1AVC INVESTMENT GUIDE | WWW.LLOYDSBANKINGGROUPPENSIONS.COM/HBOS/YOURPENSION

HBOS FINAL SALARY PENSION SCHEME

ADDITIONAL VOLUNTARY

CONTRIBUTION (AVC)

INVESTMENT GUIDE

July 2018

CONTENTS

This guide provides information about the different investment choices that are available to members of the HBOS Final Salary Pension Scheme (the Scheme) who wish to pay Additional Voluntary Contributions (AVCs).

TAKE A LOOK AT THE OPTIONS…

INTRODUCTION 3

INVESTMENT CHOICES

Types of funds 4

Summary of fund offering 6

Details of the funds 7

RISKS

Types of risk 11

Risk/Return Ratings 12

FEES AND CHARGES 14

IF YOU HAVE QUESTIONS 16

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REMEMBERPlease remember that the value of your account may go down as well as up. By law, employees of Lloyds Banking Group (the Group), the Trustees and the HBOS Pensions Team cannot give you investment advice. If you are unsure about any of the investment decisions you have to make, we strongly recommend that you contact a financial adviser. You can find one in your local area by visiting www.unbiased.co.uk. You can also visit www.moneyadviceservice.org.uk and www.pensionsadvisoryservice.org.uk for further free guidance.

INTRODUCTION

YOU’RE WORKING HARD AND SAVING, BUT ARE YOUR SAVINGS WORKING HARD FOR YOU?With Additional Voluntary Contributions (AVCs) you have the freedom to choose how you invest your extra savings. The decisions you make about how you invest will affect the value of your AVC account when you retire. So, the more you know about your investment, the better. You don’t have to be an expert, but reading this guide and knowing some of the basics will get you started.

Investing can appear to be risky; but your biggest risk of all may be not saving for the future. We understand that making investment decisions isn’t easy for everyone; there’s a lot to consider and if you’re a first-time investor, you may find understanding the different funds and strategies a daunting prospect. We have created this guide to provide you with descriptions of the funds on offer as well as helpful information on risks and what you might want to consider as you make your choices.

This guide is intended to provide you with information to help you decide how to invest your AVCs within the HBOS Final Salary Pension Scheme. It includes:

• Information about the investment choices available to you

• Background on the risks associated with these investments

• Details of the charges that apply to the funds.

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MIXED ASSET FUNDSMixed asset funds allow you to delegate the decision-making of allocating your AVCs to a manager based on your risk appetite. For example, do you prefer to be more: cautious (low expected return/low risk), balanced (medium expected return/medium risk) or adventurous (high expected return/high risk)?

The fund descriptions tell you about the levels of risk and the types of assets these funds will be investing in on your behalf. As mixed asset funds are not tracking an index, the funds have a target return which they hope to achieve over a long time horizon.

EQUITY FUNDSThe term ‘equity’ is generally used to describe a proportion of ownership in a company (known as shares). The price of a company’s equity is determined by how many people wish to buy it, compared to how many people want to sell, as well as general economic conditions.

Companies publish their financial results at least once a year and also provide other information to investors such as trading updates and dividend announcements throughout the year. If the company is performing well, more people may want to buy the shares and this will cause the price to rise. On the other hand, if more people wish to sell their shares, then the price will be pushed down.

The wider economy may also influence the share price. If economic conditions are positive then investors may have confidence that a company might perform well, leading to profit growth and them investing in the company thus

increasing the share price. This is called ‘market sentiment’ as it occurs based on broad market conditions before there is evidence of growth from the company’s financial results. Conversely, if the economic climate is not good, investors may not be so confident in the prospects of a company, and therefore they sell the shares. This means the share price can fall even if the company is performing well. Equally, the share price can rise even if the company is not performing well.

This type of disconnect between company performance and the share price is a large factor in why equities are much more variable in price than other asset classes.

FIXED INCOME FUNDSFixed income is a broad term that covers many different types of investment options. Essentially, as the name suggests, it refers to anything which provides an underlying stable (or ‘fixed’) set of returns (or ‘income’).

The most common form of fixed income is a bond. These are loans to a government or a company in return for a promise to pay back the loan, with interest, at a future date. Like any asset, the value of this promise will depend on the demand for it, which will in turn depend on the level of interest that was promised and the time period (maturity). This means that the value of Fixed Income Funds can go down as well as up.

A ‘gilt’ is a UK Government bond. There are two main types of gilts: (1) ‘conventional gilts’ which are influenced by interest rates or (2) ‘index-linked gilts’ which are influenced by inflation.

INVESTMENT CHOICES

Before we look at the range of funds available, it’s important to understand the different types of investment funds.

TYPES OF FUNDS

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PROPERTY FUNDSProperty funds invest in a physical property, such as offices, shops, factories and warehouses. Returns from long-term growth are generated from rental income and changes in property values. Property provides an additional option for you to diversify your AVC fund choices away from equities and fixed income. The costs associated with buying a property – charges like stamp duty, property surveys and legal fees – can be high and need to be paid by the fund, which will influence the value of the fund.

Property values are affected by economic cycles, with tenants willing to pay more rent and buyers willing to pay more for property when availability is low and demand high. This high demand tends to correspond with when businesses are doing well, the economy is growing and companies expand their operations.

Liquidity is provided to investors of property funds through rental income and property sales. Property can be difficult to buy or sell. This could mean that cash builds up waiting to be invested, so the performance can be dampened when property returns are greater than the interest earned on cash. Property may also have to be sold for less than expected. In exceptional circumstances, the fund may delay dealing with withdrawal requests in the best interests of all the investors.

CASHCash funds contain short dated maturity investments, heavily diversified amongst highly rated institutions and governments. These investments include bonds (commercial paper), certificates of deposit, government agency repurchase agreements, asset backed bonds and time deposits.

The objective of these funds is to maintain your capital and as such they provide a very small return in line with short dated interest rates. Cash funds are generally deemed safer than leaving money in your bank. Money left in a bank is only guaranteed up to a limit (by the UK Government) and the risk is placed on one institution whereas investment in cash funds is broadly spread across a range of high rated securities and across a range of institutions and governments.

HOW DOES RISK FACTOR IN?When choosing your AVC investments, it is important to consider how much time you have left to retirement. This will influence how much return you might wish to target and how much risk you want to take. See page 11 for information on the different types of risks. We have also included a rating scale as a guide to help you understand how each fund tends to perform. See page 12 for more details.

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INVESTMENT CHOICES

Fund Invests in… Aims to achieve a return consistent with… 1

Risk/Return Rating2

Active/Passive

AMC3

MIXED ASSET FUNDS

HBOS FSPS Cautious Fund

Predominantly developed market government bonds, corporate bonds and cash

1⁄3 Cash Fund, 1⁄3 Corporate Bond, 1⁄3 Index-Linked Gilts

L A 0.180%

HBOS FSPS Balanced Fund

Diverse range of asset classes such as UK and overseas equities, fixed and index-linked bonds, cash and UK and Overseas property.

3- Month LIBOR + 3.5% M A 0.238%

HBOS FSPS Adventurous Fund

Primarily world equity markets, but also a range of asset classes including bonds and commodities

6-month LIBOR + 5% H A 0.491%

EQUITY FUNDS

HBOS FSPS UK Equity Fund

Shares (‘equity’) of UK companies FTSE UK All Share Index H P 0.108%

HBOS FSPS Overseas Equity Fund

Shares of overseas companies based in developed market countries

FTSE All-World Developed ex-UK Index H P 0.108%

HBOS FSPS Emerging Market Equity Fund

Shares of companies domiciled in emerging market countries

MSCI Emerging Markets Index H A 0.928%

FIXED INCOME FUNDS

HBOS FSPS Fixed Interest Gilts

Conventional gilts with maturities greater than 15 years

FTSE UK Gilt Over 15 Years Index

L P 0.108%

HBOS FSPS Index-Linked Gilts

Index-linked gilts with maturities greater than 5 yearsFTSE UK Gilt Index-Linked Over 5 Years Index

L P 0.108%

HBOS FSPS Corporate Bond Fund

Global higher quality (‘investment grade’) corporate credit issuers

Barclays Global Corporate 500 Index (1% Issuer Cap)

M P 0.258%

PROPERTY FUNDS

HBOS FSPS UK Property Fund

UK commercial, retail and industrial properties IPD UK Property Index M A 0.778%

CASH FUNDS

HBOS FSPS Cash Fund Cash or near-cash investments with the sole purpose of maintaining its value

7-day LIBID L P 0.173%

1 See individual fund descriptions in ‘Details of the funds’ starting on page 7 for more information on these performance measures.

2 See page 12 for details of the Risk/Return Ratings. 3 Annual Management Charge (see page 14).

Below you’ll see your AVC investment choices at a glance. The funds have been chosen by your Trustees in conjunction with their advisers. Please see the pages that follow for further descriptions.

SUMMARY OF FUND OFFERING

A Actively managed funds have a manager who selects individual investments to buy and sell to increase the value of the fund.

P Passively managed funds or index tracking funds aim, before charges, to track the performance of a relevant index. The fund will still be affected by general market movements in values, but performance will not be impacted by the selection or otherwise of individual investments.

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DETAILS OF THE FUNDS

MIXED ASSET FUNDS

4 LIBOR is the London Interbank Borrowing Offered Rate, the interest rate that the banks charge each other for loans and a main reference rate used in investment contracts.

HBOS FSPS CAUTIOUS FUND

LAMC: 0.180% This fund provides a mix of conservative and less risky assets. The return is expected to be more

stable than the Balanced Fund or the Adventurous Fund, although relatively modest. There may be some short-term fluctuations in value. The fund will invest predominantly in developed market government bonds, corporate bonds and cash.

Target return: 1⁄3 Cash Fund, 1⁄3 Corporate Bond, 1⁄3 Index-Linked Gilts

HBOS FSPS BALANCED FUND

MAMC: 0.238% The objective of the Balanced Fund is to produce strong long-term returns, but with lower

levels of risk than equity markets. There may be frequent and sometimes significant periods of fluctuation.

The fund invests in a diverse range of asset classes including, but not limited to, UK and overseas equities, fixed and index-linked bonds, cash and UK and overseas property. The mix of investments should limit the volatility of the fund, but it will vary with market conditions in attempting to achieve higher long-term returns.

Target return: 3- Month LIBOR + 3.5%

HBOS FSPS ADVENTUROUS FUND

HAMC: 0.491% This offering is designed for members who are comfortable taking significant investment risk

to target strong long-term returns. The fund will invest in growth assets targeting similar returns to global equity markets with less risk than equities.

The fund will invest primarily in world equity markets, but will also have the flexibility to invest in a broader range of assets such as corporate bonds and commodities. The fund has the potential to be highly risky, but the fact that the investments are spread over a range of growth markets should mean the risk will be less than that of equities.

Target return: LIBOR4 + 5%

L Low risk/return M Medium risk/return H High risk/return

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DETAILS OF THE FUNDS

INVESTMENT CHOICES

HBOS FSPS UK EQUITY FUND

HAMC: 0.108% This is a fund that aims to track the performance of the FTSE UK All Share Index. It invests

in the shares (‘equity’) of UK companies and aims to achieve a return that is consistent with the Index, including the dividends paid to shareholders who own these companies.

The FTSE All-Share Index is a widely-used measure of the investment performance of UK equities, calculated by taking a size-weighted average of the share price of over 600 companies which are listed on the London Stock Exchange.

Benchmark: FTSE UK All Share Index

HBOS FSPS OVERSEAS EQUITY FUND

HAMC: 0.108% This is a fund that invests in the shares of overseas companies based in developed market

countries in the same proportion as the FTSE All-World Developed ex-UK Index.

The FTSE All-World Developed ex-UK Index is a widely-used measure of the investment performance of companies in overseas equity markets. The index measures the performance of the companies listed in Europe (ex-UK), North America, Japan and the far east, and invests in the companies in proportion to their relative size.

Benchmark: FTSE All-World Developed ex-UK Index

HBOS FSPS EMERGING MARKET EQUITY FUND

HAMC: 0.928% The fund seeks to invest in companies based in emerging market countries. An emerging market

country is one that currently has some characteristics of a developed market but is not yet itself a developed market, and may include countries that are expected to be developed markets in the future or were in the past. The fund will predominantly invest in countries which are contained within the MSCI Emerging Markets Index, a widely-recognised benchmark which measures the performance of emerging market companies, with proportionally higher weightings to larger companies.

Historically, this asset class has performed well but has experienced more volatility than developed market equity; as a result emerging market equities are considered to be higher risk. Emerging markets are generally not subject to the same stringent legal and governance requirements as developed markets, which can lead to less protection.

Benchmark: MSCI Emerging Markets Index

EQUITY FUNDS

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FIXED INCOME FUNDS

HBOS FSPS FIXED INTEREST GILTS

LAMC: 0.108% This fund invests in conventional gilts with maturities greater than 15 years. It is classed as a low

risk investment as it is extremely unlikely that the UK Government will fail to pay back the loan, including any interest. However, because in the short term the value is dependent on the demand for bonds, the value of the bonds can fall as well as rise.

Benchmark: FTSE UK Gilt Over 15 Years Index

HBOS FSPS INDEX-LINKED GILTS

LAMC: 0.108% This fund invests in index-linked gilts with maturities greater than 5 years. This means that the

interest which is promised by the UK Government will change with inflation. If the level of inflation increases, so will the interest on the gilt. Likewise, if the level of inflation falls, the interest on the gilt will fall. These funds can therefore be useful tools to protect you if you think that the level of inflation is likely to rise in the future. Although classified as a low risk investment, the value of these funds can fall as well as rise as the expectation of future inflation changes.

Benchmark: FTSE UK Gilt Index-Linked Over 5 Years Index

HBOS FSPS CORPORATE BOND FUND

MAMC: 0.258% This fund aims to provide well diversified exposure to global higher quality (‘investment grade’)

corporate credit issuers. The fund is managed to focus on avoiding those bonds which are perceived to be most at risk of a sharp deterioration in price or default. These bonds may be issued by companies and, to a lesser extent, government agencies and supranationals. The fund aims to provide diversified exposure to companies that predominantly issue Sterling denominated fixed income bonds.

Benchmark: Barclays Global Corporate 500 Index (1% Issuer Cap)

L Low risk/return M Medium risk/return H High risk/return

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PROPERTY FUNDS

HBOS FSPS UK PROPERTY FUND

MAMC: 0.778% The fund invests in UK commercial, retail and industrial properties. In practice, what this

means is that the manager will look to buy attractively-valued properties in the UK, either for retail stores, commercial properties for company offices, or industrial properties such as warehouses or manufacturing plants. The fund will invest in the physical property, so may have a relatively high weighting of cash to cope with redemptions from the fund.Benchmark:

IPD UK Property Index

CASH FUNDS

HBOS FSPS CASH FUND

LAMC: 0.173% The fund will invest in cash or near-cash investments with the sole purpose of maintaining its value.

‘Near-cash’ can include cash deposits at banks or very short-term loans to companies with high credit ratings. It is considered to be a very low risk fund which aims to maintain the monetary value of the investments, rather than look to increase it. As with all the funds, there is a risk that you could get back less than you put in.Benchmark:

7 Day LIBID5

5 LIBID is the London Interbank Bid Rate. It is the average interest rate at which major London banks borrow deposits from other banks. LIBID is calculated through a survey of London banks to determine the interest rate at which they are willing to borrow large deposits. LIBID is a main interest (reference) rate used in trading cash-like instruments.

IMPORTANT NOTE:All funds described in this section are managed by third party providers and as such may be withdrawn at any time by their respective investment company or by the Trustees. While the Trustees regularly monitor the risks and returns of these funds, the Trustees are not responsible for the performance of these funds. All funds are covered by the Financial Services Compensation Scheme (FSCS). This means that FSCS can provide compensation if a firm is unable, or likely to be unable, to pay claims against it. FSCS is an independent body, set up under the Financial Services and Markets Act 2000 (FSMA), and funded by a levy on authorised Financial Services firms. Where the FSCS pays compensation, this is based on the value of the relevant asset at the time, and compensation would only be payable if a firm is in default. Please note that the FSCS does not make up any investment losses. It is also subject to an overall cap of 90% of the value of the assets held by the Trustees. Underlying managers of the funds listed are registered with the UK Financial Conduct Authority (FCA).

DETAILS OF THE FUNDS

INVESTMENT CHOICES

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All investors want the maximum return for the minimum risk. But because risk cannot be completely excluded from any kind of investment, it’s important you understand the different kinds of risk that exist:

INVESTMENT RISKThe return of any investment in a fund will be directly related to the performance of the assets in which that fund invests. For example, if you invest in an equity fund at a time when equity markets fall, the value of your investment is also likely to fall. Therefore, with any investment there is a risk that you could get back less than what you put in.

INFLATION RISKInflation also plays an important role in investment decisions. If the inflation rate is higher than the return on the portfolio, then the ‘real’ value of your portfolio will fall. Managing this risk means choosing a selection of investments with which you are comfortable, balancing the potential for returns and the potential for losses.

LIQUIDITY RISKThis is the risk that a security or investment cannot be traded quickly, creating the possibility that you are ‘stuck’ with an underperforming asset. This may be particularly prevalent in property funds, as it takes some time for the fund to sell a property in order to access enough cash to pay redemptions. If a fund is forced to sell an asset, there is the risk that the price they are able to achieve will be less than the market price as they will be somewhat hurried to sell. For this reason, in exceptional circumstances, the fund may delay transferring or switching all or part of your money to protect the unit holders remaining in the fund.

CURRENCY RISKIf you are looking to invest in funds which invest in assets overseas, please remember that exchange rate fluctuations may affect the value of those investments. For example, if you wish to invest in the Overseas Equity Fund, the value of that investment will be partly exposed to changes in value of the British Pound relative to other currencies.

CONCENTRATION RISKIf you invest in only one area of the market and that area performs badly, then there is nothing else to balance out that poor performance. It is generally advised that you diversify your risks to multiple areas of the market to avoid ‘putting all of your eggs in one basket’.

RISKSTYPES OF RISK

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RISKS

When choosing your investments, it’s important to consider the balance between a fund’s potential return and its level of risk, in the context of your individual appetite for risk and time to retirement.

The Risk/Return Ratings are designed to give you an idea of how much return and risk each fund has. We have placed a scale of low, medium and high on the range. These ratings have been allocated by how the fund price is expected to vary from month to month based on relative long-term past returns. The Risk/Return Rating is not the only factor you should consider when selecting a fund. If you are unsure of which fund to choose, please consult a financial adviser.

Generally, the higher the Risk/Return Rating of an asset class, the higher the expected returns you should expect to receive since you should be compensated for the risk of potential losses. You should focus on your own specific needs and goals when considering investments. These will depend on:

• For how long you will be invested. If you have a long time until retirement, you may wish to take more risk than those with a shorter time, as you may have time to recoup any losses from taking on higher risk and returning investments.

• Risk appetite. You may also be more or less inclined to take risks than others. For the more risky investments, there will be times where the value of the portfolio decreases. Over the longer term, however, these investments are expected to outperform. You should only enter the more risky strategies if you are comfortable with short-term losses.

The chart below is an illustration of the risk/return trade-off inherent in investing. The more return you hope to achieve, the higher the volatility you should be prepared to accept.

In the bottom-left of the chart are the lowest risk investments, but these have also been the lowest returning asset classes. The top-right of the chart is for the riskier investments, which can also be higher returning over time.

Return represents the potential increase in value over the long term.

For example…Equities have a much greater potential to increase in value than cash over the long term, however there is also a much greater possibility that the value of equities could go down in the short term compared to cash.

HIG

H R

ETU

RN

LOW

RET

UR

N

LOW RISK HIGH RISK

EQUITIES

CORPORATEBONDS

FIXEDINTEREST

GILTS

INDEXLINKED

GILTS

CASH

REMEMBERWhichever fund(s) you choose, remember that past performance is no guarantee of future performance.

RISK/RETURN RATINGS

WHY YOUR AGE MATTERS Your age matters because the investment choices you make over the course of your life are likely to change as you approach retirement. When you are some years away from retirement, you may need to guard against inflation risk, i.e. you will need to at least retain the real buying power of your funds, and ideally increase it.

As you approach retirement you have a shorter period of time to recover any potential losses on investments. You may wish to guard against investment risk and consider reducing your investments in assets that experience large return variability, and increasing allocations to investments which provide greater levels of certainty.

This will:

• Help to reduce the risks of short-term falls in the value of your AVCs as you near retirement compared to investment choices in your younger years

• Provide protection for the buying power of your AVCs against the effects of inflation

• Help protect your AVCs against any changes in the cost of turning your AVCs into a cash lump sum or an income (often referred to as buying an annuity) on retirement.

You should contact a financial adviser to establish which investment choices are right for you during the different phases of your life.

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With every fund you invest in, there will be a cost to you. These come in two forms: the ‘Annual Management Charge’ and ‘Additional Expenses’.

ANNUAL MANAGEMENT CHARGE (AMC) This is the charge that applies to the invested amount on an annual basis. We have negotiated favourable terms for you with the fund managers which will reduce the effect of this yearly charge. These fees are outlined in this document.

ADDITIONAL EXPENSES Fund managers may charge an additional expense to cover costs such as registrars, auditors, administrators and regulators, or additional fees such as redemption, subscription and deduction fees. Where these charges are applied, they are taken directly from the fund and included in the unit price. These additional charges are subject to change and you should reference the fund factsheets (available via Your Pension) to find out what the current additional expenses charges are.

The fees and charges are regularly reviewed and we will strive to ensure that all charges are reasonable and transparent. The higher risk funds will have higher charges associated as these are typically the most labour-intensive investments.

Where we believe that it is possible for managers to outperform their market on a consistent basis, we have offered members actively-managed mixed asset funds to be able to take advantage of this. These mixed asset funds will have higher fees than index-tracking funds, which passively target a particular benchmark.

INVESTMENT SWITCHES All of the HBOS AVC funds are ‘unitised’ (sometimes referred to as ‘pooled’). Therefore, members can purchase units in each of the funds which will entail ownership of a proportion of the overall fund.

For all of the funds, a single unit price for both purchases and sales is set on a daily basis. In pricing the units for each fund, each of the funds use what is known as a ‘swinging single price’. In general this means that if a fund has net sellers on a certain day (i.e. the number of units sold exceeds the number of units purchased), the single price on that day will be the cancellation price. Conversely, if the fund has net investors, the single price is based on the creation price (also known as the ‘offer’ price) for both buyers and sellers. The cancellation price will be lower than the creation price, with the difference representing the transaction costs inherent in purchasing and selling the fund’s underlying investments. However, it will not be possible to know the costs of a switch before the trade is done as it will depend on total flows into and out of each fund.

Switches between funds (i.e. selling units in one or more funds to buy units in one or more funds) take place on the same day. This means that the risk of being out of the market, i.e. the risk that fund prices change while your assets are held in cash before being reinvested is minimised. There are no administration costs for switching between funds.

FEES AND

CHARGES

AVC INVESTMENT GUIDE | WWW.LLOYDSBANKINGGROUPPENSIONS.COM/HBOS/YOURPENSION

READY TO MAKE A CHANGE?To make your investment choices, log on to www.lloydsbankinggrouppensions.com/hbos/yourpension

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IMPORTANT NOTE:By law, employees of Lloyds Banking Group (the Group), the Trustees and the HBOS Pensions Team cannot give you investment advice. If you are unsure about any of the investment decisions you have to make, we strongly recommend that you contact a financial adviser. You can find one in your local area by visiting www.unbiased.co.uk. You can also visit www.moneyadviceservice.org.uk and www.pensionsadvisoryservice.org.uk for further free guidance.

IF YOU HAVE QUESTIONS

If you have a question, or if you need this booklet in an alternative format, such as Braille, large print or audio, please:

This guide does not constitute financial advice. Please consider speaking to a financial adviser if you are unsure about your decision. This guide is a summary only and does not give any entitlement to benefits over and above those set out in the Trust Deed and Rules.

Call the HBOS Pensions Team on 01737 227522 (9am – 5pm, Monday to Friday)

Email HBOSFSPS@towerswatson.com

Log on to www.lloydsbankinggrouppensions.com/hbos/yourpension