We continue to believe that remuneration policy at all levels, including for senior executives, needs to incentivise staff to deliver strong, sustainable growth whilst reflecting the work required to reshape and transform the Group. We strongly believe that we should align rewards to the longer term, sustainable success of our business and through this the delivery of value to shareholders.
Having attained our original AQR guidance of 50-60 basis points in 2013, we are now targeting around 50 basis points.
Total cost reductions of 13 per cent driven by simplification initiatives and disposals enabled reinvestment for future growth opportunities.
Costs improved by 8 per cent, reflecting the benefits of simplifying our business model and processes.
Commitment to gender equality We want to improve gender diversity amongst our senior managers and achieved 27 per cent female representation at board level in 2013. We are focused on building a sustainable pipeline of talented women and were included in The Times Top 50 employers for women for the second year in succession.
Supporting colleagues’ wellbeing, health and safety Colleagues who are healthy, happy and safe at work, with access to support when facing financial, physical or emotional issues, generally perform their best.
engaged colleagues in our environmental Action Plan through our Sustainability network.
Setting risk appetite and strategy. Approval of the risk management framework and Group-wide risk principles
Pensions deficit Commentary Volatility in the Defined Benefit Pension Schemes is reducing as we target rates hedging and equity sales.
TSB will be divested through an Initial Public Offering, subject to regulatory and european Commission approval.
We have significantly strengthened the Group’s capital ratios in the year. The Group’s pro forma fully loaded common equity tier 1 (CeT1) ratio has increased to 10.3 per cent from 8.1 per cent at 31 December 2012. The improvement was driven by capital generation in the core business, the decrease in risk-weighted assets from non-core asset reductions, improving economic conditions and a number of management actions. These management actions included the disposal of St. James’s Place, the announced disposals of Scottish Widows Investment Partnership and Heidelberger leben, the sale of a uS residential mortgage-backed security (RMBS) portfolio and a number of overseas businesses as well as dividends of £2.2 billion from the Insurance business to the Group. This improvement in the capital ratio was partially offset by charges for legacy items, losses on disposal of non-core assets, and other statutory items including the effects of changes to pension accounting and the costs of Simplification and Verde.
Key balance sheet items at 31 December 2013 £bn £bn £bn £bn £bn £bn loans and advances to customers1 318.2 109.5 6.5 2.7 436.9
Key balance sheet items loans and advances to customers2 341.9 343.3 –
Core customer deposits increased by 13 per cent, with increases in all client segments and growth in high quality deposits reflecting the strength of the customer franchise.
Former appointments: Juan was previously the Chief Risk Officer of Santander’s uK business. Prior to this position, he held a number of senior risk, control and business management roles across the Corporate, Investment, Retail and Risk Divisions of the Santander Group.
Matt is a member of the Board of Trustees at In Kind Direct, founded by HRH Prince of Wales in 1996. He is a member of the Guild of PR Practitioners.
Board composition– Since last reporting, three additional directors have joined the Board. nick luff, who was appointed in March 2013, has significant financial experience in the uK listed environment. His background and experience enables him to fulfil the role of Audit Committee Chair and for SeC purposes the role of Audit Committee financial expert. Juan Colombás, who was appointed in november 2013, brings significant banking and risk management experience to the Board and his appointment reflects the Board’s desire to elevate the importance of risk management in the Group. Dyfrig John was appointed in January 2014 to bolster the depth and breadth of retail banking experience on the Board. However, with my pending retirement, the search for additional directors with relevant banking, finance and risk experience continues.
Plans succession in Board appointments in conjunction with the nomination & Governance Committee.
With the exception of those matters reserved to the Board, the Group Chief executive makes decisions on matters affecting the operations, performance and strategy of the Group’s businesses.
Directors’ and Officers’ liability insurance Throughout 2013 the Group had appropriate insurance cover in place to protect Directors, including former Directors who retired during the year, from liabilities that may arise against them personally in connection with the performance of their role. As well as insurance cover, the Group agrees to indemnify the Directors to the maximum extent permitted by law. Further information on the Group’s indemnity arrangements is provided on page 74.
The non-executive Directors also receive regular updates from the Group Chief executive in the form of a weekly email or briefing call.
Committee purpose and responsibilities The purpose of the Audit Committee is to monitor and review the Group’s financial reporting arrangements, the effectiveness of the internal controls and the risk management framework, and the internal and external audit processes. The Audit Committee reports to the Board on how it discharges its responsibilities and makes recommendations to the Board, all of which have been accepted during the year.
– an annual self-assessment by divisional/functional remuneration committees against the responsibilities set out within their terms of reference. Where areas for improvement are identified, action plans are designed and implemented.
Discretion in relation to annual bonus and long-term incentive plans The Committee retains discretion with regards to the operation and administration of these plans, including : – the timing and size of awards, subject to policy maximums; – adjustments required in certain circumstances (e.g. rights issues, corporate restructuring events and special dividends); – adjustment of targets if events occur which cause it to determine that the conditions are no longer appropriate; – amending the plan rules in accordance with their terms.
– exceptional circumstances requiring the Chairman to take on an executive function on a short-term basis.
– Transitional arrangements for overseas hires, which might include relocation expenses and accommodation.
Resignation Forfeited, including unvested deferred elements (2010 deferred bonus not subject to forfeiture but continues to be subject to performance adjustment) unless the Committee determines otherwise in exceptional circumstances.
neDs are paid a basic fee plus additional fees for the chairmanship/membership of committees and for membership of Group companies/boards/non-board level committees.
The salary for the CRO has been increased to £710,000 with effect from 1 January 2014 to reflect his additional responsibilities as a member of the Board.
Remuneration outcome for 2013 Executive Directors (audited) The following table summarises the total remuneration delivered during 2013 in relation to service as an executive Director.
Awards subject to performance under the long-Term Incentive Plan had an expected value of 30 per cent of face value at grant (using current accounting assumptions). Values are based on the 31 December 2013 closing price of 78.88 pence. Full face value of awards are £25,775,379 for António Horta-Osório, £12,190,401 for George Culmer and £11,629,259 for Juan Colombás.
António Horta-Osório 1,452,401 – – – 1,452,401 – 15/6/2011 30/3/2021 a
Lloyds Banking Group Annual Report and Accounts 2013138 classification is updated if required. This process seeks to ensure that relationship managers act promptly to identify, and highlight to senior management those customers who have the possibility to become higher risk in the future.
Corporate Real estate and other Corporate2 21,777 14,447 66.3 5,411 37.5
Shareholders’ equity per balance sheet 38,989 43,999 non-controlling interests per balance sheet 347 685
Change in treatment of material holdings – (5,517) (5,516) 11,033 –
Total capital £m update to transitional phasing and treatment of insurance (10,979) 3,846 2,748 (4,385)
Adjustments onto a regulatory basis: unallocated surplus within insurance business 336 55 – – – 391
Other restrictions in the non-Participating Fund: In addition to the policies which existed at the date of demutualisation, the With-Profit Fund includes policies which have been written since that date. As a result of statements made to policyholders that investment policy will usually be the same for both types of business, there is an implicit requirement to hold additional regulatory assets in respect of the business written after demutualisation. The estimated amount required to provide such support at 31 December 2013 is £156 million (2012: £128 million). Scottish Widows has obtained from the PRA permission to include the value of this support in assessing the realistic value of assets available to the With-Profit Fund. There is a further test requiring that no amounts can be transferred from the non-Participating Fund of Scottish Widows unless there are sufficient assets within the long-Term Fund to meet both policyholders’ reasonable expectations in light of liabilities in force at a year-end and the new business expected to be written over the following year.
– Mandated policies and processes require minimum control frameworks, management information and standards to be implemented.
Mitigation The Group takes many mitigating actions with respect to people risk. Key areas of focus include: – Strengthening the risk and customer focused culture amongst colleagues by developing and delivering initiatives that reinforce behaviours to generate the best possible long-term outcomes for customers and colleagues; – embedding the Group’s Codes of Personal and Business Responsibility across the Group; – Reviewing and developing incentives to ensure they promote colleagues behaviours that meet customer needs and regulatory expectations; – Focusing on leadership and colleague engagement, through delivery of strategies to attract, retain and develop high calibre people together with implementation of rigorous succession planning; – Maintaining focus on people risk management across the Group; and
Mitigation The Group maintains a system of internal controls, which is designed to: – ensure that accounting policies are consistently applied, transactions are recorded and undertaken in accordance with delegated authorities, that assets are safeguarded and liabilities are properly recorded; – enable the calculation, preparation and reporting of financial, prudential regulatory and tax outcomes in accordance with applicable International Financial Reporting Standards, statutory and regulatory requirements; and
Loan loss impairment We focused on the determination of whether loans and advances were impaired and the measurement of impairment, in particular, the assessment of whether historic losses are indicative of incurred losses in the portfolios and the valuation of collateral for secured lending.
Currency translation differences (tax: £nil) – (6) – (6) – (6)
(5) Borrowings Borrowings (which include deposits from banks, customer deposits, debt securities in issue and subordinated liabilities) are recognised initially at fair value, being their issue proceeds net of transaction costs incurred. These instruments are subsequently stated at amortised cost using the effective interest method.
Individual assessment In respect of individually significant financial assets in the Group’s wholesale lending portfolios, assets are reviewed on a regular basis and those showing potential or actual vulnerability are placed on a watchlist where greater monitoring is undertaken and any adverse or potentially adverse impact on ability to repay is used in assessing whether an asset should be transferred to a dedicated Business Support unit. Specific examples of trigger events that would lead to the initial recognition of impairment allowances against lending to corporate borrowers (or the recognition of additional impairment allowances) include (i) trading losses, loss of business or major customer of a borrower; (ii) material breaches of the terms and conditions of a loan facility, including non-payment of interest or principal, or a fall in the value of security such that it is no longer considered adequate; (iii) disappearance of an active market because of financial difficulties; or (iv) restructuring a facility with preferential terms to aid recovery of the lending (such as a debt for equity swap).
Generally, the impairment trigger used within the impairment calculation for a loan, or group of loans, is when they reach a pre-defined level of delinquency or where the customer is bankrupt. loans where the Group provides arrangements that forgive a portion of interest or principal are also deemed to be impaired and loans that are originated to refinance currently impaired assets are also defined as impaired.
The effect on the Group’s profit before tax and shareholders’ equity of changes in key assumptions used in determining the life insurance assets and liabilities is set out in note 37.
Other income (net of insurance claims) 1,462 2,932 2,043 1,929 (315) 8,051
Interest payable on liabilities held at amortised cost 1.88 2.08 2.04 (10,734) (13,032) (13,837)
Regulatory provisions of £50 million were charged against income in 2012.
The Group’s maximum exposure to loss is equal to the carrying value of the investment. However, the Group’s investments in collective investment vehicles are primarily held to match policyholder liabilities in the Insurance division and the majority of the risk from a change in the value of the Group’s investment is matched by a change in policyholder liabilities. The collective investment vehicles are primarily financed by investments from investors in the vehicles.
These assumptions are intended to represent a best estimate of future experience, and further information about the effect of changes in key assumptions is given in note 37.
Included within brands above are assets of £380 million (31 December 2012: £380 million) that have been determined to have indefinite useful lives and are not amortised. These brands use the Bank of Scotland name which has been in existence for over 300 years. These brands are well established financial services brands and there are no indications that they should not have an indefinite useful life.
Reinsurance1 £m net £m life insurance (see (1) below): non-life insurance contracts (see (2) below): Reinsurance balances are reported within other assets (note 31).
Increase (decrease) in liabilities: Arising from current year claims 492 – 492
At 31 December 2012 non-annuitant mortality and morbidity1 5% reduction 43 33
Benefits expected to be paid between 15 and 25 years 21,102 20,072
– Proactive Mailing resulting from Past Business Reviews (PBR) – the Group is proactively mailing customers where it has been identified that there was a risk of potential mis-sale. During the year, further groups of customers have been added to the proactive mailing exercise increasing the scope to 2.8 million policies, including approximately 300,000 additional policies in the second half. This, combined with higher than expected response rates from customers covered by the proactive mailing, resulted in a further provision of £470 million for the full year to reflect the additional cost incurred to date and in relation to future mailings.
Metric has been adjusted to include mature mailings only, and exclude expected customer initiated complaints. Future response rates are expected to be lower than experienced to date as mailings to higher risk customers have been prioritised.
Limited voting ordinary shares The limited voting ordinary shares are held by the lloyds Bank Foundations (the Foundations). The holders of the limited voting ordinary shares, who held 0.1 per cent of the total ordinary share capital at 31 December 2013, are entitled to receive copies of every circular or other document sent out by the Company to the holders of other ordinary shares. These shares carry no rights to dividends but rank pari passu with the ordinary shares in respect of other distributions and in the event of winding up. These shares do not have any right to vote at general meetings other than on resolutions concerning acquisitions or disposals of such importance that they require shareholder consent, or for the winding up of the Company, or for a variation in the class rights of the limited voting ordinary shares. In the event of an offer for more than 50 per cent of the issued ordinary share capital of the Company, each limited voting ordinary share will convert into an ordinary share and shall rank equally with the ordinary shares in all respects from the date of conversion.
Change in fair value of available-for-sale financial assets (680) 900 2,527
HBOS share option plans The table below details the outstanding options for the HBOS Share Option Plan and the St James’s Place Share Option Plan. The final award under the HBOS Share Option Plan was made in 2004. under this plan, options over shares, at market value with a face value equal to 20 per cent of salary, were granted to employees with the exception of certain senior executives. A separate option plan exists for some partners of St James’s Place, which granted options in respect of lloyds Banking Group plc shares. The final award under the St James’s Place Share Option Plan was made in 2009. Movements in the number of share options outstanding under these schemes are set out below: During 2013 the Group completed the sale of all of its holding in St James’s Place plc, as set out in note 9. The participants of the St James’s Place Share Option Plan remain entitled to the lloyds Banking Group plc shares awarded under the terms of this Plan and these options are included in the table below.
(iv) Risk: relevant to 15 per cent of the award. The performance target is based on a cumulative three year risk score. If the cumulative risk score reaches a specified target level, 100 per cent of this element will vest. If the cumulative risk score reaches 120 per cent of the target level, 25 per cent of this element of the award, being the threshold, will vest. If the cumulative risk score is 80 per cent of the target level, 200 per cent of this element of the award, being the maximum, will vest.
At 31 December 2013, transactions, arrangements and agreements entered into by the Group’s banking subsidiaries with directors and connected persons included amounts outstanding in respect of loans and credit card transactions of £1 million with six directors and five connected persons (2012: £1 million with five directors and three connected persons; 2011: £3 million with four directors and three connected persons).
Business Growth Fund In May 2011 the Group agreed, together with The Royal Bank of Scotland plc (and three other non-related parties), to commit up to £300 million of equity investment by subscribing for shares in the Business Growth Fund plc which is the company created to fulfil the role of the Business Growth Fund as set out in the British Bankers’ Association’s Business Taskforce Report of October 2010. At 31 December 2013, the Group had invested £64 million (31 December 2012: £50 million) in the Business Growth Fund and carried the investment at a fair value of £52 million (31 December 2012: £44 million).
Other commitments 55,002 53,196 1 year or over original maturity 40,616 40,794
Of the amounts shown above in respect of undrawn formal standby facilities, credit lines and other commitments to lend, £56,292 million (2012: £52,733 million) was irrevocable.
Operating lease payments represent rental payable by the Group for certain of its properties. Some of these operating lease arrangements have renewal options and rent escalation clauses, although the effect of these is not material. no arrangements have been entered into for contingent rental payments.
Capital commitments excluding commitments in respect of investment property (note 26), capital expenditure contracted but not provided for at 31 December 2013 amounted to £345 million (2012: £279 million). Of this amount, £344 million (2012: £276 million) related to assets to be leased to customers under operating leases. The Group’s management is confident that future net revenues and funding will be sufficient to cover these commitments.
During 2012 the Group has reviewed its holding of government securities classified as held-to-maturity and in view of the fact that it was no longer the Group’s intention to hold these to maturity, securities with a carrying amount of £10,811 million and a fair value of £11,979 million were reclassified as available-for-sale financial assets in December 2012.
From available-for-sale financial assets to held-to-maturity investments – – – – 3,624 3,846 3,455 3,539 – – – –
(3) Fair values of financial assets and liabilities The following table summarises the carrying values of financial assets and liabilities presented on the Group’s balance sheet. The fair values presented in the table are at a specific date and may be significantly different from the amounts which will actually be paid or received on the maturity or settlement date.
Bank and building society certificates of deposit 42 146 – 188
Effect of reasonably possible alternative assumptions2 effect of reasonably possible alternative assumptions2
– Volatility parameters represent key attributes of option behaviour; higher volatilities typically denote a wider range of possible outcomes.
Trading and after financial liabilities at fair value through profit or loss² 8,839 – – 8,839 excluding reverse repurchase agreements.
Derivative assets: Derivative assets, before offsetting under master netting arrangements 33,125 56,557
Bank and building society certificates of deposit – – – – – – –
Total comprehensive income attributable to non-controlling interests 82 – – 82
effects of exchange rate changes on cash and cash equivalents 6 – 6
Trading and other financial assets at fair value through profit or loss 156,191 – – 156,191
Monolines A monoline insurer is defined as an entity which specialises in providing credit protection to the holders of debt instruments in the event of default by the debt security counterparty. This protection is typically provided in the form of derivatives such as credit default swaps referencing the underlying exposures held.
Critical accounting estimates and judgements 225 notes to the consolidated financial statements 242, 279
8 Describe the use of stress testing within the bank’s risk governance and capital frameworks. 127-128