BRITISH STEEL PENSION SCHEME Registered number – 10110638

TRUSTEE’S ANNUAL REPORT AND

FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 MARCH 2017

Contents Trustee and advisers 1

Chairman’s introduction 2

Trustee’s annual report 3

Report on Actuarial liabilities 6

Trustee’s Summary of Contributions 9

Statement of Trustee’s responsibilities for the Financial Statements 16

Independent Auditor’s report to the Trustee 17

Fund Account 18

Summary of Net Assets (available for benefits) 19

Notes (forming part of the Financial Statements) 20

Chairman’s Annual Governance Statement 40

Independent Auditor’s Statement about Contributions to the Trustee 45

Actuary’s Certification of Schedule of Contributions 46

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Trustee and advisers

Principal company Tata Steel UK Limited 30 Millbank London SW1P 4WY

Participating companies B.S. Pension Fund Trustee Limited Cogent Power Limited Federated Property Services Limited ISSB Limited Kalzip Limited Tata Steel UK Consulting Limited UK Steel Enterprise Limited

Trustee B. S. Pension Fund Trustee Limited

Trustee directors A J Johnston (Chairman) S Corten B Curran (appointed 17 February 2017) M Driscoll (resigned 2 March 2017) A Dunbar N Garbutt (appointed 8 February 2017) T Godfrey (retired 8 April 2016) K Haigh (resigned 31 May 2016) D S Maddock S Mather A McNeil M Rees P Rees J Regan I Smith (resigned 31 May 2016) A Szczur (retired 15 July 2016) J Thomas (appointed 18 November 2016) I Williams (appointed 8 June 2016) N Young (appointed 7 March 2017)

Scheme Secretary M Donohue

Director, Pensions D Mulholland

Actuary C P Burbidge Willis Towers Watson LLP

Solicitors Travers Smith LLP

Auditor KPMG LLP

Administrator B. S. Pension Fund Trustee Limited

Administration office Ground Floor Sentinel 105 Waterloo Street Glasgow G2 7BW

Corporate Finance Adviser Penfida Limited

Insolvency Adviser BDO UK LLP

Public Relations Adviser Newgate Communications

Investment Manager Pension Services Limited 125 Old Broad Street London EC2N 1AR

Chief Investment Officer H C Smart

Independent Investment Advisers P Craven S Francis P E Oldham

Custodian JP Morgan Chase Bank

Provider of DC administration and investment services Legal & General

Banker Barclays Bank plc

Medical Adviser Dr S Williams

Enquiries about the Scheme generally, or about an individual’s entitlement to benefit, should be addressed to the Pensions Office, where a copy of the Trust Deed and Rules can be inspected.

Alternatively, enquiries may be made to: pension.enquiries@tatasteel.com or via the Scheme website www.bspensions.com or by telephone on 0330 440 0802

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Chairman’s introduction I am pleased to present the Annual Report and the Financial Statements for the British Steel Pension Scheme for the year

ended 31 March 2017.

The last 18 months have been dominated by discussions around the future of the Scheme following Tata Steel Limited’s

announcement on 29 March 2016 regarding its intention to explore all options for portfolio restructuring including the

potential divestment of Tata Steel UK Limited. The publication of this Annual Report has been delayed to October 2017 to

allow me to report on the conclusion of these discussions.

The Scheme sponsor Tata Steel UK Limited (TSUK) had been working with its stakeholders to progress a transformation plan

to improve performance and to make the business sustainable. Part of this transformation plan involved the separation of the

BSPS from Tata Steel. Failure to implement the plan would result in TSUK becoming insolvent and the BSPS entering the

Pension Protection Fund (PPF).

Separation of the Scheme from Tata Steel in circumstances where the employers would otherwise become insolvent can be

achieved by means of a Regulated Apportionment Arrangement (RAA). An RAA requires the approval of the Pensions Regulator

and non-objection of the PPF. The Pensions Regulator will approve an RAA only if it is satisfied that the outcome for the scheme

is better than if the employers went through an insolvency process. The Trustee was satisfied that separation of the BSPS from

Tata Steel was necessary to avoid insolvency of TSUK and other employers.

Normally, after an RAA has been agreed for a pension scheme, the pension scheme goes into the PPF. Although the PPF is an

important safety net for pension schemes, the Trustee view was that the BSPS had sufficient assets to fund benefits in a new

scheme that would be better than PPF compensation for most members, and to do so on a low-risk basis sustainably into the

future. Using Scheme assets to achieve the best and fairest outcome for the Scheme membership as a whole was the key

priority for the Trustee during long and complex negotiations with Tata Steel, the Pensions Regulator and the PPF.

On 11 September 2017, the Pensions Regulator issued its formal approval notice for the RAA. As part of the separation, Tata

Steel companies have been released from their obligations to the BSPS and the BSPS has received £550 million from Tata Steel

together with a 33% equity stake in TSUK.

Scheme members now have two options: to switch to a new scheme (the New BSPS) providing the same benefits as BSPS but

with lower future increases, or to remain with the current BSPS and move into the PPF. The benefits offered by the New BSPS

are expected to be better than PPF compensation for the vast majority of pensioners and for many other members. For the

New BSPS to come into effect, certain qualifying conditions must be met relating to factors such as size and funding level.

The New BSPS will be sponsored by TSUK, meaning that TSUK would have legal obligations to fund the New BSPS if it fell into

deficit.

In early October, the Trustee is issuing individual information packs to all members to outline their options. Members are

being given detailed information and offered expert impartial guidance to help them make their choices. The Trustee expects

that the qualifying conditions will be met and subject to this being the case, the transfer to the New BSPS will be completed

before 29 March 2018. On that date, the old BSPS will go into a PPF assessment period.

I would like to take this opportunity to thank my colleagues on the Trustee board, Scheme Officers and Advisers for their

dedication and commitment over the last 18 months in achieving what was the best outcome possible in very challenging

circumstances.

To end on a more positive note, I am pleased to be able to report another two successes at the Investment & Pensions Europe

2016 Awards. The Fund was joint-winner of the Gold Award for Best Long-Term Investment Strategy, and winner of the Best

In-House Investment Team. This takes the Fund’s tally of IPE Awards to twelve since first entering the competition in 2008.

AJ Johnston

Chairman of the Board of Trustees

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Trustee’s annual report The Trustee has pleasure in submitting its annual report on the British Steel Pension Scheme (“the Scheme”),

together with the financial statements of the Scheme for the year ended 31 March 2017.

Constitution of the Scheme

The British Steel Pension Scheme provides a defined benefit section (“the Standard Section”) and a defined

contribution section (“the DC Section”) governed by a definitive Trust Deed dated 31 January 2013, as amended

from time to time. The Trustee holds Scheme funds on trust to apply them for the purpose of paying pensions

and other benefits in accordance with the Trust Deed.

Benefits earned in the Scheme accrued:

• in the Standard Section based on a Member’s earnings and length of service; and

• in the DC Section based on a member’s individual member account.

Both the Standard and the DC Sections of the Scheme were closed to future accrual with effect from 31 March

2017. Employee members of both sections were able to make Top Up Contributions (“TUCs”) on a defined

contribution basis to secure additional benefits.

Management of the Scheme

The Trustee directors who served during the year are listed on page 4.

The day-to-day management and operation of the Scheme has been delegated to the in-house pension

administration and investment offices set out on page 1 and is supervised by the Trustee board, who are directors

of the Trustee Company. Half of the Trustee directors are Company Nominated Trustee Directors (“CNTDs”) and

half are Member Nominated Directors (“MNDs”). Of the MNDs, one pensioner member is chosen from the ranks

of former employee pensioners on the recommendation of a selection panel consisting of Trustee directors, and

the balance of MNDs is selected by the Trade Unions.

Tata Steel UK Limited (“the Company”) is responsible for the appointment of all directors of the Trustee Company,

and for the removal of those directors it nominated. MNDs can only be removed within their term of appointment

with the approval of all other Trustee directors. CNTDs can serve until removed by the Company. MNDs are

appointed for a three-year period on a rolling-basis and may be re-nominated through the agreed nomination

process. Appointments may be for less than three years if an MND is appointed to fill a vacancy that has occurred

as a result of an MND resigning before they have served their full term.

The appointment periods for P Rees and I Williams ended on 30 September 2016. Following confirmation through

the agreed nomination process, Mr Rees and Mr Williams were re-appointed for a further three-year term,

commencing 1 October 2016.

The Trustee board has delegated the exercise of its investment powers in respect of the Standard Section to an

Investment Committee comprising six members drawn from the Trustee board, half of whom are CNTDs and half

are MNDs. The Investment Committee is advised by the Fund’s Chief Investment Officer and is assisted by three

independent advisers. The Trustee board has also established a Valuation/Covenant Sub Committee to engage

directly with the Scheme’s sponsoring employers on matters that might affect the employers’ covenant or

Scheme’s funding position.

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The Sub Committee comprises four members drawn from the Trustee board, half of whom are CNTDs and half

are MNDs, assisted by Scheme Officers, the Scheme Actuary and other professional advisers as required. The Sub

Committee has no authority to make decisions on behalf of the Trustee except as may be conferred by resolution

of the Board from time to time.

The Trustee directors’ attendance at meetings of the Trustee board and relevant Committees is summarised

below. Where a Trustee director was not entitled to attend all of the meetings in the year the maximum number

of meetings is given in brackets.

TRUSTEE DIRECTOR TRUSTEE BOARD 10 MEETINGS

INVESTMENT COMMITTEE 4 MEETINGS

A J Johnston 10 4

S Corten 10 2

B Curran 3 (3) N/A

M Driscoll 1 (8)1 N/A

A Dunbar 10 4

N Garbutt 4 (4) N/A

T Godfrey 1 (1) N/A

K Haigh 2 (2) N/A

D S Maddock 9 4

S Mather 10 2

A McNeil 10 N/A

M Rees 10 N/A

P Rees 9 4

J Regan 10 N/A

I Smith 2 (2) N/A

A Szczur 3 (3) N/A

J Thomas 5 (5) N/A

I Williams 8 (8) N/A

N Young 2 (2) N/A

In addition to scheduled and special board and committee meetings, the Trustee met regularly throughout the

year with representatives of the Company, HM Government and various regulatory bodies.

The Trustee board has implemented a governance framework intended to provide reassurance that the Scheme

is well run and a means of monitoring the effectiveness of the arrangements put in place to manage the Scheme.

The governance arrangements for the Scheme take account of the recommendations and Codes of Practice of

the Pensions Regulator and best practice, and are kept under continuous review. The Governance framework

covers:

• appointment and removal of Trustee directors,

• operation and performance of the Trustee Board and its sub committees,

• review of advisers to the Trustee board,

1 M Driscoll did not attend Trustee board meetings between May 2016 and March 2017 owing to a conflict of interests.

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• conflicts of interest,

• data protection and data quality,

• Trustee Knowledge and Understanding,

• anti-corruption and bribery,

• risk management,

• confidentiality agreements,

• delegated authorities and service standards,

• internal control regimes,

• annual business planning, and

• recovery in the event of a disaster.

Governance issues are considered throughout the year. Further details regarding Scheme governance can be

found in the Chairman’s Annual Governance Statement on page 40.

Recent developments

Following a strategic review of Tata Steel’s European operations, the Board of Tata Steel Ltd announced on

29 March 2016 that it had instructed the Board of its European holding company to explore all options for

portfolio restructuring including the potential divestment of Tata Steel UK, in whole or in parts. The Tata Steel

board subsequently announced on 8 July 2016 that it had decided to look at alternative and more sustainable

portfolio solutions and entered into discussions with strategic players, in particular ThyssenKrupp, to explore a

possible joint venture.

In the scenarios envisaged for Tata Steel UK, entry into the Pension Protection Fund (“PPF”) was the most likely

outcome for the British Steel Pension Scheme. Although the PPF is an important safeguard for pension schemes

generally, the Trustee believes that the BSPS has sufficient assets to offer members the potential for better

outcomes by enabling them to transfer to another scheme offering modified benefits. To that end, the Trustee

has been in detailed negotiation with its Company counterparts, Trade Unions, regulatory bodies and various

Government Departments and officials about how to secures better outcomes for members than entry into the

PPF.

A public consultation on the Scheme, which considered various means by which modification of benefits might

be achieved, closed on 23 June 2016. No formal announcement has yet been made by HM Government on the

outcome of this consultation.

As set out in the Chairman’s introduction, on 11 September 2017, the Pensions Regulator issued its formal

approval notice for a Regulated Apportionment Arrangement (“RAA”) under which Tata Steel companies have

been released from their obligations to the BSPS and the BSPS has received £550 million from Tata Steel together

with a 33% equity stake in TSUK. Scheme members now have two options: to switch to a new scheme providing

the same benefits as BSPS but with lower future increases, or to remain with the current BSPS and move into the

PPF.

The New BSPS will be sponsored by TSUK, meaning that TSUK would have legal obligations to fund the New BSPS

if it fell into deficit.

During the year, Tata Steel UK Limited conducted a formal consultation exercise in January 2017 with Scheme

members and their representatives on a proposal to close the Scheme to future accrual and to introduce a

replacement defined contribution pension arrangement. Following the conclusion of that exercise the Company

confirmed its intention to proceed and the Standard and DC Sections of the Scheme were duly closed to future

accrual with effect from midnight on 31 March 2017.

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The Company announced on 22 December 2015 the signing of a Letter of Intent with Greybull Capital to enter

negotiations for the potential sale of its Long Products Europe business. In anticipation of the potential sale, the

Company transferred the UK longs steel business of the Tata Steel Group to Longs Steel UK Limited (“LSUK”), a

newly incorporated, wholly owned subsidiary of Tata Steel UK Limited. LSUK did not become a participating

employer in the Scheme. The Company announced on 1 June 2016 that it had completed the sale of LSUK to

Greybull Capital LLP.

Scheme membership for nearly 3,900 Long Products employees came to an automatic end on completion of the

sale and they became Deferred Pensioner members (or, if a DC Section member, became entitled to a refund of

contributions).

The Company announced on 28 November 2016 the signing of a Letter of Intent with Liberty House, to enter into

exclusive negotiations for the potential sale of its Speciality Steels division. The transaction involved about 1,600

employee members based at the manufacturing sites at Rotherham and Stocksbridge as well as downstream

facilities and support functions at Brinsworth, Wednesbury, and Bolton. The sale was duly completed on 2 May

2017.

Report on actuarial liabilities

The financial statements set out on pages 18 to 39 do not include liabilities in respect of promised retirement

benefits which fall due after the year end. These liabilities are considered by the Scheme Actuary who carries out

an actuarial valuation of the Scheme every three years. This valuation considers the funding position of the British

Steel Pension Scheme (excluding the DC Section) and the level of contributions payable.

Under section 222 of the Pensions Act 2004, every scheme is subject to the Statutory Funding Objective, which is

to have sufficient and appropriate assets to cover its technical provisions, which represent the present value of

benefits to which members are entitled based on pensionable service to the valuation date. As described, this is

assessed at least every three years using assumptions agreed between the Trustees and the employer and set out

in the Statement of Funding Principles, a copy of which is available to Scheme members on request.

The most recent triennial actuarial valuation of the Scheme was carried out as at 31 March 2014. The Scheme

Actuary also provides an Annual Funding Update each year between actuarial valuations to provide an

approximate update of the funding position of the Scheme. An Annual Funding Update was undertaken as at 31

March 2016.

VALUATION DATE: 31 MARCH 2016

31 MARCH 2014

Formal valuation report*

After benefit changes

Value of technical provisions £13,975 million £13,639 million £12,763 million

Value of assets available to meet technical provisions

£13,636 million £12,673 million £12,673 million

Deficit £339 million £966 million £90 million

Funding level 98% 93% 99%

* The actuarial valuation of the Scheme as at 31 March 2014 does not reflect changes to benefits included in the

Deed of Amendment dated 31 July 2015. Allowing for these changes in the Recovery Plan reduces the deficit at

31 March 2014 by £876 million, leaving a residual funding shortfall of £90 million.

7

The value of technical provisions is based on Pensionable Service to the valuation date and assumptions about

various factors that will influence the scheme in the future, such as the levels of investment returns and pay

increases, when members will retire and how long members will live. The method and significant actuarial

assumptions used in the calculations are as follows:

Method

The actuarial method to be used in the calculation of the technical provisions is the Projected Unit Method.

Significant actuarial assumptions

Pre-retirement discount rate

a prudent assessment of the expected return from equities and any other return seeking asset classes held by the Scheme in respect of non-pensioner liabilities, having regard to market conditions at the valuation date.

Post-retirement discount rate

based on returns expected from gilts and high quality corporate bonds, having regard to market conditions at the valuation date and allowing for an appropriate margin of prudence within the expected asset return, in order to allow for possible reinvestment and default risk.

Pensionable Earnings increases

real pay increases of 1% p.a.

Retail Price Inflation (RPI)

term dependent rates derived from the Bank of England; fixed interest and index-linked gilt curves at the valuation date.

Consumer Price Inflation (CPI)

term dependent rates derived from the Bank of England; fixed interest and index-linked gilt curves at the valuation date, less an adjustment equal to 0.75% per annum.

Pension increases The majority of pensions increase in line with RPI. Where pension increases are capped, an allowance is made for this.

Mortality for the period in retirement, standard tables S1NMA with a scaling factor of 94% and S1DFA with a scaling factor of 100%. CMI (2009) projections with a long-term trend of 1.50% pa from 2011.

Recovery plan

A Recovery Plan and Schedule of Contributions were agreed between the Trustee and the Company on 30

September 2015. Under the Schedule of Contributions, it was agreed that the Company contributions for active

Standard Section members would decrease from 13% to 11.5% of pensionable earnings and employee members’

contributions would decrease from 7.5% to 6.5% of pensionable earnings with effect from 1 April 2016. Under

the Recovery Plan, the Company also agreed to pay additional deficit recovery contributions of £170 million over

the period from April 2015 to March 2018.

On 27 March 2017, having consulted with the Pensions Regulator and the Pension Protection Fund, the Trustee

board approved a short deferral of the deficit recovery contribution of £60 million due under the Recovery Plan

from 31 March 2017 to 30 April 2017 to allow discussions around a comprehensive settlement for the Scheme to

be progressed. A revised Schedule of Contributions and revised Recovery Plan, reflecting this deferral, were

effected on 30 March 2017. Receipt of the £60 million deficit recovery contributions was subsequently deferred

to 31 August 2017 and a revised Schedule of Contributions was certified on 30 May 2017. A copy of the Scheme

Actuary’s certificate in respect of the Schedule of Contributions is included on page 46 of this annual report.

The next triennial valuation is due as at 31 March 2017.

Financial developments of the Scheme

The financial statements included in this annual report are the accounts required by the Pensions Act 1995. They

have been prepared and audited in compliance with regulations made under sections 41(1) and (6) of that Act.

8

A summary of the Scheme’s financial statements is set out in the table below.

STANDARD SECTION DC SECTION TOTAL

2017 £’000

2016 £’000

2017 £’000

2016 £’000

2017 £’000

2016 £’000

Member related income 57,317 148,634 4,777 4,855 62,094 153,489

Member related payments (741,417) (675,686) (727) (95) (742,144) (675,781)

Net (withdrawals)/additions from dealings with members

(684,100) (527,052) 4,050 4,760 (680,050) (522,292)

Net returns on investments 2,103,768 167,539 2,087 2 2,105,855 167,541

Net (decrease)/increase in fund 1,419,668 (359,513) 6,137 4,762 1,425,805 (354,751)

Net assets at start of year 13,628,660 13,988,173 7,479 2,717 13,636,139 13,990,890

Net assets at end of year 15,048,328 13,628,660 13,616 7,479 15,061,944 13,636,139

Significant developments affecting the financial position of the Scheme during the year included:

• During the year member income into the Standard Section reduced to £57 million compared with £149

million for the prior year. This reflected the reduced member and Company contribution rate applying with

effect from 1 April 2017 and the on-going reduction in employee members. In addition, there were no deficit

recovery contributions received during the year compared with £45 million received in the preceding year.

• Employee membership also decreased significantly as a result of transfer of ownership of the UK longs steel

business to Greybull Capital LLP with nearly 3,900 employee members becoming Deferred Pensioners.

• Transfers out of the Scheme increased very significantly during the year from £17 million to £112 million.

This appears to have been in response to the possibility that the Scheme would be forced to enter the

Pension Protection Fund which would have seen a reduction of at least 10% in the benefits of members aged

under 65.

The net returns on investment for the Standard Section of £2,105,855k (2016 £167,541k) comprised change in

market value of £1,751,274k (2016 (£167,274k)) and investment income of £369,389k (2016 £350,330k) offset

by investment management expenses, including interest payable, of £12,586k (2016 £8,084k) and taxation of

£2,222k (2016 £7,431k).

A more detailed analysis of the financial developments over the year can be found in the Notes to the Financial

Statements on pages 20 to 39.

Contributions

Standard Section Member contributions were payable during the year at 6.5% of pensionable earnings with an

ordinary contribution rate of 11.5% from the Company. Members of the DC Section paid 6% of Pensionable

Earnings and also received the benefit of a Company contribution of 10% into their Member Account.

9

Pensionable Earnings and contributions are determined after applying an offset (known as the Lower Earnings

Limit (LEL) deduction). The LEL deduction for the 2016/17 Scheme Year was £4,100 per annum. Pensionable

Earnings during the year were normally gross earnings less the LEL deduction of £4,100, subject to a fixed cap of

£100,000.

The level of contributions required to be paid by Members and the employers during the year was documented

in the Schedule of Contributions certified by the Scheme Actuary on 30 September 2015. A revised Schedule of

Contributions was certified by the Scheme Actuary on 30 March 2017 in relation to the deficit reduction

contributions payable by 31 March 2017.

Members can opt to make pension contributions via a salary sacrifice arrangement, known as "SMART Pension".

Trustee’s Summary of Contributions payable under the Schedules in respect of the Scheme year ended 31 March

2017

The Trustee is responsible under pensions legislation for ensuring that there is prepared, maintained and from

time to time revised a Schedule of Contributions showing the rates of contributions payable towards the Scheme

by or on behalf of the Employer and the active members of the Scheme and the dates on or before which such

contributions are to be paid. The Trustee is also responsible for keeping records of contributions received in

respect of any active member of the Scheme and for procuring that contributions are made to the Scheme in

accordance with the Schedule.

This Summary of Contributions has been prepared by, and is the responsibility of, the Trustee. It sets out the

Employer and Member contributions payable to the Scheme under the Schedules of Contributions certified by

the actuary on 30 September 2015 and 30 March 2017 in respect of the Scheme year ended 31 March 2017. The

Scheme Auditor reports separately on contributions payable under the Schedules in the Auditors’ Statement

about Contributions on page 45.

CONTRIBUTIONS PAYABLE UNDER THE SCHEDULES IN RESPECT OF THE SCHEME YEAR £’000

Employer

Normal contributions 48,575

Member

Normal contributions 12,307

Contributions payable under the Schedules (as reported on by the Scheme Auditor) 60,882

Reconciliation of Contributions Payable under the Schedule of Contributions to Total Contributions reported in

the Financial Statements

£’000

Contributions payable under the Schedules (as above) 60,882

Contributions payable in addition to those due under the Schedules (and not reported on by the

Scheme Auditor):

-

Member Additional Voluntary Contributions 1,212

Total contributions reported in the Financial Statements 62,094

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Membership

The membership of the Scheme at the beginning and end of the year and changes during the year are set out

below.

EMPLOYEE MEMBERS STANDARD SECTION

DC SECTION TOTAL

Employee members at start of year 13,302 1,037 14,339

New entrants in year - 400 400

13,302 1,437 14,739

Leavers and exits during the year

Retirements 671 - 671

Deferreds 4,412 454 4,866

Death in service 11 1 12

5,094 455 5,549

Employee members at end of year 8,208 982 9,190

New entrants during the year are stated net of opt-outs where contributions were never remitted to the Scheme.

In addition to the DC Section members above, 3,424 active members of the Standard Section are also making DC

contributions in respect of earnings in excess of the pensionable earnings growth cap. All employee members

became Deferred Pensioners at midnight on 31 March 2017 following the closure of the Scheme to future accrual.

DEFERRED PENSIONERS STANDARD SECTION

DC SECTION TOTAL

At start of year 31,668 99 31,767

Untraced members 1,020 - 1,020

New deferred pensioners 4,333 454 4,787

37,021 553 37,574

Cessation of deferred pension resulting from:

Retirements 1,781 39 1,820

Deaths 79 - 79

Transfers to other employer’s schemes 20 - 20

Transfers to personal pension schemes 462 65 527

Refunds - 115 115

Untraced members 401 - 401

Moved to unclaimed file 114 - 114

2,857 219 3,076

Deferred pensioners at end of year 34,164 334 34,498

“Untraced” members are members who have reached normal pension age but who are not in receipt of a pension

because their whereabouts cannot be traced. A member tracing exercise was undertaken during the year which

successfully established the whereabouts of a significant number of “untraced” members. In addition, to the

deferred pensioner members above there are a further 1,308 “unclaimed” members (members who have been

untraced members for more than 5 years).

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Under current Rules, DC Section funds at retirement must be used to purchase an annuity or be paid to the

Member as cash.

PENSIONERS STANDARD SECTION

In payment at start of year 84,030

New pensioners in year 4,561

88,591

Cessation of benefits:

Cessations during the year 5,362

Commutation of trivial pensions 425

5,787

In payment at end of year 82,804

PENSIONERS ANALYSIS AT 31 MARCH 2017

Pensioners 56,204

Widow(er)s/civil partners 25,978

Children 622

Included within the above are 175 pensioners and 14 beneficiaries whose benefits are provided by annuities.

The BSPS was a qualifying pension scheme for auto enrolment purposes, which means it met or exceeded the

minimum standards set by the Government.

Pension increases

Pensions in payment were generally increased by 2.6% effective from 1 April 2017. Increases to Scheme benefits

in respect of service between 1 April 2006 and 31 March 2012 are subject to a cap of 4% per annum, and increases

to Scheme benefits in respect of service between 1 April 2012 and 31 March 2016 are subject to a cap of 3% per

annum, in accordance with the Rules of the Scheme. Additionally, increases in respect of service before 1 April

2006, for members of the former Acquisition Section, are subject to a cap of 5% per annum. Increases to Scheme

benefits in respect of service from 1 April 2016 are capped at the statutory minimum and an increase of 1.0% was

applied to this element with effect from 1 April 2017.

The pension increases referred to above do not apply to that element of the pensions in payment representing

any Guaranteed Minimum Pensions (“GMP”), which the Scheme is required to provide as a consequence of

contracting out of the State pension arrangements for the Standard Section, as these increases are provided by

the State. GMP earned after April 1988 will be increased by the Scheme in line with inflation, as required by

legislation, up to a maximum of 3% per annum. GMPs relate to service accrued from April 1978 to April 1997,

when contracting out arrangements were changed and GMP ceased to apply. Contracting out arrangements

ceased from 6 April 2016.

Deferred pensions have been increased in line with statutory requirements. All increases were in accordance with

the Trust Deed and Rules of the Scheme or legislative requirements.

There were no discretionary increases awarded in the year.

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Transfers

All transfer values paid to other pension schemes or credits given in respect of transfer values received from other

pension schemes during the year were calculated and verified by the Scheme Actuary or calculated in accordance

with instructions prepared by him, in accordance with statutory regulations.

The Trustee has instructed the Scheme Actuary not to take account of discretionary increases in calculating cash

equivalents for transfer purposes. No transfers were reduced to less than their cash equivalent value.

Custody

Custodian services are provided by JP Morgan Chase Bank N.A.. In accordance with normal practice, the Scheme’s

investments are registered in the name of the custodian’s own nominee company with designation for the

Scheme, Chase Nominees Limited for B.S. Pension Fund Trustee Limited acting for the British Steel Pension

Scheme. The Trustee reviews the internal control reports produced by the custodian and regularly reconcile the

custodian’s records of securities and cash to the investment manager’s records.

The Trustee has implemented mandates ensuring that rights attaching to Scheme investments are acted upon.

This includes active voting participation and a requirement to consider social, ethical and environmental issues

when formulating the Scheme’s investment strategy.

Investment management

The Trustee delegates the day-to-day management of investments to Pension Services Limited (“PSL”), its in-

house investment manager. It is a wholly owned subsidiary of the Scheme and regulated by the Financial Conduct

Authority. The Trustee sets the investment strategy for the Scheme after taking advice from the Scheme’s

Investment Adviser and the Scheme Actuary. The Trustee has in place an investment mandate with their

investment manager which implements this strategy.

In accordance with section 35 of the Pensions Act 1995, a Statement of Investment Principles (“SIP”) has been

prepared by the Trustee which incorporates the investment strategy and a copy of the SIP can be obtained from

the Administration Office.

Pension Services Limited is remunerated by a fixed fee and the balance of the fees are borne by the Scheme. The

performance related remuneration for members of Pension Services Limited is agreed by the Chairman of the

Trustee in conjunction with the Company and the Chief Investment Officer and is based on meeting the short to

medium term objectives of the Scheme in out-performing the Scheme Specific Benchmark.

The main investment objective of the Standard Section is to maintain a portfolio of suitable assets of appropriate

liquidity which will generate investment returns to meet the benefits of the Standard Section payable under the

Trust Deed and Rules as they fall due. The Trustee sets the investment strategy for the Standard Section taking

into account considerations such as the strength of the Employer covenant, the long-term liabilities, and the

funding agreed with the Employer. The investment strategy is set out in the SIP.

In March 2016 when the asset allocation was Maturity portfolio (66%) : Growth portfolio (34%), Tata Steel

announced the potential option to close its UK operations and find a solution to the Pension Scheme’s deficit. The

Trustee with the advice from the Actuary and the Investment Adviser sought to modify the investment strategy

and took steps to de-risk its equities exposure and invested in corporate bonds and gilts. This was undertaken

whilst navigating the volatility surrounding the BREXIT decision in June 2016 and safeguarding the Scheme’s assets

after the announcement.

13

As part of this strategy an Insurance portfolio was set up by the Trustee to hedge the net interest rate exposure

of the Scheme which accumulated to £1,464 million of fixed income gilts (2016: £Nil). Initially this was financed

by repurchase agreement (“repos”) and subsequently by internal finance but this was kept to a minimum

culminating in outstanding repo of £205 million (2016: £Nil). The strategy adopted up to 31 August 2016 was to

hold broadly:

• 70% in Maturity investment portfolio that moves in line with the long-term liabilities of the Scheme. This

comprises UK and overseas government, corporate and high return bonds and UK and overseas index linked

bonds. It also includes a Maturity Property portfolio which shares certain characteristics, namely long lease

terms, good tenant covenants and rent reviews subject to inflation linked for fixed uplifts and cash.

Derivatives in the form of inflation rate swaps hedge against the impact of inflation rate movement on long

term liabilities and interest rate swaps hedge against the impact of interest rate movements on long term

liabilities.

• 30% in Growth investments comprising UK and overseas equities, investment property and alternatives.

The actual allocations will vary from the above due to market price movements and intervals between rebalancing

the portfolio.

Following the successful implementation of the above investment strategy, the asset allocation was Maturity

portfolio (83%): Growth portfolio (17%). In September 2016, the Trustee decided to continue the restructuring of

the Bonds portfolio by reducing the index linked gilts and replacing them with corporate bonds. The Maturity

property portfolio was expanded by reassigning £245 million (2016: £Nil) of Growth property portfolio which had

similar characteristics to the Maturity Property portfolio.

Actual allocation at the Scheme’s year end is shown below:

TOTAL 2017 TOTAL 2016

% %

Maturity portfolio 77 66

Insurance portfolio 10 -

Growth portfolio 13 34

100 100

The Trustee invests directly into equity and bonds as well as pooled investment vehicles and derivative contracts.

The Trustee has authorised the use of derivatives by PSL for efficient portfolio management purposes and to

reduce certain investment risks. The principle investment in derivatives is interest rate and inflation swaps in the

LDI portfolio.

14

The nature and disposition of the Standard Section investments are set out below, together with the actual

allocation of investments at 31 March 2017, with pooled investment vehicles and derivatives analysed by

underlying economic exposure:

2017 DIRECT

INVESTMENTS POOLED

INVESTMENT VEHICLES

DERIVATIVES TOTAL PERCENTAGE

£’000 £’000 £’000 £’000 %

Maturity Portfolio

Fixed Interest and Interest/inflation swaps

10,874,347 12,532 (88,421) 10,798,458 72

Property 829,472 - - 829,472 5

Insurance Portfolio

Fixed Interest 1,464,633 - - 1,464,633 10

Growth Portfolio

Equities (UK and overseas)

1,247,399 57,295 - 1,304,694 8

Property 450,005 23,418 - 473,423 3

Private Equity - 101,638 - 101,638 1

Other 48,180 - - 48,180 1

14,914,036 194,883 (88,421) 15,020,498 100

2016 DIRECT

INVESTMENTS POOLED

INVESTMENT VEHICLES

DERIVATIVES TOTAL PERCENTAGE

£’000 £’000 £’000 £’000 %

Maturity Portfolio

Fixed Interest and Interest/inflation swaps

8,485,873 10,488 (108,037) 8,388,324 62

Property 575,289 - - 575,289 4

Growth Portfolio

Equities (UK and overseas)

3,360,796 208,328 - 3,569,124 26

Property 733,931 49,798 - 783,729 6

Private Equity - 111,382 - 111,382 1

Other 200,605 - - 200,605 1

13,356,494 379,996 (108,037) 13,628,453 100

Other than the pooled investment vehicles and OTC (“over the counter”) derivatives (interest and inflation swaps)

and property, all investments described above are quoted on recognised stock exchanges. The property portfolios

are managed and valued by the investment manager on the anniversary of the date of purchase. The derivatives

are valued mark to market on daily basis and the pooled investment vehicles are priced by the investment

manager of those vehicles. The Trustee regards all the investments of the Standard Section as readily marketable

other than the pooled investment vehicles.

15

The Standard Section investments, managed by PSL, achieved an annualised return of 15.8% compared to its

Scheme Specific Benchmark return of 14.5% over the one year ended 31 March 2017 and achieved a return of

10.4% compared to 10.3% over three years ended 31 March 2017. Over the 10 years since the inception of the

Scheme Specific Benchmark the Fund produced an annualised return of 8.3% as compared with 7.7% for the

benchmark, in line with its outperformance target.

The annualised performance of the investment funds is as follows:

1 YEAR 3 YEARS 5 YEARS 10 YEARS

% % % %

Maturity portfolio 15.3 10.5 8.2 8.6

Growth portfolio 20.0 11.2 11.2 7.5

Total Return 15.8 10.4 9.0 8.3

Scheme Specific Benchmark 14.5 10.3 8.3 7.7

Signed for and on behalf of the Trustee of the British Steel Pension Scheme on 25 October 2017.

A J Johnston

Chairman of the Board of Trustees

A Dunbar

Director

P Rees

Director

16

Statement of Trustee’s responsibilities for the Financial Statements The audited Financial Statements, which are to be prepared in accordance with UK Generally Accepted Accounting

Practice (UK GAAP) including FRS102 The Financial Reporting Standard applicable in the UK and Republic of

Ireland, are the responsibility of the Trustee. Pension scheme regulations require the Trustee to make available

to scheme members, beneficiaries and certain other parties, audited financial statements for each Scheme year

which:

• show a true and fair view, of the financial transactions of the Scheme during the Scheme year and of the

amount and disposition at the end of the Scheme year of the assets and liabilities, other than liabilities to

pay pensions and benefits after the end of the Scheme year; and

• contain the information specified in the Schedule to the Occupational Pension Schemes (Requirement to

obtain Audited Accounts and a Statement from the Auditor) Regulations 1996, including a statement

whether the Financial Statements have been prepared in accordance with the Statement of Recommended

Practice, ‘Financial Reports of Pension Schemes’.

The Trustee has supervised the preparation of the Financial Statements and have agreed suitable accounting

policies, to be applied consistently, making estimates and judgements on a reasonable and prudent basis. It is also

responsible for making available each year, commonly in the form of a trustee’s annual report, information about

the Scheme prescribed by pensions legislation, which it should ensure is consistent with the financial statements

it accompanies.

The Trustee also has certain responsibilities in respect of contributions which are set out in the statement of

Trustee’s responsibilities accompanying the Trustee’s summary of contributions.

The Trustee has a general responsibility for ensuring that adequate accounting records are kept and for taking

such steps as are reasonably open to it to safeguard the assets of the Scheme and to prevent and detect fraud

and other irregularities, including the maintenance of appropriate internal controls.

17

Independent Auditor’s report to the Trustee of the British Steel Pension Scheme We have audited the Financial Statements of the British Steel Pension Scheme for the year ended 31 March 2017

set out on pages 18 to 39. The financial reporting framework that has been applied in their preparation is

applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice) including FRS 102 The

Financial Reporting Standard applicable in the UK and Republic of Ireland.

This report is made solely to the Scheme Trustee in accordance with the Pensions Act 1995 and Regulations made

thereunder. Our audit work has been undertaken so that we might state to the Scheme Trustee those matters

we are required to state to it 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 Scheme Trustee for our audit work, for

this report, or for the opinions we have formed.

Respective responsibilities of Trustee and Auditor

As explained more fully in the Statement of Trustee’s responsibilities set out on page 16, the Scheme Trustee is

responsible for supervising the preparation of Financial Statements which show a true and fair view. Our

responsibility is to audit, and express an opinion on, the Financial Statements in accordance with applicable law

and International Standards on Auditing (UK and Ireland). These standards require us to comply with the Auditing

Practices Board’s Ethical Standards for Auditors.

Scope of the audit of the Financial Statements

A description of the scope of an audit of Financial Statements is provided on the Financial Reporting Council’s

website at www.frc.org.uk/auditscopeukprivate.

Opinion on Financial Statements

In our opinion the Financial Statements:

• show a true and fair view of the financial transactions of the Scheme during the Scheme year ended 31

March 2017 and of the amount and disposition at that date of its assets and liabilities, other than liabilities

to pay pensions and benefits after the end of the Scheme year;

• have been properly prepared in accordance with UK Generally Accepted Accounting Practice; and

• contain the information specified in Regulation 3 of the Occupational Pension Schemes (Requirement to

obtain Audited Accounts and a Statement from the Auditor) Regulations 1996, made under the Pensions Act

1995.

Emphasis of Matter - Non-going concern basis of preparation

In forming our opinion on the financial statements, which is not modified, we have considered the adequacy of

the disclosure made in note 2 to the financial statements which explains that the financial statements have not

been prepared on the going concern basis for the reason set out in that note.

Catherine Burnet for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 15 Canada Square London E14 5GL

18

Fund Account FOR THE YEAR ENDED 31 MARCH 2017

Standard Section DC Section Total Total 2017 2017 2017 2016 Notes £'000 £'000 £'000 £'000

Contributions and Benefits

Contributions receivable 4

Employer 45,019 3,556 48,575 130,578

Employees 12,298 1,221 13,519 22,911

57,317 4,777 62,094 153,489

Benefits payable 5 (637,246) - (637,246) (653,662)

Payments to and on account of leavers

6 (96,388) (727) (97,115) (18,125)

Administrative expenses 7 (7,783) - (7,783) (3,994)

(741,417) (727) (742,144) (675,781)

Net (withdrawals) / additions from dealings with members

(684,100) 4,050 (680,050) (522,292)

Return on Investments

Investment income 8 369,389 - 369,389 350,330

Taxation 8 & 9 (2,222) - (2,222) (7,431)

Interest payable 10 (2,564) - (2,564) (54)

Change in market value of investments

14 1,749,187 2,087 1,751,274 (167,274)

Investment management expenses

18 (2,618) - (2,618) (2,220)

Investment administration expenses

19 (7,404) - (7,404) (5,810)

Net return on investments 2,103,768 2,087 2,105,855 167,541

Net (decrease) / increase in the fund during the year

1,419,668 6,137 1,425,805 (354,751)

Net Assets of the Scheme

At beginning of year 13,628,660 7,479 13,636,139 13,990,890

At end of year 15,048,328 13,616 15,061,944 13,636,139

The notes on pages 20 to 39 form part of these financial statements.

19

Summary of Net Assets (available for benefits)

AS AT 31 MARCH 2017

Notes Standard Section DC Section Total Total 2017 2017 2017 2016 £’000 £’000 £'000 £'000

Investment assets

Equities 14 & 17 1,247,399 - 1,247,399 3,360,796

Bonds 14 & 17 10,874,347 - 10,874,347 8,485,873

Bonds – Insurance portfolio 14 & 17 1,464,633 - 1,464,633 -

Properties 14 & 17 1,279,477 - 1,279,477 1,309,220

Pooled investment vehicles 11 & 14 194,883 13,616 208,499 387,475

Derivatives 12 4,666 - 4,666 3,766

Other investments 14 11 - 11 11

AVC investments 13 & 14 1,484 - 1,484 1,640

Cash 14 169,627 - 169,627 131,636

Other investment balances 14 231,796 - 231,796 70,939

15,468,323 13,616 15,481,939 13,751,356

Investment liabilities

Derivatives 12 (93,087) - (93,087) (111,803)

Repurchase agreements 14 (204,944) - (204,944) -

Other investment balances 14 (149,794) - (149,794) (3,621)

(447,825) - (447,825) (115,424)

Total net investments 15,020,498 13,616 15,034,114 13,635,932

Current assets 20 68,331 - 68,331 66,929

Current liabilities 21 (40,501) - (40,501) (66,722)

27,830 - 27,830 207

Net Assets of the Scheme 15,048,328 13,616 15,061,944 13,636,139

The notes on pages 20 to 39 form part of these financial statements. The Financial Statements summarise the

transactions of the Scheme and deal with the net assets at the disposal of the Trustee. They do not take account

of obligations to pay pensions and benefits which fall due after the end of the Scheme year. The actuarial position

of the Standard Section, which does take account of such obligations, is dealt with in the Report on Actuarial

Liabilities included on pages 6 and 7 and these Financial Statements should be read in conjunction with that

Report.

Signed for and on behalf of the Trustee of the British Steel Pension Scheme on 25 October 2017.

A J Johnston

Chairman of the Board of Trustees

A Dunbar

Director

P Rees

Director

20

Notes (forming part of the Financial Statements) 1. General information

The British Steel Pension Scheme is an occupational pension scheme established under trust. The Scheme was

established to provide retirement benefits to employees of British Steel plc and its successors. The address of

the Scheme’s principal office is 125 Old Broad Street, London, EC2N 1AR.

The Scheme has a standard (defined benefit) section and a defined contribution section. Both sections were

closed to future accrual with effect from 31 March 2017. The Scheme is a registered pension scheme under

the Chapter 2, Part 4 of the Finance Act 2004. This means that contributions by employers and employees are

normally eligible for tax relief, and income and capital gains earned by the Scheme receive preferential tax

treatment.

2. Basis of Preparation

The Financial Statements have been prepared in accordance with Financial Reporting Standard 102 – The

Financial Reporting Standard applicable in the UK and Republic of Ireland issued by the Financial Reporting

Council and with the guidance set out in the Statement of Recommended Practice (SORP) (Revised November

2014).

The Scheme has elected to early adopt the amendments to FRS 102 issued by the Financial Reporting Council

in respect of Fair Value Hierarchy disclosure requirements for financial instruments held at fair value as

permitted for retirement benefit plans.

The Pension Regulator has approved an RAA under which the Scheme will enter an assessment period with the

PPF on 29 March 2018, therefore, the Financial Statements have not been prepared on a going concern basis.

3. Accounting policies

a) Investments

The principal accounting policies of the Scheme are as follows:

i. Investments are included at fair value.

ii. The majority of listed investments are stated at bid price at the date of the Statement of Net Assets.

iii. Fixed interest and index linked securities are stated at their clean prices (excluding accrued interest).

Accrued income is accounted for within investment income. Where applicable, fixed interest and

index linked securities have their respective sinking factors and indexation factors applied to the

valuation.

iv. The private equity portfolio, infrastructure funds, unquoted securities and the high return fixed

interest funds have been valued using the latest company or limited partnership financial

statements as at 31 March 2017, or at fair value if lower, as determined by the Investment

Committee on behalf of the Trustee, based on advice from the investment manager.

21

v. Freehold and long leasehold (over fifty years) property purchased prior to 1 April 2016 has been

included at an open-market internal valuation made during the year for each property in the month

of the anniversary of purchase. The valuation is in accordance with the Royal Institution of Chartered

Surveyors’ Appraisal and Valuation Standards and Practices. These valuations have been agreed by

a sub-committee comprising the Property Adviser, the Chief Investment Officer, the Head of

Property and the Senior Valuation Surveyor, and have been approved by the Investment

Committee. Property purchased on or after 1 April 2016 has been included at cost. Property

purchases and sales are recognised at the point of completion. The Scheme’s property deeds are

held at Tata Steel UK Limited’s records centre, under the control of the Scheme.

vi. Included within Properties is an investment in a joint venture. The valuation is based on the net

asset value held by the Scheme as at 31 March 2017. The property within the joint venture was

wholly owned by the Scheme until 4 October 2007 and was last valued on the same basis as other

properties held by the Scheme as at 31 March 2017. The net income related to this joint venture

has been separately disclosed as from 4 October 2007.

vii. Maturity portfolio properties tend to share certain characteristics, namely long lease terms, good

tenant covenants and rent reviews subject to inflation linked uplifts. These properties are valued on

the same basis as the properties held in the Growth portfolio i.e. valued on the anniversary of the

purchase date.

viii. Property development costs are valued as per the contractual agreement at the balance sheet date

and are held at cost until completion.

ix. Annuities purchased in the name of the Trustee have been included at nil value in the financial

statements on the grounds of materiality.

x. Derivatives are stated at fair value as at 31 March 2017.

• Exchange traded derivatives are stated at fair value determined by using market quoted prices.

• Swaps are valued taking the current value of future cash flows arising from the swap

determined by using discounted cash flow models and market data at 31 March 2017.

• All gains and losses arising on derivative contracts are reported within “Change in Market

Value”.

• Receipts and payments arising from derivative instruments are reported as sale proceeds or

purchase of investments.

xi. Repurchase and Reverse Repurchase arrangement.

Under repurchase (repo) arrangements, the Scheme continues to recognise and value the securities

that are delivered out as collateral and includes them in the Financial Statements. The cash received

is recognised as an asset and the obligation to pay it back is recognised as a liability.

Under reverse repurchase (reverse repo) arrangements, the Scheme does not recognise the

collateral securities received as assets in its Financial Statements. The Scheme does recognise the

cash delivered to the counterparty as a receivable in Financial Statements. No reverse repurchase

arrangement was held at the year end.

xii. Insurance portfolio

The Insurance portfolio was incepted on 25 April 2016 and was set up by the Trustee as a liability

hedging portfolio to reduce the net interest rate exposure of the Scheme. Following the year end,

the Insurance portfolio was merged with the Fixed Income portfolio.

22

b) Investment income

i. Dividends from quoted securities are accounted for when the security is declared ex-dividend.

ii. Fixed interest income and index linked interest income have indexation and sinking factors applied

to the income receivable where applicable.

iii. Interest is accrued on a daily basis.

iv. Investment income is reported net of attributable tax credits but gross of withholding taxes which

are accrued in line with the associated investment income. Irrecoverable withholding taxes are

reported separately as a tax charge.

v. Rents from properties are recognised in accordance with the terms of the underlying leases and

stated net of expenses.

vi. Income from reverse repurchase agreements is accrued on a daily basis dependent on the market

rate prevailing on the day.

vii. Receipts from annuity policies held by the Trustees to fund benefits payable to Scheme members

are included within investment income on an accruals basis.

c) Foreign currencies

The functional and presentational currency of the Scheme is sterling. Balances denominated in foreign

currencies are translated into sterling at the rate prevailing at 31 March 2017. Asset and liability balances

are translated at the bid and offer rates respectively. Transactions denominated in foreign currencies are

translated at the rate ruling on the date of the transaction. Differences arising on investment balance

translation are accounted for in “Change of Market Value” in the Fund Account.

d) Contributions

i. Employee normal contributions and additional voluntary contributions are accounted for when

deducted from pay, with the exception of contributions deducted from auto-enrolled members

during the opt-out year which are accounted for on the earlier of receipt or the expiry of the opt

out year. Employer normal contributions which are expressed as a rate of salary are accounted for

in the year they are due under the Schedule of Contributions.

ii. Employer deficit funding contributions are accounted for on the due dates on which they are

payable in accordance with the Schedule of Contributions and Recovery Plan under which they are

being paid.

iii. Employer s75 debt contributions are accounted for when a reasonable estimate of the amount due

can be determined.

e) Payments to members

i. Benefits are accounted for in the year in which they fall due for payment. Where there is a choice,

benefits are accounted for in the year in which the member notifies the Trustees of his decision on

the type or amount of benefit to be taken or, if there is no member choice, they are accounted for

on the date of retirement or leaving.

ii. Opt outs are accounted for when the Scheme is notified of the opt-out.

iii. Individual transfers in or out are accounted for when paid or received which is normally when

member liability is accepted/discharged.

iv. Group transfers are accounted for in accordance with the terms of the transfer agreement.

23

f) Expenses

Expenses are accounted for on an accruals basis. The Scheme bears all of the direct costs of

administration.

4. Contributions Receivable

STANDARD

SECTION DC SECTION TOTAL 2017 TOTAL 2016

£'000 £'000 £'000 £'000

Employer:

Normal 45,019 3,556 48,575 85,578

Deficit Funding - - - 45,000

45,019 3,556 48,575 130,578

Members:

Normal 11,363 944 12,307 21,203

Additional Voluntary Contributions

935 277 1,212 1,708

12,298 1,221 13,519 22,911

57,317 4,777 62,094 153,489

Deficit funding contributions are being paid by the Company into the Scheme for a period of three years to

31 March 2018 in accordance with a Recovery Plan dated 30 September 2015 in order to improve the

Scheme’s funding position. Under a revised Recovery Plan dated 28 March 2017, contributions totalling £125

million are to be made to the Scheme during the 2017/18 Scheme year.

5. Benefits Payable

STANDARD

SECTION DC SECTION TOTAL 2017 TOTAL 2016

£'000 £'000 £'000 £'000

Pensions (543,274) - (543,274) (531,779)

Commutations (4,318) - (4,318) (5,162)

Lump sum retirement benefits (86,408) - (86,408) (111,688)

Lump sum death benefits (3,246) - (3,246) (4,649)

Taxation - - - (384)

(637,246) - (637,246) (653,662)

Taxation arising on benefits paid or payable is in respect of members whose benefits exceeded the lifetime or

annual allowance and who elected to take lower benefits from the Scheme in exchange for the Scheme settling

their tax liability.

24

6. Payments to and on account of leavers

STANDARD

SECTION DC SECTION TOTAL 2017 TOTAL 2016

£'000 £'000 £'000 £'000

Individual transfers to other schemes (1,047) (64) (1,111) (699)

Transfers to personal pension arrangements

(95,060) (207) (95,267) (17,039)

Refunds to members leaving service (281) (456) (737) (387)

(96,388) (727) (97,115) (18,125)

7. Administrative expenses

STANDARD

SECTION DC SECTION TOTAL 2017 TOTAL 2016

£'000 £'000 £'000 £'000

Staff costs (927) - (927) (907)

Establishment costs (474) - (474) (566)

Legal, audit & other professional fees (5,520) - (5,520) (1,796)

Computer system costs (340) - (340) (325)

Communication costs (294) - (294) (218)

Pension levies (3) - (3) (3)

Other expenditure (225) - (225) (179)

(7,783) - (7,783) (3,994)

During the year DC Section costs of £178k were met from Standard Section assets.

It is a PPF requirement that when an RAA is agreed the party seeking the restructuring pays the costs

incurred by the Scheme in delivering that restructuring. As an RAA is in place, a proportion of the above

costs will therefore be reimbursed by the Company during the 2017/18 Scheme year.2

2 The PPF Approach to Employer Restructuring “PROTECTING PEOPLE’S FUTURES” (August 2016).

25

8. Investment income

STANDARD

SECTION DC SECTION TOTAL 2017 TOTAL 2016

£'000 £'000 £'000 £'000

Dividends from equities 70,712 - 70,712 101,561

Income from bonds 199,709 - 199,709 179,007

Income from bonds – Insurance portfolio

25,514 - 25,514 -

Net rental income 60,556 - 60,556 57,018

Income from pooled investment vehicles

10,735 - 10,735 9,636

Income from derivatives 889 - 889 899

Net income from securities lending 552 - 552 1,341

Net income from class actions 48 - 48 117

Income from cash deposits 642 - 642 717

Annuity income 32 - 32 34

Income before taxation 369,389 - 369,389 350,330

Taxation (2,222) - (2,222) (7,431)

Net income 367,167 - 367,167 342,899

Investment income shown above reflects income earned by investments within the Standard Section. All

income earned on pooled investment units held by the Defined Contribution Section is accounted for within

the value of those funds. Overseas investment income is stated gross of withholding taxes. Irrecoverable

withholding taxes are reported under Taxation in the Fund Account. Net rental income is stated after deduction

of £2,340k (2016: £2,150k) of property related expenses.

9. Taxes on investment income

The British Steel Pension Scheme is a registered pension scheme for tax purposes under the Finance Act 2004. The Scheme is therefore exempt from taxation except for certain withholding taxes relating to overseas investment income. Tax charges are accrued on the same basis as the investment income to which they relate.

10. Interest payable

STANDARD

SECTION DC SECTION TOTAL 2017 TOTAL 2016

£'000 £'000 £'000 £'000

Cash deposits – foreign currency (68) - (68) (54)

Cash – Insurance portfolio (2,496) - (2,496) -

Interest payable (2,564) - (2,564) (54)

Interest on the Insurance portfolio has been accrued on daily mark to market basis, this will be either settled on the termination of Repurchase Agreement or rolled over for a further short term.

26

11. Pooled Investment Vehicles (PIVs)

The Scheme’s holdings of PIVs are analysed below:

STANDARD

SECTION DC SECTION TOTAL 2017 TOTAL 2016

£'000 £'000 £'000 £'000

Global bond funds 12,532 1,100 13,632 11,188

UK equity funds 7,934 522 8,456 66,265

Global equity funds 49,361 9,069 58,430 148,232

UK property funds 735 - 735 26,276

Global property funds 22,683 - 22,683 23,522

UK private equity funds 41,798 - 41,798 44,947

Global private equity funds 59,840 2,504 62,344 66,725

Cash funds - 421 421 320

2017 194,883 13,616 208,499 387,475

2016 379,996 7,479 387,475

The assets underlying these PIVs are:

£'000 £'000 £'000 £'000

Equities 158,933 12,095 171,028 326,169

Bonds 12,532 1,100 13,632 11,188

Others 23,418 421 23,839 50,118

2017 194,883 13,616 208,499 387,475

2016 379,996 7,479 387,475

All PIVs in the DC Section are managed by Legal & General on behalf of the Trustee.

12. Derivatives

Objectives and policies

The Trustee has authorised the use of derivatives in a controlled manner to facilitate the timely implementation of significant asset allocation moves, for the purpose of efficient portfolio management, to reduce investment risk and to facilitate closer asset/liability management. The use of derivative contracts for such purposes is subject to prior approval by the Investment Committee.

Swaps

The Scheme started its swaps programme in 2007. The Trustee's aim is to match, as far as possible, the fixed income portfolio to the Scheme's long term liabilities, particularly in relation to their sensitivities to inflation rate and interest rate movements.

27

Inflation swaps are used as "overlays" in conjunction with the increased non-government fixed interest bond

holdings to match liabilities and to improve potential returns. The Scheme has inflation swap contracts

outstanding as at 31 March 2017 relating to its fixed interest investment portfolio and these contracts are

traded Over The Counter (“OTC”). The details are:

2017 2016

Assets Liabilities Assets Liabilities

£'000 £'000 £'000 £'000

Swaps - interest rate 1,728 - 2,450 -

Swaps – inflation 2,938 (93,087) 1,316 (111,803)

4,666 (93,087) 3,766 (111,803)

OTC contracts are used to transform floating rate interest income from certain investments into fixed income

returns which are better suited to the liability profile of the Scheme. The Scheme has the following interest

rate swap contracts outstanding as at 31 March 2017:

TYPE OF SWAP

NUMBER OF

CONTRACTS

EXPIRATION NATURE OF

SWAP

NOTIONAL AMOUNT OF

OUTSTANDING CONTRACTS

AGGREGATE ASSETS

AGGREGATE LIABILITIES

£'000/$'000 £'000 £'000

Interest rate swap

2 Expires April 2018 – June

2019

Pay LIBOR

for 3.6% - 3.8%

30,000 / - 1,728 -

Total 2017 1,728 -

Total 2016 2,450 -

Under the OTC contracts for inflation rate and interest rate contracts, the Scheme had deposited £93,163k and received £Nil (2016: deposited £108,973k and received £Nil) of Gilts as collateral for the fair value with the various market counterparties as at 31 March 2017. The Scheme held collateral against the contracts showing unrealised gains and posted collateral for unrealised losses. The deposited collateral is reported within the Scheme’s net assets.

28

TYPE OF SWAP

NUMBER OF CONTRACTS

EXPIRATION NATURE OF SWAP

NOTIONAL AMOUNT OF

OUTSTANDING CONTRACTS

AGGREGATE ASSETS

AGGREGATE LIABILITIES

£'000/$'000 £'000 £'000

Within 5 years

Inflation swap 4

November 2017 –

January 2019

Pay 2.06% - 3.312% for

UK RPI 25,000 / 50,000 2,811 (6,507)

Inflation swap

1 January 2019 Pay 1.65% for US CPI

- / 50,000 127 -

Within 5 to 10 years

Inflation swap

1 February

2024 Pay 2.35% for US CPI

- / 50,000 - (3,043)

Within 10 to 15 years

Inflation swap

12 June 2028 –

January 2029

Pay 1.95% - 2.89% for US

CPI - / 50,000 - (82,357)

Within 45 years

Inflation swap

1 January 2059 Pay 3.33% for UK RPI

10,000 / - - (1,180)

Total 2017 2,938 (93,087)

Total 2016 1,316 (111,803)

13. Additional Voluntary Contributions

STANDARD

SECTION DC SECTION TOTAL 2017 TOTAL 2016

£'000 £'000 £'000 £'000

Corus Engineering Steels Pension Scheme

1,484 - 1,484 1,640

1,484 - 1,484 1,640

Prudential have valued the Additional Voluntary Contributions for former members of the Corus Engineering Steels Pension Scheme.

29

14. Investments reconciliation

Reconciliation of investments held at the beginning and the end of the year.

STANDARD SECTION

Opening Value

Purchase Costs

Sale Proceeds Transfers / Re-

classification

Change in Market Value

Closing Value

£'000 £'000 £'000 £'000 £'000 £'000

Equities 3,360,796 575,363 (3,068,772) (9,421) 389,433 1,247,399

Bonds 8,485,873 2,526,208 (1,448,432) - 1,310,698 10,874,347

Bonds – Insurance portfolio

- 1,463,906 - - 727 1,464,633

Properties 1,309,220 30,177 (45,580) - (14,340) 1,279,477

Pooled Investment Vehicles

379,996 47,999 (285,484) 9,421 42,951 194,883

Derivatives (108,037) - - - 19,616 (88,421)

Other investments 11 - - - - 11

AVC investments 1,640 9 (267) - 102 1,484

13,429,499 4,643,662 (4,848,535) - 1,749,187 14,973,813

Cash deposits 131,636 169,627

Repo - (204,944)

Other investments 67,318 82,002

Net investment assets 13,628,453 15,020,498

DC SECTION

Pooled investment vehicles

7,479 5,198 (1,148) - 2,087 13,616

Total net investment assets

13,635,932 15,034,114

The change in market value of investments during the year comprises all increases and decreases in the market value of investments held at any time during the year, including profits and losses realised on sales of investments during the year. Annuities held by the Trustee in respect of pensioner members are not included on the grounds of materiality. DC Section funds are all designated to DC Section members.

30

15. Transaction costs

Included within the Standard Section purchases and sales are direct transaction costs of £5,963k (31 Mar 2016: £4,881k) comprising fees, commissions and stamp duty. These costs are attributable to the key asset classes as follows:

2017 FEES COMMISSIONS STAMP DUTY TOTAL

£'000 £'000 £'000 £'000

Equities 912 1,971 1,374 4,257

Other 718 - 988 1,706

1,630 1,971 2,362 5,963

2016 FEES COMMISSIONS STAMP DUTY TOTAL

Equities 889 674 1,197 2,760

Other 263 - 1,858 2,121

1,152 674 3,055 4,881

Transaction costs are borne by the Scheme in relation to transactions in pooled investment vehicles. Such costs are taken into account in calculating the bid/offer spread of these investments and are not separately reported.

16. Investment fair value hierarchy

The fair value of financial instruments has been disclosed using the following fair value hierarchy:

Level 1: The quoted price for an identical asset in an active market.

Level 2: Where quoted prices are unavailable, the price of a recent transaction for an identical asset, adjusted

if necessary.

Level 3: Where a quoted price is not available, and recent transactions of an identical asset on their own are

not a good estimate of fair value, the fair value is determined by using a valuation technique which uses

observable market data or non-observable data.

For the purpose of this analysis, daily priced funds have been included in Level 1, weekly priced funds in

Level 2 and monthly and quarterly net asset values for Private Equity funds and Limited Liability Partnerships

in Level 3.

31

The Scheme’s investment assets and liabilities have been categorised using the above fair value hierarchy

as follows:

2017 LEVEL 1 LEVEL 2 LEVEL 3 TOTAL

Standard Section £'000 £'000 £'000 £'000

Equities 1,242,736 4,662 1 1,247,399

Bonds 578,230 10,296,117 - 10,874,347

Bonds – Insurance portfolio 250,947 1,213,686 - 1,464,633

Pooled Investment Vehicles 93,245 - 101,638 194,883

Swaps - (88,421) - (88,421)

Properties - - 1,279,477 1,279,477

Investment in subsidiaries - - 11 11

AVC investments - 1,484 - 1,484

Cash 169,627 - - 169,627

Repo and Reverse Repo Agreements (204,944) - - (204,944)

Other investment balances 82,002 - - 82,002

2,211,843 11,427,528 1,381,127 15,020,498

DC Section

Pooled Investment Vehicles 13,616 - 13,616

2,211,843 11,441,144 1,381,127 15,034,114

2016 LEVEL 1 LEVEL 2 LEVEL 3 TOTAL

Standard Section £'000 £'000 £'000 £'000

Equities 3,353,313 7,445 38 3,360,796

Bonds - 8,485,873 - 8,485,873

Pooled Investment Vehicles 233,026 35,589 111,381 379,996

Swaps - (108,037) - (108,037)

Properties - - 1,309,220 1,309,220

Investment in subsidiaries - - 11 11

AVC investments - 1,640 - 1,640

Cash 131,636 - - 131,636

Other investment balances 67,318 - - 67,318

3,785,293 8,422,510 1,420,650 13,628,453

DC Section

Pooled Investment Vehicles - 7,479 - 7,479

3,785,293 8,429,989 1,420,650 13,635,932

32

17. Investment risk

FRS 102 requires the disclosure of information in relation to certain investment risks. These risks are set out by FRS 102 as follows:

Credit risk: The risk that one party to a financial instrument will cause a financial loss for the other party by

failing to discharge an obligation.

Market risk: This comprises currency risk, interest rate risk and other price risk.

Currency risk: This is the risk that the fair value or future cash flows of a financial asset will fluctuate because

of changes in foreign exchange rates.

Interest rate risk: This is the risk that the fair value or future cash flows of a financial asset will fluctuate

because of changes in market interest rates.

Other price risk: This is the risk that the fair value or future cash flows of a financial asset will fluctuate

because of changes in market prices (other than those arising from interest rate risk or currency risk),

whether those changes are caused by factors specific to the individual financial instrument or its issuer, or

factors affecting all similar financial instruments traded in the market.

The Scheme has exposure to these risks because of the investments it makes to implement its investment

strategy described in the Trustees’ Report for the Standard Section and DC Section. The Trustees manage

investment risk, including credit risk and market risk, within agreed risk limits which are set taking into

account the Scheme’s strategic investment objectives. These investment objectives and risk limits are

implemented through the investment management agreement in place with the Scheme’s investment

manager, Pension Services Limited and monitored by the Trustees with regular reviews of the investment

portfolios.

Further information on the Trustees’ approach to risk management and the Scheme’s exposures to credit

and market risks are set out below. This does not include annuity insurance policies or AVC investments as

these are not considered significant in relation to the overall investments of the Scheme.

Standard Section

Credit risk

The Standard Section is subject to credit risk as the Scheme invests in bonds, OTC derivatives, has cash

balances, undertakes securities lending activities and enters into repurchase agreements. The Scheme also

invests in pooled investment vehicles and is therefore directly exposed to credit risk in relation to the

instruments it holds in the pooled investment vehicles and is indirectly exposed to credit risks arising on the

financial instruments held by the pooled investment vehicles.

33

Analysis of direct credit risk

2017 INVESTMENT

GRADE

NON-INVESTMENT

GRADE UNRATED TOTAL

£'000 £'000 £'000 £'000

Bonds 10,668,330 140,735 65,282 10,874,347

Bonds – Insurance portfolio 1,464,633 - - 1,464,633

Pooled Investment Vehicles - - 194,883 194,883

Swaps (88,421) - - (88,421)

Cash 169,627 - - 169,627

Repo and Reverse Repo (204,944) - - (204,944)

Securities lending 8,990 - - 8,990

12,018,215 140,735 260,165 12,419,115

2016

INVESTMENT

GRADE

NON-INVESTMENT

GRADE UNRATED TOTAL

£'000 £'000 £'000 £'000

Bonds 8,269,327 131,175 85,371 8,485,873

Pooled investment vehicles - - 379,996 379,996

Swaps (108,037) - - (108,037)

Cash and Reverse Repo 131,636 - - 131,636

Securities lending 89,750 - - 89,750

8,382,676 131,175 465,367 8,979,218

Credit risk arising on bonds is mitigated by investing in government bonds where the credit risk is minimal,

or corporate bonds which are rated at least investment grade. The Scheme also invests in high yield bonds

which are non-investment grade. The Trustees manage the associated credit risk by requesting the

investment manager to diversify the portfolio to minimise the impact of default by any one issuer. Credit

risk arising on other investments is mitigated by investment mandates requiring counterparties to have at

least investment grade credit rating. This is the position at the year-end.

Credit risk arising on derivatives depends on whether the derivative is exchange traded or OTC. OTC

derivative contracts are not guaranteed by any regulated exchange and therefore the Scheme is subject to

risk of failure of the counterparty. The credit risk for OTC swaps is reduced by collateral arrangements (See

Note 12).

Cash is held within financial institutions which are at least investment grade credit rated. The Scheme

engaged in a Repurchase agreement during the year, and on the 31 March 2017, we received £44,100k

(2016: £Nil) in collateral from the market counterparty.

The Scheme lends certain equity securities under a Trustee-approved securities lending programme. The

Trustees manage the credit risk arising from securities lending activities by restricting the amount of overall

securities that may be lent, only lending to approved borrowers who are rated investment grade, limiting

the amount that can be lent to any one borrower and putting in place collateral arrangements.

34

This arrangement does not include cash. The Scheme engages in securities lending arrangements with third

parties to secure additional income. The total exposure of the Scheme's investments on loan at 31 March

2017 was £8,990k (2016: £89,750k) and the collateral provided against these loans by borrowers in the form

of US Government Securities, UK Gilts and Other “Triple A” Government Securities was £9,709k (2016:

£95,486k).

The Scheme’s holdings in pooled investment vehicles are unrated. Direct credit risk from pooled investment

vehicles is mitigated by the underlying assets of the pooled arrangements being ring-fenced from the pooled

manager, the regulatory environments in which the pooled managers operate and diversification of

investments amongst a number of pooled arrangements. The Trustee carries out due diligence checks on

the appointment of new pooled investment managers and on an ongoing basis monitor any changes to the

regulatory and operating environment of the pooled manager. A summary of pooled investment vehicles by

type of arrangement is as follows:

STANDARD

SECTION DC SECTION TOTAL 2017 TOTAL 2016

£'000 £'000 £'000 £'000

Authorised unit trusts 32,645 13,616 46,261 70,379

Open ended funds 48,068 - 48,068 90,278

Limited Liability Partnerships 101,638 - 101,638 103,085

Closed ended funds 12,532 - 12,532 123,733

2017 194,883 13,616 208,499 387,475

2016 379,996 7,479 387,475

Indirect credit risk arises in relation to underlying investments held in the bond pooled investment vehicles.

This risk is mitigated by only investing in pooled funds which invest in at least investment grade credit rated

securities.

Currency risk

The Scheme is subject to currency risk because some of the Scheme’s investments are held in overseas

markets, either as segregated investments or via pooled investment vehicles. The Trustees limit overseas

currency exposures through a selective currency hedging policy.

35

The Scheme’s total net unhedged exposure by major currency at the year-end was as follows:

2017 2016

£'000 £'000

US Dollar 691,329 774,449

Euro 202,257 460,395

Japanese Yen 83,028 274,723

Canadian Dollar 46,972 -

Hong Kong Dollar 30,531 120,303

Swiss Francs 29,216 93,494

Australian Dollar 28,986 122,336

Swedish Krona 12,853 41,779

Korean Won 12,550 115,174

Taiwanese Dollar 10,067 96,955

Other 29,189 241,527

Interest rate risk

The Scheme is subject to interest rate risk on the investments comprising bonds and interest rate swaps

held directly or through pooled investment vehicles and cash. At the year end the portfolio comprised of:

2017 2016

£'000 £'000

Direct

Bonds 10,874,347 8,485,873

Bonds – Insurance portfolio 1,464,633 -

Swaps (88,421) (108,037)

Indirect

Bond PIVs 12,532 10,488

36

Other price risk

Other price risk arises principally in relation to the Scheme’s growth portfolio which includes directly held

equities, equities held in pooled vehicles, hedge funds, and private equity and investment properties. The

Scheme manages this exposure to other price risk by constructing a diverse portfolio of investments across

various markets. At the year-end, the Scheme’s exposure to investments subject to other price risk was:

2017 2016

£'000 £'000

Direct:

Equities 1,247,399 3,360,796

Investment Properties 1,279,477 1,309,220

2,526,876 4,670,016

Indirect:

Equity PIVs 57,295 208,328

Property PIVs 23,418 49,798

Private Equity PIVs 101,638 111,382

182,351 369,508

37

DC Section

FUND FUND VALUE

FAIR VALUE LEVEL

CREDIT RISK CURRENCY RISK

INTEREST RISK

OTHER PRICE RISK

£’000

Growth

Diversified (PMC) 3 - 2 Partial Significant Partial Significant

Diversified (PMC) 2 2,504 2 Partial Significant Partial Significant

Equity

Global Equity Market Weights 30:70 Index (PMC) 3

8,590 2 None Partial None Significant

UK Equity Index (PMC) 3

522 2 None None None Significant

World (Ex-UK) Equity Index (PMC) 3

474 2 None Significant None Significant

World Emerging Markets Equity Index (PMC) 3

5 2 None Significant None Significant

Cash

L&G Cash 3 421 2 Significant None Partial None

Bond

AAA-AA-A Corp. Bond All Stocks Index

11 2 Significant None Significant None

Over 5 Year Index Linked Gilts Index (PMC) 3

364 2 Significant None Significant None

Pre-Retirement (PMC) 3

725 2 Significant Partial Significant None

Total 13,616

18. Investment management expenses

STANDARD

SECTION DC SECTION TOTAL 2017 TOTAL 2016

£'000 £'000 £'000 £'000

Fees paid to Pension Services Limited (1,907) - (1,907) (1,642)

Insurance portfolio Legal fees (126) - (126) -

Fees paid to Custodian (573) - (573) (566)

Fees paid to Adviser (12) - (12) (12)

(2,618) - (2,618) (2,220)

Pension Services Limited is an in-house investment manager with sole responsibility for managing the

Standard Section's investments.

38

19. Investment administration expenses

STANDARD

SECTION DC SECTION TOTAL 2017 TOTAL 2016

£'000 £'000 £'000 £'000

Staff costs (6,379) - (6,379) (4,940)

Establishment costs (509) - (509) (507)

Utilities (103) - (103) (84)

IT costs (102) - (102) (58)

Other administration expenses (212) - (212) (146)

Non-recoverable VAT (99) - (99) (75)

(7,404) - (7,404) (5,810)

During the year, staff costs above included an exceptional item for staff redundancies of £411k (2016: £Nil) for four members in the London office.

20. Current Assets

STANDARD

SECTION DC SECTION TOTAL 2017 TOTAL 2016

£'000 £'000 £'000 £'000

Cash balances 11,709 - 11,709 15,305

Contributions 2 - 2 -

Pre-paid pensions 44,578 - 44,578 42,233

Other debtors and prepayments 12,042 - 12,042 9,391

68,331 - 68,331 66,929

Contributions due to be paid in the prior Scheme year were paid in accordance with the effective Schedule of Contributions.

21. Current liabilities

STANDARD

SECTION DC SECTION TOTAL 2017 TOTAL 2016

£'000 £'000 £'000 £'000

Unpaid benefits (15,458) - (15,458) (45,936)

Other creditors and accruals (25,043) - (25,043) (20,786)

(40,501) - (40,501) (66,722)

39

22. Outstanding capital commitments

STANDARD

SECTION DC SECTION TOTAL 2017 TOTAL 2016

£'000 £'000 £'000 £'000

Properties

Commitments in Maturity properties

81 - 81 3,647

Commitments in Growth properties

4,200 - 4,200 3,774

4,281 - 4,281 7,421

Other

Commitments in infrastructure and alternative investments

9,556 - 9,556 12,020

13,837 - 13,837 19,441

23. Related party transactions

At 31 March 2017, all directors of the Trustee were members of the Scheme. All directors receive benefits on the same basis as other members of the Scheme. Certain directors of the Trustee Company and its subsidiaries receive remuneration, which is disclosed in the financial statements of those companies. The Scheme bears all costs of administration in the Glasgow and London offices.

Contributions received in respect of Trustee directors who are members of the Scheme have been made in accordance with the Trust Deed and Rules.

24. Employer related investments

The Scheme holds no investment in the sponsor company, Tata Steel UK Limited.

40

Chairman’s Annual Governance Statement This statement has been prepared by the Trustee of the Defined Contribution (DC) Section (the ‘DC Section’) of

the British Steel Pension Scheme (the ‘Scheme’) to demonstrate how the Scheme has complied with the

governance standards introduced under the Occupational Pension Schemes (Charges and Governance)

Regulations 2015 effective from 6 April 2015.

This statement covers four key areas:

1. The investment strategy relating to the Scheme’s default options;

2. The processing of Scheme financial transactions;

3. Charges and transaction costs within the Scheme;

4. The Trustee’s compliance with the statutory knowledge and understanding (TKU) requirements.

The Scheme’s default investment strategy

The Trustee has prepared a Statement of Investment Principles which governs its decisions about investments

including:

a. The Trustee’s aims and objectives.

b. The Trustee’s policies in relation to the:

1. Kinds of investments to be held

2. Balance between the different kinds of investment

3. Risks, including how these are measured and managed

4. Expected return on investments

5. The realisation of investments and

6. The extent (if any) to which social, environment or ethical considerations are taken into account in

the acquisition, retention and disposal of investments.

c. An explanation of how the default strategy (i.e. (a) and (b) above) is intended to ensure that assets are

invested in the best interests of members and beneficiaries.

The Trustee and their professional investment adviser, Willis Towers Watson, review how the funds within the

default strategy and self-select asset class fund range have performed against the investment managers’

objectives and benchmark, which the Trustee reviews every 6 months via Willis Towers Watson’s biannual

investment performance monitoring report.

The Trustee carried out a holistic and strategic review of the Scheme’s default investment strategy, self-select

lifestyle options and self-select asset class fund range during the year in response to the new pension flexibilities

introduced on 6 April 2015. The Trustee would also undertake an ad-hoc review of their investment policy in the

event of significant legislative, market and/or member demographic changes.

41

As a result of the Trustee’s triennial investment strategy review carried out in 2015, the Trustee agreed changes

to the default investment lifestyle strategy, self-select lifestyle options and self-select asset class funds. The

Trustee believes that this is suitable based on analysis of the demographics and risk profile of the Scheme’s

membership. The following changes were implemented:

• Three new lifestyle strategies were launched which focused on managing absolute volatility of portfolio returns as members progress to retirement and providing choice of investment strategy to allow members to invest appropriately for how they intend to use their benefits at retirement.

• Closed the existing two lifestyle options to new members.

• New fund options were made available to provide a greater flexibility in asset class exposure.

• Amended the default lifestyle strategy for new pure DC members targeting an asset allocation appropriate for members intending to take a 25% cash lump sum and purchase an annuity at retirement.

• The Scheme’s Defined Benefit (DB) Standard Section members paying excess DC and/or Top Up Contributions will be defaulted into a lifestyle strategy targeting an asset allocation appropriate for members intending to take their benefit as a cash lump sum at retirement.

A copy of the Trustee’s Statement of Investment Principles is available on request.

The financial transactions made within the Scheme

The Trustee monitors the core financial transactions of the Scheme annually via the Scheme administrators’ (Legal

and General) administration report. These include the investment of contributions, transfers into and out of the

Scheme, fund switches and payments out of the Scheme.

Legal and General carry out monthly monitoring, reconciliation and record keeping of member contribution

investments and payments from the Scheme. Any discrepancies are investigated and reconciled with the

Company’s payroll Team. The Trustee’s annual Report and Accounts (including the financial transactions) are

independently audited by the Scheme auditor annually.

Willis Towers Watson has undertaken an independent review of the Scheme’s governance processes and internal

controls and has confirmed that they are compliant with the Pensions Regulator’s DC Code of Practice number 13

on the governance and administration (paragraphs 206 to 225) of occupational DC schemes. The Scheme is also

compliant with the Code of Practice number 5 on reporting late payments of contributions and with the relevant

legislation.

Based on the above, the Trustee is satisfied that the Scheme’s core financial transactions have been processed

promptly and accurately during the Scheme year.

42

Charges and transaction costs

The Total Expense Ratio3 applied to the Scheme’s default arrangement and self-select asset class fund range as

at 31 December 2016 are shown in the tables below.

The charges applied to the Scheme’s default arrangement are set out below:

NAME ANNUAL MANAGEMENT

CHARGE

FUND MANAGEMENT

CHARGE

TOTAL MANAGEMENT

CHARGE

Legal & General (PMC) Global Equity Market Weights 30:70 Index

0.30% 0.14% 0.44%

Legal & General (PMC) Diversified 0.30% 0.21% 0.51%

Legal & General (PMC) Pre-Retirement 0.30% 0.12% 0.42%

Legal & General Cash 0.30% 0.10% 0.40%

The charges applied to all other self-select funds are set out below.

NAME ANNUAL MANAGEMENT

CHARGE

FUND MANAGEMENT

CHARGE

TOTAL MANAGEMENT

CHARGE

Legal & General (PMC) World Emerging Markets Index

0.30% 0.45% 0.75%

Legal & General (PMC) Global Equity Market Weights 30:70 Index

0.30% 0.14% 0.44%

Legal & General (PMC) World (ex-UK) Equity Index

0.30% 0.12% 0.42%

Legal & General (PMC) UK Equity Index 0.30% 0.10% 0.40%

Legal & General (PMC) Diversified 0.30% 0.21% 0.51%

Legal & General (PMC) AAA-AA-A Corporate Bond All Stocks Index

0.30% 0.12% 0.42%

Legal & General (PMC) Pre-Retirement 0.30% 0.12% 0.42%

Legal & General (PMC) Over 5 Years Index- Linked Gilt Index

0.30% 0.08% 0.38%

Legal & General Cash 0.30% 0.10% 0.40%

The transaction costs incurred by the investment managers in running the funds are automatically incorporated

into the daily fund price for each fund, and therefore is incorporated into the investment managers’ net

performance figures. Transaction costs are the costs that have been incurred by the investment managers as a

result of buying, selling, lending or borrowing investments.

3 The Total Expense Ratio provides investors with the annual costs involved in running an investment fund. This includes the annual management charge, plus other charges incurred in administering the fund (these include share registration fees, legal fees, auditor fees, custodian fees etc). Transaction costs are not included in the Total Expense Ratio.

43

The Trustees have sought to obtain details from the Scheme’s investment provider, Legal and General, of the

ongoing transaction costs, so these can be included within this statement. The Trustees believe their ability to

fully comply with the requirements in the area of disclosing transaction costs is currently limited as Legal and

General has confirmed that, in common with [most/all] other providers, it cannot disclose full details of all the

transaction costs until early 20184.

Value for Members – Considerations

The Trustee is committed to ensuring that members receive value for money from the Scheme (i.e. the costs and

charges deducted from members’ accounts and contributions paid provide good value in relation to the benefits

and services provided by the Scheme). The Trustee with support from its advisers, have undertaken a value for

members assessment as required under the new DC Code.

The Trustee undertook an assessment of whether the total cost of Scheme membership represented value for

members. In accordance with the Pensions Regulator’s DC Code of Practice number 13 and with the relevant

legislation, the Trustee concluded that the Scheme’s overall benefits and options represent good to excellent

value for members in comparison to the costs payable by members for the following reasons, including:

• Charges for the Scheme’s default investment strategy are below the charge cap of 0.75% a year;

• Members have access to low investment fund management charges which the Trustee believes is competitive in comparison to the options available on the open market e.g. via personal pensions;

• Members have access to a variety of well-designed investment options which the Trustee and its professional investment adviser monitor and update as appropriate, and therefore cater for members’ different risks/returns needs and income preferences;

• Members pay for the administration and fund management charges only. They do not pay for the costs of professional advisers, communications provided by the Pensions Office and other costs associated with running the Scheme.

• The Company offers a generous contribution structure where members contribute 6% of salary and the Company contributes 10% of salary via a tax efficient salary sacrifice arrangement. Additionally, members can contribute above 6% if they wish via the Top Up Contribution arrangement available in the Scheme, however, the Company’s contribution is restricted to 10% of salary.

Trustee Knowledge and Understanding (TKU)

The Trustee has a TKU process in place which enables it, together with the advice available to them, to exercise

its functions as Trustee of the Scheme. The Trustee’s approach to meeting the TKU requirements includes:

• Maintaining a rolling programme of bespoke Trustee training, which is delivered as part of their regular Trustee meetings throughout the calendar year.

• Recording all training and attendance at appropriate seminars in the Trustee training log in order to support the Chair’s Statement.

• Circulating to each Trustee WTW’s “Hot topics” and publications, and general DC updates/news from its advisers about matters relevant to the Scheme.

• All the Trustees have completed the relevant parts of the Pensions Regulator’s Trustee Toolkit within six months of appointment.

4 It is noted that the industry is still working on the full detail of how to provide member borne transaction costs, with pension providers and fund managers awaiting further details from the joint Department for Work and Pensions (DWP) / Financial Conduct Authority (FCA) consultation on transactions costs before taking further action.

44

• Reviewing the training programme annually following a TKU assessment.

• The Chairman considers the Trustee’s effectiveness bi--annually and in his opinion, believes the Trustee Board’s TKU is fit for purpose.

Willis Towers Watson has undertaken an independent assessment of the TKU process and has confirmed that it

meets the regulatory standards and is therefore compliant with the Pensions Regulator’s DC Code of Practice

number 13 and the Code of Practice number 7 on TKU. The Trustee is satisfied that it has met the relevant

legislative requirements enabling it to properly exercise its duties as Trustee.

Trustee board members undertook an aggregate of 679 hours training in the Scheme year to

31 March 2017.

Signed by the Chairman on behalf of the Trustee of the Scheme

A J Johnston

Chairman of the Board of

Trustees

45

Independent Auditor’s Statement about Contributions to the Trustee of the British Steel Pension Scheme We have examined the Summary of Contributions payable under the Schedule of Contributions to the British Steel

Pension Scheme in respect of the Scheme year ended 31 March 2017 which is set out on page 9.

This statement is made solely to the Scheme’s Trustee in accordance with the Pensions Act 1995 and Regulations

made thereunder. Our work has been undertaken so that we might state to the Scheme Trustee those matters

we are required to state in an auditor’s statement about contributions and for no other purpose. To the fullest

extent permitted by law, we do not accept or assume responsibility to anyone other than the Scheme Trustee for

our work, for this statement, or for the opinions we have formed.

Respective responsibilities of Trustee and Auditor

As explained more fully in the Statement of Trustee’s responsibilities set out on page 9, the Scheme Trustee is

responsible for ensuring that there is prepared, maintained and from time to time revised a Schedule of

Contributions showing the rates and due dates of certain contributions payable towards the Scheme by or on

behalf of the Employer and the active members of the Scheme. The Trustee is also responsible for keeping records

in respect of contributions received in respect of active members of the Scheme and for monitoring whether

contributions are made to the Scheme by the Employer in accordance with the Schedule of Contributions.

It is our responsibility to provide a statement about contributions paid under the Schedule of Contributions to the

Scheme and to report our opinion to you.

Scope of work on statement about contributions

Our examination involves obtaining evidence sufficient to give reasonable assurance that contributions reported

in the Summary of Contributions have in all material respects been paid at least in accordance with the Schedules

of Contributions. This includes an examination, on a test basis, of evidence relevant to the amounts of

contributions payable to the Scheme and the timing of those payments under the Schedules of Contributions.

Statement about contributions payable under the Schedules of Contributions

In our opinion contributions for the Scheme year ended 31 March 2017 as reported in the Summary of

Contributions and payable under the Schedules of Contributions have in all material respects been paid from

1 April 2016 to 29 March 2017 in accordance with the Schedule of Contributions certified by the actuary on

30 September 2015, and subsequently have been paid at least in accordance with the Schedule of Contributions

certified by the actuary on 30 March 2017.

Catherine Burnet for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 15 Canada Square London E14 5GL

46

Actuary’s Certification of Schedule of Contributions British Steel Pension Scheme

1. Adequacy of rates of contributions

I certify that, in my opinion, the rates of contributions shown in this revised Schedule of Contributions are such

that the statutory funding objective on 31 March 2014 could have expected to be met by the end of the period

specified in the revised Recovery Plan dated 30 March 2017.

I also certify that the rates of contributions shown in this schedule of contributions are not lower than I would

have provided for had I had responsibility for preparing or revising the schedule, the statement of funding

principles and the recovery plan.

2. Adherence to statement of funding principles

I hereby certify that, in my opinion, this schedule of contributions is consistent with the Statement of Funding

Principles dated September 2015.

The certification of the adequacy of the rates of contributions for the purpose of securing that the statutory

funding objective can be expected to be met is not a certification of their adequacy for the purpose of securing

the Scheme's liabilities by the purchase of annuities, if the Scheme were to be wound up.

30 May 2017

C P Burbidge

Fellow of the Institute of Actuaries

Towers Watson Limited

Midcity Place

71 High Holburn

London

WC1V 6TP