Please see attached a sample Employer Covenant report

1. XYZ Ltd
EMPLOYER COVENANT ASSESSMENT
THE TRUSTEES OF THE XYZ PENSION SCHEME
DATE
Copyright © January 15 BDO LLP. All rights reserved.
DRAFT : FOR DISCUSSION PURPOSES ONLY

2. DRAFT DATE
For discussion
purposes only
BDO LLP is authorised and regulated by the
Financial Conduct Authority to conduct investment business
The Trustees
XYZ Pension Scheme
ADDRESS
In accordance with your instructions, confirmed in our engagement letter
dated ____, we have undertaken an assessment of the Employer Covenant
available to the XYZ Pension Scheme (“the Scheme”) from XYZ Ltd (“the
Employer”).
This report is intended solely for the use of the Trustees. It should not be
disclosed to any other person including, for the avoidance of doubt, the
Employers without our prior written consent. We acknowledge that on
receipt of a signed Hold Harmless letter from the Employers that we will
consent to this report being shared with them. We do not accept or assume
responsibility to any other party, including the individual members of the
Scheme, the Participating Employer of the Scheme, any other companies
within the same Group as the Participating Employer or any shareholder or
creditor of any company within that Group. We do not accept or assume
responsibility to any other person to whom it is shown or into whose hands
it may come. If others choose to rely on the contents of this report, they
do so entirely at their own risk.
We understand that, in certain circumstances, our review may be
forwarded to the Pensions Regulator (“tPR”) and your professional
advisors; however, our review is for the Trustees only and we do not
accept any liability to any other party by virtue of the transmission of our
review to them. We understand that if forwarded to tPR, the report will be
held by the Regulator as restricted information as defined by s82 Pensions
Act 2004 (“PA04”) and will be subject to the restrictions on disclosure
contained in PA04.
Our report is based on the latest information made available to us and
we accept no responsibility for events after the date of issue. We have
carried out nothing in the nature of an audit and have relied upon
representations made to us by XYZ Ltd’s Directors in reaching our
conclusions.
We emphasise that our enquiries would not necessarily disclose all
matters of significance to you relating to the Covenant of the Employer.
The report cannot be relied upon for any commercial or investment
decisions or for any other similar purpose without considering other
factors not dealt with here.
If you have any queries or require further information, please contact
Matthew Gibson, Partner, 0161 833 8246, matthew.gibson@bdo.co.uk
Mark Young, Senior Manager, 0121 265 7231, mark.young@bdo.co.uk
Giles Stendall, Senior Manager, 0121 265 7262, giles.stendall@bdo.co.uk
Yours faithfully
BDO LLP
Dear Trustees
BDO LLP
125 Colmore Row
Birmingham, B3 3SD
Telephone:>+44 (0)121 352 6444

3. DRAFT DATE
For discussion
purposes only
CONTENTS
Glossary 4
Executive Summary 5
1. Background 16
2. Employer Covenant Methodology 19
3. Position 20
4. Prospects 29
5. Power 32
6. Employer Covenant 36
7. Employer Covenant and Scheme Deficit 37
8. Protecting the Employer Covenant 38
APPENDIX
A. Sources of Information 42
B. Employer Covenant Scoring 43
C. XYZ Group Balance Sheet 42
D. XYZ Consolidated Balance Sheet 43
E. Estimated Outcome Statement 44
Page 3
Employer Covenant Report: XYZ Ltd DRAFT DATE

4. Employer Covenant Report: XYZ Ltd DRAFT DATE
GLOSSARY
CN Contribution Notice
EBITDA Earnings Before Interest, Tax, Depreciation and Amortisation
FRS17 Financial Reporting Standard 17: Retirement Benefits
FSD Financial Support Direction
PA04 Pensions Act 2004
PPF Pension Protection Fund
s75 Section 75 (full buy-out)
The Scheme XYZ Pension Scheme
SSF Scheme Specific Funding
TD&R Trust Deed and Rules
tPR The Pensions Regulator
Page 4

5. EXECUTIVE SUMMARY
Introduction
Overview
• We have carried out an assessment of the
Employer Covenant available to the Scheme for
the purposes of the triennial valuation as at___
• We assess Employer Covenant on a scale of 0
(Non Existent) to 10 (Very Strong) in three
separate areas being:
— Position: The financial strength of the Employer
balance sheet
— Prospects: The profitability and cash generation of
the Employer
— Power: The powers available to the Trustees in
negotiation with the Employer
• We summarise in this Executive Summary the
key findings of our report. These should be read
in conjunction with the main body of this report
as set out in sections 1 to 8
Employer Covenant Report: XYZ Ltd DRAFT DATE
Page 5

6. EXECUTIVE SUMMARY
Employer Covenant Score
Conclusion on Position Score
• As an unlimited Company, XYZ Ltd has access through its
shareholders to the assets of A and beyond
• Despite the decline in the next asset position A still holds
XYZ Ltd’s key assets and JV assets including B, C and D
• Our initial insolvency analysis indicates that, in a forced sale
scenario, those Scheme liabilities underwritten by XYZ Ltd
would be repaid in full
• As such these liabilities are provided a strong asset underpin
by XYZ Ltd
• On the basis of the inherent limitations of a desktop review
and the complex nature of the intercompany balances of XYZ
Ltd, we have restricted the overall position covenant score
to 8 - STRONG. If a detailed review were to support the
findings of our desktop review this could change to a position
score of 9 – VERY STRONG.
• Under the TD&R each Employer is separately
liable for its own share of the Scheme liabilities
• Despite recent asset write downs the A Group
had substantial net assets at end 2012
• Both B and C appear to offer potential future
value but may require additional short term
funding
• D appears to offer the prospect of significant
cash inflows in the near term while the E offers
longer term upside if retained and developed
• F is highly leveraged and therefore recoveries to
the Scheme in respect of its relevant s75 claim
of c£xm are likely to be minimal
• We have assessed the insolvency outcome
excluding the F Group which has a net
deficiency of c£172m which could not be
claimed against the remaining Group
• While there would appear to be sufficient assets
to cover XYZ Ltd’s s75 liability
Employer Covenant Report: XYZ Ltd DRAFT DATE
Page 6

7. EXECUTIVE SUMMARY
Employer Covenant Score
Conclusion on Position Score (Cont.)
• There is, however, a separate issue as regards the Scheme
liabilities relating to F as, based on our review of the TD&R,
the Employers may have several liability to the Scheme
• The F division currently has significant net liabilities. In a
forced sale, it is likely that the creditors will not be settled
in full, this may include any claim by the Scheme in F as an
employer. We understand this claim is in the region of c5% of
the S75 deficit
• Therefore the total Scheme would be unlikely to recover its
claim in full but might recover c95% of its total S75 claim
• We would recommend that the Trustees seek legal advice to
clarify the several liability issue and seek appropriate Group
undertakings regarding any potential shortfall in recoveries
from F
• Under the TD&R each Employer is separately
liable for its own share of the Scheme liabilities
• Despite recent asset write downs the A Group
had substantial net assets at end 2012
• Both B and C appear to offer potential future
value but may require additional short term
funding
• D appears to offer the prospect of significant
cash inflows in the near term while the E offers
longer term upside if retained and developed
• F is highly leveraged and therefore recoveries to
the Scheme in respect of its relevant s75 claim
of c£xm are likely to be minimal
• We have assessed the insolvency outcome
excluding the F Group which has a net
deficiency of c£xm which could not be claimed
against the remaining Group
• While there would appear to be sufficient assets
to cover XYZ Ltd’s s75 liability, F is unlikely to
be able to satisfy its obligation in full
Employer Covenant Report: XYZ Ltd DRAFT DATE
Page 7

8. EXECUTIVE SUMMARY
Employer Covenant Score
Conclusion on Prospects Score
• Operating profits over the last three years have been
insufficient to meet interest costs resulting in trading losses
• In FY12 A also wrote down its investments by c£xm
• However, management forecast some significant returns from
asset sales in the next 18 months which will potentially
generate significant cash sums and a projected cash balance of
c£xm by December 2014
• There is likely to be competition for cash from the shareholders
seeking returns on their investment
• Despite uncertainty over the long term prospects of XYZ Ltd
there are opportunities for significant short term profit and cash
generation which could be used to fund the Scheme
• Overall our analysis suggests a Prospects score of 8 – STRONG
albeit that this score may tail off if the business is ultimately
wound down
•
• XYZ Ltd has been loss making over the last 3
years driven by interest costs and, in FY12, by
write downs in the carrying value of certain
investments
• Management forecast a significant inflow of
cash in the next 18 months
• There would appear to be significant funds
potentially available for the Scheme albeit
there is likely to be competing calls from the
shareholders
• There is uncertainty over the long term future
of XYZ Ltd. The Trustees should be looking to
secure appropriate funding in the event of a
wind down of XYZ Ltd
Employer Covenant Report: XYZ Ltd DRAFT DATE
Page 8

9. EXECUTIVE SUMMARY
Employer Covenant Score
Conclusion on Power Score
• The Trustees do not have the power under the TD&R to wind
up the Scheme and overall the balance of powers appears
broadly even between the Scheme and the Employer
• There do not appear to be any grounds for tPR to invoke its
powers
• However, in the event of a failure of F without XYZ Ltd
underwriting any deficit suffered by the Scheme in F, tPR
could potentially issue an FSD on the rest of XYZ Ltd in
respect of F’s liability to the Scheme
• In the past the Employer has maintained a good relationship
with the Trustees and is proposing to satisfy the liability
arising on the withdrawal of G
• On this basis our analysis suggests an overall Power score of
5 – MODERATE
• There appears to be a broadly equal balance of
powers between the Employer and the Trustees
• XYZ Ltd may be exposed to an FSD risk in
respect of F’s liability to the Scheme
• Given the remaining asset values in XYZ Ltd
compared to the Scheme any prior events are
unlikely to be deemed materially detrimental
Employer Covenant Report: XYZ Ltd DRAFT DATE
Page 9

10. EXECUTIVE SUMMARY
Overall Employer Covenant Score
Page 10
Employer Covenant Report: XYZ Ltd DRAFT DATE
1. POSITION
3. POWER2. PROSPECTS
8 5
8
Overall for an ongoing trading entity we would suggest a weighting biased towards Prospects
and an overall score on a scale of 0 to 10 of 8 - STRONG
OVERALL – 8 STRONG
Score Description
10 Insured/Underwritten
9 Very Strong
8 Strong
7 Tending to Strong
6 Upper Moderate
5 Moderate
4 Lower Moderate
3 Tending to Weak
2 Weak
1 Very Weak
0 Inevitable Insolvency

11. 0
1
2
3
4
5
6
7
8
9
10
Surplus/(Deficit) based on Technical Provisions
EmployerCovenantVector
NEUTRAL
ESTIMATE
£am
surplus
BUYOUT
£(d)m
?Extremes provide reference points
for framework of deficit
Covenant
Score
based on
BDO
review
Implied
score from
preliminary
valuation
Implied
SSF
DEFICIT
£(c)m
Prelimin
-ary
SSF
DEFICIT
£(b)m
EXECUTIVE SUMMARY
Covenant impact on Technical Provisions
Page 11
• Based on tPR guidance a very strong Employer
Covenant score (10) would suggest that the “best
estimate” or “neutral” level might be a valid level
of Technical Provisions while a non existent
Covenant (0) would suggest the Trustees should
target buy out
• These extremes provide reference points for the
potential impact of Employer Covenant on
Technical Provisions and therefore the deficit for
Scheme funding purposes.
• The framework alongside uses a straight line
approach between these extremes
• A Covenant score of 8 would imply an SSF deficit
of £Xm compared to the results for the preliminary
valuation which indicated a deficit of £Xm.
• We stress that this is a framework intended to
illustrate the potential interaction of Employer
Covenant and Scheme deficit
Employer Covenant Report: XYZ Ltd DRAFT DATE

12. EXECUTIVE SUMMARY
Pension Control Chevron
• The Pension Control Chevron© above illustrates the position of the Scheme in relation to the Employer, the nature of
the relationship between the Scheme and Employer and the importance of the Scheme relative to other stakeholders.
• For XYZ we consider the pension Schemes to be a ‘significant creditor’ given that the quantum of the deficit on an
FRS17 basis represents c60% of all balance sheet creditors at 31 December 2009 (increasing to 85% of all claims in an
insolvency scenario).
• As a significant creditor the Trustees should seek repayment of the deficit on a timely basis (per the Pensions
Regulator this equates to clearance of the deficit as soon as is reasonably affordable by the employer) and have full
knowledge of how other major creditors and stakeholders are treated.
• We would recommend that the Trustees monitor the Schemes’ position on the control chevron. In the event that the
Schemes’ deficits were to increase relative to the business and the relationship were to tend towards being a
partner/effective ownership in nature then the potential options for the Scheme become more complex in that the
Scheme must recognise it may have to support the business were it to be at risk with the subsequent compensation
being a greater share of any subsequent upside.
Page 12
Employer Covenant Report: XYZ Ltd DRAFT DATE

13. We summarise above general options that the Trustees might consider for the protection of the
existing Employer Covenant. We set out below the key areas of risk and specific mitigation that
might be sought.
EXECUTIVE SUMMARY
Mitigation Options
Page 13
Employer Covenant Report: XYZ Ltd DRAFT DATE
Notification &
Reporting
1 Negative
Pledge
2 Subordinate IC
Loans
3
Security / SLP
6 Escrow A/C or
Bank Guarantee
7Company
Guarantee
5
Undertaking
4
Least Trustee impact,
minimal loss of control for XYZ Ltd
Most Trustee impact,
potential loss of control for XYZ Ltd
Key areas of risk
• The main areas of required protection would
appear to be in respect of
1. The risk of a shortfall in respect of any claim
against F
2. the possible wind down of XYZ Ltd and the
return of capital to investors before the
Scheme is fully funded
Possible mitigation – F
• An undertaking to transfer any F liability to
another Group entity in the event of withdrawal
or
• An appropriate guarantee from elsewhere in
XYZ Ltd to make good any shortfall suffered in a
claim against F

14. EXECUTIVE SUMMARY
Mitigation Options
Possible mitigation – Return of Capital (Cont.)
• Provision of a specific contingent asset to the
Scheme to be realised in the event of a shortfall
in a wind up of the Scheme. A long term
receivable may represent an asset that most
closely matches the duration of the Scheme’s
liabilities
• Establishment of an Escrow account that would
either fund a shortfall at the time of a Scheme
buy-out or be returned to the Employer if
Scheme assets had performed sufficiently to
achieve buy-out. The escrow account could be
funded via an up front cash injection or via a
dividend sharing mechanism as referred to
above
• Direct cash funding towards buy-out. Whilst the
Scheme Funding target may reflect the STRONG
Covenant, the Trustees could overfund based on
agreed flight path to buy-out
Employer Covenant Report: XYZ Ltd DRAFT DATE
Page 14
Possible mitigation – Return of Capital
• A minimum net worth guarantee to ensure that
sufficient net assets always remain in XYZ Ltd to
enable the buy-out deficit to be met (already
under consideration). The issue arising with such
an undertaking is to ensure that the assets
underpinning the balance sheet will be realisable
at an adequate value at the time they are
required
• An up front undertaking to make good any
adverse performance in the Scheme’s asset
performance compared to a planned path to
buy-out over a medium term
• An agreement to share in any future dividend
payments with a view to using such funds to buy
out the Scheme liabilities

15. DRAFT DATE
For discussion
purposes only
EXECUTIVE SUMMARY
Conclusion and recommendations
Conclusion
• Based on our review we assess the Employer
Covenant strength as 8 – STRONG
• XYZ Ltd is forecasting significant cash inflows in
the next 18 months, some of which could be
used to fund the Scheme to its Scheme funding
target or on a path to buy-out
Recommendations
• We would recommend that the Trustees agree a
Scheme funding target reflecting the Employer
Covenant
• We would also recommend that the Trustees
look to agree a separate arrangement to ensure
a step change in funding target towards buy-out
funding in the event that the Employer
commences a wind down of the business
• The Employer is unlikely to wish to provide
immediate cash in this respect and therefore we
would recommend pursing the various forms of
mitigation set out above
• We would also suggest that the Trustees seek
assurances from the Employer that they are
notified in the event of any plans to change this
unlimited liability status
Employer Covenant Report: XYZ Ltd DRAFT DATE
Page 15

16. DRAFT DATE
For discussion
purposes only
1. BACKGROUND
1.1 Introduction
Scope of review
• We have undertaken a high level desk top review
of the Employer Covenant available to the
Scheme for the purposes of the triennial
valuation as at ___
• The Employer Covenant is a key driver in the
process of setting the assumptions necessary to
calculate the Technical Provisions for the
Scheme
• The results of our review are set out in sections
2 to 8 of our report
• The sources of information for this review are
set out at Appendix A
Distribution
• This report is prepared exclusively for the
Trustees of the Scheme and should not be
disclosed to any other parties, including for the
avoidance of doubt, individual members of the
Pension Scheme, without our prior consent
• We understand that, in certain circumstances,
our review may be forwarded to the Pensions
Regulator (“tPR”) and your other professional
advisors; however, our review is for the Trustees
only and we do not accept any liability to any
other party by virtue of the transmission of our
review to them. We understand that if
forwarded to tPR, the report will be held by the
Regulator as restricted information as defined by
s82 Pensions Act 2004 (“PA04”) and will be
subject to the restrictions on disclosure
contained in PA04
Employer Covenant Report: XYZ Ltd DRAFT DATE
Page 16

17. DRAFT DATE
For discussion
purposes only
1. BACKGROUND
1.2 Group Structure (as at 31.12.12)
Employer Covenant Report: XYZ Ltd DRAFT DATE
Page 17
Group
Company
Employers
Group Structure
• XYZ Group is an international
group
• The Scheme has three
Employers:
• XYZ Ltd
• F
• G
• XYZ Ltd structure (and key
assets) are outlined opposite
A Plc
XYZ Ltd
Asset A:
£xm
Asset B:
£ym

18. DRAFT DATE
For discussion
purposes only
1. BACKGROUND
1.3 Scheme – valuation results
• The results of the last actuarial valuation as at
___ and the preliminary results of the actuarial
valuation as at ____ are summarised opposite
• In the intra valuation period the Scheme Funding
deficit has improved from £(F)m to £(O)m,
primarily as a result of asset growth and
Employer contributions
• As a result, the Scheme is x% funded on a
preliminary scheme funding basis, however as the
Scheme has a £(R)m S75 (buy-out) deficit, it
remains reliant on the ongoing support provided
by the Employer Covenant
Page 18
___
£m Neutral PPF SSF S75
Assets n/a A D G
(Liabilities) n/a (B) (E) (H)
(Deficit) n/a (C) (F) (I)
Funding n/a 0% 0% 0%
Prelim.
£m Neutral PPF SSF s75
Assets J n/a M P
(Liabilities) (K) n/a (N) (Q)
(Deficit) (L) n/a (O) (R)
Funding 0% n/a 0% 0%
Employer Covenant Report: XYZ Ltd DRAFT DATE
Preliminary Scheme results assume a strong Employer Covenant

19. DRAFT DATE
For discussion
purposes only
2. EMPLOYER COVENANT METHODOLOGY
2.1 General Methodology
Page 19
Assessment of Employer Covenant is a key consideration for the
Trustees as part of the triennial valuation. We assess Employer
Covenant on a three vector basis:
POSITION:the Employer's legal obligations to the Plan and its
financial position. The primary diagnostic tool used for this
purpose is an estimated insolvency outcome analysis which
estimates the potential recovery by the Scheme following an
immediate insolvency of the Employer
PROSPECTS:Normally assessed via a review of Employer forecasts
and business plans. In the absence of such plans prospects are
assessed based on trends in historic trading and cash flow
POWER:Assessed subjectively based on the balance of powers
within the Trust Deed and Rules, the potential for Regulator
intervention and an understanding of the past and proposed
dealings between the parties
1. POSITION
3. POWER2. PROSPECTS
? ?
?
OVERALL
?
Employer Covenant Report: XYZ Ltd DRAFT DATE
Employer Covenant is assessed on a three vector approach

20. DRAFT DATE
For discussion
purposes only
3. POSITION
3.1 Liability to the Scheme
Liability to the Scheme
• The Trust Deed & Rules indicates the Employers
are severally liable to the Scheme (i.e. any
shortfall cannot be claimed in another Employer)
• XYZ Ltd has the majority of the Scheme liabilities.
XYZ Ltd is an unlimited company, i.e. A Plc is
liable for any shortfall to the creditors of XYZ Ltd.
• G is in the process of withdrawing from the
Scheme. The current proposal is G will pay its
share of the S75 deficit, estimated to be in the
order of £xm
• F has c5% of the Scheme liabilities
Page 20
Employer Covenant Report: XYZ Ltd DRAFT DATE
Under the TD&R each Employer is separately
liable for its own share of the Scheme liabilities
Parent
Company
Employers
A Plc
XYZ Ltd
Asset A:
£xm
Asset B:
£ym

21. DRAFT DATE
For discussion
purposes only
3. POSITION
3.2 A Consolidated Balance Sheet
Consolidated Balance Sheet (as at 31.12.12)
• The A Group holds XYZ Ltd’s interests in current
key developments
• The net assets of A has decreased from £xm in
FY10 to £ym in FY12. The decrease is primarily
due to adverse revaluations of certain
investments and joint ventures as well as the roll
up of interest on Group loans.
• At 31 Dec 2012 the A Group bank debt includes
£am within the F and £bm within the C
development. Other bank debt is held within the
respective JVs. Debt is secured against the
company’s assets
• A summary of A’s key assets and the related debt
is outlined on the following page
Page 21
Employer Covenant Report: XYZ Ltd DRAFT DATE
Despite recent asset write downs the A Group
had substantial net assets at end 2012
Audited Audited Audited
00 Jan 00 00 Jan 00 00 Jan 00
Investments - - -
Investments in joint ventures - - -
Other Fixed Assets - - -
- - -
Current assets
Stock - - -
Trade and Other Debtors (Inc - - -
Intercompany Debtors - - -
Cash at bank - - -
- - -
Current liabilities
Trade and other payables - - -
Bank borrowings - - -
- - -
Net current assets - - -
Long term liabilities
Bank borrowings - - -
Pension Scheme - - -
Other Long-term Liabilities - - -
Intercompany Loans - - -
- - -
Net Assets - - -
Net Assets excluding pensions - - -

22. DRAFT DATE
For discussion
purposes only
3. POSITION
3.3 A Key Assets
Employer Covenant Report: XYZ Ltd DRAFT DATE
Page 22
• Equity is not estimated to be realisable until
approximately 2015 and is dependent on demand
for B
C
• Asset C has £ym of debt secured against it
• A shortfall in equity value could result in the need
to impair this asset
B
• The existing debt regarding the B is off balance
sheet being held in a JV.
• After write downs in 2012 XYZ Ltd retains a
balance sheet interest in B of c£xm
• XYZ Ltd is forecasting an equity injection of £zm
in July as part of a refinancing to repay the
current bank debt.
• In the long term management anticipate that
there could be c£am of equity release

23. DRAFT DATE
For discussion
purposes only
3. POSITION
3.3 A Key Assets
Employer Covenant Report: XYZ Ltd DRAFT DATE
Page 23
D appears to offer the prospect of significant cash inflows in the near term while the
E offers longer term upside if retained and developed
E
• E is held in G and has a book value (cost) of c£xm
• Management believe XYZ Ltd could earn c£ym of
profit on E
• Currently there is no debt secured against this
asset
D (Trust/JV)
• XYZ Ltd holds 50% of the JV of which 33% is held
by A

24. DRAFT DATE
For discussion
purposes only
3. POSITION
3.4 Insolvency Analysis
Employer Covenant Report: XYZ Ltd DRAFT DATE
Page 24
We have assessed the insolvency outcome excluding the F Group which has a net
deficiency of c£xm which could not be claimed against the remaining Group
Adj Balance
Sheet High Low
£'m 31 Dec 12 31 Dec 12 31 Dec 12
Assets realised - - -
Prior ranking creditors and (-) (-) (-)
Available to unsecured
Trade and other creditors (-) % (-) (-)
Loans from related parties 0 % 0 0
Other long term creditors (-) (-) (-)
Employees – (-) (-)
Pension (-) (-) (-)
() () ()
Surplus/(Deficit) to unsecured
Dividend to unsecured 100 100% 100%
Dividend to Pension Scheme
Insolvency Analysis
• An estimated outcome statement is an analysis of
how the value of a business would be divided
amongst the stakeholders in a theoretical
insolvency scenario. It represents the “asset
underpin” provided by the Employer to the Scheme
• The ‘Low’ basis is indicative of a ‘fire sale’ of the
company assets and the ‘High’ basis is indicative of
a sale of some or all of the assets of the business
on a ‘going concern’ basis
• The consolidated balance sheet of A includes net
liabilities of the F Group of £lm (as at FY12)
• Unlike XYZ Ltd, F is a limited liability company. As
such the unsecured creditors of F would be unable
to claim any shortfall against the other A
companies we have sought to adjust the balance
sheet to remove the impact of F

25. DRAFT DATE
For discussion
purposes only
3. POSITION
3.4 Insolvency Analysis
Employer Covenant Report: XYZ Ltd DRAFT DATE
Page 25
While there would appear to be sufficient assets to cover XYZ Ltd’s s75 liability, F is
unlikely to be able to satisfy its obligation in full
Adj Balance
Sheet High Low
£'m 31 Dec 12 31 Dec 12 31 Dec 12
Assets realised - - -
Prior ranking creditors and (-) (-) (-)
Available to unsecured
Trade and other creditors (-) % (-) (-)
Loans from related parties 0 % 0 0
Other long term creditors (-) (-) (-)
Employees – (-) (-)
Pension (-) (-) (-)
() () ()
Surplus/(Deficit) to unsecured
Dividend to unsecured 100 100% 100%
Dividend to Pension Scheme
Insolvency Analysis
• On the basis of the revised balance sheet we
estimate that the Scheme would recover its full
S75 deficit claim against A should it trigger a wind
up today on both a High and Low basis
• However, based on the TD&R, we understand that
the Scheme claim in A will be restricted to any
shortfall in respect of the XYZ Ltd portion of the
Scheme
• Any claim in F is likely to suffer a shortfall
• A summary Estimated Outcome Statement is
included in Appendix E

26. DRAFT DATE
For discussion
purposes only
3. POSITION
3.4 Conclusion
• Under the TD&R each Employer is separately
liable for its own share of the Scheme liabilities
• Despite recent asset write downs the A Group
had substantial net assets at end 2012
• Both B and C appear to offer potential future
value but may require additional short term
funding
• D appears to offer the prospect of significant
cash inflows in the near term while the E offers
longer term upside if retained and developed
• F is highly leveraged and therefore recoveries to
the Scheme in respect of its relevant s75 claim
of c£0.7m are likely to be minimal
• We have assessed the insolvency outcome
excluding the F Group which has a net
deficiency of c£xm which could not be claimed
against the remaining Group
• While there would appear to be sufficient assets
to cover XYZ Ltd’s s75 liability, F is unlikely to
be able to satisfy its obligation in full
Employer Covenant Report: XYZ Ltd DRAFT DATE
Page 26
Summary
• As an unlimited Company, XYZ Ltd has access through its
shareholders to the assets of A and beyond
• Despite the decline in the next asset position A still holds
XYZ Ltd’s key assets and JV assets including B, C and D
• Our initial insolvency analysis indicates that, in a forced sale
scenario, those Scheme liabilities underwritten by XYZ Ltd
would be repaid in full
• As such these liabilities are provided a strong asset underpin
by XYZ Ltd
• On the basis of the inherent limitations of a desktop review
and the complex nature of the intercompany balances of XYZ
Ltd, we have restricted the overall position covenant score
to 8 - STRONG. If a detailed review were to support the
findings of our desktop review this could change to a position
score of 9 – VERY STRONG.

27. DRAFT DATE
For discussion
purposes only
3. POSITION
3.4 Conclusion
• Under the TD&R each Employer is separately
liable for its own share of the Scheme liabilities
• Despite recent asset write downs the A Group
had substantial net assets at end 2012
• Both B and C appear to offer potential future
value but may require additional short term
funding
• D appears to offer the prospect of significant
cash inflows in the near term while the E offers
longer term upside if retained and developed
• F is highly leveraged and therefore recoveries to
the Scheme in respect of its relevant s75 claim
of c£0.7m are likely to be minimal
• We have assessed the insolvency outcome
excluding the F Group which has a net
deficiency of c£xm which could not be claimed
against the remaining Group
• While there would appear to be sufficient assets
to cover XYZ Ltd’s s75 liability, F is unlikely to
be able to satisfy its obligation in full
Employer Covenant Report: XYZ Ltd DRAFT DATE
Page 27
Summary
• There is, however, a separate issue as regards the Scheme
liabilities relating to F as, based on our review of the TD&R,
the Employers may have several liability to the Scheme
• The F division currently has significant net liabilities. In a
forced sale, it is likely that the creditors will not be settled
in full, this may include any claim by the Scheme in F as an
employer. We understand this claim is in the region of c5% of
the S75 deficit
• Therefore the total Scheme would be unlikely to recover its
claim in full but might recover c95% of its total S75 claim
• We would recommend that the Trustees seek legal advice to
clarify the several liability issue and seek appropriate Group
undertakings regarding any potential shortfall in recoveries
from F

28. DRAFT DATE
For discussion
purposes only
4. PROSPECTS
4.1 Historic trading: A
Page 28
Employer Covenant Report: XYZ Ltd DRAFT DATE
XYZ Ltd has been loss making over the last 3 years driven by interest costs
• A has generated profits at the operating level
throughout the period under review
• Operating profits were insufficient to service
external debt in FY10 and FY11. In addition the
net internal interest costs of A are significant in
comparison to its net internal debt due to
intercompany balances. As such, A has made a
loss before tax of between £xm and £ym in the
last three years
• Despite these losses XYZ Ltd forecasts a number
of profitable disposals in the next 18 months (see
following page)
Audited Audited Audited
£m 31 Dec 10 31 Dec 11 31 Dec 12
Turnover – – –
Cost of sales – – –
Gross profit – – –
Gross profit % 0.0% 0.0% 0.0%
Net Rental Income – – –
Administrative expenses – – –
Share of Profit/Loss on JV's – – –
Profit on Sale of JV Investment – – –
Other operating income – – –
Operating Profit – – –
Net Interest - external – – –
Net Interest - internal and other – – –
PBT – – –
Impairment of Investment – – –
Taxation – – –
PAT – – –

29. DRAFT DATE
For discussion
purposes only
4. PROSPECTS
4.2 Forecast cash flow: A
Page 29
• XYZ Ltd had c£xm of cash as at ___ of which c£ym
was held in escrow for specific purposes and £zm
was held within A
• The Company Management anticipate that up to
£am of net cash will be realised from XYZ Ltd’s
assets over the next 24 months
• From the proceeds of these profits c£bm will be
required to fund further investment
Employer Covenant Report: XYZ Ltd DRAFT DATE
Management forecast a significant inflow of cash
in the next 24 months

30. DRAFT DATE
For discussion
purposes only
4. PROSPECTS
4.2 Forecast cash flow: A
Page 30
• Overall, despite some uncertainty, significant
cash inflows are expected in FY13/14 which could
be made available to the Scheme
• However, the shareholders are also likely to seek
a return on their investment through dividends
Employer Covenant Report: XYZ Ltd DRAFT DATE
• The forecast excludes interest charges which are
assumed to be covered by income
• Of the expected cash generation over this period
management had advised as follows:
— X
— Y
There would appear to be significant funds potentially available for the Scheme
albeit there is likely to be competing calls from the shareholders

31. DRAFT DATE
For discussion
purposes only
4. PROSPECTS
4.4 Conclusion
• XYZ Ltd has been loss making over the last 3
years driven by interest costs and, in FY12, by
write downs in the value of certain investments
• Management forecast a significant inflow of
cash in the next 18 months
• There would appear to be significant funds
potentially available for the Scheme albeit
there is likely to be competing calls from the
shareholders
• There is uncertainty over the long term future
of XYZ Ltd. The Trustees should be looking to
secure appropriate funding in the event of a
wind down of XYZ Ltd
Employer Covenant Report: XYZ Ltd DRAFT DATE
Page 31
Summary
• Operating profits over the last three years have been
insufficient to meet interest costs resulting in trading losses
• In FY12 A also wrote down its investments by c£xm
• However, management forecast some significant returns from
asset sales in the next 18 months which will potentially
generate significant cash sums and a projected cash balance of
c£xm by December 2014
• There is likely to be competition for cash from the shareholders
seeking returns on their investment
• Despite uncertainty over the long term prospects of XYZ Ltd
there are opportunities for significant short term profit and cash
generation which could be used to fund the Scheme
• Overall our analysis suggests a Prospects score of 8 – STRONG
albeit that this score may tail off if the business is ultimately
wound down
•

32. DRAFT DATE
For discussion
purposes only
Employer
right
Subject to
advice
Must
consult
Subject to
advice Trustee
right
Unspecified
1. Wind-up power
2a. Contributions TD&R
3. Amend rules
4. Appoint trustees
5. Interpret TD&R
2b. Contributions PA
6. Investment
5. POWER
5.1 Trust Deed & Rules (‘TD&R’)
Summary
• The Trustees do not have the power to wind up
the Scheme but can cease an Employer’s
participation in the scheme (other than the
Principal Employer)
• Employers’ contributions are agreed with the
Trustees having obtained actuarial advice
• The Principal Employer may, by deed, remove or
appoint Trustees in accordance with the 1995 PA,
which requires a third of the Trustee board to be
member nominated
• All investments, assets and monies of the Scheme
are held under legal control of the Trustees
• As such, neither the Trustees or the Employer
have any strong powers contained within the
TD&R
Employer Covenant Report: XYZ Ltd DRAFT DATE
Page 32
Legal Disclaimer
Any commentary in this presentation on the interpretation, or otherwise, of the Trust
Deed and Rules or any other legal document is given as a layman's interpretation and is
not a legal opinion. For clarity we are not qualified to give legal opinion and, where
necessary, legal opinion should be sought.
There appears to be a broadly equal balance of powers between the Employer and
the Trustees

33. DRAFT DATE
For discussion
purposes only
5. POWER
5.2 The Pensions Regulator’s (“tPR”) Powers
Contribution Notices (“CNs”)
• TPR has a second power available whereby
connected parties can be compelled to pay in
funds or provide a Guarantee to a Scheme
• CNs can be applied against an Employer or
connected party if the Regulator is of the
opinion that the act was materially detrimental
to the ability of the Scheme to recover its s75
debt
• The Regulator has a look back period to events
in the previous six years
• We have reviewed the statutory accounts for A
for the period 2007 to 2012 for potential Type A
events. The results of the review are set out
below
Employer Covenant Report: XYZ Ltd DRAFT DATE
Page 33
Financial Support Direction (‘FSD’)
• Where an Employer to a Scheme is deemed to be
insufficiently resourced – tPR can look to other
connected parties to support the Scheme.
Connected parties would include other Group
companies
• At the end of FY12 the net assets of A were £xm
which is over Y times the s75 deficit of £ym
• A would therefore not appear to be insufficiently
resourced
• However F had net liabilities of £am as at FY12.
If the Scheme is not joint and several then XYZ
Ltd may be at risk of an FSD for the extent of
any liabilities of F
• The Trustees may ultimately wish to leverage
this point in any negotiations regarding the
future of F
XYZ Ltd may be exposed to an FSD risk in respect of F’s liability to the Scheme

34. DRAFT DATE
For discussion
purposes only
5. POWER
5.2 The Pensions Regulator’s (“tPR”) Powers
Potential detrimental
events
Relevance to XYZ BDO Comment
Granting security in
priority to the Scheme
Bank debt has historically been secured on the assets to which it relates No apparent Type A event
A return of capital e.g.
dividends or buy back
of shares
A has paid out dividends in excess of its
profits in each of the last 6 years.
Dividends are used as a return on
capital injected by the shareholders.
Given the remaining asset cover it is
unlikely that the dividend payments
would be considered detrimental to
the Scheme
A change in Group
structure including a
change in control
XYZ Group is a complex Group of companies, within which there will be
various changes in Group structure according to the needs of the business.
There have been various exiting Employers in the past and it is beyond our
scope to assess whether these were executed in accordance with tPR
guidelines. The Employer and Trustees are currently considering an
appropriate exit for G
An appropriate exit for G is being
discussed between the Employer and
the Trustees. The Trustees may want
to review whether past exits were
executed in accordance with tPR
guidelines
Business and asset
sales where sales
proceeds are not
retained
The operation of XYZ Ltd relates to the disposal of certain assets/JV interest
to release generated equity. Part of these proceeds are then paid out to
shareholders as dividends (see above)
Disposals are made in the normal
course of business. See comments
above re dividends.
Events that reduce
sustainable cash flow
No historic events
Employer Covenant Report: XYZ Ltd DRAFT DATE
Page 34
Given the remaining asset values in XYZ Ltd compared to the Scheme any prior
events are unlikely to be deemed materially detrimental
A Profit (£m) Dividend (£m)
2009 x y
2010 x y
2011 x y
2012 x y

35. DRAFT DATE
For discussion
purposes only
5. POWER
5.3 Conclusion
Summary
• The Trustees do not have the power under the TD&R to wind
up the Scheme and overall the balance of powers appears
broadly even between the Scheme and the Employer
• There do not appear to be any grounds for tPR to invoke its
powers
• However, in the event of a failure of F without XYZ Ltd
underwriting any deficit suffered by the Scheme in F, tPR
could potentially issue an FSD on the rest of XYZ Ltd in
respect of F’s liability to the Scheme
• In the past the Employer has maintained a good relationship
with the Trustees and is proposing to satisfy the liability
arising on the withdrawal of G
• On this basis our analysis suggests an overall Power score of
5 – MODERATE
• There appears to be a broadly equal balance of
powers between the Employer and the Trustees
• XYZ Ltd may be exposed to an FSD risk in
respect of F’s liability to the Scheme
• Given the remaining asset values in XYZ Ltd
compared to the Scheme any prior events are
unlikely to be deemed materially detrimental
Employer Covenant Report: XYZ Ltd DRAFT DATE
Page 35

36. DRAFT DATE
For discussion
purposes only
6. EMPLOYER COVENANT
6.1 Summary
Page 36
Employer Covenant Report: XYZ Ltd DRAFT DATE
1. POSITION
3. POWER2. PROSPECTS
8 5
8
Overall for an ongoing trading entity we would suggest a weighting biased towards Prospects
and an overall score on a scale of 0 to 10 of 8 - STRONG
OVERALL – 8 STRONG

37. DRAFT DATE
For discussion
purposes only
7. EMPLOYER COVENANT AND SCHEME DEFICIT
7.1 Covenant impact on Technical Provisions
Page 37
• Based on tPR guidance a very strong Employer
Covenant score (10) would suggest that the “best
estimate” or “neutral” level might be a valid level
of Technical Provisions while a non existent
Covenant (0) would suggest the Trustees should
target buy out
• These extremes provide reference points for the
potential impact of Employer Covenant on
Technical Provisions and therefore the deficit for
Scheme funding purposes.
• The framework alongside uses a straight line
approach between these extremes
• A Covenant score of 8 would imply an SSF deficit
of £cm compared to the results for the preliminary
valuation which indicated a deficit of £bm.
• We stress that this is a framework intended to
illustrate the potential interaction of Employer
Covenant and Scheme deficit
Employer Covenant Report: XYZ Ltd DRAFT DATE
0
1
2
3
4
5
6
7
8
9
10
Surplus/(Deficit) based on Technical Provisions
EmployerCovenantVector
NEUTRAL
ESTIMATE
£am
surplus
BUYOUT
£(d)m
?Extremes provide reference points
for framework of deficit
Covenant
Score
based on
BDO
review
Implied
score from
preliminary
valuation
Implied
SSF
DEFICIT
£(c)m
Prelimin
-ary
SSF
DEFICIT
£(b)m

38. DRAFT DATE
For discussion
purposes only
We set out below various options where support made available to the Scheme may be
improved to preserve or indeed improve the underlying Employer Covenant.
We discuss the key areas in more detail on the following pages
8. PROTECTING THE EMPLOYER COVENANT
8.1 Mitigation Map
Page 38
Employer Covenant Report: XYZ Ltd DRAFT DATE
Commitment
from the
Employer to
(i) Notify the
Scheme of
potential Type A
Events; and
(ii) Report
business updates
(re: Employer
Covenant)
Employer agrees
not to create any
security interest
in priority to the
Scheme or
execute any
material disposal
without
agreement
Subordinate
intercompany
loans within
Principal
Employer so that
the Scheme
increase
recoveries on
insolvency
Employer
commits to react
for the benefit of
the Scheme on
the occurrence
of a specified
event or trigger
Obtain unsecured
guarantee(s)
from other Group
members
Obtain security
interests over
Group assets to
secure the
Scheme’s claim
Set aside cash for
the ultimate
benefit of the
Schemes or for
release back to
the Employer if
the Scheme is
fully funded/risks
fail to materialise
Notification &
Reporting
1 Negative
Pledge
2 Subordinate IC
Loans
3
Security / SLP
6 Escrow A/C or
Bank Guarantee
7
Type A events
covered by
Regulatory
framework.
Trustees could
seek early
notification of
the future plans
for the business
and any return of
capital to
shareholders
Covered by tPR
framework
however Trustees
could seek
specific negative
pledges in
respect of
changes in
unlimited status
and future
dividends without
mitigation to the
Scheme
Intercompany
balances are
significant but
the impact of any
subordination is
uncertain without
a full entity
priority modelling
exercise
There are various
medium to long
term assets that
could provide
cover for the
Scheme’s deficit
and therefore
reduce the cash
funding
requirement
Funds could be
set aside as part
of a planned path
to buy out for the
Scheme
Company
Guarantee
5
Undertaking
4
Key potential
triggers are asset
performance and
the dividends or
upstream loans
for the benefit of
shareholders.
Management have
proposed a
minimum net
worth
undertaking
The Scheme has
access to XYZ
Ltd’s assets via
XYZ Ltd, an
unlimited liability
entity. However,
the Trustees
might wish to
seek a guarantee
in respect of F’s
liability to the
Scheme
Least Trustee impact,
minimal loss of control for XYZ Ltd
Most Trustee impact,
potential loss of control for XYZ Ltd

39. DRAFT DATE
For discussion
purposes only
8. PROTECTING THE EMPLOYER COVENANT
8.2 Mitigation Options
Possible mitigation (Cont.)
• The exposure regarding return of capital in XYZ
Ltd could be addressed by way of
— A minimum net worth guarantee to ensure
that sufficient net assets always remain in
XYZ Ltd to enable the buy-out deficit to be
met (already under consideration). The
issue arising with such an undertaking is to
ensure that the assets underpinning the
balance sheet will be realisable at an
adequate value at the time they are
required
— An up front undertaking to make good any
adverse performance in the Scheme’s asset
performance compared to a planned path to
buy-out over a medium term
— An agreement to share in any future
dividend payments/upstream loans with a
view to using such funds to buy out the
Scheme liabilities
Employer Covenant Report: XYZ Ltd DRAFT DATE
Page 39
Key areas of risk
• The main areas of required protection would
appear to be in respect of
1. The risk of a shortfall in respect of any claim
against F
2. the possible return of capital to investors
before the Scheme is fully funded
Possible mitigation
• The risk of a shortfall in F could be addressed by
way of
— An undertaking to transfer any F liability to
another Group entity in the event of
withdrawal or
— An appropriate guarantee from elsewhere in
XYZ Ltd to make good any shortfall suffered
in a claim against F

40. DRAFT DATE
For discussion
purposes only
8. PROTECTING THE EMPLOYER COVENANT
8.2 Mitigation Options
Other protection
• The current assessment of the Employer
Covenant is partly reliant on the unlimited
liability status of XYZ Ltd and the companies
immediately above it in XYZ Ltd structure
• We would suggest that the Trustees seek
assurances from the Employer that they are
notified in the event of any plans to change this
unlimited liability status
Employer Covenant Report: XYZ Ltd DRAFT DATE
Page 40
Possible mitigation (Cont.)
— Provision of a specific contingent asset to the
Scheme to be realised in the event of a
shortfall in a wind up of the Scheme. The
long term receivable from may represent an
asset that most closely matches the duration
of the Scheme’s liabilities
— Establishment of an Escrow account that
would either fund a shortfall at the time of a
Scheme buy-out or be returned to the
Employer if Scheme assets had performed
sufficiently to achieve buy-out. The escrow
account could be funded via an up front cash
injection or via a dividend sharing mechanism
as referred to above
— Direct cash funding towards buy-out. Whilst
the Scheme Funding target may reflect the
STRONG Covenant, the Trustees could
overfund based on agreed flight path to buy-
out

41. DRAFT DATE
For discussion
purposes only
A. SOURCES OF INFORMATION
Company Information
1. Statutory accounts
2. Consolidation schedule as at FY11 and FY12
3. Cash flow forecast
4. Meetings with management
Scheme Information
1. Trust Deed and Rules
2. Actuarial Valuation as at _____
3. Preliminary Valuation as at _____
Employer Covenant Report: XYZ Ltd DRAFT DATE
Page 41

42. B. EMPLOYER COVENANT SCORING
Page 42
Employer Covenant Report: XYZ Ltd DRAFT DATE
Score Description
10 Insured/Underwritten
9 Very Strong
8 Strong
7 Tending to Strong
6 Upper Moderate
5 Moderate
4 Lower Moderate
3 Tending to Weak
2 Weak
1 Very Weak
0 Inevitable Insolvency

43. C. A Group vs B Group Balance Sheet
Balance Sheet
• The consolidated A group comprised £xm of XYZ
Ltd’s net assets of £ym as at FY12
Page 43
Employer Covenant Report: XYZ Ltd DRAFT DATE
A B
£m 31 Dec 12 31-Dec-12
Investments - - -
Investments in joint ventures - - -
Other Fixed Assets - - -
- - -
-
Current assets -
Stock - - -
Trade and Other Debtors (Inc JV's) - - -
Intercompany Debtors - - -
Cash at bank - - -
- - -
-
Current liabilities -
Trade and other payables - -
Bank borrowings - - -
- - -
-
Net current assets - - -
-
Long term liabilities -
Bank borrowings - - -
Pension Scheme - - -
Other Long-term Liabilities - - -
Intercompany Loans - - -
- - -
-
Net Assets - - -
-
-
Net Assets excluding pensions - - -

44. D. Consolidated Balance Sheet
Balance Sheet
• A summary of the consolidated balance sheet of
F is outlined opposite. The FY12 figures are not
yet available.
• If the current situation is crystallised (post the
injection of capital) the bank debts will be
repaid in full but the net intercompany position
and any claim from the Scheme are likely to be
irrecoverable
Page 44
Employer Covenant Report: XYZ Ltd DRAFT DATE
Audited Audited Audited
00 Jan 00 00 Jan 00 00 Jan 00
Investment and Development - - -
Investments in joint ventures - - -
Other Fixed Assets - - -
- - -
Current assets
Stock - - -
Trade and Other Debtors (Inc - - -
Intercompany Debtors - - -
Cash at bank - - -
- - -
Current liabilities
Trade and other payables - - -
Bank borrowings - - -
- - -
Net current assets - - -
Long term liabilities
Bank borrowings - - -
Pension Scheme - - -
Other Long-term Liabilities - - -
Intercompany Loans - - -
- - -
Net Assets - - -
Net Assets excluding pensions - - -

45. E. Estimated Outcome Statement
Page 45
Employer Covenant Report: XYZ Ltd DRAFT DATE
Comments
• Adjusted Balance Sheet represents A
Group without F Group
• A intercompany debtors adjusted for
impact of shortfall from F
• Cash at Bank has been reduced by
£xm to reflect to the forecast
injection of equity into the F
• Adjusted Balance Sheet represents A
Group without HL division
• On the basis of the revised balance
sheet we estimate that the Scheme
would recover its full S75 deficit
claim against A should it trigger a
wind up today on both a High and
Low basis