We are making good progress in meeting our corporate objectives of achieving sustainable earnings growth, strong cost control, high levels of customer and staff satisfaction, satisfactory asset quality and balance sheet efficiency and strength. As the board looks to the future, the increasing momentum in our businesses, supported by new revenue growth and cost control initiatives, gives us confidence that Lloyds TSB can achieve its objective of being the leading financial services company in the UK.
Operating expenses remained well controlled and, excluding customer redress provisions, increased by only £23 million, or 1 per cent. This included higher levels of restructuring costs as we continue to rationalise back office operations to improve efficiency. Levels of customer service and satisfaction have also continued to improve.
Governance risk, legal and regulatory risk, customer treatment risk, process and resource risk, theft, fraud and other criminal acts risk, people risk and change-related risk are all categories of operational risk. A more detailed language has been identified for these operational risks.
The Group’s defined benefit pension schemes are exposed to significant risks from the constituent parts of their assets, primarily equity and interest rate risk, and from the present value of their liabilities.
Each life assurance company must retain sufficient capital to meet the regulatory capital requirements mandated by the FSA; the basis of calculating the regulatory capital requirement is given below. For Abbey Life Assurance Company Limited (‘Abbey Life’), the regulatory capital requirement is a combination of amounts held in respect of actuarial reserves and sums at risk (the Long-Term Insurance Capital Requirement) and amounts required to cover various stress tests. The regulatory capital requirement is deducted from the available capital resources to give ‘statutory excess capital’.
J Eric Daniels Group Chief Executive Joined the board in 2001 as group executive director, UK retail banking before his appointment as group chief executive in June 2003. Served with Citibank from 1975 and held a number of senior and general management appointments in the USA, South America and Europe before becoming chief operating officer of Citibank Consumer Bank in 1998. Following the Citibank/Travelers merger in 1998, he was chairman and chief executive officer of Travelers Life and Annuity until 2000. Chairman and chief executive officer of Zona Financiera from 2000 to 2001. Aged 54.
In addition, the following unfunded benefits have accrued for Mr van den Bergh instead of a salary increase in 2002: Mr Ayliffe’s pension entitlement at 31 December 2005 includes additional service in respect of his notice period in accordance with the terms of his contract.
The EU endorsed version of IAS 39 which is operative for years commencing 1 January 2005 relaxes some of the hedge accounting requirements; the Group has not taken advantage of this relaxation.
Full actuarial valuations of the Group’s principal defined benefit schemes are carried out every three years with interim reviews in the intervening years; these valuations are updated to 31 December each year by qualified independent actuaries, or in the case of the Scottish Widows Retirement Benefits Scheme, by a qualified actuary employed by Scottish Widows. For the purposes of these annual updates scheme assets are included at their fair value and scheme liabilities are measured on an actuarial basis using the projected unit credit method adjusted for unrecognised actuarial gains and losses. The defined benefit scheme liabilities are discounted using rates equivalent to the market yields at the balance sheet date on high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability. The resulting net surplus or deficit is included in the Group’s balance sheet. Surpluses are only recognised to the extent that they are recoverable through reduced contributions in the future or through refunds from the schemes.
The majority of the life insurance contracts issued by the Group are long-term life assurance contracts. The Group also issues life insurance contracts to protect customers from the consequences of events (such as death, critical illness or disability) that would affect the ability of the customer or their dependants to maintain their current level of income. Guaranteed claims paid on occurrence of the specified insurance event are either fixed or linked to the extent of the economic loss suffered by the policyholder.
The Group establishes provisions for the estimated cost of making redress payments to customers in respect of past product sales, in those cases where the original sales processes are found to have been deficient. The ultimate cost is inherently uncertain and in determining the level of provisions required it is necessary for management to exercise significant judgement. The principal assumptions underlying the provisions relate to the number of cases requiring redress and the estimated average cost of redress per case; these will be affected by external factors beyond the control of management, such as regulatory actions and the performance of the financial markets. Therefore over time it is possible that adjustments will be necessary to the level of provisions held.
Assets arising from reinsurance contracts held 548 581 Deferred acquisition costs 429 2 Settlement balances 336 79 Derivative financial instruments (see note 17) 4,869 Other assets and prepayments 4,288 3,482
Insurance policy liabilities can be split into With-Profits Fund liabilities, accounted for using the FSA’s realistic capital regime (realistic liabilities) and Non-Profit Fund liabilities, accounted for using a traditional prospective actuarial discounted cash flow methodology as described in the accounting policies.
Deferred tax assets: Pensions and other post-retirement benefits (873) (917) Allowances for impairment losses (provisions for bad and doubtful debts in 2004) (165) (84) Other provisions (31) (64) Derivatives (164) – Tax losses carried forward (322) (372) Other temporary differences (270) (187)
Premium arising on issue of shares under share option schemes 25 9 i) These securities constitute limited partnership interests in Lloyds TSB Capital 1 L.P., a Jersey limited partnership in which Lloyds TSB (General Partner) Limited, a wholly owned subsidiary, is the general partner. Non-cumulative income distributions accrue at a fixed rate of 7.375 per cent per annum up to 7 February 2012; thereafter they will accrue at a rate of 2.33 per cent above EURIBOR, to be set annually. This issue was made under the limited subordinated guarantee of Lloyds TSB Bank plc. In certain circumstances these preferred securities will be mandatorily exchanged for preference shares in Lloyds TSB Group plc. Lloyds TSB Group plc has entered into an agreement whereby dividends may only be paid on its ordinary shares if sufficient distributable profits are available for distributions due in the financial year on these preferred securities.
Trading securities and other financial assets at fair value through profit or loss
Prepayments and accrued income 1,918 – – – – – – – – (1,918) – Long-term assurance business attributable to the shareholder 6,481 (6,481) – – – – – – – – – Long-term assurance assets attributable to the policyholders 50,078 (50,078) – – – – – – – – –
Unallocated surplus within insurance business – 1,362 – – – – – – – – 1,362
Requires issued financial guarantee contracts to be accounted for as financial instruments unless the issuer has previously asserted that the contracts are regarded as insurance contracts and has accounted for them as such.
We have reported separately on the consolidated financial statements of Lloyds TSB Group plc for the year ended 31 December 2005.
Amounts due from subsidiaries 76 – 76 Cash and cash equivalents 208 – 208
For telephone dealing, the current rate for both purchases and sales is 0.5%: minimum £20. For full details, contact Lloyds TSB Registrars on: 0870 850 0852.