m £m

Changes in available-for-sale assets 14.1 (48.8)

Actuarial gains and losses on employee pension scheme 14.5 (15.2)

Revaluation of self-occupied properties (3.1) 4.1

Share of actuarial gains and losses on employee pension scheme

transferred to unallocated divisible surplus – 45.8

Revaluation of self-occupied properties transferred to unallocated divisible surplus 3.1 (4.1)

Effective portion of cash flow hedges transferred to the cash flow hedging reserve 44.3 (41.6)

Cash flow hedges transferred to profit or loss (0.5) (0.1)

Revaluation of property, plant and equipment 115.0 –

Tax on items taken directly to statement of recognised income and expense (49.4) 24.8

Share of tax on items taken directly to statement of recognised income and expense

and transferred to unallocated divisible surplus – (6.3)

Net income/(expense) recognised directly in equity 138.0 (41.4)

Profit for the year – equity shareholders 109.7 218.8

Profit for the year – minority interests 3.9 2.8

Total recognised income and expense for the year 251.6 180.2

Attributable to:

Equity holders of the parent 247.0 178.5

Minority interest 4.6 1.7

Total recognised income and expense for the year 251.6 180.2

The Co-operative Group Annual Report and Accounts 2007 61


Independent auditors’ report to the members of Co-operative Group Ltd

We have audited the financial statements of Co-operative Group Ltd (the

Society) for the year ended 12 January 2008 which comprise the

Consolidated Income Statement, the Consolidated Balance Sheet, the

Consolidated Cash Flow Statement, the Consolidated Statement of

Recognised Income and Expense and the related notes. These financial

statements have been prepared under the accounting policies set out therein.

This report is made solely to the Society’s members, as a body, in

accordance with section 9 of the Friendly and Industrial and Provident

Societies Act 1968. Our audit work has been undertaken so that we might

state to the Society’s members those matters we are required to state to

them in an auditor’s report and for no other purpose. To the fullest extent

permitted by law, we do not accept or assume responsibility to anyone other

than the Society and the Society’s members, as a body, for our audit work,

for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditors

The directors’ responsibilities for preparing the Directors’ Report and the

financial statements in accordance with applicable law and International

Financial Reporting Standards (IFRSs) as adopted by the EU are set out

in the Statement of Directors’ Responsibilities on page 48.

Our responsibility is to audit the financial statements in accordance with

relevant legal and regulatory requirements and International Standards on

Auditing (UK and Ireland).

We report to you our opinion as to whether the financial statements give a

true and fair view and are properly prepared in accordance with the Industrial

and Provident Societies Act 1965 to 2002 and the Industrial and Provident

Societies (Group Accounts) Regulations 1969. We also report to you whether

in our opinion the information given in the Directors’ Report is consistent with

the financial statements. The information given in the Directors’ report

includes that information presented in the Business review – Trading,

Business review – CFS, Key performance indicators and Principal risks and

uncertainties that is cross-referenced from the Business review section of the

Directors’ report.

Basis of audit opinion

We conducted our audit in accordance with International Standards on

Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit

includes examination, on a test basis, of evidence relevant to the amounts

and disclosures in the financial statements. It also includes an assessment

of the significant estimates and judgements made by the directors in the

preparation of the financial statements, and of whether the accounting

policies are appropriate to the Group’s circumstances, consistently applied

and adequately disclosed.

We planned and performed our audit so as to obtain all the information

and explanations which we considered necessary in order to provide us with

sufficient evidence to give reasonable assurance that the financial statements

are free from material mis-statement, whether caused by fraud or other

irregularity or error. In forming our opinion, we also evaluated the overall

adequacy of the presentation of information in the financial statements.

Opinion

In our opinion:

• the financial statements give a true and fair view, in accordance with

IFRSs as adopted by the EU, of the state of the Group’s affairs as at

12 January 2008 and of its profit for the year then ended;

• the financial statements have been properly prepared in accordance with

the Industrial and Provident Societies Act 1965 to 2002 and Industrial

and Provident Societies (Group Accounts) Regulations 1969;

• the information given in the Directors’ Report is consistent with the

financial statements.

KPMG Audit Plc

Chartered Accountants

Registered Auditor

Manchester

9 April 2008

In addition we report to you if, in our opinion, the Society has not kept

proper accounting records, if we have not received all the information and

explanations we require for our audit, or if information specified by law

regarding directors’ remuneration and other transactions is not disclosed.

We review whether the statement on page 41 reflects the Society’s

compliance with paragraphs D1.1 (paragraph 5), D2.1, D2.4, D3.1

(paragraph 3) and D3.2 of the Co-operatives UK Limited’s Corporate

Governance Code of Best Practice issued in May 2005, and we report if it

does not. We are not required to consider whether the Board’s statements

on internal control cover all risks and controls, or form an opinion on the

effectiveness of the Society’s corporate governance procedures or its risk

and control procedures.

We read the other information contained in the annual report and consider

whether it is consistent with the audited financial statements. We consider

the implications for our report if we become aware of any apparent

mis-statements or material inconsistencies with the financial statements.

Our responsibilities do not extend to any other information.

62 The Co-operative Group Annual Report and Accounts 2007


Accounting policies

Policies applicable to all businesses

1 Accounting basis

The Co-operative Group Limited is an Industrial and Provident Society

domiciled in England and Wales. The address of the Society’s registered

office is New Century House, Manchester M60 4ES.

The Group accounts have been prepared in accordance with the Industrial

and Provident Societies Acts 1965 to 2002, the Industrial and Provident

Societies (Group Accounts) Regulations 1969, and applicable International

Financial Reporting Standards as endorsed by the EU (IFRS) for the year

ended 12 January 2008. They consolidate the accounts of Group

undertakings at the year-end and, as permitted by statute and IAS 1, the

account formats have been adapted as necessary to give a fair presentation

of the state of affairs and result of the Group. As allowed by Industrial and

Provident statute a separate income statement, balance sheet, cash flow

statement or statement of recognised income and expense for the Society

are not included.

The financial statements follow the provisions of the Revised Statement of

Recommended Practice on Accounting for Insurance Business (SORP) issued

by the Association of British Insurers in 2005 (as amended in December

2006), insofar as these are compatible with the requirements of IFRS.

The accounts are presented in pounds sterling. They are prepared under

the historical cost basis as modified by the revaluation of available-for-sale

financial assets; financial assets and liabilities valued at fair value through

the income statement, derivative financial instruments, certain items of

property, plant and equipment, biological assets, investment properties and,

where applicable, assets held for sale and disposal groups.

The Group’s operations comprise three key divisions, Trading and Corporate,

Banking and Insurance, each material in itself, and operating in very different

industry sectors and regulatory environments. Bank and Insurance are

collectively termed Financial Services.

The conventional financial statement formats for the Banking and Insurance

operations differ from those of the Trading Division. In order to reflect the

performance of the Group as a single economic entity, the income of the

Banking and Insurance Divisions, as defined in accounting policies

25, 26 and 30, have been included as revenue in the consolidated income

statement. Operating expenses are analysed by nature, as defined by IAS 1.

The segmental note analysis also separately discloses Group operating costs

that relate to all three businesses. As permitted by IAS 1 in the case of

diverse groups such as The Co-operative Group, a mixed presentation has

been applied to the balance sheet: the assets and liabilities of the Trading

Division are analysed as current or non-current, the assets and liabilities of

Financial Services are analysed in order of liquidity. Similarly, the cash flow

statements of the Trading and Financial Services Divisions have been

presented separately because of the differing nature of their operations.

The reconciliations to cash from operating activities in Notes 45 and 46

have been performed separately for Trading and Financial Services. These

reconciliations are from operating profit in order that the cash flows of these

operations can be linked more easily to their results as disclosed in the

segmental analysis in Note 1.

The accounting policies set out below have been applied consistently to all

periods presented in these financial statements.

The preparation of financial statements in conformity with IFRS requires

management to make judgements, estimates and assumptions that affect

the application of policies and reported amounts of assets and liabilities,

income and expenses. The estimates and associated assumptions are based

on historical experience and various other factors that are believed to be

reasonable under the circumstances, the results of which form the basis of

making the judgements about carrying values of assets and liabilities that

are not readily apparent from other sources. Actual results may differ from

these estimates.

The estimates and underlying assumptions are reviewed on an ongoing

basis. Revisions to accounting estimates are recognised in the period in

which the estimate is revised if the revision affects only that period, or

in the period of the revision and future periods if the revision affects both

current and future periods.

Judgements made by management in the application of IFRS that have

significant effect on the financial statements and estimates with a significant

risk of material adjustment in the next year are described in the following notes:

Critical accounting estimates and judgements in applying

accounting policies

The Group makes estimates and assumptions that affect the reported assets and

liabilities. Estimates and judgements are continually assessed and reviewed and

are based on historical experience and reasonable expectations of future events.

The most significant areas of estimation and judgement are detailed below

and where appropriate referenced to the appropriate section in the financial

statements:

• Pension assumptions (Note 21)

• Investment property (Note 18)

• Provision for claims (Note 36)

• Goodwill and impairment (Note 17)

• Closure and restructuring provisions (Notes 36 and 44)

• Ultimate liability from claims made under insurance contracts – details of

the methodology, key assumptions and sensitivities are provided in Note 29

• Estimate of future benefit payments from long-term insurance contracts

(Note 29)

• Fair value of investment contracts (Note 40)

• Fair value of unlisted financial assets (Note 52)

• Bank impairment provision on loans and advances and structured

investments (Note 3)

The Co-operative Group has applied all endorsed IFRS applicable to the

Group’s financial statements for the year ended 12 January 2008 and the

comparative period.

Restatement

In accordance with IFRS 5 the income statement comparatives have been

restated to show the results of businesses that have become discontinued in

the current accounting year. For further details refer to the footnote in Note 1

‘Segmental analysis’. There is no requirement to restate the Balance Sheet

and the Cash Flow Statement.

The Co-operative Group Annual Report and Accounts 2007 63


Accounting policies (continued)

The Group has adopted the following statements in the year:

• IAS 1 ‘Presentation of Financial Statements – Capital Disclosures:

The amendments to IAS 1 set out additional requirements for disclosures of:

(a) the entity’s objectives, policies and processes for managing capital;

(b) whether the entity has complied with any capital requirements; and

(c) if it has not complied, the consequences of such non-compliance.

For further details refer to Note 53.

• IFRS 7 ‘Financial Instruments Disclosure’:

This standard includes all the disclosure requirements related to financial

instruments of Banks and Similar Financial Institutions and the disclosure

requirements in IAS 32 Financial Instruments: Disclosure and Presentation.

The objective of IFRS 7 is to require entities to disclose:

(a) the significance of financial instruments for an entity’s financial position

and performance;

(b) qualitative and quantitative information about the nature and extent of

risks arising from financial instruments.

IFRS 7 disclosures are included in Notes 24 and 52.

Standards, amendments and interpretations issued but

not yet effective

The Group has not early adopted the following statements; IFRS 8, Operating

Segments (mandatory for annual periods beginning on or after 1 January

2009) introduces the ‘management approach’ to segment reporting. IFRS 8

will require the disclosure of segment information based on the internal

reports regularly reviewed by the Group’s Chief Operating Decision Maker

in order to assess each segment’s performance and to allocate resources

to them. The Group will apply IFRS 8 from 11 January 2009, but it is not

expected to have any impact on the segmental information reported in the

Group’s accounts.

Amendment to IAS 23, Borrowing Costs (mandatory for annual periods

beginning on or after 1 January 2009) removes the option to expense

borrowing costs and requires that an entity capitalise borrowing costs directly

attributable to the acquisition, construction or production of a qualifying asset

as part of the cost of that asset. Provided the amendment is endorsed for

application in the EU, the Group will apply the amendment to IAS 23 from

11 January 2009, but it is not expected to have any impact on the

Group’s accounts.

IFRIC 13 Customer Loyalty Programmes (mandatory for annual periods

beginning on or after 1 July 2008) addresses the accounting by entities that

operate, or otherwise participate in, customer loyalty programmes for their

customers. It relates to customer loyalty programmes under which the

customer can redeem credits for awards such as free or discounted goods or

services. Provided the interpretation is endorsed for application in the EU, the

Group will apply IFRIC 13 from 11 January 2009 but has not yet determined

the potential effect of the interpretation.

IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding

Requirements and their Interaction (mandatory for annual periods beginning

on or after 1 January 2008) clarifies when refunds or reductions in future

contributions in relation to defined benefit assets should be regarded as

available and provides guidance on the impact of minimum funding

requirements (MFR) on such assets. It also addresses when a MFR might

give rise to a liability. Provided the interpretation is endorsed for application

in the EU, the Group will apply IFRIC 14 from 13 January 2008, with

retrospective application required. The Group has determined there will be no

impact on the gross pension asset but there will be deferred tax implications.

IFRIC 12, Service Concession Arrangements (effective for annual periods

beginning on or after 1 January 2008) is not applicable to the Group’s

activities.

2 Accounting dates

The financial statements are made up for the 52 weeks to 12 January 2008.

Comparatives are for the 52 weeks to 13 January 2007. Since the financial

year is virtually co-terminus with the calendar year 2007, the financial year

figures are headed 2007 and the corresponding figures for the previous year

are headed 2006.

3 Basis of consolidation

The consolidated financial statements include the Society and its subsidiary

undertakings.

Subsidiaries are those entities controlled by the Group. Control exists when

the Society has the power, directly or indirectly, to govern the financial and

operating policies of an entity so as to obtain benefits from its activities.

In assessing control, potential voting rights that are presently exercisable or

convertible are taken into account. The financial statements of subsidiaries

are included in the consolidated financial statements from the date that

control commences until the date that control ceases.

Associates are those entities in which the Group has significant influence,

but not control, over the financial and operating policies. The consolidated

financial statements include the Group’s share of the total recognised gains

and losses of associates on an equity accounted basis, from the date that

significant influence commences until the date that significant influence

ceases. When the Group’s share of losses exceeds its interest in an

associate, the Group’s carrying amount is reduced to nil and recognition

of further losses is discontinued except to the extent that the Group has

incurred legal or constructive obligations or made payments on behalf of

an associate.

4 Transfer of engagements accepted from incoming societies

Assets and liabilities accepted under a transfer of engagements are restated at

fair value, including any adjustments necessary to comply with the accounting

policies of the Group. The resulting surplus or deficit is taken direct to reserves.

5 Financial expenses

Financial costs exclude interest in respect of Banking activities, which is

shown within operating profit.

6 Significant items

Items which are material by both size and nature (ie outside of the normal

operating activities of the Group) are treated as significant items and

disclosed separately on the face of the income statement.

The separate reporting of significant items helps provide an indication of

the Group’s underlying business performance. Events which may give rise

to the classification of items as significant include individually significant

restructuring and integration costs and asset impairments.

64 The Co-operative Group Annual Report and Accounts 2007


7 Derivatives and other financial instruments

Information in respect of derivatives and other financial instruments has for

clarity been prepared separately for the Trading, Banking and Insurance

activities. The policies applied are consistent across the Group.

Trading activities

Financial instruments (excluding derivatives)

The Trading Group classifies its financial assets and liabilities (excluding

derivatives) as either:

1. Loans and receivables

Loans and receivables are measured at fair value at inception less any

provision for impairment.

2. Available-for-sale

Available-for-sale financial assets are equity investments, intended to be

held for an indefinite period of time. These are measured at fair value with

movements in the carrying value brought into equity as they arise, except

for changes in value arising from impairment, which are recognised in the

income statement. On disposal, gains and losses recognised previously

in equity are transferred to the income statement. The fair value of equity

investments is their quoted market price at the balance sheet date.

3. Financial assets and liabilities at fair value through profit or loss

These are either:

• acquired or incurred principally for the purpose of selling or repurchasing

in the near term

• part of a portfolio of identified financial instruments that are managed

together and for which there is evidence of a recent actual pattern of

short-term profit taking

• upon initial recognition designated at fair value through profit or loss

to eliminate or significantly reduce a measurement of recognition

inconsistency.

These are measured at fair value with movements in the carrying value

brought into the income statement as they arise.

No assets are classified as held to maturity.

The Trading Group measures all of its financial liabilities at amortised

cost, except quoted debt, which is measured at fair value through the

income statement.

The quoted debt is designated at fair value through the income statement

because this significantly reduces a measurement inconsistency (accounting

mismatch) that would arise from measuring interest rate swaps or

recognising gains and losses on them on different bases. There are a number

of interest rate swaps whose execution and maturity dates link into the

quoted debt. Also, this group of financial assets and/or liabilities is managed

and its performance is evaluated on a fair value basis in accordance with the

risk management strategy.

Derivative financial instruments

The Trading Group uses derivative financial instruments to provide an

economic hedge to its exposure to foreign exchange and interest-rate risks

arising from operational, financing and investment activities. In accordance

with its treasury policy, the Trading Group does not hold or issue derivative

financial instruments for trading purposes.

Derivatives entered into include swaps and forward-rate agreements.

Derivative financial instruments are measured at fair value and any gains

or losses are included in the income statement.

Fair values are based on quoted market prices in active markets, and where

these are not available, using valuation techniques such as discounted cash

flow models. For further details refer to Note 52.

Interest payments or receipts arising from interest rate swaps are recognised

within net interest payable in the period in which the interest is incurred

or earned.

Banking activities

Financial instruments (excluding derivatives)

The bank classifies its financial assets (excluding derivatives) as either:

• loans and receivables

• available-for-sale

• financial assets at fair value through profit or loss.

No assets are classified as held to maturity. In the application of IFRS7;

Financial Instruments: Disclosures, the bank has not reclassified between

valuation methodologies during the year.

The Group measures all of its financial liabilities at amortised cost, other than

those within the wholesale trading portfolio, which are measured at fair value

through profit or loss.

1. Loans and receivables

Loans and receivables to customers and banks (except for specific assets

designated at fair value through profit or loss – see below) are measured

at amortised cost, being the amount advanced plus any unpaid interest,

commissions and fees charged to the customer less amounts repaid or

written off; less impairment provisions for incurred losses and adjusted for

the cumulative amortisation arising from effective interest rate adjustments.

Effective interest rate adjustments arise when future cash flows are

discounted through the expected life of the financial instrument.

2. Available-for-sale

Available-for-sale financial assets are non-traded investment securities,

intended to be held for an indefinite period of time. These are measured

at fair value with movements in the carrying value brought into equity as

they arise, except for changes in value arising from impairment and foreign

exchange gains and losses on monetary items which are recognised in the

income statement. On disposal, gains and losses recognised previously in

equity are transferred to the income statement.

The Co-operative Group Annual Report and Accounts 2007 65


Accounting policies (continued)

3. Financial assets at fair value through profit or loss

These are either:

• acquired or incurred principally for the purpose of selling or repurchasing

in the near term

• part of a portfolio of identified financial instruments that are managed

together and for which there is evidence of a recent actual pattern of

short-term profit taking or

• upon initial recognition designated at fair value through profit or loss

to eliminate or significantly reduce a measurement or recognition

inconsistency.

These are measured at fair value with movements in the carrying value

brought into the income statement as they arise.

Impairment provision

At the balance sheet date, the bank assesses its financial assets (including

loans and advances to customers) for objective evidence that an impairment

loss has been incurred.

The amount of the loss is the difference between:

• asset’s carrying amount

• present value of estimated future cash flows (discounted at the asset’s

original or variable effective interest rate).

The amount of the impairment loss is recognised immediately through the

income statement and a corresponding reduction in the value of the financial

asset is recognised through the use of an allowance account.

The written-down value of the impaired loan is compounded back to the net

realisable balance over time using the original effective interest rate. This is

reported through interest and similar income within the income statement

and represents the unwind of the discount.

A write-off is made when all or part of a claim is deemed uncollectable

or forgiven. Write-offs are charged against previously established provisions

for impairment or directly to the income statement. Provisions are released at

the point when it is deemed that the risk of loss has reduced to the extent

that a provision is no longer required.

Impairment losses on available-for-sale assets are recognised by transferring

the difference between the amortised cost and current fair value out of equity

to profit or loss. When a subsequent event causes the amount of impairment

loss on an available-for-sale debt security to decrease, the impairment loss is

reversed through profit or loss.

Offsetting

Financial assets and financial liabilities are offset and the net amount

reported in the balance sheet when there is a legally enforceable right to

offset the recognised amounts and there is an intention to settle on a net

basis, or realise the asset and settle the liability simultaneously.

Derivative financial instruments and hedge accounting

Derivatives used for asset and liability management purposes

Derivatives are used to hedge interest and exchange-rate exposures related

to non-trading positions. Instruments used for hedging purposes include

swaps, forward-rate agreements, futures, options and combinations of these

instruments.

Derivative financial instruments are stated at fair value.The gain or loss on

remeasurement to fair value is recognised immediately in the income

statement except where derivatives qualify for cash flow hedge accounting.

Embedded derivatives: A derivative may be embedded in another financial

instrument, known as the host contract. Where the economic characteristics

and risks of an embedded derivative are not closely related to those of the

host contract, the embedded derivative is separated from the host and held

on the balance sheet at fair value. Movements in fair value are posted to the

income statement, whilst the host contract is accounted for according to the

policy for that class of financial instrument.

Cash flow hedges: Where derivatives are designated as hedges of the

exposure to variability in cash flows of a recognised asset and liability, or a

highly probable forecast transaction, the portion of the fair value gain or loss

on the derivative that is determined to be an effective hedge is recognised

directly in equity. The ineffective part of any gain or loss is recognised

immediately in the income statement.

Cumulative amounts recognised through equity are recycled to the income

statement in the period in which the underlying hedged item matures and

its associated gain or loss affects the income statement. When a hedging

relationship is broken or the hedge becomes ineffective, the cumulative

unrealised gain or loss remaining in equity continues to be held in equity,

and is transferred to the income statement only when the forecast transaction

is recognised.

Fair values are based on quoted market prices in active markets, and where

these are not available, using valuation techniques such as discounted cash

flow models. For further details refer to Note 52.

Derivatives used for trading purposes: Derivatives entered into for trading

purposes include swaps, forward-rate agreements, futures, options and

combinations of these instruments. Derivatives used for trading purposes are

measured at fair value and any gains or losses are included in the income

statement. The use of derivatives and their sale to customers as risk

management products is an integral part of the bank’s trading activities.

Fair values are based on quoted market prices in active markets, and where

these are not available, using valuation techniques such as discounted cash

flow models.

Insurance activities

Investments

i) Financial assets designated as available-for-sale

CISGIL classifies all holdings in debt securities as available-for-sale. Initial

measurement is at fair value, being purchase price upon the date on

which CISGIL commits to purchase plus directly attributable transaction

costs. Subsequent valuation is at fair value with differences between fair

value and carrying value recognised in equity as they arise. On disposal,

gains or losses previously recognised in equity are transferred to the

income statement.

66 The Co-operative Group Annual Report and Accounts 2007


ii) Financial assets at fair value through profit or loss

Investments, other than those in debt securities, are classified as financial

assets at fair value through profit or loss within CISGIL. This category has

two sub-categories in CIS; financial assets held for trading and those

designated at fair value through profit or loss at inception. CIS classifies

all investments, including any derivatives, as financial assets at fair value

through profit or loss as they form part of a portfolio in which there is

evidence of short-term profit taking. CIS designates financial assets as

fair value through profit or loss where they are held to match investment

contract or other financial liabilities whose values are linked to the

performance of these assets. Initial measurement is at fair value being

purchase price upon the date which CISGIL and CIS commit to purchase.

Directly attributable transaction costs are expensed immediately on

recognition. Subsequent valuation is at fair value with realised and

unrealised gains and losses arising from changes in fair value of the

financial assets included in the income statement in the period in which

they arise. On disposal, gains or losses (being proceeds less carrying

amount) are recognised in gains and losses within the income statement.

CIS designates all investment backing long-term business and

shareholder reserves as financial assets at fair value through profit

or loss. Financial assets at fair value through profit or loss are initially

recognised at fair value, being purchase price upon the date on which CIS

commits to purchase, and are subsequently carried at fair value. Realised

and unrealised gains and losses arising from changes in fair value of the

financial assets are included in the income statement in the period in

which they arise.

iii) Financial liabilities

Financial liabilities primarily represent loans and borrowings. Initial

measurement is at fair value being consideration received plus any

directly attributable transaction costs. Subsequently, financial liabilities

are measured at amortised cost using the effective interest method.

Fair value measurement is based on a discounted cash flow basis using

prevailing market interest rate.

Financial liabilities whose value is linked to the performance of, and

measured by reference to, the fair value of a matching portfolio of assets

are designated at fair value through profit or loss at inception.

iv) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or

determinable payments that are not quoted in an active market other

than those that CIS intends to sell in the short term or that it has

designated as at fair value through profit or loss.

Loans and receivables are initially recognised at fair value, being cost

inclusive of attributable transaction costs and subsequently carried at

amortised cost using the effective interest method.

The fair value of listed investments is their quoted clean bid price at the

balance sheet date. If the market for a financial asset is not active, fair value

is established using appropriate valuation techniques.

Financial instruments, assets and liabilities are recognised/derecognised by

CIS/CISGIL on the date upon which it commits to purchase/sell the instruments.

CIS and CISGIL operate approved stock lending schemes whereby its

securities are loaned to other institutions in accordance with the terms of

agreements with those institutions. Under these arrangements, ownership

of the securities passes to the borrower but CIS/CISGIL has the right to

demand the return of the loaned securities at any time. It also retains the right

to receive the income to which it would have been entitled had the securities

not been loaned. Accordingly, the securities continue to be recognised as

investments in the balance sheet. CIS/CISGIL also participate in sale and

repurchase (repo) arrangements in connection with its portfolio of government

guaranteed securities (gilts). Under these arrangements, CIS/CISGIL sell gilts

but is contractually obliged to repurchase them at a fixed price on a fixed

future date. Securities which are the subject of repo arrangements at the

balance sheet date are included in investments in the balance sheets at their

bid value and the associated liability is recognised, being the capital amount

owing under the repo arrangements.

CISGIL requires all stock lending and repo transactions to be fully collaterised

in an agreed form for their duration and equivalent collateral is returned at

the completion of the loan period. Authorised collateral for stock lending

arrangements comprises DBV or certificates of deposit. For repo arrangements,

collateral is required in the form of cash.

Derivative financial instruments

Derivatives are accounted for as trading instruments. Derivatives are

initially recognised at fair value on the date upon which the derivative

contract is entered into and are subsequently re-measured at their fair value.

Any resultant gain or loss is recognised in the income statement.

8 Employee benefits

Pension obligations

The Group operates defined benefit pension schemes whereby the benefits

that employees receive on retirement depend on factors such as age, years

of service and earnings.

A qualified actuary calculates the Group’s net obligation in respect of the

defined benefit scheme by estimating the amount of future benefits that

employees have earned in return for their service to date. The benefit is

then discounted to determine its present value, using a discount rate equal

to the yield available as at the balance sheet date on appropriate AA creditrated

bonds. The net obligation is this value less the fair value of the

scheme’s assets.

The cost of benefits earned in return for service in the accounting period is

calculated using the projected unit method and is recognised in the income

statement. Benefit is attributed to periods of service under the plan’s benefit

formula. Where employee service will lead to a materially higher level of

benefit in later years, benefit is attributed on a straight-line basis over the

estimated remaining service life. The income statement also includes a cost

in respect of the unwinding of the discount rate used to calculate the present

value of the scheme’s benefits and a credit in respect of the expected return

on the scheme’s assets.

When the benefits of the scheme are improved, the cost relating to past

service is recognised immediately in the income statement.

The Co-operative Group Annual Report and Accounts 2007 67


Accounting policies (continued)

Actuarial gains and losses that arise from experience adjustments and

changes in actuarial assumptions subsequent to 11 January 2004 are

recognised in full in the Group’s statement of recognised income and

expense. The actuarial gains and losses that are allocated to long-term

business are taken from the statement of recognised income and expense

direct to Unallocated Divisible Surplus (UDS).

The charge to the income statement includes current service cost, past

service cost, the interest cost of the scheme liabilities and the expected

return on scheme assets.

9 Foreign currencies

Transactions in foreign currencies are translated at the foreign exchange

rate ruling at the date of the transaction. Monetary assets and liabilities

denominated in foreign currencies at the balance sheet date are translated

into sterling at foreign exchange rates ruling at that date. Differences arising

on translation are recognised in the income statement.

10 Intangible assets

i) Goodwill

All business combinations are accounted for by applying the purchase

method. Goodwill represents amounts arising on acquisition of subsidiaries,

associates and joint ventures. In respect of business acquisitions that have

occurred since 11 January 2004, goodwill represents the difference between

the cost of the acquisition and the fair value of the identifiable assets,

liabilities and contingent liabilities acquired.

In respect of acquisitions prior to 11 January 2004, goodwill is included on

the basis of its deemed cost, which represents the amount recorded under

previous UK GAAP.

Goodwill is stated at cost less any accumulated impairment losses. Goodwill

is allocated to cash-generating units and is no longer amortised but is tested

annually for impairment. In respect of associates, the carrying value of

goodwill is included in the carrying amount of the investment in the associate.

Negative goodwill arising on an acquisition is recognised directly in profit

or loss.

ii) Software development

Costs incurred in the development of computer software for internal use are

capitalised and classified as intangible assets where they are not an integral

part of the related hardware and amortised over their useful life, which is

generally three years.

Acquired computer software licences are capitalised on the basis of the costs

incurred to acquire and bring to use the specific software. Costs directly

associated with the production of software products that are expected to

generate economic benefits beyond one year are recognised as intangible

assets. The expenditure capitalised includes direct employee costs. All other

costs associated with developing or maintaining computer software

programmes are recognised within the income statement as an expense

as incurred.

iii) Assets in the course of construction

Assets in the course of construction include directly attributable software

development costs and purchased software which are not an integral part of

the related hardware, as part of strategic projects that meet the capitalisation

requirements under IAS 38 but have not been brought into use. The costs are

held within the items in course of construction until the project has gone live

or the related asset is brought into use. At that point it will be transferred out

of this classification and will be amortised based on the useful economic life

as defined by the intangible asset accounting policy specified in (ii).

iv) Other intangible assets

Other intangible assets include pharmacy licences and Deferred Acquisition

Costs (DAC) that are acquired by the Group and are stated at cost less

accumulated amortisation (see below) and impairment losses.

Expenditure on internally generated goodwill and brands is recognised in the

income statement as an expense as incurred.

v) Subsequent expenditure

Subsequent expenditure on capitalised intangible assets is capitalised only

when it increases the future economic benefits embodied in the specific

asset to which it relates. All other expenditure is expensed as incurred.

vi) Amortisation

Amortisation is charged to the income statement on a straight-line basis over

the estimated useful lives of intangible assets. Goodwill and intangible assets

with an indefinite useful life are systematically tested for impairment at each

balance sheet date. Other intangible assets are amortised from the date they

are available for use. The estimated useful lives are as follows.

• Software development costs 3–7 years

• Pharmacy licences 20 years

• General Insurance deferred

acquisition costs

Up to 1 year

• Long-term business deferred

acquisition costs (being the average

life of a unit trust contract) Up to 6 years

11 Property, plant and equipment

Where parts of an item of property, plant and equipment have different useful

lives, they are accounted for as separate items of property, plant and equipment.

Depreciation is provided on the cost or valuation less estimated residual

value of other tangible fixed assets (excluding freehold land) on a straight-line

basis over the anticipated working lives of the assets.

Annual rates are, generally:

Property

Freehold buildings 2 1 /2%

Leasehold property

Period of lease (2 1 /2% buildings)

Group plant

Plant and machinery 7 1 /2% to 33 1 /3%

Vehicles 15% to 33 1 /3%

68 The Co-operative Group Annual Report and Accounts 2007


The residual value, if not insignificant, is reassessed annually.

Freehold land that is subject to potential development is held as a separate

class of property, plant and equipment and is carried at fair value.

Movements in fair value are recognised in the SORIE.

12 Impairment

The carrying amounts of the Group’s assets, other than biological assets,

investment property, inventories and deferred tax assets, are reviewed at

each balance sheet date to determine whether there is any indication of

impairment. If any such indication exists, the assets’ recoverable amount

is estimated.

For further details regarding the impairment provision on loans and advances

to customers for The Co-operative Bank refer to page 79.

For goodwill, and for assets that have an indefinite useful life and intangible

assets that are not yet available for use, the recoverable amount is estimated

at each balance sheet date.

An impairment loss is recognised whenever the carrying amount of an asset

or its cash-generating unit exceeds its recoverable amount. Impairment

losses are recognised in the income statement.

Impairment losses recognised in respect of cash-generating units are

allocated first to reduce the carrying amount of any goodwill allocated

to cash-generating units, and then to reduce the carrying value of other

fixed assets.

An impairment loss is reversed if there has been a change in the estimates

used to determine the recoverable amount. An impairment loss is reversed

only to the extent of the asset’s carrying amount that would have been

determined, net of depreciation or amortisation, if no impairment loss had

been recognised. An impairment loss recognised for goodwill shall not be

reversed in a subsequent period.

For debt securities designated as available for sale, any decline in fair value

which is considered to reflect impairment would be recognised in the income

statement (rather than directly in equity). Any subsequent reversal of this

impairment would also be recognised in the income statement.

Impairment is not considered for those assets held at fair value through

profit or loss.

Calculation of recoverable amount

The recoverable amount is the greater of their net selling price and value in

use. In assessing value in use, the estimated future cash flows are

discounted to their present value using a pre-tax discount rate that reflects

current market assessments of the time value of money and the risks specific

to the asset.

13 Leased assets

Leases where the Group assumes substantially all the risks and rewards of

ownership are classified as finance leases. Plant and vehicles acquired under

finance leases are stated at an amount equal to the lower of its fair value and

the present value of the minimum lease payments at inception of the lease,

less accumulated depreciation and any impairment losses.

Depreciation is provided on the same basis as for owned assets. Minimum

finance lease payments are apportioned between the finance charge and

the redemption of the outstanding liability. The finance charge is allocated to

each period during the lease term so as to produce a constant periodic rate

of interest on the remaining balance of the liability.

Property held under operating leases that would otherwise meet the definition

of investment property may be classified as investment property on a

property-by-property basis. Where such leases are treated as investment

properties, the assets are held at fair value and the leases are accounted

for as finance leases. Lease payments in respect of operating leases are

charged to the profit and loss account on a straight-line basis over the

period of the lease. Lease incentives received are recognised in the income

statement as an integral part of the total lease expense and the aggregate

benefit is recognised as a reduction of rental expense over the lease term

on a straight-line basis.

For any leases where the Group is the lessor, the aggregate cost of incentives

is recognised as a reduction of rental income over the lease term on a

straight-line basis.

14 Assets and liabilities held for sale

Non-current assets (or disposal groups comprising assets and liabilities)

that are expected to be recovered primarily through sale rather than

through continuing use are classified as held for sale. Immediately before

classification as held for sale, the assets (or components of a disposal group)

are remeasured in accordance with the Group’s accounting policies.

Thereafter generally the assets (or disposal group) are measured at the lower

of their carrying amount and fair value less cost to sell. Any impairment loss

on a disposal group is first allocated to goodwill, and then to remaining

assets and liabilities on pro rata basis, except that no loss is allocated to

inventories, financial assets, deferred tax assets, employee benefit assets,

investment property and biological assets, which continue to be measured in

accordance with the Group’s accounting policies. Impairment losses on

initial classification as held for sale and subsequent gains or losses on

remeasurement are recognised in profit or loss. Gains are not recognised

in excess of any cumulative impairment loss.

The Co-operative Group Annual Report and Accounts 2007 69


Accounting policies (continued)

15 Bad and doubtful debts

The amount charged against operating profit comprises collective provisions

against identifiable losses and, in the Banking activities, a collective provision

to cover latent but unidentifiable losses due to doubtful debts. Both provisions

are based on a year-end appraisal of debtors, loans and advances on the

basis of objective evidence that a loss has been incurred. Debtors, loans and

advances are shown in the balance sheet after deducting these provisions.

Debts are written off when there is no realistic prospect of further recovery

of the amounts owing.

16 Income tax

Income tax on the profit or loss for the year comprises current and deferred

tax. Income tax is recognised in the income statement except to the extent

that it relates to items recognised directly in equity, in which case it is

recognised in equity.

Current tax is the expected tax payable on the taxable income for the year,

using tax rates enacted or substantively enacted at the balance sheet date,

and any adjustment to tax payable in respect of previous years.

An element of tax attributable to CIS comprises tax attributable to both

policyholders’ returns and shareholder’s profit or loss. The returns and

associated tax of the life business and its subsidiaries are attributable

to the life policyholders. The profit or loss of the other than life insurance

business is attributable to the shareholder.

17 Deferred taxation

Deferred tax is provided, with no discounting, using the balance sheet liability

method, providing for temporary differences between the carrying amounts of

assets and liabilities for financial reporting purposes and the amounts used

for taxation purposes. The following temporary differences are not provided

for: the initial recognition of assets or liabilities that affect neither accounting

nor taxable profits, and differences relating to investments in subsidiaries

to the extent that they will probably not reverse in the foreseeable future.

The amount of deferred tax provided is based on the expected manner of

realisation or settlement of the carrying amount of assets and liabilities,

using tax rates enacted or substantively enacted at the balance sheet date.

A deferred tax asset is recognised only to the extent that it is probable that

future taxable profits will be available against which the asset can be utilised.

Deferred tax assets are reduced to the extent that it is no longer probable

that the related tax benefit will be realised.

18 Dividends and payments to and on behalf of members

As explained in Note 31 the Society’s share capital has been classified as

debt or equity in accordance with the respective rights of the shareholder

and the obligations of the Society. All payments to holders of shares that

are classified as debt, such as corporate investor shares, are charged

to the income statement when the Society incurs the obligation to make

such payments, and classified as financial costs.

Payments to members in their capacity as equity shareholders of the Parent

Society, such as share interest, are treated as dividends, recognised as a

liability when approved by the members in a general meeting and treated

as an appropriation of profit.

Payments to non-members, or to equity shareholders in their capacity as

customers or employees (rather than as members), are treated as charges

in the income statement. Where such payments are contractual in nature,

and indistinguishable from the operating activities of the Group, such as the

former loyalty card scheme, they are treated as operating charges. Where

such payments are non-contractual and distinguishable from the operating

activities of the business, and payment is dependent on, and subject to,

member approval in a general meeting, these payments are termed

‘Payments to and on behalf of members’, charged below operating profit

(where material) and recognised when such payments are approved by

the membership.

19 Segment reporting

A segment is a distinguishable component of the Group that is engaged in

providing products or services (business segment), which is subject to risks

and rewards that are different from those of other segments. Segmental

information is presented in respect of business segments in line with the

Group’s management and internal reporting structure.

20 Cash and cash equivalents

Cash and cash equivalents comprise cash balances, call deposits and

balances with an original maturity of three months or less. Bank overdrafts

that are repayable on demand and form an integral part of the Group’s cash

management are included as a component of cash and cash equivalents for

the purpose of the statement of cash flows.

21 Provisions

A provision is recognised in the balance sheet when the Group has a legal or

constructive obligation as a result of a past event, and it is probable that an

outflow of economic benefits will be required to settle the obligation. If the

effect is material, provisions are determined by discounting the expected

future cash flows at a pre-tax rate that reflects current market assessments

of the time value of money and, where appropriate, the risks specific to

the liability.

22 Biological assets

Biological assets are stated at fair value less estimated point-of-sale costs,

with any resultant gain or loss recognised in the income statement. Point-ofsale

costs include all costs that would be necessary to sell the assets,

excluding costs necessary to get the assets to market.

23 Investment properties

Property held for long-term rental yields that is not occupied by the Group

or property held for capital appreciation is classified as investment property.

Investment property comprises freehold land and buildings. It is carried at

fair value. Fair value is based on current prices in an active market for similar

properties in the same location and condition. No depreciation is provided

on these properties. Any gain or loss arising from a change in fair value is

recognised in the income statement.

If an investment property becomes owner-occupied, it is reclassified as

property, plant and equipment, and its fair value at the date of reclassification

becomes its cost for subsequent accounting purposes. Similarly, transfers to

the investment property portfolio are made when owner occupancy ceases

and the property meets the criteria of an investment property under IAS 40.

Prior to such a transfer the property is measured at fair value with any uplift

recognised in the SORIE.

70 The Co-operative Group Annual Report and Accounts 2007


24 Inventories

Inventories are stated at the lower of cost, including attributable overheads,

and net realisable value.

Policies applicable to the Banking activities

25 Revenue

Revenue comprises interest receivable, fees and commissions receivable

from customers.

26 Revenue recognition

Interest income is recognised on an effective interest rate (EIR) basis,

inclusive of directly attributable incremental transaction costs and fees and

discounts and premiums where appropriate. The EIR basis spreads the

interest income over the expected life of the instrument. The EIR is the rate

that, at the inception of the instrument, exactly discounts expected future

cash payments and receipts through the expected life of the instrument back

to the initial carrying amount. When calculating the EIR, the Group estimates

cash flows considering all contractual terms of the instrument (for example

prepayment options) but does not consider future credit losses.

Fees and commissions

Unless included in the effective interest calculation, fees and commissions

are recognised on an accruals basis when the service has been provided.

Fees and commissions payable to introducers in respect of obtaining lending

business, where these are direct and incremental costs related to the issue

of a financial instrument, are included in interest income as part of the

effective interest rate.

27 Assets leased to customers – finance leases

Assets leased to customers are included within ‘loans and advances to

customers’ and valued at an amount equal to the net investment in the lease,

less any provisions for impairment.

Income from assets leased to customers is credited to the income statement

based on a pattern reflecting a constant periodic rate of return on the net

investment in the lease.

28 Borrowed funds

Borrowings are recognised initially at issue proceeds net of transaction

costs incurred. Borrowings are subsequently stated at amortised cost; any

difference between proceeds net of transaction costs and the redemption

value is recognised in the income statement over the period of the

borrowings using the effective interest method.

Preference shares are classified as financial liabilities and are presented

in other borrowed funds. The dividends on these preference shares are

recognised in the income statement as interest expense on an amortised cost

basis using the effective interest method.

29 Insurance contracts

All financial guarantees in respect of intra-group funding between the

Bank and its subsidiaries are treated as insurance contracts in accordance

with IFRS4.

Policies applicable to the insurance activities

30 Revenue

Premium income from insurance and participating contracts

The accounting policy in relation to the revenue arising from insurance and

insurance and participating contracts is set out within the insurance specific

accounting policies (31 and 32).

Fee and commission income

Fees and commission received by CISGIL relate primarily to commission on

outward reinsurance contracts and are earned over the lifetime of the related

policy. Commission and fees in respect of fund management activity and

sales of units are recognised in the period in which the services are provided.

Investment income

Interest income on assets at fair value through income statement is

recognised in the income statement as it accrues an effective interest basis.

Where assets are designated as available for sale, income is recognised in

the income statement based upon effective yield over the life of the asset

inclusive of any discount premium on purchase.

Dividend income is recognised in the income statement when the right

to receive payment is established – this is the date on which the related

investment is marked ex-dividend.

Rental income from investment properties is recognised in the income

statement as it accrues.

31 Classification of contracts

Contracts under which CIS/CISGIL accept significant insurance risk from

another party (the policyholder) by agreeing to compensate the policyholder

or other beneficiary if a specified uncertain future event (the insured event)

adversely affects the policyholder or other beneficiary are classified as

insurance contracts.

Contracts under which the transfer of insurance risk to CIS/CISGIL from the

policyholder is not significant are classified as investment contracts.

A contract that qualifies as insurance remains an insurance contract until all

the risks and obligations are extinguished or expire. However, an investment

contract, classified as such on inception, could be reclassified as an

insurance contract if it subsequently meets the definition provided above.

General Insurance business

All contracts of general insurance business are classified as insurance

contacts. General Insurance business is accounted for on an annual basis.

The Co-operative Group Annual Report and Accounts 2007 71


Accounting policies (continued)

i) Premiums

Gross premiums written comprise premiums receivable on those contracts

which incepted during the financial year, irrespective of whether they relate in

whole or in part to a later accounting period, together with any necessary

adjustments to amounts reported in prior periods.

Gross premiums written:

• are stated gross of commission and exclude any taxes or levies based

on premiums;

• include an estimate of the premiums receivable on those contracts which

incepted prior to the year end but which have not been notified by the

balance sheet date (‘pipeline premium’). When calculating pipeline

premiums it is assumed, where appropriate, that options to renew

contracts automatically will be exercised. Written premium is earned

evenly over the period of the contract (usually 12 months). The treatment

of outward reinsurance premiums is analogous to gross premiums written.

ii) Unearned premium provision

For general insurance business, the proportion of written premium relating to

periods of risk beyond the year-end is carried forward to future accounting

periods. The relevant proportion is calculated, for the overwhelming majority

of contracts, using the daily pro-rata basis with the remainder being

determined according to the risk profile of the business.

Outward reinsurance premiums are treated as earned in accordance with the

profile of the reinsured contracts.

iii) Claims

Claims paid are stated net of salvage and subrogation recoveries.

iv) Claims outstanding

Claims outstanding comprise provisions representing the estimated ultimate

cost of settling:

• claims notified but not settled by the balance sheet date (‘outstanding

claims’)

• claims incurred as a result of events prior to the balance sheet date but

not notified as at that date (‘IBNR’ claims).

Provisions include attributable claims handling expenses.

Claims provisions are set at a level such that no adverse run-off deviations

are envisaged.

Adverse run-off deviations, which are material in the context of the business

as a whole, are disclosed separately.

Anticipated reinsurance recoveries, and estimates of salvage and subrogation

recoveries, are disclosed separately within assets under the headings of

‘reinsurance assets’ and ‘insurance receivables and other assets’ respectively.

vi) Acquisition costs

Costs directly associated with the acquisition of new business including

commission payable are capitalised and amortised in accordance with the

rate at which the gross premiums written associated with the underlying

contract are earned.

Long-term insurance business

Insurance and participating contracts

CIS has adopted FRS 27 ‘Life assurance’, in so far as it is compatible with

the requirements of IFRS. Accordingly insurance and participating contract

liabilities are stated on a realistic basis.

i) Premiums

Premiums are accounted for on a due basis. Should the amount due not

be known, estimates are used. For unit-linked business, the due date for

payment is taken as the date the related liability is established.

ii) Claims

Claims incurred include maturities, deaths, surrenders and annuity payments.

Maturity and annuity claims are recognised as they fall due for payment.

Deaths and surrenders are accounted for upon notification. Consistent

treatment exists between the recognition of a claim in the income statement

and the calculation of future contractual liabilities. Claims incurred include

related internal and external claims handling expenses.

iii) Long-term business provision

The long-term business provision is calculated twice yearly having regard to

the principles laid down in Chapter 1.2 of the Prudential Sourcebook for

Insurers (INSPRU). It principally comprises the realistic value of CIS’s

participating contract liabilities and is calculated by determining asset shares

and the cost of options guarantees and smoothing of investment returns.

Major classes of non-participating business are valued using a gross

premium valuation method. This approach meets the minimum requirements

of the liability adequacy test.

Further details of the methods used to value long-term business contract

liabilities are given in Note 52.

32 Contracts with discretionary participation features

A contract with a discretionary participation feature is a contract, which gives

the policyholder a right to receive, as a supplement to guaranteed minimum

payments, additional payments: (a) that are likely to form a significant portion

of the total contractual payments, (b) whose amount or timing is contractually

at the discretion of the issuer; and that are contractually based on: (i) the

performance of a specified pool of contracts or a specified type of contract;

(ii) realised and/or unrealised investment returns on a specified pool of

assets held by the issuer; or (iii) the profit or loss of the company that issued

the contracts.

v) Unexpired risk provision

Additional provision is made for unexpired risks where the claims and

expenses likely to arise after the end of the financial year in respect of

contracts concluded before that date are expected to exceed the unearned

premiums carried forward for those contracts. Provisions for unexpired

risks are calculated separately for categories of business managed together

and are determined after taking account of future investment income.

Such provisions ensure that the carrying amount of liabilities less related

deferred acquisition costs is sufficient to cover the estimated future cash

flows including claims handling expenses, and therefore meets the minimum

requirements of the liability adequacy test as set out in IFRS 4.

72 The Co-operative Group Annual Report and Accounts 2007


i) Insurance contracts

The unallocated distributable surplus comprises the excess long-term

business assets over the policyholder liabilities of the long-term business.

As long-term business is transacted on a mutual basis the unallocated

distributable surplus represents amounts due to participating contract

holders, the allocation of which has yet to be determined. Insurance contracts

with discretionary participation features are subject to the liability adequacy

test as described below.

ii) Investment contracts

These contracts are valued under the policy outlined below under investment

contracts. CIS classifies the whole contract (ie both the fixed and

discretionary elements) as a liability. The unallocated excess of the assets

over the policyholder liabilities of the with-profits business recognised as

investment contracts is included within the unallocated divisible surplus.

The whole contract is subject to the liability adequacy test.

Non-participating contracts

Insurance contracts without discretionary features are non-participating

contracts. The value of future profits that are expected to arise on nonparticipating

contracts (being the present value of future cashflows under

these contracts) has been deducted when assessing the value of liabilities

in respect of participating contracts.

Investment contracts

The liabilities are designated at fair value at inception on the basis that the

liabilities are managed on a fair value basis. Fair value is measured by

reference to the carrying value of the assets supporting the liabilities.

Revenue

Amounts received from and paid to holders of investment contracts are

accounted for as deposits received (or repaid) and are not included in

premiums and claims in the income statement.

Other revenue associated with investment management and other services

is recognised in the income statement in the period in which services

are provided.

Liability measurement

The initial measurement amount of a financial liability is the fair value of the

consideration received.

As stated above, unit linked investment contract liabilities are subsequently

carried at fair value.

Acquisition costs

Incremental costs incurred in the provision of investment management

services are not deferred but are recognised when the related service is

provided. Incremental costs directly related to the costs of acquiring new

business in relation to unit trust management are deferred and recognised

over the average contract life. The carrying amount is tested for impairment

at each reporting date.

Reinsurance

Contracts with reinsurers that give rise to a significant transfer of insurance

risk are accounted for as reinsurance contracts. Amounts recoverable under

such contracts are recognised in the same period as the related claim.

Amounts recoverable under reinsurance contracts are assessed for

impairment at each balance sheet date. If objective evidence of impairment

exists, reinsurance assets are reduced to the level at which they are

considered to be recoverable and an impairment loss is recognised in the

income statement.

Unallocated divisible surplus (UDS)

Long-term business is transacted on a mutual basis and all surpluses arising

on long-term business are allocated, as appropriate, to participating contract

holders. Its mutual status means that the long-term business fund has no

equity and the UDS represents amounts due to policyholders, the allocation of

which is yet to be determined. Accordingly the UDS is classified as a liability.

33 Policies applicable to Trading activities

Gross sales and revenue

Gross sales is a non-GAAP measure representing the amounts receivable by

the Group for goods and services supplied to customers, net of discounts but

including VAT. It also includes the gross value of sales made on an agency

basis, principally relating to travel and concession sales with a reduction to

the value of commission receivable shown separately in arriving at revenue.

Revenue is recognised to the extent that it is probable that the economic

benefits will flow to the Group and the revenue can be reliably measured.

Revenue is measured at the fair value of the consideration received,

excluding discounts, rebates, VAT and other sales tax or duty. The following

criteria must be met before revenue is recognised:

Sale of goods

Revenue is recognised at the point of sale.

Rental income

Rental income arising from operating leases on investment properties is

accounted for on a straight-line basis over the lease term.

Agency fees and commissions

Agency fees and commissions are earned in the Travelcare Division.

Turnover represents the gross amount of commissions earned and is

recognised on booking.

Dividends

Revenue is recognised when the Group’s right to receive payment

is established.

34 Funeral bonds

Funeral bond investments are held at fair value with movements in fair value

included in financial income. A liability for the cost of funeral delivery is

charged at the date of bond sale, based on the estimated third party cost at

the projected date of bond redemption. This is subject to a liability adequacy

test at least annually. The liability is discounted and the unwinding of the

discount is included in finance expenses. Other changes in the liability are

included in operating profit.

The Co-operative Group Annual Report and Accounts 2007 73


Notes to the financial statements

1 Segmental analysis

2007

Corporate

Inter-

*Discon- Member- Trading company

Food

Other Property tinuing ship Group CFS elimin-

Retail Healthcare Funeralcare Travel Retail & Farms operations & Federal Total (Page 76) ations Total

£m £m £m £m £m £m £m £m £m £m £m £m

Gross revenue – including internal sales:

Sales of goods 3,676.8 540.6 234.0 216.6 173.2 72.6 – 4,098.3 9,012.1 – – 9,012.1

Gross revenue

– excluding internal sales:

Sales of goods 3,676.8 540.6 234.0 216.6 168.0 54.9 – 1,414.4 6,305.3 – – 6,305.3

Interest and similar income – – – – – – – – 800.0 – 800.0

Fee and commission income – – – – – – – – 216.5 (2.6) 213.9

Gross earned premiums – – – – – – – – – 970.8 – 970.8

Revenue 3,676.8 540.6 234.0 216.6 168.0 54.9 – 1,414.4 6,305.3 1,987.3 (2.6) 8,290.0

Premiums ceded to reinsurers – – – – – – – – – (1,836.2) – (1,836.2)

Net revenue 3,676.8 540.6 234.0 216.6 168.0 54.9 – 1,414.4 6,305.3 151.1 (2.6) 6,453.8

Segment operating profit before significant items,

Group operating costs and change in value of

investment properties 139.2 30.8 31.5 (4.7) 1.5 73.6 – **50.8 322.7 151.5 11.3 485.5

Change in the value of investment properties (18.3) (18.3) (18.3)

Group operating costs (35.6)

Segment operating profit

before significant items 431.6

Significant items (46.6) (3.9) (3.0) (18.0) (0.8) (2.2) (40.0) (114.5) (67.5) – (182.0)

Operating profit

after significant items 92.6 26.9 28.5 (22.7) 0.7 53.1 – 10.8 189.9 84.0 11.3 249.6

Financial income 4.1

Financial expenses (35.5)

Fair value movement (23.0)

Share of profit of associates and joint ventures 0.3

Payments to and on behalf of members (45.6)

Taxation (25.1)

Loss on sale of discontinued operation, net of tax (11.2)

Profit for the year 113.6

Segment assets 1,991 715 461 40 103 613 5 411 4,339 39,440 (243) 43,536

Unallocated assets – – – – – – – – 155 393 – 548

Total assets 1,991 715 461 40 103 613 5 411 4,494 39,833 (243) 44,084

Segment liabilities 395 105 283 98 39 34 1 480 1,435 36,764 (243) 37,956

Unallocated liabilities – – – – – – – – 1,155 1,176 – 2,331

Total liabilities 395 105 283 98 39 34 1 480 2,590 37,940 (243) 40,287

Cash flows from operating

activities 302.5 24.0 38.4 (27.8) (16.5) 36.4 (13.8) (251.5) 91.7 (7.8) – 83.9

Cash flows from investing

activities (92.8) (175.5) 4.2 (2.2) (3.7) 84.6 0.8 1.1 (183.5) 739.4 – 555.9

Cash flows from financing

activities (0.8) (0.1) (0.8) (0.1) – (0.4) (1.1) (16.1) (19.4) (145.8) – (165.2)

Capital expenditure 81.9 12.7 15.3 1.6 4.2 11.2 0.9 54.7 182.5 20.3 – 202.8

Depreciation (75.5) (4.7) (13.4) (5.0) (1.4) (2.5) (1.1) (25.7) (129.3) (27.4) – (156.7)

Amortisation – (14.1) – – – – – – (14.1) (48.8) – (62.9)

* Discontinuing operations relate to Department and Home Stores and Shoefayre in 2007 and Department and Home Stores, Priory, Syncro and Shoefayre in 2006. Turnover relating to these

operations was £39.6m (2006: £186.7m) and operating losses after significant items were £11.7m (2006: £19.2m).

** Included within Corporate and membership profit is a net finance income for the pension scheme of £77.8m (2006: £73.0m).

74 The Co-operative Group Annual Report and Accounts 2007


1 Segmental analysis (continued)

2006

Corporate

Inter-

*Discon- Member- Trading company

Food

Other Property tinuing ship Group CFS elimin-

Retail Healthcare Funeralcare Travel Retail & Farms operations & Federal Total (Page 76) ations Total

£m £m £m £m £m £m £m £m £m £m £m £m

Gross income – including internal sales:

Sales of goods 3,037.8 342.0 196.7 150.0 7.9 51.6 – 3,757.3 7,543.3 – – 7,543.3

Gross income

– excluding internal sales:

Sales of goods 3,037.8 342.0 196.7 150.0 7.9 46.7 – 1,524.2 5,305.3 – – 5,305.3

Interest and similar income – – – – – – – – – 708.8 – 708.8

Fee and commission income – – – – – – – – – 232.1 (2.9) 229.2

Gross earned premiums – – – – – – – – – 1,069.1 – 1,069.1

Revenue 3,037.8 342.0 196.7 150.0 7.9 46.7 – 1,524.2 5,305.3 2,010.0 (2.9) 7,312.4

Premiums ceded to reinsurers – – – – – – – – – (62.8) – (62.8)

Net revenue 3,037.8 342.0 196.7 150.0 7.9 46.7 – 1,524.2 5,305.3 1,947.2 (2.9) 7,249.6

Segment operating profit before significant items,

Group operating costs and change in value of

investment properties 92.5 28.1 19.0 (6.9) 0.6 63.8 – 41.5 238.6 134.7 8.5 381.8

Change in the value of investment properties 44.8 44.8 44.8

Group operating costs (29.2)

Segment operating profit

before significant items 397.4

Significant items (10.0) 2.2 (0.9) (11.4) – (0.1) – (2.7) (22.9) (13.5) – (36.4)

Operating profit

after significant items 82.5 30.3 18.1 (18.3) 0.6 108.5 – 38.8 260.5 121.2 8.5 361.0

Financial income 3.4

Financial expenses (25.2)

Fair value movement 19.9

Share of profit of associates and joint ventures –

Payments to and on behalf of members (31.6)

Taxation (98.4)

Loss on sale of discontinued operation, net of tax (7.5)

Profit for the year 221.6

Segment assets 1,456 250 277 32 28 420 52 680 3,195 40,052 (239) 43,008

Unallocated assets – – – – – – – – 38 782 – 820

Total assets 1,456 250 277 32 28 420 52 680 3,233 40,834 (239) 43,828

Segment liabilities 571 72 118 40 14 13 28 344 1,200 37,695 (239) 38,656

Unallocated liabilities – – – – – – – – 566 1,334 – 1,900

Total liabilities 571 72 118 40 14 13 28 344 1,766 39,029 (239) 40,556

Cash flows from operating

activities 219.2 37.2 38.7 (2.9) (17.6) 7.7 (3.8) (41.3) 237.2 904.0 – 1,141.2

Cash flows from investing

activities (87.9) (103.0) (27.6) (3.8) (5.9) 79.4 (4.7) (16.9) (170.4) (568.0) – (738.4)

Cash flows from financing

activities (0.5) (3.2) (0.7) – – (0.2) (1.7) (10.0) (16.3) 25.7 – 9.4

Capital expenditure 61.6 4.1 11.9 3.8 6.1 2.1 0.1 34.9 124.6 77.7 – 202.3

Depreciation (58.2) (3.0) (11.4) (4.9) (1.9) (2.3) (0.2) (22.8) (104.7) (29.6) – (134.3)

Amortisation – (4.5) – – – – – – (4.5) (42.9) – (47.4)

All business is conducted within the UK in both 2006 and 2007.

The Co-operative Group Annual Report and Accounts 2007 75


Notes to the financial statements (continued)

CFS segmental analysis

2007 2006

General Other Total Long-Term General Other Total Long-Term*

Banking Insurance Shareholder Shareholder Business Total Banking Insurance Shareholder Shareholder Business Total

£m £m £m £m £m £m £m £m £m £m £m £m

Interest and similar income 800.0 – – 800.0 – 800.0 708.8 – – 708.8 – 708.8

Fee and commission income 216.5 – – 216.5 – 216.5 232.1 – – 232.1 – 232.1

Gross earned premiums – 436.6 – 436.6 534.2 970.8 – 520.7 – 520.7 548.4 1,069.1

Premiums ceded to reinsurers – (17.1) – (17.1)(1,819.1) (1,836.2) – (32.9) – (32.9) (29.9) (62.8)

Net revenue 1,016.5 419.5 – 1,436.0 (1,284.9) 151.1 940.9 487.8 – 1,428.7 518.5 1,947.2

Segment operating profit

before significant items and

Group operating costs 50.4 67.1 34.0 151.5 – 151.5 76.3 37.0 21.4 134.7 – 134.7

Significant items (38.0) (29.5) – (67.5) – (67.5) – (13.0) (0.5) (13.5) – (13.5)

Operating profit

after significant items 12.4 37.6 34.0 84.0 – 84.0 76.3 24.0 20.9 121.2 – 121.2

Segment assets 12,699 1,439 929 15,067 24,373 39,440 12,318 1,298 1,106 14,722 25,330 40,052

Unallocated assets 388 – 5 393 – 393 461 230 18 709 73 782

Total assets 13,087 1,439 934 15,460 24,373 39,833 12,779 1,528 1,124 15,431 25,403 40,834

Segment liabilities 11,399 1,125 22 12,546 24,218 36,764 11,234 1,135 285 12,654 25,041 37,695

Unallocated liabilities 971 14 36 1,021 155 1,176 846 126 – 972 362 1,334

Total liabilities 12,370 1,139 58 13,567 24,373 37,940 12,080 1,261 285 13,626 25,403 39,029

Cash flows from operating

activities (248.5) (17.5) 258.2 (7.8) – (7.8) 845.0 (380.4) 439.4 904.0 – 904.0

Cash flows from investing

activities 776.7 – (37.3) 739.4 – 739.4 (511.6) (10.0) (46.4) (568.0) – (568.0)

Cash flows from financing

activities (57.9) 23.8 (111.7) (145.8) – (145.8) 25.6 379.7 (379.6) 25.7 – 25.7

Capital expenditure 14.7 – 5.6 20.3 – 20.3 42.6 – 34.0 76.6 1.1 77.7

Depreciation (19.1) – (7.6) (26.7) (0.7) (27.4) (21.1) – (7.8) (28.9) (0.7) (29.6)

Amortisation (3.6) (26.0) (10.1) (39.7) (9.1) (48.8) (3.3) (34.5) (5.1) (42.9) – (42.9)

* Cash flows for the long-term business are not reported separately by management, and are included in the ‘Other Shareholder’ segment cash flow figures disclosed above.

The restructuring within CFS at the start of 2006 has created some presentational changes to the accounts. Within the segmental analysis and certain notes

to the accounts, CFS result is analysed between: Bank; General Insurance; Other Shareholder and Long-Term Business. Other Shareholder includes the results

of CFS Management Services Limited, CFS Services Limited, CFS Limited and investment activity attributable to the Shareholder element of CIS Limited.

76 The Co-operative Group Annual Report and Accounts 2007


2 Premiums – Financial Services

2007 2006

£m £m

Gross premiums:

Non-participation contracts 41.5 40.0

Participation contracts 492.7 508.4

General insurance written premiums 412.8 471.4

Change in unearned premium provision 23.8 49.3

Gross premium revenue 970.8 1,069.1

Outward reinsurance premiums:

Non-participation contracts (1,819.1) (29.9)

Premium ceded (16.9) (29.6)

Change in unearned premium provision (0.2) (3.3)

Premium ceded to reinsurers (1,836.2) (62.8)

Net earned premiums (865.4) 1,006.3

Analysis of gross written premiums:

Premiums under individual contracts 526.9 539.4

Premiums under Group contracts 7.3 9.0

534.2 548.4

Life contracts

Premiums from life assurance business 383.7 385.4

Premiums from annuity business – 0.1

Premiums from pensions business 147.7 160.8

Premiums from permanent health business 2.8 2.1

534.2 548.4

General insurance contracts

Property 149.6 167.9

Motor 256.7 323.4

Other 30.3 29.4

970.8 1,069.1

During the 2007 financial year CIS has entered into an arrangement to reinsure the majority of its remaining obligations in respect of annuities in payment

and a proportion of those in deferment. The premium charged to the income statement, £1,800.2m, represents payment obligations under the agreement

totalling £4.6bn, which have been discounted at rates which average 4.9% pa over the duration of the agreement to produce a net present value. The

arrangement significantly reduces insurance risk arising from annuitant longevity. Further details are provided in Note 43 covering other reinsurance liabilities.

The Co-operative Group Annual Report and Accounts 2007 77


Notes to the financial statements (continued)

3 Operating expenses

Trading & Banking General CFS Other Shareholder Group

Corporate Insurance & Long-Term Business

2007 2006 2007 2006 2007 2006 2007 2006 2007 2006

£m £m £m £m £m £m £m £m £m £m

Cost of inventories sold (4,572.0) (3,776.9) – – – – – – (4,572.0) (3,776.9)

Interest expense and similar charges – – (456.8) (378.9) – – (0.4) – (457.2) (378.9)

Fee and commission expense (Note 5) – – (33.3) (33.8) (6.3) (22.3) (21.4) (9.8) (61.0) (65.9)

Net claims paid and benefits (Note 4) – – – – (269.7) (359.0) (1,459.8) (1,448.9) (1,729.5) (1,807.9)

Technical charges (includes change in

reinsurance assets) – – – – 2,461.4 502.8 2,461.4 502.8

Unallocated divisible surplus – – – – – – 107.1 (340.4) 107.1 (340.4)

Investment expenses and charges – – – – (6.2) – (61.6) (52.2) (67.8) (52.2)

Impairment losses on loans and

advances – – (102.0) (105.3) – – – – (102.0) (105.3)

Impairment losses on structured investments – – (31.8) – – – – – (31.8) –

Employee benefits expense (Note 21) (843.6) (698.8) (145.3) (142.3) – – (179.7) (192.1) (1,168.6) (1,033.2)

Depreciation and amortisation

expense (143.4) (109.1) (22.7) (24.4) (26.0) – (27.5) (13.6) (219.6) (147.1)

Operating lease rentals (78.2) (86.1) (10.3) (14.0) – – – – (88.5) (100.1)

Subscriptions and donations (2.9) (2.6) – – – – – (2.9) (2.6)

Auditors’ remuneration and expenses

(see detailed analysis below) (1.8) (1.2) (0.4) (1.1) (0.2) (0.3) (0.4) (0.6) (2.8) (3.2)

Direct operating expenses of

investment property

Generated rental income (2.7) (0.5) – – – – – – (2.7) (0.5)

Did not generate income (0.1) (0.2) – – – – – – (0.1) (0.2)

Other operating expenses (457.0) (483.4) (140.6) (153.4) (101.1) (146.8) 31.3 37.9 (667.4) (745.7)

Total (6,101.7) (5,158.8) (943.2) (853.2) (409.5) (528.4) 849.0 (1,516.9) (6,605.4) (8,057.3)

Significant items excluded from the above analysis are as follows:

Restructuring costs (69.5) (20.7)

Merger costs (96.9) –

Goodwill and fixed-asset impairment (26.8) (15.7)

Goodwill adjustment arising on recognition of previously unrecognised tax assets (12.6) –

Gains on PACE scheme settlements and curtailments 26.0 –

Brand costs (2.2) –

(182.0) (36.4)

Auditors’ remuneration and expenses

Trading & Banking General CFS Other Group

Corporate Insurance Shareholder

2007 2006 2007 2006 2007 2006 2007 2006 2007 2006

£000 £000 £000 £000 £000 £000 £000 £000 £000 £000

Audit of financial statements 467 317 238 236 124 140 216 211 1,045 904

Other services

Amounts receivable by auditors

and their associates in respect of:

Audit of financial statements of

subsidiaries pursuant

to such legislation 244 166 60 73 41 38 – 31 345 308

Other services pursuant to

such legislation – – 15 14 – – 73 65 88 79

Other services relating to taxation 678 322 – – – – – – 678 322

Services relating to information technology 17 98 – – – 20 – 17 17 135

Services relating to recruitment

and remuneration 3 24 – 7 – – – – 3 31

Services relating to corporate finance

transactions entered into or proposed 111 18 – – – – – – 111 18

All other services 250 236 143 752 14 81 116 334 523 1,403

Total 1,770 1,181 456 1,082 179 279 405 658 2,810 3,200

78 The Co-operative Group Annual Report and Accounts 2007


3 Operating expenses (continued)

Restructuring costs largely relates to extensive restructuring and modernisation of the CFS business, necessitating substantial investment. Fixed-asset

impairments relate to a number of individual stores within The Co-operative Food and The Co-operative Travel in 2007 and within The Co-operative Food,

Travel and Shoefayre in 2006. Goodwill impairments relate principally to The Co-operative Food, Travel and Funeralcare in 2007 and The Co-operative Travel

in 2006. A £12.6m restatement of goodwill has arisen as a result of the Group now being able to recognise tax assets from the Alldays acquisition in 2002.

As a result of the amalgamation of The Co-operative Group and United Co-operatives Limited, significant integration costs have been incurred. As a result of

the restructuring in the Group, a gain on settlement and curtailment has been recognised in relation to pension liabilities. Within operating expenses are

£37.5m non-recurring restructuring costs relating to the long-term insurance business.

The loan portfolios are reviewed on a continuous basis to assess impairment in determining whether a bad debt provision should be recorded. Judgements are

made as to whether there is objective evidence that a financial asset or portfolio of financial assets is impaired as a result of loss events that occurred after

recognition of the asset and prior to the balance sheet date.

• Bank collective provisions

Personal advances are identified as impaired by taking account of the age of the debt’s delinquency, by product type. The provision is calculated by applying a

percentage rate to different categories and ages of impaired debt. The provision rates reflect the likelihood that the debt in that category/age will be written off

or charged off at some point in the future. The rates are based on historical experience and current trends, incorporate the effects of discounting at the

customer interest rate and are subject to regular review. The provision is the product of the rate and the spot balance for the relevant arrears bucket.

• Bank individual provisions

Mortgage accounts are identified as impaired by taking account of the age of the debt’s delinquency on a case-by-case basis based on arrears data held

within the mortgages system.

Individual provisions are also raised on a case-by-case basis for each mortgage account in arrears. Each Corporate account is assessed and allocated a ‘risk

grade’ to enable The Co-operative Bank to monitor the overall quality of its lending assets. Those of lesser quality, where the lending is potentially at risk and

provisions for future loss may be required, are centrally monitored with specific management actions taken at each stage within laid down procedures and

specific provisioning criteria. Provisions represent the likely net loss after realisation of any security.

• Bank impairment on structured investments

The Co-operative Bank holds £63m of Structured Investments. The accounting treatment for these assets is available-for-sale which means that they are fair

valued in the balance sheet with movements passing through reserves, unless the assets are deemed to be impaired which results in movements being

recognised in the income statement. The impacts of the ‘credit crunch’ and subsequent reductions in liquidity in wholesale markets has led to reductions in

values for these assets but has also increased the subjectivity of valuation as there is no active market or traded price available for such assets.

The Co-operative Bank has adopted a valuation policy of Net Asset Value (NAV), unless a restructuring proposal is in place which provides better valuation

evidence.

For assets in the process of restructuring, it has been necessary to estimate what cash flows, levels of default and funding rates will arise post restructure.

Additionally, it is necessary to consider whether these assets are impaired as this requires losses to be recognised in the income statement. Impairment has been

assessed by:

• Is there evidence that a loss event has occurred; and

• Does the loss event have a negative impact on future cash flows.

Each of The Co-operative Bank’s structured investments meet these criteria and therefore an impairment provision has been made.

There is a tax credit of £10.25m relating to the above significant items.

In the current year £386,877 was paid to the Co-operative Party (2006: £464,900) and £nil to the Labour Party (2006: £4,523).

The Co-operative Group Annual Report and Accounts 2007 79


Notes to the financial statements (continued)

4 Claims paid and benefits – General Insurance and Long-Term Business

2007 2006

£m £m

Gross claims paid

Long-term insurance contracts:

– death benefits 135.4 140.4

– surrender benefits 594.8 558.6

– maturity claims 622.1 672.2

– annuity and other benefits 185.5 159.3

1,537.8 1,530.5

General insurance contracts:

– current and prior year claims 287.1 364.4

Claims paid and benefits 1,824.9 1,894.9

Less recovered from reinsurers

Long-Term Business:

– death benefits (8.9) (6.5)

– annuity and other benefits (69.1) (75.1)

(78.0) (81.6)

General Insurance:

– current and prior year claims (17.4) (5.4)

Amounts recovered from reinsurers (95.4) (87.0)

Net claims paid and benefits 1,729.5 1,807.9

5 Fees and commissions – Financial Services

2007 2006

£m £m

Commission 58.6 72.9

Change in unearned commission 2.4 (7.0)

61.0 65.9

80 The Co-operative Group Annual Report and Accounts 2007


6 Operating income

Trading & Banking General CFS Other Group

Corporate Insurance Shareholder

2007 2006 2007 2006 2007 2006 2007 2006 2007 2006

£m £m £m £m £m £m £m £m £m £m

Gains less losses arising from financial

instruments and other assets (Note 8) – – 5.5 2.8 (1.4) 3.9 (371.9) 137.5 (367.8) 144.2

Investment income (Note 7) – 0.5 – – 64.2 68.7 797.9 832.9 862.1 902.1

Net gain/(loss) on disposal of property,

plant and equipment 49.8 46.3 (17.4) (1.8) – – – (0.1) 32.4 44.4

Change in value of investment property (18.3) 44.8 – – – – – – (18.3) 44.8

Rental income of investment property 19.8 14.4 – – – – – – 19.8 14.4

Other operating income* – – 0.1 0.5 2.4 54.5 52.7 55.0 55.2

51.3 106.0 (11.9) 1.1 63.3 75.0 480.5 1,023.0 583.2 1,205.1

* This includes fee and commission income, and income from service activities and other operating income (Co-operative Insurance), dividend income and net trading income (bank).

7 Investment income

2007 2006

£m £m

Financial assets

Interest income from debt securities at fair value through profit or loss 418.6 416.8

Dividend income from equities at fair value through profit or loss 209.0 272.2

Interest money from loans and receivables at amortised cost 0.9 1.7

Rental income from investment property 121.1 124.0

Cash and cash equivalents interest income 31.6 4.7

Fair value income from deposit with credit institutions 2.7 6.8

Interest income from financial assets designated available for sale:

Listed debt securities 61.1 61.6

Unlisted debt securities 0.4 0.3

Other 16.7 14.0

862.1 902.1

8 Gains less losses arising from financial assets

2007 2006

£m £m

Net gains/(losses) on remeasurement of financial and other assets at fair value

Listed equities 75.3 667.5

Unlisted equities 12.7 8.2

Listed debt securities (224.4) (644.6)

Unlisted debt securities 63.2 6.0

Derivatives (76.2) (192.5)

Investment property – financial services (155.0) 271.3

Net gains of financial assets at available-for-sale (1.4) 3.9

Foreign exchange net trading income 5.2 5.0

Net losses on remeasurement of financial liabilities at fair value (72.4) –

Other investments 5.2 19.4

(367.8) 144.2

Property held for long-term rental that is not occupied by CIS is classified as investment property and included within investments for Financial Services.

For further details refer to Note 28.

The Co-operative Group Annual Report and Accounts 2007 81


Notes to the financial statements (continued)

9 Financial income

2007 2006

£m £m

Interest receivable 1.6 3.4

Unwinding of discount 2.5 –

4.1 3.4

10 Financial expenses – interest payable

2007 2006

£m £m

Loans repayable within five years (9.8) (2.3)

Loans repayable wholly or in part after five years (18.6) (16.6)

Corporate investor share interest (5.1) (4.3)

Unwinding of discount (2.0) (2.0)

11 Financial expenses – fair value movement

(35.5) (25.2)

2007 2006

£m £m

Fair value movement on quoted debt (0.8) 18.7

Fair value movement on interest rate swaps 4.5 (4.9)

Fair value movement on funeral bonds (16.4) 2.1

Exchange (loss)/gain on Yen borrowing/deposits (10.3) 4.0

The fair value movement on funeral bonds reflects an adjustment to the discount rate.

12 Payments to and on behalf of members

(23.0) 19.9

2007 2006

£m £m

To corporate members (15.1) (15.0)

To individual members (22.1) (13.9)

Community distribution (2.1) (1.0)

To employees who are members (6.3) (1.7)

Total payments to and on behalf of members (45.6) (31.6)

The distribution of £45.6m includes £40.6m relating to the amount approved by members at the Annual General Meeting on 19 May 2007 and is based

on available profits for the financial year to 13 January 2007. A further £5m paid to individual members was approved by members at the 2007 Half Year

Meeting, based on available profits for the half year to 28 July 2007. The corporate member payment was calculated per £100 of total qualifying purchases

at the rate of 89p (2006: 91p) to corporate members. The individual member payments were made to all member customers with payments aligned to their

2007 shopping levels with the Group’s businesses.

It is proposed that a total payment to members of £94.7m, in respect of the year ended 12 January 2008, be submitted for approval at the Annual General

Meeting on 17 May 2008. This represents a payment to individual members of £39.9m, a community distribution of £10.0m, a payment to employee

members of £19.9m and a payment to corporate members of £24.9m, calculated at the rate of 206p per £100 of total qualifying purchases. This is in

addition to the £5m interim dividend for 2007 included above.

82 The Co-operative Group Annual Report and Accounts 2007


13 Income tax expense

Restated

2007 2006

£m £m

Current tax 48.0 16.6

Deferred tax (27.7) 78.6

20.3 95.2

The tax charge is represented by:

Continuing business 25.1 98.4

Discontinuing business (4.8) (3.2)

20.3 95.2

The tax on the Group’s net profit before tax differs from the theoretical amount that would arise using the corporation tax rate of the UK as follows:

Profit before tax 149.9 327.5

Current tax at 30.0% 45.0 98.4

Different basis of tax for UK life insurance – policy holder tax – current year (0.5) 7.0

Different basis of tax for UK life insurance – policy holder tax – prior year 14.5 1.9

Different basis of tax for UK life insurance – accounting profit not subject to policyholder tax (4.2) (5.1)

Non-taxable profit on disposal of investments/assets (5.0) (1.4)

Expenses not deductible for tax 9.0 0.8

Depreciation and amortisation on non-qualifying assets 15.4 7.9

Non-taxable investment income (0.6) (10.9)

Adjustment in respect of prior periods (4.9) 6.6

s107 interest adjustment on technical liabilities 1.7 3.2

Utilisation of tax losses – (0.2)

Preference dividend – 1.7

Tax on sale of discontinuing operations (4.8) (3.2)

Foreign exchange (6.4) –

Restatement of deferred tax to 28% (28.5) –

Other 3.6 (2.6)

Total tax charge 34.3 104.1

Less tax attributable to policyholders’ returns (14.0) (8.9)

20.3 95.2

Deferred taxation

Deferred income taxes are calculated on all temporary differences under the liability method using an effective tax rate of 28% (2006: 30%).

Restated

2007 2006

£m £m

At beginning of year 642.5 600.0

Income statement charge/(credit)

– CIS Life Business (63.5) (21.8)

– Group (excluding CIS Life Business) (27.7) 78.6

Charged to equity:

Retirement benefit obligations 4.1 8.9

Self-occupied property – 0.2

Cash flow hedges 10.6 (12.1)

Unrealised appreciation on investments – (17.6)

Unrealised appreciation on investment property 29.6 –

CIS Life business – attributable to policy holders – 6.3

Fair value on transfer of engagements 60.2 –

Other fair value acquisitions 15.0 –

At end of year 670.8 642.5

The Co-operative Group Annual Report and Accounts 2007 83


Notes to the financial statements (continued)

13 Income tax expense (continued)

The deferred tax charge in the income statement comprises the following differences:

Restated

2007 2006

£m £m

Original and reversal of temporary differences (13.9) 3.3

Retirement benefit obligations 33.1 22.6

Unrealised appreciation on investments and rolled-over gains (4.3) 25.7

Unrealised appreciation on investments (22.1) 15.0

Utilisation of tax losses 5.7 –

Capital allowances on assets leased to customers 1.8 1.7

Capital allowances on fixed assets 22.7 1.6

Adjustments to tax charge in respect of previous periods (22.2) 8.7

Change in tax rate to 28% (28.5) –

(27.7) 78.6

The adjustments in respect of previous periods relate to the re-assessment of capital gains available for rollover relief resulting in the reduction of the provision

for unrealised properties of £9m, in addition to the recognition of brought forward losses of £12.6m considered to be capable of utilisation.

14 Losses on sale or termination of activities

Losses on the sale or termination of businesses are stated after releasing provisions of £4.7m (2006: £1.2m release).

An analysis of the assets and liabilities of businesses sold and terminated is as follows:

2007 2006

Assets at date of sale or termination £m £m

Tangible fixed assets (6.2) (15.9)

Investments (0.3) –

Inventories (11.6) (1.8)

Debtors (4.5) (2.3)

Deferred tax asset (2.6) –

Pension scheme deficit 2.0 –

Creditors 11.1 5.1

Net assets (12.1) (14.9)

Net provisions credited 4.7 1.2

Operating losses of discontinuing operations (11.7) (22.5)

Net cash consideration 3.1 25.5

Loss on sale or termination (16.0) (10.7)

Taxation at 30% 4.8 3.2

Total loss on sale or termination, net of tax (11.2) (7.5)

The net cash consideration of £3.1m was received in the year and is reflected in the cash flow. The net cash flow costs of £14.6m also relate to utilisation of

closure provisions made in 2006 in respect of Department and Home Stores.

84 The Co-operative Group Annual Report and Accounts 2007


15 Emoluments of directors

The total remuneration of the directors was as follows:

2007 2006

£000 £000

Salaries 470 416

Payments to societies for directors’ services 287 159

757 575

Directors’ emoluments fall into the ranges shown: 2007 2006

£nil to £5,000 – –

£5,001 to £10,000 6 3

£10,001 to £15,000 – 10

£15,001 to £20,000 17 9

£20,001 to £25,000 1 1

£25,001 to £30,000 2 3

£30,001 to £35,000 3 2

£35,001 to £40,000 1 1

£40,001 to £45,000 – 1

£45,001 to £50,000 1 –

£50,001 to £55,000 3 –

£55,001 to £60,000 – –

34 30

Details of directors’ and Executives’ remuneration can be found on pages 49 to 55.

16 Property, plant and equipment

Group

2007 2006

£m £m

Trading and Corporate activities 1,710.6 1,160.5

Financial Services 143.2 163.5

Total 1,853.8 1,324.0

Group

2007 2006

£m £m

The net book value of property comprises:

Freehold 1,091.7 808.8

Long leasehold 50.0 15.4

Short leasehold 47.8 1.3

1,189.5 825.5

Plant includes assets held under finance leases as follows:

Cost 14.5 13.3

Accumulated depreciation (9.5) (10.2)

Net book value 5.0 3.1

The Co-operative Group Annual Report and Accounts 2007 85


Notes to the financial statements (continued)

16 Property, plant and equipment (continued)

For year ended 12 January 2008

Group

Property Plant Total

£m £m £m

Cost or valuation:

At 13 January 2007 1,024.8 1,326.0 2,350.8

Additions 31.9 174.4 206.3

Arising on transfer of engagements (Note 47) 372.6 137.9 510.5

Revaluation 115.0 – 115.0

Business acquisitions (Note 48) 5.0 9.5 14.5

Business disposals (Note 14) (5.1) (15.7) (20.8)

Transfers to investment properties (88.4) – (88.4)

Other disposals and transfers (61.6) (63.7) (125.3)

At 12 January 2008 1,394.2 1,568.4 2,962.6

Depreciation:

At 13 January 2007 199.3 812.2 1,011.5

Charge for the year 18.8 137.9 156.7

Impairment 3.0 7.3 10.3

Business disposals (1.9) (12.7) (14.6)

Other disposals and transfers (14.5) (46.4) (60.9)

At 12 January 2008 204.7 898.3 1,103.0

Less assets held for sale (5.8) – (5.8)

Net book value:

At 12 January 2008 1,183.7 670.1 1,853.8

At 13 January 2007 810.2 513.8 1,324.0

At 12 January 2008 the Group revalued certain former trading properties prior to a transfer to the investment property portfolio (see Note 18). In addition the

Group revalued certain estates that are intended for future development. The valuation was carried out by external chartered surveyors, Colliers Conrad Ritblat

Erdman and Smiths Gore, on the basis of open market value in accordance with the RICS Appraisal and Valuation Manual. Within Property, land of £47.2m is

held at valuation (2006: £nil). Its historical cost equivalent is £0.4m (2006: £nil).

For year ended 13 January 2007

Group

Property Plant Total

£m £m £m

Cost:

At 14 January 2006 1,049.1 1,284.7 2,333.8

Additions 2.4 163.9 166.3

Business acquisitions 10.9 4.4 15.3

Business disposals (13.0) (23.4) (36.4)

Other disposals and transfers (24.6) (103.6) (128.2)

At 13 January 2007 1,024.8 1,326.0 2,350.8

Depreciation:

At 14 January 2006 194.7 792.2 986.9

Charge for the year 16.4 117.9 134.3

Impairment 0.8 5.4 6.2

Business disposals (3.2) (17.2) (20.4)

Other disposals and transfers (9.4) (86.1) (95.5)

At 13 January 2007 199.3 812.2 1,011.5

Less assets held for sale (15.3) – (15.3)

Net book value:

At 13 January 2007 810.2 513.8 1,324.0

At 14 January 2006 821.0 486.7 1,307.7

86 The Co-operative Group Annual Report and Accounts 2007


17 Intangible assets

Group

2007 2006

£m £m

Trading and Corporate activities 737.4 409.1

Financial Services 81.0 85.1

Total 818.4 494.2

Deferred acquisition costs (see a below) 46.4 49.6

Other intangible assets (see b below) 772.0 444.6

Total intangible assets 818.4 494.2

a) Deferred acquisition costs

At the beginning of the year 49.6 34.5

Deferred acquisition costs 31.9 49.6

Amortisation (35.1) (34.5)

At the end of the year 46.4 49.6

Incremental costs incurred in the provision of investment management services by CIS Unit Managers Limited (subsidiary of the long-term business fund)

are deferred and recognised in the same period as the related service income. The deferred costs are stated gross of a related deferred income liability.

b) Other intangible assets

For year ended 12 January 2008

Group

Assets in

Intellectual Computer course of

Goodwill Licences property software construction Total

£m £m £m £m £m £m

Cost:

At 13 January 2007 377.4 133.5 0.5 42.3 8.8 562.5

Acquisitions in year (Note 48) 18.3 166.1 – – – 184.4

Arising on transfer of engagements (Note 47) – 196.1 – – – 196.1

Additions – – 0.3 11.8 1.0 13.1

Disposals (6.7) (0.4) – (0.1) – (7.2)

Transfers (2.2) – – – – (2.2)

At 12 January 2008 386.8 495.3 0.8 54.0 9.8 946.7

Amortisation:

At 13 January 2007 96.1 6.2 – 15.6 – 117.9

Charge for the year – 14.1 – 13.7 – 27.8

Impairment charge 16.5 – – – – 16.5

Goodwill adjustment arising on recognition of

previously unrecognised tax assets 12.6 – – – – 12.6

Disposals – – – (0.1) – (0.1)

At 12 January 2008 125.2 20.3 – 29.2 – 174.7

Net book value:

At 12 January 2008 261.6 475.0 0.8 24.8 9.8 772.0

At 13 January 2007 281.3 127.3 0.5 26.7 8.8 444.6

The Co-operative Group Annual Report and Accounts 2007 87


Notes to the financial statements (continued)

17 Intangible assets (continued)

For year ended 13 January 2007

Group

Assets in

Intellectual Computer course of

Goodwill Licences property software construction Total

£m £m £m £m £m £m

Cost:

At 14 January 2006 341.1 31.7 – 15.9 13.3 402.0

Acquisitions in year (Note 48) 37.8 101.8 – – – 139.6

Additions – – 0.5 6.3 15.8 22.6

Disposals (1.5) – – (0.2) – (1.7)

Transfers – – – 20.3 (20.3) –

At 13 January 2007 377.4 133.5 0.5 42.3 8.8 562.5

Amortisation:

At 14 January 2006 84.8 1.7 – 7.2 – 93.7

Charge for the year – 4.5 – 8.4 – 12.9

Impairment charge 11.3 – – – – 11.3

At 13 January 2007 96.1 6.2 – 15.6 – 117.9

Net book value:

At 13 January 2007 281.3 127.3 0.5 26.7 8.8 444.6

At 14 January 2006 256.3 30.0 – 8.7 13.3 308.3

Licences relate to the Healthcare business.

The main components of goodwill relate to Alldays (£86.6m), Somerfield (£22.1m), Conveco (£20.1m) within Co-operative Food, and Fairways (£10.5m) within

Co-operative Funeralcare.

Goodwill is not amortised but is subject to impairment reviews at least annually. Impairment testing is carried out for cash generating units (‘CGUs’) which are

set at the level at which management monitor goodwill, typically at total acquisition level.

Impairment testing compares the recoverable amount of goodwill with the book value. Recoverable amount is calculated by discounting future cash flows of the

CGU based on the three year plans approved by the Board. The key factors are future growth rates and discount rates which are based on the cost of capital for

each business and range from 11% to 15%. Business specific growth rates are used to extrapolate cash flows beyond the three year plan.

18 Investment properties – Trading and Corporate activities

Group

2007 2006

£m £m

Valuation at beginning of year 277.8 282.4

Revaluation (deficit)/surplus recognised in income statement (18.3) 44.8

Arising on transfer of engagements (47(a)) 53.3 –

Additions 4.2 –

Transfers in from property, plant and equipment 88.4 –

Disposals (19.8) (49.4)

Valuation at end of year 385.6 277.8

Investment properties have been valued as at 12 January 2008. The valuation was carried out by a mixture of external chartered surveyors, Colliers Conrad

Ritblat Erdman, Smiths Gore, as well as in-house valuations, on the basis of open market value in accordance with the RICS Appraisal and Valuation Manual.

The properties are valued individually, and yields are therefore varying on a property-by-property basis. The transfers in from fixed assets arise from the end of

owner occupancy at former trading and administrative locations.

88 The Co-operative Group Annual Report and Accounts 2007


18 Investment properties – Trading and Corporate activities (continued)

The mean ERV yield over the whole estate at year-end is 4.2%. (2006: 4.986%)

In the case of investment properties it is assumed that uplifts on valuation principally reflect future rentals.

Investment properties do not include those within Insurance activities. Details of these are included in Note 28.

The valuation of investment properties comprises:

Group

2007 2006

£m £m

Freehold 365.5 270.4

Long leasehold 18.5 5.1

Mixed tenure 1.6 2.3

385.6 277.8

If investment properties were carried at historical cost, the cost and accumulated depreciation would be:

Group

2007 2006

£m £m

Cost 219.8 136.3

Accumulated depreciation (14.2) (2.9)

Net historic cost value 205.6 133.4

19 Investments – Trading and Corporate activities

Associates

& Joint Ventures Other Total

Group £m £m £m

Shares:

At 13 January 2007 1.4 5.2 6.6

Additions 2.2 1.0 3.2

Disposals – (0.3) (0.3)

Fair value adjustment* – (2.2) (2.2)

At 12 January 2008 3.6 3.7 7.3

Loans:

At 13 January 2007 and at 12 January 2008 – 0.2 0.2

Provisions:

At 13 January 2007 and at 12 January 2008 (1.0) – (1.0)

Share of reserves:

At 13 January 2007 1.2 – 1.2

Retained profit 0.3 – 0.3

Arising on transfer of engagements (Note 47 (d)) 9.4 – 9.4

At 12 January 2008 10.9 – 10.9

Total investments:

At 12 January 2008 13.5 3.9 17.4

At 13 January 2007 1.6 5.4 7.0

* As a result of the amalgamation of The Co-operative Group and United Co-operatives Limited, E-Store became a subsidiary of The Co-operative Group, and is no longer included in investments.

Other investments include quoted investments with a market value of £219,731 (2006: £210,113) that are designated as financial assets at fair value through

income statement.

The Co-operative Group Annual Report and Accounts 2007 89


Notes to the financial statements (continued)

20 Financial instruments and derivatives

2007 2006

Assets Liabilities Assets Liabilities

£m £m £m £m

Trading and Corporate activities (a) 0.6 (7.7) 1.5 (11.8)

Bank (b) 88.2 (92.3) 84.4 (117.7)

Co-operative Insurance (c) 545.7 (6.0) 635.2 (22.6)

Total Financial Services 633.9 (98.3) 719.6 (140.3)

a) Trading and Corporate activities

At 12 January 2008

Derivatives held for non-trading purposes for which hedge accounting has not been applied

Contractual/ Fair Fair

notional value value

amount assets liabilities

£m £m £m

Interest-rate swaps 586.9 0.6 (7.7)

Total recognised derivative assets/(liabilities) 586.9 0.6 (7.7)

The interest rate swaps are measured at fair value through income statement.

The objectives and policies for financial instruments are included within Note 52 on risk management.

b) Banking activities

The Co-operative Bank has entered into various derivatives as principal either as a trading activity, which includes proprietary transactions and customer

facilitation, or as a hedging activity for the management of interest-rate risk and foreign exchange-rate risk. Positive and negative fair values have not been

netted as The Co-operative Bank does not have legal right of offset.

Derivatives held for trading purposes:

The trading transactions are wholly interest-rate related contracts including swaps, caps and floors, forward-rate agreements and exchange traded futures.

Trading transactions include derivatives where The Co-operative Bank enters into a transaction to accommodate a customer together with the corresponding

hedge transaction.

Non-trading derivatives:

Non-trading transactions comprise derivatives held for hedging purposes to manage the asset and liability positions in The Co-operative Bank. Derivatives used

to manage interest rate related positions include swaps, caps and floors, forward-rate agreements and exchange traded futures. The foreign exchange-rate

positions are managed using forward currency transactions and swaps.

1) Derivatives held for trading

Interest-rate derivatives

2007

Notional

principal Fair value Fair value

amount asset liability

£m £m £m

Interest-rate swaps 1,450.3 9.1 (7.5)

Over-the-counter (OTC) interest-rate options 136.4 0.5 (0.5)

Total OTC derivatives 1,586.7 9.6 (8.0)

Total derivative assets/(liabilities) held for trading 1,586.7 9.6 (8.0)

90 The Co-operative Group Annual Report and Accounts 2007


20 Financial instruments and derivatives (continued)

2) Derivatives held for hedging

Derivatives designated as cash flow hedges

2007

Notional

principal Fair value Fair value

amount asset liability

£m £m £m

Interest-rate swaps 2,376.9 10.7 (12.4)

Total derivative assets/(liabilities) designated as hedges 2,376.9 10.7 (12.4)

Derivatives held for non-trading purposes for which hedge accounting has not been applied

Interest-rate swaps 709.0 0.6 (3.9)

Embedded derivatives – options 600.0 66.9 (66.5)

Forward currency transactions 115.8 0.4 (1.5)

Total derivative assets/(liabilities) held for non-trading 3,801.7 78.6 (84.3)

Total recognised derivative assets/(liabilities) 5,388.4 88.2 (92.3)

1) Derivatives held for trading

Interest-rate derivatives

2006

Notional

principal Fair value Fair value

amount asset liability

£m £m £m

Interest-rate swaps 3,346.4 6.0 (6.9)

OTC interest-rate options 123.8 0.3 (0.3)

Total OTC derivatives 3,470.2 6.3 (7.2)

Exchange-traded interest-rate futures 500.0 – –

Total derivative assets/(liabilities) held for trading 3,970.2 6.3 (7.2)

2) Derivatives held for hedging

Derivatives designated as cash flow hedges

2006

Notional

principal Fair value Fair value

amount asset liability

£m £m £m

Interest-rate swaps 2,430.0 2.6 (31.4)

Total derivative assets/(liabilities) designated as hedges 2,430.0 2.6 (31.4)

Derivatives held for non-trading purposes for which hedge accounting has not been applied

Interest-rate swaps 950.5 1.4 (4.9)

Embedded derivatives – options 515.0 73.4 (73.7)

Forward currency transactions 200.9 0.7 (0.5)

Total derivative assets/(liabilities) held for non-trading 4,096.4 78.1 (110.5)

Total recognised derivative assets/(liabilities) 8,066.6 84.4 (117.7)

The Co-operative Group Annual Report and Accounts 2007 91


Notes to the financial statements (continued)

20 Financial instruments and derivatives (continued)

The derivatives designated as cash flow hedges are interest-rate swaps used to hedge interest-rate risk in the bank’s retail lending operations.

Cash flows are hedged by quarterly time periods for durations up to 10 years.

The number of non-margin exchange traded contracts held by the bank at the year end was none (2006: none).

The objectives and policies for financial instruments are included in Note 52.

c) Co-operative Insurance

At 12 January 2008

Fair Fair

value value

assets liabilities

£m £m

Interest-rate swaps 8.8 –

FTSE Options 54.4 –

Financial futures contracts 47.5 –

Interest rate swaptions 435.0 –

Interest rate futures – (5.9)

Total recognised derivative assets/(liabilities) held for trading 545.7 (5.9)

At 13 January 2007

Fair Fair

value value

assets liabilities

£m £m

Interest-rate swaptions 591.9 –

FTSE Options 43.3 –

Financial futures contracts – (11.5)

Interest rate futures – (11.1)

Total recognised derivative assets/(liabilities) held for trading 635.2 (22.6)

CIS has no derivative financial instruments designated at fair value through profit or loss at inception and none of the arrangements qualify for hedge

accounting treatment under IAS 39.

CIS has purchased a series of interest-rate swap contracts as an economic hedge against part of its exposure to guaranteed annuity options. The market value

represents the initial margin and the daily variation margin as the contracts are settled on a daily basis in arrears. FTSE put options are held to mitigate the

impact of equity price risk.

Financial futures contracts which were open at 12 January 2008 had the effect of reducing CIS’s exposure to UK equities by £1,187.6m (2006: £767.7m).

21 Employee benefits and retirement benefit obligations

2007 2006

The average number employed by the Group in the UK was:

Full-time 34,016 30,507

Part-time 42,694 37,080

76,710 67,587

2007 2006

£m £m

Wages and salaries 1,122.2 987.0

Social security costs 66.2 58.8

Pension costs (19.8) (12.6)

1,168.6 1,033.2

92 The Co-operative Group Annual Report and Accounts 2007


21 Employee benefits and retirement benefit obligations (continued)

a) Disclosures required by accounting standard IAS 19

The Group operates a number of defined benefit pension schemes, the assets of which are held in separate trustee-administered funds. There are now five

principal schemes operated by the Group following the transfer of engagements of United Co-operatives Limited. These are The Co-operative Group Pension

(Average Career Earnings) Scheme (PACE), United Norwest Co-operatives Employees’ Pension Fund, the Yorkshire Co-operatives Limited Employees’

Superannuation Fund, the Leeds Co-operative Society Limited Employee Pension Fund and the Sheffield Co-operative Society Limited Employees’

Superannuation Fund. All of the former United Co-operatives pension schemes are closed to new entrants. In addition there exists the United Norwest

Co-operatives Limited 1989 Discretionary Early Retirement Benefits Scheme (closed to new entrants from 5 November 1995), which provides additional

benefits for long-serving employees who commenced employment prior to 6 November 1994, and the Leeds Co-operative Society Limited Managerial Staff

Pensions Scheme.

Details of the principal schemes are given below:

The pension costs are assessed in accordance with actuarial advice using the projected unit method.

The most recent valuation of the schemes was carried out by a qualified actuary. The date of the last full valuations of the five principal schemes are shown

below. The assumptions used by the actuary are the best estimates chosen from a range of possible actuarial assumptions which, due to the timescale

covered, may not necessarily be borne out in practice.

PACE United Norwest Yorkshire Sheffield Leeds

Scheme Scheme Scheme Scheme Scheme

Date of last full actuarial valuation April 2007 January 2005 January 2005 January 2006 April 2005

The actuarial valuation of the schemes has been updated to 12 January 2008.

2007 2006

The principal assumptions used to determine the liabilities of the Group’s pension schemes were:

Discount rate 5.65% 5.1%

Rate of increase in salaries 5.15% 4.5%

Future pension increases where capped at 5.0% pa 3.65% 3.0%

Future pension increases where capped at 2.5% pa 2.5% 2.5%

Assumptions used to determine net pension cost for the PACE scheme are:

Discount rate 5.1% 4.6%

Expected long-term return on scheme assets 6.3% 6.0%

Future pension increases were capped at 5.0% pa 3.0% 2.7%

Future pension increases were capped at 2.5% pa 2.5% n/a

Assumptions used to determine net pension cost for the former United Co-operatives schemes are:

Discount rates 5.40%

Expected long-term return on scheme assets 7.30%

Rate of increase in salaries 4.80%

The average life expectancy (in years) for mortality tables used to determine scheme liabilities for the PACE scheme at 12 January 2008 are:

Life expectancy at age 65 Male Female

Member currently aged 65 20.2 23.0

Member currently aged 45 21.2 24.0

The current life expectancies (in years) underlying the value of the accrued liabilities stated here for the former United Co-operatives schemes are:

Life expectancy at age 65 Male Female

Member currently aged 65 20.3 23.1

Member currently aged 45 21.3 24.0

The fair value of the scheme’s assets, which are intended to be realised in the future, may be subject to significant change before they are realised.

The Co-operative Group Annual Report and Accounts 2007 93


Notes to the financial statements (continued)

21 Employee benefits and retirement benefit obligations (continued)

Group

2007 2006

£m £m

Trading and Corporate activities 303.2 290.2

Financial Services (3.5) (3.1)

Net pension asset 299.7 287.1

The £299.7m net pension asset is made up of £434.4m surplus for the PACE Scheme, less £134.0m pension deficit, for the four defined benefit pension

schemes operated by the former United Co-operatives Group, less £0.6m deficit for the Nith Valley Scheme. These amounts include Employer Funded

Retirement Benefit Scheme (EFRBS) provisions of £12.4m (£8.9m Trading and Corporate activities and £3.5m Financial Services) of which £3.7m is shown

in the PACE Scheme and £8.7m relates to the former United Co-operatives Schemes.

(i) The Co-operative Group Pension Scheme (PACE)

2007 2006

£m £m

The amounts recognised in the balance sheet are as follows:

Present value of funded obligations (5,073.6) (5,050.9)

Present value of unfunded liabilities (3.7) (6.0)

Fair value of plan assets 5,511.7 5,344.0

Net retirement benefit asset 434.4 287.1

The pension scheme assets include property occupied by the Group with a fair value of £1.1m (2006: £1.2m).

2007 2006

£m £m

The amounts recognised in the income statement are as follows:

Current service cost 47.6 68.1

Interest on liabilities 253.2 219.1

Expected return on scheme assets (331.0) (300.2)

Past service cost – 2.6

Gains on settlement and curtailments (26.0) (2.2)

Total included in ‘employee benefits expense’ (56.2) (12.6)

Actual return on scheme assets 306.7 430.3

The (credit)/expense is recognised in the operating expenses line in the income statement, other than gains on settlements and curtailments, which are

included in significant items in 2007, and past service cost, which was included in restructuring costs in 2006.

2007 2006

£m £m

Changes in the present value of the scheme liabilities are as follows:

Opening defined benefit liabilities 5,056.9 4,810.9

Current service cost 47.6 68.1

Past service cost – 2.6

Interest on liabilities 253.2 219.1

Contributions by members 22.0 23.0

Actuarial (gains)/losses recognised in equity (49.8) 145.3

Benefits paid (196.3) (209.9)

Gains on settlements and curtailments (26.0) (2.2)

Reduction of liabilities relating to the disposal of Shoefayre (30.3) –

Closing defined benefit liabilities 5,077.3 5,056.9

94 The Co-operative Group Annual Report and Accounts 2007


21 Employee benefits and retirement benefit obligations (continued)

2007 2006

£m £m

Changes in the fair value of the scheme assets are as follows:

Opening fair value of scheme assets 5,344.0 5,030.5

Expected return on scheme assets 331.0 300.2

Actuarial (losses)/gains recognised in equity (24.3) 130.1

Contributions by the employer 60.7 70.1

Contributions by members 22.0 23.0

Benefits paid (193.4) (209.9)

Reduction of assets relating to the disposal of Shoefayre (28.3) –

Closing fair value of scheme assets 5,511.7 5,344.0

The Group expects to contribute £56m to its PACE scheme in 2008.

2007 2006

£m £m

The weighted-average asset allocations at the year-end were as follows:

Equities 43% 45%

Liability-driven investments 51% 49%

Property 5% 5%

Cash 1% 1%

Total scheme assets 100% 100%

To develop the expected long-term rate of return on assets assumption, the Group considered the current level of expected returns on risk free investments

(primarily government bonds), the historical level of the risk premium associated with the other asset classes in which the portfolio is invested and the

expectations for future returns of each asset class. The expected return for each asset class was then weighted based on the target asset allocation to

develop the expected long-term rate of return on assets assumption for the portfolio. This resulted in the selection of the 6.3% assumption for the year

ended 12 January 2008. The assumption calculated for the year ending 10 January 2009 will be 6.4%.

2007 2006 2005 2004 2003

£m £m £m £m £m

Amounts recognised in the balance sheet:

Defined benefit liabilities (5,077.3) (5,056.9) (4,810.9) (4,366.5) (4,162.5)

Scheme assets 5,511.7 5,344.0 5,030.5 4,071.2 3,881.0

Surplus/(deficit) 434.4 287.1 219.6 (295.3) (281.5)

History of experience gains and losses:

Experience adjustment on scheme liabilities 65.5 (238.8) 163.0 144.5 (0.2)

% of scheme liabilities 1% 5% 3% 3% –

Experience adjustment on scheme assets (24.3) 130.1 686.7 145.2 387.8

% of scheme assets 0% 2% 14% 4% 10%

The Co-operative Group Annual Report and Accounts 2007 95


Notes to the financial statements (continued)

21 Employee benefits and retirement benefit obligations (continued)

(ii) United Norwest Co-operatives Employees’ Pension Fund

The amounts recognised in the balance sheet are as follows:

Present value of funded obligations (384.8)

Fair value of plan assets 285.2

Net retirement benefit asset (99.6)

2007

£m

The pension scheme assets include property occupied by the Group with a fair value of £nil.

The amounts recognised in the income statement are as follows:

Current service cost 5.4

Interest on liabilities 9.0

Expected return on scheme assets (9.1)

Total included in ‘employee benefits expense’ 5.3

2007

£m

Actual return on scheme assets 9.9

The expense is recognised in the operating expenses line in the income statement.

Changes in the present value of the scheme liabilities are as follows:

Defined benefit liabilities acquired upon transfer of engagements of United Co-operatives Limited 366.9

Current service cost 5.4

Interest on liabilities 9.0

Contributions by members 2.1

Actuarial losses 6.4

Benefits paid (5.0)

Closing defined benefit liabilities 384.8

2007

£m

Changes in the fair value of the scheme assets are as follows:

Scheme assets acquired upon transfer of engagements of United Co-operatives Limited 272.5

Expected return on scheme assets 9.1

Actuarial gains 0.8

Contributions by the employer 5.7

Contributions by members 2.1

Benefits paid (5.0)

Closing fair value of scheme assets 285.2

2007

£m

The Group expects to contribute £12m to the United Norwest pension scheme in 2008.

The weighted-average asset allocations at the year-end were as follows:

Equities 48%

Diversified growth 16%

Bonds 27%

Property 5%

Cash 4%

Total scheme assets 100%

2007

£m

96 The Co-operative Group Annual Report and Accounts 2007


21 Employee benefits and retirement benefit obligations (continued)

To develop the expected long-term rate of return on assets assumption, the Group considered the current level of expected returns on risk free investments

(primarily government bonds), the historical level of the risk premium associated with the other asset classes in which the portfolio is invested and the

expectations for future returns of each asset class. The expected return for each asset class was then weighted based on the target asset allocation to develop

the expected long-term rate of return on assets assumption for the portfolio. This resulted in the selection of the 7.3% assumption for the year ended

12 January 2008. The assumption calculated for the year ending 10 January 2009 will be 6.5%.

Amounts recognised in the balance sheet:

Defined benefit liabilities (384.8)

Scheme assets 285.2

Deficit (99.6)

2007

History of experience gains and losses:

Experience adjustment on scheme liabilities –

% of scheme liabilities –

Difference between expected and actual return on scheme assets 0.8

% of scheme assets –

(iii) Yorkshire Co-operatives Limited Employees’ Superannuation Fund, Sheffield Co-operative Society Limited Employees’

Superannuation Fund, Leeds Co-operative Society Limited Employee Pension Fund and United Norwest Co-operatives Limited 1989

Discretionary Early Retirement Benefits Scheme.

The amounts recognised in the balance sheet are as follows:

Present value of funded obligations (133.8)

Present value of unfunded liabilities (8.7)

Fair value of scheme assets 108.1

Net retirement benefit deficit (34.4)

2007

£m

The amounts recognised in the income statement are as follows:

Current service cost 1.0

Interest on liabilities 3.4

Expected return on scheme assets (3.3)

Total included in ‘employee benefits expense’ 1.1

2007

£m

Actual return on scheme assets 1.4

The expense is recognised in the operating expenses line in the income statement.

Changes in the present value of the scheme liabilities are as follows:

Defined benefit liabilities acquired upon transfer of engagements of United Co-operatives Limited 138.1

Current service cost 1.0

Interest on liabilities 3.4

Contributions by members 0.5

Actuarial losses 2.3

Benefits paid (2.8)

Closing defined benefit liabilities 142.5

2007

£m

The Co-operative Group Annual Report and Accounts 2007 97


Notes to the financial statements (continued)

21 Employee benefits and retirement benefit obligations (continued)

Changes in the fair value of the scheme assets are as follows:

Scheme assets acquired upon transfer of engagements of United Co-operatives Limited 108.2

Expected return on scheme assets 3.3

Actuarial losses (2.8)

Contributions by the employer 1.7

Contributions by members 0.5

Benefits paid (2.8)

Closing fair value of scheme assets 108.1

2007

£m

The Group expects to contribute £4m to the Yorkshire, Sheffield and Leeds pension schemes in 2008.

The weighted-average asset allocations at the year-end were as follows:

Equities 48%

Diversified growth 10%

Bonds 36%

Property 6%

Total scheme assets 100%

2007

Amounts recognised in the balance sheet:

Defined benefit liabilities (142.5)

Scheme assets 108.1

Deficit (34.4)

2007

History of experience gains and losses:

Experience adjustment on scheme liabilities (0.4)

% of scheme liabilities –

Difference between expected and actual return on scheme assets 2.8

% of scheme assets 3%

98 The Co-operative Group Annual Report and Accounts 2007


22 Deferred taxation

Deferred income taxes are calculated on all temporary differences under the liability method using an effective tax rate of 28% (2006: 30%)

2007 2006

£m £m

Net deferred tax comprises:

Deferred tax asset

Trading and Corporate activities (78.2) (36.9)

Financial Services (1.7) (4.7)

(79.9) (41.6)

Deferred tax liability

Trading and Corporate activities 462.8 313.9

Financial Services 287.9 370.2

750.7 684.1

670.8 642.5

Other temporary differences 19.9 (12.5)

Retirement benefit obligations 81.0 85.8

Capital allowances on fixed assets 120.7 61.1

Capital allowances on assets leased to customers 9.4 7.8

Unrealised gains on investments, investment properties and rolled-over gains 460.9 510.6

Claims equalisation reserve 3.8 11.6

Inter-company eliminations (5.7) (2.3)

Acquisition costs deferred (19.2) (19.6)

670.8 642.5

The main components of the deferred tax liabilities are capital allowances on property, plant and equipment of £130.1m (2006: £61.1m), unrealised

appreciation on investments of £290.4m (2006: £373.2m), potential liability on rolled over gains and unrealised gains on investment properties of £170.5m

(2006: £136.3m) and retirement benefit obligations of £118.5m (2006: £85.8m).

These liabilities are partially offset by deferred tax assets arising in respect of acquisition costs deferred of £19.2m (2006: £19.6m), funeral bonds of £11.4m,

(2006: £10.4m) derivatives of £6.6m (2006: £16.2m) and retirement benefit obligations of £37.5m (2006: £nil).

23 Inventories

Group

2007 2006

£m £m

Raw materials and consumables 19.1 3.6

Work in progress 1.5 0.1

Finished goods and goods for resale 368.6 270.8

Less assets held for sale (1.0) –

388.2 274.5

The year-end inventories provision is £12.0m, of which £11.0m relates to Food Retail. £2.5m additional provision has been charged to the income statement

in the year.

The Co-operative Group Annual Report and Accounts 2007 99


Notes to the financial statements (continued)

24 Trade and other receivables – Trading and Corporate activities

Group

2007 2006

£m £m

Trade debtors 320.8 219.7

Prepayments and accrued income 44.1 41.5

Other debtors 107.4 85.9

Less assets held for sale – (35.3)

472.3 311.8

All of the above financial assets are classified as loans and receivables.

Trade debtors are stated net of a bad debt provision of £6.9m (2006: £9.7m). The provision is calculated in line with individual businesses’ bad debt policies

and any adjustment to the level of provision is recognised within the income statement in operating profit.

Trade debtors include amounts totalling £74.0m (2006: £21.2m) which are overdue but not considered to be impaired, age analysed as follows:

2007 2006

£m £m

Amounts overdue:

Less than 3 months 50.5 15.8

3 to 6 months 20.0 3.0

More than 6 months 3.5 2.4

74.0 21.2

Amounts overdue but not impaired typically comprise high volume/low value balances for which the individual trading businesses do not seek collateral but

continue to work with counterparties to secure settlement. No other debtors are overdue.

25 Non-current assets held for sale and discontinued operations

Discontinued operations

The Group completed the sale of Shoefayre in September 2007.

Trading ceased in the remaining department stores at the end of February 2007, others were sold in 2006. A decision was taken in November 2007 to

dispose of the former United Co-operatives non food stores following the amalgamation. The related assets and liabilities for the non food stores have been

classified as held for sale accordingly.

Assets and liabilities held for sale

2007 2006

£m £m

Assets and liabilities held for sale

Property, plant and equipment 5.8 15.5

Inventory 1.0 –

Trade and other receivables – 35.3

Cash at bank – 16.3

Assets held for sale 6.8 67.1

Trade and other payables (0.6) (9.1)

Non-current interest-bearing loans and borrowings – –

Provisions – (19.0)

Liabilities held for sale (0.6) (28.1)

100 The Co-operative Group Annual Report and Accounts 2007


26 Loans and advances to banks – Financial Services

2007 2006

£m £m

Items in the course of collection from other banks 141.3 134.0

Placements with other banks 1,062.7 1,088.0

Included in cash equivalents 1,204.0 1,222.0

Loans and advances to other banks – 145.0

1,204.0 1,367.0

Of which:

Variable rate 268.1 66.6

Fixed rate 935.9 1,300.4

1,204.0 1,367.0

Mandatory reserve deposits of £11.3m (2006: £10.6m) are not available for use in The Co-operative Bank’s day-to-day operations, are non-interest-bearing

and are included in cash equivalents. Collateral of £53.9m (2006: £139.9m) held under reverse repo agreements can be sold or repledged without default.

At the balance sheet date £nil (2006: nil) was resold or repledged. These transactions are conducted under standard repo agreement terms.

27 Loans and advances to customers – Financial Services

Group

2007 2006

£m £m

Bank 8,973.4 8,147.4

Long-Term Business 12.7 15.9

Total 8,986.1 8,163.3

2007 2006

£m £m

Gross loans and advances 9,134.1 8,302.7

Less allowance for losses on loans and advances (160.7) (155.3)

Bank 8,973.4 8,147.4

Of which:

Variable rate 4,440.3 4,288.6

Fixed rate 4,533.1 3,858.8

8,973.4 8,147.4

Concentration of exposure

The Group’s exposure is virtually all within the United Kingdom. The following industry concentrations of gross advances before provisions are

considered significant.

2007 2006

£m £m

Property and construction 1,309.5 1,001.7

Retail, distribution and services 695.5 504.1

Business and other services 1,927.4 1,530.5

Personal 5,201.7 5,266.4

9,134.1 8,302.7

The Co-operative Group Annual Report and Accounts 2007 101


Notes to the financial statements (continued)

27 Loans and advances to customers – Financial Services (continued)

In addition to the above loans and advances, insurance long-term business loans are as follows:

2007 2006

£m £m

Long-Term Business

Loans:

– secured by mortgages 5.1 6.9

– secured by insurance policies 7.2 9.0

– other loans 0.4 –

CFS Other Shareholder & Long-Term Business 12.7 15.9

Fair value of loans and receivables is assessed to be the discounted amount of the future cash flows expected to be received. Discount rates used reflect

current market rates and produce fair values which are not materially different from those quoted above.

Allowance for losses on loans and advances

2007 2006

Individual Collective Total Individual Collective Total

£m £m £m £m £m £m

Group

At beginning of year 27.5 127.8 155.3 47.7 108.7 156.4

Charge against profits 13.9 88.1 102.0 6.0 99.3 105.3

Amounts written off (5.0) (87.9) (92.9) (26.8) (77.2) (104.0)

Recoveries 0.1 – 0.1 0.4 – 0.4

Unwind of discount of allowance (1.4) (2.9) (4.3) (1.5) (3.0) (4.5)

Interest charged on impaired loans 0.5 – 0.5 1.7 – 1.7

At end of year 35.6 125.1 160.7 27.5 127.8 155.3

All provisions are held against loans and advances to customers. Within Co-operative Bank individual allowance for losses £0.3m (2006: £0.6m) of the closing

balance relates to mortgages, reflecting a charge of £0.3m (2006: £0.2m) and write offs of £0.6m (2006: £nil) made in the year. The remainder of individual

allowance for losses relate to corporate lending. The collective allowance relates to retail unsecured lending.

Loans and advances to customers include £29.1m (2006: £35.6m) of financial assets at fair value through profit or loss designated at initial recognition to

eliminate or significantly reduce a measurement or recognition inconsistency.

Loans and advances to customers include finance lease receivables

2007 2006

£m £m

Gross investment in finance leases, receivable:

No later than one year 47.2 52.7

Later than one year and no later than five years 101.4 109.6

Later than five years 72.2 78.8

220.8 241.1

Unearned future finance income on finance leases (47.2) (57.0)

Net investment in finance leases 173.6 184.1

The net investment in finance leases may be analysed as follows:

No later than one year 35.6 41.5

Later than one year and no later than five years 77.7 84.9

Later than five years 60.3 57.7

173.6 184.1

There are no finance lease unguaranteed residual values. The Co-operative Bank enters into finance lease and hire purchase arrangements with customers in

a wide range of sectors including transport, retail and utilities.

102 The Co-operative Group Annual Report and Accounts 2007


28 Investments – Financial Services

Group

2007 2006

£m £m

Investments comprise:

Fair value through profit or loss:

Listed equities 6,227.4 7,162.8

Unlisted equities 102.7 74.1

Listed debt securities 6,631.6 8,910.4

Unlisted debt securities 1,850.9 16.6

Available-for-sale:

Unlisted equities 8.8 1.7

Listed debt securities 1,914.4 1,952.0

Unlisted debt securities 1,588.7 1,965.2

Deposits with credit institutions 4,160.9 5,862.2

Investment properties 1,977.6 2,218.5

24,463.0 28,163.5

The above investments are held by Co-operative Insurance Society Ltd, CIS General Insurance Limited, CFS Management Services Limited, CFS Services

Limited and The Co-operative Bank plc.

Investment properties have been valued as at 12 January 2008. The valuation was carried out by chartered surveyors employed by external valuers DTZ

Debenham Tie Leung, on the basis of open market value in accordance with the RICS Appraisal and Valuation Manual.

At the balance sheet date, CIS had securities with a market value of £1,193.9m (2006: £1,306.5m) on loan under approved stock lending arrangements.

Eligible collateral totalling £1,253.5m (2006: £1,364.5m), in the form of DBV’s and certificates of deposit, was held as security.

Government guaranteed securities with a market value of £2,782.9m (2006: £4,795.7m), which were the subject of repurchase contracts are included in

debt securities in the analysis above. Collateral is received in the form of cash and deposits with credit institutions include certificates of deposit with a market

value of £2,589.3m (2006: £5,335.3m) purchased with the collateral. A liability of £2,981.2m (2006: £5,658.4m) is included within financial liabilities in

respect of the associated repurchase liability.

The Co-operative Group Annual Report and Accounts 2007 103


Notes to the financial statements (continued)

29 Insurance contracts liabilities and reinsurance assets – Financial Services

a) Analysis of insurance and participating contract liabilities

2007 2006

£m £m

Gross

– Insurance contracts 2,326.8 2,010.1

– Insurance participation contracts 14,626.3 15,417.5

– Investment participation contracts 553.5 559.3

– Claims reported (including claims settlement) 718.9 841.0

– Claims incurred but not reported 33.7 37.2

– Claims settlement expenses 22.3 28.1

– Unearned premiums 200.4 224.2

– Provision for unexpired risks 5.7 4.6

Total gross insurance liabilities 18,487.6 19,122.0

Recoverable from reinsurers

– Insurance contracts (1,879.5) (1,062.4)

– Insurance participation contracts (1,223.1) –

– Claims reported (27.4) (2.8)

– Claims incurred but not reported (3.1) (1.8)

– Unearned premiums (2.7) (3.0)

Total reinsurers’ share of insurance liabilities (3,135.8) (1,070.0)

Net

– Insurance contracts 447.3 947.7

– Insurance participation contracts 13,403.2 15,417.5

– Investment participation contracts 553.5 559.3

– Claims reported (including claims settlement) 691.5 838.2

– Claims incurred but not reported 30.6 35.4

– Claims settlement expenses 22.3 28.1

– Unearned premiums 197.7 221.2

– Provision for unexpired risks 5.7 4.6

Total net insurance liabilities 15,351.8 18,052.0

b) General insurance contracts – assumptions, changes in assumptions and sensitivity

i) Basis of assessing liabilities

CISGIL has been established to write new and renewing General Insurance business formerly written by CIS, a fellow subsidiary within the CFS group. CISGIL has

access to historical data and trends relating to the General Insurance business of CIS for which it has now assumed responsibility.

CISGIL uses a combination of recognised actuarial and statistical techniques to assess the ultimate cost of claims. These include:

• Projecting historic claims payment and recoveries data

• Projecting numbers of claims

• Adjusting case estimates for future inflation and onto a provisioning basis

• Deriving average costs per claim to apply to claim numbers

• Chain Ladder techniques.

Extensive use of detailed claims data including individual case estimates is made to derive patterns in average claim costs and timings between occurrence

and notification and between notification and settlement. The most common method used is the Chain Ladder method. This technique involves the analysis of

historical claims development trends and the selection of estimated development factors based on this historical pattern. The selected development factors are

then applied to cumulative claims data for each accident year which is not yet fully developed to produce an estimated ultimate claims cost for each accident

year. A degree of judgement is required in selecting the most appropriate development factors.

The work is undertaken and supervised by suitably qualified personnel. Claims provisions are separately computed for each claim type such as bodily injury,

accidental damage, storm, flood and subsidence. All provisions are calculated gross with explicit allowance for reinsurance and subrogation recoveries.

Provisions are not discounted for investment return other than any required additional provision for unexpired risks.

As outlined in Note 52 there is significant uncertainty in the assessment of liabilities and provisions are set to be adequate to cover the eventual cost.

Sensitivity analysis is performed to assist the selection of key parameters and, hence, the provisions adopted. There is a governance process in place to

ensure that provisions are subject to detailed review regarding the appropriateness of key assumptions and the quantum of the provisions established.

104 The Co-operative Group Annual Report and Accounts 2007


29 Insurance contracts liabilities and reinsurance assets – Financial Services (continued)

ii) Key assumptions

Principal assumptions underlying the claims provisions include:

• Explicit allowance for future inflation at rates varying from 0% to 7% pa according to the claim type. The range of future inflation rates is largely unchanged

from that used at the previous year end, but some modest increases have been applied to rates for certain claim types based on more recent indices and

expectations for future levels of inflation.

• For bodily injury claims allowance has been made for:

i) Use of the Ogden Tables at a discount rate of 1.75%

ii) Increased awards for general damages in accordance with the 8th edition of the JSB guidelines

iii) A small proportion of large claims being settled by periodic payments

iv) The average cost of bodily injury claims for the last three accident years on the motor account reflecting the increased proportion of similar claims

relating to whiplash, and the known incidence of large claims.

The gross insurance provision for claims and loss adjustment expenses arising in respect of prior years of £522.0m (2006: £nil) includes a movement of

£101.6m (2006: £nil) arising from changes in assumptions and release of surplus, details are as follows:

• Reduction in volume of motor claims, £13.6m

• Reduction in severity of motor claims, £86.6m

• Reduction in the run off pattern of fire and accident claims, £1.4m.

CISGIL’s first year of operation was 2006 and hence there was no provision for prior year claims at the end of the 2006 financial year.

iii) Sensitivity analysis

There is greater uncertainty over motor claims provisions than other provisions as they typically involve claims for bodily injury and associated legal costs and

therefore typically have a longer period to settlement. Motor provisions represent the most significant proportion of the total General Insurance outstanding

claims liabilities (gross of salvage and subrogation). Sensitivity information is given for motor claims provisions together with limited information for all other

classes. The following table indicates the effect on gross claims provisions (gross of reinsurance and salvage and subrogation) and the net provisions (net of

reinsurance but gross of salvage and subrogation) of changes in key assumptions. Impacts to net technical provisions have an equivalent impact to profitability.

Assumption

Effect on

Change in gross Effect on net

parameter provision provision

£m % Effect £m % Effect

Motor

Average cost of claims for last three years +10% +52.6 9.6% +52.6 10.0%

Mean term to settlement + 1/2 year +16.5 3.0% +16.3 3.0%

Rate of future inflation +1.0% +10.6 1.9% +10.4 2.0%

Ogden discount rate –0.50% +8.4 1.5% +6.7 1.3%

Other classes

Mean term to settlement (liability) +1/2 year +0.7 2.7% +0.7 2.7%

Mean term to settlement (non-liability) +1/2 year +0.9 1.6% +0.9 1.6%

Rate of future inflation (liability) +1.0% +0.5 2.0% +0.5 2.0%

Rate of future inflation (non-liability) +1.0% +0.5 0.9% +0.5 0.9%

Ogden discount rate (liability) -0.25% +0.3 1.2% +0.3 1.2%

c) Changes in General Insurance liabilities and reinsurance assets

i) Change in insurance contract liabilities (net of salvage and subrogation)

Unexpired

risk Salvage &

Gross provision subrogation Net

At the beginning of the financial period 906.3 4.6 (63.2) 847.7

Movement in the year (131.4) 1.1 9.7 (120.6)

At the end of the financial period 774.9 5.7 (53.5) 727.1

The Co-operative Group Annual Report and Accounts 2007 105


Notes to the financial statements (continued)

29 Insurance contracts liabilities and reinsurance assets – Financial Services (continued)

ii) General Insurance – claims and loss adjustment expenses

2007 2006

Gross Reinsurance Net Gross Reinsurance Net

£m £m £m £m £m £m

Notified outstanding claims 841.0 (2.8) 838.2 895.9 (19.6) 876.3

Claims incurred but not reported 37.2 (1.8) 35.4 43.9 (0.3) 43.6

Claims settlement expenses 28.1 – 28.1 29.5 – 29.5

At the beginning of the financial year 906.3 (4.6) 901.7 969.3 (19.9) 949.4

Claims paid during the year (464.8) 9.1 (455.7) (414.3) 3.2 (411.1)

Increase in liabilities:

– arising from current and prior year claims 333.4 (35.0) 298.4 351.3 12.1 363.4

Total movement (131.4) (25.9) (157.3) (63.0) 15.3 (47.7)

Notified claims 718.9 (27.4) 691.5 841.0 (2.8) 838.2

Incurred but not reported 33.7 (3.1) 30.6 37.2 (1.8) 35.4

Claims settlement expenses 22.3 – 22.3 28.1 – 28.1

At the end of the financial year 774.9 (30.5) 744.4 906.3 (4.6) 901.7

iii) General Insurance – provisions for unearned premiums

2007 2006

Gross Reinsurance Net Gross Reinsurance Net

£m £m £m £m £m £m

Unearned premium provision

At the beginning of the financial year 224.2 (3.0) 221.2 274.3 (7.0) 267.3

Increase in the financial year 200.4 (2.8) 197.6 224.2 (3.0) 221.2

Release in the financial year (224.2) 3.0 (221.2) (274.3) 7.0 (267.3)

Movement in the financial year (23.8) 0.2 (23.6) (50.1) 4.0 (46.1)

At the end of the financial year 200.4 (2.8) 197.6 224.2 (3.0) 221.2

iv) General Insurance – provisions for unexpired risk

2007 2006

Gross Reinsurance Net Gross Reinsurance Net

£m £m £m £m £m £m

Unexpired risk provision

At the beginning of the financial year 4.6 – 4.6 5.1 – 5.1

Increase in the financial year 5.7 – 5.7 4.6 – 4.6

Release in the financial year (4.6) – (4.6) (5.1) – (5.1)

Movement in the financial year 1.1 – 1.1 (0.5) – (0.5)

At the end of the financial year 5.7 – 5.7 4.6 – 4.6

Additional provision is made for unexpired risks where the claims and expense, likely to arise after the end of the financial period, in respect of contracts

concluded before that date, are expected to exceed the unearned premiums at the end of the financial period. The provision primarily relates to the motor class

of business.

106 The Co-operative Group Annual Report and Accounts 2007


29 Insurance contracts liabilities and reinsurance assets – Financial Services (continued)

v) Analysis of claims development – gross of reinsurance

Estimate for cumulative claims

Accident year

2001 2002 2003 2004 2005 2006 2007 Total

£m £m £m £m £m £m £m £m

At end of accident year 507.1 591.8 572.0 550.5 480.1 419.3 384.5 3,505.3

– One year later 484.4 559.7 542.8 527.1 459.9 412.1 – 2,986.0

– Two years later 475.8 560.3 526.5 491.2 439.9 – – 2,493.7

– Three years later 486.2 550.6 505.4 467.2 – – – 2,009.4

– Four years later 488.8 542.6 499.5 – – – – 1,530.9

– Five years later 483.3 548.1 – – – – – 1,031.4

– Six years later 484.9 – – – – – – 484.9

Estimate of cumulative claims 484.9 548.1 499.5 467.2 439.9 412.1 384.5 3,236.2

Cumulative payments to date (453.7) (499.1) (442.6) (387.0) (310.6) (269.3) (165.9) (2,528.2)

Provision 31.2 49.0 56.9 80.2 129.3 142.8 218.6 708.0

Provision for prior years 44.6

Salvage and subrogation –

Gross outstanding claims liabilities 752.6

Gross claims reported 718.9

Gross claims incurred but not reported 33.7

Gross outstanding claims liabilities 752.6

£m

Analysis of claims development – net of reinsurance

Estimate for cumulative claims

Accident year

2001 2002 2003 2004 2005 2006 2007 Total

£m £m £m £m £m £m £m £m

At end of accident year 504.0 585.6 569.6 547.2 477.6 461.6 372.6 3,518.2

– One year later 480.6 553.0 540.7 525.1 465.8 408.9 – 2,974.1

– Two years later 471.6 553.8 524.5 493.3 437.4 – – 2,480.6

– Three years later 480.9 541.0 505.6 465.2 – – – 1,992.7

– Four years later 480.1 537.8 497.5 – – – – 1,515.4

– Five years later 479.6 538.5 – – – – – 1,018.1

– Six years later 476.2 – – – – – – 476.2

Estimate of cumulative claims 476.2 538.5 497.5 465.2 437.4 408.9 372.6 3,196.3

Cumulative payments to date (452.1) (494.5) (441.2) (385.1) (308.1) (269.4) (162.1) (2,512.5)

Provision 24.1 44.0 56.3 80.1 129.3 139.5 210.5 683.8

Provision for prior years 38.3

Salvage and subrogation –

Net outstanding claims liabilities 722.1

Net claims reported 691.5

Net claims incurred but not reported 30.6

Net outstanding claims liabilities 722.1

£m

The Co-operative Group Annual Report and Accounts 2007 107


Notes to the financial statements (continued)

29 Insurance contracts liabilities and reinsurance assets – Financial Services (continued)

d) Capital position statement 2007

Long-Term

Business With-profits Total

(excl. stakeholder Shareholder Long-Term

stakeholder) fund funds Business

£m £m £m £m

Available capital resources

Shareholders’ funds held outside fund – – 200.0 200.0

Shareholders’ funds held in fund – – – –

Total shareholders’ funds – – 200.0 200.0

Adjustments onto regulatory basis:

– UDS 1,028.1 – – 1,028.1

– Adjustments to assets (18.8) – – (18.8)

Total available capital resources 1,009.3 – 200.0 1,209.3

With-profits liabilities on realistic basis:

– Options and guarantees 1,121.6 – 1,121.6

– Other policyholder obligations 12,819.6 187.3 13,006.9

Total participating contract liabilities 13,941.2 187.3 14,128.5

– Non-participating life assurance 357.2 – 357.2

Insurance and participating contract liabilities per capital position statement 14,298.4 187.3 14,485.7

Reconciliation to insurance and participating contracts liability

2007 2006

£m £m

Insurance and participating contract liabilities as per capital position statement 14,485.7 16,961.3

Add back reinsurance 3,102.6 1,062.4

Outstanding claims reserves 90.1 65.7

General insurance gross contract liabilities 981.0 1,135.1

Less funeral bonds held by Trading Group (171.8) (102.5)

Insurance and participating contract liabilities 18,487.6 19,122.0

e) Long-term life insurance contracts – assumptions, changes in assumptions and sensitivity

i) Capital management policies and objectives

The liabilities of the long-term business fund shown in the capital position statement are calculated following FSA rules and guidance. CIS has a general

reserve of £317m which is available to support both long-term business and general insurance business in run off. The general reserve is shareholder capital

and is held outside the long-term business fund. However, as at 12 January 2008, £200m of the general reserve was allocated to the long-term business.

The whole of the profits of the long-term business are applied for the sole benefit of the long-term business policyholders. This includes the making of reserves

with the aim of preserving the strength of the fund for the benefit of current and future life assurance and pensions policyholders. Similarly, any losses incurred

within the fund are borne by the policyholders, either through a reduction in the working capital of the fund or through a reduction in their benefits.

The working capital of the fund is the excess of assets within the fund over the amount needed to meet liabilities, including those arising from the regulatory

requirement to treat customers fairly when setting discretionary benefits. The working capital is managed to ensure that the long-term business fund can meet

its solvency requirements under a range of adverse conditions and to meet business plans.

Risks that may affect the long-term business fund are managed according to documented risk management policies, which require risks and capital to be

monitored and reported regularly, and decisions made according to delegated authorities. Actions to control risk and manage the working capital of the fund

include the use of reinsurance, the matching of assets and liabilities (including using derivatives) and the setting of discretionary benefits at appropriate levels,

as described in the Principles and Practices of Financial Management (PPFM).

In exceptional circumstances, assets held outside the fund (share capital and general reserve), if available, may be used to help meet the long-term business

fund’s solvency requirements. In some circumstances, this may require a transfer of assets into the fund. In such cases the fund would be managed with the

aim of repaying these assets (accumulated with interest at an appropriate level) over time from within the fund.

108 The Co-operative Group Annual Report and Accounts 2007


29 Insurance contracts liabilities and reinsurance assets – Financial Services (continued)

ii) Policy options and guarantees

Personal and free-standing pension scheme pure endowment contracts issued prior to March 1999 contain options guaranteeing a minimum annuity rate

at vesting. The value of the options is calculated using a market-consistent stochastic approach. For a representative set of policies, the asset shares are

projected to the date of vesting. If, based on projected market interest rates at the date of vesting, the annuity that would then be payable is less than the

guaranteed annuity, additional provision is made with the additional costs being calculated on a market-consistent basis. Assumptions used in the calculation

relating to expenses, mortality experience and the proportion of policies that reach vesting are best estimates based on experience investigations carried

out during 2007. At 12 January 2008, provisions amounting to £670.5m (2006: £665.6m) have been made to cover the future cost of meeting guarantees

of this type.

For accumulating with-profits business, provision has been made for the guarantee that no market value reduction will apply to premiums paid prior to

1 April 2000 and 10 or more years prior to the date of surrender. The value of the guarantee is calculated using a market-consistent stochastic approach,

and assuming that annual bonuses continue at their current levels. Provision has been made for the current value of the excess of the guaranteed payout on

surrender over the projected asset share. Expense and mortality assumptions used in the calculation are best estimates based on experience investigations

carried out during 2007. At 12 January 2008, provisions amounting to £41.0m (2006: £12.8m) have been made to cover the future cost of meeting

guarantees of this type.

The cost of meeting maturity guarantees on life and pensions savings products is calculated stochastically using market-consistent interest rates. It is

assumed that annual bonuses continue to be declared at the levels applicable following the bonus declaration arising out of the current valuation. Provision

has been made for the present value of the excess of the guaranteed payout at maturity over the projected asset share. Expense and mortality assumptions

used in the calculation are best estimates based on experience investigations carried out during 2007. At 12 January 2008, provisions amounting to

£530.5m (2006: £895.7m) have been made to cover the future cost of meeting guarantees of this type.

iii) Basis of assessing liabilities

The long-term business provision is calculated twice a year having regard for the principles laid down in Chapters 1.2 and 1.3 of the Prudential Sourcebook

for Insurers (INSPRU). In December 2006, FSA issued a policy statement (PS06/14) allowing insurers to move the capital and reserving requirements of

non-profit business to a more realistic basis. At 12 January 2008, CIS adopted the changes under this policy statement. The changes have reduced technical

provisions by £2.1m.

iv) Participating business methodology

Provisions for participating business are calculated as the value of the with-profits benefits reserve plus the cost of options, guarantees and smoothing.

Retrospective methods are used to calculate with-profits benefits reserves for all products apart from whole of life policies for which a prospective method is used.

Retrospective methods of calculation involve the accumulation of monthly cash flows in respect of premiums plus investment income (including unrealised

gains/losses and allowances for allocations in respect of past miscellaneous surplus) less policy charges, expenses and tax.

Prospective methods are used to calculate with-profits benefits reserves for all Ordinary and Industrial Branch whole-of-life policies.

Prospective methods of calculation involve determining the present value of the future cash flows in respect of premiums plus investment return, less policy

charges and expenses, benefits payable (including guaranteed benefits, bonuses declared and an element of potential future bonuses) and tax.

The cost of guarantees, options and smoothing is calculated using a market-consistent stochastic model. Policies are grouped by similar nature, term and

size for each product. Stochastic projections are performed using grouped model points representing individual contracts.

The market-consistent asset model has been used to calculate the costs of guarantees, options and smoothing.

The model is calibrated according to the rules within INSPRU and tests are performed to ensure that the model reproduces current market prices of traded

instruments and is arbitrage-free.

v) Non-participating business methodology

Reserves for conventional non-participating business are valued prospectively, using a gross premium approach, by subtracting the actuarial value of the

estimated future premium income from the value of the future benefit outgo. Prudent assumptions are used in these calculations but some allowance is

made for expected future lapses.

The value of the in-force business is calculated using realistic assumptions and is deducted from the reserves to determine the provision for conventional

non-participating business.

Provisions for unit-linked policies are determined by reference to the value of the units allocated to policies at the accounting date.

Although the gross insurance liabilities and the related reinsurance are fairly stated on the basis of the information currently available, the eventual liability

may vary as a result of subsequent information and events.

The provisions, estimation techniques and assumptions are periodically reviewed with any changes in estimates reflected in the income statement as they occur.

The Co-operative Group Annual Report and Accounts 2007 109


Notes to the financial statements (continued)

29 Insurance contracts liabilities and reinsurance assets – Financial Services (continued)

vi) Assumptions used in valuing the realistic liabilities

In general, assumptions used in the valuation of realistic liabilities are based on the results of the most recent experience investigations and are considered to

be best estimates of future experience. Where data is not significant enough to make firm conclusions, industry data is also considered.

vii) Interest rates

A risk-free future interest rate of 4.51% (2006: 4.77%) is assumed when calculating prospective asset shares and the value of in-force business on nonparticipating

contracts in compliance with the requirements of INSPRU.

Liabilities for non-participating contracts require a prudent assumption to be made regarding future interest rates and are determined by reference to recent

investment returns on assets backing the contracts and consideration of the long-term view of these returns.

In calculating the value of in-force business on non-participating contracts, future profits are discounted using an interest rate that is 1% above the risk-free

rate of return.

In determining the value of options and guarantees, the interest rate is stochastic with an average of the risk-free curve across all scenarios. The risk-free

curve varies by duration.

viii) Future bonuses

Prospective asset share calculations and the valuation of options and guarantees assume the continuation of annual bonus rates at their current levels (these

rates are unchanged from 2006).

ix) Expenses and expense inflation

Expense assumptions for prospective asset shares and value for the in-force business on non-participating contracts are determined based on the latest

experience and are adjusted, where appropriate, to reflect any expected changes in patterns in the future.

Reserves for non-participating contracts require a prudent explicit allowance to be made for the future expenses of maintaining contracts in force.

The level of future expense inflation is determined with reference to historical trends and expectations of how future per policy expenses will change.

The assumption used in determining the provisions is 4.0% pa (2006: 4.5% pa).

x) Mortality, morbidity and persistency

Wherever appropriate, mortality and persistency assumptions used are based on the results of the most recent experience investigations. Mortality

assumptions are based on percentages of standard tables published by the Continuous Mortality Investigations Bureau (CMIB) and vary by product.

Persistency assumptions (including early retirement rates on pension policies) vary by product and the number of years that a policy has been in force.

Where data is not of a significant enough size to make firm conclusions, industry data is also considered. Critical illness assumptions are also based on

percentages of standard tables published by CMIB.

In valuing guaranteed annuity options on personal pension policies, on retirement at the normal retirement age and after allowing for any tax-free cash

sums, all guaranteed annuity options that are ‘in-the-money’ are assumed to be taken.

Assurance mortality and morbidity assumptions have been updated to reflect the results of the 2007 experience investigations, but these changes have not

had a major impact on the insurance contract liabilities as most of this business is reinsured.

The assumption for annuitant mortality has been strengthened in 2007. CIS assumes that future improvements to annuitant mortality will be in line with

medium cohort improvement factors supplied by the CMIB (2006: medium cohort for males, short cohort for females). In addition, a minimum level of

improvement has been introduced of 1.0% per annum for males and 0.75% per annum for females. The impact of these changes is to increase technical

provisions by £184m.

Persistency assumptions have been updated to reflect the results of the 2007 investigations but these changes have not had a major impact on the insurance

contract liabilities.

xi) Tax

It is assumed that the current tax legislation and associated tax rates remain unchanged. The tax rate assumption used for netting interest rates and expenses

is 20% (2006: 20%).

110 The Co-operative Group Annual Report and Accounts 2007


29 Insurance contracts liabilities and reinsurance assets – Financial Services (continued)

xii) Sensitivity analysis

The capital position of the long-term business fund is sensitive to a number of economic and insurance variances since the fund contains a number of

different policyholder options and guarantees as described in section (ii) above. Some of the main sensitivities of the fund can be examined by applying the

stress tests prescribed by the FSA in calculating the Risk Capital Margin (RCM). The tests carried out in calculating the RCM and the sensitivity of the working

capital to each test are as follows:

Stress test

Reduction

in working

capital

£m

15.8% fall in equity values and 12.5% fall in property values 99

17.5% change in long-term gilt yields 36

32.5% improvement in persistency rates 90

Increase of 74 basis points in bond yields for credit risk test 101

Total RCM before management actions 326

Other stress tests:

5% fall in assurance mortality rates 1

5% fall in annuitant longevity rates 44

10% increase in renewal expenses 52

1% increase in renewal expense inflation 116

In calculating the RCM, it has been assumed that the following management action would be taken under the stressed conditions:

• All allowances in respect of past miscellaneous surplus are removed from asset shares.

With these management actions, the RCM has been calculated to be £86m. The excess working capital of the fund after the RCM is therefore £923m or

£1,123m if the additional capital available outside the long-term business fund is included. The RCM is covered 11.7 times by working capital (excluding the

£200m allocated from the general reserve).

f) Change in long-term insurance liabilities and reinsurance assets

2007

Non-participating Participating

insurance insurance

contracts contracts Reinsurance Net

£m £m £m £m

At the beginning of the financial year 1,944.4 16,079.3 (1,062.4) 16,961.3

New liabilities 186.8 218.1 – 404.9

Changes in liabilities during the year (64.4) (1,434.4) – (1,498.8)

Effect of changes in non-economic assumptions (26.1) 134.9 – 108.8

Effect of changes in asset shares – 441.7 – 441.7

Effect of changes in economic conditions 127.8 (197.8) – (70.0)

Other 68.2 109.8 (2,040.2) (1,862.2)

At the end of the financial year 2,236.7 15,351.6 (3,102.6) 14,485.7

Movement in working capital of the long-term business fund 2007 2006

£m £m

At the beginning of the financial year 1,130.4 814.5

Opening adjustments 22.7 26.3

Changes to insurance assumptions (165.0) 32.8

Economic variances (139.7) 235.4

Insurance variances (21.7) 3.8

Other factors 182.6 17.6

At the end of the financial year 1,009.3 1,130.4

The Co-operative Group Annual Report and Accounts 2007 111


Notes to the financial statements (continued)

29 Insurance contracts liabilities and reinsurance assets – Financial Services (continued)

Opening adjustments

Opening adjustments consist of:

• improvements to the actuarial models used to calculate the working capital.

Changes to insurance assumptions

Changes to insurance assumptions include:

• changes to expense, mortality and persistency assumptions to reflect the latest experience investigations; and

• a move to the use of an underpin for future annuitant mortality improvements.

Economic variances

Economic variances arise from the following:

• investment returns exceeding the assumed risk-free rate helping to reduce the cost of meeting policy guarantees;

• erosion of the time value of policy guarantees;

• a decrease in risk-free rates which has increased the cost of policy guarantees; and

• assumed equity volatility which has increased the cost of policy guarantees.

Insurance variances

Insurance variances include:

• variances between actual and assumed experience during the financial year;

• changes to pension and endowment mis-selling compensation costs;

• new business profits or losses; and

• one-off expenses.

Other factors

Other factors include:

• changes to reinsurance arrangements; and

• the effect of assets sales to maintain the Equity Backing Ratio within the range specified in the Principles and Practices of Financial Management (PPFM).

30 Prepayments and other receivables – Financial Services

2007 2006

£m £m

Receivables arising from insurance:

– due from contract holders 139.9 128.9

– due from agents, brokers and intermediaries 3.2 3.0

– salvage and subrogation recoveries 53.5 63.2

– reinsurance operations 1.2 3.0

Other receivables:

– accrued interest and rent 210.6 187.4

– prepayments and accrued income 89.5 114.7

– outstanding interest 7.3 6.3

– amounts receivable for investments sold 406.0 159.8

– other receivables 39.6 60.3

– accrued income – 0.4

Trade debtors 3.1 6.8

Other assets 13.4 37.4

967.3 771.2

112 The Co-operative Group Annual Report and Accounts 2007


31 Share capital

Nominal and paid-up value

Members’ share capital

2007 2006

£m £m

At beginning of year 55.7 55.9

Arising on transfer of engagements 29.2 _

Cancellation of own shares (6.1) _

Shares issued and interest credited less shares withdrawn (11.6) (0.2)

At end of year 67.2 55.7

Representing:

Corporate shares of £5 each 9.3 15.3

Individual shares of £1 and 10p each 57.9 40.4

67.2 55.7

IFRIC 2 determines the features which allow shares to be classified as equity capital.

Members’ share capital

Members’ share capital comprises corporate and individual shares. The rights attached to shares are set out in the Society’s rules. Shares held by corporate

members (corporate shares) are not withdrawable and are transferable only between corporate members with the consent of the Society’s Board. Shares held

by individual members (individual shares) are withdrawable on such period of notice as the Society’s Board may from time to time specify.

As the Board has an unconditional right to refuse redemption of both classes of shares, both corporate and individual shares are treated as equity shares.

Both classes of share maintain a fixed nominal value, attract a limited rate of interest and do not carry voting rights per se. Voting for corporate members is in

proportion to trade with the Society. Each individual member has one vote in the appropriate region of the Society and each region has voting rights calculated

on the same basis as a corporate member.

Corporate members receive a payment on trade transacted with the Society.

Distribution of reserves in the event of a winding up

The Society’s rules state that any surplus in the event of a winding up shall be transferred to one or more societies registered under the Industrial and

Provident Societies Acts 1965 to 2002. Such societies must be in membership of Co-operatives UK Limited and have the same or similar rule provisions as

regards surplus distribution on a dissolution or winding up as the Society. If not so transferred, the surplus shall be paid or transferred to Co-operatives UK

Limited to be used and applied in accordance with co-operative principles.

The Co-operative Group Annual Report and Accounts 2007 113


Notes to the financial statements (continued)

32 Reserves and retained earnings

Group

2007 2006

£m £m

Retained earnings

Movements in retained earnings were as follows:

Retained earnings at beginning of year 3,228.2 2,988.1

Net profit for year 109.7 218.8

Arising from transfer of engagements 264.8 –

Members’ share interest (1.1) (0.9)

Retirement benefit schemes 10.6 22.2

Retained earnings at end of year 3,612.2 3,228.2

2007 2006

£m £m

Other reserves

Revaluation reserve – available for sale investments (a) (6.4) (16.0)

Hedging reserve – cash flow hedges (b) 9.5 (20.5)

Revaluation reserve – property, plant and equipment (c) 87.3 –

90.4 (36.5)

a) Revaluation reserve – available for sale investments (net of tax)

At beginning of year (16.0) 17.8

Net gains/(losses) from changes in fair value 18.3 (45.3)

Net gains transferred to the income statement on sale (4.5) (3.1)

Deferred income taxes (4.1) 14.6

Income taxes (0.1) –

At end of year (6.4) (16.0)

2007 2006

£m £m

b) Hedging reserve – cash flow hedges

At beginning of year (20.5) 8.0

Effective portion of changes in fair value 43.8 (40.6)

Deferred taxes (13.3) 12.2

Transferred to net profit (0.5) (0.1)

At end of year 9.5 (20.5)

2007 2006

£m £m

c) Revaluation reserve – property, plant and equipment

At beginning of year – –

Revaluation 115.0 –

Deferred income taxes (27.7) –

At end of year 87.3 –

114 The Co-operative Group Annual Report and Accounts 2007


33 Movements in equity

2007 2006

£m £m

At beginning of year 3,271.5 3,093.3

Total recognised income and expense for the year 251.6 180.2

Arising from transfer of engagements 264.8 –

Dividend paid by bank – minority interests (0.9) (0.9)

Share interest (1.1) (0.9)

Movement in share capital 11.5 (0.2)

At end of year 3,797.4 3,271.5

34 Interest-bearing loans and borrowings – Trading and Corporate activities

This Note provides information about the contractual terms of the Group’s interest-bearing loans and borrowings. For more information about the Group’s

exposure to interest rate and foreign currency risk, see Note 52.

2007 2006

£m £m

Non-current liabilities

Unsecured bank loans 60.5 24.8

5 7 ⁄8% Eurobond Issue 2013* 194.5 195.6

7 5 ⁄8% First Mortgage Debenture Stock 2018* 58.1 55.9

Other loans 0.9 2.0

Non-current portion of finance lease liabilities 1.8 0.9

Less liabilities held for sale – –

315.8 279.2

Current liabilities

Corporate investor shares 83.7 100.7

Current portion of finance lease liabilities 1.1 –

Other loans 249.1 7.2

333.9 107.9

* These loan commitments are designated as financial liabilities at fair value through the income statement. All of the other liabilities, except the finance lease liability, are classified as loans and

receivables in accordance with IFRS 7.

Corporate investor share capital

Corporate investor debt may be issued to existing corporate members who hold fully paid corporate shares and are registered Industrial and Provident

Societies. The terms and conditions under which such loans are withdrawn or repaid, and the rate of interest payable, is determined from time to time

by the Society’s Board.

Terms and repayment schedule

The 7 5 ⁄8 % First Mortgage Debenture Stock 2018, which is secured over freehold and leasehold properties with a carrying amount of £100m, has an

original value of £50m to be paid to holders upon maturity.

The 5 7 ⁄8 % Eurobond Issue 2013 has an original value of £200m to be paid to holders upon maturity.

Finance lease liabilities

Minimum Lease Minimum Lease

payments interest Principal payments interest Principal

2007 2007 2007 2006 2006 2006

£m £m £m £m £m £m

Less than one year 1.0 0.1 1.1 – – –

Greater than one year but less than five years 1.6 0.2 1.8 0.8 0.1 0.9

2.6 0.3 2.9 0.8 0.1 0.9

Under the terms of the lease agreements, no contingent rents are payable.

The Co-operative Group Annual Report and Accounts 2007 115


Notes to the financial statements (continued)

35 Trade and other payables – Trading and Corporate activities

2007 2006

£m £m

Amounts falling due within one year:

Trade creditors 696.4 472.1

Value-added tax, PAYE and social security 12.8 5.8

Accruals and deferred income 95.0 105.9

Payments proposed to and on behalf of members 18.1 16.7

Funeral bonds – 7.0

Other creditors 150.0 96.6

Less liabilities held for sale (0.6) (9.1)

971.7 695.0

Amounts falling due after more than one year:

Funeral bonds 236.5 164.2

236.5 164.2

36 Provisions – Trading and Corporate activities

Provision Onerous 2007 2006

for claims leases Other Total Total

£m £m £m £m £m

At beginning of year 45.3 55.1 54.8 155.2 173.7

Arising on transfer of engagements – 32.9 15.6 48.5 –

Credit to income statement – (6.6) (8.8) (15.4) (17.1)

Charge to income statement 17.1 7.9 52.8 77.8 43.5

Arising on acquisition – – – – 0.8

Discounting – 2.0 – 2.0 2.0

Payments (17.1) (8.3) (25.4) (50.8) (47.7)

Transfer from creditors – – 2.6 2.6 –

At end of year 45.3 83.0 91.6 219.9 155.2

Less liabilities held for sale – (19.0)

219.9 136.2

Non-current 199.7 117.8

Current 20.2 18.4

219.9 136.2

The provision for claims relates to potential liabilities arising from past events. The provision includes an assessment, based on historical experience, of claims

incurred but not reported at the year end. The claims are expected to be settled substantially over the next three years.

The provision for leases primarily relates to properties which are no longer used for trading. The provision is net of estimated rental income from sub-letting

the properties. The leases expire at dates ranging over many years and payments under lease commitments, net of amounts receivable under sub-lettings,

will be approximately £49.5m payable in the next five years. The costs have been discounted at a rate of 4.42%.

Other provisions relate principally to redundancies as a result of restructuring due to the amalgamation in the year, and also to estimates of potential litigation.

With the exception of certain litigation, the majority of these costs are expected to be incurred within the next year.

116 The Co-operative Group Annual Report and Accounts 2007


37 Amounts owed to credit institutions – Financial Services

2007 2006

£m £m

Items in course of collection 5.6 5.7

Deposits from other banks 655.7 694.9

661.3 700.6

Of which:

Variable rate 54.2 48.1

Fixed rate 607.1 652.5

661.3 700.6

Gilt repo liability 2,983.2 5,686.3

Other 5.2 30.5

3,649.7 6,417.4

The amounts owed to credit institutions by CIS represents repurchase liabilities in respect of government-guaranteed securities which are the subject of

repurchase contracts. The government-guaranteed securities are included within investments.

Other represents overnight borrowings and overdraft balances.

38 Customer accounts – Financial Services

2007 2006

£m £m

Variable rate 8,940.2 7,846.8

Fixed rate 1,372.3 1,493.7

10,312.5 9,340.5

39 Debt securities in issue – Financial Services

2007 2006

£m £m

Bonds and medium-term notes – 300.0

Other debt securities in issue 535.8 813.3

535.8 1,113.3

The Co-operative Group Annual Report and Accounts 2007 117


Notes to the financial statements (continued)

40 Investment contracts – Financial Services

All financial liabilities at fair value through profit or loss are designated by CIS to be in this measurement category in accordance with the guidance

issued by ASB.

The maturity value of these financial liabilities is determined by the fair value of the underlying assets at the maturity date. There will be no difference between

the carrying amount and the maturity amount at maturity date.

Investment contract liabilities arising from unit-linked contracts are measured at fair value by reference to the fair value of the underlying portfolio of assets

and are designated in this measurement category at inception. None of the change in liability is attributable to changes in the credit risk of the underlying

assets. The maturity value of these financial liabilities is determined by the fair value of the linked assets at maturity date. There will be no difference between

the carrying amount and the maturity amount at maturity date.

Investment contracts – unit-linked

The movement in the liability arising from investment contracts is summarised below:

2007 2006

£m £m

At the beginning of the financial year 192.6 139.5

Contributions 37.0 36.5

Account balance paid on surrender and other terminations in the financial year (11.6) (6.3)

Investment return credited and related benefits 1.5 22.2

Management charges (2.0) (1.6)

Other income – management rebate 2.6 2.3

Movement in the year 27.5 53.1

At the end of the financial year 220.1 192.6

2007 2006

£m £m

Net movement in the financial year 27.5 53.1

Release of liability for deposit accounting previously recognised:

Creations (37.0) (36.5)

Cancellations 11.6 6.3

Management charges 2.0 1.6

Management charge rebate (2.6) (2.3)

Movement in fair value 1.5 22.2

41 Unallocated divisible surplus – Financial Services

2007 2006

£m £m

At the beginning of the financial year 1,155.4 850.4

Transfer (to)/from the income statement (107.1) 340.4

Transfers (to)/from the statement of recognised income and expense:

Actuarial gains on employee pension benefit obligation – (45.8)

Revaluation of owner occupied property (3.0) 4.1

Deferred tax on items through SORIE 0.3 6.3

At the end of the financial year 1,045.6 1,155.4

118 The Co-operative Group Annual Report and Accounts 2007


42 Other borrowed funds – Financial Services

2007 2006

£m £m

£30,000,000 subordinated perpetual floating-rate notes (i) – 30.0

£150,000,000 step-up callable subordinated notes 2019 (ii) 150.0 150.0

56,200,000 9.25% non-cumulative irredeemable preferred shares of £1 each (iii) 56.2 49.5

Subordinated Notes 2021 (iv) 150.0 150.0

Issue costs and discount (1.9) (2.2)

354.3 377.3

The Co-operative Bank has not had any defaults of principal, interest or redemption amounts during the year on its borrowed funds (2006: nil).

All of the above liabilities are an unsecured obligation of the Banking activities and, in the event of the winding up of The Co-operative Bank, the claims of note

holders will be subordinated in right of payment to the claims of depositors and other creditors of The Co-operative Bank.

i) Subordinated perpetual floating-rate notes

The notes were issued on 9 January 1998. The notes carry an annual interest rate of 1.18% above six months LIBOR up to (but excluding) 9 January

2008. Thereafter the notes carry an annual interest rate of 2.18% above six months LIBOR. Interest is payable half yearly in arrears on 9 January and

9 July each year. The bank redeemed all of the notes at their principal amount on 9 January 2008.

ii) Step-up callable subordinated notes 2019

The notes were issued on 1 April 2004 at a discount of 0.946%. The notes carry an annual interest rate of 5.875% per annum to (but excluding)

2 April 2014, and thereafter the interest rate will be determined by reference to the gross redemption yield on the five year benchmark gilt, and

a margin of 2.25%. Interest is payable annually in arrears on 2 April. The bank may redeem all, but not less than all, of the notes at their principal

amount on 2 April 2014.

No early repayment, which includes the purchase of the notes or stock by the Group for cancellation, of any of the above subordinated liabilities can

be made without the prior written agreement of the Financial Services Authority.

iii) 56,200,000 9.25% non-cumulative irredeemable preference shares of £1 each

The preference shares carry the right to a fixed non-cumulative preferential dividend on the capital for the time being paid up, at the rate of 9.25%

per annum exclusive of any associated tax credit. The dividends are payable on 31 May and 30 November each year and take priority over dividends

to any other class of share in the capital of The Co-operative Bank.

On a return of capital on a winding-up, the assets of The Co-operative Bank shall be applied in repaying the preference share capital in priority to any

payments to the holders of any other class of shares in the capital of The Co-operative Bank. The amount receivable by the holders of the preference

shares shall be the greater of the capital paid up or the average quoted price during the three months immediately preceding the date of the notice

convening the meeting to consider the resolution to wind up.

The holders of the preference shares shall have the right to vote at a general meeting of The Co-operative Bank only if and when, at the date of the

notice convening the meeting, the dividend due to them has been in arrears for six months or more, or if a resolution is to be proposed at the meeting

abrogating or varying their rights or privileges or for the winding up of The Co-operative Bank or other return of capital and then only on that resolution.

iv) Subordinated notes due November 2021

The notes were issued on 16 November 2006 at a discount of 0.189%.

The notes carry an interest rate of 5.625% per annum up to and including the interest payment date on 16 November 2016, when the interest basis

changes to floating rate. During the fixed rate period, interest is payable semi-annually in arrears on 16 May and 16 November.

From 17 November 2016, the notes carry a floating interest rate of 3 month LIBOR plus a margin of 1.75%. Interest is payable quarterly in arrears

on 16 February, 16 May, 16 August and 16 November, commencing on the interest payment date falling in February 2017 up to and including the

maturity date.

The Co-operative Bank may redeem all, but not less than all, of the notes at the principal amount on 16 November 2016, and on any quarterly interest

payment date thereafter.

The Co-operative Group Annual Report and Accounts 2007 119


Notes to the financial statements (continued)

43 Other liabilities and accruals – Financial Services

2007 2006

£m £m

Arising out of direct insurance operations 6.6 6.2

Accruals and deferred income 109.2 152.1

Other taxation and social security 8.2 9.2

Other payables 192.3 80.2

Amounts due for investments purchased 384.2 138.9

Trade creditors 103.8 108.1

Other reinsurance liabilities 1,841.6 14.8

2,645.9 509.5

Liabilities arising from reinsurance operations include a financial liability of £1,834.7m which is valued at fair value through profit or loss. The liability is owed

to a major reinsurer under a reinsurance arrangement to reinsure the majority of CIS’s remaining obligations in respect of annuities in payment and a proportion

of those in deferment. Under the reinsurance arrangement, CIS is contracted to pay premiums in accordance with a schedule of payments covering a period

up to 2066. At inception of the contract, CIS recognised its premium obligation in full within the income statement by a charge representing the net present

value of the contracted payments and continues to recognise a financial liability to the extent that the premium has yet to fall due for payment. At inception

of the contract, CIS also purchased a debt security, cash flows from which will fund the discharge of the financial liability as amounts fall due for payment.

The value of the financial liability is linked to the value of the debt security and accordingly both the asset and liability were designated in the measurement

category of fair value through profit or loss at inception. All of the change in the fair value of the liability is attributable to changes in the fair value of the debt

security and does not reflect changes in the credit risk of the liability.

The maturity value will be determined by the fair value of the debt security at maturity date. There will be no difference between the carrying amount and the

maturity value at maturity date. Of the discounted liability value, £49.3m falls due for settlement within one year giving rise to a cash outflow of £50.6m

(inclusive of interest). The remainder is non-current.

44 Provisions – Financial Services

2007 2006

Provisions for Other

restructuring provisions Total Total

£m £m £m £m

At beginning of year 3.4 26.8 30.2 48.5

Utilised (18.5) (5.6) (24.1) (27.1)

Charge to income statement 26.2 5.3 31.5 8.8

Provision released – (9.5) (9.5) –

At end of year 11.1 17.0 28.1 30.2

Restructuring provisions principally relate to the extensive restructuring and modernisation of the business, and the subsequent redundancy costs. The provision

is expected to unwind during 2008.

Other provisions mainly comprise onerous contract provisions in respect of long-term business investment contracts, onerous lease provisions for vacant

properties not in use, and an estimate of future payments to customers by The Co-operative Bank in compensation for loss suffered from past pension and

investment advice.

120 The Co-operative Group Annual Report and Accounts 2007


45 Reconciliation of operating profit to net cash inflow from operating activities – Trading and Corporate activities

2007 2006

£m £m

Operating profit after significant items (continuing activities) (see Note 1) 189.9 260.5

Add: Operating losses of discontinuing businesses (11.7) (22.5)

Less: Group operating costs (35.6) (29.2)

142.6 208.8

Add back:

– Depreciation and amortisation charges 143.4 109.2

– Goodwill and fixed asset impairment 39.4 17.4

– Profit on disposal of fixed assets (including those in significant items) (35.4) (42.4)

– Loss on disposal of investment 0.3 –

– Change in value of investment properties and joint venture 16.2 (44.8)

Effect of non-cash pension costs (88.9) (75.0)

Movements in working capital:

– (Increase)/decrease in inventories (5.8) 29.3

– Decrease in debtors (23.9) 47.1

– (Decrease)/increase in creditors and provisions (31.9) (26.9)

Tax (paid)/received (64.3) 14.5

Net cash inflow from operating activities 91.7 237.2

The Co-operative Group Annual Report and Accounts 2007 121


Notes to the financial statements (continued)

46 Reconciliation of operating profit to net cash inflow from operating activities – Financial Services

2007 2006

£m £m

Operating profit after significant items (see Note 1) 84.0 121.2

Decrease/(increase) in prepayments and accrued income 39.1 (276.6)

(Decrease)/increase in accruals and deferred income 26.5 47.8

Interest payable on subordinated liabilities 19.5 18.4

Effect of exchange-rate movements (5.2) (5.0)

Impairment losses on loans and advances 102.0 105.4

Impairment losses on structured investments 31.8 –

Effect of non-cash pension costs 0.1 4.9

Depreciation and amortisation 50.2 87.8

Investment income recognised (0.1) (0.2)

Interest amortisation (4.6) (0.2)

Amortisation on investments 5.3 0.1

Profit on sale of investments 0.3 0.8

Loss on disposal of fixed assets 8.1 2.5

Preference dividend 5.6 5.6

Net cash flow from trading activities 362.6 112.5

Increase/(decrease) in deposits by banks (53.7) 146.1

Increase in customer accounts 1,015.2 725.5

(Increase)/decrease in debt securities in issue (577.5) 63.1

Decrease/(increase) in loans and advances to bank 145.0 80.0

Increase in loans and advances to customers (958.9) (328.9)

Net movement of other assets and other liabilities 26.2 (27.3)

Investment property movement 240.9 (83.8)

Fair value through profit and loss movement 3,119.8 (116.8)

Derivative financial instruments movement 72.7 115.9

Assets available for sale movement 95.6 (1,216.5)

Deferred acquisition costs (5.9) (49.6)

Reinsurance assets (1,740.6) (640.7)

Net movement in other assets and liabilities 1,874.0 170.4

Insurance and participation contract provisions (890.3) 45.8

Unallocated divisible surplus (109.8) 340.4

Investment contracts 27.5 53.1

Amounts owed to credit institutions (2,705.9) 1,646.2

Employee benefits – 38.0

Other provisions 5.5 (19.0)

Insurance and other payables 24.6 10.7

Other reinsurance liabilities (2.9) 0.8

Net asset value attributable to unit holders – (6.9)

United Kingdom corporation tax paid 28.1 (155.0)

Net cash flow from operating activities (7.8) 904.0

122 The Co-operative Group Annual Report and Accounts 2007


47 Transfer of engagements of United Co-operatives Limited

On Sunday 29 July 2007, The Co-operative Group and United Co-operatives Limited amalgamated their respective societies by a transfer of engagements

between the two co-operative societies under section 51 (1) of the Industrial and Provident Societies Acts.

In the 24 weeks to 12 January 2008 the ‘former’ United Co-operatives businesses contributed operating profit before significant items of £26.3m. If the

transfer of engagements had occurred on 14 January 2007, management estimates that consolidated net revenue would have been £7.2bn and operating

profit before significant items for the period would have been approximately £470m. In determining these amounts, management has assumed that the fair

value adjustments that arose on the date of amalgamation would have been the same if the amalgamation occurred on 14 January 2007.

The amalgamation had the following effect on the Group’s assets and liabilities on amalgamation date:

Pre-transfer Fair value Professional fees Inter-company Recognised values

of engagements adjustments charged to reserves elimination on transfer

carrying amounts

of engagements

£m £m £m £m £m

Fixed assets – Land and buildings (a) 321.6 51.0 372.6

Fixed assets – Investment property (a) 59.2 (5.9) 53.3

Fixed assets – Fixtures and fitting

& transport (b) 144.5 (6.6) 137.9

Goodwill (c) 251.8 (251.8) –

Other intangible assets (c) – 196.1 196.1

Investments (d) 28.3 8.3 36.6

Deferred tax asset (e) 32.4 5.5 37.9

Derivatives (f) – (0.3) (0.3)

Inventories (g) 115.8 (1.5) 114.3

Debtors (h) 260.2 (0.4) (125.0) 134.8

Cash 25.9 – 25.9

Creditors (i) (359.9) 2.0 (357.9)

Provisions (j) (43.8) (105.7) (1.5) (151.0)

Loans (182.6) – (182.6)

Pension deficit (k) (104.5) (19.7) (124.2)

Net identifiable assets and liabilities 548.9 (129.0) (1.5) (125.0) 293.4

The value of assets, liabilities and contingent liabilities recognised are their estimated fair values based on applicable IFRSs.

These preliminary adjustments, in particular in respect of provisions, can only be determined on an estimated basis because of the uncertainty over the

outcome of events which may impact on these fair values. As a consequence further adjustments may arise in the 2008 financial statements.

a) The property estate including investment properties has been valued at market value. Fixtures and fittings at leasehold sites have been written off to the

extent they are reflected in the fair value of lease payments.

b) An impairment test at individual store level has resulted in the impairment of certain tangible fixed assets held at under-performing stores/branches.

c) Under IFRS, the goodwill on the balance sheet of the transferring entity is de-recognised. At the same time however any intangible assets are identified and

valued. The book value of goodwill in the balance sheet at the date of transfer of £251.8m has therefore been written off. Having reviewed all businesses

for possible intangibles, the only material area relates to Healthcare licences, which have been valued at £196.1m. This has been calculated using a

discounted cash flow calculation based on budgeted individual branch NHS cash flows.The value of £196.1m includes £18.6m in relation to the estimated

tax amortisation benefit. Other potential intangible assets were considered in all business units including Food, Funerals, Travel, Motor and E-Store. No further

intangibles were identified.

d) Within the total there is an investment in Grangefern, an investment property company joint venture. IFRS requires investments to be fair valued and the

uplift of £8.3m, increasing the carrying value to £9.4m, reflects the increase in value of the underlying investment property, a retail park.

e) The deferred tax asset relating to the pension scheme deficit has increased as a result of the pension scheme fair value adjustment explained in Note (k).

f) Interest rate swaps meet the definition of a derivative under IAS 39 and have been market valued and recognised on the balance sheet accordingly.

g) Alignment of food stock policy.

h) At the time of the merger The Co-operative Group owed £125m to United Co-operatives under a short term loan facility. As a consequence of the

merger the related creditor and debtor balances were eliminated.

The Co-operative Group Annual Report and Accounts 2007 123


Notes to the financial statements (continued)

The creditor’s total includes short-term borrowings of £51.4m.

i) Upon receipt of the Corporate dividend from Group, the ‘former’ United Co-operatives set up a deferred income creditor which was then credited each period

into the income statement. At the amalgamation date the deferred income creditor of £2.2m has been released to reserves.

j) Provisions have been restated in accordance with the Group’s policies with provisions made/increased in respect of onerous leases and dilapidations.

– United Co-operatives ran an employee share option plan and under the rules of the plan the benefits vested on a change of ownership.

– Deferred tax adjustments arise both from accounting policy changes from moving to IFRS and deferred tax arising on the fair value adjustments. The key

accounting policy adjustments arise because IAS 12 requires deferred tax to be provided on the revaluation of properties and rolled-over capital gains, rather

than those expected to crystallise. The total fair value adjustment for this is a £11.7m deferred tax liability largely relating to rolled over gains of £26.3m.

The deferred tax arising on the fair value adjustments (excluding impact of pension scheme as per Note (e)) is a charge of £54.0m. The largest components of

this are £47.1m of deferred tax on the Healthcare licences of £196.1m and £14.8m relating to the uplift on land and buildings.

k) The fair value adjustment to the various United Co-operatives pension schemes reflects the updating of the IAS 19 actuarial valuation from the start of the

year to the date of amalgamation.

Nith Valley

During the year The Co-operative Group accepted the transfer of engagements from Nith Valley Society, recognising net assets of £0.6m upon the transfer.

48 Acquisitions

A summary of the balances acquired is shown below:

2007 2006

Total Total

fair value fair value

£m £m

Fixed assets 14.5 15.3

Intangible assets 166.1 101.8

Inventories 1.0 0.1

Debtors 0.7 1.3

Creditors (9.4) (2.4)

Provisions – (0.8)

Cash 0.9 2.3

Finance leases – (1.2)

Bank and other borrowings within one year – (15.8)

Net assets 173.8 100.6

Goodwill 18.3 37.8

Purchase consideration 192.1 138.4

£m £m

Cash flow on acquisition:

Cash consideration (192.1) (138.4)

Bank balances acquired 0.9 2.3

Cash settled on borrowings acquired – (15.8)

Cash outflow (191.2) (151.9)

There are no significant fair value adjustments included in the above with the exception of the recognition of Healthcare licences. The preliminary adjustments

made can only be determined on an estimated basis because of the uncertainty over the outcome of events which may impact on these fair values. As a

consequence, further adjustments may arise in the 2008 financial statements.

The acquisitions set out above relate to a number of acquisitions principally in Healthcare. For Healthcare, the contributions to revenue and operating profit

made since acquisition are approximately £42m and £4m.

The goodwill of £15.7m relating to the acquisition of individual food stores is attributable to the synergies expected to be achieved by integrating these into the

Group’s existing food businesses.

Within Healthcare £166.1m has been capitalised as licence intangible assets.

If the Healthcare acquisitions had occurred on 14 January 2007, management estimates that net revenue would have been approximately £160m and

operating profit for the year would have been approximately £15m.

124 The Co-operative Group Annual Report and Accounts 2007


49 Commitments and contingent liabilities

a) Capital expenditure committed by the Group at the year end was £160.4m (2006: £89.1m).

b) Commitments under operating leases:

Group

At 12 January 2008, the future minimum lease payments under non-cancellable operating leases were:

2007 2006

Land and

Land and

buildings Other buildings Other

£m £m £m £m

Operating leases which expire:

Within one year 78.3 3.4 68.2 7.7

In two to five years 271.1 8.4 211.0 14.0

In over five years 491.8 0.2 389.3 –

841.2 12.0 668.5 21.7

c) Banking activities

The table below gives the nominal principal amounts, credit equivalent amounts and risk-weighted amounts of contingent liabilities and commitments.

The nominal principal amounts indicate the volume of business outstanding at the balance sheet date and do not represent amounts at risk. The credit

equivalent and risk-weighted amounts have been calculated in accordance with the FSA guidelines implementing the Solvency Ratio Directive on capital

adequacy (for 2006) and the Capital Requirements Directive (CRD) for 2007.

2007 2006

Credit Average Risk- Risk-

Contract equivalent risk weighted Contract weighted

amount amount (i) weight amount amount amount

£m £m £m £m £m

i) Contingent liabilities:

Guarantees and irrevocable letters of credit 90.9 79.7 60.2% 48.0 77.0 62.1

90.9 79.7 77.0 62.1

ii) Other commitments:

Documentary credits and short-term

trade-related transactions 1.6 0.3 77.1% 0.2 1.9 0.4

Forward assets purchases and forward deposit placed 215.0 215.0 6.4% 13.8 50.0 10.0

Undrawn formal standby facilities, credit lines and

other commitments to lend (includes revocable

and irrevocable commitments) 6,155.1 3,048.3 44.8% 1,364.6 5,762.6 213.8

6,371.7 3,263.6 42.2% 1,378.6 5,814.5 224.2

Notes

(i) Under the Solvency Ratio Directive, credit equivalent amounts, obtained by applying credit conversion factors, are risk weighted according to counter-party.

Under the CRD credit conversion factors are applied to exposures subject to the Standardised and Foundation IRB approach, primarily Corporate and

Wholesale exposures as defined by BIPRU. Under the Retail IRB approach the Credit Equivalent amount is defined as Exposure at Default (EAD).

(ii) Undrawn loan commitments consist largely of undrawn credit card facilities.

Assets pledged

Assets are pledged as collateral under repurchase agreements with other banks. Mandatory reserve deposits are also held with the Bank of England in

accordance with statutory requirements. These deposits are not available to finance the Group’s day-to-day operations.

Assets

Related Liability

2007 2006 2007 2006

Balances with central banks 11.3 10.6 – –

The Co-operative Group Annual Report and Accounts 2007 125


Notes to the financial statements (continued)

49 Commitments and contingent liabilities (continued)

Unauthorised overdraft charges

In July 2007, the Office of Fair Trading (OFT) launched a test case in the High Court to determine the status and enforceability of certain of the charges applied

to customers in relation to requests for unplanned overdrafts. Pending resolution of the test case, the Financial Services Authority has agreed, subject to

conditions, that the handling of customer complaints on this issue can be suspended unless in the light of prevailing circumstances this would be inappropriate.

A range of outcomes is possible from the test case and any appeal, some of which could have a significant financial impact on the Group. It is not considered

appropriate to make provision or quantity for a wide range of potential outcomes before the conclusion of the legal process.

50 Related party transactions and balances

a) Trading and Corporate activities

The nature of the relationship of related parties and the extent of material transactions and balances with them are set out below or are disclosed elsewhere

within the financial statements.

2007 2006

Relationship £m £m

Sales to associated undertakings and joint ventures on normal trading terms (i) – 9.3

Subscription to Co-operatives UK Limited (ii) 0.8 0.8

i) Details of the Society’s principal associates are set out in Note 51.

ii) The Society is a member of Co-operatives UK Limited.

The Society’s corporate members include consumer co-operative societies which, in aggregate, own the majority of the corporate shares with rights attaching

as described in Note 31. The sales to corporate members, on normal trading terms, were £1,071.3m (2006: £1,284.0m) and the amount due from corporate

members in respect of such sales was £70.0m at 12 January 2008 (2006: £77.1m).

Transactions with directors and key management personnel

A number of trading transactions are entered into with related parties in the normal course of business. Key management are considered to be Board

Executive members and directors of The Co-operative Group. The average value of all transactions greater than £1,000 with the Trading Group was

£6,066 (2006: £3,954).

b) Banking activities

A number of banking transactions are entered into with related parties in the normal course of business. These include loans and deposits. Key management

are considered to be Board Executive members of the Group. The volume of related party transactions, outstanding balances at the year end and related

income and expense for the year are as follows:

Directors and key

management personnel

2007 2006

£m £m

Loans outstanding at 13 January 2007 and 12 January 2008 0.5 0.5

Deposits at beginning of year 1.4 1.0

Interest and fee expense 0.2 0.1

Net movement 0.1 0.3

Deposits at end of year 1.7 1.4

c) Insurance activities

Transactions with directors and key management personnel

The Society enters into transactions with key management personnel in the normal course of business. Details of the transactions carried out during the year

and balances are as follows:

2007 2006

£ £

At beginning of year 42,668 53,172

Net movement 27,846 (10,504)

At end of year 70,514 42,668

126 The Co-operative Group Annual Report and Accounts 2007


51 Principal subsidiary and associated undertakings

The principal subsidiary and associated undertakings of the Society, which are registered in England except where stated, are:

Society’s holding %

Nature of business

Co-operative Financial Services Ltd: 100 Holding society

CIS General Insurance Ltd 100 General Insurance

CFS Management Services Ltd 100 Service company

CFS Services Ltd 100 Financial Services

Co-operative Insurance Society Ltd (vi):

Hornby Road Investments Ltd (vi)

CIS Unit Managers Ltd (vi)

CIS Policyholder Services Ltd (vi)

Life assurance

Investment holding

Investment holding and management

Provision of Financial Services

The Co-operative Bank plc (vi): 100 Banking

Unity Trust Bank plc (iii) (vi) 27 Banking

Co-operative Bank Financial Advisers Ltd (vi) 100 Financial advisers

Trading:

Convenience Stores West Ltd 100 Food and general retailing

Co-operative Legal Services Ltd 75 Legal services

Millgate Insurance Brokers Ltd 100 Insurance broking

Farmcare Ltd 100 Farming

The Manx Co-operative Society Ltd (iv) – Food retailing

CRS (Properties) Ltd 100 Property management

National Co-operative Chemists Ltd 99 Pharmaceutical retailing

Alldays Stores Ltd 100 Food retailing

Balfour Convenience Stores Ltd 100 Food retailing

The Fairways Partnership Ltd 87 Funeral directors

Co-op Healthcare Ltd 100 Pharmacy Retail

Funeral Services Ltd 100 Funeral Services

Sants Pharmaceutical Distributors Ltd 100 Pharmacy Distribution

United Co-operatives Foodstores Ltd 100 Food Retail

United Co-operatives Travel Group Ltd 100 Holding Company

United Estates Services Ltd 100 Property Management

Co-operatives E-Store Ltd 100 Online electrical equipment

The principal associated undertakings of the Society are:

Industrial and Provident Societies:

Gilsland Spa Ltd (v) 98 Holiday centre management

Notes

i) All the principal subsidiaries and associated undertakings have been audited by KPMG Audit Plc or its associate.

ii) All the principal subsidiaries have year ends which are co-terminus with the Society, with the exception of CRS (Properties) Ltd (31 January 2008) and

Unity Trust Bank plc (31 December 2007).

iii) Unity Trust Bank plc is a subsidiary of the Group because The Co-operative Bank plc elects a majority of directors and appoints the chair and managing

director of Unity Trust Bank plc.

iv) Manx Co-operative (CWS) Limited is a subsidiary of the Group because The Co-operative Group (CWS) Ltd elects a majority of directors.

v) The principal associated undertaking is not considered to be a subsidiary because the Society does not elect the majority of directors, and it is considered

that this business is not therefore under the Society’s control.

vi) Indirectly held subsidiaries.

The Co-operative Group Annual Report and Accounts 2007 127


Notes to the financial statements (continued)

52 Risk management

The Board is responsible for approving the Group’s strategy, its principal markets and the level of acceptable risks. The Group operates a risk management

process that identifies the key risks facing each business. Each business and division has a risk register which identifies the likelihood and impact of those

risks occurring and the actions being taken to manage those risks.

The principal risks facing the Group are set out below in the context of the three main divisions: Trading and Corporate; Banking; and Insurance.

a) Trading and Corporate activities

Credit risk

Credit risk arises from the possibility of customers and counterparties failing to meet their obligations to the Trading Group. Management has a credit policy

in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations are performed on all customers requiring credit over a certain

amount. The Trading Group does not require collateral in respect of financial assets.

Investments are allowed only in liquid securities and only with counterparties that have a credit rating equal to or better than the Trading Group. Transactions

involving derivative financial instruments are with counterparties with whom the Trading Group has a signed netting agreement as well as sound credit ratings.

Given their high credit ratings, management does not expect any counterparty to fail to meet its obligations.

At the balance sheet date there were no significant concentrations of credit risk.

Interest-rate risk

Hedging

Interest-rate risk arises from movements in interest rates that impact on the fair value of the assets and liabilities and related finance flows. The Trading

Group adopts a policy of ensuring that between 30-70% of its exposure to changes in interest rates on borrowings is on a fixed-rate basis. The fixed

proportion as at 12 January 2008 was 67%, Interest-rate swaps, denominated almost exclusively in sterling (some denominated in Japanese Yen), have been

entered into to achieve an appropriate mix of fixed and floating-rate exposure within the Trading Group’s policy. The swaps mature over the next six years

following the maturity of the related loans (see the following table) and have fixed swap rates ranging from 0.6% (Yen) to 5.86%. At 12 January 2008, the

Trading Group had interest-rate swaps with a notional contract amount of £586.9m (2006: £399.8m).

The Trading Group does not designate interest-rate swaps or forward foreign-exchange contracts as hedging instruments. Derivative financial instruments

that are not hedging instruments are classified as held for trading by default and thus fall into the category of financial assets at fair value through income

statement. Derivatives are subsequently stated at fair value, with any gains and losses being recognised in the income statement.

The net fair value of swaps at 12 January 2008 was £6.3m (2006: £10.3m) comprising assets of £0.6m (2006: £1.5m) and liabilities of £6.9m (2006: £11.8m).

These amounts are recognised as fair value derivatives.

Effective interest rates and repricing analysis

In respect of income-earning financial assets and interest-bearing financial liabilities, the following table indicates their effective interest rates at the balance

sheet date and the periods in which they reprice.

2007

Effective 6 months 6–12 1–2 2–5 More than

interest Total or less months years years 5 years

rate £m £m £m £m £m £m

Cash and cash equivalents 5.50% 160.3 160.3 – – – –

Secured debt:

First mortgage debenture 2018 7.625% (50.0) – – – – (50.0)

CIS Mortgage Loan 10.25% (1.2) (0.1) (0.2) (0.3) (0.6) –

Unsecured bond issued:

Fixed rate sterling eurobond 5.875% (200.0) – – – – (200.0)

Effect of interest rate swaps 1.78% – (200.0) – – – 200.0

Yen floating rate loan (1) 0.97% (25.6) (25.6) – – – –

Yen floating rate loan (2) 0.97% (60.5) (60.5) – – – –

Effect of interest rate swap 0.24% – 60.5 – (60.5) – –

Other unsecured loans (see below) 6.53% (258.8) (205.3) (2.8) (15.7) (13.2) (21.8)

Effect of interest rate swaps 0.86% – – (12.5) (106.3) (19.5) –

Corporate investor shares 5.80% (83.7) (82.6) (1.1) – – –

Finance lease liabilities (2.9) (0.5) (0.6) (1.1) (0.7) –

(522.4) (353.8) (17.2) (183.9) (34.0) (71.8)

128 The Co-operative Group Annual Report and Accounts 2007


52 Risk management (continued)

Foreign currency risk

The Trading Group is exposed to foreign currency risk on purchases and borrowing that are denominated in a currency other than sterling. The currencies

giving rise to this risk are primarily Euro, US Dollars and Japanese Yen.

The Trading Group hedges at least 90% of all trade payables denominated in a foreign currency. At any point in time the Trading Group also hedges 90%

of its estimated foreign currency exposure in respect of orders placed and not invoiced over the following four months. The Trading Group uses forward

exchange contracts to hedge its foreign currency risk. The forward exchange contracts have maturities of less than one year after the balance sheet date.

Where necessary, the forward exchange contracts are rolled over at maturity.

In respect of other monetary assets and liabilities held in currencies other than sterling, the Trading Group ensures that the net exposure is kept to an

acceptable level, by buying or selling foreign currencies at spot rates where necessary to address short-term imbalances.

Liquidity risk

As at 12 January 2008 the Trading Group has available borrowing facilities totalling £794m, which comprises committed facilities of £739m and uncommitted

facilities of £55m.

Sensitivity analysis

Interest rate risk

At 12 January 2008 if Sterling (GBP) market interest rates had been 1% higher/lower and Japanese Yen (JPY) interest rates had been 0.5% higher/lower with

all other variables held constant, post tax profit for the year would have been GBP £11.2m (2006: GBP £10.8m) higher and GBP £14.7m (2006: GBP £19.6m)

lower respectively, mainly arising from the revaluation of the Society’s £250m quoted debt marked to market through the consolidated income statement.

Profit is relatively less sensitive to movements in GBP interest rates due to the level of borrowings fixed interest cover in place as disclosed under ‘hedging’.

Foreign Exchange Risk

At 12 January 2008, if the Euro, US Dollar, Australian Dollar and New Zealand Dollar had all strengthened by 10% against Sterling (GBP) with all variables

held constant, post tax profit for the year would have been £0.1m (2006: £0.2m) lower, mainly as a result of foreign exchange losses on translation of USD

denominated trade payables.

Conversely, if the Euro, US Dollar, Australian Dollar and New Zealand Dollar had all weakened by 10% against Sterling (GBP) with all variables held constant,

post tax profit for the year would have been £0.1m (2006: £0.2m) higher.

The Society has two external Japanese Yen denominated loans that are fully hedged against exchange rate fluctuations on a post tax profit basis.

Guarantees

In the course of conducting its operations, the Trading Group is required to issue bank guarantees and bonds in favour of various counterparties.

These facilities are provided by the Trading Group’s banking syndicate and as at 12 January 2008 the total amount of guarantees/bonds outstanding

is £84.8m (2006: £66.4m).

Fair values

The fair value of financial assets and liabilities together with the carrying amounts shown in the balance sheet at 12 January 2008 are as follows:

Carrying Fair

amount value

2007 2007

£m £m

Trade and other receivables 472.3 472.3

Cash and cash equivalents 160.3 160.3

Interest rate swaps:

Assets 0.6 0.6

Liabilities (7.7) (7.7)

Secured debt

First mortgage debenture 2018 (58.1) (58.1)

Unsecured bond issue:

Fixed-rate sterling eurobond (194.5) (194.5)

Unsecured bank facilities

Yen floating-rate loan(1) (25.6) (25.6)

Yen floating-rate loan(2) (60.5) (60.5)

Other unsecured loans (258.8) (258.8)

Corporate investor shares (83.7) (83.7)

Finance lease liabilities (2.9) (2.9)

Trade and other payables (972.3) (972.3)

The Co-operative Group Annual Report and Accounts 2007 129


Notes to the financial statements (continued)

52 Risk management (continued)

Estimation of fair values

The following summarises the major methods and assumptions used in estimating the fair values of financial instruments reflected in the table.

Securities

Fair value is based on quoted market prices at the balance sheet date without any deduction for transaction costs.

Derivatives

Forward exchange contracts are either marked to market using listed market prices or by discounting the contractual forward price and deducti