A year of
mutual
support
Annual Report & Accounts 2021
Harry, supporting members since 2017
Annual Report and Accounts 2021
1
Welcome
to our Annual Report and Accounts 2021
As a building society, we are a mutual organisation. We’re owned by and run for our members and we are founded on the belief that we
can achieve more by acting together than we can alone. Together, we are building a stronger, kinder society for the mutual good of all.
During last year, a year like no other, our mutual values and purpose proved more relevant than ever.
All through the pandemic, we did our best to keep each other safe and support one another. We continued to help each other save
and buy homes. And we gave back to our communities.
Strategic report
An overview of how we’ve done
this year, our strategy and how
we measure our performance
How have we helped to build
society, nationwide?
Our mutual difference is our
business model
3
4
A letter from your Society’s Chair 5
A letter from your Society’s Chief
Executive
A year of mutual support
Our stakeholder engagement
How we’re building society,
nationwide
Committed to doing
the right thing
Climate-related financial
disclosures
Risk overview
Financial review
7
10
12
18
33
36
56
60
Governance
How we are governed, what items
are discussed in our Board and
Committee meetings and how
we pay our directors
Chair’s introduction to the report
on Corporate Governance
Board of directors
Nationwide Leadership Team
Report of the directors
on Corporate Governance
69
71
77
79
Report of the directors
on remuneration
Directors’ report
115
138
Risk report
Key risks that could affect our
business performance and what
we do to manage them
Financial statements
Our audited financial statements,
related notes and independent
auditor’s report
Introduction
Managing risk
142
142
Principal risks and uncertainties 145
Credit risk
Liquidity and funding risk
Solvency risk
Market risk
Pension risk
Business risk
Operational and conduct risk
Model risk
146
189
200
207
215
218
219
224
Independent auditor’s report
Income statements
Statements of
comprehensive income
Balance sheets
227
241
242
243
Statements of movements in
members’ interests and equity 244
Cash flow statements
Notes to the financial
statements
246
247
Other information
Including our annual
business statement
Annual business
statement
Underlying profit
Forward looking
statements
Glossary
327
330
330
330
Strategic report
Annual Report and Accounts 2021
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How have we helped to build society,
nationwide?
Our mutual difference is our
business model
A letter from your Society’s Chair
A letter from your Society’s Chief Executive
A year of mutual support
Our stakeholder engagement
How we’re building society, nationwide
Committed to doing the right thing
Climate-related financial disclosures
Risk overview
Financial review
3
4
5
7
10
12
18
33
36
56
60
The Strategic report has been approved by the
Board of directors and signed on its behalf by:
Joe Garner
20 May 2021
Business model page 4
Describes our mutual difference,
and how we create value over
the longer term.
Risk overview page 56
Includes our approach to
managing risks, our assessment
of our top and emerging risks
and our viability disclosures.
Strategy page 18
Shares our progress against
our 5 strategic cornerstones.
Our culture
and values
Our culture reflects our shared set
of values, beliefs and behaviours which
are centred around the acronym PRIDE
and consider our members at the
heart of our decision making.
See page 25 for further information.
Financial review page 60
Includes information on financial
performance and the main
trends and factors which have
impacted our financial results.
Key performance
indicators page 10
Used to assess progress against
our strategy and more generally
our performance.
Stakeholders page 12
Our social purpose ensures
we are able to deliver value
for all our stakeholders.
Committed to doing the right thing
As a building society, owned by our members, our ambition is to run a responsible business for mutual good.
That’s for our employees, our members, the wider society and our environment.
Our climate change
disclosures are on
pages 36 to 55
Our Mutual Good Commitments and
Environmental, Social and Governance
(ESG) disclosures are on pages 33 to 35
Our non-financial
information statement
is on page 35
For more information on our social purpose and our ESG commitments and disclosures,
see our ESG hub on nationwide.co.uk/about/responsible-business
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How have we helped to build society, nationwide?
Annual Report and Accounts 2021
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No. 1 for customer
satisfaction
among our peer group1
16.3 million
members
2020: 16.3 million
One of the UK’s
most trusted
financial brands2
Helped 1 in 7
first time buyers
into a home of their own
2020: 1 in 6
A w a rds 2020
B
a
nking Brand o f
e ar
t h e Y
Banking Brand
of the Year 2020
for the fourth year
Start to Save account
helped 130,000 people with
little or no savings with us to save more
than £100 with us for the first time
£790
million
underlying profit
2020: £469 million
£823
million
statutory profit
2020: £466 million
£265 million member
financial benefit, from better incentives
and pricing than the market average
2020: £735 million3
5.4% UK
leverage ratio
demonstrates our financial strength
2020: 4.7%
Extended our
Branch Promise
to keep a branch in every town or city
we are in today until at least 2023
For those impacted
by the pandemic
256,000 mortgage payment holidays and
105,000 payment breaks or interest-free
periods on loans, credit cards and overdrafts
Carbon neutral
for all energy use and emissions
for our internal operations and
our fleet vehicles
1 Lead at March 2021: 1.6%pts, March 2020: 5.4%pts. © Ipsos MORI 2021, Financial Research Survey (FRS), for the 12 months ending 31 March 2021 and 12 months ending 31 March 2020. Results based on a sample of around
47,000 adults (aged 16+). The survey contacts around 54,000 adults (aged 16+) a year in total across Great Britain. Interviews were face to face, over the phone and online, taking into account (and weighted to) the overall profile
of the adult population. The results reflect the percentage of extremely satisfied and very satisfied customers minus the percentage of customers who were extremely or very or fairly dissatisfied across those customers with a main
current account, mortgage or savings. Those in our peer group are providers with more than 3.5% of the main current account market as of April 2020 - Barclays, Halifax, HSBC, Lloyds Bank, NatWest, Santander and TSB.
2 Nationwide Brand Guidance Study compiled by Kantar, based on customer and non-customer responses for the 12 months ending March 2021. Financial brands included Nationwide, Barclays, Co-operative Bank, First Direct,
Halifax, HSBC, Lloyds Bank, NatWest, TSB and Santander, with Nationwide first for trust amongst non-customers and joint first with First Direct for trust amongst customers.
3 The comparative for member financial benefit has been restated. More information on member financial benefit can be found on page 61.
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Our mutual difference is our business model
Our building society was founded to help people save and buy homes of their own.
Annual Report and Accounts 2021
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We continue to be driven by this same social purpose – building society, nationwide.
Our mutual difference is what defines us, our values and how we do business. We are here
to support our members – people who have their mortgages, savings or current accounts
with us – with their financial ambitions, wherever they are in life, whether that is:
•• owning a home – this year, we helped one in seven first time buyers into a home;
•• saving for the future – we look after almost £1 in every £10 saved in the UK;
•• helping members with their day-to-day finances – one in ten of the UK’s current
accounts are with us ; or
1
•• helping our members live better in retirement – we were the first high street
provider to offer a comprehensive range of Later Life mortgages.
We also support those who rely on the private rental sector for their long-term
housing needs and continue to take positive action to improve this sector
(see page 19). Our buy to let business diversifies our income, and helps
us give value back to our members, whether through better savings rates
or service.
Being owned by and run for our members, we can make decisions differently
from our competitors, and we consider our members in every decision we make:
•• we don’t have to pursue profits to pay shareholders dividends. Instead, we
balance our need to retain sufficient profit to remain a safe and secure home
for our members’ money with:
– giving better value and service to our members; and
– investing so that our service and product propositions continue to meet
the needs and expectations of our existing and future members;
•• we measure our success on things that matter to our members (see page 10);
•• we have a low-risk approach to lending, that supports our financial strength; and
•• we give at least 1% of each year’s pre-tax profits to charitable activities.
Our members are our primary stakeholders, but we also have a number of other
important stakeholders who we consider in our decision making. More information
can be found on page 12.
We’re different. And we do business differently.
1 CACI’s Current account and savings database (February 2021).
Member-owned
We are owned by our members
and run for their benefit.
Our members’ interests shape
everything we do, and we want them
to be part of something special.
A safe home for
our members’ money
and information
We are dependable and our members
can be confident that we will keep
their money and information secure.
Around two-thirds of our funding
comes from our members trusting
us with their money.
Building society and
investing in the future
Our decisions are guided by what is
important to our members, and we act
responsibly and in a sustainable way.
We invest so our service is amongst
the best in the UK; we support
local communities; and we
seek to make a difference
on issues that matter.
Attracting,
developing and
retaining talent.
We look to recruit the
right people with
the right skills
and values.
Helping people
into a home
We are here to help people into
a place fit to call home – whether
that is owning or renting.
As a building society, at least
75% of our lending is secured
on residential property.
We think
about profits
differently
We balance our need to be
profitable with delivering value
to our members.
Last year, we focused on keeping our members and
colleagues safe through the pandemic, and ensuring
we remained strong and built to last, to support our
members through the uncertain times ahead.
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A letter
from David Roberts
Your Society’s Chair
Dear fellow member,
During the nearly 40 years I have spent working in financial services,
I cannot recall a year of greater uncertainty or change.
The pandemic has been a crisis first for people, and second for
the economy. While the huge success of the UK’s vaccination
programme gives grounds for optimism, significant uncertainty
and personal hardships remain.
Against this backdrop, I’d like to explain how we as a Board
approached this crisis and the actions we took in the interests of
our Society and you, our members.
Maintaining our financial strength to support members
into the future
Nationwide is a member-owned mutual. We have always succeeded
by bringing people together and putting our members first –
delivering high quality products, excellent service and value to
our members. Today, 16.3 million members trust us with their
finances. As I have explained in previous letters, our success
allows us to make choices. In recent years, for example, we have
chosen to invest in improving our service, upgrading our
technology and in giving more value to members. When times
are tough, however, we must focus first on the fundamentals.
The pandemic is one of those times. When the pandemic hit in
the last quarter of our 2019/20 financial year, it was imperative
that we took swift decisions to protect our financial strength so
that we could support people who needed us most.
The Society’s primary responsibility has always been to keep our
members’ money safe. We do this by making sure we are
financially strong and operationally resilient. We have been
profitable for over a century. That meant that we came into the
pandemic in a strong financial position. However, in light of the
largest fall in GDP on record, we strengthened our capital ratios
further as a protection against uncertain economic times ahead.
Our Common Equity Tier 1 ratio and our UK leverage ratio, key
measures of our financial strength, both improved.
We also took some tough decisions. When the Bank of England
cut bank base rate to a historic 300-year low, it was inevitable
that we would have to reduce our savings rates. We were very
conscious of the impact on our savings members, so this was not
a decision we took lightly. However, facing into a very uncertain
future, it was the right thing to do, and in the interests of our
members as a whole. Since December, we have once again been
increasing value to members through propositions including our
Start to Save account and our Triple Access Online accounts.
Having ensured we were strong financially to help our members
through the pandemic, our second big decision was to renew
and strengthen our commitment to support members, colleagues
and communities through thick and thin. I am grateful for how
we have pulled together over the last year, in the face of physical,
mental and financial challenges. We have protected and supported
our members and our colleagues. I am also Vice Chair of NHS
England, and I have been both humbled and inspired to see the
efforts of people in both the public and private sectors to support
each other.
You can learn more about the Society’s response on page 18.
However, on behalf of the Board, I would like to thank our
employees for their hard work, adaptability and deep ethic of
care, and our members for their support, understanding and
patience during this challenging period. I would also like to thank
the senior leadership who have done such a tremendous job of
guiding the Society through such difficult circumstances.
Annual Report and Accounts 2021
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A letter from your Society’s Chair (continued)
Refocusing our strategy to meet the challenges
of a post-Covid world
Crises are often a catalyst for change and this one is no exception.
We are optimistic that the vaccination programme should allow
us to return to a more normal life in future. However, the rapid
changes we have seen in how we live, shop, work and bank are
here to stay.
We must adapt to this new world, and this is why the Board
approved a refreshed strategy in October. This builds on the
success of our previous strategy, which helped us grow our
membership significantly.
As a mutual, a thriving membership is what makes us strong.
Our updated strategy, re-building society, nationwide, will show
our mutual difference through delivering better value and service to
members, and contributing positively to our communities. We will
focus on establishing meaningful, lifelong relationships that deliver
real value to our members, with products and services more attuned
to where they are in life. We hope that approach will encourage
members to choose us for more of their financial needs.
We will also need to adapt to both the challenges and the opportunities
ushered in by the pandemic. We have long believed that the service
we provide as a mutual, driven by our members’ needs and wishes,
is a differentiator. More members than ever have embraced digital
services and we are investing in our digital tools and capabilities.
At the same time, we are protecting the branch services members
value by extending our Branch Promise, to keep a branch in every
town or city we are in today until at least 2023. This decision will
support people and communities during the difficult period ahead,
and reflects our wish to help rebuild lives and communities as we
emerge from the pandemic.
As always, our strategy will be underpinned by a determination
to be a safe and secure home for our members’ money. We will
maintain our strong financial position and continue to manage
our finances prudently. By doing so, we are confident we can
meet the challenges ahead, support our members and emerge
strong and competitive. You can read more about our strategic
priorities throughout our cornerstones on page 18.
Strong governance and oversight
The Board plays a key role in providing strong governance and
oversight of the Society. Our goal is not only to fulfil our statutory
obligations but also to ensure the Society is managed in line with
our mutual values.
Among our values is a commitment to being an inclusive organisation,
which reflects the diversity of the wider communities we serve.
This is important both in the boardroom and throughout our Society.
We meet the Hampton-Alexander and Parker review recommended
targets for boardroom diversity. The Board is also actively monitoring
progress on improving diversity across the Society towards our
2028 measures.
We are also committed to being a responsible organisation – and
always have been. From our founding days, we have sought to be
a force for good in society. This has always been a huge part of
who we are, but this year we have included more information in
our Strategic report on how we do business and how we engage
with all our stakeholders – from members to employees, from
suppliers to communities. We are also reporting, in more detail
than ever, the climate risks we face and the steps we are taking
to reduce our impact on the world around us. During the year we
were carbon neutral for all energy use and emissions for our
internal operations and our fleet vehicles and our carbon emissions
have reduced by 90% since 2010.
Each year we review the effectiveness of the Board and Board
committees. Every three years, we commission an independent
assessment. An independent review is being carried out in 2021,
and we will report on the findings in next year’s Annual Report.
The Board is most effective when it brings together people with a
breadth of views, experiences and backgrounds who can challenge
the Society to grow and improve. We have welcomed two new
directors in the last year, Tamara Rajah, CEO of digital company Live
Better With, and Debbie Klein, Group Chief Marketing, Corporate
Affairs and People Officer at Sky. Together, they will strengthen
our knowledge of digital transformation, disruptive technologies,
and sustainability. Rita Clifton will retire at this year’s AGM, after
9 years of outstanding service to the Society. I would like to thank
her for her wise counsel and unwavering support for members.
The Board is also responsible for setting the pay for our most senior
executives. We must pay fairly those who run our Society today,
and be able to attract and retain the talented people needed to
run a financial business as large as ours in the future. We are also
conscious that our mutuality requires us to demonstrate pay
restraint. We know the pandemic has put the finances of many of
our members and fellow citizens under pressure. Reflecting that,
our CEO was one of the first in the UK to take a voluntary reduction
in his pay, of 20% of salary and pension contributions for 2020/21,
whilst the non-executive directors committed to donate 20% of
their net fees from June to December 2020 to Shelter. We did not
award any performance pay to our leadership team in 2019/20
and their performance pay potential this year, in line with that for
all employees, was limited to one third of normal times. We believe
Annual Report and Accounts 2021
Annual Report and Accounts 2021
6
that it was right to take these actions. However, it is also important
that we appropriately reward our senior leaders for the extraordinary
effort that they put into running our Society – particularly through
such a challenging time. Looking ahead, we would be failing in our
duty to members if we were unable to attract or retain the right
executive team, so we expect remuneration for executive directors to
return to previous levels over the next year – with performance pay
subject, of course, to outcomes.
As a member-owned Society, it is very important to directors that
we hear the views of our members first hand. During the pandemic,
we have had to move more of our engagement events online. On
the plus side, virtual events are more accessible to more members
– so please do take advantage and come and talk to us. Around
1,400 members have joined online TalkBacks, attended by our
directors. We held our 2020 AGM online, and we will make sure
members can go online to watch and ask questions at our 2021
AGM too. Please do take the time to vote and to join us virtually
on the day to hear about how our Society has navigated the past
extraordinary year.
We continued to expand our Member Connect community. This
is an online forum where members can share their views with us
on a whole range of issues, including the products and services
we offer. The community is now over 7,000 strong.
A year of mutual support
We end the year in a good place: financially strong, operationally
resilient and committed to supporting our members to save, own
their own homes and achieve financial security.
Looking ahead, we are optimistic that the UK is on a path back to
normality. However, we remain acutely conscious of the economic
uncertainties that lie ahead as support schemes are wound down
and the economy gets back on its feet. We are ready and able
both to support our members, colleagues and communities through
challenging times ahead and to help our communities build back
better after the pandemic.
It only remains for me to say a heartfelt thank you to our members
and my colleagues for your mutual support for each other and the
Society over the last year.
David Roberts
Chair
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A letter
from Joe Garner
Your Society’s Chief Executive
Dear fellow member,
The last year has been dominated by the pandemic which continues
to be – first and foremost – a human crisis. The pandemic has
tested the resilience of people, communities and organisations
and has shown once again how important it is that we work
together. Nationwide is a mutual organisation, founded on the
belief that we can achieve more by acting together. Everyone
has dug deep to help us keep members and colleagues safe,
to keep our services running smoothly, and to safeguard our
financial strength. By working together, we have come through
this year financially strong, which means we have been able
to support our members and communities through uncertain
times: this is the essence of what it means to be a mutual.
I would like to thank you, our members, and my colleagues, for
your support for our Society during the last year.
During the pandemic we have been focused on the following
key priorities which are aligned to our purpose and the
cornerstones of our strategy:
Keeping members and colleagues safe and supporting
their health and wellbeing
From the start of the first lockdown, protecting the health and
safety of colleagues and members was our top priority, while
maintaining essential services.
We supported vulnerable members with, for example, cash
deliveries and specialist telephone helplines. We moved many
services online at speed, such as only taking 12 days to
introduce online valuations. We also extended ‘tea & tech’
sessions to de-mystify our digital services for members who
had not used them before and to help them understand how
best to protect themselves against fraud.
Meanwhile, the vast majority of our office-based colleagues
moved to home working almost overnight, as did some 1,000
branch roles. Colleagues supported one another by working
flexibly. For example, branch staff took member calls to relieve
pressure on call centres and have answered over 1.5 million
calls in this way to date.
We put in place a range of wellbeing initiatives to support our
employees, and used our real-time colleague sentiment tracker
to understand how our people were feeling. This helped us
shape our response so we supported people in the ways they
needed most. Personally, I’m really proud of the resilience
shown by our colleagues in challenging circumstances, and
how everyone rose to the challenge of finding ways to support
our members and keep our essential services running.
Supporting members and communities
We rapidly put in place measures to protect members and
colleagues which meant more than 90% of branches remained
open through the first lockdown and 98% in the latest lockdown.
We introduced social distancing in our branches and offered
members video appointments in their homes.
Supporting members through financial hardship has been
another priority this year. We put in place a comprehensive home
support package to enable people to stay in their homes.
As well as payment holidays, this included an industry-leading
‘no repossessions’ pledge until May 2021.
Annual Report and Accounts 2021
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Annual Report and Accounts 2021 8
Annual Report and Accounts 2021
A letter from your Society’s Chief Executive (continued)
Communities also faced extraordinary pressures. We extended
our Branch Promise to support people and communities for those
times when our members need to see us face to face. We gave
charities flexibility to use our funding to help those most in need.
We also continued with our long-term programmes to support
community housing needs and to promote respect and inclusion
between diverse groups of people.
We remained focused on helping members achieve their dreams
of home ownership, despite a difficult year in the housing market.
After months of almost complete closure, the market bounced
back thanks to pent-up demand, the stamp duty holiday and
because the pandemic prompted people to re-evaluate their homes
and where they wanted to live. The partial market closure reduced
our overall lending compared to last year, but our market share
was broadly the same.
We continued to support first time buyers onto the housing
ladder. We lent responsibly, and, by tightening our lending criteria,
were one of the first few lenders to be able to offer 90% loan to
value mortgages again.
Since the year end, the launch of our Helping Hand mortgage saw
us become the first major lender to offer first time buyers the
ability to borrow 5.5 times salary, on 5 or 10 year fixed rate
mortgages with a loan to value of up to 90%, enabling home
ownership for many who have been frozen out. In May 2021
we became the largest mortgage provider to reintroduce 95%
loan to value lending without government support, offering
market-leading mortgages to first time buyers and home movers.
Our buy to let business, The Mortgage Works, has had one of its
strongest ever years for gross lending. As the rental sector has
grown, supporting good landlords is an increasingly important
part of how we fulfil our role as a building society, helping people
into good quality homes. This business diversifies our income
and supports our profitability, which in turn helps us reward
members with value and service.
This was a tough year for savers when the bank base rate was cut
to an all-time low. It was frustrating for us too since our aim
is to pay the best possible rates to our savers. Nationwide has
a proven record of paying higher deposit rates than the market
average; in the last five years, we have paid over £2 billion in
extra interest to depositors. However, we reduced our savings
rates in light of the reduction in bank base rates and this
resulted in member financial benefit falling below our target of
£400 million, having significantly exceeded it in recent years.
In the medium term we expect member financial benefit to exceed
our target again. Despite this, total deposit balances increased
by around £11 billion, although our overall share of deposits fell.
We want to continue to encourage a savings culture, despite the
low-rate environment, as it is an important part of financial
wellbeing and resilience. That means finding new ways to reward
savers, which we have done through our Start to Save account,
a Mutual Reward Bond, and Triple Access Online accounts;
we continue to stand by our principle of paying savers the best
rates we can sustainably afford. I am pleased to report a recovery
in our savings volumes towards the end of the year as a result
of this activity.
Account Switching Service, reflecting our continued appeal to
existing and new members2.
We are delighted that in 2020 we were named Which? Banking
Brand of the Year for the fourth year running, and our customer
satisfaction remained strong. We were no. 1 for customer satisfaction
among our peer group for the ninth year running3, although our
lead narrowed and fell below our target. Our own member
experience survey highlighted that this was because lower savings
rates and the disruption to branch services, both caused by
the pandemic, reduced satisfaction among savers and branch
users, although this recovered towards the year end as things
began to normalise4.
Safeguarding our financial strength
We have always taken a prudent approach to managing our finances,
as we believe this is what our members expect of us, and it also
means we can take a long-term view of decisions. That proved
its worth in this crisis year, when we have remained strong and
secure despite a very volatile environment.
Our capital ratios remain high. Our UK leverage ratio is above
our target. On the income side, our net interest income and margin
improved. We also reduced our costs. Arrears remain low today
but, unsurprisingly, in light of the uncertain economic times
ahead, the impairment charge for loans that might not be repaid
remained elevated.
Last year we reached a 10% market share of all current accounts1.
This year, we withdrew switching incentives so that we could
focus on supporting our existing members during this very
uncertain period. We maintained our share , and continued
to attract new current account members through the Current
1
Overall, these factors combined to increase our profitability levels
significantly. This enhances our financial strength at a time of
uncertainty, allowing us to support our members, colleagues
and communities, including extending our Branch Promise and
launching our Member Prize Draw.
1 CACI’s Current account and savings database (February 2021 and February 2020).
2 Pay.UK quarterly CASS data, 9 months to December 2020.
3 © Ipsos MORI 202
1, Financial Research Survey (FRS), for the 12 months ending 31 March 2013 to the 12 months ending 31 March 2021. Results based on a sample of around 47,000 adults (aged 16+). The survey contacts around
54,000 adults (aged 16+) a year in total across Great Britain. Interviews were face to face, over the phone and online, taking into account (and weighted to) the overall profile of the adult population. The results reflect the percentage of
extremely satisfied and very satisfied customers minus the percentage of customers who were extremely or very or fairly dissatisfied across those customers with a main current account, mortgage or savings. Those in our peer group
are providers with more than 3.5% of the main current account market as of April 2020 - Barclays, Halifax, HSBC, Lloyds Bank, NatWest, Santander and TSB. Prior to April 2017, those in our peer group were providers with more than
6% of the main current account market – Barclays, Halifax, HSBC, Lloyds Bank (Lloyds TSB prior to April 2015), NatWest and Santander.
4 Member experience tracker survey asks members to rate their satisfaction and provide feedback, following a specific interaction across channels and products. Survey results for the 3 months ending 31 March 2020 to the 3 months
ending 31 March 2021.
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We are therefore moving away permanently from fixed location
working to a flexible model. We do still see an important role for
offices, both for collaborative work, and for those who cannot or
do not want to work from home. This is better for our members,
our employees and the Society overall.
We will also use our voice where it matters to help solve some of
the challenges and injustices in our society today – from climate
change, to housing, to diversity. For example, the greening
of UK homes is a priority if the UK is to meet its carbon net zero
emissions target. On top of the £1 billion loan fund we have
created, to encourage people to green their homes, we have
launched a house purchase cashback offer. We are also extending
green options to landlords through The Mortgage Works. You can
read more about these matters on page 39. We also want to
contribute to tackling climate change by reducing our direct impact.
We have maintained our Carbon Trust Triple Standard accreditation
and our internal operations were carbon neutral in the year.
So, to summarise, over the last year, we have demonstrated the
Society’s resilience – financially, operationally and culturally.
While the outlook is undoubtedly challenging, the strength of
our values, our social purpose and our finances mean we can
continue to work for the mutual good of our members, colleagues
and communities, as we re-build society, nationwide.
Joe Garner
Chief Executive
A letter from your Society’s Chief Executive (continued)
Re-building society, nationwide
Looking ahead, we face a radically different business and economic
outlook compared with 18 months ago. Despite the undoubted
success of the vaccination programme, the shape and speed
of the economic recovery is unclear. On top of that, the pandemic
has accelerated existing trends in digital adoption and working
practices – breaking through historical barriers. Major issues for
our communities, including climate change and the inequalities
and injustices exposed by the Black Lives Matter movement,
demand fundamental change.
As you would expect, we are constantly adapting our strategy
to meet these challenges. We will, of course, continue to enhance
our resilience, invest in security and become more efficient.
After a period of very strong growth, over the next few years we
will focus on delivering the value of mutuality to our members.
We will prioritise building lifelong relationships with our members,
helping them make the most of their money at every stage
of their lives – from opening a first current account, to starting
to save, to buying a home, to living well in retirement. In addition,
we set out our ambitions for supporting our members and
communities in our Mutual Good Commitments, which you can
read about on page 35.
We intend to continue to deliver the outstanding service our
members deserve and want. With members adopting digital
technology at an even faster rate this last year, we are investing
in our digital capabilities to complement our branch service.
We are also making more of our branch network and the
experience of our branch colleagues, by moving to a model
where branches are serving customers over the phone as well
as in person. This means we can build on the experience and
capability of our branch-based colleagues and spread this
excellent service across all our channels.
With 13,000 colleagues working from home during the pandemic,
we have had a unique opportunity to review our working practices.
Our decisions have been shaped by the views of our people,
who enjoyed the flexibility of remote working and felt more
productive. We have also experienced better flexibility from home
working which has enabled us to serve our members better.
Annual Report and Accounts 2021
Annual Report and Accounts 2021
9
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Annual Report and Accounts 2021
10
A year of mutual support
Nationwide is not like its banking competitors
– our mutual difference means we measure
our performance on the things that matter
most to our members: great service, long-
term value and financial strength.
We seek to strike the right balance between retaining
sufficient profit to maintain our financial strength,
delivering value to our members now, and investing
so that we can continue to meet the needs and
expectations of our members in the future.
In this exceptional year, dominated by the Covid-19
pandemic, we focused on keeping our Society, our
members and our colleagues safe, and protecting our
financial strength so we were able to serve and support
our members, and remain secure for the future.
Our targets were set in expectation of a normal year.
As a result of the pandemic, and the decisions we made,
we have not achieved some of our targets this year.
We also expect some of these impacts to continue into
the next year, and so have revised some of our near
term targets as indicated opposite.
We remain committed to giving at least 1% of pre-tax
profits to charitable activities, as voted for by our members
in 2007, helping to make a positive difference in the
communities we serve. In 2020/21, this amounted to
£7.4 million (2019/20: £9.5 million)1
. In the financial year
we paid £6.6 million (2019/20: £8.0 million) to charities.
Service
Giving our members great service
We aim to be the best for customer satisfaction in our peer group.
We remained no. 1 for customer satisfaction among our peer group,
but did not achieve our 4%pts target lead2
.
One of our key differentiators for satisfaction is our ethic of care,
and the service our members experience in our branches. A decline
in satisfaction reflects fewer members visiting our branches in the
pandemic, the effect of changes made to our branch service to
maintain social distancing, and the impact of lower savings rates
in response to a record low bank base rate.
In 2022, we will target a lead of at least 2%pts, instead of 4%pts,
with an ambition to regain a 4%pts lead by 2023.
We want to be among the top five organisations
across all sectors for customer satisfaction.
We were joint 13th in January 20213
, below our
target, though we remain the highest ranked
high street financial services provider.
Core products satisfaction 2
lead, %pts
4.6
4.8
5.4
4.0
1.6
2.0
UK CSI 3
rank
4th
5th
5th
5th=
7th=
13th=
2018
2019
2020
Actuals
2021
Target
2022
2018
2019 2020
Actuals
2021
Target
2022
1 The 1% is calculated based on average pre-tax profits over the previous three years. This covers donations to the Nationwide Foundation, social investment activities, including multiple programmes, such as grants to local
housing projects and the internal costs of managing this investment. For more information on these activities, see page 29.
2 © Ipsos MORI 2021, Financial Research Survey (FRS), for the 12 months ending 31 March 2018 to the 12 months ending 31 March 2021. For more information, see footnote 3 on page 8.
3 Institute of Customer Service UK Customer Satisfaction Index (UKCSI) as at January in each year.
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A year of mutual support (continued)
Annual Report and Accounts 2021
11
Value
Helping more members achieve their financial ambitions and providing better value to our members
Strength
Keeping our members’ money safe and secure
We have 3.6 million committed members4. Growth was impacted
by pandemic-related lockdowns, which reduced overall member
spending activity and led to fewer products being opened in branches.
In this new environment, we no longer expect to grow our committed
membership to 4 million by 2022, but will aim to do so by 2026.
We will aim to maintain 3.6 million committed members in 2022.
Committed membership is more aligned to our strategy to build
deeper relationships with our members than engaged membership,
and so going forward we will only report on committed membership.
We have 9.5 million engaged members and, similarly, would not
have expected to achieve our 10 million target by 2022.
4
We aim to provide at least £400 million of member
financial benefit each year, through better incentives and
pricing than the market average , but during exceptional
times we may not always be able to deliver this.
5
In 2021, we provided £265 million of member financial
benefit, reflecting the historically low interest rate
environment and our decision to reduce savings rates
and protect our financial strength during a period of
significant uncertainty.
Over the medium term, we expect member financial
benefit to return to in excess of £400 million.
We aim to have a UK leverage ratio (a measure of our
financial strength) of at least 4.5%.
Our UK leverage ratio of 5.4% exceeded our 2021 target.
Committed members4
million
3.2
3.4
3.5
3.6
3.6
3.6
2018 2019
2020
Actuals
2022
2021
Target
Member financial benefit5
£ million
705 735
400 400
265
2019 2020
Actuals
2021
Minimum target
2022
560
2018
UK Leverage ratio
%
5.4
4.9
4.9
4.7
4.5
4.5
2018
2019 2020
Actuals
2021
Minimum target
2022
4 Engaged members have their main personal current account with us, a mortgage of at least £5,000, or a savings account of at least £1,000. Committed members have an engaged membership product plus at least one
other product. Prior to 2018/19, the savings threshold was £5,000; prior year comparatives have been restated using the £1,000 threshold. The comparative for 2019/20 committed membership has been restated to reflect
improved data quality since originally reported.
5 The 2020 comparative for member financial benefit has been restated. For more information on member financial benefit see page 61.
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Annual Report and Accounts 2021
12
Annual Report and Accounts 2021
Our stakeholder engagement
Our stakeholder engagement
Listening and engaging regularly with our stakeholders is fundamental to the way we do business
Listening and engaging regularly with our stakeholders is fundamental to the way we do business and ensures we operate in a balanced
and responsible way, both in the short and longer-term
and ensures we operate in a balanced and responsible way, both in the short and longer-term.
Our approach to stakeholder engagement
Our approach to stakeholder engagement
Section 172(1) statement
Section 172(1) statement
The way in which we engaged with stakeholders was significantly impacted by the Covid-19
pandemic; however, we remain committed to maintaining good communications and building
positive relationships with all our stakeholders. The table below summarises, for each of our key
stakeholders, who they are and why they are important to us, how we engaged with them
during the year, the topics raised and our response.
This section describes how the directors considered matters set out in section 172(1) of the
Companies Act 2006 (the ‘Act’). This also forms the directors’ statement required under section
414CZA of the Act. Although Nationwide, as a building society, is not required to follow the Act,
we seek to apply its requirements where appropriate.
Key decisions taken by the Board in the year and the consideration of relevant stakeholders is
included on pages 15 to 17. Further details on how the Board has engaged directly with our key
stakeholders is included on pages 87 to 88 of the Governance report.
Who are our stakeholders and
why are they important to us?
MMeemmbbeerrss
As a mutual organisation, we are
owned by our members and we
place great importance on being
there when they need us.
We encourage our members to
share their views and we
recognise that in order to
achieve long-term success, it is
critical to understand their
needs, now and in the future.
How have we engaged with them?
What were the key topics raised?
Our response and further information
How members have been impacted
by Covid-19 and the support needed
(including mortgage payment
holidays and payment breaks on
loans, credit cards and overdrafts)
Interest rates for savers
Security and fraud prevention
•
•
• Maintaining access to branches
•
Accessible and digital banking
•
Environmental matters
We engaged with our members in person,
through our branches, online and via other
channels.
•
Our AGM is the key event at which members
can have their say and vote on important
issues. In 2020 our AGM was held online due
to the pandemic. We also held a number of
digital member TalkBack events during the
year, giving access to board directors and
senior management. In addition, we have
continued to expand our Member Connect
Community, an online forum where members
can share their views with us on a range of
issues.
We also engaged with members on other
activities, for example our Community Boards
programme and through customer surveys.
•
•
• We went beyond regulatory guidance, offering support to
members facing financial hardship as a result of Covid-19,
including a no repossessions pledge until May 2021
In a low bank base rate environment, we launched
propositions at competitive rates with some offering a
chance to participate in prize draws
Extended our promise to keep a branch in every town or city
we are in today until at least 2023
Adapted our branches to make them Covid-19 safe
Invested in the security and resilience of our systems
Encouraged digital interactions
Held fraud education TalkBacks
Extended our green propositions, including a new cashback
offer for those purchasing a property with a high-energy
efficiency rating
•
•
•
•
•
FFuurrtthheerr iinnffoorrmmaattiioonn -- Building Thriving Membership cornerstone,
on pages 19 to 20, Building Legendary Service cornerstone, on
pages 23 to 24 and Climate-related financial disclosures – our
carbon journey, on page 38 and supporting our members, on
page 40.
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Our stakeholder engagement (continued)
Annual Report and Accounts 2021
13
Annual Report and Accounts 2021
How have we engaged with them?
What were the key topics raised?
Our response and further information
Who are our stakeholders and
why are they important to us?
OOuurr bbuuyy ttoo lleett ccuussttoommeerrss,, ootthheerr
llaannddlloorrddss aanndd rreenntteerrss
We support landlords and those
who rely on the private rental
sector for their long-term
housing needs and continue to
take positive action to improve
this sector.
We originate buy to let mortgages via
intermediaries, and a growing direct channel.
We provided information and educational
material to landlords and renters through our
Landlord Lifeguard website. We also actively
monitored changes in the buy to let sector
through research organisations.
CCoolllleeaagguueess
The dedication, passion and
values of our organisation are
key reasons for our success.
Consistent with our mutual
principles, we believe in creating
an inclusive culture where all our
colleagues can be themselves
and thrive, where they believe in
what they do, feel supported and
valued, and are able to develop
and grow their careers.
Our colleague sentiment tracker and future of
work surveys provided colleagues with the
opportunity to have their say on how it feels to
work at Nationwide and what they really value.
In addition, we used a variety of ways to
gather their insights and feedback on their
experiences, including our Employee Network
Groups, engagement with Nationwide Group
Staff Union (NGSU) and external surveys such
as the Banking Standards Board survey and
the MIND Wellbeing Index.
CCoommmmuunniittyy
As a building society, we believe
that whether you own your home
or rent it, everyone deserves a
place fit to call home. This forms
the core, not just of our business
activities, but of our broader
contribution to society.
We also work with community
partners and charities to support
our local communities.
We support charities through committing at
least 1% of our pre-tax profits each year to
good causes, focused on housing, including
the Nationwide Foundation. We are in contact
with our communities through our Community
Grants programme and our Community
Boards. Other examples of how we support
our communities and charities include our
employee volunteering programme, our
partnerships with Shelter and St Mungo’s. We
have worked closely with the local community
in the design and planning of the Oakfield
development, in Swindon.
•
•
•
•
•
•
•
•
•
•
•
•
How landlords and tenants have been
impacted by Covid-19
Improving the quality of rental
properties
Improving the private rental sector
through information, support and
educational materials
•
•
•
Offered payment holidays and encouraged landlords to pass
on this benefit to support tenants
Introduced further advance products, offering a discounted
rate on borrowing for green improvements
Digital educational resources continue to help landlords
understand their responsibilities and provide better homes
for renters and better understand renter needs
How Nationwide could support
colleagues through the Covid-19
pandemic
Health and wellbeing
Unacceptable behaviour faced by
member-facing colleagues
Inclusion and diversity
Opportunities for personal and career
development
Progress against our strategic
objectives
Raising awareness of housing issues
and need
Understanding the funding issues
charities have faced during the
pandemic
Reducing carbon emissions and
commitments to tackling climate
change
FFuurrtthheerr iinnffoorrmmaattiioonn -- Building Thriving Membership cornerstone,
on pages 19 to 20 and Building a National Treasure cornerstone
on pages 29 to 31.
•
•
Homeworking made available to around 13,000 colleagues,
whilst making branches and offices Covid-19 safe
Supported health and wellbeing; we gave our colleagues
access to the Unmind wellbeing app
• Mutual respect campaign to support member-facing
colleagues
•
• Worked with our Employee Network Groups to redesign
many of our employee policies and our approach to
employee wellbeing
Updated our cultural values to make our commitment to
inclusion and diversity more explicit
Committed to giving our colleagues greater flexibility in their
working arrangements permanently
•
FFuurrtthheerr iinnffoorrmmaattiioonn -- Building PRIDE cornerstone, on pages 25 to
28.
•
•
•
•
Social investment programmes, including our Community
Grants programme, and support for Shelter and St Mungo’s
Carbon neutral for all energy use and emissions for internal
operations and fleet vehicles
Committed to building a more mutually respectful and
inclusive society, partnering with The Diana Award and the
Football Association’s Respect programme
Our Mutual Good Commitments are focused on building a
better society
FFuurrtthheerr iinnffoorrmmaattiioonn -- Building a National Treasure strategic
cornerstone on pages 29 to 31, Climate-related financial
disclosures on pages 36 to 55 and Our Mutual Good
Commitments on page 35.
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Our stakeholder engagement (continued)
Annual Report and Accounts 2021
14
Annual Report and Accounts 2021
How have we engaged with them?
What were the key topics raised?
Our response and further information
Who are our stakeholders and
why are they important to us?
SSuupppplliieerrss
We work with over 1,100
suppliers who provide a range of
goods and services, helping us
run and improve our business
and deliver quality service for our
members. Our suppliers have
played a critical role in ensuring
continuity of service during the
pandemic.
RReegguullaattoorrss
Regulators oversee our activities
and undertake consultations and
policy reform. We seek to
maintain the highest possible
standards of regulatory
compliance, to protect and
enhance the integrity of the UK
financial system and ensure fair
outcomes for our members.
We organised a virtual annual partner
conference, where leaders from our key
suppliers heard from our leadership team
about the opportunities and challenges we
face together. In addition, we conducted
supplier monitoring activity, focusing on
resilience and changes across our supply chain
risk profile. We also met with suppliers
regularly to have two-way conversations on
key topics such as operational performance,
contract management, risk and sustainability.
We actively monitor changes in the regulatory
landscape, and have engaged with regulatory
consultations and provided regular and ad-hoc
reporting as required
•
•
•
•
•
•
•
•
In addition, regular and ad-hoc regulatory
meetings were attended by our Board, NLT
members and subject matter experts.
IInnvveessttoorrss
Nationwide is active in wholesale
funding markets, engaging in the
issuance of a range of financial
instruments. Wholesale investors
support the Society in meeting
its funding and capital
requirements.
We engaged with our wholesale investors
through a regular and active dialogue. Also,
twice a year, Board members engage with our
largest investors, providing an update aligned
with the most recent published financial
results. In addition, to support the analysis of
investors and their understanding of the
Society’s performance and risk management,
we regularly engage with Credit and ESG
rating agency providers to ensure the Society
is rated appropriately.
•
•
•
•
•
•
Progress against our strategic
objectives
Impacts from Covid-19 and Brexit
Competition within UK financial
services
Sustainability, in particular the
Society’s approach to climate change
Strength of our regulatory capital and
liquidity
Asset quality
Engagement and support during the
Covid-19 pandemic
Environmental matters and climate
change
Ethics, living wages and modern
slavery
Inclusion, diversity and social
enterprise
Prompt payment of invoices
•
•
•
•
Our Procurement for Mutual Good programme, supporting a
greener, more diverse and more ethical supply chain
Our target for our supply chain to be carbon neutral by 2030
Code of Practice that we ask suppliers to commit to
Introduced quicker payments to our micro, small and
medium size enterprise third party suppliers to support their
cash flow during the Covid-19 pandemic
FFuurrtthheerr iinnffoorrmmaattiioonn -- Building a National Treasure strategic
cornerstone on pages 29 to 31.
Board and senior management
accountability
Resolvability Assessment Framework
Financial Crime and Anti-Money
Laundering regulations
Covid-19 support measures
Brexit
Operational resilience
Risk and controls framework
•
•
•
•
• Management of conduct remediation
•
•
•
•
Outsourcing contracts
Access to cash
Fraud scams
Readiness for negative interest rates
•
•
•
•
•
•
Responded to information requests to help inform regulator
policy and decision-making
Responded to various consultations and other requests for
comment and input
Directors and Senior Management had regular engagement
with regulators to discuss key priorities including regular
industry conversations such as meeting stress tests,
adequacy of provisions and transition from Libor to
alternative risk-free rates
Played a full part in working with regulators and across the
sector to support the response to Covid-19
Investors received strategic and financial updates
Feedback was used to develop our Annual Report and
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Annual Report and Accounts 2021
Our stakeholder engagement (continued)
Strategic report (continued)
KKeeyy ddeecciissiioonnss ttaakkeenn bbyy tthhee BBooaarrdd
Annual Report and Accounts 2021
15
At the heart of our mutual purpose is the need to engage, consult and act in the needs of our members, employees and other stakeholders.
The Board is responsible for setting a clear strategy and direction, ensuring the long-term success and sustainability of the Society. When making decisions, the Board considers the outcome for all
relevant stakeholders, as well as the need to maintain a reputation for high standards of business conduct, the need to act fairly and the long-term consequences of its decisions.
The following case studies provide some examples of key decisions taken by the Board, and how stakeholder interests have been taken into account.
Board decision
Future of Legendary Service strategy
Providing truly legendary service has been at the heart of Nationwide’s culture for decades. We strive to ensure that our frontline colleagues display an ethic of care
that has become a defining part of the Society’s culture and values and a powerful differentiator in the market. Members recognise and value the service they
receive across all of our service distribution channels (branch, telephony and digital). As we adapt to the impacts of the global Covid-19 pandemic and adjust to
advancing trends in technology, our task is to ensure that we protect, adjust and adapt this commitment to legendary service for what the future holds.
During the year, the Board approved the establishment of a future service operating model which will match member demand across all of our channels. One of the
key reasons for the change was recognition of the need to meet increasing service expectations on the part of members by delivering against higher digital service
benchmarks in a way unique to Nationwide while seeking to make best use of spare capacity within our branch network to serve more members in more ways. The
Future of Legendary Service strategy will build a more flexible, adaptable organisation through a new unified operating model which will, for example, see branch
colleagues taking phone calls and responding to digital servicing queries. The Board reviewed this change as fundamental and foundational to Nationwide, as the
changes will enable future strategic optionality and ensure that the Society is well placed to adapt in an increasingly complex market, technology and societal
backdrop.
Stakeholders
The implications for key stakeholders of this future servicing model were considered. The Board had input into the mechanisms put in place for the ongoing
monitoring of all stakeholder interests throughout the implementation of the strategy.
Members
Nationwide continues to be committed to meeting members needs throughout their lives and the Future of Legendary Service strategy will see the Society invest in a
multi-year digital servicing enhancement strategy and move our branch network to more flexible opening hours, allowing our branch-based colleagues to serve
members over the phone and through digital channels. In reviewing this plan, the Board took into account the short-and long-term interests of members, ensuring
that the new service strategy offers flexible ways of servicing members, and recognising that the shift to increased digital adoption by members needs to be supported
by an enhanced digital servicing offering. In making the decision the Board:
•
reviewed internal and external market research related to service during the Covid-19 pandemic, which was sourced through direct member and non-member
feedback and provided insight and challenge. This showed that during the pandemic a large proportion of members moved to digital services, creating a new
consumer appetite for self-servicing offerings;
considered the cohort of members that currently continue to rely on branches to service their accounts and gave particular focus to vulnerable members. The
Board highlighted the significance of executing the strategy iteratively, to enable us to listen to and react to member feedback on changes, and ensure exceptions,
risk mitigations and controls are designed and executed robustly;
recognised the distinct role that the Society could play in supporting members in the further adoption of digital banking services. Over the course of the strategy,
members will be engaged and communicated with at a local level; and
acknowledged the potential impact on members of more variable branch opening hours and noted the plans to engage with members and stakeholders at the
local level well in advance of any changes.
•
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Annual Report and Accounts 2021
Our stakeholder engagement (continued)
Strategic report (continued)
KKeeyy ddeecciissiioonnss ttaakkeenn bbyy tthhee BBooaarrdd (continued)
Annual Report and Accounts 2021
16
Colleagues
As a result of the enhanced digital proposition and members shifting their behaviour to digital servicing, the number of member-facing colleagues in branches and call
centres will ultimately need to reduce and those colleagues that remain will be required to become multi-skilled. In considering colleagues, the Board:
•
reviewed plans for a significant multi-skilling learning pathway, to ensure colleagues are able to move from serving members in branches to being able to service
telephone calls and digital servicing queries; and
endorsed a programme of activity of extensive colleague engagement which included high-quality training, career planning, transparent communications and
union engagement. Colleagues impacted by the reduction of roles have been given the ability to re-train for other roles within the Society.
•
Community
The Board considered the interests of local communities and:
•
recognised that changes to branch opening hours and a branch closure programme could impact specific communities, especially those not well-served by other
financial services institutions; and
a series of engagement activities with local communities was undertaken and the proposal to the Board highlighted that the role of branches could evolve in local
communities. In approving the final proposition, the Board agreed that it should be designed to ensure that the Society could remain on local high streets longer,
whilst also meeting the increasing shift to digital servicing.
Regulators
The Board discussed the views of regulators, and in making the decision:
•
analysed the main considerations from a regulatory perspective, including receiving assurance from management that members would be supported through the
changes;
recognised that the strategy would increase the regulatory scrutiny for our frontline and digital operations;
recognised that the Society also faces a risk if it does not seek to transform its service model in this way, reflecting on the need to evolve the business model in
response to changes in member demand; and
• balanced stakeholder interests over the long term, noting that the strategy would maintain and extend the Society’s comparative advantage in service to support
the Society’s risk and cost strategies in the post pandemic environment.
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Our stakeholder engagement (continued)
Strategic report (continued)
KKeeyy ddeecciissiioonnss ttaakkeenn bbyy tthhee BBooaarrdd (continued)
Annual Report and Accounts 2021
17
Board decision
Re-imagining the future of work
During the past year, around 13,000 (90%) of Nationwide’s office-based colleagues have been working from home, as a result of the Government guidelines for Covid-
19. Over this time the actions taken, and the support offered to colleagues, has meant that colleague commitment to Nationwide has increased, resulting in better,
more agile decision making. This has been made possible through improved technology.
The Board took learnings from the pandemic and recognised the opportunity to radically change the future of the workplace for Nationwide and, as a result, supported
management in the announcement made in March 2021 of its commitment to re-shape the future of working at Nationwide and to allow colleagues greater freedom
to choose where they work, depending on the work they do each day.
Stakeholders
Colleagues
During the year, as colleagues across the Society adapted to working from home, the Board received monthly reports which included the insights from colleague
surveys, sentiment trackers and leadership interviews. The Board monitored colleague sentiment through these internal mechanisms and contributed to external
research conducted on the topic, as well as drawing on their experiences elsewhere within the industry. This was augmented by giving colleagues direct opportunities
to attend Board meetings to give feedback and report on their sentiment and wellbeing directly.
The Board considered colleague interests and preferences as a whole, taking into account the varied roles across the Society, along with the benefits of human
interaction and impacts on mental wellbeing. Therefore, whilst noting that a large proportion of colleagues would prefer to work from home full-time, it was agreed
that workspaces needed to remain for colleagues who preferred to work from office locations, or for those who preferred a mix of home and office-based work. In
response to colleague feedback, office spaces are being redesigned to be purposed for collaborative working and flexible workspace.
Suppliers
The Board highlighted the significance of communicating the changes to suppliers, recognising the key role our suppliers play in helping us run our business. The
impact on suppliers was low overall; however, an outcome of fewer people requiring office space for work is that the Board has approved the permanent closure of
three office buildings and a small number of colleagues and third-party suppliers have been impacted by the decision.
Members
The Board considered the member impact of this decision. The Board concluded that the closure of the three administration buildings located in Swindon was in the
interest of members due to the sustainable cost savings that would be achieved by closure of the buildings.
Additionally, research from colleague engagement activities highlighted several indirect positive member benefits, with evidence showing that remote working had
improved productivity and outcomes suggested that colleagues were able to make better decisions when working from home as they gave greater consideration to
the human impact of their decisions.
Community
In making the decision to change the future of work, the Board delegated operational matters to the leadership team, who took forward engagement activities with
the local media, the local council and locally elected Members of Parliament prior to the public announcement that our estate of administrative buildings in Swindon
would be reduced. Where possible, early engagement took place and feedback was monitored by the leadership team.
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Annual Report and Accounts 2021
18
How we’re building society, nationwide
As a mutual, owned by our members and formed with a strong underlying social
purpose which we express as building society, nationwide, our ambitions are to
provide better value and service for our members, and to contribute to wider
society too. These ambitions are underpinned by our five strategic cornerstones,
that describe what we do and how we do it.
In October, our Board approved a refreshed strategy, which builds on the successes of, and evolves, our
previous strategy in the context of the considerably different external backdrop brought about by the pandemic.
Our cornerstones remain as relevant today as they did when we first launched them in 2016, but our strategic
priorities under each cornerstone have been refreshed as we embed new positive ways of working developed
through the pandemic, and look forward to the opportunities we have to deliver more for our members,
colleagues and communities.
We are reorganising ourselves to focus on delivering even better outcomes for our members today and into
the future. We have structured this around what we call our Member Missions, which ensure that we put our
members at the heart of everything we do, while focusing on our controls and the efficiency of our processes.
Our three Member Missions
Supporting our members
in buying their own homes,
improving their financial
resilience and wellbeing,
and helping them to invest
in their futures.
Making it easier to become
a member and simpler
to get things done, while
supporting members to feel
confident and in control of
their money.
Improving the experience our
members receive in the moments
when they may need some extra
support, such as managing their
finances during life transitions,
or helping them transact safely
without fear of fraud.
Building a
National
Treasure
Building
PRIDE
Building
Legendary
Service
Building
Thriving
Membership
Built to
Last
Our five
strategic
cornerstones
Building thriving membership
Growing and serving our membership
page 19
Built to last
Managing the Society for the long term
page 21
Building legendary service
Doing our very best to serve our members
page 23
Building PRIDE
Creating a healthy culture for our people
page 25
Building a national treasure
Contributing to our wider community
page 29
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Building thriving membership
Growing and serving our membership
Annual Report and Accounts 2021
Annual Report and Accounts 2021
19
16.3 million
members
2020: 16.3 million
Helped 1 in 7
first time buyers
into a home of their own
2020: 1 in 6
Start to Save
account helped 130,000
people with little or no savings
to save more than £100 with
us for the first time
Provided 256,000
mortgage payment holidays and
granted 105,000 payment
breaks or interest-free periods on
loans, credit cards and overdrafts
1 in 10 of the UK’s
current accounts are with us
2020: 1 in 101
We are here to support our members in becoming financially
secure through saving, buying a home and managing their
money. We support 16.3 million members (2020: 16.3 million)
and have a committed membership – those who have two or
more products with us - of 3.6 million (2020: 3.5 million ).
2
HHeellppiinngg mmoorree mmeemmbbeerrss ttoo hhaavvee aa ppllaaccee ffiitt ttoo ccaallll hhoommee rreemmaaiinnss
ccoorree ttoo oouurr ppuurrppoossee
We were founded to help our members into homes of their own.
Through the pandemic we have remained committed to the
mortgage market, being there for our members when they have
needed us. Additionally, in recognition of the growing private
rental sector, we seek to support good landlords and the
provision of quality rental accommodation for those who cannot
yet afford to buy.
Over the past year, we have provided 256,000 mortgage
payment holidays and granted 105,000 payment breaks or
interest-free periods on loans, credit cards and overdrafts. We
also went beyond regulatory guidance and industry peers, by
pledging that, until the end of May 2021, no mortgage member
would lose their home as a result of Covid-19 if they worked with
us to get their finances back on track. For those who continue to
be impacted financially, our specialist support service is able to
offer a wide range of options tailored to members’ individual
circumstances.
We have also been there for our members who were able to buy
or move home. We continued to lend carefully and at
competitive rates. Coming out of the first lockdown, we were
one of the few lenders to offer higher loan to value mortgages
for first time buyers, while strengthening our lending rules to
manage the risk for borrowers and the Society. This year, we
supported one in seven of all first time buyers into a home of
1 CACI's Current account and savings database (February 2021 and
February 2020).
2 The comparative for committed members has been restated to reflect
improved data quality since originally reported.
their own (2020: one in six). Since the year end, the launch of
our Helping Hand mortgage saw us become the first major
lender to offer first time buyers the ability to borrow up to 5.5
times their salary on 5 or 10 year fixed rate mortgages, with a
loan to value of up to 90%, helping more people to realise their
dream of home ownership. In May 2021 we became the largest
mortgage provider to reintroduce 95% loan to value lending
without government support, offering new market-leading
mortgages to first time buyers and home movers.
We broadly maintained our share of total gross mortgage
lending, at 11.1% (2020: 11.4%), as gross lending remained
robust at £29.6 billion (2020: £30.9 billion). Lower than normal
demand during the periods of lockdown was offset by a time of
greater demand as members re-evaluated their housing needs
as a result of Covid-19. Demand was further stimulated by the
Government’s stamp duty holiday. Our net lending reduced to
£1.9 billion (2020: £2.8 billion).
With many of our members in rented accommodation, we have
encouraged our landlord borrowers to pass on payment breaks
to their tenants where needed. Our digital educational resource,
Landlord Lifeguard , seeks to help landlords understand their
responsibilities and provide better homes for renters.
3
Today, we face a growing environmental crisis. With housing
accounting for around 15% of the UK’s total carbon emissions ,
4
we believe we have an important part to play in tackling climate
change. Creating greener, more sustainable homes is therefore
important to us. We continue to offer preferential rates on our
green additional borrowing products, with the support of our
£1 billion green fund. Take-up has so far been slow, highlighting
the challenges in improving the energy efficiency of homes. In
April 2021, we expanded our green product range to encourage
and reward members who purchase greener homes, and
3 landlordlifeguard.co.uk
4 Office for National Statistics, February 2020.
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Building thriving membership (continued)
Annual Report and Accounts 2021
Annual Report and Accounts 2021
20
OOuurr ssttrraatteeggiicc pprriioorriittiieess ggooiinngg ffoorrwwaarrdd
We are committed to supporting our members in saving, buying
a home and managing their money. Our focus remains on
building lifelong relationships with our members, and creating
greater long-term value for them. We want to help them make
the most of their money at every stage of life – from renting and
saving for a deposit, to buying their first home, to helping them
use the value in their homes to live better in retirement. To
support this ambition, we will continue to centre our
propositions around home and family. Alongside this, we aim to
lead the greening of UK homes, for example by providing
incentives for those looking to make green changes.
We also recognise the importance of ‘rainy day’ savings and will
continue to encourage a regular savings culture and look for
more opportunities to reward savers beyond rate, as we have
done with our prize draws.
incentivise landlords to improve the energy efficiency of their
rental properties. More information on what else we are doing
to support greener homes can be found on pages 36 to 55.
EEnnccoouurraaggiinngg ggoooodd ssaavviinnggss hhaabbiittss
5
We continued to offer interest rates on deposits that, on average
over the year, were above the market average . Our decision to
reduce savings rates in response to the fall in bank base rate to
record low levels was taken to protect our financial strength as
we faced into a period of significant economic uncertainty. As
the situation stabilised, we have started to return value back to
members through our propositions, including our leading
Mutual Reward Bond, Start to Save account, and Best Buy
pricing on our Triple Access Online account.
Despite several months of strong competition from government-
backed savings provider National Savings & Investments (NS&I),
we gained an extra £10.6 billion in member deposits over the
year (2020: £5.7 billion). This reflected growth in current
account balances, in part from the reduced opportunity to
spend through lockdown periods and, in the second half of the
year, from growth in savings balances driven by our new
propositions, and from balances regained after NS&I lowered its
savings rates. However, our market share of deposit balances of
9.4% was lower (2020: 9.9%), as market growth was
particularly strong in current account balances where our
competitors have a higher share.
Having a savings safety net when faced with financial hardship
has proved to be especially important through the pandemic,
and we remain committed to encouraging good savings habits
and finding new ways to reward savers in the current low rate
environment. Through the year, we launched a range of new
propositions at competitive rates, with some offering a chance
to win more through prize draws. For example, our popular
Start to Save account has helped 130,000 people with little or
no savings with us to save more than £100 with us for the first
time, while our Mutual Reward Bond has rewarded our existing
members with our best fixed rate and entry to a prize draw – of
the 85,000 members who opened one, 336 members won
£10,000. We will be sharing the mutual benefit even further
from September, with our new Member Prize Draw. Every
month, for twelve months, all eligible members will
automatically be entered into the draw to win a share of the
£1 million monthly prize fund . 6
HHeellppiinngg oouurr mmeemmbbeerrss ttoo mmaannaaggee tthheeiirr eevveerryyddaayy ffiinnaanncceess
7
Last year we reached a 10% market share of all current
accounts . This year, although we withdrew switching incentives
to new members, our market share remained stable at 10%7,
and we continued to be a net gainer from the Current Account
Switching Service, demonstrating the satisfaction of our existing
members and our continued appeal to new joiners . 8
IImmppaacctt ooff BBrreexxiitt oonn oouurr mmeemmbbeerrss
The transition period agreed between the UK and the European
Union (EU) ended on 31 December 2020. Unfortunately, this
meant that we were no longer able to service the current
accounts, savings and credit cards of our members resident in
the Netherlands and Italy. For those affected, we provided
dedicated support through the closure process. For existing
members resident in other EU jurisdictions, we were able to
continue to provide the majority of their existing products and
services.
5 Due to data being unavailable, the market average does not include
deposits with National Savings & Investments (NS&I).
6 England, Scotland, Wales only. Age 18+. Automatic entry with a
mortgage, personal savings or current account. Must be eligible on last
working day of month preceding a draw. Winners drawn 2nd Tuesday
of each month September 2021 to August 2022. Prizes for each draw:
1 x £100k, 2 x £25k, 5 x £10k and 8,000 x £100. One entry per eligible
member, per monthly draw. Rules and opt out at nationwide.co.uk.
7 CACI's Current account and savings database (February 2021 and
February 2020).
8 Pay.UK quarterly CASS data, 9 months to December 2020.
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Built to last
Managing the Society for the long term
Annual Report and Accounts 2021
Annual Report and Accounts 2021
21
5.4% UK
leverage ratio
2020: 4.7 %
36.4% Common
Equity Tier 1 ratio
2020: 31.9%
£790 million
underlying profit
2020: £469 million
£823 million
statutory profit
2020: £466 million
£265 million
member financial benefit,
from better incentives and
pricing than the market average
2020: £735 million9
This year we have focused on keeping our Society, our members
and our colleagues safe through the pandemic and ensuring we
remain financially strong and built to last. This has enabled us to
serve and support our members through the challenges of the
pandemic. Our financial strength also stands us in good stead as
we look to continue to support our members through the
uncertain times ahead, consistent with our mutual heritage.
FFiinnaanncciiaallllyy ssttrroonngg
We aim to achieve the right balance between making sufficient
profit to maintain our financial strength, giving long-term value
to members, and investing in our business so that we can
continue to meet our members’ needs and expectations both
now and into the future.
In a period of heightened economic uncertainty, we have
continued to take a prudent approach to managing our low risk
business to protect our financial strength. As a result, we have
remained financially strong and resilient, which is reflected in
our capital position. Our UK leverage ratio, which is one of the
measures of our ability to withstand economic shocks, such as
the Covid-19 pandemic, increased to 5.4% (2020: 4.7%). This is
above both regulatory requirements and our own internal
minimum target of 4.5%. Our Common Equity Tier 1 ratio
improved to 36.4% (2020: 31.9%). Both include the benefit of a
recent regulatory change to the treatment of intangible assets.
More information can be found on page 60.
We aim to provide at least £400 million of financial benefit to
our members each year, but during exceptional times we may
not always be able to deliver this. After bank base rate fell to a
record low of 0.1%, we reluctantly took the decision to reduce
interest rates across our savings range, as paying significantly
higher rates would not be financially sustainable in the long
term. This had an impact on member financial benefit, which
9 The comparative for member financial benefit has been restated.
More information on member financial benefit can be found on page
61.
was lower at £265 million and below our annual target of
£400 million (2020: £735 million9). Over the medium term, we
expect to return to delivering annual member financial benefit
in excess of £400 million.
Our underlying profit of £790 million (2020: £469 million) has
contributed to our robust capital position. This enables us to
maintain the level of support we want to give our members in
such challenging and uncertain times.
Total underlying income increased to £3,285 million (2020:
£3,046 million), as mortgage income increased due to the
macroeconomic uncertainty which resulted in stronger new
business margins across the market. Income was further
supported by our reduction in savings rates following the fall in
bank base rate. At the same time, we reduced our costs by
£94 million to £2,218 million (2020: £2,312 million), as we
continued to work to become more efficient in serving
members. More information can be found on page 60.
We have put substantial support in place for members in
financial difficulty. This, together with the impact of our prudent
underwriting and wider government support schemes, has
meant the number of our members falling into arrears remains
low. This may change when support schemes are withdrawn,
which is why we have set aside £190 million (2020: £209
million) in the year for loans that may not be repaid in full.
RReessiilliieenntt aanndd sseeccuurree
We remain committed to our digital transformation, investing to
deliver the services and platforms that our members will want
and need in the future. Through our refreshed strategy, we have
rephased and reprioritised our investment spend over a longer
period and with a focus on delivering in a more efficient way, in
areas that provide most value to our members and the Society.
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Built to last
(continued)
This year, we continued to simplify our technology, strengthen
our operational resilience, build greater capacity in our
payments platform and enhance our cloud-based capability.
This will enable us to support higher membership and
transaction volumes and create an improved member
experience, while protecting our members’ money and personal
information. We also continue to invest in the resilience and
strength of our control processes. In the year, we began an
improvement programme for our processes and controls,
targeted at our more complex processes.
Simultaneously, we are preparing ourselves and our systems for
negative bank base rate, should it ever arise.
OOuurr ssttrraatteeggiicc pprriioorriittiieess ggooiinngg ffoorrwwaarrdd
We will protect our financial strength and resilience, so we can
continue to support our members, colleagues and communities,
and invest for their benefit.
We have made good progress in becoming more efficient
through modern ways of working and delivering change, and
will continue to enhance our efficiency by prioritising
investment. This will ensure we are able to withstand future
challenges and are sustainably profitable and resilient for the
long term.
OOuuttllooookk
The outlook for the UK economy remains highly uncertain; much
will depend on how the pandemic evolves, as well as on the
policy measures to combat it and the resulting impact on wider
society. In the near term, continued policy support and good
progress on the rollout of the Covid-19 vaccination programme
provide cause for optimism that the economy will recover
strongly in the second half of the year. However, we recognise
that the economy faces many difficult adjustments in the years
ahead, in the wake of the pandemic and Brexit. In addition, it is
Annual Report and Accounts 2021
Annual Report and Accounts 2021
22
unclear how behavioural shifts ushered in by the pandemic will
impact our markets.
While there are many uncertainties ahead, we face into them
from a position of considerable strength – and are ready to
stand by our members, as we always have done.
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Building legendary service
Doing our very best to serve our members
Which? Banking
Brand of the
Year 2020
for the fourth year running
No. 1 for customer
satisfaction
among our peer group10
Active mobile
users grew by 13% to
3.7 million members,
representing over half of all active
current account members
Extended our
Branch Promise
to keep a branch in every
town or city we are in today
until at least 2023
As a mutual, owned by and run for our members, we focus on
our members’ needs and wishes, setting our service apart from
our competitors, and helping us to build a stronger, thriving
membership.
We place great importance on being there when our members
need us. In a year of significant uncertainty and, for many,
unsettlement, being able to talk to us has been really important
for our members. We have therefore focused on ensuring the
consistency and availability of our services and operations
through the pandemic, while responding flexibly to
government-imposed restrictions and changes in member
behaviour. We are proud to have been awarded Which? Banking
Brand of the Year 2020, for the fourth year running, with special
mention made of our flexibility during lockdown.
In normal times, it is our people, and the face-to-face service our
members experience when they visit our branches, that help set
us apart from our competitors. However, during the pandemic
we had to prioritise the safety of both members and colleagues,
so we needed to ask our members to limit their visits to
branches where possible. Over the year, member satisfaction
has been impacted, reflecting fewer branch visits, adaptations
we have had to make to our branch service to adhere to
government guidelines on social distancing, and the impact of
our decision to reduce savings rates in response to record low
interest rates.
We are pleased to have remained no. 1 for customer satisfaction
among our peer group for the ninth year , although we were
below our target lead of 4%pts. We were joint 13th in the all-
sector UK Customer Satisfaction Index , where we remain the
highest ranked high street financial services provider, but this
was below our target of being in the top 5.
10
11
Annual Report and Accounts 2021
Annual Report and Accounts 2021
23
AAddaappttiinngg oouurr sseerrvviicceess ttoo ssuuppppoorrtt oouurr mmeemmbbeerrss tthhrroouugghh tthhee
ppaannddeemmiicc
Through the pandemic, we have worked hard to find the best
ways to support our members in a safe way, and to maintain the
level of service our members deserve and expect. We kept 90%
of our branches open through the first lockdown and in the
latest lockdown, 98% of our branches stayed open . We
created more space in 440 branches to serve more members
safely, whilst adhering to strict social distancing requirements,
and provided our branch colleagues with digital tools to reduce
instances of queuing and improve member experience.
12
We were also more creative in how we used our branches,
quickly transforming the role of our branch colleagues to
support other member service channels that were experiencing
greater member demand. Our branch colleagues have now
answered over 1.5 million member calls and supported around
350,000 digital interactions with members. Meanwhile, many
of our other member-facing colleagues, such as our contact
centre colleagues, were enabled to work remotely.
Where government guidelines meant we were no longer able to
hold face-to-face meetings with our members, we introduced
video appointments. These were well received by members,
with feedback acknowledging the advantages of reduced travel,
time saved and ease of service.
We remain acutely aware of the challenges faced by our more
vulnerable, typically branch-reliant, members through the
pandemic. We have worked hard to protect them with safe
access to their cash, initially through extended branch opening,
but also with cash deliveries to their homes where needed, and
10 © Ipsos MORI 2021, Financial Research Survey (FRS), for the 12 months
ending 31 March 2013 to the 12 months ending 31 March 2021. For more
information, see footnote 3 on page 8.
11 Institute of Customer Service UK Customer Satisfaction Index (UKCSI)
as at January 2021.
12 Average calculated between 6 January to 12 April 2021, consistent
with the high street reopening.
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24
Building legendary service (continued)
with a dedicated phoneline. We also offered digital support –
including demonstrations and fraud and scam education.
DDeelliivveerriinngg ddiiggiittaall ssoolluuttiioonnss
Over the year, we have seen a rise in the number of members
interacting digitally with us, in part spurred on by the
restrictions of the pandemic. Members who actively used our
mobile app grew by 13% to 3.7 million (2020: 3.3 million),
representing over half of all active current account members.
The number of members interacting with us through digital
channels such as browser based messaging, Webchat and
Apple Business Chat grew by 29% to 2.9 million (2020:
2.3 million), and 76% of all product sales were made through
digital channels (2020: 62%).
We started some time ago to reshape our Society for an
increasingly digital world and our investment in building
capacity and the resilience of our systems has put us in good
stead for handling growing digital transaction volumes. This
year, however, the lockdown periods impacted members’ day-
to-day routines and spending patterns, and so overall payment
volumes remained broadly stable at 2.6 billion (2020:
2.6 billion), although the number of members shopping online
increased significantly.
With more of our members needing, or choosing, to interact
with us digitally, we launched a number of new digital solutions
and enhancements over the year. Within seven working days of
mortgage payment holidays being introduced, we had
automated our online application process, making it quicker
and easier for our members to apply. For our mortgage
members wanting to buy or move home, we enabled house
price valuations to be undertaken remotely, and our new online
decision in principle application process provides members with
a mortgage decision in only fifteen minutes. Meanwhile, new
members opening a savings or current account can now do so
faster, with selfie identification and e-signatures. We also
launched an online Covid-19 support hub on our website,
showing our members the different ways that we can support
them all in one place.
We are continually enhancing our Banking App to meet even
more of our members’ needs. This year we added the ability to
view pending transactions and cancel direct debits, and
additional measures to further protect our members from falling
victim to scams, such as advanced fraud warnings, confirmation
of payee checks and app-based two-step authentication on
online shopping transactions.
FFrraauudd pprreevveennttiioonn
OOuurr ssttrraatteeggiicc pprriioorriittiieess ggooiinngg ffoorrwwaarrdd
Supporting our members through the uncertainty and potential
financial challenges caused by Covid-19 has been and will
remain a priority for us. We are pleased to see our satisfaction
ratings in our own member experience survey already strongly
recovering, as lockdowns ease and we continue to be there for
our members when they need us .
13
As we emerge from the pandemic, we will adapt to, and enable,
members’ changing behaviours towards digital channels. At the
same time, we will protect the easy, seamless access to our
people that we know our members so greatly value. In doing so,
we remain committed to being thoughtful, caring and here to
help, at home and on the high street.
We continue to invest in the security and resilience of our
systems to protect against fraud and scams. Last year, our fraud
defence systems and specialist fraud team together helped
prevent £113 million of attempted fraud on card and online
transactions (2020: £97 million). In addition, our branch
colleagues protected our members from at least £5.5 million of
attempted scams (2020: £4.8 million).
We will continue to invest in our digital capabilities and evolve
the role of our branches, progressing our vision of a more
united, flexible and multi-skilled member-facing workforce. We
will support our members wherever they are - whether in
branch, on the telephone or across digital channels - and in
whatever they need, demonstrating our mutual difference with
member needs at the centre.
One of the best solutions for protecting our members from fraud
and scams is education. Last year, we applied real-time
additional fraud warnings and checks as members made
payments, and provided advice on fraud and scams on our
website, in Member Talkbacks and, more broadly, through
national media. We work closely with the financial services
industry to share information on emerging issues and insights,
as we collectively look for ways to combat fraud at an industry
level.
By transforming the roles our branches play in serving our
members, we are pleased to have extended our Branch
Promise, to remain in every town or city we are in today until at
least 2023. At a time when many of our competitors are
announcing widescale branch closure programmes, we are
demonstrating our commitment to the high street and our
communities, and our desire to be a force for good in society.
13 Member experience tracker survey asks members to rate their
satisfaction and provide feedback, following a specific interaction
across channels and products. Survey results for the 3 months ending
31 March 2020 to the 3 months ending 31 March 2021.
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Building PRIDE
Creating a healthy culture for our people
Annual Report and Accounts 2021
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25
Highest proportion
of employees across all
major peers surveyed who were
proud of the way we supported our
members through the pandemic14
Top quartile score
for shared purpose, respect,
reliability and resilience15
Committed to giving our
colleagues greater flexibility in
their working arrangements now
and into the future, so they can
be at their best to serve our
members and the Society
Bupa Health and
Wellbeing Award
Responsible Business
Champion 2020 ,
for embedding health and wellbeing
into our culture
16
Protected the jobs
of all our employees until the end
of December 2020
The dedication, passion and values of our people are the key
reasons for our success. Consistent with our mutual principles,
we believe in creating an inclusive culture where all our
colleagues can be themselves and thrive, where they believe in
what they do, feel supported and valued, and are able to
develop and grow their careers. Our culture reflects our shared
set of values, beliefs and behaviours which are centred around
the acronym PRIDE, and put our members at the heart of our
decision making.
This year, we have updated the ‘E’ in PRIDE from ‘Excelling at
relationships’ to ‘Empowering each other’, as we seek to further
embed inclusion, diversity and wellbeing in everything we do.
Putting our members and their money first
Rising to the challenge
Inspiring trust
Doing the right thing in the right way
Empowering each other
We are tremendously proud of, and grateful to, our colleagues
for how they have risen to the challenges of the pandemic. Our
people have done the best that they can for our members, kept
our essential services going, and supported each other through
unprecedented times, often while facing their own personal
challenges brought about by the pandemic. The wellbeing and
safety of our colleagues has remained at the centre of our
response to the pandemic.
14 Banking Standards Board’s 2020 Employee Survey. Major peers
surveyed comprise the following systemically important institutions:
HSBC, Lloyds Banking Group, Morgan Stanley International, NatWest
and Santander UK.
We are pleased that, in the Banking Standards Board’s 2020
Employee Survey, Nationwide had the highest proportion of
employees of all systemically important institutions surveyed,
who were proud of the way we supported our members during
the pandemic14. We also moved into the top quartile for ‘shared
purpose’, where we are already placed for three other
characteristics (respect, reliability and resilience)
.
15
We continue to progress our broader inclusion and diversity
strategy, but recognise we still have more to do. Further
information can be found on the next page.
SSuuppppoorrttiinngg oouurr ccoolllleeaagguueess’’ wweellllbbeeiinngg
We have worked hard to support and protect our colleagues’
health and wellbeing through the Covid-19 pandemic. Around
13,000 (90%) of our office-based colleagues now work from
home, supported by a ‘click and collect’ service for essential
office equipment and access to an ergonomist for advice on
home working setup, to help protect their future health. Where
homeworking was not feasible, including for colleagues
struggling with prolonged homeworking, we made office space
available but implemented stringent measures such as split-shift
working, social distancing and regular deep cleaning to ensure
our workplaces are Covid-safe.
We continue to support our colleagues in looking after their
social, mental, physical and financial wellbeing, launching a
number of initiatives, including a dedicated wellbeing site,
virtual wellbeing sessions and access to the Unmind wellbeing
app, which has been downloaded by 40% of colleagues. We
have made a number of supportive people policy changes to
increase flexibility and reduce potential stress for our
colleagues. These include extending paid emergency
dependants and carers’ leave, promoting flexible working for
15 Banking Standards Board’s 2020 Employee Survey.
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Building PRIDE (continued)
those juggling homeschooling and offering paid leave for
colleagues who were shielding and unable to work from home.
Through the pandemic, we made it our priority to listen to how
our colleagues were feeling. Our colleague sentiment tracker, an
employee listening survey, helped us to better understand in a
timely way how our colleagues felt, and how we could best
support them. In response to feedback, we encouraged
meeting-free times during the working day for colleagues to
focus on their own wellbeing. We also provided help with
finding ‘buddies’ so our colleagues could build social
connections outside of their working relationships, and have
trained a support network of around 200 Healthy Mind
Champions across the Society to offer ‘in the moment’ support
and guidance to colleagues struggling with their mental health
or wellbeing. We are pleased that our actions were recognised
by Business in the Community (BITC), as a BUPA Health and
Wellbeing Award Responsible Business Champion 2020 , for
embedding health and wellbeing into our culture.
16
With so many colleagues now homeworking, and able to sample
what working more flexibly might look like, we engaged our
people in shaping our plans for how we will work in the future.
Around 8,500 colleagues took part in our survey, with over half
saying they would like to work at home full time and more than
a third preferring a blend of home and office-based work. We
are therefore moving away permanently from fixed location
working and towards greater flexibility, putting our colleagues
in control of where they work. In doing so, we believe our
colleagues can be at their best to serve our members and the
Society. As a result, we are closing three of our smaller
Swindon-based offices, with 3,000 colleagues located there
either moving to our Swindon head office, working from home,
or a blend of both. Office workspace will still play an important
role, with an increased focus on collaboration.
We committed to protecting the jobs of all our employees until
the end of December 2020, providing reassurance at a
particularly worrying time. Like most organisations though, we
have had to review our internal team structures to ensure we
are fit for the future. Through the year we reduced our reliance
on contractors and temporary staff, and a restructuring of job
roles led to a reduction in the number of permanent employees,
primarily in the first three months of 2021. For all affected
permanent employees, we offered personalised support aimed
at helping them to find a new role, for example with workshops
on using LinkedIn, CV writing and with retirement planning
where relevant. We continue to manage change with care and
sensitivity, in line with our values.
DDeevveellooppiinngg oouurr ttaalleenntt ffoorr tthhee ffuuttuurree
We continue to invest in our people and their careers. We have
now held leadership pathway career conversations with over
150 of our leaders. As a result, 40 senior colleagues have taken
broader and more stretching roles and, over the last 12 months,
around 70% of all new executive appointments have been
internally hired.
We continue to invest in our new talent for the future, through
our Emerging Talent programme. Last year, we recruited 64
participants, made up of graduates and internal colleagues, 11
industrial placement students and 18 apprentices.
Through our Technology Talent programme, we recruited
around 450 new technology specialists over the year as
planned, while also re-skilling our colleagues to grow our digital
capability and expertise internally. This has enabled us to reduce
the number of contractors we use, further improving our
efficiency. Our new dynamic workspace in London will evolve as
a collaboration hub, particularly for our technology specialists.
Through the pandemic, we also multi-skilled some of our
colleagues so they could support business areas that were
experiencing higher member demand, as we create a more
flexible workforce.
RReewwaarrdd aanndd rreeccooggnniittiioonn
Fair pay and reward remain an important part of our ethos. Our
Sharing in Success reward scheme recognises every colleague’s
contribution based on the Society’s overall performance, which
reflects our success in achieving the things that are most
important to our members. Further information can be found in
the Report of the directors on remuneration.
As outlined in the 2020 Annual Report and Accounts, on 31
March 2021 our defined benefit pension scheme (for colleagues
who joined Nationwide before June 2007) closed to future
accrual. Around 4,500 colleagues who were affected by the
change were provided with a range of support channels in the
months before the scheme closure, from September 2019 to 31
March 2021. Scheme members will retain their accumulated
benefits and will build up future benefits in our defined
contribution pension scheme, which offers employer
contributions of up to 16% based on a colleague contribution of
7% of salary.
IInncclluussiioonn aanndd ddiivveerrssiittyy
Inclusion is at the heart of our mutual purpose and, as our
members’ needs change, we are committed to building an
inclusive society that leaves no-one behind. Internally, our aim is
to build a culture where everyone can be themselves and thrive,
and for our Society to reflect the diversity of the wider
communities we serve. This ambition forms one of our Mutual
Good Commitments, as presented on page 35. Our philosophy is
inclusion first – we want our people to feel valued for who they
are and be empowered to thrive, bringing out the best in
16 Awarded by Business in the Community (BITC).
26
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27
Building PRIDE (continued)
themselves and in others. This provides a strong driving force
for our inclusion and diversity strategy, which the Board and our
leadership team are committed to progressing, with a focus on
long-term, sustainable change.
We are introducing inclusion measures to assess our progress
and complement our existing diversity measures, which we
aspire to meet by 2028 or sooner. These will be tracked and
reported to our leadership team and the Board.
We have taken positive steps this year to progress our inclusion
and diversity strategy and our measures, but recognise we have
more to do. The Board has committed to focus on further
embedding inclusion and diversity in our culture and ways of
working.
Our Strategic Inclusion and Diversity Action Group, led by our
Chief Operating Officer, brings together senior leaders to
support the embedding of inclusion and diversity across our
Society, including in our people processes, such as recruitment,
talent leadership and reward. We continue to tackle imbalances
in our workforce, particularly at more senior levels, by using
data and insight to take targeted action. Around 100 colleagues
are participating in our sponsorship programme, that supports
the development and career progression of under-represented
groups and includes development events, external coaching and
masterclass participation. Our latest leadership conversations
have focused on progressing around 25 ethnically diverse
colleagues into broader and more stretching roles.
Externally, the Black Lives Matter movement shone a spotlight
on the inequalities that still exist within wider society today.
Mutual respect is a core value for us and, last year, we took a
bolder anti-racism stance internally, as racism, hatred and
division have no place in our Society. We did this through
communication, education, and conversations throughout the
year. Our leadership team now each have a reciprocal
mentoring relationship with a colleague from an ethnically
diverse background, to enable the sharing of experiences,
encourage dialogue and provide development support, and our
CEO, Joe Garner, has formed his own ethnically diverse
colleague mentoring panel that has now met five times over the
year.
Our
current
diversity1
6
Senior
Managers
37.3%
31
Diversity
measures
to meet
by 2028
Gender2
Leadership
7
population
34.5%
363
Leadership
population
50%
Ethnicity3
Disability4
Sexual Orientation5
All
employees
61.2%
11,098
Senior
Managers
2.4%
Leadership
population
6.5%
All
employees
11.8%
Leadership
population
2.1%
All
employees
2.9%
Leadership
population
1.7%
All
employees
3.4%
Leadership
population
12%
All
employees
15%
Leadership
population
8%
All
employees
12%
Leadership
population
4%
All
employees
4%
1 All data as at 4 April 2021, and based upon headcount not FTE (full-time equivalent value) of employees directly employed by Nationwide Building Society.
2 Gender – The figures reflect female representation in each of the populations.
3 Ethnicity – Figures reflecting Black, Asian, mixed and other. Excluded from the % are white majority and minority.
4 Disability – Figures reflecting those identifying as disabled.
5 Sexual Orientation – Figures reflecting those identifying as bi-sexual, gay m an, gay woman, lesbian and other.
6 Senior Managers – Figures reflecting the Companies Act definition of an em ployee who has responsibility for planning, directing or controlling the activ ities of an entity or a strategically important part of it, which
includes our executive population comprising the Nationwide Leadership Team (NLT) and their direct reports.
7 Leadership population – A targeted and broader leadership population used in leadership planning and reporting comprising around 1,000 of our leaders.
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Building PRIDE (continued)
Our eight colleague-led networks continue to play a valuable
part in bringing our colleagues’ voices to the fore to aid decision
making, and cover gender, ethnicity, sexual orientation,
disability, faith and belief, working carers, working families and
veterans and reservists. Our employee network for ethnicity re-
branded and re-launched as the Race Together Network in
2020 – they support network members and colleagues to
champion diversity at a societal level and accelerate systemic
change to make Nationwide a fairer and inclusive place for all,
regardless of race or ethnicity.
The networks also help us to develop initiatives. Last year this
included a volunteering service for colleagues to support other
colleagues isolating as a result of the pandemic, by delivering
shopping, medical supplies or office equipment; supportive
people policy changes; and a number of celebratory and
educational events to build awareness and understanding
across the Society. This included our celebration of Black History
Month, with over 30 events and 5,000 colleagues involved,
LGBTQ+ History Month, International Day of People with
Disabilities, and International Women’s Day.
The increased flexibility in working patterns brought in through
the pandemic has naturally supported more inclusive ways of
working, enabling us to expand our recruitment pool to access
more diverse talent. We partnered with Lorien as our new
recruitment delivery provider and we are seeing positive
progress in hiring candidates from ethnically diverse
backgrounds, particularly into technical roles. We also offer a
wide and flexible approach to personal working arrangements -
a total of 24% of our workforce have opted for part-time hours
to suit their personal circumstances.
We promote openness, honesty and transparency, and
encourage our colleagues to speak up whenever they witness or
experience behaviour or actions that do not match our values.
We encourage our colleagues to raise any concerns through
their management, but for those who wish to remain
anonymous, or prefer not to raise the matter with their
manager, we have a confidential whistleblowing process. More
information can be found on page 82. We also recognise the
importance of colleague representation and actively encourage
our colleagues to become members of the Nationwide Group
Staff Union (NGSU).
GGeennddeerr aanndd eetthhnniicciittyy ppaayy ggaapp
Our 2020 mean gender pay gap was 28.3%, broadly the same
as in previous years (2019: 28.2%). We voluntarily published our
mean ethnicity pay gap, which has improved slightly to 16.2%
(2019: 16.9%). In addition, we published a breakdown by
different ethnicity groups as part of our commitment to be
transparent and focus on ethnic diversity.
In both cases, the gap reflects that we have a higher proportion
of women and ethnically diverse employees in lower paid roles
than we do in senior roles. As outlined above, we are working
hard to address these imbalances. Our CEO, Joe Garner, has
joined a number of business leaders in calling on government to
introduce mandatory ethnicity pay gap reporting.
Gender and ethnicity pay is not the same as equal pay and our
regular audits show that our pay policies operate fairly.
OOuurr ssttrraatteeggiicc pprriioorriittiieess ggooiinngg ffoorrwwaarrdd
Over and above our focus on building an inclusive culture
internally, we are working on tackling intolerance in wider
society too. More information can be found on page 30.
We will continue to embed the positive new ways of working
that we have learned and adapted to in response to the
pandemic. This includes evolving the role of our branches so our
Annual Report and Accounts 2021
Annual Report and Accounts 2021
28
member-facing colleagues can provide our leading service to
support our members, wherever they may be, and for other
colleagues, providing greater flexibility in working location. In
combination, we will evolve our workspaces based on what we
need for the future.
By enabling colleagues to work more flexibly and in a way that
works for them and our business, we believe we will be able to
access more diverse talent pools and drive more inclusive ways
of working.
We will also focus on further enabling a more empowered and
agile workforce – by developing our leaders and high potential
talent, and growing skills and capabilities across the business.
As we do this, colleague inclusion and wellbeing will remain at
the heart of everything we do. In doing these things, we will
reinforce our distinctive colleague and leadership proposition.
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Building a national treasure
Contributing to our wider community
Annual Report and Accounts 2021
Annual Report and Accounts 2021
29
29
We commit at
least 1% of our pre-tax
profits to good causes – in 2020/21
this amounted to £7.4 million
2019/20: £9.5 million17
Celebrating 20 years
of our partnership with
Shelter, a charity focused
on tackling homelessness
Carbon neutral
for all energy use and emissions
for our internal operations and
our fleet vehicles
Partnered with
The Diana Award
– funding 10,000 anti-bullying
ambassadors across 660 UK
primary schools over three years
Made 5 Mutual Good
Commitments, focused
on building a better society
MMuuttuuaalliittyy mmeeaannss aacchhiieevviinngg mmoorree ttooggeetthheerr tthhaann wwee ccaann aalloonnee
As a mutual organisation, owned by our members and formed
with a strong underlying social purpose, our focus is not just on
providing better value and service for our members, but on
being better for society too. Mutual benefit with mutual support
for the mutual good of all.
OOuurr mmuuttuuaall aaiimm:: eevveerryyoonnee ddeesseerrvveess aa ppllaaccee ffiitt ttoo ccaallll hhoommee
The building society movement began to enable people to own
a decent home of their own for the first time. This aim, to
ensure everyone has a place fit to call home, remains at the
core, not just of our business activities, but of our broader
contribution to society.
Our social investment programme is aligned with our founding
purpose. As voted for by our members in 2007, we commit at
least 1% of our pre-tax profits each year to good causes, focused
on housing. This money is split between our own social
investment programme, including funding our long-term
partnership with Shelter, our donations to the Nationwide
Foundation and the internal costs of managing social
investment activities. In 2020/21, this amounted to £7.4 million
(2019/20: £9.5 million)17. In the financial year we paid
£6.6 million to charities (2019/20: £8.0 million).
Within our own social investment programme we provide
grants to local housing projects. These are distributed through
our Community Boards under the direction of member and
colleague volunteers. Last year, we awarded £4.0 million to
support 99 charitable housing projects (2020: £5.5 million).
Since the Community Boards were founded three years ago, we
have awarded a total of £13.7 million across 350 projects.
17 The 1% is calculated based on average pre-tax profits over the
previous three years.
The Nationwide Foundation is an independent charity that we
set up and fund. It aims to increase the availability of decent,
affordable homes for people in housing need. Each year, at least
a quarter of our donations are awarded to the Nationwide
Foundation. More information on the Nationwide Foundation
can be found on page 32.
This year, we will celebrate 20 years of our partnership with
Shelter, a charity whose focus is on helping those in housing
need. Over the year we have donated TV advertising space that
directly helped Shelter raise £175,000, and funded six more
advisers for its helplines and three community engagement
workers to provide housing advice in local communities. Our
Chairman and non-executive directors also committed to donate
20% of their net fees, earned from June to December 2020, to
Shelter. Our funding towards Shelter’s helpline has helped the
charity to answer almost 15,500 calls from those in housing
need over the year.
In addition, we have our colleague volunteering programme.
Given the pressures of the pandemic, we increased the number
of volunteering days each colleague could take from two to five
days for those helping assist in the pandemic. We also actively
encouraged our colleagues to sign up as stewards in the Covid-
19 NHS vaccination rollout. However, inevitably, colleague
volunteering was impacted by pandemic-related restrictions.
Despite this, our colleagues volunteered 14,500 hours and, with
help from our members, raised over £730,000 for local charities
(2020: 58,000 hours and £1.6 million raised). More than
£235,000 was also donated to local charities through member
and colleague events, and grants awarded to colleagues’
charities of choice through our Colleague Grant scheme.
We use our expertise in housing to campaign for positive
changes in housing policy. Last year we joined others in
successfully campaigning to make it unlawful for blanket bans
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Annual Report and Accounts 2021
30
Building a national treasure
(continued)
to be applied on renting properties to those receiving benefits.
We have also been working closely with industry bodies to seek
government funding to remove dangerous cladding and on
changing the mortgage valuation process for these properties to
ensure that members do not unwittingly buy a flat that is
dangerous or is liable to large expenses in the future.
OOuurr mmuuttuuaall eennvviirroonnmmeenntt:: NNaattiioonnwwiiddee’’ss ddiirreecctt eennvviirroonnmmeennttaall
iimmppaacctt
We recognise that we are facing a critical moment for climate
change and continue to work towards a low carbon future. Our
business model means that our strategy does not involve
lending to or investing in businesses which have a negative
impact on society and the environment, such as those in the
fossil fuels industry. We have enhanced our climate disclosures
on pages 36 to 55 in line with the recommendations of the
Taskforce on Climate-related Financial Disclosures (TCFD), to
demonstrate how we are embedding climate change
considerations within our business and to highlight the potential
financial impacts for the Society of climate change.
We are committed to reducing our own carbon emissions and
have led the way with some of our operational targets and
initiatives. More information on our achievements can be found
on page 38.
We are also increasingly engaging with our colleagues on
actions they can take to reduce carbon emissions in their own
working and personal lives. Our Green Champion colleagues
across the Society help to run initiatives that educate and
inspire greener lifestyles.
Environmental considerations have been a key focus for the
defined contribution Nationwide Group Personal Pension plan
(GPP). This year, we are signing up to the Make My Money
Matter pledge, committing us to include environmental and
18 Office for National Statistics, February 2020.
climate change considerations in our management of the GPP,
to generate sustainable long-term returns for our colleagues.
It is also important to us that our 1,100 suppliers reflect our
values. Our Procurement for Mutual Good programme, launched
last year, goes further to support a greener, more diverse and
more ethical supply chain. We have set a target for our supply
chain to be carbon neutral by 2030 and are working closely with
our suppliers to achieve this. This includes modelling our
procured emissions and working to reduce them. This year, we
will begin to use supplier sustainability ratings provider,
EcoVadis, to help us screen and monitor our suppliers across
environment, labour and human rights, ethics and sustainable
procurement activities. We are pleased to have been Highly
Commended by the Chartered Institute for Procurement and
Supply, for our Procurement for Mutual Good programme in
their 2020 annual Excellence Awards.
OOuurr mmuuttuuaall hhoommee:: ggrreeeenniinngg tthhee nnaattiioonn’’ss hhoouussiinngg
With housing accounting for around 15% of the UK’s total
carbon emissions , we recognise that one of the biggest
impacts we can have as a Society is reducing the impact on the
environment of the homes in our mortgage portfolio.
18
The concept of creating a more sustainable, greener home is
also becoming increasingly important to our members and we
have an important role to play in supporting them with this. As
well as offering a green product range, we support greener
homes in a number of other ways too. Further information can
be found on pages 19 and 36.
We are funding a not-for-profit housing development, Oakfield,
in Swindon, which aims to build 239 homes to high
environmental standards, with an EPC A rating. Having worked
closely with the local community in the design and planning of
the homes, build is now underway and we hope the Oakfield
development will be a blueprint for others to develop
sustainable homes, with the support of local communities. To
further support communities local to the site, last year we
launched the Oakfield Community Response Fund, awarding
£88,000 in grants to 21 charities, clubs and community groups
in Swindon that were impacted by the pandemic.
OOuurr mmuuttuuaall ssoocciieettyy:: bbuuiilltt oonn mmuuttuuaall rreessppeecctt aanndd iinncclluussiioonn
The pandemic has been universal in its reach, but far from equal
in its impact, exacerbating existing divisions and inequalities in
society, and having a disproportionate effect on those who are
most vulnerable.
Unfortunately, we have also witnessed an increase in
unacceptable behaviour towards our own colleagues, in
branches and on the phone. Our Together Against Hate
campaign has focused on protecting frontline workers across all
industries from unacceptable behaviour and has been well
received. We continue to work with government to strengthen
protection measures for our frontline colleagues.
We are committed to building a more mutually respectful and
inclusive society, principles which have always been at the heart
of our mutual values. To support our ambition, we have
partnered with The Diana Award, funding 10,000 anti-bullying
ambassadors across 660 UK primary schools over three years.
In addition, we have partnered with the Football Association’s
Respect programme, where we aim to engage with 1 million
parents, coaches and young players across 100,000 local
football teams on the importance of mutual respect.
SSuuppppoorrttiinngg oouurr mmeemmbbeerrss iinn tthheeiirr ffiinnaanncciiaall wweellllbbeeiinngg
We want to help our members to become financially stable and
secure, and our member-facing colleagues receive training to
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Building a national treasure
(continued)
Annual Report and Accounts 2021
Annual Report and Accounts 2021
31
we can achieve more together than we can alone. Working with
Ipsos MORI, we have assembled a panel of 30 like-minded
organisations together to share insight and create solutions to
systemic issues caused as a result of the pandemic, driving
positive, meaningful change in society for the mutual benefit of
all. We are focusing our efforts around the future of work, home,
financial wellbeing and community.
OOuurr MMuuttuuaall GGoooodd CCoommmmiittmmeennttss
Our mutual difference has never been more relevant and our
Mutual Good Commitments mean we can report progress and
hold ourselves to account on our initiatives. Demonstrating how
we are building society, nationwide, they are centred around:
1. Helping to achieve safe and secure homes for all
2. Leading the greening of UK homes
3. Supporting our members’ financial wellbeing
4. Championing thriving communities
5.
Internally reflecting the diversity of our society
Further information on our Mutual Good Commitments,
including the associated targets, can be found on page 35.
help them identify members who might need additional support
as a result of vulnerability.
We have a number of relationships in place with third parties
that help us to support our members who are facing financial
hardship. For example, since 2013 we have worked with
IncomeMax to help members find ways to increase income,
reduce bills and access grants and benefits. To date, this has
helped our members to access over £1.25 million of extra
income. And, since 2015, our specialist support service, in
partnership with Macmillan Cancer Support, has supported
members with managing their finances through challenging
times.
We have continued to build on our Open Banking for Good
programme. Working with charities, government and other
organisations, we identify challenges faced by those who are
financially vulnerable and, collaborating with FinTech start-ups,
find solutions through Open Banking. Since its launch in 2019,
the programme has delivered initiatives to help people
understand their income and expenditure, smooth irregular
incomes, and manage their money and debt. This year, we
partnered with Fair By Design to support business start-ups in
building initiatives that improve financial wellbeing.
Our CEO, Joe Garner, continues to co-chair the joint
government, business and civil society Inclusive Economy
Partnership’s Financial Capability and Inclusion group, that
seeks to provide the financially vulnerable with access to
affordable credit and improve financial wellbeing. This year, we
led the development of a voluntary code of best practice in the
recovery of debt, which we hope will encourage better and more
consistent practices across industry sectors.
OOuurr ssttrraatteeggiicc pprriioorriittiieess ggooiinngg ffoorrwwaarrdd
As we consider the future landscape and how society will
emerge from the pandemic, we believe we have an opportunity
to support the UK in its recovery and future. We recognise that
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The Nationwide Foundation
The Nationwide Foundation is an independent charity set up by the Society in 1997. Each year, we pay at least 0.25% of Nationwide’s pre-tax profits to the Nationwide
Foundation – £2.2 million in 2020/21 – as part of the 1% of pre-tax profits we give to good causes. The Nationwide Foundation’s vision is for everyone in the UK to have
access to a decent home that they can afford. Since 2016 it has supported three programmes to help make this happen.
1
Annual Report and Accounts 2021
32
1 Nurturing ideas to change the housing system
– supporting new and emerging solutions to help create truly affordable and decent homes
During 2020/21, the Nationwide Foundation sought to ensure planning reforms will help deliver
decent affordable homes, as well as building consensus for quality standards so that healthy homes
are available to everyone.
2 Backing community-led housing
– helping local people take control of their housing
Community-led housing puts power back into the hands of communities, so they can create homes
in the places people need them, at prices they can genuinely afford. The Nationwide Foundation’s
support has strengthened the sector, helping it flourish and become sustainable.
3 Transforming the private rented sector
– making sure private tenants have secure, affordable and decent homes
Renters should have access to homes that are safe, affordable and that are available to them for as
long as they want or need them. The Nationwide Foundation has been backing the case for better
protection for renters, especially in light of the additional pressures brought about by Covid-19.
The Nationwide Foundation’s response to Covid-19
In response to the Covid-19 pandemic, the Nationwide Foundation reassured all grant-holders that their funding was
secure and could be used flexibly to provide support where it was most needed. It also provided additional funding
where necessary and offered wellbeing support to grant-holders’ staff.
The Nationwide Foundation is a registered charity (no. 1065552). @NationwideFdtn www.nationwidefoundation.org.uk
1 The 0.25% is calculated based on average pre-tax profits over the previous three years.
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Committed to doing the right thing
Annual Report and Accounts 2021
33
Statement from Joe Garner,
Chief Executive
Nationwide Building Society was
founded on a social purpose, ‘building
society, nationwide’, and we are still
guided by that purpose today. As a
building society owned by our members,
it is imperative we are striving to do the
right thing in a responsible way, whether
for our colleagues, members, wider
society, or the environment.
In 2019, we declared our commitment
to the UN Global Compact and I am
pleased to confirm we are reaffirming
our support of the Ten Principles of the
United Nations Global Compact which
are categorised into the areas of
Human Rights, Labour, Environment
and Anti-Corruption.
UN Global Compact: Communication on Progress
We set out below how we continue to integrate the Global Compact and its principles into our business strategy, culture and daily
operations. Additional information is included on the pages referenced below, and also on https://www.nationwide.co.uk/about/
responsible-business/overview, where noted by the icon.
Human Rights: doing the right
thing for our members and the
way we do business
Mutual Good Commitments
Financial inclusion
Modern slavery and human trafficking
PRIDE
Reward
Empowerment
Community
Page 35
Page 30
Page 25
Page 26
Page 29
Labour (our employees): doing
the right thing for our employees
Mutual Good Commitments
Our colleagues
PRIDE
Inclusion and diversity
Wellbeing
Page 35
Page 25
Page 25
Page 26
Page 25
Environment: doing the right
thing for the environment and
its impact on our members
Anti-corruption: doing the
right thing to prevent crime
Mutual Good Commitments
Climate-related financial disclosures
Protecting members from crime
Fraud and scams
Page 24
Green homes
Our operations
Page 35
Page 36
Page 30
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Committed to doing the right thing (continued)
UN Sustainable Development Goals
As signatories of the UN Principles for Responsible Banking we are committed to strategic
alignment with the 2015 Paris Agreement and to the UN Sustainable Development Goals (SDGs)
– our strong purpose directly supports these goals. We focus on those that are most closely
aligned to our mutual purpose of building society, nationwide, as listed below.
SDG 1 – No poverty
We take positive action against homelessness, to enhance financial
inclusion and support and protect our members’ money
SDG 10 – Reduced inequalities
We are working to reduce economic inequality and seek to ensure
everyone has access to good and secure housing, finances and
work opportunities
SDG 11 – Sustainable cities and communities
In addition to our not-for-profit Oakfield housing development
in Swindon, we have extended our Branch Promise, to remain
in every town or city we are in today until at least 2023
SDG 12 – Responsible consumption and production
We maintain the Carbon Trust Triple Standard, send no waste to
landfill, recycle our office equipment and source food locally
SDG 13 – Climate action
Internally, our energy use and business miles from our own fleet
are carbon neutral (scope 1 and 2), and our green propositions will
help members to reduce the carbon footprint of their homes
Annual Report and Accounts 2021
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Annual Report and Accounts 2021
35
Reflect the diversity
of our society
By 2028:
• Our people at every level
will reflect the society that
we represent
Committed to doing the right thing (continued)
Our Mutual Good Commitments
Enabling our members to achieve more together than they can alone, for the mutual good of society
Our mutual difference and ethic of care has never been more relevant and we are committed to progressing bold initiatives that support
our ambition to re-build society, nationwide, represented by five Mutual Good Commitments that are closely aligned with our strategy.
Our Mutual Good
Commitments
Help to achieve safe and
secure homes for all
Lead the greening
of UK homes
Support our members’
financial wellbeing
Champion thriving
communities
Our targets
By 2025 we will:
• Help 250,000 members to buy
their first home
• Help 25,000 members use the
money built up in their home
to live a better retirement
• Equip 50,000 landlords with
tools to improve tenants’ lives
By 2030:
• At least 50% of homes in our
mortgage book will be rated
EPC C or above
• Our business operations,
suppliers and commuting
will be carbon neutral
UN Sustainable
Development Goals
SDG 1 – No poverty
SDG 10 – Reduced inequalities
SDG 11 – Sustainable cities
and communities
SDG 12 – Responsible
consumption and production
SDG 13 – Climate action
By 2025 we will:
• Support 200,000 financially
squeezed and struggling
members to become regular
savers
• Every town and city which has
a branch today will still have
one until at least 2023
• We will commit at least 1% of
our pre-tax profits to charitable
activities every year
SDG 1 – No poverty
SDG 10 – Reduced inequalities
SDG 11 – Sustainable cities
and communities
SDG 10 – Reduced inequalities
We launched our Mutual Good Commitments in November 2020 and will start to report our progress against our targets at least annually.
Non-financial information statement
This non-financial information statement provides an
overview of topics and related reporting references as
required by Sections 414CA and 414CB of the Companies
Act 2006. Non-financial and Environmental, Social and
Governance (ESG) information is integrated across the
Strategic report and other publications, and we have
used cross referencing to avoid duplication.
Reporting Requirement
Our business model
Our KPIs
Our stakeholders
Social matters
Our key risks and their management
Our employees
Environmental matters
Human rights
Financial crime and anti-corruption
Section
Our mutual difference is our business model
How we’re building society, nationwide
A year of mutual support
Our stakeholder engagement
Committed to doing the right thing
Risk overview
Managing risk
References are set out on page 33
Page
4
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33
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Climate-related financial disclosures
Annual Report and Accounts 2021
36
Climate change presents a risk to the Society and its members. Since
2019, Nationwide has been enhancing and embedding its capabilities
to monitor and manage climate risk and meet the requirements of the
Prudential Regulation Authority’s (PRA’s) Supervisory Statement 3/19
(SS3/19) – Enhancing banks’ and insurers’ approaches to managing
the financial risks from climate change.
Nationwide has also been a supporter of the Financial Stability Board’s
Taskforce on Climate-related Financial Disclosures (TCFD) since 2019
and its objective to improve and increase the reporting of climate-related
financial information. The information set out opposite is provided in
line with the requirements of SS3/19 to disclose the financial risks from
climate change, and is aligned with the TCFD’s recommendations.
This information details our understanding of the impact of climate
change on the Society and its members. In addition, it explains how
the risks from climate change are managed and incorporated into the
Society’s governance model, and the metrics and targets used
to monitor the risk.
Climate-related disclosures overview
Overview of Nationwide’s climate ambitions, the progress made to date, and
current focus and future plans for addressing climate risk across the four TCFD
elements of Strategy, Governance, Risk management, and Metrics and targets.
page 37
Our carbon journey
Summary of the key activities undertaken to date to reduce Nationwide’s
impact on the environment.
page 38
Strategy
Description of Nationwide’s approach to considering climate change, the
opportunities it presents, and how the associated risks are measured and managed.
page 39
page 45
Governance
Description of the roles, responsibilities, committees, and operating model through
which Nationwide governs climate-related risks and makes climate-related decisions.
page 47
Risk management
Outline of how Nationwide considers climate change risk, the Society’s climate risk
appetite, and how climate risk management is embedded within the Society.
Metrics and targets
Information on the metrics and targets used by the Society to monitor and
manage its climate risk exposures, including scope 1, 2 and 3 emissions data.
page 50
Future developments in climate risk
Planned future enhancements to Nationwide’s climate risk measurement
and management capabilities.
page 55
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Climate-related financial disclosures (continued)
Climate-related disclosures overview
Annual Report and Accounts 2021
37
Nationwide’s climate change
ambitions are clear...
To lead the greening of UK homes, where
at least 50% of homes in our mortgage
portfolio will be EPC C or better by 2030
Our business operations,
suppliers and commuting will
be carbon neutral by 2030
We are working towards
alignment to a net zero
emissions pathway by 2050
Achievements
Current focus
Future activity
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• Climate change considerations embedded in strategic planning and green
proposition development, making use of the £1 billion funding available to
lend on products which incentivise greener homes
• Developed and tested our approach to climate change scenario analysis
to quantify physical and transition risk
• Formed cross-industry partnerships to drive real change
• Announced climate-related pledges including our Mutual Good Commitments,
which include the ambition to lead the greening of UK homes
• Further enhancing scenario analysis capability and
preparation for the Climate Biennial Exploratory
Scenario (CBES) in June 2021
• Using transition and physical risk outputs to better
manage the potential financial implications and
develop supporting propositions
• Use outputs from scenario analysis to influence strategic
decisions
• Further enhance understanding of the impacts of transition
risk, and fold these into strategic considerations
• Continue to identify climate change risk and opportunities
e • Chief Strategy and Sustainability Officer assumed Society-wide accountability
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to ensure embedding of climate change risk
• Climate change risk governance established and matured, with senior
management and Board level engagement
• Education sessions on climate change held with the Board
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t • Climate change embedded as a cause in the existing Enterprise Risk
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• The most material climate change risks identified and understood
• Climate change risk standard created and embedded which describes
how climate risk is managed and monitored
• Further embedding and evolving the climate change
• More frequent and detailed discussion on climate
governance at Board and management level
• Engagement with the Board on strategy and
proposition development, risk management
and disclosures
change, and the risks and opportunities it presents,
at committees and with the Board
• Climate change will be a key consideration in this
year’s Board strategy conference
• Updating the Risk Control Self-Assessment
process to include, where appropriate, any
changes in risk profile due to climate change
• Broaden understanding of transition risk through scenario
analysis, for both non-financial and financial risks
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• Scope 1 and 2 carbon emissions reduced by 90% since financial year 2010/11,
achieving carbon neutrality in April 2020
• Physical and transition risk metrics produced to quantify impact
• Scope 3 carbon emissions for the mortgage book calculated in alignment
with the Partnership for Carbon Accounting Financials (PCAF) methodology
• Creating new internal modelling capabilities to
produce metrics that will measure the financial
risks from climate change for both physical and
transition risk in readiness for the CBES, whilst
supporting the development of climate strategy
• Enhance climate change metrics, ambitions and targets,
in line with changes to strategy, propositions and the
outcomes of scenario analysis
• Explore setting science-based targets to help track our
progress towards net zero emissions by 2050
Using our collective voice, Nationwide is campaigning for…
A clear roadmap for net zero, for residential property, by 2050 with
affordability at its heart. This will enable government, members, and the
building supply chain to have a clear understanding of how homes of every
tenure, and households at different income levels, can achieve net zero
Long-term sustainable incentives to support
homeowners in reducing their carbon
emissions and to encourage the development
of new green supply chains
The Government to ensure all new homes are
built to high energy efficiency standards so
these properties do not need to be retrofitted
at a later stage
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Climate-related financial disclosures (continued)
Our carbon journey
Annual Report and Accounts 2021
38
2012
2014
2015
2016
2018
2019
2020
2021+
Solar panels
installed on
our head office
building in
Swindon
Achieved Carbon
Trust Triple
Standard for water,
waste and energy,
which recognises
organisations that
follow best practice
in measuring,
managing and
reducing their
environmental
impact
Started carbon
offsetting
Zero waste to
landfill, with all
non-recyclable waste
converted to energy
Old IT equipment
recycled or donated
to charity
Set 2020 carbon,
water and waste
reduction targets
Signed a long-term
solar farm Power
Purchase Agreement
for over 50% of our
electricity use
Formed the
Property Risk Hub
in partnership with
Airbus and JBA,
providing a better
understanding of
the environmental
credentials of the
properties on which
we lend
Signed up to green
wind and hydro
energy, meaning
100% of our
electricity comes
from renewable
sources
Car-share scheme
introduced for
colleagues’ commute
to work
Renewal of Carbon
Trust accreditation
and awarded an
additional Carbon
Trust standard for
Supply Chain
More than 30 electric
car charging points
installed and electric
vehicles available on
colleague car scheme
90% of food produce
sourced within a 50
mile radius
Food waste from
admin sites converted
to biogas and
cooking oil returned
to supplier to be used
as fuel for their vans
Joined the UN Global
Compact
Became an official
supporter of TCFD
100% carbon neutral
from April 2020
for all energy use
and emissions for
internal operations
and Nationwide fleet
vehicles by offsetting
residual carbon
90% carbon
reduction since 2010
Joined the Partnership
for Carbon Accounting
Financials UK
(PCAF UK)
Launched the Green
Additional Borrowing
Mortgage
Introduced our mutual
good target; at least
50% of our mortgage
portfolio to have an
EPC of C or better
by 2030
Signed up to the United
Nations Principles for
Responsible Banking
Launched the Green Reward
Mortgage
Launched the Green Further
Advance Mortgage for The
Mortgage Works customers
Mailed 70,000 buy to let
mortgage customers with no EPC
to tell them about the support
available to improve the energy
efficiency of their properties
Launched the first phase
of Environment, Social and
Governance (ESG) content
onto the website
Developing plans to eliminate
our use of single use plastic
by 2025, starting with debit
and credit cards to be made
from recycled plastic in 2021
Participating in the Carbon
Disclosure Project
Participating in the Bank of
England’s Climate Biennial
Exploratory Scenario
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Climate-related financial disclosures (continued)
Strategy
Annual Report and Accounts 2021
39
Supporting the transition to a net zero economy
Supporting society
The Society’s purpose of building society, nationwide, aligns with the need to transition to a net zero economy – to achieve an
overall balance between greenhouse gas emissions produced and taken out of the atmosphere. Nationwide aims to build a greener
society and as a building society, we exist to meet the needs of our members. Nationwide does not have any exposure to corporate
lending (except small, closed commercial real estate and private finance initiative portfolios, and lending to registered social
landlords (RSL)). This business model means that our strategy does not involve lending to or investing in businesses which have
a negative impact on society and the environment, such as those in the fossil fuels industry.
We realise the impact climate change could have on our members, their homes and wider society, and understand how crucial it
is to act now. To help us better address the impact, we have embedded climate change considerations into our strategic planning
and execution. We recognise the importance of climate change to our members and stakeholders and are actively addressing
the risks and exploring the opportunities with them in mind.
Nationwide’s position on climate change is reflected in everything it does
Leveraging our scale and influence
to promote green practices
within our supply chain
Working with government
and industry to make a
positive difference to climate
change with a focus on
greening homes
Helping members to reduce
their carbon emissions
through our propositions
Suppliers
Business
Operations
Society
Regulators
Members
Employees
Demonstrating to investors that
Nationwide is managing the risks and
opportunities presented by climate change
Investors
Reducing our own
carbon footprint
Building our capability to
manage the financial risks
from climate change and
deliver our regulatory
commitments
Encouraging increased
engagement in green issues
and making it easier for
colleagues to reduce their
carbon footprint whilst at
work and home
In 2020, Nationwide launched its Mutual Good Commitments, which
included the ambition to lead the greening of UK homes. To support
this, the Society has the ambition that at least 50% of its mortgage
portfolio will have an Energy Performance Certificate (EPC) rating of
C or above by 2030.
It is recognised that EPCs are not perfect, but they currently represent
the best source of publicly available data on the energy efficiency of
properties. Nationwide will continue to assess and use the best data
possible, aligning with industry best practice, whilst recognising that
this may change as new data sources become available and
understanding increases.
The Society also recognises that it alone cannot improve the energy
efficiency of UK homes, which is why Nationwide is working with
government and industry to make the greening of UK homes a reality.
In order to facilitate the transition, Nationwide will seek to work with
the Government to encourage the following:
• Future Homes Standard to be introduced by the building industry at
the earliest possible opportunity. This is currently due in 2025 and
will require new-build homes to be fitted with low carbon heating,
and high levels of energy efficiency
• Full implementation of the Clean Growth Strategy, including the
Department for Business, Energy and Industrial Strategy (BEIS)
recommendation to upgrade all buy to let properties in England and
Wales to EPC C or above by 2028 (all new tenancies from 1 April 2025,
all existing tenancies by 1 April 2028), subject to a retrofit cost cap of
£10,000 (currently this requirement is due to be implemented by
2030 and the retrofit cost cap is £3,500). BEIS estimates that on
average, landlords will spend £4,700 per property to reach EPC C, and
that a majority (approximately 70%) of properties would be improved to
EPC C within the £10,000 cap1
• Long-term government financial incentives for owner-occupiers to
retrofit, in particular supporting those on low incomes and those where
the financial payback from retrofit is minimal. This would help facilitate
the trusted supply of retrofit materials, the workforce to fit them and the
willingness of homeowners to undertake works on their property.
1 The Department for Business, Energy and Industrial Strategy’s consultation on Improving the Energy Performance of Privately Rented Homes in England and Wales September 2020.
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Strategy (continued)
Nationwide will also increase awareness of potential improvements
to the energy efficiency of a property through engagement with
our members, the promotion of retrofit lending products, and the
development of innovative propositions.
Based on the above, different scenarios have been considered for
increasing the proportion of the Society’s mortgage properties
rated EPC C or better, from around 36% today to 50% by 2030.
Whilst stretching, the Society believes its Mutual Good
Commitment is achievable with continued government support
and if key stakeholders work together. Most of the improvement to
2030 is expected to be driven by changes in the energy efficiency
of buy to let properties and through the Society’s share of lending
to new builds (typically EPC rated B or above).
Nationwide will publish an update on progress towards its Mutual
Good Commitment at least annually.
Partnering for mutual success
Collective effort is needed to achieve net zero. Nationwide has
therefore partnered with the following key organisations to
increase its knowledge and effect real change:
• Member of the Green Finance Institute’s Coalition of Energy
Efficiency of Buildings (GFI CEEB) since 2019
• Committed to the UN Global Compact (UNGC) since 2019
• Founding partner of the Partnership for Carbon Accounting
Financials UK (PCAF UK) since 2020
• Joined the UK Green Building Council (UKGBC) in 2021
• Joined the UN Principles of Responsible Banking (UN PRB)
in 2021
• Part of the London School of Economics Financing a Just
Transition Alliance
• Member of the Imperial College Business School Centre for
Climate Finance and Investment
• Active participant of UK Finance’s Sustainability Committee
• Part of the Prudential Regulation Authority’s (PRA’s) and
Financial Conduct Authority’s (FCA’s) Climate Financial
Risk Forum (CFRF) scenario analysis and retail banking
working groups
2 Office for National Statistics – February 2020.
Annual Report and Accounts 2021
40
• Contributor to key discussions on the greening of UK homes
through engagement with the Government’s Environmental
Audit Committee
• Respondent to strategic BEIS consultations on how to improve
the energy efficiency of the UK’s homes through lenders and
for those privately rented.
Supporting our members
2
UK homes and the energy they consume account for 15% of
the UK’s carbon emissions and many of the homes being built
today are still not energy efficient enough to meet the
requirements for a net zero economy. Nationwide continues to
develop new and innovative propositions to help combat climate
change. In the past year, the Society has:
• Launched a Green Additional Borrowing mortgage product
to our members to help make energy efficient home
improvements
• Partnered with Switchd to offer our members and colleagues
a free six-month trial of their auto-energy tariff switching
service, which includes green options
• Contacted approximately 70,000 The Mortgage Works (TMW)
customers (around 33% of our buy to let book) who do not
appear to have a valid EPC, with the aim to remind them of
regulation and educating them about energy efficiency,
referencing key government tools and guides
• Launched a green web page for TMW customers
• Pledged to eliminate single-use plastics by 2025, and roll out
debit and credit cards made from recycled plastic in 2021
• Progressed its Oakfield development consisting of 239 EPC A
rated homes built to high environmental standards, which is
hoped will provide a blueprint for future sustainable homes
• Launched the Green Reward Mortgage product to our members,
offering cashback for properties with an EPC of A or B
• Launched the Green Further Advance Mortgage to TMW
customers to help make energy efficient home improvements.
Nationwide will continue to explore further climate change-
related propositions over the coming year whilst monitoring our
exposure to potential liability and conduct risk.
Helping our people to go green
The Society’s employees have an important role to play in
tackling climate change. Over the past year the employee
engagement on green initiatives has increased. Examples
include the provision of hints and tips on how employees can
reduce their carbon footprint and the sharing of propositional
successes, as well as utilising the Society’s Green Champions
network. Nationwide is also developing an internal green
engagement strategy which describes what we want our
employees to ‘think, feel and do’ in relation to climate change.
Greening our business operations
Nationwide is proud of its climate-related operational targets and
initiatives, and its repeated Carbon Trust Triple Standard
accreditation for its management of water use, waste and energy
consumption. Nationwide continues to send zero waste to landfill.
Since 2018, 100% of the Society’s electricity has been supplied
from renewable sources, and since April 2020 Nationwide has
been carbon neutral (no net release of carbon dioxide into the
atmosphere) for its internal operations. This includes energy use
and business miles from its own vehicles, with remaining
emissions offset through verified carbon offsetting projects that
actively remove carbon from the atmosphere.
This year, the Society’s focus has been on building a clearer picture
of the emissions produced by its employees, suppliers, and
products. Definitions of scope 1, 2 and 3 emissions are as follows:
Scope 1
Direct emissions
from owned
sources such as
emissions from
the Society’s
car fleet
Scope 2
Indirect emissions
from the generation
and consumption of
purchased electricity
and heating such as
the electricity bought
by the Society to
power its branches
Scope 3
All other indirect
emissions that
occur in our value
chain such as
emissions from
the Society’s
mortgage
properties
Detailed scope 1 and 2 emission metrics, including comparable
year on year performance, can be found in the ‘Metrics and
targets’ section on page 50.
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Strategy (continued)
Sourcing services responsibly
Embedding climate change risk
in the Risk management section on page 47.
Annual Report and Accounts 2021
41
Nationwide has partnered with sustainability consultancy,
Carbon Intelligence, to refresh its estimate of the upstream
scope 3 emissions – those that result from its supply chain.
Previous estimations indicated that the largest component of
these emissions was due to purchased goods and services.
With this is mind, the Society took further steps to build climate
change considerations into its procurement and supply chain
management processes. Different methods were explored to
collect environmental performance data from Nationwide’s third
parties, and key third parties were engaged to share learnings
through supplier decarbonisation discussions.
We continue to explore ways to understand and record the carbon
emissions that Nationwide is responsible for through its supply
chain, and aims to be carbon neutral for purchased goods and
services by 2030. In 2021 environmental performance data will
be collected from key third parties using shared information from
EcoVadis, a universal sustainability ratings provider.
Nationwide has also enhanced the environmental requirements
within its Third Party Code of Practice, including the need for
all third parties to monitor and disclose their scope 1 and 2
emissions and set reduction targets.
Our external stakeholders
Investor, rating agency and regulator expectations of the
minimum standards for Environment, Social and Governance
(ESG) disclosures continue to increase. As a result, there has
been a material increase in the breadth and depth of ESG-
related disclosures in recent years.
The ESG content on our website is being improved to make it
easier for stakeholders to find what they are looking for. This
includes information on all key themes and topics of interest
to investors and ESG rating agencies. The first phase of these
improvements went live in early 2021, with further
enhancements due throughout 2021.
Nationwide also offers investors focused discussions with internal
subject matter experts on how climate change risk and ESG issues
are managed more broadly. Nationwide has held a number of
cross-industry roundtables on the greening of UK homes.
Due to its nature, climate change has implications across the
Society’s entire Enterprise Risk Management Framework
(ERMF). Climate change has been embedded as a cause to
the Society’s most significant risks. Consideration as a cause
ensures appropriate identification, monitoring and management
across all existing risk categories, along with full traceability.
The following diagram explains how climate change risk has
been embedded within our ERMF:
Cause
Climate change
Risk
Physical risk
Transition risk
Risk
Credit risk
Operational & conduct risk
Market risk
Liquidity & funding risk
Pension risk
Solvency risk
Business risk
Model risk
Impact
Financial
Non-financial
Climate change risk is considered to manifest across two main
causes, physical and transition risk:
• Physical risk – the risks arising from the increasing severity
and frequency of climate and weather-related events such
as flooding
• Transition risk – the risks which could result from the process
of adjustment towards a lower carbon economy such as
through developments in policy and regulation, emergence
of disruptive technology or business models, shifting societal
preferences, or evolving legal interpretations.
To form a view on materiality, and to understand the broad
financial impacts across different time horizons, the ERMF was
assessed through a climate change lens. More detail is provided
This exercise identified Nationwide’s top three climate change
risks as:
• Credit
• Operational and conduct
• Liquidity and funding.
Credit risk is the most material climate change risk due to the
Society’s mortgage portfolio exposures.
Climate change risk has been considered as part of the internal
capital adequacy assessment process (ICAAP). This assessed the
need to hold capital for climate-related risk over a 12-month period.
Based on our current assessment the capital requirement for
physical risk is immaterial. Further work is needed to establish any
capital requirement for transition risk. Climate change risk is also
covered as part of the internal liquidity adequacy assessment
process (ILAAP). The impacts of climate change will continue to be
assessed within both the ICAAP and ILAAP on an annual basis.
Assessing climate risk in lending decisions
Nationwide’s approach to lending incorporates various
environmental risk considerations. When evaluating new residential
mortgage applications, climate-related risks, including flooding
and subsidence, along with energy performance, are used to
inform the potential impact on future property values. Further
detail can be found in the ‘Risk management’ section on page 47.
Energy Performance Certificates (EPC)
An EPC is a document which sets out the energy efficiency of a
property. Produced by an accredited domestic energy assessor,
an EPC provides an indication of how much it will cost to heat
(both water and space) and light a property. EPCs also include
recommendations for energy-efficiency improvements, the cost
of carrying them out, and the potential savings that each one
could generate.
Energy efficiency is indicated using a traffic light system rating
from A to G, based on Standard Assessment Procedure (SAP)
points, with A being the most efficient.
The SAP calculates a property’s expected annual energy cost
and potential carbon emissions based on:
• The structure of the property
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Strategy (continued)
• The heating and hot water system
• The internal lighting
• Any renewable technologies used in the home.
The higher the SAP score, the lower the running cost, with a
score of 100 (EPC A) representing zero energy cost.
EPCs are currently the best source of publicly available data on
the energy efficiency of a property and whilst useful, they have
their limitations, such as:
• Energy price dependencies – the current methodology is
sensitive to fuel prices and so a property on a grade boundary
can improve its EPC rating purely by having its assessment
undertaken when energy prices are low
• Lack of carbon neutral incentives – the methodology rates
efficient gas boilers above carbon neutral sources like air or
ground source heat pumps
• Incomplete data set – an EPC is required every time a property
is built, sold or rented and is valid for 10 years; therefore,
only around half of Nationwide mortgage properties have
a current EPC
• Out of date data – changes to the energy efficiency of a property
(for example, due to improved insulation) will not be captured
unless the homeowner chooses to have the property reassessed.
EPC modelling
Nationwide uses EPC data to inform its transition risk
assessment and scope 3 emissions. Using artificial intelligence
and machine learning algorithms, the characteristics of a
property that does not have an EPC are used to estimate its EPC
Testing climate scenarios
The upcoming CBES is focused on stress testing the financial
impact of climate change on firms across three scenarios,
namely Early policy action, Late policy action and No additional
policy action.
Transition risk was assessed for the Early policy action and Late
policy action scenarios, noting that transition risk will not occur
in a No additional policy action scenario.
Details of the three scenarios tested are opposite:
Annual Report and Accounts 2021
42
rating and other factors. The characteristics used include details of
the home, owners, surrounding area and surrounding properties.
Despite the inherent limitations of EPCs, the modelling informs
the calculation of the EPC composition of the Society’s
mortgaged properties. The model outputs are also used to
assess transition risk through the implied cost of retrofitting and
the energy consumption for lighting, and heating the home, and
water. This work has informed our Mutual Good Commitment
(to ensure 50% of our portfolio is rated EPC C or better by 2030)
and supported the PCAF-aligned disclosure of the Society’s
scope 3 mortgage portfolio emissions, as set out in the ‘Metrics
and targets’ section on page 50.
Testing the approach to EPC modelling and outcomes
The modelling approach was tested on Welsh properties to check
the outputs and to prove the modelling achieved a statistically
robust result. Due to a lack of available data, properties in
Scotland and Northern Ireland were matched to the mathematically
‘most similar’ property in the rest of the UK – this process was
repeated for multiple randomised simulations.
Nationwide’s approach to scenario analysis
To ensure strategic decisions are informed by an understanding
of the opportunities and risks from climate change, different
climate scenarios were modelled.
• Lending to registered social landlords (RSL).
The physical risk impacts on the Society’s own properties, and
those that Nationwide lends against, were assessed. The
approach involved:
• Assessing river and coastal flooding, and surface water, using
data supplied by Jeremy Benn Associates Risk Management
Limited (JBA) via flood risk matrices. JBA projected changes in
precipitation, temperature and sea level obtained from the
Met Office’s UK Climate Projections (UKCP18) and information
on existing flood protection
• Reducing property values based on flood severity and
likelihood, informed by analysis of the impact of previous
flooding on property prices. No price reductions were
applied where the incremental flood depth was negligible.
The assessment of transition risk used the EPC modelling
detailed above, together with:
• Assumptions regarding the implementation of government
policy, such as, the Future Homes Standard and the Clean
Growth Strategy. These informed expected future minimum
EPC requirements for new homes and the timing of
retrofitting activity on both prime and buy to let properties
• Forecast energy prices and carbon taxation inputs from the
Network for Greening the Financial System (NGFS).
This capability was proven as part of an internal stress test
undertaken in 2020, which focused on:
• Prime and buy to let mortgage properties
Nationwide has developed further its capabilities ahead of
the PRA’s Climate Biennial Exploratory Scenario (CBES)
in June 2021.
Early policy action
Late policy action
No additional policy action
Transition risk (medium)
Transition risk (high)
No transition risk
Policy is brought in early to
address the risk of climate change,
and Paris Agreement targets are
met, limiting the temperature
increase to 2 degrees. There are
transitional risks as policy shifts,
but no macroeconomic shock.
Policy changes are delayed to 2030.
As a result, these later shifts are sizable
and the sharp repricing of assets results
in a macroeconomic shock occurring
towards the end of the scenario.
The Paris Agreement is met, limiting the
temperature increase to 2 degrees.
No policy changes are implemented.
There are no transitional risks;
however all the physical risks
associated with climate change arise.
The Paris Agreement is not met
and temperatures increase by
2 to 3 degrees.
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Strategy (continued)
To develop our understanding of physical risk, we have used
different climate scenarios based on Representative
Concentration Pathways (RCPs), developed by the
Intergovernmental Panel on Climate Change (IPCC).
These reductions were input into existing models to increase the
losses given default and expected credit losses (ECLs) in order to
quantify the impact on impairments at five year intervals over a
30-year period.
RCPs are a recognised series of greenhouse concentration
trajectories and have been used in global climate science since
2013. The RCPs include:
• RCP 2.6 – which requires declining CO2 emissions by 2020
to get to zero by 2100 and keep global temperature rises
below two degrees
• RCP 4.5 – which predicts that emissions peak around 2040,
then decline to half the levels of CO2 by 2100, resulting in
a global temperature rise between two and three degrees
• RCP 6.0 – which predicts that emissions peak around 2080,
then decline
• RCP 8.5 – which is seen as the worst-case climate change
scenario, where emissions continue to rise throughout the
21st century.
Scenario analysis outcomes
The outcomes of the climate change scenario analysis are
provided separately for physical and transition risk given the
different methodologies used. Further detail on both physical
and transition risk metrics can be found in the ‘Metrics and
targets’ section on page 50.
Physical risk outcomes
Our scenario analysis results suggest physical risks arising from
climate change should have a low impact on our mortgage
portfolio over the next 30 years.
3
For the past five years, flood risk has been considered as part of our
mortgage underwriting process. Decisions over this period not
to lend against high flood risk properties have lowered the risk.
In addition, the low loan to value (LTV) profile of those properties
more at risk has led to a reduction in physical risk exposure.
The flood risk data from JBA was converted into property value
reductions informed by the frequency and severity of flooding.
3 Low indicated an estimated increase in ECLs of less than £5 million.
The impact on ECLs across the 30-year analysis period was low,
due to the low level of affected properties. Only approximately
95,000 of properties securing prime and buy to let mortgages,
out of a total portfolio of approximately 1.5 million, experienced
non-negligible flooding. Of these, approximately 1,800 incurred
the most severe valuation reductions, due to the frequency of
flooding. This combined with the low LTVs resulted in the low
impact on impairments.
The sensitivity of the ECLs to different inputs was analysed:
• The property value reductions of flood risk properties were
increased. For those properties deemed uninsurable (due to
frequency of flooding), the already high value reductions were
doubled, and for other properties the value reductions were
increased by a multiple of 10 – the impact remained low
• The impact across different RCPs over the 30-year period
(to 2050) was assessed to understand how the ECLs might
vary with each climate scenario. The results indicated that
losses remain low for all RCPs.
The physical risk associated with the Society’s RSL lending was
also assessed. Around 87% of approximately 180,000 RSL
properties were matched to the data provided by JBA, with the
incremental impact of river, coastal and surface flooding
assessed to 2050.
The impact of the flooding on cashflows was evaluated at
counterparty level where more than 5% of the borrower’s
properties showed an increase in flood severity. This equated
to approximately 1,000 properties across 22 borrowers. When
properties with a negligible flood depth were removed, the
number of properties requiring analysis fell to approximately
600. The impact on borrower cashflows was deemed to be low.
Transition risk outcomes
Using the estimated EPC composition of the entire mortgage
portfolio, transition risks for both the Early and Late policy action
scenarios were assessed. These assessments were made using
known, and potential future, government policy and included
Annual Report and Accounts 2021
43
assumptions on:
• Improved new build standards on housing stock
• Increased energy costs
• The cost of retrofit.
For retrofitting costs, data was taken or inferred from underlying
EPCs, and for Early policy action a degree of government
subsidy was assumed.
Energy costs
To assess transition risk, energy usage from EPCs was combined
with electrical goods energy usage data from the Energy Savings
Trust and combined with forecast energy prices (electricity, oil
and natural gas prices) from the NGFS for the EU region.
The impact of carbon taxation was also included, with carbon
price used as a proxy for the net impact of government direct
and indirect taxation. Again, NGFS data for the EU region
provided forecast carbon pricing for the period 2020 to 2050.
This data enabled the quantification of potential future energy
bills for homes (excluding inflation) in the Early and Late policy
action scenarios for the period 2020 to 2050.
An example of how electricity prices may change over the
next 30 years in each scenario is shown in the following graph
(note i).
Forecast Electricity Price
x
e
d
n
I
1.3
1.2
1.1
1
0.9
0.8
2020 2025 2030 2035 2040 2045 2050
No additional policy action Late policy action
Early policy action
Note:
i. The data is taken from the NGFS REMIND-MAgPIE 1.7-3.0 model
outputs for the EU region.
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Strategy (continued)
Cost of retrofitting
Estimated retrofitting costs were calculated based on the
average retrofitting plan as detailed in a property’s EPC to raise
the rating of the property to its maximum achievable EPC rating.
Regardless of scenario, around 99% of Nationwide’s prime and
buy to let properties may require some form of retrofitting.
4
Nationwide’s assessment assumed all homes were brought up
to their maximum achievable EPC rating, to estimate the
potential magnitude of retrofitting costs, assuming alignment
with net zero. It is recognised that some homes simply will not
be able to reach the required standard and for many the cost of
retrofitting does not make financial sense.
Early policy action transition risk outcomes
In the Early policy action scenario energy costs increased for
all properties over the 30-year period, with the most efficient
homes still seeing around a 50% increase. EPC E properties,
rather than F and G, were most affected. This was because
EPC F and G properties rely disproportionately on electricity
for heating, which was forecast to decrease in cost in absolute
terms and relative to gas and other carbon fuels, over the period.
Due to Early policy action, retrofitting costs were assumed to be
subsidised by two-thirds, aligned to the Government’s recently
closed Green Homes Grant scheme. Costs therefore remained lower
across all property types, compared with the Late policy action
scenario. EPC G rated homes had the highest retrofitting costs.
In an Early policy action scenario, it was assumed the efficiency of
Nationwide’s mortgage portfolio housing stock improved. This was
through a combination of higher new build standards (for example,
homes built to the more efficient Future Homes Standard from
2025) and early (assumed) subsidised retrofitting activity.
For the purposes of this initial analysis, all properties of a similar
EPC were assumed to undertake retrofitting at the same point in
time. For example, all buy to let EPC G-D properties became EPC C
by 2025, all prime EPC G–D properties became EPC C in 2030, and
all homes reached their maximum potential efficiency in 2045.
From a starting position where approximately 70% of the
Society’s mortgage book was rated EPC D or below in 2020, it
transitioned to only 2% forecast to be rated D or below by 2050.
In this scenario, energy efficiency improvements meant that
Nationwide met its Mutual Good Commitment by 2030 – at least
50% of the mortgage portfolio will be EPC C or better.
The analysis showed that the majority of EPC A rated homes still
use natural gas as a fuel source rather than relying on air or
ground source heat pumps for heating. This indicates the need for
retrofitting in the future if net zero emissions are to be achieved.
Late policy action transition risk outcomes
In a Late policy action scenario energy costs (including carbon
pricing) escalated rapidly from 2030, with some normalisation
of electricity prices from 2035. For similar reasons to the Early
policy action analysis, EPC E rated homes had the greatest
increase. In monetary terms, it was estimated that, for EPC G
rated homes, annual fuel and climate tax charges increased
by up to four times the current cost by 2050.
In this scenario, retrofitting costs were more substantial,
reflecting the assumption that costs were borne in full by the
owner due to an absence of subsidies.
It was assumed that the UK housing stock increased gradually
over the duration of the scenario. These homes were initially
built to current standards and only became more efficient later
in the scenario.
Retrofitting activity was also later, as was the implementation of
the Future Homes Standard (assumed from 2030), and so was
implemented over a condensed period. Again, all properties of a
similar EPC were assumed to undertake retrofitting at the same
point in time. All buy to let EPC G-D properties became EPC C by
2035 and all prime EPC G–D properties became EPC C in 2040.
All homes reached their maximum potential efficiency in 2045.
In the Late policy action scenario, Nationwide failed to meet its
Mutual Good Commitment with an estimated 39% of properties
rated C or better by 2030.
4 Based on less than 1% of properties with an EPC of A or B and an electric fuel source.
Annual Report and Accounts 2021
44
Incorporating climate change scenario impacts into
our strategy
The Board has reviewed the outcomes and learnings from the
climate change scenario analysis. As a result, the Board is
supportive of using the outcomes as the basis for building the
further capability for the CBES and future stress testing. Planned
enhancements to the transition risk assessment include building
energy cost considerations and retrofitting costs into ECL
assessments.
Learnings from transition risk will be used to inform lending
policy and proposition development as Nationwide seeks to help
members balance the need to transition to net zero with the
costs of doing so.
Equally, the Society will adapt its strategy to respond to external
developments, particularly those in governmental policy and
their adoption. We recognise the potential implications of a Late
policy action scenario on our ability to reach our EPC Mutual
Good Commitment by 2030 and will work with government
and industry to address this.
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Climate-related financial disclosures (continued)
Governance
A well-established climate change governance model
The Board has ultimate accountability for all climate change risk
related matters. The Board Risk Committee and Executive Risk
Committee are responsible for oversight of climate-related risks.
Climate change risk is discussed at the Executive Risk Committee
quarterly, and the Board Risk Committee every six months.
The Executive Risk Committee is chaired by the Chief Risk Officer
(CRO), with membership formed from the leadership team.
The Executive Risk Committee has delegated authority from the
Board Risk Committee to monitor and review the risk exposures
of the Society in accordance with the ERMF, Board risk appetite,
and the Society’s strategy and Plan.
This year, the Board Risk Committee has:
• Reviewed the requirements of the upcoming CBES
and the scenarios that will be tested
• Reviewed the scenario analysis work and the capabilities
tested across physical and transition risk
• Discussed key outputs from scenario analysis and
understood the actions needed for CBES readiness
• Approved the approach to disclosures and the TCFD
requirements
• Received updates on the progress made in maturing
climate change risk management capabilities and
management information
• Considered analysis of the impact of climate change
on the mortgage portfolios in light of the winter storms
and loss event data
• Discussed the importance of climate change to
Nationwide’s investors, and the noticeable increase
in ESG-focused conversations.
Annual Report and Accounts 2021
45
This year, the Executive Risk Committee has:
• Discussed the progress of the climate change risk
management plan, including the monitoring of the climate
change management information dashboard
• Discussed the CBES requirements in detail
• Approved the approach to scenario analysis, testing both
physical and transition risk capabilities
• Built awareness of key partnerships and collaborations to
progress climate change thinking
• Discussed the outputs of the scenario analysis stress test
and approved the actions needed in readiness for the CBES.
To support the maturing of the Society’s approach to climate change
risk management and oversee progress against the plan to meet
the requirements of SS3/19, and other regulatory requirements,
a Climate Change Risk Committee has been established.
Chaired by the Chief Strategy and Sustainability Officer (CSSO),
and meeting monthly, the Climate Change Risk Committee
comprises members from the Society’s Risk, Financial planning
and stress testing, Operational shared services, Strategy and
Treasury teams. This broad membership ensures appropriate
consideration, monitoring and management of climate-related
risks by senior management.
The Climate Change Risk Committee is also responsible for
overseeing the Climate Change Risk Working Group which has
the day-to-day responsibility for implementing the plan for
embedding climate change risk in line with SS3/19.
The Climate Change Risk Committee provides input to the
Responsible Business Committee which meets every other
month and is chaired by the CSSO. This Committee is charged
with establishing Nationwide’s responsible business agenda,
including the strategic approach to address climate change
and environmental ambitions.
This year, the Responsible Business Committee has:
• Discussed the progress of the climate change and
responsible business strategy
• Engaged in the development of green propositions,
including a detailed execution roadmap
• Discussed the broader ESG implications, including
inclusion and diversity, modern slavery and social
investment, as well as climate change risk and updates
on the scenario analysis approach
• Helped define Nationwide’s Mutual Good Commitments
• Built awareness of the work being undertaken to
understand Nationwide’s supply chain emissions as well
as ongoing oversight of the Society’s own operational
emissions.
This year, the Climate Change Risk Committee has:
• Provided oversight of delivery against the plan
• Continued to monitor the climate change risk
management information
• Engaged in the scenario analysis activity, approving
the approach, and reviewing the results
• Approved Nationwide’s partnership with PCAF UK
• Reviewed the gap analysis of progress against the
requirements of the SS3/19 and associated Dear CEO
letter, the PRA’s Discussion Paper on the CBES, and
disclosures against TCFD requirements.
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Governance (continued)
Our climate change governance model
Our climate change operating model
Board Risk Committee
Every six months
Nationwide Leadership Team
When required
External & internal
engagement
Member
propositions
Annual Report and Accounts 2021
46
Executive Risk Committee
Every quarter
Responsible Business Committee
Every other month
Investor
relations
Responsible business
team
Operational shared
services
Climate Change Risk Committee
Every month
Climate Change Working Group
Every fortnight
2nd line risk oversight
& internal audit teams
Our climate change governance model shows the committees and groups where climate
change is discussed and the frequency of climate change risk on their respective agendas.
Strategy
Climate change
risk team
1st line risk teams
(credit, operational &
conduct, financial)
Financial planning &
stress testing team
3rd party support
A strategically led approach
Additional Board engagement on climate change risk
Ownership for responding to climate change sits within the Strategy team, led by the CSSO, whilst
Senior Managers Regime (SMR) accountabilities sit with the Chief Executive Officer (CEO).
This year the Board attended two bespoke climate change training sessions. These sessions covered:
• The implications, risks and opportunities to financial services of climate change and the transition
A climate change risk team owns and drives forward the plan for embedding climate change risk
across the Society. This plan was shared with the PRA in October 2019 and will enable us to meet
the requirements of SS3/19.
A strategically led climate change risk team enables consistent focus on climate change across the
Society, co-ordinating other specialist teams across the Risk, Financial planning and stress testing,
Operational shared services and Treasury functions. Nationwide’s climate change operating model
is shown opposite.
to a net zero economy
• Nationwide’s ambition and activities to become the leading voice in championing sustainable,
energy efficient housing in the UK
• A deep dive into climate change risk and the changing expectations of Nationwide’s investors
and regulators, and the role of the Board.
Climate-related remuneration and our Board’s credentials
As part of the remuneration of Nationwide’s most senior leaders, an individual’s contribution is
considered, including their impact on climate-related activities where relevant.
The Board has focused on increasing its understanding of climate change. Further information
on the Board’s credentials is provided in the biographies on page 71.
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Climate-related financial disclosures (continued)
Risk management
Annual Report and Accounts 2021
47
How climate change risk is embedded at Nationwide
Our climate change risk appetite statement
How the risks are managed
Nationwide has developed a climate change risk standard to aid
the embedding, management and monitoring of climate change
risk as a cause to the Society’s most significant risks. This standard
articulates how climate change risk may occur across the ERMF
and links to the Society’s principal risk policies.
Risk roles and responsibilities
The climate change risk standard articulates clear roles and
responsibilities for managing and monitoring climate change
risk across the Society, with a summary provided below:
In line with SS3/19 and to support the embedding of climate
change risk we have developed a climate change risk appetite
statement:
“ We are committed to working towards alignment
to a net zero emissions pathway by 2050. We will
seek to minimise the impact of physical and transition
climate risk on Nationwide and our members.”
In support of this appetite, complementary quantitative risk
appetite metrics are being developed which will be included
in future disclosures.
Team
Climate change risk
Roles and responsibilities
• Coordinating progress against the SS3/19 plan
• Coordinating climate change scenario analysis
• Ownership of the climate change risk standard
• Ownership of the centralised climate change risk governance and reporting
• Ownership of climate change financial disclosures
First line risk, such as Credit risk
• The identification, assessment, management, and monit
oring of climate change risks
across all impacted risk categories
• Reporting of climate change risk against existing risk management information and
enhancing decision-making to embed climate change
• Developing and enhancing climate change scenario analysis capabilities
Financial planning & stress testing
• Helping to shape the climate change risk stress testing scenarios
• Creation and reporting of scenario metrics
Second line Risk oversight
• Providing ongoing oversight, with advisory input and challenge, to ensure Nationwide
meets external and internal climate change risk management requirements
Internal audit
Third parties
• Providing independent assurance on activity to embed climate change risk management
• Scenario expansion support for scenario analysis
• Quantitative modelling for physical risk peril data
• Support to understand qualitative assumptions
The ERMF was assessed through a climate change lens to
identify how climate change could manifest in each of
Nationwide’s principal risks. Processes are in place to manage
the top three risks impacted by climate change, and to help
track against the Society’s risk appetite statement:
• Credit risk – An assessment of physical risk is undertaken
at the point of a secured lending decision. We do not lend
where the risk could render a property uninsurable.
Restrictions are in place on lending to buy to let properties
rated below EPC E. These criteria will be further enhanced
through the outcomes of the scenario analysis and calculation
of expected credit losses
• Operational and conduct risk – Climate change is included
as part of existing Risk Control Self-Assessment processes and
within the initiative development framework. All loss events
are recorded in Nationwide’s operational risk system, enabling
the identification of climate-related risk events. In addition,
potential liability and conduct risks are considered through
the development of green propositions
• Liquidity and funding risk – The potential impacts of climate
change risk are assessed as part of the ILAAP.
Internal assurance
Nationwide’s Internal audit team provides focused independent
assurance on the approach taken to managing and embedding
climate change risk. The most recent audit focused on the
Society’s progress in embedding the requirements of SS3/19 by
the end of 2021. The team concluded that the current approach,
including actions already identified for enhancing scenario
analysis, will ensure that Nationwide embeds climate change
risk management by the end of 2021.
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Annual Report and Accounts 2021
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Risk management (continued)
Impact of climate change on Nationwide’s principal risks
Risk category
Climate change impact examples
Horizon
(note i)
Potential risk
indicator (note ii)
T
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O
Credit
Operational
&
conduct
Transition
Physical
Transition
Physical
Liquidity
& funding
Transition
& physical
Transition
Business
• Reduced member creditworthiness due to the transition to a greener economy (for example, due to loss of jobs or increased energy costs)
leading to default
• Declining house values due to aggressive housing policy (for example, introducing minimum EPC ratings)
• Registered social landlord challenges in meeting policy requirements
• Houses damaged by physical impacts, such as floods, causing a decline in property value
• Higher insurance prices leading to uninsured properties
• Exposure to other financial services firms who are exposed to physical climate risk
• Increased supply chain costs
• Reconsideration of third-party relationships due to their carbon footprint
• Reputational impact of carbon footprint of products and services leading to lower member and employee attraction and retention
• Potential liability and conduct risk from green propositions and assumed advice
• Branches or offices damaged, or loss of systems or key data due to physical impacts, such as floods, affecting key processes
• Increased incidence of environmental perils affecting the delivery of third party goods and services
• Increased member activity (for example, increased call volumes) resulting from physical risk impacting Nationwide’s service capacity
• Internal capability affected by physical events preventing employees from accessing the office or working from home
• Falling deposit balances due to economic distress of members
• Lower deposit balances due to members’ loss of confidence in Nationwide relating to negative perceptions of climate credentials
• Reduced wholesale funding access following lower investor appetite due to negative perception of Nationwide in relation to climate change
• Changes in member expectations relating to prioritisation of green strategic objectives
• Increased costs associated with policy changes
Physical
• Income impacted as a result of physical impacts, such as loss of operations
Pension
Transition
& physical
• Impact of physical or transition risk on pension asset valuations leading to increased deficit or reduced surplus
Solvency
Physical
• Deterioration of balance sheet assets, such as offices or branches, due to physical impacts
Transition
& physical
• Changes in member behaviour in relation to their mortgages or deposits as a result of interest rate changes, arising from physical or
transition events
• Macroeconomic market impacts arising from physical or transition events, impacting value (or net income from) assets and liabilities,
Market
as a result of interest rate movements
Transition
• Tightening of climate related policy leading to market repricing
Physical
• Impact on exchange rates due to physical events, affecting currencies in which investment securities are held
Medium High
Long
Medium
Medium Medium
Medium
– Long
Medium
Medium
– Long
Medium
Medium Medium
Medium
– Long
Medium
– Long
Medium
– Long
Medium
Medium
Medium
Long
Medium
Long
Long
Medium
Medium
Notes:
i. Horizons: Short 0-1 year, Medium 1-5 years, Long 5-40 years.
ii. Potential risk indicator provides an indicative view on climate change impact across each risk category, with high being a large-scale impact.
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undefended river flood map for an area of the UK. Displayed are
flood extents, with colour grading indicating depths, for a 200-year
river flood event. Image 2 shows an example of the modelled
percentage change in undefended river flood depths under the
RCP 4.5 climate scenario and time horizon 2036 to 2040.
Image 1:
Image 2:
Risk management (continued)
Advancing the use of property risk data
In 2013, we identified a gap in how and when data is collected
on a mortgaged property, which impacted the ability to assess
certain risks. This often meant that consideration of
environmental risks to the property was limited, and only took
place after the mortgage offer had been issued through the
conveyancing process.
Recognising the need to change, we developed the Property
Risk Hub, in conjunction with key partners such as Airbus
Defence and Space, JBA and Ordnance Survey. The Property Risk
Hub collects data to support future decision making and manage
climate risk. This capability went live in 2016. It enables us to
decide better what constitutes suitable security for mortgage
lending and how changing climate and environmental factors
might impact this over a typical mortgage term of 25 to 40 years.
This was also the first step in a fundamental change to valuation
methodology, moving away from a pure present-day comparable
basis, to incorporate new longer-term environmental data
sources and models of climate change impacts.
Property-level data is collected on every property from various
specialist providers using a Unique Property Reference Number
(UPRN) to ensure consistency. Relevant data collected includes:
• Energy Performance Certificate (EPC) rating
• Flood data (run-off, river and coastal)
• Coastal erosion data
• Ground stability data (subsidence, soil, sand, and silt)
• Natural ground hazards (such as mining and sink holes)
• Insurability (consideration given to the Government and
Insurer backed Flood Re scheme, that supports the
insurability of high flood risk properties).
Using this data, property-related risks are assessed when
originating new residential mortgages. This allows different
methods of valuation (Automated Valuation Model, desktop,
full physical) to be mandated, and informs the current valuation
of each property.
Visualisation tools can be used to help understand and assess
specific risk events. Illustrative examples are contained in
Images 1 and 2. Image 1 shows an example of the baseline
Annual Report and Accounts 2021
49
Data like this helps to assess the current flood risk of properties
used as security for lending as well as being used in scenario
analysis modelling.
Over the last year this wealth of data has been used to model
the financial impact of physical risk on the whole mortgage
portfolio posed by these long-term climate scenarios. A greater
awareness of the potential impacts in different scenarios enables
a better understanding of the risks that may occur over the
lifetime of the mortgage. This allows us to make more informed
lending decisions in the best interests of its members.
Using EPC ratings to inform lending decisions
EPC ratings currently inform buy to let lending decisions, with
lending only granted against properties that have a rating of E
or better. This data is likely to become increasingly important in
assessing transition risk as future regulation and government
policy aim to decarbonise the UK housing stock.
Monitoring the risk
Using a combination of visualisation and modelling capabilities,
scenario analysis and stress testing, and an analysis of EPC
ratings, we can track the exposure of its mortgage portfolios to
flood risk and energy efficiency. Details of the metrics tracked
can be found in the ‘Metrics and targets’ section on page 50.
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Climate-related financial disclosures (continued)
Metrics and targets
Annual Report and Accounts 2021
50
Nationwide’s climate change metrics are anchored to its
ambition to lead the greening of UK homes and its Mutual Good
Commitments, that by 2030:
• At least 50% of homes in our mortgage portfolio (prime and
buy to let) will be rated EPC C or better
• Our business operations, suppliers and commuting will be
carbon neutral.
The achievement of these ambitions is partly dependent on
government policy. Progress will be supported by the enhanced
suite of metrics developed to monitor and manage the impacts
of climate change. These metrics aid discussions and inform
strategic decisions made by management and the Board. The
metrics are shared in various committees, through the climate
change governance model, to support committee responsibilities.
Recognising that there is more to do to fully understand the
impact of climate change across our business, we are working
on developing further metrics as our and the industry’s
understanding continues to mature.
Nationwide’s scope 1 and 2 carbon emissions
We are pleased to have remained carbon neutral for scope 1 and
2 emissions throughout the year. These emissions are tracked
against a set of strategic ambitions that aim to improve the
Society’s sustainability. This year the focus has been on enhancing
disclosures by providing more detail on scope 1 and 2 operational
emissions aligned to the Government’s streamlined energy and
carbon reporting requirements.
Nationwide has seen a further reduction in scope 1 and 2 emissions
this year as detailed in the scope 1, 2 and 3 carbon emissions
data table opposite. With the unprecedented impact of Covid-19
causing a shift in ways of working, the majority of the Society’s
employees (around 13,000) now work from home. This has
caused a reduction in energy consumption across Nationwide’s
buildings and through reduced travel, resulting in lower carbon
emissions. We have not included the emissions as a result of
employees working from their homes – these would be captured
as scope 3. We are aware that emissions may not stay at this level
as further changes in work patterns take place in the coming year.
Scope 1, 2 and 3 carbon emissions data
Scope 1 and 2 emissions:
Year to 4 April
2021
Year to 4 April
2020
Year to 4 April
2019
Baseline year
to 4 April 2011
and )ii
notes i
Carbon dioxide (CO2e/y) in tonnes (
Scope 1 emissions
Energy
Travel
Scope 2 emissions
Electricity
note iii
)
Total scope 1 and 2 emissions (
PPA carbon reduction for scope 2 (
note iv
)
Green tariff electricity for scope 2 (note v)
Absolute carbon outturn
Total carbon offsets used for scope 1 in tonnes (
Net carbon outturn
Total scope 1 and 2 emissions per full time employee (FTE)
Data score (
note vii
)
note vi
)
3,411
63
18,069
21,543
(11,227)
(6,842)
3,474
(3,474)
0
0.21
1.50
3,966
823
20,907
25,696
(21,367)
3,721
2,190
23,446
29,357
(22,187)
4,890
2,448
50,802
58,140
4,837
7,170
58,140
0.30
0.39
3.46
Scope 3 mortgage emissions:
Number of properties (prime and buy to let and legacy) in millions
Total book
With a valid EPC
Total property floor area in million metres square (
note viii
)
Absolute scope 3 carbon dioxide emissions (CO2e) in million tonnes (Mt) per year (y) for mortgages
On properties with a valid EPC (
On whole book using interpolated EPC data (note x)
Absolute carbon dioxide emissions in kilograms per square metre of floor area per year (kgCO
interpolated EPC data
LTV weighted scope 3 carbon dioxide emissions (CO2e) in million tonnes (Mt) per year (y) for mortgages
On whole book using interpolated LTV weighted data (
LTV weighted carbon dioxide emissions in kilograms per square metre of floor area per year (kgCO2e/m2/y)
using interpolated data
Data score (
2e/m /y) using
note vii
)
note ix
)
note xi
)
2
As at 31 Dec 2020
1.59
0.85
150.94
3.32
6.25
41.40
2.75
18.20
3.47
i. CO2e/y is an abbreviation of ‘carbon dioxide equivalent per year’ and is the internationally recognised measure of greenhouse gas emissions.
ii. When calculating its carbon emissions, Nationwide has used the DEFRA 2020 conversion factors. (Notes continue overleaf).
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Metrics and targets (continued)
Notes (continued):
iii. Scope 1 covers direct combustion of fuels and company-owned
vehicles and scope 2 covers emissions from electricity. Amounts
presented for the year to 4 April 2021 reflect latest estimates as at
March 2021.
iv. Purchase Power Agreement (PPA) represents the contribution of a
solar power purchase agreement, producing emissions-free energy
backed by renewable obligations certificates.
v. Nationwide’s ‘Green Tariff electricity’ comes from 100% zero carbon
wind sources that have a renewable energy guarantee of origin
(REGO), with assurance for this product provided by Deloitte in
accordance with ISAE 3000. Green Tariff data has been added into
the calculation for this year – for previous years this data was
unavailable.
vi. The purchased offsets are generated by Community Reforestation
(carbon sequestration). The project is verified and has approval
under both the Verified Carbon Standard (VCS) and the Climate,
Community and Biodiversity Standard (CCB). This is the first year
Nationwide has purchased offsets to cover its residual emissions.
vii. Data scores are based on the quality of data inputs used to calculate
carbon dioxide emissions. Data scoring aligns with PCAFs Global
GHG Accounting and Reporting Standard, with 1 representing high
data quality and 5 representing low data quality.
viii. Total property floor area is calculated using machine learning
techniques based on around 400 property features.
ix. Calculations are based on number of mortgage properties (prime
and buy to let) with a valid EPC. This equates to approximately 50%
of the mortgage portfolio.
x. Calculations are based on estimating EPC data across the whole
mortgage portfolio (prime and buy to let) using interpolation based
on housing data. The carbon dioxide emissions account for EPC
covered emissions only (space and water heating, and lighting).
Indirect emissions from other energy uses by the household have
been excluded such as those resulting from the use of domestic
appliances. Nationwide believes this approach best aligns with
those emissions associated with its lending.
xi. LTV adjustments have been applied to the total CO2 emissions
predicted for the whole mortgage book, using the outstanding
balance and modelled property valuation, as at 31 December 2020.
Nationwide believes this best reflects the emissions it finances.
A data score has been calculated for Nationwide’s carbon emissions in the financial year using PCAFs Global Greenhouse Gas (GHG)
Accounting and Reporting Standard (which received the “Built on GHG Protocol Mark” from the GHG Protocol) to provide insight into
the quality of the data. The scope 1 and 2 emissions achieve a weighted data score of 1.50, on a scale of 1 to 5, where 1 represents the
highest data quality and 5 represents the lowest data quality.
This is based on a weighted average of:
• Primary data used for the consumption of energy and water, and waste for our buildings,
to the end of December 2020, achieving a data score of 1, weighted at 75%
• Estimated building energy consumption data based on known entities for our buildings, from the
end of December 2020 until the end of March 2021, achieving a data score of 3, weighted at 25%.
Nationwide’s scope 3 carbon emissions
Aligned to the PCAF standard, we have developed an approach for estimating the scope 3 carbon emissions from our mortgage book.
The approach leverages the EPC model built for assessing transition risk to estimate the carbon emissions. This model has been
through a high level internal oversight process and will go through further assurance prior to the CBES. More details can be found in
the scope 1, 2 and 3 carbon emissions data table above.
The scope 3 emissions have been weighted by the loan to value (LTV) on the mortgage, in line with PCAF methodology, in order to
calculate the proportion of emissions financed by Nationwide. Modelled property valuations as at 31 December 2020 have been used.
We believe this provides the most appropriate valuation data. The use of original valuation was considered but deemed inappropriate.
This was particularly true where additional borrowing had taken place since the original valuation, as this could result in calculated
LTVs, and hence emissions, in excess of 100%.
A weighted data score of 3.47 has been calculated for the scope 3 emissions. This is based on:
• Using emissions data in publicly accessible EPCs available for approximately 51% of Nationwide’s prime,
and 62% of Nationwide’s buy to let mortgage properties, giving a data score of 3, weighted at 53%
• Interpolated EPC data across the remainder of the portfolio, estimated using most similar property
features and location specific attributes, giving a data score of 4, weighted at 47%.
It is expected that data quality scores will improve overtime as internal models and EPC datasets mature.
Nationwide’s carbon emissions disclosures will be developed further over the coming year. Work is underway to assess the Society’s
balance sheet for additional scope 3 exposures.
Whilst Nationwide has not yet set science-based targets for scope 1, 2 and 3 emissions, there are plans to explore this to enable the
Society to track its progress towards a carbon emissions target aligned to net zero.
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Metrics and targets (continued)
Physical risk metrics
Nationwide no longer lends on properties at high risk of flooding (in red flood risk zones), but updates to UKCP18 and flood defence datasets are included within model outputs.
The increase in the number of properties in red flood risk zones from last financial year can be attributed to a shift in climate forecasting data.
The 30-year scenario analysis of prime and buy to let mortgages, and lending to registered social landlords, showed a low financial impact of physical risk. Further details are
provided in the table below.
Nationwide’s low future exposure to climate change is due to the low current exposure to flood risk red and amber zones. Over the course of the next year, through work as part
of the CBES, and working closely with flood risk partners JBA, the Society’s physical risk modelling approach will evolve further.
Physical risk data
Prime mortgages
Properties in red flood risk zone (note i)
Properties in amber flood risk zone (note i)
Buy to let and legacy mortgages
Properties in red flood risk zone (note i)
Properties in amber flood risk zone (note i)
As at 31 Dec 20
As at 31 Dec 19
Number
Exposure £bn
% of Book
Number
Exposure £bn
% of Book
457
27,610
0.05
3.36
As at 31 Dec 20
0
2
433
25,991
0.05
3.22
0
2
As at 31 Dec 19
Number
Exposure £bn
% of Book
Number
Exposure £bn
% of Book
203
9,160
0.02
1.08
0
3
204
8,506
0.02
0.98
0
3
RCP 4.5 30-year scenario – prime and buy to let and legacy (Dec 20)
Total number of properties affected by incremental future flooding (to the nearest thousand)
Total number of properties deemed uninsurable (to the nearest hundred) / (percentage of book) (note ii)
Overall financial impact
RCP 4.5 30-year scenario – registered social landlords (Dec 20)
Total number of RSL properties (to the nearest thousand)
Percentage matched to JBA data
Total number of matched properties affected by future flooding (to the nearest hundred)
Overall financial impact
Notes:
i. Flood risk scores are weighted by risk level and type (such as coastal flooding) and any flood defences in place.
ii. Uninsurable properties are incremental to those properties already in a red flood risk zone.
5 Low indicated an estimated increase in ECLs of less than £5 million.
95,000
1,800 / (0.10%)
Low5
180,000
87%
600
Low5
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Metrics and targets (continued)
Transition risk metrics
The use of EPC data has been critical to Nationwide’s understanding of the impact of transition risk.
EPC ratings of the mortgage portfolio are monitored to provide a view on the energy efficiency of
the Society’s housing stock. This, coupled with internal modelling to interpolate core EPC data
across both the prime and buy to let mortgage portfolios, produces the management information
used to track progress against the EPC Mutual Good Commitment. Further details are contained in
the table below.
Actual EPC data is compared with interpolated model data to aid the understanding of differences
in the EPC composition across the mortgage book. The most common EPC rating in Nationwide’s
mortgage book is D, in line with UK average , with approximately 36% of the book (total for prime
and buy to let) currently rated EPC C or better on an interpolated basis.
6
Using physical and transition risk metrics in our governance
Climate change risk data is monitored quarterly by the Climate Change Risk Committee.
Physical and transition risk data is reported alongside other metrics and data such as:
• The number of UK extreme weather events
• The annual Climate Change Committee’s assessment of the UK’s progress against
carbon budgets
• The frequency with which climate change is raised in investor meetings
• The number of physical risk related incidents that have impacted our operations
• The green profile of our operations (tracking waste and emissions figures).
Nationwide’s transition risk data
Prime mortgages
Buy to let and legacy mortgages
Current EPC data (note i)
As at 31 Dec 20
As at 31 Dec 19
Current EPC data
As at 31 Dec 20
As at 31 Dec 19
Number Exposure
£bn
% of
Book
Number Exposure
£bn
% of
Book
Number Exposure
£bn
% of
Book
Number Exposure
£bn
% of
Book
EPC Rated A/B/C
EPC Rated D/E
EPC Rated F/G
No EPC / unmatched
Interpolated EPC
data (note ii)
255,752
363,774
20,581
619,048
37.79
52.10
3.06
57.18
As at 31 Dec 20
20
29
2
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Number Exposure
£bn
% of
Book
EPC Rated A/B/C
EPC Rated D/E/F/G
465,915
793,240
59.27
90.86
37
63
Not reported
EPC Rated A/B/C
371,766
23,163
51.93
3.34
33
2
EPC Rated D/E
EPC Rated F/G
67,599
134,055
4,032
9.04
16.11
0.40
Not reported
No EPC / unmatched
124,106
20.46
20
41
1
38
Not reported
113,583
5,705
13.30
0.587
467
2
Not reported
Interpolated EPC
(note ii)
data
As at 31 Dec 20
Number Exposure
£bn
% of
Book
EPC Rated A/B/C
106,910
EPC Rated D/E/F/G
222,882
16.43
29.58
32
68
Notes:
i. EPC data used as at 30 September 2020.
ii. Interpolated EPC data calculated using machine learning techniques matching most similar properties where data gaps exist. EPC data as at 30 September 2020 and mortgage portfolio data as at 31 December 2020.
6 Ministry of Housing, Communities and Local Government EPC Database, to June 2020.
7 Comparative amounts have been restated.
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Metrics and targets (continued)
Climate change complaint and loss data
8
In addition to the above metrics, both complaint and loss event
data related to climate risk are tracked. This data informs the
Society’s understanding of any material impacts on its operations
and members. Whilst the numbers are minimal, we will continue
to monitor this activity, particularly given the more regular
extreme weather events that have happened in recent years.
Managing our waste and water consumption
In addition to tracking the scope 1 and 2 carbon emissions for
buildings, water and waste consumption are measured across
Nationwide’s sites. More details can be found in the table
opposite. Nationwide continues to divert 100% of its waste from
landfill. Nationwide has seen a larger reduction in waste and
water consumption this year in comparison to previous years,
which can be attributed to the increase in home working due to
Covid-19. The evolution of this trend will be dependant on future
working patterns.
Tracking our green propositions
Annual Report and Accounts 2021
54
Climate-related
complaints (note i)
Number of complaints
(note ii)
Year to 4 April
2021
0
Year to 4 April
2020
1
Notes:
i. Complaints based on verbatim search of climate-related words.
ii. Rationale of complaint to 4 April 2020 – branch inaccessible due
to flooding.
Climate-related loss
events (note i)
Number of loss events
(note ii)
Year to 4 April
2021
5
Year to 4 April
2020
8
Notes:
i. Based on operational and conduct risk loss events and near misses
recorded with a climate change route cause.
ii. Rationale: Most events were found to be flood related or due to more
recent major storms.
Waste and water usage
Water use (cubic metres)
Water use (cubic metres) per FTE
Percentage of water consumption reduction / target
Waste generated (tonnes)
Waste reduction (tonnes) / target
Percentage of waste recycled / target
Year to 4 April
2021
Year to 4 April
2020
Year to 4 April
2019
Baseline year
to 4 April 2011
170,606
10.13
15% / 2%
1,501
967 / 25
62% / 60%
199,547
10.79
2,468
58%
195,854
10.56
2,581
63%
259,718
15.44
4,554
43%
In 2020, Nationwide launched its Green Additional Borrowing
Mortgage with the support of its £1 billion green fund. Initially
launched with a fixed rate of between 1.00 and 2.55% dependent
on LTV, the mortgage rate was lowered to a fixed rate of 0.75%,
for either two or five years. The take-up for the Green Additional
Borrowing mortgage is summarised below.
Green Additional Borrowing Mortgage
Number of applications
Number of completed applications
Total value of applications (£m)
Total value of completed applications (£m)
Year to
4 April 2021
419
345
6.6
5.3
The number of applications and completions for the Green
Additional Borrowing mortgage have been low. This illustrates
that it is not the absence of affordable funding that is constraining
retrofitting – other barriers exist including a lack of: economic
rationale, ability to borrow, convenience, trusted suppliers to
undertake the work, and awareness or knowledge of the need
for, and how to go about retrofitting.
For many, the cost of retrofitting is not sufficiently offset by the
financial benefits. Whilst retrofitting can deliver other benefits,
such as more comfortable living conditions, more needs to be
done to enable cost-effective retrofitting. The Government’s
Green Homes Grant was a positive step in this direction but
has recently been withdrawn. We will continue to work with
government, policy makers and industry, to innovate its
propositions, to support further activity to address the industry-
wide retrofitting challenges.
Nationwide’s partnership with Switchd has seen a number of
sign-ups to the service since the staff pilot was launched in
January 2020 (followed by a member launch in July 2020), with
a significant proportion of them opting to switch to green energy
providers, resulting in a carbon emissions saving. A summary
of sign-ups is opposite.
Switchd
As at 4 April
2021
Total member and colleague sign ups to
Switchd
Percentage of Switchd sign ups that have
chosen to switch to green tariffs only
Total percentage of Switchd sign ups
actually switched to green tariffs
Carbon saving to date (tonnes)
Estimated carbon saving annually (tonnes)
(note i)
2,967
13.6%
63.0%
1,229
3,411
Note:
i. B ased on projected carbon saved annually through the Switchd service.
We will continue to monitor the progress of existing and new
green propositions over the next year.
8 An event which creates a minor or above impact to the Society arising from: inadequate or failed internal processes, conduct and compliance management, people and systems, or from external events.
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Climate-related financial disclosures (continued)
Future developments in climate risk
Annual Report and Accounts 2021
55
The environment will undoubtedly remain the dominant discourse of this century. Governments and businesses across the globe must do all they can to reduce waste, pollution and use of natural
resources, restore biodiversity and ecosystems, and return the planet to, at least, net zero carbon.
As one of the UK’s largest mortgage providers, Nationwide has a role to play in supporting society’s transition to a net zero economy, with a particular focus on the home. Through the Mutual Good
Commitment to lead the greening of UK homes, and the embedding of SS3/19, Nationwide is ensuring that climate change discussions are intrinsic to how its business operates. Responsible business is
the way we conduct ourselves – it aligns strongly with the Society’s purpose and climate change is an important part of this.
Going beyond the requirements of SS3/19
Nationwide’s climate change risk focus continues to be on
embedding the requirements of SS3/19 and tracking progress
against the climate change plan. We have also developed the
capabilities needed for the upcoming CBES. However, the
Society’s goals extend beyond this, and Nationwide will continue
to mature its understanding of, and capabilities for managing,
climate change in years to come.
Furthermore, the lessons learned from the climate change
scenario analysis, and CBES itself, will shape the Society’s
approach to ongoing climate change stress testing. Energy
prices impacting affordability, and government policy and
outstanding retrofitting requirements affecting property values,
could all lead to potential credit losses. We are considering how
to integrate transition risk implications into our credit risk
modelling to understand the impact on future impairments.
Further improvements to the Society’s transition risk modelling
are underway to incorporate other considerations such as
operational, member, and employee impacts.
Enhancements to the Society’s climate change risk management
approach will enable it to further enrich its metrics and targets.
Driven by the Society’s risk appetite statement, complementary
risk appetite metrics will be developed.
Evolving our climate change governance approach
and learnings
Since its formation, the Society’s governance approach has
become well-established, but we recognise that there is more it
can and should do to further enhance its effectiveness. Over the
coming year we will:
• Further embed climate change into the governance model,
which will continue to evolve, informed by the outcomes of
committee annual effectiveness reviews
• Encourage broader climate change conversations and
enhance understanding – using learnings from partnerships
and engagements across the industry
• Track progress of our ambitions and outline future plans
for further metric development.
Staying close to climate change developments
Through engagement with existing partners, and links into
industry bodies leading the way on climate change, Nationwide
will continue to develop its knowledge of climate change and the
impact on the Society and its members.
We will continue to remain close to government policy
consultations and participate in engagements relating to climate
change and those that impact on the home. We will continue
to campaign for:
• New build homes to be built to high energy efficiency
standards to avoid the need for future retrofit
• Long-term government financial incentives for owner-
occupiers to retrofit, in particular supporting those on
low-incomes and those where the financial payback from
retrofit is minimal
• A trusted supply chain of retrofit materials, along with
the appropriately skilled workforce to fit them
• Behavioural changes to help our members and wider
society reduce their carbon emissions.
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Risk overview
Risk overview
Annual Report and Accounts 2021
56
Annual Report and Accounts 2021
Nationwide adopts a prudent approach to risk management, keeping our members’ money safe and secure by ensuring that the risks we take in support of our strategy are controlled through a robust
risk appetite framework. To ensure these risks are managed consistently and rigorously, we operate an Enterprise Risk Management Framework, which sets out the minimum standards and processes for
risk management, translating the Society’s overall strategy and the Board’s risk appetite into the localised risk management activities and controls which protect our members and their money on a day to
day basis. Further detail on this framework is included on page 142 of the Risk report.
Our approach to managing risks:
We operate a relatively simple business model and operate in lower risk segments of the market to serve our members’ interests and keep them and their money safe and secure. This means our
earnings volatility is low and that we ensure our capital ratios remain above regulatory requirements through the economic cycle. We accept that lower volatility can mean lower returns and we manage
the Society within these constraints. To do this we:
take credit risk, focusing on UK residential mortgage lending, which is supported by our strong solvency position;
•
• manage solvency risk to support current business activity, planned growth and innovation, whilst remaining resilient to significant stresses. We aim to generate enough profit to be self-sufficient
through the economic cycle and maintain capital above regulatory minima in a downturn;
take opportunities to generate returns from our liquidity and market risk exposures where appropriate, but without compromising the management of those risks;
•
• minimise the impact of operational risks on our customers; this includes identifying, managing and prioritising actions to improve our operational risk, control, and resilience position to keep
•
member services secure and available, whilst optimising the cost of control; and
ensure our management of conduct risk helps develop propositions which meet customer needs, balancing risk and reward for both our members and the Society, and we aim to provide
services which result in fair outcomes for our members.
Principal risk types have been defined to ensure the Society understands and manages its risks in a comprehensive and consistent way. Further information on the Society’s attitude across these
principal risk types can be found on page 145 of the Risk report.
Developing our risk management
Over the year we have continued to review the risk management and control environment, developing a programme of activity to streamline the approach to control ownership, including
management accountability for key controls and declarations of control effectiveness across the first and second lines of defence to deliver more consistent outcomes.
Top and emerging risks
Top and emerging risks are those with potential to have a significant impact on Nationwide’s financial results and delivery of its strategic objectives. Nationwide’s strategic responses to its top and
emerging risks are described below, together with developments in specific external and internal risks. More information on our response to these risks across our principal risk types is provided in
the Risk report.
Covid-19 Pandemic
The effects of the Covid-19 pandemic have been far reaching with widespread restrictions placed on individuals and businesses, triggering a downturn in the UK economy. Nationwide invoked the
highest level of incident management response to the pandemic and has taken unprecedented action to balance three key objectives: maintaining the safety of our members and colleagues;
supporting our members with their individual needs; and ensuring the Society remains stable and secure. The unique challenges posed by the pandemic are reflected in a heightened risk profile
both externally, driven by the macro-economic environment and the changing needs of our members, and internally as we seek to ensure our processes and systems remain robust whilst
minimising risks to our colleagues and members.
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Risk overview (continued)
Risk overview (continued)
Top and emerging risks
External Risks
Geopolitical and macroeconomic environment – As a UK-focused building society, Nationwide’s performance is naturally aligned to the UK’s economic conditions, in particular household
income and the corresponding impact on the housing market. Despite significant government intervention, economic conditions remain uncertain, having been severely impacted by a
combination of the Covid-19 pandemic and the UK’s exit from the European Union. The Society maintains strong capital and liquidity levels and regularly undertakes robust internal and
regulatory stress tests to ensure these are sufficient under a range of severe scenarios, including the potential introduction of negative bank base rates.
Competitive environment –– The operating environment remains highly competitive, with shifting customer behaviours, regulatory changes and continued innovation in the financial services
sector leading to heightened competition in our core markets, as well as new entrants competing primarily via digital channels.
Regulatory change –– The Society is responding to a high volume of complex regulatory changes and engages with regulators to implement any relevant regulatory developments promptly
and appropriately.
Climate change – We continue to respond to the threat posed to our members and the Society’s business activities by climate change. This includes both the physical risks to housing stock
and property, and the transitional risks as the UK transitions towards zero net emissions. More information can be found on page 36.
Financial crime / cyber security – We continuously monitor the external landscape to identify potential cyber or fraud threats whilst operating and maturing our key financial crime and
cyber controls to protect our members and services as financial crime levels rise in the industry.
Libor transition – Preparations for the phasing out of Libor by the end of 2021 are ongoing. This will impact a range of Libor-linked assets, liabilities and derivatives and work continues to
manage the impact on the Society and our customers, including working with regulators and industry bodies.
Trend
Internal Risks
Resilience – Maintaining resilient systems, infrastructure and processes remains critical as Covid-19 restrictions influence member needs in accessing our products and services, and how they
interact with us. We continue to strengthen our control environment whilst proactively monitoring the resilience of our services to reduce disruption to our customers.
People risk – Throughout the pandemic, ensuring the safety and wellbeing of our colleagues has been of paramount importance. We have implemented measures to ensure colleagues
remain safe and supported, including transitioning our workplace to comply with government Covid-19 guidance, enabling colleagues to work from home through technology, allowing
flexibility and additional paid leave where necessary to look after children/dependants, and have introduced initiatives to support the physical and mental wellbeing of all our colleagues. Our
decision to allow remote working permanently will benefit our colleagues, but we recognise the need to focus on maintaining controls.
Third parties – We rely on a network of suppliers to support the provision of member-facing services. Throughout the pandemic, we have continued to work closely with our key suppliers to
identify and mitigate any risks which could impact our services. We continue to develop capability to ensure consistent and robust management of third party risks.
Data – As increasing volumes of customer data are utilised to improve customer experience and deliver intuitive digital services, the safeguarding of customer data is becoming increasingly
critical. We are committed to protecting member and employee data and continue to invest in data architecture and technology to manage and protect personal data more effectively in an
evolving digital environment.
Model risk – Model risk is heightened under Covid-19 as unprecedented government support and industry measures break traditional economic and credit relationships. To manage the
increased model risk the understanding of model limitations has been revisited, model monitoring has been enhanced, and, where appropriate, adjustments to model outputs are made.
Trend
KKeeyy (change in level of risk to Nationwide in year)
Increased level of risk Stable level of risk
Decreased level of risk
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Annual Report and Accounts 2021
Viability statement
Viability statement
The directors have an obligation to confirm that they believe that both the Society and the Group will be able to continue in operation, and to meet their liabilities as
they fall due. This viability statement considers the Group’s current financial and strategic position and the potential impact of its principal risks, to explain the
directors’ assessment of the Group’s prospects over an appropriate period.
Assessment of viability
In making their assessment, the directors have considered the Group’s top and emerging risks, and the stress testing activity which has been carried out to assess the potential impact of these risks.
When reviewed alongside the Group’s strategic plan, and the strength of the Group’s current financial position, the directors conclude that the Group remains viable over a three-year period.
The directors consider a period of three years to be appropriate. Whilst there is always going to be difficulty in predicting the future path of the UK or the wider global economy with any degree of
precision, it strikes the right balance between assessing likely outcomes with the current information we have, whilst accepting a degree of uncertainty. Notwithstanding this, information contained
within the outer years of our financial forecasts supports the assessment of the directors that the Group expects to remain viable in the longer term. A three-year period is within the timeframe of
the Group’s profitability projections and stress tests.
Consideration of key risks
The directors have considered the impact on Nationwide’s risk profile of the prevailing macroeconomic environment, the changing needs of our members and our work to ensure our processes and
systems remain robust. Throughout the year, the Board has considered the principal risks which are most relevant to Nationwide’s strategy, which include:
• Covid-19 pandemic – Over the past year, the pandemic created significant uncertainty, given the unprecedented and rapidly evolving nature of the situation. By invoking the highest level of
incident management response to the pandemic, the directors have balanced three key objectives: maintaining a safe environment for our members and colleagues; supporting our members
with their individual needs; and ensuring the Society remains stable and secure.
• Geopolitical and macroeconomic environment – As a UK-focused business, the Group’s performance is naturally aligned to the UK’s economic conditions. Despite significant government
intervention, the economic outlook remains uncertain, having been severely impacted by the Covid-19 pandemic and the UK’s exit from the European Union. Whilst there remains uncertainty
regarding the future profile of interest rates, with the potential for a negative bank base rate, the Society maintains strong capital and liquidity levels and regularly undertakes robust internal
and regulatory stress tests to ensure these are sufficient under a range of severe scenarios.
• Competitive environment and consumer behaviours – The level of competition remains a key consideration. This could be driven by shifting customer behaviours, regulatory changes and
•
continued innovation in the financial services sector, and new participants using price and service advantage to challenge our market share aspirations and profitability.
Financial crime and cyber security – The directors continuously monitor the external landscape to identify potential cyber or fraud threats whilst operating and maturing our key financial crime
and cyber controls to protect our members and services, and to meet our regulatory obligations.
• Operational resilience – Maintaining resilient systems, infrastructure and processes remains critical as Covid-19 restrictions and changing consumer behaviours influence member needs in
accessing our products and services and how they interact with us. We continue to monitor and strengthen our controls environment whilst pro-actively monitoring the resilience of our services
to reduce disruption to our members.
More information on the response to these risks is shown on pages 56 to 57 and 145.
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Annual Report and Accounts 2021
59
Viability statement (continued)
Viability statement (continued)
Planning and stress testing activity during 2020/21
During 2020/21, the Group has developed financial forecasts and a range of plausible stressed economic scenarios, which reflects the impact of our top and emerging risks, which are most material
to our financial strength. The scenarios considered include:
• A central ‘U-shaped’ economic scenario, where the economy gradually recovers during 2021. This scenario has been subject to revision during the year to reflect developments in the pandemic
and changes to government measures designed to limit the negative impact on the UK economy.
• A ‘downside’ economic scenario which considers the implications of a further economic downturn, either linked to the pandemic and/or a disorderly reversion to new trading arrangements
with the EU.
• A ‘severe downside’ economic scenario which considers an even more severe downturn linked to the pandemic and/or a more disorderly adjustment to new global trading arrangements with
•
the EU.
The Bank of England’s 2021 Solvency Stress Test (SST), which considers a severe path for the current macroeconomic outlook, reflecting a similar peak to trough in HPI compared to the
stressed scenarios described above, but with a stronger and more accelerated economic recovery.
• Our 2020 reverse stress test (RST) scenario, which explored our ability to meet our strategic purpose and support the needs of our members in the context of an extended central ‘U-Shaped’
economic scenario, where we experience intense levels of competition and changes in consumer behaviour.
• Our 2020 Internal Capital Adequacy Assessment process (ICAAP).
A selection of these scenarios has been used for expected credit loss modelling during 2020/21, and further detail can be found in note 10 to the financial statements.
Key planning and stress testing considerations specific to the Covid-19 pandemic
When undertaking planning and forecasting activity during the past 12 months, we have included an assessment of the following key Covid-19 pandemic considerations:
•
•
•
•
•
The impact of lockdown restrictions, social distancing policies and consumer spending on GDP.
The impact on HPI of government support measures specific to the housing sector, such as the stamp duty tax holiday, mortgage payment deferral schemes and the subsequent impact on
our core lending markets, including behavioural shifts in housing demand.
The impact of government measures designed to support the labour market and limit the rate of unemployment, such as the Job Retention Scheme and loan schemes for businesses.
The impact of government support measures specific to the financial services sector, such as the Term Funding Scheme with additional incentives for SMEs (TFSME) and the subsequent impact
on our core retail and wholesale funding markets.
The long-term impact of a sustained low interest rate environment, and consideration of negative interest rates, on our mutual business model.
Conclusion on viability
In addition to the Group’s current financial strength, demonstrated through our strong capital ratios (CET1 ratio of 36.4% and UK leverage ratio of 5.4% at 4 April 2021) and liquidity position (LCR of
165% at 4 April 2021), the directors have assessed the impact of the scenarios described above on the Group’s key financial metrics over the three-year assessment period.
In our central ‘U-shaped’ economic scenario, key financial performance metrics are projected to remain comfortably above Board Risk Appetite and regulatory buffers. In addition, our recent
external and internal stress testing activity demonstrates how the Group can withstand severe economic and competitive stresses, including those linked to the Covid-19 pandemic.
The directors have a reasonable expectation that the Society and Group will be able to continue its operations, and to meet its liabilities as they fall due, over the three-year assessment period.
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Financial review
We have continued to support our 16.3 million members
through these challenging times, providing 256,000 mortgage
payment holidays and granting 105,000 payment breaks or
interest free periods on loans, credit cards and overdrafts.
We have remained open for business, with total residential
mortgage lending of £29.6 billion (2020: £30.9 billion). Our
market share of mortgage balances was 12.5% (2020: 12.9%).
We saw significant net deposit growth of £10.6 billion (2020:
£5.7 billion) due to strong current account inflows as consumer
spending was subdued. Our market share of all deposit balances
reduced to 9.4% (4 April 2020: 9.9%), reflecting our lower
proportion of current account balances, and therefore lower
inflows, relative to the market.
In this exceptional year, we have demonstrated the Society’s
financial resilience by improving our balance sheet strength.
Our CET1 and UK leverage ratios improved to 36.4% and
5.4% (4 April 2020: 31.9% and 4.7%) respectively, although
this includes a regulatory change in the treatment of intangible
assets which the PRA is proposing to reverse. Our Liquidity
Coverage Ratio (LCR) was 165% (4 April 2020: 163%).
By preserving our capital strength, we can face the future
with confidence, as we continue to support members through
a highly uncertain period.
In summary
Throughout the financial year, we have faced an uncertain and
unprecedented period. The global pandemic led to the reduction
of bank base rate to a historic low and created significant
macroeconomic disruption and uncertainty.
We have therefore focused on preserving our strong capital
position and continuing to support our members through these
challenging times. As a result, underlying profit for the year has
improved to £790 million (2020: £469 million) and statutory
profit increased to £823 million (2020: £466 million), reflecting
strong income and a reduction in administrative expenses.
Total income increased by £239 million, as our net interest
margin (NIM) increased to 1.21% (2020: 1.13%). Mortgage
income increased as the macroeconomic uncertainty resulted
in stronger new business margins across the market.
The reduction in our savings rates, in response to the cut in
bank base rate to 0.1%, reduced member financial benefit
to £265 million (2020: £735 million ). Over the medium term
we expect member financial benefit to return to above our
£400 million target.
1
Our continued focus on our cost base has led to administrative
expenses reducing by £94 million to £2,218 million (2020:
£2,312 million). Reductions from reprioritisation of investment
spend over the medium term, and lower business as usual run
costs, have been partly offset by restructuring costs as we took
action to reduce our future cost base.
The total credit impairment charge remains elevated compared
to pre-pandemic levels at £190 million (2020: £209 million).
The forward-looking scenarios that we have used to determine
the charge encompass a range of outcomes that could arise
as a result of the pandemic. However, arrears rates on lending
portfolios have remained low, in part due to the impact of
government support schemes on our borrowers’ finances and
the use of payment deferrals.
1 The comparative for member financial benefit has been restated. More information on member financial benefit can be found on page 61.
Annual Report and Accounts 2021 60
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Chris Rhodes
“We have focused on preserving our
strong capital position and continuing
to support our members.”
Underlying profit:
£790m
(2020: £469m)
Statutory profit:
£823m
(2020: £466m)
UK leverage ratio:
5.4%
(2020: 4.7%)
Financial review (continued)
Financial review (continued)
Income statement
Underlying and statutory results
Net interest income
Net other income
Total underlying income
Administrative expenses
Impairment losses
Provisions for liabilities and charges
Underlying profit before tax
Financial Services Compensation Scheme (FSCS) (note i)
Gains/(losses) from derivatives and hedge accounting (notes i, ii)
Statutory profit before tax
Taxation
Profit after tax
Annual Report and Accounts 2021
Annual Report and Accounts 2021 61
2021
£m
3,146
139
3,285
(2,218)
(190)
(87)
790
(1)
34
823
(205)
618
2020
£m
2,810
236
3,046
(2,312)
(209)
(56)
469
4
(7)
466
(101)
365
Net Interest Margin:
1.21%
(2020: 1.13%)
Underlying Cost Income
Ratio:
67.5%
(2020: 75.9%, note iii)
Statutory Cost Income
Ratio:
66.8%
(2020: 76.1%, note iii)
Return on Assets
0.24%
(2020: 0.15%)
Notes:
i. Underlying profit represents management’s view of underlying performance. The following items are excluded from statutory profit to arrive at underlying profit:
• FSCS costs and refunds arising from institutional failures, which are included within provisions for liabilities and charges.
• Gains or losses from derivatives and hedge accounting, which are presented separately within total income.
ii. Although we only use derivatives to hedge market risks, income statement volatility can still arise due to hedge accounting ineffectiveness or because hedge accounting is either not applied or is not achievable. This
volatility is largely attributable to accounting rules which do not fully reflect the economic reality of the hedging strategy.
iii. The underlying cost income ratio represents management’s view of underlying performance. Gains or losses from derivatives and hedge accounting are excluded from the statutory cost income ratio to arrive at the
underlying cost income ratio.
Total income and net interest margin
Total income has increased by £239 million to £3,285 million (2020: £3,046 million), with a £336 million increase in net interest income. The macroeconomic outlook has been particularly
uncertain during the year, with impairment losses across the past two years being higher than pre-pandemic levels. In response to the increased credit risk, mortgage margins have increased across
the market. This has generated higher net interest income in the year, which provides some protection against the elevated risk of further impairment losses.
The increase in net interest income was further supported by our reduction in savings interest rates, following the fall in bank base rate to 0.1% and in recognition of the highly uncertain future. Net
interest margin (NIM) has increased to 1.21% (2020: 1.13%).
Net other income has reduced by £97 million to £139 million (2020: £236 million) reflecting our decision to buy back covered bond funding which will support income in future years, realising a loss
of £35 million. In addition, the prior year included material one-off gains relating to contingent consideration recognised on previous investment disposals.
Member financial benefit
As a building society, we seek to maintain our financial strength whilst providing value to our members through pricing, propositions and service. Through our member financial benefit, we
measure the additional financial value for members from the highly competitive mortgage, savings and banking products that we offer compared to the market. Member financial benefit is
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Financial review (continued)
Financial review (continued)
calculated by comparing, in aggregate, Nationwide’s average interest rates and incentives across mortgages, savings, current accounts, personal loans and credit cards to the market, predominantly
using market data provided by the Bank of England and CACI, alongside internal calculations. The value for individual members will depend on their circumstances and product choices.
During the first half of the year we made a change to our methodology for calculating member financial benefit, where instead of using market non-mortgage household lending data from the Bank
of England to derive interest rate comparators for personal loans, we are now using data from CACI. This more specifically covers personal loans and provides a good level of coverage of our peer
lending group, making it a more appropriate comparator. The impact of this change is to increase member financial benefit for 2019/20 by £20 million.
Annual Report and Accounts 2021
Annual Report and Accounts 2021 62
We quantify member financial benefit as:
Our interest rate differential + incentives and lower fees
Interest rate differential
We measure how our average interest rates across our member balances in total compare against the market over the period.
For our two largest member segments, mortgages and retail deposits, we compare the average member interest rate for these portfolios against Bank of England and CACI industry data. A
market benchmark based upon the data from CACI and internal Nationwide calculations is used for mortgages and a Bank of England benchmark is used for retail deposits, both adjusted to exclude
Nationwide balances. The differentials derived in this way are then applied to member balances for mortgages and deposits.
For unsecured lending, a similar comparison is made. We calculate an interest rate differential based on available market data from the Bank of England and CACI and apply this to the total interest-
bearing balances of credit cards and personal loans.
Member incentives and fees
Our member financial benefit measure also includes amounts in relation to incentives and fees that Nationwide offers to members. The calculation includes annual amounts for the following:
• Mortgages: the differential on incentives for members compared to the market
• ‘Recommend a friend’: the amount paid to existing members, when they recommend a new current account member to the Society, although we removed this incentive during 2020/21
• FlexPlus account: this current account is considered market leading against major banking competitors, with a high level of benefits for a relatively smaller fee. The difference between the
monthly account fee of £13 and the market average of £17 is included in the member financial benefit measure.
For the year ended 4 April 2021, this measure shows we have provided our members with a financial benefit of £265 million (2020: £735 million). This is below our target of £400 million, reflecting
the low interest rate environment and the importance of preserving our strong capital position during a period of significant macroeconomic uncertainty. Over the medium term, we expect this to
return to in excess of £400 million.
In calculating member financial benefit using available market or industry level data, no adjustment is made to take account of factors such as customer mix, risk appetite and product strategy, due
to limitations in the availability of data and to avoid bias from segments in which Nationwide may be under or over-represented. Furthermore, due to data non-availability, deposits with National
Savings & Investments are not included in the market benchmark for deposits. We will continue to review our methodology to ensure it remains relevant given changing market conditions, as well
as to ensure it captures all the key elements of the financial benefits we provide to our members, where data is available.
Administrative expenses
Administrative expenses reduced by £94 million to £2,218 million (2020: £2,312 million). The reduction is attributable to lower costs relating to strategic investment spend of £160 million and a £22
million reduction in business as usual costs. These are in part offset by an increase in restructuring costs of £72 million for severance and property closures, following actions taken to reduce our
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Financial review (continued)
Financial review (continued)
future cost base and our decision to enable our colleagues to work from home where they choose to do so. The prior year also included a non-recurrent item associated with the development and
subsequent cessation of Nationwide for Business of £88 million, and the £104 million benefit from closure of the defined benefit pension scheme to future accrual.
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Annual Report and Accounts 2021 63
Impairment losses/(reversals) on loans and advances to customers
Impairment losses/(reversals) (note i)
Residential lending
Consumer banking
Retail lending
Commercial
Impairment losses on loans and advances
2021
£m
71
125
196
(6)
190
2020
£m
53
159
212
(3)
209
Note:
i.
Impairment losses/(reversals) represent the net amount charged/(credited) through the income statement, rather than amounts written off during the period.
Impairment losses have decreased year on year to £190 million (2020: £209 million) but remain elevated due to the continued uncertainty over the economic impacts of the pandemic. The
underlying arrears performance of our portfolios has remained broadly stable, with the impacts of Covid-19 on borrowers offset by government support schemes and the use of payment deferrals.
During the year additional payment deferrals have been granted and, whilst the majority have now expired, the outlook for borrowers remains uncertain.
More information on the key judgements, including the forward-looking economic information used in our impairment calculations, is included in note 10 to the financial statements.
Provisions for liabilities and charges
We hold provisions for customer redress to cover the costs of remediation and redress in relation to past sales of financial products and ongoing administration, including non-compliance with
consumer credit legislation and other regulatory requirements. The customer redress charge has increased to £87 million (2020: £56 million charge) primarily as a result of a £42 million charge
relating to historical quality control procedures and a £36 million charge in relation to past administration of customer accounts. The remainder of the charge relates to remediation costs for other
redress issues, including the processing of remaining PPI complaints. More information is included in note 27 of the financial statements.
Taxation
The tax charge for the year of £205 million (2020: £101 million) represents an effective tax rate of 24.9% (2020: 21.7%) which is higher than the statutory UK corporation tax rate of 19% (2020:
19%). The effective tax rate is higher due to the 8% banking surcharge of £38 million (2020: £24 million), the tax effect of disallowable bank levy and customer redress costs of £5 million and
£8 million (2020: £11 million and £4 million) respectively and unrecognised deferred tax assets of £10 million (2020: £nil) primarily in respect of expected future capital losses on revalued
properties. This is partially offset by the tax credit on the distribution to the holders of Additional Tier 1 capital instruments of £12 million (2020: £9 million) and the tax impact of deferred tax
provided at different rates of £5 million (2020: £17 million). Further information is provided in note 11 to the financial statements.
Balance sheet
Total assets have increased by 3% to reach £254.9 billion at 4 April 2021 (2020: £248.0 billion). Growth is predominantly due to higher holdings of cash and liquid assets driven largely by an
increase in member deposits.
Member deposit balance growth has been strong, with balances increasing by £10.6 billion to £170.3 billion (2020: £159.7 billion) as a reduction in consumer spending during the national and
regional lockdowns has led to an increase in current account credit balances.
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Financial review (continued)
Financial review (continued)
Assets
Cash
Residential mortgages (note i)
Commercial
Consumer banking
Impairment provisions
Loans and advances to customers
Other financial assets
Other non-financial assets
Total assets
Asset quality
Residential mortgages
Proportion of residential mortgage accounts more than 3 months in arrears
Average indexed loan to value (by value)
(note i)
:
Consumer banking:
Proportion of customer balances with amounts past due more than
3 months (excluding charged off balances)
Note:
i. Residential mortgages include prime, buy to let and legacy lending.
Cash
Annual Report and Accounts 2021
Annual Report and Accounts 2021 64
Liquidity Coverage Ratio at
4 April 2021:
165%
(2020: 163%)
%
94
4
2
100
2021
2020
£m
16,693
191,023
6,972
4,404
202,399
(852)
201,547
33,888
2,786
254,914
%
0.43
56
1.33
%
95
3
2
100
£m
13,748
188,839
7,931
4,994
201,764
(786)
200,978
30,185
3,130
248,041
%
0.41
58
1.22
Cash comprises liquidity held by our Treasury function amounting to £16.7 billion (2020: £13.7 billion). The £2.9 billion increase in cash is driven by inflows of member deposits during the year,
reflecting the accumulation of funds during the national and regional lockdowns, coupled with increased repurchase agreement balances as we managed the assets within our liquidity portfolio.
This was in part offset by a reduction in wholesale funding and an increase in the size of the liquid asset portfolio.
The average Liquidity Coverage Ratio over the 12 months ending 4 April 2021 increased to 159% (2020: 152%). We continue to manage liquidity against our internal risk appetite which is more
prudent than regulatory requirements. Further details are included in the Liquidity and funding risk section of the Risk report.
Residential mortgages
Total gross mortgage lending in the year was £29.6 billion (2020: £30.9 billion) as significantly lower new lending during the first national lockdown was later offset by stronger demand, in part due
to the temporary changes to stamp duty. Our market share of gross lending was 11.1% (2020: 11.4%). Total mortgage net lending in the year was £1.9 billion (2020: £2.8 billion) which includes buy
to let mortgage net lending of £3.6 billion (2020: £3.3 billion).
Total mortgage balances grew to £191.0 billion (2020: £188.8 billion). Strong buy to let mortgage lending resulted in our buy to let and legacy mortgage balances growing to £41.2 billion (2020:
£37.7 billion). Prime mortgage balances declined to £149.8 billion (2020: £151.1 billion) as we tightened our lending criteria.
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Annual Report and Accounts 2021
Annual Report and Accounts 2021 65
Financial review (continued)
Financial review (continued)
Arrears increased slightly during the year but remain low, with cases more than three months in arrears at 0.43% of the total portfolio (2020: 0.41%). Arrears have been suppressed by payment
deferrals and other government support measures, and in view of UK economic conditions, an increase in arrears from current levels is expected over the medium term. Impairment provision
balances have increased to £317 million (2020: £252 million) due to the deterioration in the economic outlook reflected in the economic scenarios used to model expected credit losses. We have
granted 256,000 payment deferrals in the year to support members impacted by the pandemic.
Commercial lending
During the year, commercial lending balances have decreased to £7.0 billion (2020: £7.9 billion). Continuing the deleveraging activity in previous financial years, the overall portfolio is increasingly
weighted towards public sector lending. This includes registered social landlords with balances of £4.8 billion (2020: £5.4 billion), and project finance with balances of £0.7 billion (2020:
£0.7 billion). With a smaller book, and fewer active borrowers requiring further lending, our commercial real estate balances decreased during the year to £0.8 billion (2020: £1.0 billion).
Impairment provision balances have decreased to £33 million (4 April 2020: £40 million) due to improvements to a small number of individually assessed exposures.
Consumer banking
Consumer banking balances have decreased to £4.4 billion (2020: £5.0 billion). Consumer banking comprises personal loans of £2.8 billion (2020: £3.0 billion), credit cards of £1.4 billion (2020:
£1.7 billion) and overdrawn current account balances of £0.2 billion (2020: £0.3 billion). The pandemic has resulted in balances declining as the market demand for consumer credit has decreased.
Impairment provision balances have increased to £502 million (4 April 2020: £494 million) primarily due to the deterioration in economic outlook, reflected in the economic scenarios used to
model expected credit losses, with underlying performance remaining broadly stable. To support members impacted by the pandemic, we have granted 105,000 payment deferrals and interest
holidays in the year.
Other financial assets
Other financial assets total £33.9 billion (2020: £30.2 billion) and comprise investment assets held by our Treasury function amounting to £29.1 billion (2020: £23.6 billion), derivatives with positive
fair values of £3.8 billion (2020: £4.8 billion) and fair value adjustments and other assets of £1.0 billion (2020: £1.8 billion). The £3.7 billion increase is driven primarily by an increase in liquid asset
holdings. Derivatives largely comprise interest rate and foreign exchange contracts which economically hedge financial risks inherent in core lending and funding activities.
Members’ interests, equity and liabilities
Member deposits
Debt securities in issue
Other financial liabilities
Other liabilities
Total liabilities
Members’ interests and equity
Total members’ interests, equity and liabilities
Member deposits
Wholesale funding ratio:
26.7%
(2020: 28.5%)
2021
£m
170,313
27,923
41,009
1,556
240,801
14,113
254,914
2020
£m
159,691
35,963
37,817
1,608
235,079
12,962
248,041
Member deposit balance growth of £10.6 billion (2020: £5.7 billion) to £170.3 billion (2020: £159.7 billion) represents growth in current account credit balances and retail savings balances of £8.0
billion and £2.6 billion respectively. Increased current account credit balances were driven by ‘forced’ saving during the national and regional lockdowns as consumer spending remained subdued.
There were savings outflows in H1 2020/21 following the decision to reduce interest rates across our savings range, as a result of the bank base rate reductions in March 2020. However, these were
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Annual Report and Accounts 2021
Annual Report and Accounts 2021 66
Financial review (continued)
Financial review (continued)
more than offset by savings inflows in the second half of the year reflecting the launch of more competitive propositions including our leading Mutual Reward Bond, Start to Save account and our
Triple Access Online account, in addition to NS&I’s decision to reduce rates in November. There was a more significant overall increase in deposit balances across the UK as our competitors hold a
greater proportion of current account balances which experienced strong growth during periods of lockdown. This has led to a reduction in our deposit stock market share to 9.4% (2020: 9.9%).
Our market share of all current accounts remains stable at 10.2% (2020: 10.0%) . 1
Debt securities in issue and other financial liabilities
Debt securities in issue primarily comprise wholesale funding but exclude subordinated debt, which is included within other financial liabilities. Balances have decreased to £27.9 billion (2020:
£36.0 billion) largely due to a change in funding mix as member deposit balances have grown significantly. Other financial liabilities have increased to £41.0 billion (2020: £37.8 billion) principally
due to an increase in repurchase agreement balances as we managed the composition of the liquidity portfolio. Nationwide’s wholesale funding ratio has also decreased to 26.7% (2020: 28.5%)
reflecting the change in funding mix; this ratio remains well below the statutory maximum of 50%. Further details are included in the Liquidity and funding risk section of the Risk report.
Members’ interests and equity
Members’ interests and equity have increased to £14.1 billion (2020: £13.0 billion) largely as a result of the issuance of £750 million of Additional Tier 1 capital in June 2020 and retained profits.
Statement of comprehensive income
Statement of comprehensive income (note i)
Profit after tax
Net remeasurement of pension obligations
Net movement in cash flow hedge reserve
Net movement in other hedging reserve
Net movement in fair value through other comprehensive income reserve
Net movement in revaluation reserve
Total comprehensive income
Notes:
i. Movements are shown net of related taxation.
2021
£m
618
(72)
(111)
(4)
131
2
564
2020
£m
365
119
(14)
(42)
(67)
(11)
350
Gross movements are set out in the financial statements on page 242. Further information on movements in the pension obligation is included in note 30 to the financial statements.
1 CACI's Current account and savings database (February 2021 and February 2020)
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Financial review (continued)
Financial review (continued)
Capital structure
Our capital position remains strong, with both the Common Equity Tier 1 (CET1) ratio and UK leverage ratio comfortably above regulatory capital requirements of 12.7% and 3.6% respectively. The
CET1 ratio increased to 36.4% (2020: 31.9%) and the UK leverage ratio increased to 5.4% (2020: 4.7%). The capital disclosures included in this report are in line with Capital Requirements Directive
IV (CRD IV) and on an end point basis with IFRS 9 transitional arrangements applied.
Annual Report and Accounts 2021
Annual Report and Accounts 2021 67
Capital structure
Capital resources
Common Equity Tier 1 (CET1) capital
Total Tier 1 capital
Total regulatory capital
Capital requirements
Risk weighted assets (RWAs)
UK leverage exposure
CRR leverage exposure
CRD IV capital ratios
CET1 ratio
UK leverage ratio
CRR leverage ratio
2021
£m
12,007
13,343
16,176
32,970
248,402
265,079
%
36.4
5.4
5.0
2020
£m
10,665
11,258
14,578
33,399
240,707
254,388
%
31.9
4.7
4.4
The CET1 ratio increased to 36.4% (2020: 31.9%) as a result of an increase in CET1 capital of £1.3 billion and a reduction in RWAs of £0.4 billion. The CET1 capital increase was driven by £0.6 billion
profit after tax and a £0.1 billion increase in IFRS 9 transitional capital relief. In addition, £0.6 billion of software intangible assets are no longer deducted from capital . The reduction in RWAs was
driven by unsecured loan RWAs linked to decreasing total loan balances and reduced probability of default (PD). In addition, modifications were made to risk weights for small and medium-sized
enterprises (SMEs) and infrastructure loans in line with EU Regulation 2020/873, culminating in a reduction of commercial loan RWAs.
2
On 23 December 2020, EU Regulation 2020/2176 came into force, providing an amendment to the deduction of intangible assets from CET1 resources. The PRA confirmed as part of CP5/21
‘Implementation of Basel standards’ their intention to modify the applicable regulation and reverse this change by 1 January 2022. If the revised rules had not been applied, Nationwide’s CET1 ratio
and UK leverage ratio at 4 April 2021 would have been 35.4% and 5.2% respectively . 2
Whilst the future economic impact of Covid-19 continues to be unclear, it may lead to some RWA inflation and therefore a lower CET1 ratio in the medium term. Once the extended government
support schemes announced in November 2020 end, we will better understand how individual members have been affected and the subsequent impact on risk-based ratios. However, the current
capital position and the published stress testing results show that we are well capitalised and positioned to meet such periods of financial stress.
The UK leverage ratio increased to 5.4% (2020: 4.7%), with Tier 1 capital increasing by £2.1 billion as a result of the CET1 capital movements referenced above and the issuance of £0.7 billion of AT1
capital instruments in June 2020. Partially offsetting the impact of this, there was an increase in UK leverage exposure of £7.7 billion, primarily as a result of net retail lending and treasury
investments in the period.
The CRR leverage ratio increased by 0.6%, closing at 5.0% (2020: 4.4%). The difference between the Capital Requirements Regulation (CRR) leverage ratio and the UK leverage ratio is driven by the
exclusion of qualifying central bank claims from the UK leverage exposure measure as required by the PRA Rulebook.
2 Further details of the capital position, regulatory changes and developments are included in the Solvency risk section of the Risk report.
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Annual Report and Accounts 2021 68
Governance
Structure of the Governance section
The Governance section has been organised to follow the structure of the 2018 UK Corporate Governance Code (the ‘Code’)
and illustrates how we have applied the Code principles and complied with its provisions.
Chair’s introduction to the report
on Corporate Governance
Board of directors
Nationwide Leadership Team
69
71
77
Board leadership and Society purpose 81
• The role of the Board
• Board activity during the year
• How the Board operates
• Stakeholder engagement
Composition, succession
and evaluation
• Board composition
• Board diversity, skills, experience and knowledge
• Board effectiveness
• Nomination and Governance Committee report
Audit, risk and internal control
• Audit Committee report
• Board Risk Committee report
• Board IT and Resilience Committee report
Division of responsibilities
• Leadership structure and Board committee responsibilities
• Directors’ responsibilities, independence and time commitment
• Board support, information and advice
89
Remuneration
• Report of the directors on remuneration
Directors’ report
94
96
115
138
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Annual Report and Accounts 2021 69
Annual Report and Accounts 2021
Report of the directors on
Corporate Governance
For the year ended 4 April 2021
David
Roberts
DDeeaarr ffeellllooww mmeemmbbeerr,
I am pleased to present the Corporate Governance
report for the financial year ended 4 April 2021.
Nationwide is owned by its members and is therefore driven by a
mutual purpose to take decisions in the interest of the
membership. This starts with good governance to ensure we
continue to make decisions that support the Society’s resilience
and future prospects as well as delivering value for our members.
The Society’s Board of directors is responsible for its governance and
setting a clear strategy and direction. The Board is committed
to maintaining the highest standards in the way Nationwide is
directed, governed and managed and we have adopted the UK
Corporate Governance Code (the Code) which sets the
governance standards for public listed companies. Whilst we
aim to comply with the Code’s ethos and principles, we do so in
line with the Building Societies Association guidance on the
Code to ensure alignment with good practice and our mutual
status. Further information on our governance structure and
how we have applied the provisions of the Code can be found
on pages 79 to 80.
This financial year has continued to provide constant challenge
as the Society and its members have navigated through the
challenges of the pandemic and the UK exit from the European
Union. Throughout this, the Board has adapted successfully to
holding virtual Board and Board committee meetings since
March 2020. The Board has been engaged appropriately and
informed of the associated risks and the Society’s response to
the pandemic, with a focus on maintaining the Society’s
financial strength, operational resilience, effective cost
management, the ongoing wellbeing of our colleagues and
support for members and other stakeholders.
Members were instead invited to online sessions, which were
held at different times of the day to enable us to reach even
more of our members during the pandemic. More information
on these sessions and how to take part is on our website,
nationwide.co.uk
Our members
Members continue to be at the heart of what we do at
Nationwide. At the 2020 AGM we were unable to invite
members to attend due to the national restrictions on public
gatherings. We encouraged our members to vote online,
submit questions in advance and watch the event via
livestream on the day of the meeting. Both Joe Garner and I
made short films to respond to submitted questions and allow
members to be engaged as much as possible in challenging
circumstances. Sadly, we will not be able to welcome our
members back in person to our 2021 AGM, as we have
decided, in April, that in order to keep our members and
colleagues safe we will hold our AGM with just the minimum
number of colleague members present in person. The Board
continues to encourage all members to engage before the
AGM and to watch the event which will be live streamed online
on the day of the meeting. We hope to welcome members
again in person in future years.
As a member-owned Society, we will only be successful if we
listen to and meet the needs of our members. We have
adapted our regular Member TalkBack sessions so that the
Board can continue to connect directly with the Society’s
members despite the inability to hold physical meetings.
In the last year, members have taken part in discussions and
surveys to share their views through our Member Connect
community. Their views have helped to shape new products
and have included suggestions for improvements. More
information on these initiatives can be found on our website.
Our people and culture
To support our mutual principles and to ensure members get
the best possible service and outcomes from us, the Board is
committed to the development of a workplace strategy for our
colleagues to thrive and succeed. Throughout the year, the
Board has been closely engaged with management on its
proposals for reimagining the future of work, and endorsed the
commitments announced in March 2021 to be more flexible in
how and where our colleagues work.
For a better understanding of the views of our people, Mai
Fyfield, our designated director responsible for ensuring the
voice of our employees is heard in the Boardroom, has met
with colleagues throughout the year and shared the feedback
with the Board. Further information on Mai’s engagement
activities can be found on pages 87 to 88.
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Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
In addition, the Board has received presentations from chosen
representatives and employee networks sponsors on
championing working families, disability, gender and ethnicity.
The Board receives regular updates on a suite of colleague
listening mechanisms and during the year received monthly
updates on colleague sentiment. These updates include
insights from a Culture Mosaic, which brings together all data-
points, allowing the Board to assess progress in developing our
culture in line with our PRIDE values. The continuous listening
tools give colleagues the opportunity to provide feedback
about their working experience, the Society’s leadership,
service to members and strategy. The results tell us that we
retain a strong culture and committed colleagues. Due to the
unprecedented impact of the pandemic on colleagues’ daily
lives, extended families, mental health and wellbeing, the
Board receives regular updates from management on how
colleagues are feeling and the challenges that are being faced.
The annual Banking Standards Board1 survey is a valuable
source in understanding how Nationwide’s culture has evolved
over time, allowing the Board to compare Nationwide’s culture
with that of other UK financial services providers. The results of
the 2021 survey were shared with the Board and showed that
Nationwide promotes high standards of behaviour and saw a
positive response to questions concerning the management of
the Covid-19 pandemic.
Our care for members and each other is strong, and as a Board
we are committed to ensuring that our policies and practices
are aligned with the values of the Society. Nationwide
promotes openness, honesty and transparency and recognises
the importance of colleagues being able to raise concerns in
confidence and without fear of reprisal. The Board continues to
oversee the integrity, independence, operation and
effectiveness of Nationwide’s policies and procedures on
whistleblowing.
Leadership
The Board is responsible for setting the medium and long-term
vision for the Society, being a guardian for its culture and
values, overseeing performance and the Society’s attitude to
risk, and supporting and challenging management. As Chair, it
is my responsibility to lead the Board and promote its effectiveness
within a strong and sound governance framework. Each year, a
formal evaluation of the effectiveness of the Board and its
committees is conducted and this is facilitated by an independent
third party every three years. In 2021, the effectiveness review is
being conducted independently, and we will report on the
findings in next year’s Annual Report. The progress made on
actions taken in response to the findings of the 2020 review is
detailed on page 95.
It is important that the Board has the right blend of
experience, skills and diversity required to continue to provide
the appropriate level of oversight and challenge for the
business. The Board’s composition, balance, skills and
experience are reviewed regularly to ensure that the Board
continues to discharge its responsibilities effectively.
After nine years of service as a non-executive director, Rita
Clifton will retire from the Board at our AGM in July 2021. I
would like to take this opportunity to thank Rita on behalf of
the Board and Nationwide for her contribution and wish her
well in her future portfolio.
We were pleased to announce the appointments of Tamara
Rajah and Debbie Klein to the Board as non-executive directors
in September 2020 and March 2021 respectively.
Tamara is the founder and CEO of Live Better With, with an in
depth knowledge of digital transformation and disruptive
technologies which will be key skills to support the onward
strategy and challenges for the Society. Tamara is a member of
the Board IT and Resilience and Board Risk Committees.
Debbie has extensive experience in commercial brand and
marketing roles and is currently Group Chief Marketing,
Corporate Affairs and People Officer at Sky. Her understanding
and experience of people leadership, large scale adoption of
data and analytics in driving consumer and organisational
value, brand strategy, sustainability and corporate social
responsibility will prove invaluable to the Board.
Annual Report and Accounts 2021
Annual Report and Accounts 2021
70
Inclusion and diversity
The Board benefits from the diversity of views, backgrounds
and experience of its directors and remains committed to
increasing its diversity. It is this which creates better
governance and improves our ability to challenge and support
the Society.
The composition of the Board continues to meet or exceed all
of the benchmarks set for listed companies with regard to
gender and ethnic diversity. The Society publishes both an
ethnicity pay gap report and a gender pay gap report each
year, and has set itself a clear pathway to achieve a more
inclusive and diverse Society, which better reflects the
communities it serves. More information on our inclusion and
diversity strategy and measures across the Society can be found
on pages 26 to 28.
David Roberts
Society Chair
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1This is an annual survey undertaken by the Banking Standards Board covering 29 firms, including 6 systemically important institutions in the UK (of which Nationwide is one) plus a range of other mid-sized and small banks and building societies.
2,081 of the Society’s colleagues participated in the last assessment.
Board of directors
Meet your Board of directors who were in office at 4 April 2021, including Tamara Rajah and Debbie Klein,
who are seeking election as non-executive directors.
David Roberts CBE − Non-executive director and Chair elect from 1 September 2014. Chair since 24 July 2015 (independent upon appointment as Chair)
ng
r
Annual Report and Accounts 2021
71
Skills and experience
David combines a distinctive blend of leadership experience across major listed
corporations, the mutual movement, and public service, including 35 years in
financial services. He is a passionate champion of Nationwide’s social purpose
and of the Society’s commitment to help improve the financial lives of its
members. David also strongly believes in the economic value of commerce and
the importance of rebuilding trust in big business. David has many years of
experience at Board and Executive level; his previous positions include Group
Deputy Chair of Lloyds Banking Group plc, Executive Director at Barclays Bank
plc and Chair / CEO of Bawag PSK AG. He is also a former non-executive
director at BAA plc and Absa Group SA.
Joe Garner − Chief Executive Officer since 5 April 2016
Skills and experience
Joe has spent his working life in consumer-focused businesses, starting his career
with consumer product companies Procter & Gamble and Dixons Carphone. He
later took on leadership roles, first as Head of HSBC’s UK retail and commercial
businesses and then as CEO at Openreach. Joe was also previously a non-executive
director of the Financial Ombudsman Service. Throughout his career, Joe has
championed the interests of colleagues and customers, believing that looking after
both is not only the right thing to do, but the key to commercial success. Since
joining Nationwide, Joe’s mission has been to inspire colleagues to remain true to the
Society’s social purpose, using the power of the collective to improve people’s lives.
Joe is passionate about Nationwide’s core purpose of ‘building society, nationwide’.
Current external positions
• Vice Chair, NHS England
• Chair, Beazley plc
• Chair, Beazley Furlonge Limited
• Non-executive director, Campion Wilcocks Limited
• Advisor Board member, The Mentoring Foundation Advisory Council
• Member, Strategy Board, Henley Business School, University of Reading
Current external positions
• Director, UK Finance
• Member, Financial Conduct Authority Practitioner Panel
• Patron, British Triathlon
• Member, Economic Crime Strategy Board
• Co-chair, Inclusive Economy Partnership Financial Capability
and Inclusion Steering Committee
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Board of directors (continued)
Annual Report and Accounts 2021
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Rita Clifton CBE − Non-executive director since 1 July 2012 (independent)
Skills and experience
As a former CEO and Chair of brand consultancy Interbrand, Rita is an
acclaimed brand expert. This, and her background in consumer insight, helps
ensure that member interests are central to Board business. She was Vice Chair
and Strategy Director at Saatchi & Saatchi and Chair of BrandCap Group
Limited. Rita has helped a wide range of iconic British organisations understand
how to use research, marketing strategy and communications to build
sustainable brand value. She has held previous positions as a non-executive
director for ASOS plc, Dixons Retail plc, Populus Limited and Bupa. She is a
committed advocate for environmental and sustainability issues and was a
member of the UK Government’s Sustainable Development Commission and
a former Trustee of the Worldwide Fund for Nature.
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Current external positions
• Director, Leaderbrand Limited
• Non-executive director, Ascential plc
• Member, Assurance and Advisory Panel, BP’s carbon off-setting programme
‘Target Neutral’
• Trustee, Green Alliance
• Chair, Forum for the Future
• Fellow, Oxford University
• Deputy Chair, John Lewis Partnership
Mai Fyfield − Non-executive director since 2 June 2015 (independent)
Skills and experience
Mai combines her experience as an economist and strategist with considerable
commercial experience to guide the Board’s strategic thinking and assessment
of new opportunities and initiatives. She was Chief Strategy and Commercial
Officer at Sky until October 2018, where she led strategy and commercial
partnerships across the Sky Group plc. During her nearly 20 years at Sky she
was a key player in the growth and diversification of the business.
Mai is a champion of diversity and helping women succeed in senior
management and Board positions.
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• Non-executive director, Roku Inc
• Non-executive director, BBC Commercial Holdings Limited
• Non-executive director, ASOS plc
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Board of directors (continued)
Annual Report and Accounts 2021
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Albert Hitchcock − Non-executive director since 2 December 2018 (independent)
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Skills and experience
Albert is a leader in information technology with over 30 years in the
technology industry. His experience is of huge value to the Society as we
continue our ambitious transformation programme to meet the expectations
of our members today and in the future.
Albert was previously a Technology Advisor to the Board of the Royal Bank of
Scotland plc and has held executive positions as a Group Chief Information
Officer at Vodafone plc and Nortel Networks.
Current external positions
• Chief Technology and Operations Officer, Pearson plc
Debbie Klein − Non-executive director since 1 March 2021 (independent)
Skills and experience
Debbie has extensive experience in commercial brand and marketing roles.
She is currently Group Chief Marketing, Corporate Affairs and People Officer
at Sky, where her remit includes responsibility for overall brand and marketing
development, as well as leading corporate communications, public affairs,
internal communications, and human resources. She is also responsible for
Sky’s corporate social responsibility (CSR) programme (‘Bigger Picture’).
Her expertise in sustainability and CSR matters will assist with building
Nationwide’s future Environmental, Social and Corporate Governance
(ESG) agenda.
Debbie was previously Chief Executive Europe and Asia Pacific at The Engine
Group, an integrated marketing services business where she worked closely
with Sky for 12 years. She held various leadership roles in her 20 years at the
firm, including Head of Strategy. Earlier in her career she worked in Strategy
and Insight at Saatchi & Saatchi and Nielsen.
Current external positions
• Group Chief Marketing, Corporate Affairs and People Officer, Sky
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Board of directors (continued)
Annual Report and Accounts 2021
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Kevin Parry OBE − Non-executive director since 23 May 2016 and Senior Independent Director since 17 January 2020
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Skills and experience
Kevin is a chartered accountant with a distinguished career in financial services
and professional practice, bringing to the Board expertise in audit, regulation, risk
management, and finance. As a former Chair of the Homes and Communities
Agency, his perspective on housing is a valuable asset to the Society. Kevin has a
wealth of experience across a broad range of organisations; he was formerly Chair
of Intermediate Capital Group plc and Senior Independent Director of Standard
Life Aberdeen plc, as well as holding previous executive positions with Schroders
plc and Management Consulting Group plc. In addition, he is a former trustee and
Chair of the Royal National Children’s Springboard Foundation, a charity providing
life transforming opportunities through education to disadvantaged children.
Current external positions
• Chair, Royal London Mutual Insurance Society Limited
• Non-executive director and Chair of the Audit and Risk Committee,
Daily Mail and General Trust plc
Tamara Rajah MBE − Non-executive director since 1 September 2020 (independent)
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Skills and experience
Tamara has extensive experience in entrepreneurial ventures and technology
and is founder and CEO of an award-winning, venture capital backed global
consumer healthcare platform. She has published widely on high growth
entrepreneurship and was formerly a non-executive director of the ScaleUp
Institute Limited and Entrepreneur First Operations Limited. Prior to launching
her own company Tamara was one of the youngest partners at strategy firm
McKinsey where she spent a decade in the healthcare practice and led
McKinsey’s knowledge and client work on entrepreneurship and technology
clusters in life sciences, digital and technology. She brings to the Board vast
experience of digital transformation, entrepreneurship and innovation.
Current external positions
• Non-executive director, Holland & Barrett Limited
• CE0, Live Better With Limited
• Non-executive director, London & Partners Ventures Limited
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Board of directors (continued)
Annual Report and Accounts 2021
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Chris Rhodes − Executive director since 20 April 2009
Skills and experience
Chris was appointed Chief Financial Officer in October 2019; he is a chartered
accountant with over 30 years’ experience in retail and commercial banking,
holding senior leadership roles across finance, treasury, operations, retail
distribution and risk management. His previous positions include Group
Finance Director for Alliance and Leicester Group, Board Director at Visa
Europe and Deputy Managing Director for GiroBank.
Chris was a Director of the Lending Standards Board Limited and a Trustee of
National Numeracy. His broad background means he has a deep understanding
of the Society and the mutual business model and he is ideally placed to
oversee the long-term financial stability of the Society, ensuring the Society
continues to invest for the future on behalf of its members.
Phil Rivett − Non-executive director since 1 September 2019 (independent)
Skills and experience
Phil is a chartered accountant with over forty years’ experience of professional
accountancy and audit with a focus on banks and insurance companies.
Phil has a wealth of experience advising major financial services providers
in the UK and on a global basis; he has held various senior positions at
PricewaterhouseCoopers LLP and was Chair of its Global Financial Services
Group prior to retiring from the firm.
Phil has an exceptional leadership track record advocating a collaborative
and inclusive approach.
Current external positions
• Non-executive director and Audit Committee Chair, Standard Chartered Plc
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Board of directors (continued)
Annual Report and Accounts 2021
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Tim Tookey − Non-executive director since 2 June 2015 (independent)
Skills and experience
Tim is a chartered accountant with over 30 years’ experience in finance, across
retail and commercial banking, life assurance and pensions, and insurance.
As a former Chief Financial Officer, Tim has the background and expertise to
analyse and test the Society’s financial and risk strategies.
Tim’s previous appointments include Chief Financial Officer at Quilter plc where
he led the IPO from Old Mutual Wealth Management Limited, Chair at Alliance
Trust Savings Limited, Chief Financial Officer at Friends Life Group Limited and
Group Finance Director of Lloyds Banking Group plc.
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Current external positions
• Non-executive director, Royal London Mutual Insurance Society Limited
• Director, Westmoreland Court Management (Beckenham) Limited
Gunn Waersted − Non-executive director since 1 June 2017 (independent)
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Skills and experience
Gunn has a distinguished international career, including senior leadership
positions in financial services, telecommunications and petrochemicals.
Gunn previously served as Group Vice President at Nordea Bank Group and
was CEO of Nordea Bank Norway. In addition she has been CEO at SpareBank
Group and Vital Forsikring. Gunn was a non-executive director of Statkraft,
Statoil. She brings to the Board vast experience of driving large-scale
operational change, cultural change and digital transformation programmes
to improve customer experience.
She is a strong advocate of the need for strong people cultures and creating
genuinely diverse organisations.
Current external positions
• Chair, Telenor ASA
• Chair, Petoro AS
• Member, Fidelity International
• Non-executive director, Saferoad Holding ASA
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Annual Report and Accounts 2021
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Nationwide Leadership Team
The Nationwide Leadership Team derives its authority from the Chief Executive Officer and is responsible
for directing and coordinating the executive management of the Society within the strategy, risk appetite,
operational plans, policies, objectives, frameworks, budget and authority approved by the Board.
The Nationwide Leadership Team acts as a forum to assist the Chief Executive
Officer with his responsibilities. Members of the Nationwide Leadership Team
lead either functional communities, or one of our Member Missions, which have
responsibility for bringing together activities across our communities to serve
our members.
As well as sitting on
the Board of Directors,
the following individuals
are also part of the
Nationwide Leadership
Team:
Mandy Beech – Member Experience Director,
Retail Distribution & Servicing
Mandy joined Nationwide in 2010 and has a deep understanding
of retail financial services and a wealth of experience in leading
operational teams. She currently leads the Branch, Contact Centre
and Digital Servicing teams as well as representing our member-
facing teams across the Society. Mandy is passionate about the
critical role these teams play in bringing our brand to life and the
service they provide to our members. Prior to joining Nationwide
Mandy led large retail teams within Royal Bank of Scotland.
Joe Garner
Chris Rhodes
Sara Bennison – Chief Product and Marketing Officer
Sara started her career in advertising, working for major brands
in the UK and Asia. She joined Nationwide in March 2016 having
spent the previous decade at BT and then Barclays. She is
responsible for leading the Propositions and Engagement
Community which involves understanding what members want,
developing propositions which answer member needs, and
managing all the products we offer and the way in which we
communicate, as well as our social investment programme.
Janet Chapman – Mission Leader – Moments that Matter
Mark Chapman – Chief Legal Officer
Janet joined Nationwide in January 2017 as Chief Internal Auditor.
She currently leads the Moments that Matter Member Mission
which focuses on building and delivering unique services and
experiences to support members at times when they need it.
Prior to joining Nationwide, Janet was Chief Auditor for
institutional businesses at Citigroup. Before that, she was
Chief Auditor for the Americas at The Bank of Tokyo Mitsubishi.
Her early career was spent with Accenture as an IT consultant.
Mark joined Nationwide in March 2018 as Leader of Legal and
Secretariat, delivering expert advice and guidance on legal and
regulatory issues, as well as a comprehensive secretariat service.
Mark was Society Secretary until March 2021. Before joining
Nationwide, Mark spent a year volunteering as a teacher in South
Africa. He previously served as General Counsel of Barclays UK
and General Counsel at Nomura International, having started his
career as a litigator at Freshfields in both London and New York.
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Nationwide Leadership Team (continued)
Annual Report and Accounts 2021
78
Patrick Eltridge – Chief Operating Officer
Jane Hanson – Chief People Officer
Patrick joined Nationwide as Chief Operating Officer (COO) in
February 2019. He was previously Group Information Officer at
Royal Bank of Scotland, where he was responsible for the successful
delivery of IT and operational resilience improvement programmes.
Patrick has vast experience in financial services, telecommunications
and technology start-ups. As COO, Patrick’s focus is on the
realisation of the Society’s technology strategy to deliver value
and service for members, while keeping them safe and secure.
Jane joined Nationwide in January 2018 and in September 2019 was
appointed as Chief People Officer, leading the Society’s people,
culture and inclusion experience. Previously, Jane was Chief People
Officer for Yorkshire Building Society, with responsibility for people
experience along with communications. Jane spent 13 years at HSBC,
where she was HR Director for First Direct and also held business
leadership roles such as Customer Experience and Branch Network
leadership. Jane is a member of the Banking Standards Board.
Paul Riseborough – Mission Leader – Hassle Free Money
Rachael Sinclair – Mission Leader – Homes and Dreams
Paul joined Nationwide in July 2020. He is responsible for leading the
Hassle Free Money Member Mission, which involves developing a
simple, connected and secure banking proposition for members. Prior
to Nationwide, he spent 8 years at Metro Bank, where he was Chief
Commercial Officer running the product, digital, communications,
data and marketing teams. He is a Finance Fellow at the Aspen
Institute in the US, which focuses on improving the relationship
between finance and society to create a more sustainable future.
Gavin Smyth – Chief Risk Officer
Gavin joined the Nationwide Risk Leadership team in September
2017. He was appointed Chief Risk Officer in March 2021, having
held the position on an interim basis since November 2020,
helping to keep the Society, and its members, safe and secure.
Prior to joining Nationwide, Gavin held senior roles at Tandem
Bank, PricewaterhouseCoopers and Royal Bank of Scotland.
Rachael joined Nationwide in June 2008 and has carried out multiple
roles across the Society, including Head of Operational Strategy, Director
of Channel Strategy and Operations, and Director of Strategic Planning.
She is currently responsible for leading the Homes and Dreams Member
Mission, which involves bringing together the end to end running of the
Society’s mortgage, investment and protection businesses. Prior to
joining Nationwide, Rachael spent the previous decade working in
various roles across Europe, Africa and Asia with Barclaycard.
Claire Tracey – Chief Strategy and Sustainability Officer
Claire joined Nationwide in September 2019 and is responsible
for Nationwide’s Strategy Community including strategy
development, delivery, innovation, venturing and disruptive
business growth. She also leads the Society’s response to
climate change. Claire chairs the Society’s Responsible
Business Committee and the Strategic Investment Committee.
She was previously a partner and managing director at Boston
Consulting Group.
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Annual Report and Accounts 2021
Annual Report and Accounts 2021
79
Report of the directors on corporate governance
Governance at Nationwide
The Board has established a set of internal standards and principles by which Nationwide is governed to ensure sound and prudent control of the Society, and to keep members’ money and interests
safe. Everyone in Nationwide has a role to play in governance.
The Board
Sets the strategy and tone and promotes ethical leadership,
leads on culture, embodies the Society’s values, encourages
good governance, monitors controls and manages risk.
Chief Executive Officer
Derives authority from the Board and cascades standards and
principles agreed by the Board to the business.
Nationwide’s people
Everyone at Nationwide is responsible for good governance
and adhering to the standards and tone set by the Board.
UK Corporate Governance Code – statement of compliance
Nationwide is committed to high standards of corporate governance and has continued to adopt the relevant parts of the UK Corporate Governance Code 2018, which is available at www.frc.org.uk
(the Code). The Board believes that throughout the year ended 4 April 2021 Nationwide has complied with the principles of the Code in line with the Building Societies Association guidance of July
2018. Details of the principles, including where you can read more about how Nationwide complied with them, are set out below:
Section
Code principles2
Where to read more on how Nationwide Building Society has
complied
Board leadership
and
company purpose
A. Entrepreneurial board with the role to promote the long-term sustainable success of the
Society and generate value for members
B. Purpose, values and culture
C. Performance measures, risks and controls framework
D. Stakeholder engagement
E. Workforce policies and practices
Strategic report
Role of the Board
Strategic report
Role of the Board
Strategic report – KPIs
Board Risk Committee report
Risk report - Principal risks
Engagement with stakeholders
Building Pride
Culture, whistleblowing
Role of the Board
Page
2 to 67
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2 to 67
81
10 to 11
104 to 106
145
87 to 88
25 to 28
81 to 82
81
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2The UK Corporate Governance Code uses the terminologies of ‘company’ and ‘shareholder’ but for the purpose of Nationwide and this Corporate Governance report, these terms should be read as ‘Society’ and ‘members’ respectively.
Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
UK Corporate Governance Code – statement of compliance (continued)
Section
Code principles2
Division of
responsibilities
F. Leadership of Board and Board operations
G. Board composition, Board roles and independence
Annual Report and Accounts 2021 80
Annual Report and Accounts 2021
Where to read more on how Nationwide Building Society has
complied
Page
Role of the Chair / Chair’s letter
How the Board operates
Nomination and Governance Committee report
Information and advice
Board composition
Tenure and independence
Roles on the Board
H. Directors’ responsibilities and time commitment
Attendance chart – How the Board operates
I. Board support, information and advice
Time commitment
Information and advice
Induction, training and development
Composition,
succession and
evaluation
Audit, Risk and
Internal control
J. Board appointments and succession plans for Board and senior management
Nomination and Governance Committee report
K. Board skills, experience and knowledge
L. Annual Board evaluation
M. Effectiveness of external auditor and internal audit
Board composition
Board of directors
Board effectiveness review
Audit Committee report
N. Fair, balanced and understandable assessment of the Society’s position and prospects
Audit Committee report
O. Risk Management and Internal Control Framework
Remuneration
P. Remuneration and Society purpose, strategy and values
Q. Executive and senior management remuneration
R. Authorisation of remuneration outcomes
Directors’ report
Audit Committee report
Board Risk Committee report
Remuneration report
Remuneration report
Remuneration report
5 and 89
86
110 to 114
93
94
93 to 94
89 to 90
86
92
93
93
110 to 114
94
71 to 76
95 to 96
97 to 103
97 to 103
138 to 140
97 to 103
104 to 106
115 to 137
115 to 137
115 to 137
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2The UK Corporate Governance Code uses the terminologies of ‘company’ and ‘shareholder’ but for the purpose of Nationwide and this Corporate Governance report, these terms should be read as ‘Society’ and ‘members’ respectively.
Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
Board leadership and Society purpose
The role of the Board
The Nationwide Board ensures that the Society’s long-term strategy is implemented within a good quality governance framework to enable it to continue to deliver the benefits of mutuality to its
members. More information on the Society’s purpose, the business model and how the Society generates and preserves value over the long-term can be found on page 18.
Annual Report and Accounts 2021 81
Annual Report and Accounts 2021
Alongside the progress we have made, we have also identified
themes for continued focus and activity, including:
• Continuing to create an inclusive culture where everyone
can thrive, building on the momentum and energy seen
over the last year, and working to ensure that our actions
flow through into tangible outcomes that help us achieve
our objectives and support colleague experience of
inclusion at Nationwide.
•
The need to continue to ensure our internal processes and
practices truly empower colleagues to deliver the best
outcomes for our members.
The Board will continue to sponsor and monitor progress in all
areas of our culture in the coming year.
The Board is responsible for ensuring that the Society delivers
long-term value for its members and is built to last. It
determines the Society’s strategic objectives within a
framework of risk appetite and controls. The Board monitors
the Society’s overall financial performance and ensures effective
governance, controls and risk management.
When setting the Society’s strategy, the Board considers the
impact that its decisions might have on various stakeholders
such as members, colleagues, suppliers and the community. It is
accountable for ensuring that, as a collective body, it has the
appropriate skills, knowledge and experience to perform its
role effectively. The Board is also responsible for providing
leadership to the Society on culture, values and ethics. The
powers of the Board are set out in the Society’s Memorandum
and Rules which are available on the Society’s website
nationwide.co.uk
The Board operates under formal terms of reference which
include a schedule of matters reserved to the Board for
decision, with the day to day running of the business delegated
to the Chief Executive Officer. The Chief Executive Officer
derives his authority from the Board and cascades the agreed
standards to the business. The Board’s Terms of Reference and
Matters Reserved can be found on the Society’s website
nationwide.co.uk
Culture
The Society’s culture remains a key focus of the Board to
support the organisation’s purpose, and the delivery of its
strategic ambitions. To ensure the Board has a strong
understanding of the Society’s current culture, target state and
progress made, the Board receives updates from
management. The Society’s cultural assessment tool, the
Culture Mosaic, which is reviewed by the Board twice a year,
provides a holistic view of the Society’s cultural evolution which
in turn helps inform and shape activity to manage, drive and
accelerate the pace of culture change. The Culture Mosaic uses
qualitative and quantitative information from a range of
sources (including employee engagement surveys and the
Banking Standards Board report for example) to track progress
against five key cultural shifts, which align to each of
Nationwide’s PRIDE values. More information on the Society’s
PRIDE values can be found on pages 25 to 28.
The most recent Culture Mosaic review concluded that
progress has been made against all five desired cultural shifts.
In particular, there has been continued progress in ‘Putting
members and their money first’. The behaviours that underpin
this value and desired shift have been consistently experienced
and are embedded in the culture, particularly in front-line
colleagues and the care demonstrated for members during the
pandemic, with branch satisfaction increasing to 87%.
Additionally, a positive shift has been seen in ‘Inspiring Trust’
where autonomy and trust has improved, with remote working
and support for home-schooling widely appreciated by
colleagues.
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Annual Report and Accounts 2021 82
Annual Report and Accounts 2021
Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
Board leadership and Society purpose (continued)
Whistleblowing
Nationwide has arrangements in place for employees,
contractors and temporary workers to raise concerns about
possible misconduct, wrongdoing and behaviour towards
others by its employees and third parties, including those
related to non-financial matters. Concerns can be raised
confidentially or anonymously (if preferred) via various
channels, including an online portal and a mobile telephone
app, hosted by an independent third party. These reporting
channels were introduced to make anonymous reporting
easier and to provide employees with an additional degree of
surety around raising concerns.
All Nationwide’s employees, contractors and temporary
workers receive annual training on the Society’s
whistleblowing policies and procedures, which includes how to
raise concerns both internally and by reporting directly to the
Financial Conduct Authority or the Prudential Regulation
Authority without first reporting the matter internally.
In January 2021, the role of Whistleblower’s Champion passed
from Nationwide’s Chair, David Roberts, to Kevin Parry, Senior
Independent Director and Chair of the Audit Committee. He
has assumed the responsibility for ensuring and overseeing the
integrity, independence and effectiveness of Nationwide’s
How the Board spent its time in the year
policies and procedures relating to whistleblowing, including
those intended to protect whistleblowers from being
victimised because they have disclosed reportable concerns.
The Board recognises that having effective and trusted
confidential whistleblowing arrangements is key in supporting
the Society’s open and honest culture. The Board receives an
Annual Whistleblowing Report and has reviewed the adequacy
and effectiveness of the arrangements in place for the
proportionate and independent investigation of concerns
raised, including any required follow-up action taken. From
January to December 2020, a total of 206 concerns were
raised of which 99 were formally investigated as
whistleblowing. The remainder were investigated utilising
other investigatory resources. (2019: 212 concerns raised and
106 investigated as whistleblowing).
Conflicts of interest
Directors have a legal duty to avoid conflicts of interest. Prior to
appointment (and on an ongoing basis), potential conflicts of
interest are disclosed and assessed to ensure that there are no
matters which would prevent that person from taking on the
appointment.
If any potential conflict arises, the Society’s Directors’ Conflicts
of Interest Policy permits the Board to authorise a conflict,
subject to such conditions or limitations as the Board may
determine appropriate. The Board has considered the current
external appointments of all directors which may give rise to a
situational conflict and has authorised any potential conflicts
where appropriate. Directors are required to notify the Board
of any change in circumstances relating to an existing
authorisation and to review and confirm their external
interests twice a year.
In addition, at the start of every Board or Board committee
meeting the Chair asks whether there are any conflicts (in
addition to those already recorded) to be declared. In a
situation where a potential conflict arises, the director will
recuse themselves from any meeting or discussion, and all
material in relation to that matter will be restricted.
Details of other directorships held by the Board can be found
in the Annual Business Statement on pages 328 to 329.
An all-encompassing Conflicts of Interest Policy is also
applicable to all other employees which covers the need to
appropriately identify and robustly manage all organisational
and personal conflicts of interest.
12%
7%
17%
Strategic development and performance
43%
Governance
Finance and internal controls
Risk and regulatory matters
21%
People, culture and remuneration
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Annual Report and Accounts 2021 83
Annual Report and Accounts 2021
Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
Board leadership and Society purpose (continued)
Throughout the year, the Board focused its activity on supporting management in the delivery of the Society’s strategic aims, reviewing and approving the Society’s
strategy and financial plans, and considering governance and regulatory matters.
The Board regularly received updates on business progress
and the issues and challenges faced by management. Board
activities were regularly structured to support and review the
Society’s strategy, focusing on the strategic cornerstones as
outlined on pages 18 to 31, and an in-depth review of the
Society’s strategy was considered by the Board at its annual
strategy day in October 2020.
The Society continues to develop and invest in new products
and services which are assessed to be within the Board’s risk
appetite and continues to ensure its existing products and
services are robust.
In addition to the main items for consideration, the Board
received updates at each meeting on the work of its principal
committees to keep abreast of significant issues.
The following pages set out a non-exhaustive list of the matters
that the Board has considered during the year.
During the year, the Board focused on a number of specific areas in line with the Society’s cornerstones, stakeholder considerations and principal risks.
Board activity – Strategic development and performance
Strategic cornerstone
Discussed regular updates from the CEO on progress against the Society’s purpose to build society nationwide, including
provision of external insights on key factors affecting the business. As part of this, the Board reviewed key performance
metrics to assess progress made in the implementation of the Society’s strategy.
Debated and considered the opportunities and challenges facing Nationwide due to the changing macroenvironment
heightened by the Covid-19 pandemic and Brexit. This included agreeing the propositional, financial and strategic response.
Discussed and approved recommendations regarding the future strategic growth of Nationwide. This included strategic
discussions centred on organisational vision, proposition, brand, responsible business, sustainability, technology and data
transformation, digital and front-line servicing.
Received an update on the progress made on the Society’s social investment strategy and Community Board activities.
Received updates on Nationwide’s key charitable partnerships, which focused on Nationwide’s social investment response to
the Covid-19 pandemic, recognising that the charity sector could be detrimentally impacted by the pandemic.
Reviewed the impact of the Society’s brand in relation to market conditions and its competitors.
Approved changes to our strategy for technology and other strategic investment, which created options for the future
direction of Nationwide with demonstrable member benefit.
Stakeholder
Members
Colleagues
Suppliers
Communities
Investors
Members
Suppliers
Communities
Regulators
Members
Colleagues
Suppliers
Communities
Communities
Members
Colleagues
Members
Investors
Colleagues
Members
Suppliers
Principal risk
P
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Key:
Building a National Treasure
Building Thriving Membership
Building Legendary Service
Built to Last
Building Pride
Prudential risks (including credit, model, liquidity and funding, market, solvency and pension risks)
Operational and conduct risks
Enterprise risk (including business risk)
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Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
Board leadership and Society purpose (continued)
Board activity - Finance
Due to the volatility and changes in economic assumptions generated by Covid-19, the Board continued to review and revise
the Society’s five-year Plan for 2020-25 and the revised economic and market assumptions throughout the first half of the
financial year. As part of the process, the Board provided input, guidance and advice to the senior management team. The
same steps were undertaken to finalise and approve the Society’s five-year plan for 2021-26.
Strategic cornerstone
Regularly assessed financial performance and the capital and liquidity position of the Society via business performance reports
from the Chief Financial Officer.
Reviewed and approved the Society’s interim and full year financial results prior to publication. Approved the Society’s Annual
Report and Accounts prior to publication with consideration given to business viability and the preparation of the accounts on
a going concern basis.
Reviewed the Society’s strategic cost and efficiency programme and discussed the cost opportunities over the five-year plan.
Board activity - Governance
The Board has overseen the Society’s response to the Covid-19 pandemic. It received regular reports from management,
including operational contingency planning updates, as the Society adapted to meet government requirements. These reports
and updates covered matters such as the impact on members, colleagues, suppliers and other stakeholders.
Strategic cornerstone
Received and considered regular reports from the General Counsel and Society Secretary on emerging changes to legislation
and regulation impacting the Society’s business.
Reviewed and approved the revised plans for the 2020 AGM in light of the changes required due to the Covid-19 pandemic,
including the recommendation for a change to the Society’s Memorandum and Rules. Approved the Notice of the 2021 AGM
and associated documentation.
Carried out and received the report of a review into the effectiveness of the Board and its committees, including developing an
action plan designed to remedy areas needing improvement.
Reviewed progress towards resolvability as required under the Bank of England Resolvability Assessment Framework to ensure
that capabilities are being developed to protect the Society’s business and its members.
Approved the Society’s Modern Slavery Statement for 2020.
Reviewed and received updates on Environmental, Social and Governance (ESG) matters, including continued engagement on
progress made on these matters.
Annual Report and Accounts 2021 84
Annual Report and Accounts 2021
Stakeholder
Members
Colleagues
Regulators
Investors
Communities
Member
Regulators
Members
Regulators
Investors
Members
Colleagues
Stakeholder
Members
Colleagues
Regulators
Investors
Communities
Regulators
Investors
Suppliers
Members
Regulators
Investors
Regulators
Investors
Members
Regulators
Members
Regulators
Investors
Members
Suppliers
Investors
Members
Communities
Principal risk
P
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Principal risk
P
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Key:
Building a National Treasure
Building Thriving Membership
Building Legendary Service
Built to Last
Building Pride
Prudential risks (including credit, model, liquidity and funding, market, solvency and pension risks)
Operational and conduct risks
Enterprise risk (including business risk)
Annual Report and Accounts 2021 85
Annual Report and Accounts 2021
Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
Board leadership and Society purpose (continued)
Board activity - People, culture and remuneration
Reviewed and discussed the people strategy, including the Society’s remuneration strategy and how this is aligned with
achieving the Society’s overall strategic aims.
Strategic cornerstone
Engaged with the wider workforce via the designated non-executive director for Employee Voice, and colleagues attended
Board meetings to provide the Board with direct insight on key topics impacting colleagues and members.
Considered the Society’s Gender and Ethnicity Pay Gap reporting for 2020, including Nationwide’s approach to closing the
gap.
Reviewed the progress made on the development of Nationwide’s culture, including discussing the revised Culture Mosaic, the
Banking Standards Board results on the Society’s culture and monitoring colleague sentiment through various internal
engagement surveys and sentiment trackers.
Reviewed the Annual Whistleblowing Report and the Society’s whistleblowing arrangements.
Board activity - Risk and regulatory matters, including external outlook
Assessed the Society’s overall risk profile and emerging risk themes, including receiving direct reports from the Chief Risk
Officer and Chair of the Board Risk Committee. The Board also approved revisions to the Board Risk Appetite.
Strategic cornerstone
Reviewed Nationwide’s Brexit preparations.
Assessed the economic and market conditions affecting the Society’s business and, as part of this, reviewed in detail and
approved the Society’s financial planning and stress testing activity for 2021.
Stakeholder
Colleagues
Members
Colleagues
Members
Colleagues
Regulators
Investors
Communities
Colleagues
Colleagues,
Regulators
Stakeholder
Members
Regulators
Members
Regulators
Members
Regulators
Principal risk
O
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O
O
O
E
O
E
Principal risk
P
P
P
O
E
O
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O
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Key:
Building a National Treasure
Building Thriving Membership
Building Legendary Service
Built to Last
Building Pride
Prudential risks (including credit, model, liquidity and funding, market, solvency and pension risks)
Operational and conduct risks
Enterprise risk (including business risk)
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Annual Report and Accounts 2021 86
Annual Report and Accounts 2021
Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
Board leadership and Society purpose (continued)
How the Board operates
The Board meets regularly and holds a strategy meeting annually
to review strategic options open to the Society in the context of
the economic, regulatory and competitive environment. The
Board also meets when necessary to discuss important emerging
issues that require consideration between scheduled Board
meetings. There were ten scheduled Board meetings, including a
two-day Strategy Conference. The Board meetings are
structured to ensure that the Board covers a range of items (as
detailed on pages 83 to 85) relating to the Society’s business,
strategy, culture and performance through open debate.
Members of the Nationwide Leadership Team and other senior
executives are invited to attend meetings as required to present
and discuss matters relating to their business and subject matter
areas. The Chair meets with the non-executive directors, without
executive directors present, during each Board cycle.
Where directors are unable to attend meetings, they are
encouraged to give the Chair their views in advance on the
matters to be discussed. The attendance record for Board
members during the period is set out below. The table shows
the actual number of meetings attended, with the number of
meetings for which directors were eligible to attend shown
separately.
In addition to scheduled meetings, Board members were given
the opportunity to join two informal conference calls, in the
months where no meetings were formally scheduled. These
calls were led by the executive directors and focused on
monthly operational and financial performance. During the
first quarter of the year, the non-executive directors also
participated in a series of discussions focused on preparing
Nationwide for the challenges and opportunities which have
emerged from the pandemic. Regardless of whether Board
members could attend these sessions, all documents were
circulated to all Board members.
Board attendance
Rita Clifton
Mai Fyfield
Joe Garner
Albert Hitchcock
Debbie Klein (note i)
Kevin Parry
Phil Rivett
Tamara Rajah (note ii)
Chris Rhodes
David Roberts
Tim Tookey (note iii)
Gunn Waersted
Scheduled meetings attended/
eligible to attend
10/10
10/10
10/10
10/10
1/1
10/10
10/10
6/6
10/10
10/10
9/10
10/10
Notes:
i.
ii.
iii. Unable to attend the meeting in January 2021 due to illness.
Joined the Board on 1 March 2021.
Joined the Board on 1 September 2020.
Board and Committee meetings during the year
Apr
2020
May
2020
Jun
2020
Jul
2020
Aug
2020
Sep
2020
Oct
2020
Nov
2020
Dec
2020
Jan
2021
Feb
2021
Mar
2021
Board
Audit Committee
Board Risk Committee
Board IT and Resilience Committee
Nomination and Governance Committee
Remuneration Committee
Key:
Scheduled meeting
Additional meeting
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Annual Report and Accounts 2021 87
Annual Report and Accounts 2021
Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
Board leadership and Society purpose (continued)
Engaging with stakeholders
The Board recognises the impact the business has on its diverse range of stakeholders and therefore understands the importance of engaging with them at all
levels. The Board takes into consideration the interests of these stakeholders as part of its discussion and decision-making processes. The detail below provides an
insight into the Board’s engagement with its principal stakeholders.
Members
We listen to our members
As a mutual organisation, members are also the owners of
Nationwide, and we want our members to be able to share
their views on the overall direction of the business, so that we
can continue to meet their needs now and in the future. To
help them do this, we aim to hold a number of virtual and
physical events, giving members the opportunity to meet
Board directors and senior management.
Our AGM
The AGM is the event at which members can vote on important
issues and provides them with the opportunity to meet the
Board. As a result of the ongoing Covid-19 pandemic, member
attendance was not possible at the 2020 AGM. We
nevertheless encouraged members to participate by voting
online or by post, by streaming the event online and by
submitting questions for a specific Member TalkBack session
the day following the AGM. The live stream of the 2020 AGM
was viewed by 498 people.
The 2021 AGM will be live streamed on the day of the meeting.
We will also be hosting an online Member TalkBack the week
before the AGM where members will be able to ask questions
to Board directors.
Member Talkback
Our Member TalkBack programme gives members the
opportunity to ask questions directly of the Society’s Board and
senior management. Members are encouraged to share their
views on the Society and its performance.
During the year we held nine digital Member TalkBack events,
giving the opportunity to hear from and ask questions to Board
directors and senior management. 1,401 members participated
in these events and we look forward to supplementing our
digital programme with a face-to-face Member TalkBack
programme as soon as we can do so, allowing us to meet even
more members.
More information on how the Society engages with its
members can be found in the Strategic report on page 12.
Colleagues
We value our colleagues
At Nationwide, we value our people, their commitment to the
Society and their contribution to fulfilling our purpose of
building society, nationwide. To ensure Nationwide is a great
place to work, the Board engages with colleagues throughout
the year to understand what they really value.
Colleagues are critical to the services provided by the Society
and employee engagement is regularly discussed including the
results of employee engagement surveys, and the findings
from the Banking Standards Board survey.
The CEO and Chair engage directly with colleagues, such as
through branch visits and via the Society’s intranet to receive
feedback and views directly from the workforce. The CEO
writes a monthly blog, which enables a two-way engagement
with colleagues on key topical issues, such as the impacts of
the pandemic, future ways of working, climate change, and
inclusion and diversity.
The Member TalkBack sessions are supported by senior
leaders from across the organisation and over 50% of those
held during the year had a non-executive director on the panel.
During the year, the General Secretary of the Nationwide
Group Staff Union (NGSU) attended a Board meeting and a
Remuneration Committee meeting to discuss the relationship
of the NGSU with Nationwide and the alignment of interests
between the NGSU and the Society.
To further promote engagement between the Board and the
wider workforce, Mai Fyfield, the designated non-executive
director with specific responsibilities for the Employee Voice in
the boardroom, completed a programme of engagement
activity over the past year. Although the inability to meet
colleagues face to face since mid-March 2020 has made
colleague engagement more challenging, Ms Fyfield has
maintained a broad schedule of virtual meetings. During the
year, she has met with colleagues from across the different
business areas in the Society and at different levels of seniority.
This has included meeting colleagues based in Bournemouth
and Northampton, meeting the NGSU General Secretary,
attending an NGSU National Executive Meeting, and meeting
with the Society’s Employee Network Groups.
The meetings provided qualitative insights to inform
conversations and decisions made by the Board. During these
meetings a number of themes emerged, including the
Society’s response to Covid-19 where colleagues felt very
supported and appreciated the level of communication with
management, feeling that the Society was doing everything it
could to keep them safe. Colleagues responded positively to
the flat pay increase in 2020 and also valued the leadership
position taken by Nationwide in respect of executive pay.
Colleagues highlighted the importance of having tools to be
able to recognise and reward high performers. In addition,
performance management and line management in general
were key areas of discussion where the need for greater
consistency and better support and training for line managers
was an emerging theme.
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Annual Report and Accounts 2021 88
Annual Report and Accounts 2021
Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
Board leadership and Society purpose (continued)
Over the next year, engagement will continue with the NGSU
and with colleagues from across the Society.
Investors
Regulators
Work will continue to build a better awareness and visibility of
the Employee Voice programme across the Society.
Management will also be engaged to ensure insights are
shared and that conversations with colleagues remain a focus.
During the year the Board has welcomed several colleagues
from across the Society to Board meetings, allowing the
opportunity for these colleagues to share their insight on a
range of topics. Colleagues provided their observations,
experiences and reflections on the Society’s efforts through the
Covid-19 pandemic, and in turn allowed the Board and
management to consider the implementation of actions to be
taken in the best interests of colleagues. Additionally,
representatives from several of the Society’s Employee
Networks (Race Together, Enable (disability network), Working
Families and Gender Equality) were invited to attend a Board
meeting during the year to provide insight for Board members.
The representatives shared their experiences and views of the
Society and offered suggestions on how the Board could assist
with advancing the objectives of each Network.
More information on the Society’s employee engagement can
be found in the Strategic report on page 13.
Communities
We engage actively with our investors
Nationwide is active in wholesale funding markets through the
issuance of instruments. Wholesale investors support the
Society in meeting its funding and capital requirements,
helping to ensure that Nationwide is built to last. The Society
maintains an active dialogue with the investors in its
instruments and our investor relations programme provides
current and potential investors with the opportunity to meet
senior managers and executive directors of the Society. At
least twice a year, Board members engage with our largest
investors, providing an update on the Society’s most recent
financial performance.
More information on the Society’s investor engagement can be
found in the Strategic report on page 14.
Suppliers
We work closely with our suppliers
During the year, Nationwide worked with over 1,100 third party
suppliers who provide a range of goods and services to the
Society, helping us run and improve our business and deliver
quality service for our members. Our suppliers are an
extension of our business; they help us operate safely and
securely, they help us learn and improve, and importantly they
help each other where it matters too.
We support our local communities
The Board received updates on the Society’s social investment
strategy and on Community Board activities. During the year,
this included reviewing Nationwide’s social investment
response to the Covid-19 pandemic, the progress of grants
funded through the Community Grant programme, and
progress updates on Nationwide’s partnerships with charities
such as Shelter and St Mungo’s. The Board also received
updates on the Oakfield housing development.
During the year, on delegation from the Board, the Board Risk
Committee received updates on the resilience of key supply
chains. These updates highlighted the monitoring,
engagement, risk mitigation and reporting activities conducted
by Nationwide across its supply chain, and particularly focused
on any changes to the supply chain risk profile in light of the
macroeconomic environment being impacted by the ongoing
Covid-19 pandemic and Brexit. Additionally, the Audit
Committee received updates on broker mortgage fraud risk.
We seek an open relationship with regulators
Nationwide is committed to complying with all legislation and
regulatory rules applicable to its business. The Society is
supportive of the objectives of the Prudential Regulation
Authority, the Financial Conduct Authority and other
applicable regulatory bodies. Consequently, Nationwide seeks
to maintain the highest possible regulatory standards, to
protect and enhance the integrity of the UK financial system
and ensure fair outcomes for our members.
The Board receives regular reports detailing Nationwide’s
regulatory interaction, the changing regulatory environment
and how this impacts Nationwide. Additionally, Board
members attend regular one-to-one meetings with
representatives from its regulatory bodies and regulators are
invited to attend Board meetings to present key reports, such
as the presentation of the findings of the PRA Periodic
Summary Meeting.
More information on the Society’s engagement with regulators
can be found in the Strategic report on page 14.
Buy to let customers and renters
We support our buy to let customers and renters
During the year, Nationwide worked with its buy to let lending
business, The Mortgage Works plc (TMW), to support those
who rely on the private rental sector for their long-term
housing needs.
The Board receives regular reports and updates detailing the
operations of TMW. During the year, the Board reviewed a
detailed update on the implementation of TMW’s strategy.
More information on the Society’s engagement with its buy to
let customers can be found in the Strategic report on page 13.
More information on the Society’s engagement with
community activities can be found in the Strategic report on
page 13.
More information on the Society’s engagement with its
suppliers can be found in the Strategic report on page 13.
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Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
Division of responsibilities
Leadership structure
An overview of the Board structure and its committees as at 4 April 2021 is set out below.
Audit
Committee
Board IT and
Resilience Committee
Board Risk
Committee
Nomination and
Governance Committee
Remuneration
Committee
Board committees
Chief Executive
Officer
Nationwide
Leadership Team
(NLT)
Further information on the role of the Board and its committees
can be found on pages 81 to 91 of this report and in the
individual committee reports.
The Board
The Board governs and makes decisions as a collective body. Each role on the Board has specific responsibilities. A summary of the responsibilities of each role can be found below.
Role
Responsibilities
Chair
David Roberts
Senior Independent
Director
Kevin Parry
•
•
•
•
•
•
•
•
Leads the Board, ensuring it operates effectively in setting the strategic direction of the Society, including shaping the culture in the Boardroom;
Sets the tone from the top and epitomises the Society’s culture by fostering open and honest debates in the Boardroom;
Fosters a culture of open dialogue and mutual respect between executive and non-executive directors, both in and outside of the Boardroom, including
ensuring that each non-executive director provides valuable contributions;
Together with the other members of the Board, promotes the long-term success of the Society and ensures the accountability to its members; and
Provides support and advice to the Chief Executive Officer while respecting executive responsibility.
Provides a sounding board for the Society Chair, providing him with support in the delivery of his objectives;
Is available to directors if they have concerns when contact through the usual channels (Chair, Chief Executive Officer or other executive directors) has failed
to resolve, and acts as a trusted intermediary for members when necessary; and
Leads the annual review of the Chair’s performance by the Board and is responsible, in conjunction with the Nomination and Governance Committee, for
the succession process for the Society Chair.
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Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
Division of responsibilities (continued)
Role
Responsibilities
Non-executive
directors
Rita Clifton
Mai Fyfield
Albert Hitchcock
Debbie Klein
Tamara Rajah
Phil Rivett
Tim Tookey
Gunn Waersted
Chief Executive Officer
Joe Garner
Executive director
Chris Rhodes
Society Secretary
JJaassoonn WWrriigghhtt
•
Collectively set the tone from the top, in relation to culture and governance – holding management to account for embedding and maintaining the Society’s
culture and values;
•
Contribute to the development of the strategy and risk appetite, exercising effective oversight over risk management and controls;
• Monitor performance and constructively challenge as appropriate using their skills and expertise to engage in honest debate; and
•
Promote the long-term success of the Society for the benefit of members and ensure that the Society meets its obligations as a regulated firm.
•
•
•
•
•
•
•
•
•
•
•
•
Responsible for the day to day running of the business and accountable to the Board for the Society’s financial and operational performance;
Responsible for providing leadership and direction to set and implement the Society’s strategy having regard to the duty to promote the success of the
Society in the interests of members, colleagues and Nationwide’s public and social responsibilities within the wider community;
Embodies the Society’s culture and values and develops policies for the Society’s people that drive the right behaviour; and
Implements and monitors systems for the apportionment and oversight of responsibilities, controls and best practices within the Society, which maintain its
operational efficiency and high standards of business conduct.
As a member of the Board, collectively with the non-executive directors, sets the strategy, risk appetite and culture and values;
Ensures that the Board is kept informed of all significant matters, escalating issues on a timely basis;
Is accountable to the Board for the execution of the strategy and the performance of the business; and
Holds specific management responsibilities in the day to day running of the business.
Advises the Board through the Chair on all governance-related matters;
Provides support to the Board in managing good information flows between the Board and the rest of the Society to ensure that high quality and timely
information is provided to the Board;
Assists the Chair in ensuring that adequate resources are allocated to developing the directors’ knowledge and capabilities in order to enhance Board and
Committee effectiveness; and
Assists the Chair in establishing the policies and processes required to enable the Board to function effectively.
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Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
Division of responsibilities (continued)
Board Committees
To assist the Board in carrying out its functions and to ensure that there is independent oversight of internal control and risk management, certain governance responsibilities have been delegated
by the Board to its committees. These board committees comprise independent non-executive directors and, in some cases, the Board Chair. The terms of reference of the Board and its committees
can be found on the Society’s website: nationwide.co.uk
Role
Responsibilities
Audit Committee
The Audit Committee provides oversight and advice to the Board in respect of financial reporting, financial crime, internal and external audit, and the adequacy and
effectiveness of internal controls and risk management systems.
Board IT and
Resilience Committee
The Board IT and Resilience Committee provides oversight and advice to the Board in respect of IT strategy, IT investment, IT architecture, IT operating model
effectiveness, delivery performance and resilience controls, including cyber risk, as well as overseeing the Society’s data management strategy.
Board Risk Committee
The Board Risk Committee provides oversight and advice to the Board in relation to current and potential future risk exposures and risk strategy, including
determination of risk appetite. Additionally, the Committee is responsible for monitoring compliance oversight, the effectiveness of the Enterprise Risk Management
Framework (ERMF) and advising the Remuneration Committee on any risk adjustments to be made to remuneration.
Nomination and
Governance
Committee
Remuneration
Committee
The Nomination and Governance Committee assists the Chair in keeping the composition of the Board under review, leading the appointments process for
nominations to the Board and making recommendations to the Board on succession planning and executive level appointments. The Committee reviews the Board’s
governance arrangements and makes recommendations to the Board to ensure that the arrangements remain consistent with best practice. The Committee oversees
the implementation of the Society’s inclusion and diversity strategy and objectives.
The Remuneration Committee is responsible for determining and agreeing with the Board the remuneration strategy and the broad policy for remuneration of
directors, senior management and any other individual employees deemed appropriate by the Committee, including those identified as material risk takers for the
purposes of the PRA and FCA Remuneration Codes. It determines, within the terms of the agreed policy, the specific remuneration packages for these roles. The
Committee also reviews the ongoing appropriateness and relevance of the remuneration policy and pay practices for the workforce across the Society.
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Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
Division of responsibilities (continued)
Nationwide Leadership Team
There is a clear division of responsibilities between the Chair, as leader of the Board, and the Chief Executive Officer who is responsible for the day to day running of the business. To the extent that
matters are not reserved to the Board, responsibility is delegated to the Chief Executive Officer, who is assisted by the Nationwide Leadership Team.
Role
Responsibilities
Nationwide Leadership
Team
The purpose of the Nationwide Leadership Team is to direct and coordinate the executive management of the Society within the strategy, risk appetite, operational plans,
policies, objectives, frameworks, budget and authority approved by the Board, and to act as a forum to assist the Chief Executive Officer (CEO) with his responsibilities. The
Committee considers all matters of strategic importance to the Society, guided by its purpose and the Society’s strategic cornerstones. More information on the Nationwide
Leadership Team can be found on pages 77 to 78.
Time commitment
To discharge their responsibilities effectively, non-executive
directors must commit sufficient time to their role. The time
the Society’s non-executive directors are expected to commit
to their role at Nationwide is agreed individually, as part of the
appointment process, and depends upon their responsibilities.
For example, additional time commitment will often be
required of the Senior Independent Director and Chairs of the
board committees in order to fulfil their extra responsibilities.
The Chair and non-executive directors are expected to allocate
sufficient time to understanding the business, through
meetings with management and undergoing training to
ensure ongoing development. The Chair and non-executive
directors are also expected to attend meetings with the
Society’s regulators to foster and maintain an open and
transparent working relationship. This time is in addition to
that spent preparing for, and attending, Board and board
committee meetings. Time commitments are reviewed
annually, or more regularly if needed, as Nationwide
recognises the need to take account of changes in best
practice – for example any revisions to the Code
recommending different or expanded roles of board
committees. Non-executive directors are expected to commit a
minimum of 30 days per year for core activities and
membership of Board committees. The Senior Independent
Director and Committee Chairs are expected to commit a
minimum of 50-60 days per year. The Chair will spend a
minimum of an average of 2 days per week on Nationwide
business. For this year, the Chair has individually confirmed
with each non-executive director that they have been able to
allocate sufficient time to fulfilling their duties. Externally, there
has been no increase in the other significant commitments of
the Chair during the year which would impact the time he has
to fulfil the role.
During the year and on the recommendation of the
Nomination and Governance Committee, the Board gave
approval to the following significant additional external
appointments taken by non-executive directors of the Society:
• The Board, on the recommendation of the Nomination and
Governance Committee, approved the appointment of
Tamara Rajah as a non-executive director of Holland and
Barrett. The additional appointment was not considered to
impair her ability to serve as a director of Nationwide in
view of the time commitment.
• The Board, on the recommendation of the Nomination and
Governance Committee, also approved the appointment of
Rita Clifton as Deputy Chair of John Lewis Partnership. It
was considered that this appointment would not impair Ms
Clifton’s ability to perform her role as a non-executive
director of Nationwide.
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Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
Division of responsibilities (continued)
Director independence
Information and advice
The Nomination and Governance Committee considers the
independence of each non-executive director on an annual
basis. In reaching its determination of independence, the
Committee considers factors such as length of tenure and
relationships or circumstances which are likely to affect or
appear to affect the director’s judgement. On the
recommendation of the Committee, all non-executive directors
have been assessed by the Board to be independent as to
character and judgement and to be free of relationships and
other circumstances which could materially affect the exercise
of their judgement. In reviewing the independence of each
non-executive director, the Committee examined the cross
directorships of Kevin Parry and Tim Tookey who both sit on
the Board of The Royal London Mutual Insurance Society (Royal
London). The Committee was satisfied that the cross
directorships did not impact their independence or their ability
to carry out their role as directors of the Society.
The Committee also considered Phil Rivett’s independence and
was satisfied that he is independent notwithstanding his past
relationship with PricewaterhouseCoopers LLP (PwC), the
Society’s former auditor. PwC ceased to be the Society’s
auditor in July 2019 following a competitive tender for external
audit in accordance with auditor rotation requirement. Phil
Rivett retired as a partner of PwC in 2018. He had no personal
engagement with any business of the Society prior to his
appointment to the Board of the Society in September 2019.
The Code requires the Chair to be independent on
appointment. Thereafter, the test of independence no longer
applies to this role. David Roberts, Chair of the Society, was
deemed to be independent upon his appointment to the role of
non-executive director and Chair Elect in 2014. Following the
assessment, all directors eligible for re-election (save for Rita
Clifton who will be retiring from the Board) will be
recommended to members for re-election at the AGM in July
2021.
The Board has full and timely access to all relevant information
to enable it to perform its duties effectively. The Society
Secretary ensures appropriate and timely information flows
between the Board, its Committees and senior management,
enabling the Board to exercise its judgement and make fully
informed decisions when discharging its duties. The Society
Secretary supports the Chair in setting the Board agenda.
Board papers are distributed to all directors in advance of
Board meetings via a secure electronic system allowing
directors to access information in a timely manner. Regular
management updates are sent to directors to keep them
informed of events between formal board meetings and to
ensure that they are advised of the latest issues affecting the
Society. All directors have access to the advice and services of
the Society Secretary, who is responsible for advising the
Board through the Chair on all governance matters and for
ensuring that Board procedures are followed and compliance
with applicable rules and regulations is observed. The directors
may, if required, take independent professional advice at the
Society’s expense.
Induction, training and development
Following appointment, each new director receives a full and
formal bespoke induction to familiarise them with their duties
and the Society’s business operations, and risk and governance
arrangements. Inductions are tailored to each director’s
individual experience, background and areas of focus and are
set alongside their broader individual development plan. The
induction programme includes meetings with members of the
Nationwide Leadership Team and other senior managers in
key areas of the business. Typical areas covered include an
overview of the Society’s business strategy and model, the
Society’s brand, products and markets, capital management
and financial controls, and risk and governance
responsibilities, as well as information on the Society’s people
and culture. These meetings are supplemented by induction
Annual Report and Accounts 2021 93
Annual Report and Accounts 2021
materials such as recent Board papers and minutes, industry
and regulatory reports and relevant policies.
The Chair, with support from the Society Secretary, has overall
responsibility for ensuring that the directors receive suitable
training to enable them carry out their duties. The directors
are regularly provided with the opportunity for ongoing
training and professional development to ensure they have the
necessary knowledge and understanding of the Society’s
business. Training opportunities are provided through internal
meetings, presentations and briefings by internal as well as
external advisers. During the year, the directors attended
internal training sessions on subjects including climate
change, the post Covid-19 consumer, resolution, hedge
accounting and derivatives and the risk and controls of Cloud
infrastructure.
They are encouraged to continually update their professional
skills and knowledge of the business and to identify any
additional training requirements that would assist them in
carrying out their role. Where individual directors have
requested, individual training sessions have been held with
subject matter experts, to assist with continuous professional
development. The Chair has conversations with each non-
executive director on a regular basis during the year and at the
end of the year to review performance and development
needs. The Senior Independent Director is responsible for the
evaluation of performance and development needs for the
Chair. Executive board directors continue to undertake
performance and development review and planning activity as
part of the annual performance management cycle.
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Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
Composition, succession and evaluation
Board composition
The Nomination and Governance Committee is responsible for
reviewing Board composition, considering succession plans for
both the Board and senior executives, selecting and appointing
new directors and considering the results of the Board
effectiveness review. More information on the work of this
Committee during the year can be found on pages 110 to 114.
In order to maintain a balanced Board, the skills and
experience of individual Board members are regularly
reviewed. Ensuring the right mix of director competencies is
vital for constructive discussion and, ultimately, effective Board
decisions. The individual biographies of the directors, which
include their relevant skills and experience, can be found on
pages 71 to 76.
All directors are subject to conduct rules laid down by
regulators and must satisfy requirements relating to their
fitness and propriety. In addition, the Chair, the Senior
Independent Director and Chairs of the key board committees
are subject to all aspects of the Senior Managers Regime.
Corporate Governance Code (the Code), all directors of
Nationwide are subject to election or re-election by the
members annually. Before re-election, a non-executive director
will be subject to a review of that director’s continued
effectiveness and independence as described above.
Executive directors’ service contracts and the letters of
appointment for the Chair and non-executive directors are
available for inspection at the Society’s principal office, subject
to Covid-19 restrictions, and will be available at the AGM.
Board tenure
The Society’s Memorandum and Rules require that Board
directors must be re-elected by the Society’s membership
every three years. However, in compliance with the UK
Member nominations
Members of Nationwide have the right to nominate candidates
for election to the Board, subject to the Society’s Memorandum
and Rules and compliance with PRA and FCA requirements.
No such nominations had been received by 4 April 2021, this
being the deadline for election to the Board at the 2021 AGM.
Board composition
E x e c u t i v e a n d n o n-
e x e c u t i v e d i r e c t o r s
Executive directors
Non-executive directors
E t h n i c i t y
Ethnically diverse
Non-ethnically diverse
A g e o f B o a r d
m e m b e r s
N o n- e x e c u t i v e
d i r e c t o r s ' t e n u r e
G e n d e r
35-45
46-55
56-60
61+
0-3 years
3-6 years
6-9 years
Male
Female
2
10
1
11
1
3
5
3
4
5
1
7
5
Non-executive directors skills and experience
Customer, brand and marketing
Strategy
People and talent
Retail banking
Digital and technology resilience and transformation
Financial accounting and audit
Regulation and compliance
Financial services
9
9
8
7
7
3
6
5
0
2
4
6
8
10
Notes:
•
•
Individual directors may fall into one or more categories.
The number of directors indicate directors with considerable experience and knowledge in each area.
Other directors may have some relevant experience and knowledge in these areas. These have not
been included in the numbers.
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Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
Composition, succession and evaluation (continued)
Board performance
On an annual basis, the Board conducts a review of its
performance. The annual performance review is a key
mechanism by which the Board ensures that it continues to
operate effectively and to set objectives and development areas
for the forthcoming year. In 2020, the Board performance
review was carried out internally and was facilitated by the
Society Secretary. It provided the Board with the opportunity to
assess the effectiveness of each Board committee, and to
receive input from the Nationwide Leadership Team, to
highlight further areas of focus and development, as well as
identifying the strengths that could continue to be optimised.
A review of the performance and contribution of each director
was conducted by the Society Chair to ensure that all directors,
contributed effectively to the good governance of Nationwide.
This is one of the factors considered when deciding whether
individual directors will offer themselves for election or re-
election at the Society’s AGM. The reviews concluded that each
director continues to perform effectively and demonstrates
commitment to the role.
The review of the Chair’s performance and ongoing fitness and
propriety was led by Kevin Parry, the Senior Independent
Director, on behalf of the Board. As part of the process,
feedback on the Chair’s performance was obtained from all the
directors. The results were collated and were discussed at a
meeting without the Chair present. The review concluded that
the Chair continues to perform effectively, remains fit and
proper to perform the role and uphold his regulatory
responsibilities, and demonstrates commitment to his role.
2020 Board performance review
Stage 1. Agreement of form and scope of the Board
evaluation
The 2020 Board evaluation was conducted internally. The
Society Secretary met with the Chair to agree the purpose,
scope and practicalities of the evaluation. The scope of the
evaluation covered general areas of effectiveness including
Board composition and succession planning, Board dynamics
and operations, strategic oversight, risk and crisis
management. A proposal outlining the arrangements for the
review was considered and approved by the Nomination and
Governance Committee in March 2020.
Stage 2. Information gathering
The performance review was conducted by a self-assessment
questionnaire completed by all Board directors and members
of the Nationwide Leadership Team who are regular attendees
at Board and Board committee meetings. The questionnaire
covered general areas of effectiveness, as well as focusing on
how the Board set itself up for future success in an evolving
macroeconomic landscape. Individual committee
questionnaires were also completed by the relevant committee
members where appropriate.
Stage 3. Feedback and report findings
The Chair discussed responses with individual directors. A
report of the findings and feedback from the review of the
Board was presented and discussed at the Board meeting in
June 2020. Feedback regarding the effectiveness of each
Board committee was discussed at each relevant committee
meeting following the June 2020 Board meeting programme.
Stage 4. Findings and action plan
Overall, the findings endorsed the belief that the Board and its
committees are performing and operating effectively, with
directors satisfied with the performance and effectiveness of
the Board and its committees. Board members display the
values, behaviours, skills, and experiences expected by
members to allow them to discharge their duties effectively. It
was observed, however, that the Board needed to ensure its
was devoting significant time and attention to the future
strategy and business model for Nationwide in a post Covid-19
world, and to board composition and succession planning.
The Board adopted the recommendations from the findings and developed a plan to implement the actions with oversight by the Nomination and Governance Committee. The progress made
on the key recommendations from the 2020 performance review process is described below.
Area of focus and key recommendations
Action taken
Continue to review, and as appropriate, amend the balance between the
time devoted to operational and strategic discussions.
Board discussions have targeted strategic matters, but the Covid-19 pandemic has brought operational matters to the fore
as the Board assists with leading the business through the Covid-19 pandemic, response to the economic downturn and
financial and technical resilience of the Society. Given the output of the 2020 Board Strategy Conference, there will be
significant focus on strategy execution and transformation, and the Board will focus on ensuring prioritisation of
members’ current and emerging needs as they change during and post the pandemic.
Continued focus on succession planning by implementing a structured
process to review succession options for the Nationwide Leadership Team
including giving directors greater exposure to key talent.
The Nomination and Governance Committee has regular executive succession updates at scheduled meetings and key
talent is invited to present to the Board and Board Committees where possible.
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Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
Composition, succession and evaluation (continued)
2021 Board performance review
The UK Corporate Governance Code and the Financial
Reporting Council’s guidance on Board Effectiveness
recommend that the annual performance review of the Board
should be externally facilitated every three years. To this end,
the Board engaged Lintstock Limited, which has no other
connection with the Society, to assist with the 2021 evaluation
of its own performance and that of its committees, the Chair
and individual directors. The results of the review were
presented to the Board for discussion at its May 2021 meeting
and will form the basis of an action plan for completion during
2021. A similar process was followed for Board committees.
Further information on the evaluation process, outcomes and
actions identified will be presented in the Annual Report and
Accounts 2022.
Audit, risk and internal control
The Board is responsible for determining the nature and extent
of the risks the Society is willing to take in order to achieve its
long-term strategic objectives. This is detailed in the Board’s
risk appetite statement. The Board is also responsible for
ensuring that management maintains an effective system of
risk management and internal control and for assessing its
effectiveness.
There are risk management and internal control systems and
processes in place for identifying, evaluating and managing the
principal risks and the emerging risks facing the Society in
accordance with the ‘Guidance on Risk Management, Internal
Control and Related Financial and Business Reporting’,
published by the Financial Reporting Council (FRC).
The framework under which risk is managed in the business is
supported by a system of internal controls designed to embed
the management of risk throughout the Society. The risk
management and internal controls systems are designed to
manage rather than eliminate the risk of failure to achieve
business objectives and can only provide reasonable and not
absolute assurance against material misstatement or loss.
The Board monitors the Society’s risk management and
internal control systems and carries out an annual review of
their effectiveness. On the basis of this year’s review, the Board
is satisfied that the Society has an adequate risk framework
and internal controls in place, the design of which has been
and will continue to be improved to ensure it remains fit for
purpose and reflects changes to the Society’s internal and
external risk profiles.
Internal control over financial reporting
The Society’s financial reporting process has been designed to
provide assurance regarding the reliability of financial
reporting and preparation of financial statements, as well as
consolidated financial statements, in accordance with
International Financial Reporting Standards (IFRS).
The Annual Report and Accounts is scrutinised throughout the
financial reporting process by relevant senior stakeholders
before being submitted to the Audit Committee, who provide
challenge, before recommending to the Board for approval.
The Audit Committee also discusses with the external auditor
control conclusions and recommendations arising from the
audit.
Internal and risk management systems are in place to provide
assurance over the preparation of the financial statements.
These include independent testing of the critical financial
reporting processes and controls, from data origination to
reporting, to an agreed level aligned to Board risk appetite.
The result of this assurance work is reported to control owners
and the Chief Financial Officer with a summary report
presented to the Audit Committee. Financial information
submitted for inclusion in the financial statements is attested
by individuals with appropriate knowledge and experience.
Internal control over financial reporting has been reviewed by
management, as well as internal and external audit. Based on
this review, it was concluded that the controls over financial
reporting are effective.
More information on the Society’s risk management and
internal control systems can be found on page 56, pages 97 to
103, pages 104 to 106, pages 107 to 109, and pages 142 to 144.
Remuneration
The Board is responsible for determining the Society’s remuneration policies and practices, including executive and senior management remuneration. Information on the work of the Board’s
Remuneration Committee and the Report of the directors on remuneration can be found on pages 115 to 137.
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Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
Audit Committee report
Dear fellow member,
As Chair of the Audit Committee, I am pleased to present its report for the year. We have overseen and challenged the integrity of the
financial reports and robustness of the financial internal controls in a year overshadowed by the Covid-19 pandemic.
Keeping members’ money safe and secure has always been Nationwide’s priority. The Committee has maintained its focus on the
maintenance of a robust control framework within the Society and, with the onset of the pandemic, widened its remit to conduct a
series of deep dives into the strength of internal and external fraud procedures in an environment of increased risk of fraud exposure.
As Nationwide has worked tirelessly to play its part in the support of its members throughout the pandemic, the Committee has
ensured close oversight of financial reporting judgements, in particular relating to credit impairment provisions.
Further details of the judgements that the Audit Committee debated are set out in this report and cross referenced to the extensive
disclosures elsewhere in the Annual Report and Accounts. The Audit Committee has worked diligently with management to ensure that
reporting is appropriately prudent and balanced, at a time when uncertainty as to the forward view of economic conditions remains
high.
The Committee has reviewed the Society’s financial reporting, ensuring that the financial statements published by the Society are fairly
presented and are prepared using appropriate judgements. The Committee has also monitored and reviewed internal and external audit
arrangements and the effectiveness of the Society’s internal controls and reviewed the Society’s procedures relating to fraud and financial
crime. Additionally, the Committee has monitored the external environment to ensure that reporting and controls respond to developments and
external risks.
We continue to prioritise monitoring the development of the control environment, including increasing the maturity of control ownership
across the Society, and controls over important business activities such as cyber security, physical security and digital services.
We are evaluating and will contribute to the Department for Business, Energy and Industry Strategy (BEIS) consultation on restoring
trust in audit and corporate governance. In the next 12 months, we will also continue to develop our approach to and disclosure of
climate change risks.
If members have feedback on this report, I should be pleased to receive their comments.
Kevin Parry Chair – Audit Committee
Annual Report and Accounts 2021
Annual Report and Accounts 2021 97
Kevin
Parry
How the Committee
spent its time in the year
37%
37%
7% 7% 6% 6%
• Financial reporting
• Internal controls and risk management
(including internal audit)
• External audit
• Financial crime
• Statutory and governance duties
• Other (including meeting administration)
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Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
Who sits on the Committee
Annual Report and Accounts 2021 98
Annual Report and Accounts 2021
Committee members
Kevin Parry (Chair)
Rita Clifton
Phil Rivett
Tim Tookey (note i)
Meetings attended/eligible
to attend
8/8
8/8
8/8
7/8
Note:
i. Unable to attend the meeting in January 2021 due to illness.
How the Committee works
The membership of the Committee comprises independent
non-executive directors who bring a diverse range of
experience in business, finance, auditing, risk and controls,
with particular depth of experience in the financial services
sector. The qualifications and experience of each member of
the Committee are included in their biographies on pages 71 to
76.
In addition to the members, regular attendees of the Committee
include the Chair of the Board, Chief Executive Officer, Chief
Internal Auditor, Chief Financial Officer, Chief Risk Officer,
Director of Financial Reporting and representatives of the
external audit firm.
The Board is satisfied that the Committee possesses recent
and relevant financial experience and accounting competence
and that the Committee as a whole is appropriately competent
in the sector in which the Society operates. The Committee
also draws on the expertise of key advisers and control
functions, including the internal and external auditors.
The Committee provides oversight and advice to the Board on
the matters listed in its terms of reference (available at
nationwide.co.uk) and reports to the Board on those matters
after each meeting. The Committee is authorised by the Board
The Committee reviewed its terms of reference and its
activities over the previous year as part of an annual cycle to
confirm that its activities were in line with its remit. More detail
on the Committee’s duties and responsibilities can be found
within its terms of reference. The exercise to review the
effectiveness of the Committee was conducted as part of the
internal Board performance review and was led by the Chair.
The conclusion of the review was positive, with the Board
satisfied that the areas and activities currently delegated by the
Board to the Committee remained appropriate to assist the
Board with identifying any issues that required action or
improvement. Further details of the review are available on
page 95.
to obtain any information it needs from any director or
employee of the Society, and to seek, at the expense of the
Society, appropriate professional advice as needed. The
Committee did not need to take any independent advice
during the year.
In the absence of the Committee Chair and/or an appointed
deputy, the remaining members present shall elect one of
themselves to chair the meeting.
The Committee held eight scheduled meetings during the
year, and additionally held two joint meetings with the Board
Risk Committee to review and approve assurance plans for
Risk and Compliance Oversight and Internal Audit.
During the year, the Committee met privately with the Chief
Internal Auditor, the Society’s external auditors and the Chief
Risk Officer, without management present. These meetings
provide the opportunity for the Committee to discuss any
concerns directly and for participants to raise any concerns
directly with the Committee. The Chair of the Audit Committee
also has regular meetings with regulators, including the
tripartite meetings with the audit firm.
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Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
What the Committee did in the year
Financial reporting and the preparation of
financial statements
The Committee scrutinised the Annual Report and Accounts
and Preliminary Results Announcement. The Committee
considered the Annual Report and Accounts as a whole and
was satisfied that the reporting, including the disclosures in
the notes to the accounts, fairly represented the results and
business performance for the year. The Committee considered
the Annual Report and Accounts against a number of
hallmarks of ‘fair, balanced and understandable’, including
whether the overall portrayal of Nationwide was open and
honest, setting out both successes and challenges, and whether
language was used that a person with reasonable knowledge of
financial sector financial reporting could understand. The
Committee also considered whether the reporting was relevant
in the context of the Society’s strategy, and whether the
impacts of the Covid-19 pandemic were appropriately
recognised.
The Committee discussed and challenged management’s
analyses, the external auditor’s work, and conclusions on the
main areas of judgement presented in the Annual Report and
Accounts. The Committee was satisfied that internal controls
and risk management systems are in place to provide
assurance over the preparation of the Annual Report and
Accounts. Financial information submitted for inclusion in the
financial statements was attested by individuals with
appropriate knowledge and experience. The Annual Report
and Accounts was scrutinised throughout the process by
relevant senior stakeholders before being submitted to the
Audit Committee, who provided debate and challenge, before
recommending to the Board for approval. Key controls in the
process were subject to regular testing, the results of which
were reported to the Audit Committee.
Each main area of focus in relation to the Annual Report and
Accounts for 2021 was discussed with the external auditor
during the year and, where appropriate, have been addressed
as an area of audit focus in the Auditor’s report.
The Committee also scrutinised the 2020/21 Interim Results
and the accounting judgements made in their preparation.
Going concern and viability statement
The going concern statement is included in the Directors’
report on page 139 and the viability statement is included in
the Strategic report on pages 58 to 59.
The Committee reviewed the going concern basis of preparation
of the financial statements and the statement of business
viability for recommendation to the Board for approval. It
assessed, alongside the Board Risk Committee, the levels of
capital and availability of funding and liquidity, together with
output of stress tests and reverse stress tests. It also
considered risks from business activities, technology change
and economic factors such as the impacts of the Covid-19
pandemic and Brexit, which may affect the Society’s future
development, performance and financial position, together with
the implications of principal risks including operational
resilience and cyber security. The Committee also considered
whether a longer period than three years should be covered in
the viability statement, concluding that, as in the prior year, a
period of three years was appropriate, particularly when taking
into account changes in the economic, technological and
regulatory environment.
Based on its thorough review, the Committee concluded that
the application of the going concern basis for the preparation of
the financial statements continued to be appropriate, and
recommended the approval of the viability statement to the
Board.
Accounting policies and judgements
The Committee reviewed the Society’s accounting policies and
confirmed they were appropriate to be used in the financial
statements. It also considered changes to policies and
processes. Judgments considered for the 2021 reporting are
set out within this report.
The Committee noted that there were no new standards, or
amendments to standards, relevant to Nationwide that had
become effective for the reporting period. It was agreed that
Nationwide would be an early adopter of the IASB Interest Rate
Benchmark Reform Phase 2.
Annual Report and Accounts 2021 99
Annual Report and Accounts 2021
Alternative performance measures and
disclosure of member financial benefit
Details of member financial benefit are shown on page 61.
The Committee continues to consider that certain non-GAAP
measures, such as underlying profit, aid an understanding of
the Society’s results. The Committee considered the disclosure
of and prominence given to underlying profit to be
appropriate.
The other performance measure considered carefully by the
Committee was the value for member financial benefit presented
in Nationwide’s financial reporting. This metric shows the
benefit provided to members in the form of differentiated pricing
and incentives, representing Nationwide’s interest rate
differential, lower fees and higher member incentives compared
with market averages and is considered a key performance
indicator. The Committee was satisfied with the approach to
measurement of member financial benefit and the associated
disclosure.
Climate change risk and related disclosures
Disclosures are set out on page 36 of the Strategic report.
The Committee considered the disclosures set out within this
document, to ensure that they presented fairly the current
status of climate risk management and measurement, and the
Society’s governance arrangements.
The Committee discussed with management progress on
working towards comprehensive disclosures by 2022 in
accordance with the recommendations of the Task Force on
Climate-related Financial Disclosures.
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Annual Report and Accounts 2021
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Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
Significant financial reporting issues and accounting judgements considered by the Committee during the year
In compiling a set of financial statements, it is necessary to make estimates and judgements about outcomes that are typically dependent on future events. Significant matters are set out below.
Area of focus
Committee’s response
Impairment provisions
for loan portfolios and
related disclosures
Given the materiality of Nationwide’s loan portfolios, understanding the Society’s exposure to credit risk and ensuring that impairment provisions are appropriate remain key
priorities for the Committee, but took on even greater significance in the light of Covid-19 pandemic. A detailed review of Covid-19 impacts was undertaken to identify
potential impacted areas.
Information on credit
risk and assumptions
relating to expected
credit losses is included
in note 10 to the
financial statements
The selection of, and probabilities applied to, a range of economic scenarios for the purpose of modelling expected credit losses continue to have a material impact on loan
loss provisions, and the impact on economic conditions and forecasts of the Covid-19 pandemic in particular increased the level of uncertainty and judgement required. The
Committee challenged management to demonstrate that provisions reflected appropriately the uncertainty in the economic outlook and the potential for an economic
downturn. Discussions took into account contemporary economic data and management’s forward-looking view of the economy in the period after Brexit and in light of the
pandemic. Following detailed review and discussion, assumptions for central, upside and downside scenarios, as well as for a severe economic downturn, were agreed. The
Committee concurred with management that the scenarios used reflected an appropriate range of assumptions and agreed the inclusion of an updated central economic
scenario to reflect the impact of Covid-19. Following discussion, including the use of sensitivity analysis, scenario probability weights were unchanged from the half year at
10% for the upside scenario weight, 40% for the central scenario, 40% for the downside scenario and 10% for the severe downside scenario.
At the year end, the level of estimation uncertainty continued to be heightened by the impacts of the economic conditions and uncertain outlook resulting from Covid-19. The
Committee challenged management to demonstrate that all relevant risks had been taken into account in the expected credit loss models, and that post model adjustments
that rely on expert judgement were recognised, in particular for tail risks which could not be modelled due to an absence of historical data. The most significant area of focus
was the impact of Covid-19 on expected credit losses, both in terms of the extent and timing of the impacts on the UK economy and the impacts of government interventions.
This included consideration of the potential for the furlough scheme to delay unemployment increases, and the possible effect on house prices of the suspension of stamp
duty on property purchases. The Committee also considered the performance of lending where borrowers had taken up payment holidays as a result of being affected by
Covid-19. The Committee was satisfied that available evidence, including the use of sensitivity analysis to determine the materiality of changes to assumptions, supported the
level of provisioning and it was satisfied that the disclosures and sensitivities set out in the accounts were sufficiently comprehensive to allow readers to understand the
unusually high level of judgement associated with the provision at the year end.
Overall, disclosures in respect of credit risk and provisions were considered carefully to ensure that they were transparent and gave insight into Nationwide’s credit risk
profile, taking into account the most recent recommendations of the industry disclosure task force and the aims of the Prudential Regulation Authority and industry to
improve consistency. The Committee was satisfied with the overall level of provisioning and related disclosures.
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Annual Report and Accounts 2021
Annual Report and Accounts 2021
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Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
Significant financial reporting issues and accounting judgements considered by the Committee during the year (continued)
Area of focus
Committee’s response
Provisions for
customer redress
Information on
provisions is included in
note 27 to the financial
statements
The Committee received updates on a number of conduct-related matters during the year and considered whether provisions for customer redress were appropriate.
Assumptions used in calculating provisions for customer redress require judgements in relation to the number of cases and value of redress required, and in addition,
judgement is applied to assessing the likelihood of potential conduct issues crystallising to evaluate whether a provision, or alternatively disclosure of a contingent liability, is
required.
The Committee reviewed judgements and estimates for a number of conduct-related issues, discussing with management matters including administration of customer
accounts, non-compliance with consumer credit legislation and other issues subject to ongoing remediation, including the historic sale of Payment Protection Insurance (PPI)
and the related Plevin legal case in respect of undisclosed commission. Discussions included the criteria for recognition of new provisions or provision releases, as well as the
estimation of liabilities.
Provisions for other conduct matters were reviewed and the basis for assumptions challenged, including the potential outcomes for those matters where less historic
experience is available.
The Committee concluded that the provisions held by the Society were appropriate.
Capitalisation and
impairment of
intangible assets
Nationwide’s significant investment in technology, together with fast-moving technology development and new techniques for delivery such as agile methodologies, increase
the importance of detailed assessment of the nature of assets capitalised, the useful lives of assets and implications of new investment for the existing technology estate. The
Committee scrutinised management’s work to review both existing assets and ongoing capitalisation of development costs to ensure that the value of assets held on the
balance sheet was appropriate, including the recognition of impairments arising from changes in the year. The Committee concurred with management’s conclusions that
only appropriate costs were capitalised, carrying values remained appropriate and that asset lives were reasonable.
Pension scheme
accounting
Nationwide’s defined benefit scheme assets and liabilities are material to the financial statements, and the valuation of liabilities involves making a number of assumptions.
The Committee scrutinised assumptions made by management in calculating the surplus relating to the scheme, including reviewing benchmarking information to ensure
that assumptions were appropriate in comparison with market trends. Pension asset valuations were also considered in light of current market conditions. The Committee was
satisfied with the assumptions and judgements made.
Internal controls
Control environment
The Committee continued to monitor the overall effectiveness
of the Society’s control environment, including work to
strengthen and enhance controls. The Committee was updated
regularly on the status of important work to streamline the
approach to control ownership, including management
accountability for key controls and declarations of control
effectiveness.
Financial controls
The Committee reviewed reporting by management on the
effectiveness of the financial control framework, which
included progress on strengthening the control environment.
During the course of the year, the Committee also discussed
the potential impact of the introduction of new legislation and
the introduction of a new regulatory regime. The Committee
discussed the potential impact of the introduction of a UK
version of the Sarbanes Oxley control framework following the
publication of the Kingman and Brydon reports, and will
monitor the response to the Department for Business, Energy
and Industry Strategy (BEIS) consultation on restoring trust in
audit and corporate governance.
The Committee received regular reports on the plan of activity
to support the demonstrable embedding of the Risk and
Control Simplification Programme, to further enhance control
standards and gain efficiencies across the Society. During the
year the Committee increased its focus on control
improvements and the steps being taken by management to
respond on a timely basis to internal audit findings.
Accordingly, the Committee was supportive of management’s
decision to create a Chief Controls Office, agreeing that its
establishment would simplify and enhance the Society’s
controls management.
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Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
Security, IT controls and operational resilience
The Committee monitored closely the work that has continued
on strengthening aspects of security management, with
quarterly updates received from the Chief Security and
Resilience Officer. Internal Audit completed several related
audits during the year, and the Committee discussed with the
external auditors their view on controls over privileged access
to IT systems. These reports, together with reporting by
management, demonstrated the progress made in the year.
The Committee will continue to monitor this important aspect
of control.
Financial crime
Financial crime is a broad term that includes bribery and
corruption, money laundering, fraud (including fraud scams),
theft from customers’ accounts and card related thefts. The
Committee received a number of reports on each of these
areas.
The Committee received two reports from the Group Anti-
Money Laundering Officer and noted the improvements made
to the control environment since the prior year and the
associated positive impact that this had on members. The
Committee emphasised the importance of the Society being
able to identify proactively the risk of money laundering and
apply enhanced due diligence measures.
The Committee reviewed a detailed report on anti-fraud
controls, which noted the Society’s fraud performance against
risk appetite and key areas of focus for the forthcoming year.
The Committee considered the continued external threat and
was satisfied with the steps being taken to reduce losses from
financial crime.
The Committee held a dedicated training session with its
external auditors on fraud, where it reviewed the industry
perspectives and developments in fraud risk, and in particular
the impact of the Covid-19 pandemic on fraud risks in the
sector. Arising from the session, and under the wider ambit of
fraud risk and the impact that the Covid-19 pandemic had had
on it, the Committee identified topics for further follow up,
focusing on first and second line controls. This led to a series of
deep dive sessions, which started towards the end of the
reporting period and to date has included the controls over
and monitoring of mortgage broker fraud, and an assessment
of the Covid-19 fraud risks. During the next reporting year, the
deep dive sessions will continue, and biannual fraud reviews
have been scheduled on specific fraud topics.
As part of the Committee’s wider responsibilities, other
matters considered during the year were:
Capital and distributions
The Committee is responsible for advising the Board on the
affordability of making distributions to holders of core capital
deferred shares (CCDS) and AT1 securities and recommended
to the Board that the payments proposed by management
during the financial year be approved.
Tax
The Committee reviewed the management of Nationwide’s tax
affairs and discussed the management of tax risk in business
activities. The Committee also reviewed developments in the
year, areas of focus and judgements relating to tax made in the
financial statements.
Internal Audit
The Committee works closely with the Chief Internal Auditor
who reports directly to the Chair of the Committee.
Throughout the year, the Committee continued to monitor the
progress of the internal audit function.
During the year, the Committee approved the appointment of
Stephen Evenden as Chief Internal Auditor following a full
selection exercise led by the Chair of the Committee. Mr
Evenden’s permanent appointment followed a period where he
had served as Interim Chief Internal Auditor since April 2020
when the previous Chief Internal Auditor moved to a new
internal role.
The Committee reviewed reports from the Chief Internal
Auditor on a quarterly basis, which drew the Committee’s
attention to the most significant audit work, including issue
management, operational resilience, foundational IT and
security controls, system resilience and technology strategy.
The Committee met jointly with the Board Risk Committee at
the beginning of the year to approve a revised minimum viable
audit plan for the first three months of the financial year
because it was recognised that previous plans needed to be
reviewed in light of new and emerging risks identified in
relation to the pandemic. During the year, the Committee
approved the transition from a full year audit plan to a rolling
plan, updated every six months, increasing Internal Audit’s
ability to react more dynamically to changing environments.
Subsequently, the Committee also approved the plan for the
second half of the financial year.
The Committee continued to focus on the prompt and effective
resolution of issues raised by Internal Audit; whilst progress
was made during the year, this remains an area of focus,
particularly in respect of complex issues which require
extended time to resolve.
The Committee reviewed the resourcing of the internal audit
function each quarter and was satisfied that the resources
were appropriate. The Committee Chair and the Chief Internal
Auditor reviewed progress against planned activities on a
monthly basis. The Committee also noted changes to the
organisational structure of the Internal Audit function
implemented by the new Chief Internal Auditor, which
recognised the changing focus of its activities since the onset
of the Covid-19 pandemic working arrangements.
The quality of Internal Audit’s work was monitored by a quality
control function which reported findings directly to the
Committee Chair; no major issues were reported.
External Audit
One of the Committee’s key responsibilities is overseeing the
relationship with the external auditor, and the effectiveness of
the audit process. Ernst & Young LLP (EY) has acted as the
Society’s external audit firm since appointment at the Annual
General Meeting in July 2019. Nationwide’s policy for auditor
rotation and audit tender follows regulatory requirements, and
the audit firm will be required to be rotated after no more than
20 years, with an audit tender to be held after no more than 10
years. EY’s report can be found on pages 227 to 240.
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Annual Report and Accounts 2021
Annual Report and Accounts 2021
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that the non-audit work does not detract from EY’s audit
independence.
Effectiveness of the external audit
The Committee reviews the effectiveness of the external audit
process annually. EY reports to the Audit Committee key tests
undertaken to support its opinion, focusing on judgemental
and complex issues. The detailed reporting supports the Audit
Committee’s assessment of the quality of EY’s work. Further,
the Committee received a report on audit effectiveness based
on a questionnaire to Committee members and those
members of management who interact with the auditors,
regarding the EY audit of the 2019/20 financial statements. It
showed that the external auditor was performing its duties in
an independent and effective manner.
During the year, the FRC conducted an Audit Quality Review of
EY’s 2020 audit of Nationwide. There were no significant
points raised in this review. The findings and the actions EY
will take in response to them, were considered by the Audit
Committee. The Committee was satisfied that none of the
findings were significant and noted that the FRC had accepted
EY’s response to the review.
Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
Audit quality and materiality
Audit and non-audit fees
The Committee has responsibility for reviewing the quality and
effectiveness of the external audit. The Committee approved
the scope of the audit plan and materiality level in advance of
the annual audit. Materiality is the level at which the auditor
considers that a misstatement would compromise the truth or
fairness of the financial statements. For 2020/21, overall audit
materiality was set at £39.5 million (2020: £31.2 million).
Senior statutory auditor
The Committee acknowledges the provisions contained in the
UK Corporate Governance Code 2018 in respect of audit
tendering and the UK legislation on mandatory audit rotation
and audit tendering. Javier Faiz of EY became Nationwide’s
senior statutory auditor for the financial year 2019/20
following EY’s appointment as Nationwide’s external auditor at
the Annual General Meeting in July 2019. Under regulation Mr
Faiz’s term as senior statutory auditor should not normally
exceed a maximum duration of five years.
Auditor independence
EY has confirmed that it has complied with relevant regulatory
and professional requirements and its objectivity is not
impaired. The Committee is satisfied that EY remained
independent throughout the year.
The Board has an established policy setting out the non-audit
services that can be provided by the external auditor. The aim
of the policy, which is reviewed annually, is to safeguard the
independence and objectivity of the external auditors and
comply with the ethical standards of the Financial Reporting
Council (FRC).
The policy specifies limited non-audit services permitted to be
provided by the external auditor, and requires all non-audit
work to be approved by the Audit Committee following a
detailed assessment of the nature of the work, availability of
alternative suppliers and implications for auditor
independence.
During the year, the Committee reviewed and approved EY’s
terms of engagement for the statutory audit and the audit fee.
In addition, the Committee regularly approves fees for non-
audit services in accordance with the Society’s policy.
In line with the Society’s non-audit fees policy, all non-audit
work is approved by the Committee where the fee is over
£50,000, or by the Committee Chair and the Chief Financial
Officer with ratification at the next Audit Committee meeting
where the fee is below £50,000. Where aggregate non-audit
fees reach 50% of the statutory audit fee in any given year, all
non-audit work must be approved by the Audit Committee in
advance.
During the year, the Committee considered a number of
proposals from management to use the external auditors for
non-audit services, ensuring that management had considered
alternative suppliers and scrutinising analysis of any potential
threats to auditor independence.
A regulatory cap on the annual value of non-audit fees of 70%
of the average of three years’ audit fee will be mandatory for
Nationwide in 2022/23, being the fourth financial year
following the change of auditor. The Committee reviewed the
cumulative value of non-audit work quarterly with the aim of
operating within this framework in advance of the regulatory
requirement.
The fees paid to EY for the year ended 4 April 2021 totalled
£5.2 million (2020: £4.0 million), of which £0.6 million
(2020: £0.5 million) were for non-audit services. Total EY non-
audit services represented 10% (2020: 10%) of the statutory
audit fee.
No fees were paid to EY for individual services with an
expenditure of more than £100,000. Non-audit services
provided by EY relate to treasury funding activity.
The value of audit and non-audit fees in respect of the financial
year are disclosed in note 8.
Having reviewed both the quantum of the non-audit fees and
the nature of the work carried out, the Committee is satisfied
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Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
Board Risk Committee report
Dear fellow member,
I am pleased to present the Board Risk Committee’s report for the financial year ended 4 April 2021. During the year, we have
continued to focus on the risks facing the Society from the current macroeconomic, political and pandemic conditions and worked to
ensure that the Society remained resilient in light of these risks. Despite these challenges, the Society’s risk profile has remained broadly
stable, and the Committee and management continue to proactively monitor, manage and mitigate risk using the Society’s risk
management framework.
The Committee has continued to provide oversight of the important role played by our second line colleagues in risk management,
independent of the Society’s operational functions, and to scrutinise performance against risk appetite (the amount and type of risk the
Society is prepared to accept in the delivery of its strategy). It continues to review the adequacy of the Society’s systems for risk
assessment, internal controls and reporting. The Committee continued to challenge management on internal risks such as those
relating to operational changes made in response to the pandemic, incident management, credit risk, data risk, economic crime and
the Society’s response to governmental and regulatory policy decisions.
In relation to external risks, the Committee continued to monitor the Society’s initiatives in relation to climate change, and its response
to the Bank of England’s consultation on negative interest rates. During the forthcoming financial year, the Committee will continue to
actively support management in the implementation of the Society’s Strategy, reviewing key risk policies and frameworks including key
risk appetite statements, and monitoring the continued influence of the Society’s Missions on the risk profile to continue to ensure fair
outcomes for members.
Tim Tookey Chair – Board Risk Committee
Annual Report and Accounts 2021
Annual Report and Accounts 2021
104
Tim
Tookey
“During the year, we have
continued to focus on the risks
facing the Society from the current
macroeconomic, political and
pandemic conditions”
How the Committee
spent its time in the year
34%
28%
25%
7% 6%
• Prudential risk
• Operational and conduct risk
• Enterprise risk
• Governance and regulatory
• Other matters (including meeting administration)
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Annual Report and Accounts 2021
Annual Report and Accounts 2021
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Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
Who sits on the Committee
Committee members
Tim Tookey (Chair) (note i)
Albert Hitchcock
Kevin Parry
Phil Rivett
Tamara Rajah (note ii)
Meetings attended/eligible
to attend
8/9
9/9
9/9
9/9
6/6
Notes:
i. Unable to attend the meeting in January 2021 due to illness.
ii.
Joined the Committee in September 2020.
How the Committee works
The Committee comprises at least three independent non-
executive directors. Details of the skills and experience of the
Committee members can be found in their biographies on
pages 71 to 76. The Committee is required to meet four times a
year. During the year there were two joint Audit and Board
Risk Committee meetings to consider matters of common
interest, for example reviewing the assurance plans for Internal
Audit and Risk Oversight functions.
In the absence of the Committee Chair and/or an appointed
deputy, the remaining members present shall elect one of
themselves to chair the meeting.
Regular attendees of the Committee include the Chair of the
Board, Chief Executive Officer, Chief Product and Marketing
Officer, Chief Financial Officer, Chief Operating Officer, Chief
Risk Officer, Chief Internal Auditor, and representatives of the
Society’s auditors, Ernst & Young.
The Committee invites the Chief Executive Officer to give his
perspectives on the current and emerging risk profile of the
Society and receives a report from the Chief Risk Officer on the
same matters at each meeting. Subject matter experts are
invited to Committee meetings to present on a variety of topics.
Following each meeting, updates are provided to the Board,
which are supplemented by regular reports from the Chief Risk
Officer.
The Committee oversees the Executive Risk Committee, which
is the management committee responsible for ensuring a co-
ordinated risk management approach across all the Society’s
risks. The oversight and challenge of the day-to-day IT and
resilience risk, control and oversight arrangements of the
Society is undertaken by the Board IT and Resilience
Committee. This includes the effectiveness of the relevant
aspects of the control environment. More detail on the
Committee’s duties and responsibilities can be found within its
terms of reference on the Society’s website: nationwide.co.uk
The Committee reviewed its activities to confirm that they
were in line with its remit as set out in its terms of reference.
The Committee’s effectiveness is reviewed annually. In 2020,
the effectiveness review was carried out internally as part of
the overall review of the effectiveness of the Board and its
committees. The review found that the Board was satisfied with
the performance and effectiveness of the Board Risk
Committee. The 2020 effectiveness review process is
described on page 95.
What the Committee did in the year
The principal purpose of the Committee is to provide oversight
on behalf of, and advice to, the Board in relation to risk-related
matters. The Committee fulfils this role by providing advice,
oversight and challenge to enable management to promote,
embed and maintain a strong risk awareness culture
throughout the Society. The Society’s approach to the
management of risk is set out in more detail on pages 142 to
144.
In addition to considering the Society’s current and emerging
risk exposures, the Committee also considered longer-term
risks to delivering the Society’s strategy and emerging issues
that could present risks in the future.
The Board considers the appropriateness of the Society’s
strategic plan in the context of its risk appetite. During the year, the
Committee recommended the Society’s Board Risk Appetite to
the Board and monitored performance against it by
undertaking appropriate reviews of material risk issues against
the set risk appetite.
The Committee balanced its agenda to continue to focus on
standing areas of risk management whilst ensuring key risks
were escalated for consideration. As part of this, the
Committee reviewed the Society’s risk profile, facilitated by
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Annual Report and Accounts 2021
Annual Report and Accounts 2021
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Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
reporting and analysis from the Chief Risk Officer. An outline of
other key matters considered by the Committee in the year is
broken down by risk category and set out below.
• Maintaining the integrity of the Society’s IT systems during
the extended period of colleague home working; and
The resilience of the Society’s supply chains.
•
Prudential risk (includes credit, model, liquidity
and funding, market, solvency and pension risks)
The Committee considered the impact of Brexit on members
resident in the EU 27 countries.
The Society lends in a responsible, affordable and sustainable
way to ensure we safeguard members’ interests and maintain
financial strength through the credit cycle. It maintains
sufficient capital and liquidity resources to support current
business activity to remain resilient to significant stress.
In this context, the Committee discussed macroeconomic risks
against a challenging global geopolitical backdrop and the
uncertainty around Brexit and the impacts of Covid-19. These
risks and events were continually monitored and assessed to
manage the impact on Nationwide’s business and were
considered alongside wider discussions relating to the
competitive environment.
During the year, the Committee reviewed a number of aspects
of prudential risk as required by the PRA, including the
Society’s capital and liquidity adequacy (as reported in the
ICAAP and ILAAP respectively), the Pillar 3 risk disclosures, the
recovery plan, the resolvability framework and associated
regulatory reporting. It also reviewed and approved the 2020
reverse stress test. The Committee considered the Society’s
response to the uncertainties presented by the current
economic and pandemic climate, and the impact of
government and regulator policy decisions, such as the
furlough scheme, payment holidays, and the stamp duty
exemption for residential properties.
Operational and conduct risk
The Society minimises member and customer disruption,
financial loss and reputational damage through providing
sustainable services and resilient systems.
During the year the Committee sought confirmation on the
following risk matters related to Covid-19:
• Regular updates on health and safety;
• Maintaining robust controls during the extended period of
operational change;
The Committee received the annual Data Protection Officer’s
Report, detailing the adequacy of data protection policies,
procedures and governance arrangements to mitigate data
protection risks and comply with data protection legislation,
including the General Data Protection Regulation.
The Society always seeks to treat members and customers
fairly, before, during and after the sales process through
offering products and services which meet their needs and
expectations, perform as represented and provide value for
money. The Committee has continued to champion the
Society’s approach to the ongoing management of conduct
risk, meaning that the Society’s products and processes are
focused on delivering good customer outcomes and
minimising regulatory non-compliance and minimising the risk
of economic crime.
Enterprise risk (includes business risk)
The Committee has challenged the Society’s business model in
the current ‘lower for longer’ interest rate environment to
ensure its mutual business model is sustainable and remains
within the constraints of the Building Societies Act 1986 in a
stress as set out below. In particular, it has:
•
Endorsed the Board’s risk appetite which clearly sets out
the amount and type of risk that the Board is comfortable
with the Society taking. This is to ensure that it remains
sustainable in the long term for all members’ benefit.
Within the parameters set by the Board’s risk appetite, the
Committee performed a regular review of the Society’s risk
performance to ensure that appropriate action was being
taken and to inform the Remuneration Committee’s
consideration of any potential risk adjustments to executive
remuneration.
• Approved the results of the review of the Society’s
Enterprise Risk Management Framework – the system of
risk management and internal controls which the Society
operates within. The review concluded that the Society’s
system of risk management and internal control was
adequate when assessed against the Board’s overall risk
appetite and improvement plans.
• Approved the results of a reverse stress test which
assessed Nationwide’s business model risk and strategic
vulnerabilities over a 10 year time frame.
• Approved the Society’s risk strategy which was updated
based on enhancements to controls management
capability; encouraging a risk culture that considers both
risk and reward in decision making; and maturing the
Society’s approach to measuring risks associated with
climate change, including the work ongoing in preparation
for the Climate risk Biennial Exploratory Scenario.
•
•
•
Reviewed the Society’s compliance with the BCBS239
regulation on principles for effective risk data aggregation
and risk reporting.
Considered the potential propositional, operational and
margin implications of negative interest rates on the
Society.
Ensured that Nationwide’s pricing frameworks align with
the requirements of the European Banking Authority
Guidelines on Internal Governance.
• Approved the Third Party Risk Policy on behalf of the
Board.
During the year, the Committee received regular updates from
the Society’s second line oversight functions. It satisfied itself
that the Society’s segregation of duties between the first,
second and third lines of defence is sufficiently robust to ensure
that the Society’s operational decisions receive timely and
appropriate challenge. The Committee also approved changes
to the Terms of Reference of the Executive Risk Committee.
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Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
Board IT and Resilience
Committee report
Dear fellow member,
I am pleased to present the Board IT and Resilience Committee’s report for the financial year ended 4 April 2021. In a year dominated
by the Covid-19 pandemic, the importance of resilient IT systems and digital strategy continues to be of paramount focus to
Nationwide. During 2020/21, we have ensured that our digital and technology capabilities were able to support over a billion digital
logins and a significant increase in online and e-commerce card transactions as more of our members completed digital transactions
during periods of lockdown across the UK.
In September 2018, we announced plans for additional technology investment to enhance our existing technology programme, and
we have invested an extra £702 million to date. Our technology investment is helping us deliver increased resilience, stronger security
and better member outcomes through improved digital capabilities and better use of data, whilst also driving down ongoing and
future costs. Throughout the financial year it became clear that the Covid-19 pandemic would have significant financial implications as
we enter a period of economic uncertainty and prolonged low interest rates. As a result, we are now looking hard at our plans, to
balance priorities for technology investment with the need to maintain day to day operations and ensure that Nationwide is financially
secure for the future, and we expect to scale back some of this activity in the medium term.
Over the past year, members have experienced technology changes enabling them to have increased accessibility across all platforms,
contact centres staying open through remote working, and continued access to our branches across the UK throughout the Covid-19
pandemic. We will continue to deliver improvements to enhance the quality of the service we can offer, while prioritising the security
and resilience our members expect.
The year ahead will be an exciting but challenging one as we continue to deliver technology change which will ultimately be
transformative for the Society, instrumental in safeguarding future resilience and a key enabler to continuing to meet Nationwide’s
core purpose in years to come. The Committee will continue to challenge how operations run and the delivery of change, as well as
provide oversight of management’s prioritisation of technology change. It is recognised that there is a need to strike a balance
between the enablement of operational continuity and security, meeting new regulatory requirements and delivering improvements
for members in a challenging economic environment.
Gunn Waersted Chair – Board IT and Resilience Committee
Annual Report and Accounts 2021
Annual Report and Accounts 2021
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“Over the past year members have
experienced technology changes
enabling them to have increased
accessibility across all platforms,
contact centres staying open through
remote working, and continued
access to our branches across the UK
throughout the Covid-19 pandemic.”
31%
29%
7%
16%
14% 3%
• Service delivery and operational resilience
• Technology programme
• Cyber and security
• Transformation
• IT risk and controls oversight
• Other (including meeting administration)
Annual Report and Accounts 2021
Annual Report and Accounts 2021
108
Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
Who sits on the Committee
Committee members
Gunn Waersted (Chair)
Mai Fyfield (note i)
Albert Hitchcock
Tim Tookey (note ii)
Tamara Rajah (note iii)
Phil Rivett
Meetings attended/eligible
to attend
6/6
5/6
6/6
5/6
4/4
6/6
Unable to attend the meeting in July 2020 due to a prior engagement.
Notes:
i.
ii. Unable to attend the meeting in January 2021 due to illness.
iii.
Joined the Committee on 1 September 2020.
How the Committee works
The Board IT and Resilience Committee supports the Board
and the Board Risk Committee and comprises non-executive
directors whose attendance record is set out above.
Following each Committee meeting, the Chair of the
Committee provides verbal updates to the Board and escalates
items to the Board Risk Committee as appropriate.
Regular attendees of the Committee include the Chair of the
Board, Chief Executive Officer, Chief Operating Officer, Chief
Financial Officer, Chief Risk Officer, Chief Information Officer,
Chief Internal Auditor; Member Mission Leads, and the Society’s
external advisers Conrad Prince and Oliver Bussmann. The
Society’s other external advisers partner business areas and
attend the Committee where their specific expertise is relevant
and valuable to the Committee.
In the absence of the Committee Chair and/or an appointed
deputy, the remaining members present shall elect one of
themselves to chair the meeting.
The Committee reviewed its activities to confirm that they were
in line with its remit as set out in its terms of reference (available
at nationwide.co.uk). The Committee’s effectiveness was
reviewed and was carried out as part of the overall review of the
effectiveness of the Board and its committees. The 2020
What the Committee did in the year
Service delivery and operational resilience
The Committee regularly reviewed the Society’s IT service
provision throughout the year, considering incidents and root
causes, as part of a standing agenda item, the Chief Operating
Officer’s Report.
The Committee has sustained a focus on improving operational
resilience. Following the approval of the Operational Resilience
Strategy in May 2019 management has focused on making
resilience improvements across the Society’s key services.
During 2020, the Committee received a detailed update on the
approach that will be taken to set and operate within impact
tolerances, ahead of an expected development in the
regulatory approach in 2021. In addition, the Committee
received specific operational resilience and IT service updates
on activity undertaken in response to the Covid-19 pandemic.
The Society enabled approximately 13,000 colleagues to work
safely from home by making a number of changes to our IT
estate, including the deployment of over 5,000 new laptops.
performance review process is described on page 95. The
conclusion of the review was that the Board was satisfied with
the performance and effectiveness of the Committee. It was
agreed that the Committee continued to provide effective
oversight on behalf of the Board Risk Committee, ensuring that
the impact of IT strategies and IT service delivery performance
was understood in the context of the Society’s risk appetite.
The Society’s disaster recovery capability remains an area of
focus and whilst progress has been made, the impact of the
Covid-19 pandemic delayed some disaster recovery testing.
Continued investment and an ongoing programme of work,
including testing through 2021, has been agreed.
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Annual Report and Accounts 2021
Annual Report and Accounts 2021
109
and other non-financial benefits;
• Oversight of dependencies, prioritisation and efficient
•
•
sequencing of key investments;
The response to Covid-19 and support to both colleagues
and our members; and
The implementation of a technology operating model,
aligning to the new Member Missions.
IT risk and controls oversight
The Committee is routinely provided with the output of
independent reviews from the Society’s Risk and Compliance
Oversight and Internal Audit functions. This activity
complements the first line’s management of risk and control,
which continues to improve as processes are enhanced and
embedded.
Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
Technology programme
Cyber and security
In 2018, the Board approved a multi-year technology
programme to simplify the Society’s IT estate. At the start of
the financial year, the Committee approved the priority areas
of investment for the 2020/21 financial year, given lower than
planned investment levels as a result of factors including the
emerging Covid-19 pandemic. The Committee agreed a plan to
ensure that the Society’s IT estate remained resilient, alongside
continued significant investment in its payment systems,
disaster recovery, security, cloud computing and the
simplification of its banking systems, whilst reducing
investment in areas such as process automation.
Ahead of the refresh of the Society’s strategy in October 2020,
the Committee reviewed the options that formed part of the
technology programme. These options were influenced by how
the Covid-19 pandemic had changed the way our members
interacted with the Society, and the amount of investment
available within a revised financial plan. This ultimately led to
the creation of a combined technology, digital and data
strategy for the Society which contains four focus areas:
1. Continued investment in the Society’s technology
foundations to continue to improve resilience and agility.
2. A set of initiatives to reduce the cost of the Society’s IT
3.
estate.
Investment in a new digital platform to modernise the
services we provide for our members.
4. Enhancements to how we use data to create new
experiences for our members based on modern analytical
capabilities such as Artificial Intelligence.
As focus moved from agreeing the new strategy to mobilising
the work to deliver it, the Committee received updates to chart
the progress on the evolution of our culture, ways of working
and the recruitment of additional technologists, all of which
are crucial to the delivery of the strategy.
PricewaterhouseCoopers (PwC) have continued to provide
external independent assurance over the execution of the
technology programme to the Committee and Board. PwC,
together with the Society’s Oversight and Internal Audit
functions, form part of a combined, multi-faceted and Society-
wide assurance approach.
The cyber-threat environment presents an ongoing challenge.
Throughout the course of the year, the Society and its supply
chain have seen an increase in the sophistication and
complexity of cyber-attacks, which it has monitored and fully
mitigated to prevent impact on the Society and its members.
The threat faced is common across the financial services
industry.
The Committee has received regular updates from
management, including a cyber security maturity update,
which highlighted that the Society’s overall security position
continues to improve. The delivery of the technology
programme provides opportunities to continually improve
security within the IT estate and across the Society.
Management, supported by the Committee, continues to
provide focus and allocate investment to support and enable
the ongoing improvement of its security capability, through
sustained management of evolving threats and by taking a
proactive approach to help keep members’ money and data
safe.
The Committee regularly receives expert advice from an
industry-leading external adviser. Additionally, the Society
continues to collaborate with the wider industry, the UK
Government’s National Cyber Security Centre and National
Crime Agency to share good practice and inform
understanding about new and evolving threats.
Transformation
The Committee has continued to review management’s
progress against key transformation delivery objectives, some
of which are enabled by change activity, by receiving updates
and insight on change programmes including:
• Assessing the performance of the portfolio across all
categories of strategic investment, including whether
critical delivery milestones are met in line with planning
estimates;
• Achieving compliance within our digital channel offerings
and core IT systems, such as Strong Customer
Authentication and Confirmation of Payee regulations;
• Maintaining our focus on improving operational resilience
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110
Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
Nomination and Governance
Committee report
Dear fellow member,
I am pleased to report on the work of the Nominations and Governance Committee (the ‘Committee’) during the financial year ending
4 April 2021.
The Committee continues to play an important role in ensuring that the Society is led by a Board and senior management with the
combination of skills and experience required to build sustainable success for the benefit of our members and other stakeholders.
It is essential that the Board is well balanced in terms of structure, skills, experience, diversity and knowledge to enable the Society to
achieve its objectives and long-term strategy. A Board composition and skills matrix which provides a view of Board capability and skills
is regularly updated and formally reviewed annually by the Committee to ensure it reflects our future competency priorities. To support
the continued focus on inclusion and diversity (I&D) at Board level, acknowledgement of I&D as an essential lever in achieving the
Society’s strategic objectives has been incorporated into the Board composition and skills matrix.
We maintain and implement an effective succession plan to ensure that the Board is progressively refreshed. During the year, the
Committee strengthened the Board’s composition with the appointment of Tamara Rajah and Debbie Klein. More information on this can be
found on page 112. Following the retirement of Baroness Usha Prashar in July 2020, Kevin Parry was appointed to the Remuneration
Committee. In addition, to further strengthen the composition of the Nomination and Governance Committee, Gunn Waersted was
appointed a member of the Committee in April 2021.
Succession at senior management levels remains a key aspect of the Committee’s agenda, and during the year we received and considered
updates on succession planning and the development of a diverse pipeline for succession on the Nationwide Leadership Team and
other key roles.
As part of its remit, the Committee continues to exercise oversight of the Society’s governance arrangements on behalf of the Board to
ensure they are in line with best practice.
Our I&D strategy outlines our ambition to ensure our Society reflects the diversity of the wider communities we serve, and we have
agreed a number of diversity measures to meet by 2028. These include measures of 50% female and 12% ethnically diverse
representation for our senior leadership population. We have also agreed actions and interim measures to ensure we achieve the
desired outcomes by the set date. The Board continues to sponsor the Society’s I&D agenda with the Committee receiving regular
updates on the progress made. More information on our diversity measures and progress made can be found on page 112.
In the coming year, the Committee will continue to focus on Board composition, senior management leadership and succession
planning and monitoring the progress made against the Society’s diversity measures.
David Roberts Chair – Nomination and Governance Committee
David
Roberts
“It is essential that the Board is well
balanced in terms of structure, skills,
experience, diversity and knowledge
to enable the Society to achieve its
objectives and long-term strategy.”
37%
22%
18%
11%
9%
3%
Executive resourcing, leadership, talent and
succession
Other (including meeting administration)
Governance and regulatory requirements
Board composition and effectiveness
Inclusion and diversity
Individual accountability regimes
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Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
Who sits on the Committee
Committee members
David Roberts (Chair) (note i)
Mai Fyfield
Kevin Parry
Tim Tookey (note ii)
Gunn Waersted (note iii)
Meetings attended/eligible
to attend
5/6
6/6
6/6
5/6
0/0
Notes:
i. Unable to attend a meeting due to unforeseen circumstances.
ii. Unable to attend a meeting due to illness.
iii. Joined the Committee on 1 April 2021.
How the Committee works
The Committee is chaired by the Chair of the Board and the
members are independent non-executive directors. Details of the
skills and experience of the Committee members can be found
in their biographies on pages 71 to 76. The Committee meets at
least twice a year and otherwise as required. The number of
meetings held in the year can be found in the table on page
86. The attendance record of Committee members is set out
above. In addition to the members, regular attendees of the
Committee include the Chief Executive Officer, Chief People
Officer, Chief Legal Officer and Society Secretary and Director
of Secretariat.
In the absence of the Committee Chair and/or an appointed
deputy, the remaining members present shall elect one of
themselves to chair the meeting.
Following each meeting, the Chair of the Committee provides
updates to the Board, summarising activities undertaken, and
key decisions taken.
The Committee reviewed its activities over the previous 12
months to confirm they were in line with its remit. The
Committee also reviewed its terms of reference as part of an
annual cycle to ensure they were fit for purpose and continue
to reflect all applicable governance codes, guidelines,
legislations and best practice. More details on the Committee’s
duties and responsibilities can be found within its terms of
reference on the Society’s website: nationwide.co.uk
The Committee’s effectiveness is reviewed annually. In 2020,
the review was carried out as part of the overall review of the
effectiveness of the Board and board committees.
The results of the review indicate that Committee members are
satisfied with the performance and effectiveness of the
Committee. The Committee will continue to build into its agendas
sufficient time to focus on executive succession planning. The
review also identified the need for continuous improvements to
management reports and papers to ensure an appropriate level
of information is presented to the Committee. The 2020
effectiveness review process is described on page 95 and a report
on the findings will be disclosed in next year’s Annual Report.
What the Committee did in the year
Executive resourcing, leadership, talent, and
succession
The Committee received updates on the flow of internal and
external appointments, promotions, stretch and planned
appointments for senior leadership and other key roles.
There is a continued focus on recruitment processes to ensure
an increase in diverse appointments.
The Committee continued to provide oversight for the
implementation of the Society’s ‘leadership pathways’
programme initiated in January 2019 and designed to identify
opportunities that provide stretching roles and experiences for
leaders to grow their capability and potential for the future and
to strengthen leadership succession.
In overseeing the Society’s approach to resourcing the needs
of the business, and developing our colleagues, the Committee
continued to focus on strengthening the Society’s leadership to
ensure it has the talent needed for the future. The Committee
received updates on the Society’s executive succession
management which included a review of emergency
succession plans and talent management development plans
for longer term succession. This provided the Committee with
a view of the talent pipeline of potential leaders as well their
key strengths and development areas. It was noted that whilst
the Society’s succession pipeline is gender balanced, there is a
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Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
lack of ethnic diversity over all time horizons. In recognition of
this, with the ‘leadership pathways’ programme, there is
particular focus on increasing diversity within the senior
management population and ensuring succession management
facilitates opportunities for diverse colleagues.
Inclusion and diversity
The Committee continues to oversee the development and
implementation of the Society’s inclusion and diversity (I&D)
strategy and objectives.
The Society’s ambition is to build an inclusive culture where
everyone can thrive and for the diversity of our Society to
reflect the diversity of the communities we serve. Key to
success is ensuring I&D is integrated into the Society’s purpose
and embedded in what we do across all business areas.
Good progress has been made in the last year; however, the
Society’s I&D outcomes are not yet where they need to be. In
recognition of this, it was agreed at the Board Strategy
Conference in October 2020 that I&D would form a critical
focus for the next 3-5 years.
The Committee received updates on progress made in the key
areas of focus for I&D. Notably this included:
• Embedding I&D into core people processes such as
•
recruitment;
Improving access to and use of data and insights to
provide leaders with visibility of progress made;
• Educating and improving awareness amongst colleagues
on building an inclusive Society; and
• Ensuring leadership accountability for the delivery of the
I&D agenda.
More information on the Society’s I&D mission, measures and
progress made can be found on page 26.
The Board of Nationwide is committed to ensuring that it
comprises a membership which is diverse and reflects the
communities that it represents. It aims to achieve this by
ensuring representation within the Board of race, age, gender,
disability, and sexual orientation in addition to appropriate
educational and professional backgrounds. This will be a key
determinant of any new appointments. It will also be taken into
consideration in the development of a diverse pipeline for
succession. Selecting the best candidate is paramount and all
appointments will be based on merit and objective criteria
with due regard for the benefits of diversity on the Board. This
will benefit the effectiveness of the Board by creating a breadth
of perspective among directors.
Our current Board composition is 42% female, with 8%
ethnically diverse representation. The Society is committed to
maintaining the Board diversity target set by the Hampton-
Alexander Review of a minimum of 33% female representation
on the Board by 2020 and the Parker Review target of a
minimum of one director from an ethnically diverse
background by 2021.
The Board’s Diversity Statement is set out in the Board
Composition and Succession Policy which can be found on the
Society’s website: nationwide.co.uk
The Committee continues to review the development of the
pipeline of both ethnically diverse and female senior
management within the Society and as a signatory to the
Women in Finance charter, the Society has committed to
supporting the progression of women into senior roles.
To increase our focus on disability inclusion, the Society signed
up to the Valuable 500 movement, which involves ensuring
disability is discussed at Board level and requires signatories to
publish a firm pledge for action.
The Society continues to play an active membership role in the
30% Club and is signed up to the BiTC Race at Work charter
which involves a commitment at Board level to zero tolerance
of harassment and bullying, particularly racial.
Board composition and effectiveness
The remit of the Committee includes ensuring the Society has
the right mix of knowledge, skills and behaviours on the Board
for it to be effective in delivering its responsibilities to provide
oversight and governance of the Society and to safeguard the
interests of its members.
In determining the Board’s needs, the Committee considers a
range of factors including the diversity of the Board in its
widest sense, the current and future challenges and
opportunities facing the Society and the need to balance
continuity and knowledge of the Society with progressively
refreshing membership of the Board and its Committees. The
recruitment process for directors is designed to ensure the
Board possesses a range of skills and appropriate objectivity. It
also involves detailed referencing and other checks to establish
the candidate’s credentials, including suitability, fitness and
propriety. Regulatory approval is also required for certain
Board roles.
During the year, the Committee oversaw and recommended to
the Board the appointment of Tamara Rajah as a non-
executive director. Korn Ferry, an executive search firm which
has no other connection with the Society or its individual
directors, was engaged to assist with the search. The
Committee, supported by the search firm, prepared a
candidate specification based on objective criteria, setting out
the knowledge, skills, experience and attributes required. From
the candidate specification, a longlist of potential candidates
was drawn up from which a shortlist was compiled. Following
a review of the shortlisted candidates, two preferred
candidates emerged. They met with the Chair and other
members of the Committee as well as the CEO. Feedback on
the candidates was obtained through professional references
and these, together with the feedback from the Committee
members and CEO, were considered alongside the relative
characters, skills and experience of the candidates. Following
due and careful consideration of each of the candidates and
the current needs of the Board, the Committee selected
Tamara Rajah as the sole preferred candidate for the role.
Tamara’s appointment fulfils the need to further strengthen
the Board with a non-executive director with skills and
experience in one or more areas of digital technology, data,
entrepreneurship or innovation, given some of the core
strategic and operational challenges facing the Society over the
next few years.
The Committee also oversaw and recommended to the Board,
the appointment of Debbie Klein as a non-executive director.
Following a review of the composition of the Board, taking into
account the effect of planned departures, the Committee
identified a potential gap on the Board and the need for a non-
executive director with a deep understanding and practical
experience of leading brand strategy and development,
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Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
Annual Report and Accounts 2021
Annual Report and Accounts 2021
113
The Committee received an update from Mai Fyfield, the
designated director for employee engagement, on the
Employee Voice activity over the last year which included
colleague views and lessons learnt from the engagement. An
update was also received on the employee engagement plans
for 2021.
In addition, the Committee reviewed the corporate governance
disclosures in the 2020 and 2021 Annual Reports.
Individual accountability regimes
The Senior Manager and Certification regimes (SM&CR) were
introduced by the regulator to encourage individuals
performing certain roles to take greater responsibility for their
actions and to stop recurrence of poor behaviours which could
result in poor member outcomes. The regimes allow
regulators to act against individuals in cases where significant
wrongdoing has occurred or been identified.
The Committee continues to focus on regulatory requirements
to ascertain suitability, fitness and propriety of relevant
individuals and ensure the SM&CR responsibilities are allocated
appropriately through the Society’s well-established mapping
process. Overall, the Society’s processes and controls in
relation to the accountability regimes continued to operate
effectively.
The Committee was also satisfied that all processes and
controls relating to the assessment of the Financial Conduct
Authority Conduct Rules breaches continue to operate
effectively.
combined with an understanding of consumer/member
insight, customer data and analytics.
The Society’s Executive Resourcing Team assisted the
Committee with the search. A candidate specification was
prepared from which a longlist of potential candidates with
varying backgrounds was drawn up and from which a shortlist
was compiled. Following a review of the shortlisted candidates,
two preferred candidates emerged. They met with the Chair
and other members of the Committee as well as the CEO and
the Chief Product & Marketing Officer. Feedback on the
candidates was obtained through professional references and
these, together with the feedback from the Committee
members and CEO, were considered alongside the relative
characters, skills and experience of the candidates. Following
due and careful consideration of each of the candidates and
the current needs of the Board, the Committee selected
Debbie Klein as the sole preferred candidate and
recommended her appointment. With her background and
experience, Debbie will bring additional diversity of thought
and approach and her understanding and experience of large-
scale adoption of data and analytics in driving consumer and
organisational value will prove invaluable to the Board. Debbie
also brings considerable experience in the people and
sustainability agenda.
The Committee oversaw the 2020 Board effectiveness review
and examined the progress of the action plan arising out of
that review. It endorsed the approach to be taken for the 2021
externally facilitated Board effectiveness review. More
information on the effectiveness review can be found on page
96.
Corporate governance
As part of its remit, the Committee is responsible for the
oversight of the Society’s governance arrangements on behalf
of the Board. During the year the Committee reviewed and
approved a revised version of the Nationwide Governance
Manual and the Delegated Authority Framework which
documents the top down framework in place at Nationwide to
facilitate sound decision making and prudent management.
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Report of the directors on corporate governance (continued)
Report of the directors on corporate governance (continued)
Annual Report and Accounts 2021
Annual Report and Accounts 2021
114
What do you see as the main opportunities and
challenges for Nationwide?
No-one really knows how consumer behaviour will be 6, 12
or 24 months post the Covid-19 pandemic. In particular, will
the leaps in digital adoption that we've seen in the last 12
months be here to stay? Will previously very innovative
technologies now become mainstream and expected?
Shaping the future of customer service, with seamless
touchpoints across physical and digital touchpoints,
presents many exciting opportunities, but is not
straightforward to navigate when the degree of turbulence
and change in societal behaviours over the last year makes
predictions in terms of consumer mindset, behaviour and
expectations an art as much as a science.
What attracted you to Nationwide, and what are
your first impressions of the Society and its
culture?
First, Nationwide is a brand I grew up with - my parents have
been members for as long as I can remember - and to me it's
an honour to serve such a trusted, household name. Second,
from my very first conversations, it was evident that the
principles of mutuality and purpose were very much heartfelt
and deeply ingrained. It was a real hook to be able to
contribute to an organisation that not only holds such strong
principles at its core, but also applies them so visibly in
decision-making for both members and its own people. Third,
it's an exciting time for the sector as regards the consumer-
facing digital and technological opportunities, and this is
where I particularly felt I could bring my experiences to bear.
My first impressions have been how the Society is completely
centred on its members, and how this shines through in every
element of strategy, execution, and culture. From the moment
my onboarding started, I was also able to experience how all at
Nationwide are supportive, respectful, open, and receptive.
How have you found joining a Board in the virtual
world?
Whilst technology has done its best for us all over the past
year, I have greatly missed the 'real life' element that comes
from being able to visit branches and meet regularly with
members and colleagues. I am very much looking forward to
being able to do this in the coming months.
Tamara joined the Board in
September 2020 and shares her
experiences so far
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Annual Report and Accounts 2021
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115
Report of the directors on
remuneration
For the year ended 4 April 2021
Dear fellow member,
I am pleased to share the Remuneration Committee’s report. It sets out details of our directors’ pay for the year to 4 April 2021. This report
also includes a summary of the directors' remuneration policy and key decisions made in the year.
The impact of the pandemic
Mai
Fyfield
When I wrote my report last year, the Covid-19 pandemic was in its early stages. The past year has continued to be extremely challenging
for our colleagues and our members, and the difficult economic environment has impacted our business and how we operate. Since the
outset of the pandemic the decisions made by the Committee on performance pay outcomes have been guided by the experience of our
members and our colleagues. Over the last two financial years we have exercised restraint whilst also recognising the exceptional work of
colleagues to continue to support our members.
“Having the same goals helps make
sure everyone works together to put
our members’ needs first.”
Last year, taking into account the emerging impact of the pandemic, along with a request to forego any performance pay they would
otherwise have been due, the Committee determined that no performance pay award would be made to the leadership team, including the Chief Executive Officer (CEO) and Chief Financial Officer
(CFO), and that a flat award of £1,200 should be given to all other employees. At the start of 2020/21 we reduced the maximum amount of performance pay all our colleagues, including executive
directors, could earn for performance during the year by around two-thirds. We also decided not to give any across-the-board pay rises to directors, senior employees, the Society Chair and non-
executive directors. You will remember that, in the best interests of our members, Joe Garner, our CEO, also asked for a 20% reduction in his combined salary and pension for 2020/21. Chris
Rhodes, our CFO, asked that his pension allowance drop to 16% of salary, in line with the wider workforce.
Our primary priority for 2020/21 was the safety of our colleagues and members. We gave our people certainty and promised not to make any permanent colleague leave Nationwide through
redundancy in 2020 and we honoured that commitment. We also looked beyond our membership to wider society. For example, in April last year, our Society Chair and non-executive directors
committed to personally giving 20% of their net fees from June to December 2020 to Shelter, our partner charity that helps people whose vulnerabilities increased as a result of Covid-19.
Performance and pay for 2020/21
We are enormously proud of, and grateful to, our colleagues for how they have risen to the challenges of the pandemic – doing their best for our members and keeping our essential services going.
To reflect this, in view of the two thirds reduction in performance pay opportunity and the strong financial results for the year, the Committee agreed that it was appropriate to reward colleagues
over and above the mechanical outcome of the Society’s performance pay plan. The Committee agreed to use its discretion to make two small gestures. Whilst Society performance against the
measures set last year was slightly below target, the Committee agreed to pay out the Society’s performance pay plan for all colleagues at the target level. In addition, the Committee agreed to a
one-off recognition payment of £300 for all employees, excluding the CEO and CFO. Together, these gestures will cost the Society an additional £7 million.
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Annual Report and Accounts 2021
Annual Report and Accounts 2021
116
Report of the directors on remuneration (continued)
Report of the directors on remuneration (continued)
Our results for the year show that the Society has continued to
deliver strong performance against our purpose of building
society, nationwide, and our strategic cornerstones. We have
retained our position of first amongst our peer group on
customer satisfaction1, have grown our committed members,
and achieved our target for total costs.
For our executive directors this means payments have been
awarded under the Directors’ Performance Award (DPA) in
respect of the year. In line with the approach taken for all
employees, the Committee agreed to pay out the Society
measures under the plan at target level. A reduction was also
made to the awards for executive directors to take into account
risk factors in the year. Details of these payments, including the
measures set and factors considered, are set out in this report.
A reminder of our core principles
Pandemic or no pandemic, being a member-owned
organisation, our approach to remuneration reflects the needs
of our members and is designed to drive behaviours consistent
with our purpose, strategy and values, alongside the need to
remain competitive in the employment market. The
remuneration we pay includes two elements: fixed pay and
performance related pay. The latter includes three measures
that apply to everyone. Having the same goals helps make sure
everyone works together to put our members’ needs first. For
our senior leaders, performance pay also reflects their
individual contribution. We measure not just what they have
delivered through their individual objectives but also how they
delivered them. In addition, the Nationwide Leadership Team
is also assessed against the overall Society scorecard. This
considers our performance against a range of financial and
non-financial measures, including our improving sustainability
and our inclusion and diversity ambitions. Further information
on Nationwide’s approach to environmental, social and
governance (ESG) factors, which is intrinsically linked to our
purpose, building society, nationwide, can be found on the
responsible business section of our website: nationwide.co.uk
Our safeguards
The Board will only pay any performance related pay if it is
sure that the Society is financially secure. Performance
payments for senior leaders are paid in instalments, over seven
years in the case of our executive directors. This way, if one of
our leaders leaves the Society, then some of the performance
payments already awarded may be forfeited. The Committee
also has the discretion to cancel all, or part of, previously
awarded performance pay in the event of misconduct or if the
Society’s performance deteriorates significantly. A substantial
proportion, therefore, remains ‘money at risk’, taking into
account the Society’s and the individual’s performance over
the seven-year period. We aim to be transparent with our
members and voluntarily disclose details of our executive pay
arrangements, including as required under the UK Corporate
Governance Code where it is relevant for us to do so as a
mutual.
Looking ahead to 2021/22
As we look forward the Committee recognises the need to
attract and retain the talent needed to deliver our strategy.
With this in mind and taking into the account the Society’s
strong financial performance, the Committee agreed that
having had two years of significantly reduced performance pay
it was appropriate to reinstate performance pay opportunities
for 2021/22 to pre Covid-19 levels. For 2021/22 our
performance award will operate in a similar way to recent
years, with the same gateways and a combination of Society
measures including customer service satisfaction, committed
members and total costs. For the element in which the most
senior leaders participate, we are adding a controls measure to
recognise our focus on continuing to ensure the Society
remains safe and secure for the long term. We believe that
these gateways and measures reflect what is important to our
members.
The CEO made a voluntary reduction to his combined salary
and pension of 20% in 2020/21. For 2021/22 the Committee
approved a salary 2% above the CEO’s salary prior to the
voluntary reduction he made last year. However, the CEO’s and
CFO’s pension allowance will remain at the reduced level of
16% of salary. The Committee also approved a salary increase
of 2% for the CFO. These salary increases are aligned to the
anticipated all-employee settlement. Following these changes,
the combined salary and pension allowance for the CEO will
remain below what it was on his appointment in 2016. For the
CFO, the combined salary and pension allowance is also lower
than it was on appointment to CFO in September 2019.
Over the coming year the Committee will undertake a review of
executive pay arrangements, including how we link
performance related pay to the achievement of the longer-
term objectives of the Society, with a view to present a revised
policy for your approval at the 2022 AGM. As part of this review
we will look closely at whether the current permitted 1 to 1
ratio of fixed pay to performance pay limits our ability to
attract, reward and retain the talent we need to remain
competitive and best serve our members.
A core principle of our approach is that members’ views and
interests are considered when we design remuneration
policies and determine pay outcomes. Our directors'
remuneration policy received strong support at the 2020 AGM
(with around 93% of votes ‘For’), and I would like to thank
members for this level of support. I confirm we operated in line
with the approved policy, a summary of which is set out in this
report. Our annual report on remuneration for 2020/21 will
again be put forward for an advisory vote at the 2021 AGM. On
behalf of the Remuneration Committee, I recommend that you
endorse our annual report on remuneration and thank you for
taking the time to read its content.
Mai Fyfield
Chair – Remuneration Committee
1© Ipsos MORI 2021, Financial Research Survey (FRS), for the 12 months ending 31 March 2021 and 12 months ending 31 March 2020. Results based on a sample of around 47,000 adults (aged 16+). The survey contacts around 54,000 adults (aged
16+) a year in total across Great Britain. Interviews were face to face, over the phone and online, taking into account (and weighted to) the overall profile of the adult population. The results reflect the percentage of extremely satisfied and very
satisfied customers minus the percentage of customers who were extremely or very or fairly dissatisfied across those customers with a main current account, mortgage or savings. Those in our peer group are providers with more than 3.5% of the
main current account market as of April 2020 - Barclays, Halifax, HSBC, Lloyds Bank, NatWest, Santander and TSB.
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Annual Report and Accounts 2021
Annual Report and Accounts 2021
117
Report of the directors on remuneration (continued)
Report of the directors on remuneration (continued)
What the Committee did in the year
Who sits on the Committee
The members of the Remuneration Committee are all independent non-executive directors of the Society and include the Chair of the Audit Committee, who is also a member of the Board Risk
Committee, and the Society Chair who is an attendee of the Board Risk Committee.
Committee members
Mai Fyfield (Chair)
David Roberts (note i)
Rita Clifton (note ii)
Usha Prashar (note iii)
Kevin Parry (note iv)
Meetings attended/eligible
to attend
13/13
12/13
12/13
4/4
9/9
Notes:
i. Unable to attend a meeting due to unforeseen circumstances.
ii. Unable to attend a meeting arranged at short notice.
iii. Member to July 2020.
iv. Member from July 2020.
How the Committee works
The Remuneration Committee is responsible for determining
and agreeing with the Board the remuneration strategy, how
the strategy is reflected in the remuneration policy and the
specific remuneration packages for the Society Chair, the
executive directors and other members of the Nationwide
Leadership Team, as well as any other employees who are
deemed to fall within scope of the PRA / FCA Remuneration
Codes. This includes approving the design of, and determining
the performance targets for, any discretionary performance
pay plan operated by the Society for the benefit of these
employees. The Committee also approves the outcomes of any
performance pay plan and reviews the year-end pay outcomes
for all these employees.
including the quality and objectivity of advice provided, and
ensures that advice received is independent. The Committee
also reviews annually all other services provided by Deloitte to
ensure they continue to be independent and objective. Deloitte
is a founding member of the Remuneration Consultants Group
and voluntarily operates under the code of conduct in relation
to executive remuneration consulting in the UK. Deloitte's
advisory team has no connection with any individual director of
Nationwide. Their fees for advice provided to the Committee
during 2020/21 were £200,250 (excluding VAT), typically
charged on a time-and-materials basis. Deloitte also provided
tax, financial advisory, risk, internal audit and consulting
services to the Society during 2020/21.
Regular attendees of the Committee include: the Chief
Executive, the Leader of People and Culture, the Chief Risk
Officer and the Director of People Policy, Reward and
Governance. In no case is any person present when their own
remuneration is discussed. Deloitte LLP, our independent
external consultants, also attend. Deloitte were retained by the
Committee during 2020/21 following a tender process in 2019.
The Committee assesses the performance of Deloitte annually,
The Remuneration Committee is supported by the Board Risk
Committee on risk-related matters including performance pay
plan design, the assessment of specific performance measures,
and wider issues relating to risk and controls. The
Remuneration Committee is also supported by and receives
input from the Audit Committee.
In making executive pay decisions, the Committee takes into
account remuneration practices across the Society. This
includes an update from the general secretary of the
Nationwide Group Staff Union (NGSU) and the interaction the
Committee Chair has with wider colleagues in her role as Voice
of the Employee. More information on the Committee Chair’s
engagement with colleagues can be found in the Governance
report on page 87.
Following the 2020 AGM, a colleague talkback took place
where a range of topics from the AGM were discussed between
Board members and colleagues, providing an opportunity for
questions to be asked on executive pay. The Committee’s
decision to align executive directors’ pensions with the wider
workforce was previously shared during the colleague briefing
sessions on the closure to the future accrual of the Nationwide
Pension Fund.
The Committee reviewed and updated its terms of reference
during the year. It also reviewed its activities over the previous
year as part of an annual update to confirm that they were in
line with its remit and the duties and responsibilities which can
be found within its terms of reference at nationwide.co.uk
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Annual Report and Accounts 2021
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118
Report of the directors on remuneration (continued)
Report of the directors on remuneration (continued)
How the Committee spent its time in the year
26%
31%
6%
PPaayy ssttrraatteeggyy aanndd aapppprrooaacchh
PPeerrffoorrmmaannccee aawwaarrdd oouuttccoommeess
AApprriill -- MMaayy 22002200
Agreed the approach to performance pay for
2020/21, including the scaling back of
opportunities under the Directors’ Performance
Award (DPA) and across the Society.
.
NNoovveemmbbeerr 22002200 aanndd JJaannuuaarryy 22002211
Undertook a strategic review of remuneration
across the Society, including the approach to
executive remuneration and performance pay plan
design for 2021/22. Provided input into the
Society’s early design for performance enablement.
MMaarrcchh -- MMaayy 22002211
Set performance measures and targets for the
2021/22 year, including the design of the new
controls measure. Agreed the approach for the
Nationwide Leadership Team pay review and
Society Chair’s fee for 2021/22.
.
AApprriill -- MMaayy 22002200
Taking into account input from the Board Risk and
Audit committees, reviewed and approved the
outcome of the DPA to be paid in respect of
2019/20, including the flat variable pay award of
£1,200 to be given to all employees other than the
CEO, CFO and broader Nationwide Leadership
Team.
MMaayy 22002200 aanndd NNoovveemmbbeerr 22002200
Approved deferred payments in respect of prior
years due for payment, including taking account of
the PRA's request not to pay any cash bonuses to
senior colleagues during 2020 due to economic
uncertainty attributed to the Covid-19 enforced
lockdowns.
OOvveerrssiigghhtt ooff rreemmuunneerraattiioonn aaccrroossss tthhee
SSoocciieettyy
SSeepptteemmbbeerr 22002200
Reviewed the Society’s gender and ethnicity pay
gap reporting and received an update giving
insight into the distribution of performance ratings
by ethnicity across the Society.
.
NNoovveemmbbeerr 22002200
Received an update on pay policies and practices
across the Society, including the distribution of
exceptional pay awards by gender.
JJaannuuaarryy 22002211
Met with the Nationwide Group Staff Union and
received an update on remuneration-related issues
raised by NGSU members.
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Report of the directors on remuneration (continued)
Report of the directors on remuneration (continued)
How the Committee spent its time in the year (continued)
Annual Report and Accounts 2021
Annual Report and Accounts 2021
119
17%
12%
8%
RReegguullaattoorryy aanndd rreeppoorrttiinngg
PPrroocceedduurraall mmaatttteerrss
GGoovveerrnnaannccee
Throughout the year received updates on key
regulatory matters.
.
SSeepptteemmbbeerr 22002200 aanndd FFeebbrruuaarryy 22002211
Reviewed and approved the approach to
identifying, and list of, employees who fall within
the scope of the PRA/FCA Remuneration Codes.
NNoovveemmbbeerr 22002200
Agreed the Society’s annual Remuneration Policy
Statement and provided this to the PRA/FCA.
Reviewed the impact of the changes under CRD V
on the Society’s remuneration arrangements for
employees within the scope of the PRA/FCA
Remuneration Codes.
Throughout the year for all employees within the
scope of the PRA/FCA Remuneration Codes, agreed
the base pay and variable pay arrangements.
.
MMaayy 22002200
Reviewed adviser’s consultancy arrangements and
confirmed continued independence.
MMaarrcchh –– MMaayy 22002200
Reviewed and approved the ‘Report of the directors
on remuneration’ for 2019/20.
.
SSeepptteemmbbeerr 22002200 aanndd MMaarrcchh 22002211
Reviewed the Committee’s effectiveness against its
Terms of Reference for 2019/20.
SSeepptteemmbbeerr 22002200
Approved updated Terms of Reference.
SSeepptteemmbbeerr 22002200 aanndd MMaarrcchh 22002211
Reviewed market trends in executive pay.
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Annual Report and Accounts 2021
Annual Report and Accounts 2021
120
Report of the directors on remuneration (continued)
Report of the directors on remuneration (continued)
How our approach to remuneration aligns with our strategic cornerstones for 2021/22
Building thriving
membership
The Society’s aim to build a thriving membership is core to our approach to remuneration. Our committed members target is built into
the DPA and drives our ambition to support members, including helping more people buy their own homes. Our executive directors’
objectives, to which their remuneration is linked, include goals relating to the development of core products to meet our members’
financial needs.
Built to last
Our total costs target built into the DPA ensures that all colleagues are incentivised to manage the Society’s money wisely for our
members. Delivering value to members while ensuring the Society is able to maintain financial resilience in the long term is a core part
of our executive directors’ objectives, along with goals relating to the resilience of our IT infrastructure.
Building
legendary service
The quality of our customer service is a key priority in our approach to remuneration. Our customer service satisfaction rating
continues to be built into the DPA and ensures that all colleagues are incentivised to deliver the best service to our members among
our peer group. Our executive directors’ objectives include goals relating to accessibility of our products and services, and our
investment in continuing to provide human service while enhancing digital activity.
Building PRIDE
Our approach to remuneration aims to support an inclusive culture where our employees are reflective of the diversity of the wider
communities we serve and all colleagues can thrive. Our executive directors’ objectives include a wide range of goals that prioritise
colleague engagement and wellbeing, as well as the delivery of our inclusion and diversity ambition.
Building a
national treasure
Our social purpose is fundamental to our approach to remuneration. A key focus of our executive directors’ objectives is progress on
the Society’s green agenda, and investment in our communities and on issues that matter to us and members. Our approach to
remuneration also remains cognisant of external debate and public sentiment on pay and equality.
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Annual Report and Accounts 2021
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121
Report of the directors on remuneration (continued)
Report of the directors on remuneration (continued)
Annual report on remuneration for 2020/21
Base salary and pension
As announced in last year's report, no increases to base salary
were awarded to the executive directors for 2020/21. Our CEO,
J D Garner, voluntarily requested that his combined base salary
and pension allowance be reduced by 20% for the 2020/21
year.
Directors’ Performance Award (DPA) 2020/21
Our CFO, C S Rhodes, also voluntarily requested that his
pension allowance be reduced to 16% of salary from 2020/21.
The base salaries which applied in the year were £783,000
(including the voluntary temporary reduction) and £654,000
for the CEO and CFO respectively.
The pension allowances of both executive directors are 16% of
salary, which is the maximum benefit available to the wider
employee population.
A significant proportion of the overall remuneration for
executive directors is dependent on the performance achieved
in the year against a number of key measures.
The DPA has two elements: an all-employee element and an
element for our most senior leaders. Performance under both
elements of the DPA reward the attainment of challenging
strategic and financial measures drawn from the Society’s Plan
and for 2020/21 this included specific measures linked to three
of the five strategic cornerstones, as set out below. These
measures ensure that we are focused on delivering benefits to
our members. The senior element also incorporates an amount
based on individual performance and behaviours.
Building thriving membership – Number of committed members
Individual performance
Building legendary service – Customer service satisfaction rating
Built to last – Total costs
Objectives reflecting each individual’s contribution
towards the delivery of the Society’s Plan as well
as individual conduct and behaviours
As announced in last year's report, awards under the DPA for
2020/21 were set at around one-third of the normal
opportunity. This was in line with the approach taken for all
employees. The maximum potential award level for 2020/21
was therefore 51% of salary for the CEO and 37% of salary for
the CFO. For the CEO, 28% of the maximum award was based
on individual performance. For the CFO, this was 27% of the
maximum award for 2020/21.
Payments under the plan are made at the discretion of the
Remuneration Committee and delivered in instalments over
the next seven years. Payments due over the seven year period
remain “at risk” and may be reduced or cancelled if the
Committee believes the plan outcomes are not representative
of the overall performance of the Society, the individual or by
reference to wider circumstances, as appropriate. The Society
also has the ability to claw back performance pay awards for
up to ten years after they were awarded in certain
circumstances.
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122
Report of the directors on remuneration (continued)
Report of the directors on remuneration (continued)
Annual report on remuneration for 2020/21 (continued)
The illustration below shows how any awards under the plan would be released to executive directors over the long term:
A minimum of 50% of the upfront element is linked
to the value of the Society’s core capital deferred
shares (CCDS) and subject to a twelve-month
retention period, in line with regulatory
requirements.
12% (cash)
12% (CCDS)
12% (CCDS)
12% (CCDS)
DPA
12% (cash)
20% (CCDS)
60% of the award is deferred for between three and seven years in line with regulatory
requirements. A minimum of 50% of the deferred element is linked to the value of the Society’s
core capital deferred shares (CCDS).
Performance Year
20% (cash)
Paid three months
after the end of the
performance year
Paid one
year later
Paid two
years later
Paid three
years later
Paid four
years later
Paid five
years later
Paid six
years later
Paid seven
years later
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Annual Report and Accounts 2021
123
Report of the directors on remuneration (continued)
Report of the directors on remuneration (continued)
Outcomes for DPA 2020/21
Audited Information
Three ‘gateways’ must be passed before any payment is made
under the plan. The three gateways are based on measures of
profit before tax, leverage ratio and conduct risk. These
gateways were passed in 2020/21.
In reviewing performance under the DPA during 2020/21, the
Committee assessed the Society’s performance against the
three measures, equally weighted, as illustrated below.
The Committee must also be satisfied that there are no
significant conduct, risk, reputational, financial, operational or
other reasons why awards should not be made, taking into
account input from the Board Risk and Audit committees.
Cornerstone
Measure
Performance target range: threshold, target and maximum, and performance achieved
Building thriving
membership
Number of
committed
members (note i)
3.38m
3.55m
3.56m
3.74m
Building
legendary
service
FRS satisfaction
(note ii)
1st + 1.6%pts lead
1st
1st + 4%pts lead
1st + 6%pts lead
Built to last
Total costs
(note i)
£2,256m
£2,225m
£2,225m
£2,174m
Individual performance element (see further detail below)
Total performance pay achieved based on Society and individual performance
Remuneration Committee discretionary performance and risk assessment: In line with the approach taken for all employees, the Committee exercised its
discretion to pay out the Society measures under the plan at target in recognition of the resilient performance during the year. In determining award levels for the
executive directors, the Committee also took into account a broad range of factors and then applied a downwards adjustment of 5% to the value of the award to
take into account risk factors arising during the year.
Total performance pay achieved based on Society and individual performance (after Remuneration Committee adjustment)
Out of a maximum opportunity (as a % of salary) of
Performance pay achieved
(% of salary)
C S Rhodes
J D Garner
8.7%
6.9%
6.4%
5.0%
8.9%
7.1%
12%
36.0%
1.0%
3377%%
5511%%
9.5%
28.5%
0.5%
2299%%
3377%%
Notes:
i. During the year, the Board approved changes to the Society’s Plan for committed members and total costs. The Remuneration Committee subsequently approved these changes to be reflected in the targets for the DPA. Whilst
the actual total costs outcome of £2,218 million for 2020/21 was lower than the revised plan target of £2,225 million, for the purposes of the DPA the outcome of this element was awarded at target.
ii. © Ipsos MORI 2021, Financial Research Survey (FRS), for the 12 months ending 31 March 2021. Results based on a sample of around 47,000 adults (aged 16+). The survey contacts around 54,000 adults (aged 16+) a year in
total across Great Britain. Interviews were over the phone and online, taking into account (and weighted to) the overall profile of the adult population. The results reflect the percentage of extremely satisfied and very satisfied
customers minus the percentage of customers who were extremely or very or fairly dissatisfied across those customers with a main current account, mortgage or savings. Those in our peer group are providers with more than
3.5% of the main current account market as of April 2020 - Barclays, Halifax, HSBC, Lloyds Bank, NatWest, Santander and TSB.
In the 2019/20 annual report on remuneration, the outcomes for
DPA 2019/20 reflected performance achieved for the committed
members measure as 3.56 million. The committed members for
4 April 2020 has since been restated to 3.52 million to reflect
improved data quality since originally reported. As no awards
were made to executive directors relating to this outcome, no
restatement of performance awards is required.
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Report of the directors on remuneration (continued)
Report of the directors on remuneration (continued)
Outcomes for DPA 2020/21 (continued)
For the element based on individual performance,
performance was assessed against both the delivery of the
Society’s strategic scorecard as well as individual goals,
conduct and behaviours.
J D Garner’s individual objectives for 2020/21
Objectives
Performance
The tables below provide an overview of the individual
performance for 2020/21 achieved by each executive director
based on their objectives. The performance scorecard contains
a number of ESG factors, including improving sustainability
and our inclusion and diversity measures.
Achievement
Building thriving membership
Develop a limited number of new
propositions with a focus on helping
members manage their homes and
alleviating financial distress.
Built to last
Deliver financial and overall performance
through a very challenging and unpredictable
year.
•
•
•
•
•
•
•
Provided continued support for members in financial difficulty, recognising the need to balance financial and operational
resilience and member financial benefit at a time of immense challenge.
Implemented the 5-point Home Support Package, providing a range of support options to those members impacted financially
by the pandemic.
Introduced a number of new and innovative propositions to offer value beyond rate, including the Mutual Reward Bond to reward
members’ loyalty in a low interest rate environment.
Continued to support the housing market and members by maintaining mortgage supply at a range of loan to values.
Exceptional performance in leading the Society safely through the many and varied operational and external trading challenges
that Covid-19 has brought. This included a strategy refresh in the context of a low interest rate environment. The Society is well
placed for 2021/22 and beyond.
Strong performance against the Society’s collective performance scorecard, in particular in relation to total costs, underlying
profit, wholesale funding ratio and leverage ratio.
Continued strong net interest income, driven by strong income performance from mortgages and savings. The Society
responded very well to strong mortgage demand.
Progress with the simplification and
enhanced resilience of IT infrastructure.
Very strong performance in relation to operational resilience and the IT transformation agenda.
•
• Well-navigated incident response in the context of the pandemic, including the delivery of home working capability for
colleagues, and digitalisation and automation of processes, such as mortgage holiday window requests, to address peaks in
demand.
Regulation and risk
•
Progress made on audit actions and general control environment but more improvement needed.
Leadership and succession
•
Exceptional leadership in navigating the Society through the pandemic whilst focusing on the years ahead.
• Good progress in developing medium-term succession options, with effective short-term solutions in place.
=
Key to achievement of objectives:
Expectation achieved or exceeded
=
Reasonable outcome against expectation
Expectation not met
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Report of the directors on remuneration (continued)
Report of the directors on remuneration (continued)
Outcomes for DPA 2020/21 (continued)
J D Garner’s individual objectives for 2020/21 (continued)
Objectives
Performance
Achievement
Building legendary service
Continue to focus on service, ethical values
and support to meet member needs across
digital and human interactions.
•
Strong performance in adapting to changes in member behaviour, broadening and deepening the Society’s member
relationships by protecting human service delivery while enhancing digital activity.
• More than 90% of branches remained open and the Society has extended its Branch Promise made in 2019 from May 2021 to
January 2023. The Society also continued to support vulnerable branch-dependent members with access to cash home
deliveries.
Rolled out video call technology, to speak with members in their homes, via Nationwide NOW.
•
• Which? Banking Brand of the Year for 2020 for the fourth year running.
Building PRIDE
Build an inclusive culture where everyone
can thrive, and a Society which reflects the
diversity of the wider communities we serve.
Building a national treasure
Strengthen our leading brand position and
external influence aligning to our core
purpose.
•
•
•
•
•
•
Showed relentless focus on colleague engagement, wellbeing and morale in the context of the pandemic.
Significantly advanced progress as part of our refreshed inclusivity and diversity ambitions.
Significant improvement against ethnic diversity measures with further progress to be made on other diversity metrics.
Launched a Winter Support Package for colleagues and partnered with external providers to ensure employees have useful tools
to support their mental wellbeing.
Led evolution of how we operate to provide greater focus on member needs via the introduction of Member Missions.
=
Strong progress on the Society’s green agenda including the Society’s Mutual Good Commitments and the development of
Oakfield, a not-for-profit housing development in Swindon funded by the Society. The Society also partnered with Switchd,
helping members to save on energy bills and switch to greener tariffs.
Launched a Together Against Hate campaign to take a bolder stance on issues that matter to the Society and members.
Partnered with the Football Association and the Diana Award to support the Society’s Anti Bullying campaign.
•
•
• Made efforts to support the Society’s suppliers throughout this period by accelerating payments.
•
•
Convened business, civil society and opinion formers to reimagine how employees will work in a post-pandemic world.
Significant contribution to the Inclusive Economy Partnership.
Key to achievement of objectives:
Expectation achieved or exceeded
=
Reasonable outcome against expectation
Expectation not met
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Report of the directors on remuneration (continued)
Report of the directors on remuneration (continued)
Outcomes for DPA 2020/21 (continued)
C S Rhodes’s individual objectives for 2020/21
Objectives
Performance
Achievement
Building thriving membership
Support the embedding and success of the
Society’s member mission model to enable
us to meet the ever-changing needs of our
members more efficiently.
Built to last
Deliver financial and overall performance
through a very challenging and
unpredictable year.
Regulation and risk
Leadership and succession
•
•
•
•
•
•
•
•
•
•
•
Provided strong leadership in the development of the Society’s organisational model which aligns our teams around end to end
member outcomes.
Excellent leadership contribution to the Society’s leadership team, including in relation to propositions focused on helping
members manage their finances and alleviating financial distress.
Exceptional performance in leading decisive, early actions to secure the financial security and operational resilience of the
Society.
Provided strong leadership on the Society’s efficiency objective, ensuring short and medium term cost targets can be met.
Enabled the Society to continue to pay distributions to CCDS holders.
Provided strong leadership in ensuring the Society’s Brexit-readiness, with a particular focus on funding and liquidity.
Strong performance in optimising returns from the Society’s treasury portfolio and reducing the cost of the liquid asset buffer.
Provided strong leadership in the development of the Society’s planning and stress testing processes, ensuring the Board has
the appropriate information to judge the long-term performance of the Society.
Ensured investors received clear and transparent information on the Society’s performance with a strong focus on asset quality
and forbearance disclosure.
Progress made on improving the Society’s controls with a strong focus on the financial control environment.
Strong leadership in managing the Society through the financial impacts of the pandemic, whilst ensuring the Society continues
to invest for the future.
=
• Good progress in developing medium-term succession options for the Finance and Efficiency community.
Key to achievement of objectives:
Expectation achieved or exceeded
=
Reasonable outcome against expectation
Expectation not met
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Report of the directors on remuneration (continued)
Report of the directors on remuneration (continued)
Outcomes for DPA 2020/21 (continued)
C S Rhodes’s individual objectives for 2020/21 (continued)
Objectives
Performance
Achievement
Building legendary service
Provide support to give our members the
great service they deserve.
Building PRIDE
Build an inclusive culture where everyone
can thrive, and a Society which reflects the
diversity of the wider communities we serve.
•
•
Showed strong and reliable judgement in the delivery of cost and efficiency outcomes while at the same time considering issues
of member vulnerability.
=
Strong leadership on the engagement of colleagues through the pandemic with a focus on mental wellbeing and the ongoing
support of working from home.
• Good progress on the Society’s refreshed inclusivity and diversity ambitions.
Building a national treasure
Protect and enhance the Society’s brand and
reputation, including managing investor and
regulator relationships.
•
•
Key to achievement of objectives:
Expectation achieved or exceeded
Provided strong leadership on the ongoing development of the Society’s ESG agenda, ensuring reporting continues to evolve in
line with best practice.
Excellent contribution to the progression of the Society’s green agenda and wider societal contributions.
=
Reasonable outcome against expectation
Expectation not met
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Report of the directors on remuneration (continued)
Report of the directors on remuneration (continued)
Executive directors’ remuneration
Where indicated, the tables in the following sections have been
audited. These disclosures are included in compliance with the
Building Societies Act 1986 and other mandatory reporting
regulations, as well as the Large and Medium-Sized Companies
and Groups (Accounts and Reports) (Amendment) Regulations
2013, which the Society has voluntarily adopted. The table
below shows the total remuneration for each executive
director for the years ended 4 April 2021 and 4 April 2020.
Single total figure of remuneration for each executive director (Audited)
2021
Executive directors
Salary
J D Garner
C S Rhodes
Total
2020
Executive directors
J D Garner
C S Rhodes
T P Prestedge (note iii)
M M Rennison (note iv)
Total
£’000
783
654
1,437
Salary
£’000
916
634
601
306
2,457
Fixed remuneration
Pension
allowance
Travel and other
taxable benefits
(note i)
£’000
39
30
69
£’000
125
105
230
Fixed remuneration
Pension
allowance
£’000
220
137
144
73
574
Travel and other
taxable benefits
(note i)
£’000
150
63
144
59
416
Total
£’000
947
789
1,736
Total
£’000
1,286
834
889
438
3,447
Variable remuneration
Directors’
Performance
Award (note ii)
£’000
289
191
480
Variable remuneration
Directors’
Performance
Award (note ii)
£’000
-
-
-
-
-
Total
£’000
289
191
480
Total
£’000
-
-
-
-
-
Total pay package
£’000
1,236
980
2,216
Total pay package
£’000
1,286
834
889
438
3,447
Notes:
i. This value is included as fixed remuneration for the calculation of the bonus cap in meeting our regulatory requirements. A full description of the taxable benefits is set out below.
ii. Variable remuneration consists of the awards under the DPA. A substantial proportion of any awards under this plan are subject to deferral with payments spread over the following seven years.
iii. T P Prestedge resigned from the Board on 10 March 2020.
iv. M M Rennison stepped down from the Board on 13 September 2019.
Our directors receive a number of benefits and, where
appropriate, we pay on their behalf the tax associated with
those benefits. In the single figure table above, ‘taxable
benefits’ includes certain essential travel costs met by the
Society, including any tax due under HMRC regulations,
provided to enable the executive directors to work whilst
travelling and undertake their responsibilities most effectively.
Other benefits include medical insurance, car allowance and
security.
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Report of the directors on remuneration (continued)
Report of the directors on remuneration (continued)
Society Chair and non-executive directors
Fee policy changes for 2021/22
The fees for the Society Chair and non-executive directors
were reviewed in March 2021, at which point increases of
1.97% were made to the Society Chair fee and the basic fee
for non-executive directors. In light of changing market
practice, the senior independent director will now receive
committee membership fees, which were previously
included within the senior independent director fee. In
respect of this change, the senior independent director fee
has reduced to £30,000. In consideration of market data,
the Voice of the Employee fee has been increased by 10%.
Fee Policy (note i)
Society Chair
Basic fee
Senior Independent Director (note ii)
Chair of the Audit, Board Risk or Remuneration Committee
Member of the Audit, Board Risk or Remuneration Committee
Member of the Nomination and Governance Committee
Chair of the Board IT and Resilience Committee
Member of the Board IT and Resilience Committee
Voice of the Employee
Annual fees for 2021/22
£’000
413
70
30
35
15
6
25
10
11
Annual fees for 2020/21
£’000
405
69
40
35
15
6
25
10
10
Notes:
i. Additional fees may be paid for other committee responsibilities during the year.
ii. For 2020/21 the Senior Independent Director fee was inclusive of committee membership fees. Committee Chair fees were paid in addition. For 2021/22 both committee membership and Chair fees will be paid in
addition.
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130
Report of the directors on remuneration (continued)
Report of the directors on remuneration (continued)
Society Chair and non-executive directors (continued)
The total fees paid to each non-executive director are shown below.
Single total figure of remuneration for non-executive directors (Audited)
D L Roberts (Society Chair)
R Clifton
M Fyfield
A Hitchcock
D Klein (note ii)
K A H Parry (Senior Independent Director)
U K Prashar (note iii)
T Rajah (note iv)
P Rivett (note v)
T J W Tookey
G Waersted
M A Lenson (note vi)
L M Peacock (note vii)
Total
Pension payments to past non-executive directors (note viii)
Society and Group
fees
£’000
405
98
130
94
6
143
26
55
109
134
94
-
-
1,294
2021
Travel and
other taxable
benefits
(note i)
£’000
Total fees
and taxable
benefits
£’000
1
-
3
-
-
-
-
-
-
-
-
-
-
4
406
98
133
94
6
143
26
55
109
134
94
-
-
1,298
242
Society and Group
fees
£’000
405
98
119
94
-
129
83
-
63
134
94
28
96
2020
Travel and
other taxable
benefits
(note i)
£’000
Total fees
and taxable
benefits
£’000
2
7
4
7
-
6
5
-
1
3
7
1
3
407
105
123
101
-
135
88
-
64
137
101
29
99
1,389
248
1,343
46
Notes:
i. Taxable benefits for non-executive directors relate to expenses incurred in connection with travel and attendance at Board and committee meetings. HMRC deems these expenses to be taxable where the meetings take place
at the Society’s main offices; the Society settles the tax on behalf of the non-executive directors and this is included in the amounts shown.
ii. D Klein joined the Board on 1 March 2021.
iii. U K Prashar stepped down from the Board on 16 July 2020.
iv. T Rajah joined the Board on 1 September 2020.
v. P Rivett joined the Board on 1 September 2019.
vi. M A Lenson stepped down from the Board on 18 July 2019.
vii. L M Peacock stepped down from the Board on 31 December 2019.
viii. The Society stopped granting pension rights to non-executive directors who joined the Board after January 1990.
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131
Report of the directors on remuneration (continued)
Report of the directors on remuneration (continued)
Additional disclosures
Chief Executive Remuneration for the past ten years
The table shows details of the Chief Executive’s remuneration for the previous ten years.
Financial year
Total remuneration
2020/21
2019/20
2018/19
2017/18
2016/17
2015/16
2014/15
2013/14
2012/13
2011/12
£’000
1,236
1,286
2,372
2,317
3,386 (note iii)
3,413 (note iv)
3,397 (note iv)
2,571
2,258
2,251
Annual performance pay earned as % of maximum
available
%
72.3 (note ii)
0.0
75.1
69.5
71.9
75.8
74.4
83.3
60.6
60.6
Medium term performance pay earned as % of
maximum available (note i)
%
-
-
-
-
-
80.8
84.5
74.9
41.7
40.7
Notes:
i. Medium term performance pay ceased at the end of 2015/16.
ii. Performance pay opportunity for 2020/21 was reduced by around two thirds.
iii. J D Garner commenced his role as Chief Executive on 5 April 2016. His total remuneration for 2016/17 included the value of buy-out awards on joining (2017: £1,070,752). These awards do not form part of ongoing
remuneration. If this amount is excluded, the figure for 2016/17 would be £2,315,047.
iv. The Chief Executive in 2015/16 and all previous financial years shown in the table above was G J Beale. His total remuneration for 2015/16 and 2014/15 includes awards under the DPA as well as legacy payouts under
the directors’ previous medium term pay plan as a result of the transition period between plans.
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132
Report of the directors on remuneration (continued)
Report of the directors on remuneration (continued)
Comparison of annual change in directors’ pay with average employee
The following table shows the percentage change in remuneration (base salary, benefits and annual performance pay) of each of the directors from 2019/20 to 2020/21 compared with the average
for all other employees.
Salary/fees
2020/21
Benefits (note i)
2020/21
Annual performance pay
2020/21
Executive directors
J D Garner (note ii)
C S Rhodes
Non-executive directors (note iv)
D L Roberts (Society Chair)
R Clifton
M Fyfield
A Hitchock
D Klein (note v)
K A H Parry
U K Prashar (note vi)
T Rajah (note vii)
P Rivett (note viii)
T J W Tookey
G Waersted
All employees (note ix)
All employees
(14.5%)
3.2%
0%
0%
9.2%
0%
-
10.9%
(68.7%)
-
73%
0%
0%
3.2%
(55.7%)
(32.5%)
(50%)
(100%)
(25%)
(100%)
-
(100%)
(100%)
-
(100%)
(100%)
(100%)
(5.3%)
- (note iii)
- (note iii)
41.9%
Notes:
i. The reduction in benefits reflects reduced travel costs in the year as a result of a significant reduction in travel due to the pandemic.
ii. The percentage decrease in salary for J D Garner reflects the voluntary temporary reduction in base salary for the year.
iii. The annual performance pay for J D Garner and C S Rhodes for 2019/20 was nil and therefore no percentage change is shown.
iv. The non-executive directors are not eligible to participate in the annual performance pay plan.
v. D Klein joined the Board on 1 March 2021 and therefore comparative remuneration data for 2019/20 is not available.
vi. U K Prashar stepped down from the Board on 16 July 2020 and remuneration for 2020/21 reflects approximately four months on the Board versus a full year in 2019/20.
vii. T Rajah joined the Board on 1 September 2020 and therefore comparative remuneration data for 2019/20 is not available.
viii.P Rivett joined the Board on 1 September 2019 and remuneration for 2020/21 reflects a full year on the Board versus seven months in 2019/20.
ix. Data for all employees has been calculated on a full-time equivalent basis and reflects all employees on 1 March 2020 and 1 March 2021.
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Report of the directors on remuneration (continued)
Report of the directors on remuneration (continued)
Relative importance of spend on pay
Payments to past directors
The chart below shows the cost of remuneration for all
employees of Nationwide Building Society, compared with
retained earnings.
Remuneration cost for all employees
All-employee remuneration
Retained earnings
2020/21
£m
852
453
2019/20
£m
662
215
Payroll costs represent 38.41% (2020: 28.63%) of total
administrative expenses. Nationwide’s profit after tax for the
year was £618 million, of which £165 million was paid as
distributions and the remaining £453 million is held as
retained earnings. In the year ended 4 April 2020, all
employee remuneration is net of a non-recurrent gain of £164
million relating to the closure to future accrual of the
Nationwide Pension Fund.
Other directorships
Executive directors and members of senior management may
be invited to become non-executive directors of other
companies, subject to the agreement of the Society. These
appointments provide an opportunity to gain broader
experience outside Nationwide and therefore benefit the
Society, providing that appointments are not likely to lead to a
conflict of interest. Any fees earned may be retained by the
executive director concerned. No executive director earned any
such fees during the year. The number of external
appointments that executive and non-executive directors can
hold is limited as required under both CRD IV and CRD V.
Payments for loss of office
No payments for loss of office were made during the year.
As set out in last year’s report, T P Prestedge remained eligible
for his salary, pension allowance and benefits during the
period spent as an employee to 28 August 2020. This included
a reduced pension allowance of 16% of salary (from 24%) and
amounted to £361,527. T P Prestedge was not eligible for any
awards under the DPA 2020/21.
Pay gap reporting
The Society is fully committed to promoting a diverse and
inclusive workplace. The gender pay gap measures the
difference in earnings between women and men across all
roles. Whilst the mandatory Gender Pay Reporting
requirements were suspended for 2020, we nevertheless
published our latest report in December 2020 which can be
found at nationwide.co.uk, together with an update of
progress on our inclusion and diversity ambition and Women
in Finance Charter commitments. We have also voluntarily
published our ethnicity pay gap, comparing the pay of all
employees who have identified as black, Asian and minority
ethnicity (ethnically diverse), with the pay for white (non-
ethnically diverse) employees across Nationwide.
As at 5 April 2020, our mean average gender pay gap was
28% (unchanged on the previous year) and our mean ethnicity
pay gap was 16% (decreasing from 17% in the previous year).
Pay gaps are not the same as equal pay. We carry out regular
equal pay audits, checking the pay of people with different
characteristics (such as gender and ethnicity) doing the same
or similar roles. Our audits continue to show that our pay
policies are operating fairly.
Annual Report and Accounts 2021
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133
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Report of the directors on remuneration (continued)
Report of the directors on remuneration (continued)
CEO pay ratio reporting
The table below compares the total remuneration of the Chief Executive against the total remuneration of the median employee and those who sit at the 25th and 75th percentiles (lower and upper
quartiles). This reporting will build annually to cover a rolling ten-year period.
The reduction in the median pay ratio compared to 2019/20 is due to the 20% voluntary reduction in the CEO’s combined salary and pension for 2020/21 and an increase to the total remuneration
of the median employee.
Year
2020/21
2019/20
2018/19
Method 25th percentile pay ratio
Median pay ratio 75th percentile pay ratio
Option A
Option A
Option A
51:1
53:1
99:1
38:1
41:1
77:1
24:1
26:1
48:1
The total remuneration and salary values for the 25th, median and 75th percentile employees for 2020/21 are:
Total remuneration
Salary
25th percentile
£24,070
£20,405
Median
£32,125
£22,414
75th percentile
£51,620
£43,729
Notes:
i. The calculation is based on Option A as set out in the regulations which is considered to be the most statistically accurate methodology.
ii. Employee data includes full time equivalent total remuneration for all UK employees as at 1 March 2021. For each employee, remuneration was calculated based on all components of pay including base pay,
performance pay for 2020/21, core benefits including medical insurance and car allowance, and pension payments.
iii. Whilst most employees participate in a defined contribution scheme with a fixed maximum employer contribution, there are other pension arrangements in place for some employees, including a defined benefit
pension scheme which has been closed to new participants since 2007. Although it would be possible to recognise a higher value under the defined benefit scheme, in order to ensure accurate year on year
comparative data going forward, a fixed value equal to the maximum employer contribution available to the defined contribution scheme members is included for all defined benefit scheme members.
iv. The Committee has considered the pay data for the three individuals identified for 2020/21 and confirms that the ratios reasonably represent the Society’s approach to pay and reward for employees taken as a whole.
Voting at AGM
Resolutions to approve both the 2019/20 ‘Report of the directors on remuneration’ and the Directors' Remuneration Policy were passed at the 16 July 2020 AGM. In each case votes were cast as
follows:
Votes in favour
Votes against
Votes withheld
Report of the directors on remuneration
Remuneration Policy
478,066 (93.5%)
33,238 (6.5%)
7,588
474,181 (92.8%)
36,789 (7.2%)
7,933
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135
Report of the directors on remuneration (continued)
Report of the directors on remuneration (continued)
The year ahead
A summary of the remuneration policy approved by our
members in 2020 is set out below, together with an overview
of how it will be applied in 2021/22. In applying this policy, the
Committee is guided by the need to ensure executives are
appropriately motivated and rewarded to deliver demonstrable
value for our members. This summary does not replace or
override the full approved policy, which is available at
nationwide.co.uk
the year and the need to remain competitive so that the
Society is able to attract and retain the appropriate talent, the
Committee has agreed to reinstate the potential performance
pay opportunities for all employees for 2021/22, following the
temporary reduction for 2020/21. For our executive directors,
this means that the performance pay opportunities for the year
ahead will be in line with the normal levels in our approved
policy, as summarised in the table below.
As set out in the Committee Chair's letter, J D Garner's base
salary will return to the 2020/21 level that would have applied
in 2020/21, had the temporary voluntary reduction not been
made. An increase of 2% has been applied to J D Garner’s base
salary thereafter. A 2% increase has also been applied to C S
Rhodes’s base salary. The reduction in pension allowances in
2020/21 will continue to apply, with the pension allowances of
both executive directors continuing to be aligned with the
maximum benefit available to the wider employee population.
Taking into account the Society's resilient performance over
In determining any awards under the plan, the Committee will
consider the overall performance of the Society over the year
and the economic circumstances at that time. The actual
maximum amount that may be awarded in respect of any year
will be subject to the limit prescribed by regulation, which is
currently set such that variable remuneration does not exceed
100% of fixed remuneration. This means in certain cases, the
actual maximum opportunity available under the DPA may be
lower than the values set out in the table.
The Committee will continue to focus on ensuring our
remuneration structure supports the right culture and
behaviours as well as our values as a mutual. Awards under the
DPA will continue to be aligned to measures which are most
important to our members. For the element in which the most
senior leaders participate we are adding a controls measure to
recognise our focus on continuing to ensure the Society
remains safe and secure for the long term. Targets are
commercially sensitive and so will be disclosed, along with
performance achieved, in next year’s report. Gateway measures
will continue to have to be met before any payments are made
under the plan. For 2021/22 these gateways will be based on
profit before tax, leverage ratio and conduct risk.
Remuneration policy implementation for 2021/22
Remuneration element
Summary of policy
Implementation in 2021/22
Base salary
Benefits
Pension
• Normally reviewed on an annual basis, taking into account market data for similar
roles in comparable organisations, the individual’s skills, experience and performance
and the approach being taken on salaries in the wider organisation.
J D Garner £934,320 (19.3% increase on reduced salary / 2% increase
on 2020/21 salary prior to voluntary reduction).
C S Rhodes £667,080 (2% increase).
•
•
•
Include car benefits, healthcare and insurance benefits.
No change for 2021/22.
Executive directors receive a cash allowance in lieu of pension.
No change for 2021/22.
The maximum pension allowance payable is set at a level in line with the wider
employee population (currently 16% of base salary).
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136
Report of the directors on remuneration (continued)
Report of the directors on remuneration (continued)
The year ahead (continued)
Remuneration policy implementation for 2021/22
Remuneration element
Summary of policy
Implementation in 2021/22
Directors’ Performance Award
(DPA)
Comprises two elements:
i. an all-employee element
ii. an element in which the most
senior leaders participate
subject to deferral provisions
•
•
The gateway and Society performance measures selected for both elements of the
DPA will normally reflect a mix of financial measures and measures relating to the
strategic performance of the Society as well as regulatory obligations. Individual
performance (including conduct and behaviours) will also be assessed.
The targets reflected in the Society’s plan need to be achieved to generate a ‘target’
award against the Society measures, and considerably exceeded to generate the
maximum award.
For awards made in respect of 2021/22, maximum variable pay
opportunities including both elements are as follows:
•
152% of base salary for the Chief Executive Officer (CEO)
112% of base salary for the Chief Financial Officer (CFO)
•
Performance measures:
• Gateway measures based on profit before tax, leverage ratio and
• No more than 40% of the total performance pay award (i.e. the sum of both elements
of the DPA) is paid after the end of the performance period and at least 60% is
deferred for between three and seven years.
•
• A minimum of 50% of both the upfront and deferred elements is linked to the value of
the Society’s core capital deferred shares (CCDS) and subject to a twelve-month
retention period.
•
The all-employee element operates on the same basis for all employees.
conduct risk; and
Society performance, which accounts for 72%/73% of the award
for the CEO and CFO respectively and is subject to minimum
performance thresholds, assessed against the following
cornerstones:
o Building thriving membership:
o Number of committed members
o Building legendary service
o Customer service satisfaction rating
o Built to last
o Total costs
o Controls (for senior leaders only)
A portion of the award assessed is based on individual contribution,
behaviours and conduct (28%/27% of the award for the CEO and CFO
respectively).
SSoocciieettyy CChhaaiirr aanndd nnoonn--eexxeeccuuttiivvee
ddiirreeccttoorr ffeeeess
•
The Society Chair’s fee is normally reviewed and approved by the Remuneration
Committee on an annual basis.
• Non-executive director fees are normally reviewed and approved by the executive
directors and the Society Chair on an annual basis.
•
The Society Chair and non-executive directors do not take part in any performance pay
plans or in any pension arrangements. Benefits may be provided if considered
appropriate, including reimbursement of any reasonable expenses.
As set out in this report, increases of 1.97% were made to the Society
Chair fee and the basic fee for non-executive directors. The senior
independent director will now receive committee membership fees,
and, in recognition of this, the senior independent director fee has
reduced to £30,000. The Voice of the Employee fee has been
increased by 10%.
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Annual Report and Accounts 2021
137
Report of the directors on remuneration (continued)
Report of the directors on remuneration (continued)
What our directors could earn in 2021/22 based on performance
The table below illustrates the amounts that executive directors would be paid under three different scenarios.
Breakdown of total remuneration for 2021/22 (£'000)
Fixed pay
Salary
Pension as a % of salary
Performance pay
Target as a % of salary
Maximum as a % of salary
Total remuneration
Fixed pay – base salary, pension and benefits (note i)
Target – assuming we deliver target levels or performance against measures set out in the DPA
Maximum - assuming DPA arrangements pay out in full. This would only occur where performance has been truly exceptional across all measures set (note ii)
J D Garner
C S Rhodes
934
16%
98%
152%
1,234
2,149
2,654
667
16%
78%
112%
837
1,357
1,584
Notes:
i.
ii. The actual maximum amount that may be awarded in respect of any year would be subject to the limit laid down by regulatory standards, which is currently set such that variable remuneration does not exceed 100%
Includes benefits based on 2019/20 actuals, in line with the scenario charts included in our directors' remuneration policy report.
of fixed remuneration.
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138
Annual Report and Accounts 2021
Directors’ report for the year ended 4 April 2021
Information for the ‘Content’ items listed in the table below can be found in the section of the accounts as shown. These items are required to be included in the Directors’ report by the Building
Societies Act 1986 and are incorporated into the Directors’ report by this cross referencing.
Content
Business objectives and future plans
Nationwide results and key performance indicators
Charitable donations
Employee involvement, engagement, development, inclusion and diversity
Viability statement
Directors’ remuneration
Mortgage arrears
Risk management
Principal risks
Top and emerging risks
Directors’ share options
CRD IV country-by-country reporting
Distributions on CCDS instruments
Business relationships
Financial instruments
Corporate Governance statement
Section
Strategic report
Strategic report – A letter from your Society’s Chief Executive
Strategic report – Building a national treasure
Strategic report – Building PRIDE
Strategic report
Governance – Report of the directors on remuneration
Risk report
Risk report
Risk report
Strategic report – Risk overview
Annual business statement
Published online – www.nationwide.co.uk/about/corporate-information/results-and-accounts
Financial statements – note 31
Strategic report – section 172(1) statement
Financial statements – note 15
Corporate governance report
Pages
7 to 32
7 to 9
29 to 32
25 to 28
58 to 59
115 to 137
163 to 164
142 to 144
145
56 to 57
329
-
317
12 to 17
290 to 293
69 to 96
Board of directors
The names of the directors of the Society who were in office at
the date of signing the financial statements, along with their
biographies, are set out on pages 71 to 76.
The changes in the year and up to the date of signing the
financial statements are as follows:
•
•
•
the retirement of Baroness Usha Prashar (non-executive
director) in July 2020;
the appointment of Tamara Rajah (non-executive director)
in November 2020; and
the appointment of Debbie Klein (non-executive director)
in March 2021.
None of the directors have any beneficial interest in equity
shares in, or debentures of, any connected undertaking of the
Society.
The Board has agreed that in accordance with the UK
Corporate Governance Code, all the directors will stand for
election or re-election on an annual basis.
Political donations
The Society is politically neutral and does not support, or seek
to influence public support for, any political party nor make
donations, contributions or pay subscriptions to any party.
However, the Society will from time to time make payments to
third parties to participate in events organised by them at
party conferences and which are related to matters of interest
to the Society and its members so as to communicate its
position and understand that of others. These activities are not
intended or considered to be in the nature of party political
campaigning, activity or support.
Participation in the unclaimed assets scheme
The Society participates in the Government-backed unclaimed
assets scheme, whereby savings accounts that have been
inactive for 15 years, and where the account holder cannot be
traced, are eligible to be transferred into a central reclaim
fund. The central reclaim fund has the responsibility for
retaining sufficient monies to meet the costs of future reclaims
for any previously transferred dormant account balances, and
to transfer any surplus to the Big Lottery Fund for the benefit
of good causes which have a social or environmental purpose.
On 12 August 2020 Nationwide made a transfer of £3,644,472
to the Reclaim Fund Limited, the administrators of the
unclaimed assets scheme. This follows the previous transfer
the Society made in October 2019 (£3,644,473). The total
contribution from inception to August 2020 is £76,931,288.
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Directors’ report (continued)
Directors’ report (continued)
Creditor payment policy
Environment
Research and development
Annual Report and Accounts 2021
Annual Report and Accounts 2021
139
The Group’s policy is to agree the terms of payment with
suppliers at the start of trading, ensure that suppliers are
aware of the terms of payment, and pay in accordance with its
contractual and other legal obligations. The Group’s policy is to
settle the supplier’s invoice for the complete provision of goods
and services (unless there is an express provision for stage
payments), when in full conformity with the terms and
conditions of the purchase, within the agreed payment terms.
The Society’s creditor days, calculated based on year end
creditor balances and total spend, were 7 days at 4 April 2021
(2020: 9 days).
The Society reports its greenhouse gas emissions, within the
Strategic report, as set out by the Companies Act 2006. More
information on the Society’s environmental sustainability
performance can be found in the Strategic report on page 50.
New activities
There were no new activities in which the Society or any of its
subsidiaries engaged during the financial year of a different
nature from those in which the Society previously engaged.
Directors’ responsibilities in respect of the preparation of the Annual Report and Accounts
In the ordinary course of business, the Society regularly
develops new products and services.
The following statement, which should be read in conjunction
with the Independent auditor’s report on pages 227 to 240, is
made by the directors to explain their responsibilities in
relation to the preparation of the Annual Report and Accounts,
the directors’ emoluments disclosures within the Report of the
directors on remuneration, the Annual business statement and
the Directors’ report.
The Group and Society financial statements included within the
Annual Report and Accounts are prepared in accordance with
international accounting standards in conformity with the
requirements of the Building Societies Act 1986 and with
those parts of the Building Societies (Accounts and Related
Provisions) Regulations 1998 (as amended) that are
applicable. International accounting standards which have
been adopted for use within the UK have also been applied in
these financial statements. The Group financial statements are
also prepared in accordance with International Financial
Reporting Standards (IFRS) adopted pursuant to Regulation
(EC) No. 1606/2002 as it applies in the European Union.
A copy of the Annual Report and Accounts can be found on
Nationwide Building Society’s website at nationwide.co.uk
(Results and accounts section). The directors are responsible
for the maintenance and integrity of statutory and audited
information on the website. Information published on the
internet is accessible in many countries with different legal
requirements. Legislation in the UK governing the preparation
and dissemination of financial statements may differ from
legislation in other jurisdictions.
Accounts 2021 have been prepared in compliance with its
principles.
Building Societies Act 1986 (the Act)
As required by regulations made under the Act, the directors
have prepared an Annual Report and Accounts which gives a
true and fair view of the income and expenditure of the Society
and the Group for the financial year and of the state of the
affairs of the Society and the Group as at the end of the
financial year, and which provides details of directors’
emoluments in accordance with Part VIII of the Act and
regulations made under it. The Act states that the
requirements under international accounting standards
achieve a fair presentation. In preparing the Annual Report and
Accounts, the directors have:
•
Selected appropriate accounting policies and applied them
consistently;
• Made judgements and estimates that are reasonable;
•
Stated whether applicable accounting standards have been
followed, subject to any material departures disclosed and
explained in the financial statements; and
• Prepared the financial statements on the going concern
basis.
UK Finance Code for Financial Reporting Disclosure
The Group has continued to adopt the UK Finance Code for
Financial Reporting Disclosure and its Annual Report and
Going Concern
The Group’s business activities, along with its financial
position, capital structure, liquidity and funding, risk
management approach and factors likely to affect its future
performance are described in the Strategic report on pages
58.
The Group’s forecasts and projections, taking account of
possible changes in trading performance and funding
retention, and including stress testing and scenario analysis,
show that the Group will be able to operate at adequate levels
of both liquidity and capital for the next 12 months.
Furthermore, the Group’s capital ratios and its total capital
resources are comfortably in excess of Prudential Regulation
Authority (PRA) requirements.
The directors have made enquiries and considered the
implications of the Covid-19 pandemic on the Group’s financial
position, projected funding, capital structure, and the impact
of further stress-testing and scenario analysis, along with other
key risks as set out in the Principal risks and uncertainties
section of the Risk report on page 145. On the basis of those
enquiries and considerations the directors are satisfied that
the Group has adequate resources to continue in business for a
period of at least 12 months from the date of this report
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140
The auditors
A resolution to re-appoint Ernst & Young LLP (EY) as auditors
will be proposed at the Annual General Meeting.
David Roberts
Chair
20 May 2021
Directors’ report (continued)
Directors’ report (continued)
and that, therefore, it is appropriate to adopt the going
concern basis in preparing the financial statements.
Fair, balanced and understandable
The directors are satisfied that the Annual Report and
Accounts, taken as a whole, are fair, balanced and
understandable, and provide the information necessary for
members and other stakeholders to assess the Group’s
position and performance, business model and strategy.
Details of the governance procedures that have been
embedded to support this can be found in the Audit
Committee report.
Enhanced Disclosure Task Force (EDTF)
The EDTF established by the Financial Stability Board,
published its report ‘Enhancing the Risk Disclosures of Banks’
in October 2012, with an update in November 2015 covering
IFRS 9 expected credit losses. The Taskforce on Disclosures
about Expected Credit Losses (DECL), jointly established by the
Financial Conduct Authority, Financial Reporting Council and
the Prudential Regulation Authority, published its phase 2
report recommendations in December 2019. EDTF and DECL
recommendations are reflected in either the Annual Report
and Accounts or Pillar 3 Disclosures.
Directors’ statement pursuant to the disclosure
guidance and transparency rules
As required by the Disclosure Guidance and Transparency
Rules of the Financial Conduct Authority, the directors have
included a fair review of the business and a description of the
principal risks and uncertainties facing the Group. The
directors confirm that, to the best of each director’s knowledge
and belief:
•
The Chief Executive’s review and the Financial review
contained in the Strategic report include a fair review of
the development and performance of the business and the
position of the Group and Society. In addition, the Strategic
report contains a description of the principal risks and
uncertainties.
•
•
The financial statements, prepared in accordance with
IFRSs adopted pursuant to Regulation (EC) No. 1606/2002
as it applies in the European Union, give a true and fair
view of the assets, liabilities, financial position and profit of
the Group and Society.
In addition to the Annual Report and Accounts, as required
by the Act, the directors have prepared an Annual business
statement and a Directors’ report, each containing
prescribed information relating to the business of the
Society and its connected undertakings.
Directors’ responsibilities in respect of
accounting records and internal control
The directors are responsible for ensuring that the Society and
its connected undertakings:
• Keep accounting records which disclose with reasonable
accuracy the financial position of the Society and the Group
and which enable them to ensure that the Annual Report
and Accounts comply with the Building Societies Act 1986.
•
Take reasonable care to establish, maintain, document and
review such systems and controls as are appropriate to the
Society.
The directors have general responsibility for safeguarding the
assets of the Group and for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
The directors who held office at the date of approval of this
report confirm that, so far as they are each aware, there is no
relevant audit information of which the Group’s auditors are
unaware, and each director has taken all the steps that they
ought to have taken as a director to make themselves aware of
any relevant audit information and to establish that the
Group’s auditors are aware of that information.
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141
Risk report
Effective risk management is critical to our purpose of building society, nationwide and ensures that we keep our
members’ money safe and secure. Nationwide adopts a prudent approach to risk management, taking only those
risks which support our strategy and managing those risks rigorously through a consistent and robust methodology.
Introduction
Managing risk
Principal risks and uncertainties
Credit risk
• Overview
• Residential mortgages
• Consumer banking
• Commercial
• Treasury assets
142
142
145
146
Liquidity and funding risk
Solvency risk
Market risk
Pension risk
Business risk
Operational and conduct risk
Model risk
189
200
207
215
218
219
224
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142
Annual Report and Accounts 2021
Risk report
Risk report
Introduction
Risk management is at the heart of our business and has an important part to play in delivering our shared purpose of building society, nationwide by making sure
we are safe and secure for the future.
All business activities involve some degree of risk, Nationwide seeks to protect its members by managing appropriately the risks that arise from its activities. Nationwide’s risk management
processes ensure it is built to last by:
•
identifying risks through a robust assessment of principal risks and uncertainties facing the Society, including those that would threaten its business model, future performance, solvency, or
liquidity;
robust decision making, ensuring we take the right risks, in a way that is considered and supports the strategy;
ensuring the risks we do take are understood, controlled, and managed appropriately; and
•
•
• maintaining an appropriate balance between delivering member value and remaining a prudent and responsible lender.
Managing risk
Enterprise risk management framework (ERMF)
The Society operates an Enterprise Risk Management Framework (ERMF) which articulates the Society’s approach to risk management. The structure is based on eight principal risk categories,
establishing risk appetite, and implementing risk management through the three lines of defence model. The ERMF is underpinned by processes, policies and standards that are specific to
individual risk categories and focus on the responsibilities of key executives and risk practitioners. The outputs of the ERMF are governed through the Society’s risk committee structure.
The Society continues to develop its risk management capabilities. In March 2020, the Society launched its new Governance, Risk and Compliance tool, MetricStream, which provides the Society
with enhanced, industry standard operational and conduct risk and control management capabilities. During the year, MetricStream has been embedded across the Society, in addition to enhancing
the operational and conduct risk taxonomy and controls taxonomy (though the principal risks themselves remain unaffected).
The design of the ERMF has been and will continue to be improved, to ensure it remains fit for purpose and reflects changes to the internal and external risk profile, allowing tailored responses to be
developed where further maturity or improvements are considered appropriate. The strengthening of the operational and conduct risk environment will continue to be a focus in 2021/22 and
beyond.
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Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Managing risk (continued)
The structure of the ERMF is summarised below:
Annual Report and Accounts 2021
143
Appetite - articulates how much risk the Society is prepared to take in the pursuit of its objectives.
Policy - sets out the objectives to be met by relevant critical controls to ensure that specific material risks are managed on a day-to-day basis, in line with
risk appetite.
Risk Management - defines the standard processes, tools and systems needed for the practical operation of risk management across the Society.
Reporting - ensures the appropriate monitoring, aggregation, and escalation of relevant risk, loss event and control information to the Board, risk
committees, and management to enable effective, risk-based, decision-making and achieve better outcomes.
Three lines of defence
The Society adopts a Three Lines of Defence (3LoD) model in the way it structures its risk management activities. We have tailored this approach to reflect our size, complexity, and business model.
Though everyone has a role to play in risk management, the overall responsibilities and accountabilities are outlined through this 3LoD model, which are:
Line of defence
First line
Risk and control ownership
Responsibilities Designing and running business operations, owning and
Accountabilities
operating most controls to manage the Society’s risks
and meet regulatory requirements.
Setting business objectives
•
• Defining management risk appetite
•
Identifying, owning, and managing risks
• Defining, operating, and testing controls
•
Implementing and maintaining regulatory
compliance
• Adhering to the Society’s minimum standards for
risk management and associated policies
Identifying future threats and risks
•
Second line
Oversight, support, challenge, and advice
Overseeing, through support, challenge and the
provision of advice, the effectiveness of risk
management by the first line.
•
• Advising the Board on setting risk appetite
•
Providing expert advice on business initiatives
Reporting aggregate enterprise level risks to the
Board
Conducting independent and risk-based
assurance
Interpreting material regulatory change
Setting the Society’s minimum standards for risk
management and associated policies
Identifying future threats and risks
•
•
•
•
Third line
Assurance
Providing assurance to the Board on the
effectiveness of our control environment.
•
•
•
Performing independent audits of the
effectiveness of first line risk and control and
second line risk oversight, support, challenge,
and advice
Taking a risk-based approach to the programme
of audit work
Preparing an annual opinion on the risk
management and controls framework across the
Society to present to the Audit Committee
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Risk report (continued)
Risk report (continued)
Managing risk (continued)
Risk committee structure
Annual Report and Accounts 2021
144
The Board Risk Committee (BRC), Board IT & Resilience Committee and Audit Committee provide oversight and advice to the Board. Further details are set out in the Governance report.
The Executive Risk Committee (ERC), chaired by the Chief Risk Officer, sits below these and ensures a co-ordinated management approach across all risks and provides regular updates to the Board
Risk Committee on areas where the Committee has challenged management and key decisions. The committee structure leading to ERC (including each committee’s purpose) is shown below.
Business Risk is managed directly by ERC.
Executive Risk Committee
•
•
Determines and amend the Society’s attitude to risk and set thresholds for
endorsement by the Board and/or the BRC;
Exercises responsibility for controlling risk across the Society, ensuring that
controls are adequately designed and operating effectively;
• Monitors and review the risk exposures of the Society in accordance with
the ERMF, board risk appetite, Nationwide’s Strategy and the Plan; and
Approves changes to the above within the Committees mandate.
•
Model Risk
Model Risk Oversight
Oversight Committee
Committee
•
•
•
•
Promotes best practice for the Society’s
use of models;
Oversees the model risk profile of the
Society;
Assesses whether the models are fit for
purpose; and
Reviews and challenges the use and
management of models to manage risk.
Credit Committee
•
Determines and amend the Society’s
attitude to credit risk and set thresholds
for endorsement by the ERC and the
BRC; and
• Manages the credit risk profile of the
Society in accordance with the ERMF,
board risk appetite, Nationwide’s
Strategy and the Plan.
Assets & Liabilities
Committee
•
Determines the Society’s approach to
financial risk and sets thresholds for
each risk for endorsement by ERC and
approved by Board; and
• Manages the financial risk profile of the
Society in accordance with the ERMF,
board risk appetite, Nationwide’s
Strategy and the Plan.
Conduct & Operational
Risk Committee
• Monitors the Society’s actual and future
operational, regulatory and conduct risk
appetite and profile to ensure alignment
with strategy, business objectives, risk
and corporate culture and values;
• Makes recommendations to the ERC on
the Society’s operational, regulatory and
conduct risk appetites and the
corresponding metrics and limits, and
approve management risk appetite
metrics; and
Escalates items of significant risk or
opportunity to the ERC and performs any
other duties aligned to the operational,
regulatory and conduct risk categories as
determined by the Board.
•
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Risk report (continued)
Risk report (continued)
Principal risks and uncertainties
Annual Report and Accounts 2021
145
The principal risk types set out below are the key risks relevant to the Society’s business model and achievement of its strategic objectives. These principal risks are further broken down into lower
level categories to support day to day management. The principal risk categories remain unchanged from last year and are managed through the Society’s Enterprise Risk Management Framework.
The impacts of, and responses to, the Covid-19 pandemic are set out in relevant sections of this Risk report.
Principal risk
Definition
Risk Committee
Further risk detail
Credit risk
The risk of loss as a result of a member, customer or counterparty failing to meet their financial obligations.
Credit Committee
Page 146
Liquidity and
funding risk
Solvency risk
Market risk
Pension risk
Business risk
Model risk
Operational
and conduct
risk
Liquidity risk is the risk that Nationwide is unable to meet its liabilities as they fall due and maintain member and
other stakeholder confidence.
Funding risk is the risk that Nationwide is unable to maintain diverse funding sources in wholesale and retail
markets and manage retail funding risk that can arise from excessive concentrations of higher risk deposits.
The risk that Nationwide fails to maintain sufficient capital to absorb losses throughout a full economic cycle and
to maintain the confidence of current and prospective members, investors, the Board, and regulators.
The risk that the net value of, or net income arising from, the Society’s assets and liabilities is impacted as a result
of market price or rate changes. As Nationwide does not have a trading book, market risk only arises in the
banking book.
The risk that the value of the pension schemes’ assets will be insufficient to meet the estimated liabilities, creating
a pension deficit.
The risk that achievable volumes or margins decline relative to the cost base, affecting the sustainability of the
business and the ability to deliver the strategy due to macro-economic, geopolitical, industry, regulatory,
competitor or other external events.
The risk of an adverse outcome (incorrect or unintended decision or financial loss) that occurs as a direct result of
weaknesses or failures in the development, implementation or use of a model. The adverse consequences include
financial loss, poor business or strategic decision making, or damage to Nationwide’s reputation.
The risk of Society impacts resulting from inadequate or failed internal processes, conduct and compliance
management, people and systems, or from external events.
Assets and Liabilities Committee
Page 189
Assets and Liabilities Committee
Page 200
Assets and Liabilities Committee
Page 207
Assets and Liabilities Committee
Page 215
Executive Risk Committee
Page 218
Model Risk Oversight Committee
Page 224
Conduct and Operational Risk
Committee (note i)
Page 219
Note:
i. Conduct and Operational Risk Committee was incepted in Q1 2021 and brought together two previous senior committees, Operational Risk Committee and Conduct & Compliance Committee.
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Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Credit risk – Overview
Annual Report and Accounts 2021
146
Credit risk is the risk of loss as a result of a member, customer or counterparty failing to meet their financial obligations. Credit risk encompasses:
• borrower/counterparty risk – the risk of loss arising from a borrower or counterparty failing to pay, or becoming increasingly likely not to pay the interest or principal on a loan, or on a financial
product, or for a service, on time;
security/collateral risk – the risk of loss arising from deteriorating security/collateral quality;
concentration risk – the risk of loss arising from insufficient diversification; and
refinance risk – the risk of loss arising when a repayment of a loan or other financial product occurs later than originally anticipated.
•
•
•
Nationwide manages credit risk for the following portfolios:
Portfolio
Residential mortgages
Consumer banking
Commercial and other lending
Treasury
Management of credit risk
Definition
Loans secured on residential property
Unsecured lending comprising current account overdrafts, personal loans and credit cards
Loans to registered social landlords, project finance loans made under the Private Finance Initiative, commercial real estate lending and other balances due from
counterparties not covered by other categories
Treasury liquidity, derivatives and discretionary investment portfolios
At Nationwide, we lend in a responsible, affordable and sustainable way to ensure we safeguard members and the financial strength of the Society throughout the credit cycle. To this end, the Board
Risk Committee sets the level of risk appetite it is willing to take in pursuit of the Society’s strategy, which is articulated as Board risk appetite statements and underlying principles:
We safeguard our members by lending responsibly
• We will only lend to members, customers or counterparties who demonstrate that they can afford to borrow.
• We will support members and customers buying mortgageable houses of wide-ranging types and qualities.
• We will work with members, customers and counterparties to recover their financial position should there be a delay, or risk of delay, in meeting their financial obligations.
We safeguard the Society’s financial performance, strength and reputation
• We will manage asset quality so that losses through an economic cycle will not undermine profitability, financial strength and our standing with internal and external stakeholders.
• We will ensure that no material segment of our lending exposes the Society to excessive loss.
• We will proactively manage credit risk and comply with regulation.
We operate with a commitment to responsible lending and a focus on championing good conduct and fair outcomes. In this respect, we formulate appropriate credit criteria and policies which are
aimed at mitigating risk against individual transactions and ensuring that the Society’s credit risk exposure remains within risk appetite. Under a governed delegated mandate structure from the
Board Risk Committee, the Credit Committee, the Executive Sanctioning Committee, individual Material Risk Takers and underwriters holding personal lending mandates make credit decisions,
based on a thorough credit risk assessment, to ensure that customers are able to meet their obligations.
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Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Credit risk – Overview (continued)
Annual Report and Accounts 2021
147
At a portfolio level, we measure and manage our risk profile and the performance of our credit portfolios on an ongoing basis. Compliance with Board risk appetite is measured against absolute limits
and risk metrics including impairment provisions and is reported to the Society’s Credit Committee (members of which include the Chief Risk Officer, the Chief Financial Officer and the Chief Credit
Officer) monthly, with adverse trends being investigated and corrective action taken to mitigate the risk and bring performance back on track.
Nationwide is committed to helping customers who may anticipate or find themselves experiencing a period of financial difficulty, offering a range of forbearance options tailored to their individual
circumstances. Accounts in arrears, or where the borrower is in financial difficulty, are managed by specialist teams within Nationwide to ensure an optimal outcome for our members, customers
and the Society.
Forbearance
Forbearance occurs when concessions are made to the contractual terms of a loan when the customer is facing or about to face difficulties in meeting their financial commitments. A concession is
where the customer receives assistance, which could be a modification to the previous terms and conditions of a facility or a total or partial refinancing of debt, either mid-term or at maturity.
Requests for concessions are principally attributable to:
•
temporary cash flow problems;
• breaches of financial covenants; or
•
an inability to repay at contractual maturity.
In addition, we are supporting borrowers financially affected by the Covid-19 pandemic with payment holidays and other concessions.
Consistent with the European Banking Authority reporting definitions, loans that meet the regulatory forbearance exit criteria are not reported as forborne. The concession events used to classify
balances subject to forbearance for residential mortgages, consumer banking and commercial lending are described in the relevant sections of this report.
Impairment provision
Impairment provisions on financial assets are calculated on an expected credit loss (ECL) basis for assets held at amortised cost and at fair value through other comprehensive income (FVOCI). ECL
impairment provisions are based on an assessment of the probability of default (PD), exposure at default (EAD) and loss given default (LGD), discounted to give a net present value. Provision
calculations for retail portfolios are typically performed on a collective rather than individual loan basis. For collective assessments, whilst each loan will have an associated ECL calculation, the
calculation will be based on cohort level data for assets with shared credit risk characteristics (e.g. origination date, origination loan to value, term).
Impairment provisions are calculated using a three stage approach depending on changes in credit risk since original recognition of the assets:
•
an asset which is not credit impaired on initial recognition and has not subsequently experienced a significant increase in credit risk is categorised as being within stage 1, with a provision equal
to a 12 month ECL (losses arising on default events expected to occur within 12 months);
• where a loan’s credit risk increases significantly, it is moved to stage 2. The provision recognised is equal to the lifetime ECL (losses on default events expected to occur at any point during the
life of the asset);
if a loan meets the definition of credit impaired, it is moved to stage 3 with a provision equal to its lifetime ECL.
•
For loans and advances held at amortised cost, the stage distribution and the provision coverage ratios are shown in this report for each individual portfolio. The provision coverage ratio is
calculated by dividing the provisions by the gross balances for each main lending portfolio. Loans remain on the balance sheet, net of associated provisions, until they are deemed no longer
recoverable, when such loans are written off.
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Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Credit risk – Overview (continued)
Governance and oversight of impairment provisions
The models used in the calculation of impairment provisions are governed in accordance with the Society’s Model Risk Framework as described in the Model risk section. PD, EAD and LGD models
are subject to regular monitoring and back testing and are reviewed annually. Where necessary, adjustments are approved for risks not captured in model outputs, for example where insufficient
historic data exists. The economic scenarios used in the calculation of impairment provisions and associated probability weightings are proposed by our Chief Economist. Details of these economic
assumptions and material adjustments are included in note 10 to the financial statements.
Governance and oversight of economic assumptions, weightings applied to economic scenarios and all key judgements relating to impairment provisions is through a formal monthly meeting
including the Chief Financial Officer, Chief Risk Officer and Chief Credit Officer. Impairment provisions are regularly reported to the Audit Committee, which reviews and challenges the key
judgements and estimates made by management.
PPeerrffoorrmmaannccee oovveerrvviieeww
A significant and prolonged contraction in economic activity was observed during the year, due to the Covid-19 pandemic and government measures to reduce the spread of the virus.
Government support schemes introduced at the onset of the Covid-19 pandemic and the Society’s own support mechanisms, including a moratorium on possessions activity to protect and reassure
members struggling with the financial impact of the pandemic and the furlough and payment deferral schemes, provided temporary financial relief for our members.
Help and support continues to be offered to members who have been impacted in these challenging times. This includes offering payment deferrals to affected borrowers, to temporarily suspend
their contractual payments. In accordance with regulatory guidance, these payment concessions are not recorded as forbearance and do not automatically have an impact on the staging of balances
used in calculating provisions. For borrowers applying for an initial payment deferral the deadline for applications was March 2021; payment deferrals can be taken beyond this point if they are
consecutive, but all must end by July 2021. For borrowers who continue to need financial support after the payment deferral scheme ends, we will continue to offer non-arrears bearing concessions
based on consideration of their individual circumstances.
The various measures of support have affected the relationship between the economic drivers for the retail models used in determining ECL. Specifically, unemployment rates remained relatively
stable, whereas GDP saw a significant decline in 2020. To account for this, GDP forecasts, where used within the retail impairment models, have been updated. Due to these factors, careful
consideration has been given to model performance during their annual reviews, and model monitoring continues to show the models are performing as expected.
Observed credit quality and performance has remained broadly stable over the period, with residential mortgage and consumer banking arrears remaining at a relatively low level. Whilst balances
subject to arrears and forbearance have reduced during the reporting period, stage 2 balances have increased due to a change to our staging criteria. In our judgement, arrears performance has
benefited from the government measures in combination with reduced spending on current account and credit cards and the low bank base rate environment, which have had the effect of
suppressing what would otherwise have been a degradation in performance due to reduced economic activity that may have a lasting impact on consumer preferences and behaviour.
In addition, since the initial lockdown, housing market activity has recovered strongly. This has been driven by a combination of pent-up demand, stamp duty changes and a behavioural shift as
people reassess their housing needs and preferences. This increased activity has resulted in house price growth, with the Nationwide House Price Index recording a 7.3% rise in house prices in
2020.
Outlook
Despite the stable performance over the year, the economic outlook and effects of the pandemic on the portfolio remain uncertain. Payment deferrals have now largely matured but may have
suppressed underlying cases of financial difficulty which may now emerge; similarly, as the various support schemes offered by the Government (including the furlough scheme) begin to wind down
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Risk report (continued)
Risk report (continued)
Credit risk – Overview (continued)
Annual Report and Accounts 2021
149
this may expose more borrowers to difficulties in making their repayments. There remains wider uncertainty related to the pandemic and its short- and medium-term impacts on the economy.
Taken together, this points to a likely increase in arrears and losses over the next year. The potential impact on impairment is captured by the economic scenarios used within our IFRS 9 calculation.
Further details are included in note 10 to the financial statements.
Maximum exposure to credit risk
Nationwide’s maximum exposure to credit risk has increased to £265 billion (2020: £256 billion), principally reflecting higher holdings of liquid assets.
Credit risk largely arises from loans and advances to customers, which account for 81% (2020: 83%) of Nationwide’s total credit risk exposure. Within this, the exposure relates primarily to
residential mortgages, which account for 94% (2020: 94%) of total loans and advances to customers and comprise high quality assets with historically low occurrences of arrears and possessions.
In addition to loans and advances to customers, Nationwide is exposed to credit risk on all other financial assets. For all financial assets recognised on the balance sheet, the maximum exposure to
credit risk represents the balance sheet carrying value after allowance for impairment, plus off-balance sheet commitments. For off-balance sheet commitments, the maximum exposure is the
maximum amount that Nationwide would have to pay if the commitments were to be called upon. For loan commitments and other credit related commitments that are irrevocable over the life of
the respective facilities, the maximum exposure is the full amount of the committed facilities.
Maximum exposure to credit risk
2021
(Audited)
Amortised cost loans and advances to customers:
Residential mortgages
Consumer banking
Commercial and other lending
Fair value adjustment for micro hedged risk (note ii)
FVTPL loans and advances to customers:
Residential mortgages (note iii)
Commercial
Other items:
Cash
Loans and advances to banks and similar institutions
Investment securities – FVOCI
Investment securities – Amortised cost
Investment securities – FVTPL
Derivative financial instruments
Fair value adjustment for portfolio hedged risk (note ii)
Total
Gross
balances
£m
190,955
4,404
6,267
653
202,279
68
52
120
16,693
3,660
24,218
1,243
12
3,809
946
50,581
252,980
Impairment
provisions
Carrying
value
Commitments
(note i)
£m
(317)
(502)
(33)
-
(852)
-
-
-
-
-
-
-
-
-
-
-
(852)
£m
190,638
3,902
6,234
653
201,427
68
52
120
16,693
3,660
24,218
1,243
12
3,809
946
50,581
252,128
£m
12,039
43
1,176
-
13,258
-
-
-
-
-
-
-
1
-
-
1
13,259
Maximum
credit risk
exposure
£m
202,677
3,945
7,410
653
214,685
68
52
120
16,693
3,660
24,218
1,243
13
3,809
946
50,582
265,387
% of total
credit risk
exposure
%
76
2
3
-
81
-
-
-
6
1
9
1
-
2
-
19
100
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Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Credit risk – Overview (continued)
Maximum exposure to credit risk
2020
(Audited)
Amortised cost loans and advances to customers:
Residential mortgages
Consumer banking
Commercial and other lending
Fair value adjustment for micro hedged risk (note ii)
FVTPL loans and advances to customers:
Residential mortgages (note iii)
Commercial
Other items:
Cash
Loans and advances to banks and similar institutions
Investment securities – FVOCI
Investment securities – Amortised cost
Investment securities – FVTPL
Derivative financial instruments
Fair value adjustment for portfolio hedged risk (note ii)
Total
Annual Report and Accounts 2021
150
Gross
balances
£m
188,768
4,994
7,133
741
201,636
71
57
128
13,748
3,636
18,367
1,625
12
4,771
1,774
43,933
245,697
Impairment
provisions
£m
(252)
(494)
(40)
-
(786)
-
-
-
-
-
-
-
-
-
-
-
(786)
Carrying
value
£m
188,516
4,500
7,093
741
200,850
71
57
128
13,748
3,636
18,367
1,625
12
4,771
1,774
43,933
244,911
Commitments
(note i)
£m
10,734
40
642
-
11,416
-
-
-
-
-
-
-
-
-
-
-
11,416
Maximum
credit risk
exposure
£m
199,250
4,540
7,735
741
212,266
71
57
128
13,748
3,636
18,367
1,625
12
4,771
1,774
43,933
256,327
% of total
credit risk
exposure
%
78
2
3
-
83
-
-
-
5
1
7
1
-
2
1
17
100
Notes:
i.
In addition to the amounts shown above, Nationwide has revocable commitments of £10,624 million (2020: £10,139 million) in respect of credit card and overdraft facilities. These commitments represent agreements
to lend in the future, subject to certain considerations. Such commitments are cancellable by Nationwide, subject to notice requirements, and given their nature are not expected to be drawn down to the full level of
exposure.
ii. The fair value adjustment for portfolio hedged risk and the fair value adjustment for micro hedged risk (which relates to the commercial lending portfolio) represent hedge accounting adjustments. They are indirectly
exposed to credit risk through the relationship with the underlying loans covered by Nationwide’s hedging programmes.
iii. FVTPL residential mortgages include equity release and shared equity loans.
Commitments
Irrevocable undrawn commitments to lend are within the scope of provision requirements. The commitments in the table above consist of overpayment reserves and separately identifiable
irrevocable commitments for the pipeline of residential mortgages, personal loans, commercial loans and investment securities. These commitments are not recognised on the balance sheet and
are predominantly within stage 1, with an associated provision of £0.5 million (2020: £0.4 million) which is included within provisions for liabilities and charges.
Revocable commitments relating to overdrafts and credit cards are included in ECL provisions, with the allowance for future drawdowns made as part of the exposure at default element of the ECL
calculation.
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Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Credit risk – Residential mortgages
Summary
Annual Report and Accounts 2021
151
Nationwide’s residential mortgages comprise prime, buy to let and legacy loans. Prime residential mortgages are mainly Nationwide-branded advances made through the branch network and
intermediary channels. Buy to let mortgages are now only originated under The Mortgage Works (UK) plc (TMW) brand. Legacy mortgages are smaller portfolios in run-off.
As highlighted in the Credit risk overview section of this report the Covid-19 pandemic has had a significant impact on the residential mortgage market and, whilst house prices have increased, the
economic outlook is uncertain.
To date arrears remain low and credit quality continues to be strong; however, this performance is supported by government intervention, payment deferrals and the low bank base rate
environment.
Residential mortgage gross balances
(Audited)
Prime
Buy to let and legacy (note i):
Buy to let (note ii)
Legacy (note iii)
Amortised cost loans and advances to customers
FVTPL loans and advances to customers
Total residential mortgages
2021
£m
149,706
39,312
1,937
41,249
190,955
68
191,023
%
78
21
1
22
100
2020
£m
151,069
35,539
2,160
37,699
188,768
71
188,839
%
80
19
1
20
100
Notes:
i. This category of lending was previously referred to as specialist lending.
ii. Buy to let mortgages include £37,983 million (2020: £34,031 million) originated under the TMW brand.
iii. Legacy includes self-certified, near prime and sub-prime lending, all of which were discontinued in 2009.
Total balances across the residential mortgage portfolios have grown by 1% during the year to £191 billion (2020: £189 billion), in particular within the buy to let portfolio which saw 11% growth in
the year.
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Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Credit risk – Residential mortgages (continued)
Impairment losses for the year
Impairment losses and write-offs for the year
(Audited)
Prime
Buy to let and legacy
Total impairment losses
Impairment charge as a % of average gross balance
Gross write-offs
2021
£m
39
32
71
%
0.04
£m
9
2020
£m
13
40
53
%
0.03
£m
11
Impairment losses for the year include the impact of updating macroeconomic assumptions and weightings to reflect the impact of the Covid-19 pandemic; further details are included in note 10 to
the financial statements. Updates to the severe downside scenario assumptions increased provisions by £33 million during the year. Additional provisions totalling £56 million have been recognised
to reflect an increased risk relating to property valuations. This comprises £23 million to reflect risks associated with flats where work is required to meet fire safety standards, and £33 million to
reflect an increase in the idiosyncratic risk associated with property recovery values for repossessed properties over the next few years. The prior year impairment losses included a £51 million
charge reflecting the estimated impact of Covid-19 at 4 April 2020.
The following table shows residential mortgage lending balances carried at amortised cost, the stage allocation of the loans, impairment provisions and the resulting provision coverage ratios.
Residential mortgages staging analysis
2021
(Audited)
Gross balances
Prime
Buy to let and legacy
Total
Provisions
Prime
Buy to let and legacy
Total
Provisions as a % of total balance
Prime
Buy to let and legacy
Total
Stage 1
Stage 2
total
£m
£m
Stage 2
Up to date
(note i)
£m
Stage 2
1 – 30 DPD
(note i)
£m
Stage 2
>30 DPD
(note i)
£m
143,500
35,247
178,747
5,313
5,346
10,659
4,606
5,009
9,615
17
49
66
%
0.01
0.14
0.04
39
137
176
%
0.74
2.58
1.66
33
118
151
%
0.73
2.38
1.59
505
201
706
3
9
12
%
0.59
4.28
1.64
202
136
338
3
10
13
%
1.39
7.18
3.72
Stage 3
POCI
(note ii)
£m
893
508
1,401
37
38
75
%
4.10
7.46
5.32
£m
-
148
148
-
-
-
%
-
-
-
Total
£m
149,706
41,249
190,955
93
224
317
%
0.06
0.54
0.17
Annual Report and Accounts 2021
152
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Risk report (continued)
Risk report (continued)
Credit risk – Residential mortgages (continued)
Annual Report and Accounts 2021
153
Residential mortgages staging analysis
2020
(Audited)
Gross balances
Prime
Buy to let and legacy
Total
Provisions
Prime
Buy to let and legacy
Total
Provisions as a % of total balance
Prime
Buy to let and legacy
Total
Stage 1
Stage 2
total
£m
£m
Stage 2
Up to date
(note i)
£m
Stage 2
1 – 30 DPD
(note i)
£m
Stage 2
>30 DPD
(note i)
£m
148,355
29,399
177,754
1,953
7,642
9,595
27
13
40
%
0.02
0.05
0.02
8
117
125
%
0.41
1.53
1.30
998
7,115
8,113
2
87
89
%
0.22
1.23
1.11
698
270
968
3
11
14
%
0.46
3.93
1.42
257
257
514
3
19
22
%
1.02
7.22
4.12
Stage 3
POCI
(note ii)
£m
761
503
1,264
10
27
37
%
1.30
5.33
2.90
£m
-
155
155
-
(1)
(1)
%
-
-
-
Additional
provision
(note iii)
£m
-
-
-
11
40
51
%
-
-
-
Total
£m
151,069
37,699
188,768
56
196
252
%
0.04
0.52
0.13
Notes:
i. Days past due (DPD) is a measure of arrears status.
ii. POCI loans are those which were credit-impaired on purchase or acquisition. The POCI loans shown in the table above were recognised on the balance sheet when the Derbyshire Building Society was acquired in
December 2008. These balances, which are mainly interest-only, were 90 days or more in arrears when they were acquired and so have been classified as credit-impaired on acquisition. The gross balance for POCI is
shown net of the lifetime ECL of £5 million (2020: £6 million).
iii. In recognition of the financial impact that Covid-19 may have on our borrowers, an additional provision of £51 million was included in the impairment provisions for residential mortgages at 4 April 2020. This
additional provision was not allocated to underlying loans and therefore was not attributed to stages. During the reporting period this provision has been assigned across the stages and is reflected in the allocations
for 4 April 2021.
At 4 April 2021, 93% (2020: 94%) of the residential mortgage portfolio is in stage 1, reflecting the portfolio’s underlying strong credit quality. During the year there has been an increase in stage 2
balances to £10,659 million (2020: £9,595 million). The prime portfolio stage 2 balance has increased by £3,360 million. This increase is the result of a change to staging criteria from a multiple of
4 times origination PD to a multiple of 2. The change in criteria was made to increase staging sensitivity during the current uncertain economic conditions. In addition, a higher risk segment of
loans with payment deferrals moved to stage 2 from stage 1. This change did not have a significant impact on provisions.
The buy to let and legacy portfolio stage 2 balances have reduced by £2,296 million, primarily due to a reduction in the refinance risk associated with interest only loans. The refinance assessment
estimates the ability of a borrower with an interest only loan to refinance at maturity and considers both collateral values and affordability criteria. Due to the low bank base rate assumption used in
the modelling of expected credit losses, a higher proportion of interest only mortgages are expected to meet the affordability criteria, so have therefore moved from stage 2 to stage 1 during the
year. This reduction has been partially offset by the change in the multiple of PD described above. The impact of the staging criteria change across both portfolios has had no significant impact on
provisions due to strong quality of the loans affected.
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Risk report (continued)
Risk report (continued)
Credit risk – Residential mortgages (continued)
Annual Report and Accounts 2021
154
Stage 3 loans in the residential mortgage portfolio equate to 1% (2020: 1%) of the total residential mortgage exposure. Of the total £1,401 million (2020: £1,264 million) stage 3 loans, £690 million
(2020: £679 million) is in respect of loans which are more than 90 days past due, with the remainder being impaired due to other indicators of unlikeliness to pay such as forbearance or the
bankruptcy of the borrower. Stage 3 provisions have increased by £38 million during the year, primarily driven by an additional provision of £33 million to recognise an increase in the idiosyncratic
risk associated with property recovery values for repossessed properties over the next few years. The uncertainty has arisen from shifts in the housing market, partly due to Covid-19, with the
expectation that future repossessed properties may be more difficult to sell and may not follow the modelled HPI recovery assumed for the wider market.
For loans subject to forbearance, accounts are transferred from stage 3 to stages 1 or 2 only after being up to date and meeting contractual obligations for a period of 12 months; £242 million
(2020: £244 million) of the stage 3 balances in forbearance are in this probation period.
The table below summarises the movements between stages in the Group’s residential mortgages held at amortised cost. The movements within the table are an aggregation of monthly
movements over the year.
Reconciliation of movements in gross residential mortgage balances and impairment provisions
(Audited)
At 5 April 2020 (note ii)
Stage transfers:
Transfers from Stage 1 to Stage 2
Transfers to Stage 3
Transfers from Stage 2 to Stage 1
Transfers from Stage 3
Net remeasurement of ECL arising from transfer of stage
Net movement arising from transfer of stage
New assets originated or purchased
Net impact of further lending and repayments
Changes in risk parameters in relation to credit quality
Other items impacting income statement
charge/(reversal) (including recoveries)
Redemptions
Removal of year-end additional provision for Covid-19
(note ii)
Income statement charge for the year
Decrease due to write-offs
Other provision movements
4 April 2021
Net carrying amount
Non-credit impaired
Subject to 12-month ECL
Stage 1
Subject to lifetime ECL
Stage 2
Credit impaired (note i)
Subject to lifetime ECL
Stage 3 and POCI
Total
Gross balances
£m
177,754
Provisions Gross balances
£m
9,595
£m
40
Provisions Gross balances
£m
1,419
£m
125
Provisions Gross balances
£m
188,768
£m
36
Provisions
£m
252
(17,422)
(409)
15,250
255
(2,326)
29,452
(8,303)
-
-
(17,830)
-
-
178,747
(15)
-
100
-
(82)
3
9
(3)
22
-
(5)
-
-
66
178,681
17,422
(812)
(15,250)
541
1,901
-
(127)
-
-
(710)
-
-
10,659
15
(38)
(100)
12
130
19
-
-
40
-
(8)
-
-
176
10,483
-
1,221
-
(796)
425
-
(28)
-
-
(247)
(20)
-
1,549
-
38
-
(12)
(19)
7
-
-
43
(3)
(2)
(9)
3
75
1,474
-
-
-
-
-
29,452
(8,458)
-
-
(18,787)
(20)
-
190,955
-
-
-
-
29
29
9
(3)
105
(3)
(15)
(51)
71
(9)
3
317
190,638
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Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Credit risk – Residential mortgages (continued)
Reconciliation of movements in gross residential mortgage balances and impairment provisions
(Audited)
At 5 April 2019
Stage transfers:
Transfers from Stage 1 to Stage 2
Transfers to Stage 3
Transfers from Stage 2 to Stage 1
Transfers from Stage 3
Net remeasurement of ECL arising from transfer of stage
Net movement arising from transfer of stage
New assets originated or purchased
Net impact of further lending and repayments
Changes in risk parameters in relation to credit quality
Other items impacting income statement charge/(reversal) (including
recoveries)
Redemptions
Additional provision for Covid-19 (note ii)
Income statement charge for the year
Decrease due to write-offs
Other provision movements
4 April 2020 (note ii)
Net carrying amount
Non-credit impaired
Subject to 12-month ECL
Stage 1
Subject to lifetime ECL
Stage 2
Credit impaired (note i)
Subject to lifetime ECL
Stage 3 and POCI
Gross
balances
£m
176,023
(15,257)
(315)
12,923
199
(2,450)
30,501
(8,230)
-
-
(18,090)
-
-
177,754
Provisions
£m
37
(15)
-
66
1
(52)
-
5
(3)
4
-
(3)
-
-
40
177,714
Gross
balances
£m
8,479
15,257
(779)
(12,923)
539
2,094
-
(140)
-
-
(838)
-
-
9,595
Provisions
£m
127
15
(31)
(66)
13
72
3
-
1
3
-
Gross
balances
£m
1,438
-
1,094
-
(738)
356
-
(45)
-
-
(9)
(295)
-
-
125
9,470
(35)
-
1,419
Provisions
£m
42
-
31
-
(14)
(12)
5
-
(2)
3
(4)
(1)
(11)
4
36
1,383
Total
Gross
balances
£m
185,940
Provisions
£m
206
-
-
-
-
-
30,501
(8,415)
-
-
(19,223)
(35)
-
188,768
-
-
-
-
8
8
5
(4)
10
(4)
(13)
51
53
(11)
4
252
188,516
Notes:
i. Gross balances of credit impaired loans include £148 million (2020: £155 million) of POCI loans, which are presented net of lifetime ECL impairment provisions of £5 million (2020: £6 million).
ii. At 4 April 2020, an additional provision for credit losses of £51 million was recognised to reflect the estimated impact of the Covid-19 pandemic on ECLs. At 4 April 2020, this additional provision was not allocated to
underlying loans, nor was it attributed to stages. During the year, this provision has been allocated to underlying loans and is reflected in the movements within the table and the 4 April 2021 position.
The increase in stage 2 balances is driven by a combination of the change to staging criteria, the movement of a higher risk segment of loans with payment deferrals to stage 2 from stage 1 and a
reduction in the refinance risk associated with interest only loans. As the stage of individual loans is assessed monthly, the gross movements between stages 1 and 2 include the cumulative impact of
transfers caused by changes in PD leading to the loans breaching the criteria for transferring assets to stage 2 and vice versa.
Further information on movements in total gross loans and advances to customers and impairment provisions, including the methodology applied in preparing the table, is included in note 14 to the
financial statements.
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156
Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Credit risk – Residential mortgages (continued)
Reason for residential mortgages being included in stage 2 (notes i and ii)
2021
Prime
Buy to let and legacy
Total
Gross balances
£m
Provisions Gross balances
£m
£m
Provisions Gross balances
£m
£m
Provisions
£m
Quantitative criteria:
Payment status (greater than 30 DPD)
Increase in PD since origination (less than 30 DPD)
Qualitative criteria:
Forbearance (less than 30 DPD)
Interest only – significant risk of inability to refinance at maturity (less than 30 DPD)
Other qualitative criteria
202
5,067
6
-
38
3
36
-
-
-
136
3,288
3
1,914
5
10
70
-
57
338
8,355
9
1,914
43
Total Stage 2 gross balances
5,313
39
5,346
137
10,659
13
106
-
57
-
176
Reason for residential mortgages being included in stage 2 (note i and ii)
2020
Quantitative criteria:
Payment status (greater than 30 DPD)
Increase in PD since origination (less than 30 DPD)
Qualitative criteria:
Forbearance (less than 30 DPD)
Interest only – significant risk of inability to refinance at maturity (less than 30 DPD)
Other qualitative criteria
Total Stage 2 gross balances
Prime
Buy to let and legacy
Total
Gross balances
£m
Provisions
£m
Gross balances
£m
Provisions
£m
Gross balances
£m
Provisions
£m
257
1,509
165
-
22
1,953
3
5
-
-
-
8
257
2,697
5
4,678
5
7,642
19
27
-
71
-
117
514
4,206
170
4,678
27
9,595
22
32
-
71
-
125
Notes:
i. Where loans satisfy more than one of the criteria for determining a significant increase in credit risk, the corresponding gross balance has been assigned in the order in which the categories are presented above.
In recognition of the financial impact that Covid-19 may have on our borrowers, an additional provision of £51 million was included in the impairment provisions for residential mortgages at 4 April 2020. This
ii.
additional provision was not allocated to underlying loans and therefore was not attributed to stages. During the reporting period this provision has been assigned across the stages and is reflected in the allocations
for 4 April 2021.
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Risk report (continued)
Risk report (continued)
Credit risk – Residential mortgages (continued)
Annual Report and Accounts 2021
157
Loans which are reported within stage 2 are those which have experienced a significant increase in credit risk since origination, determined through both quantitative and qualitative indicators, as
shown in the table below.
Criteria
Quantitative
Qualitative
Backstop
Detail
The primary quantitative indicators are the outputs of internal credit risk assessments. For residential mortgage exposures, PDs are derived using scorecards, which use external
information such as that from credit reference agencies, as well as internal information such as known instances of arrears or other financial difficulty. While different approaches are
used within each portfolio, current and historical data relating to the exposure are combined with forward-looking macroeconomic information to determine the likelihood of default.
12-month and lifetime PDs are calculated for each loan.
The 12-month and lifetime PDs are compared to pre-determined benchmarks at each reporting date to ascertain whether a relative or absolute increase in credit risk has occurred. The
indicators for a significant increase in credit risk are:
• Absolute measures:
-
-
The 12-month PD exceeds the benchmark 12-month PD that is indicative, at the assessment date, of an account being in arrears.
The residual lifetime PD exceeds the benchmark residual lifetime PD, set at inception, which represents the maximum credit risk that would have been accepted at that point.
• Relative measure:
-
The residual lifetime PD has increased by at least 75 basis points and a multiple of 2 (2020: 4x multiple).
Qualitative indicators include the increased risk associated with interest only loans which may not be able to refinance at maturity.
Also included are forbearance events where full repayment of principal and interest is still anticipated, on a discounted basis.
In addition to the primary criteria for stage allocation described above, accounts that are more than 30 days past due are also transferred to stage 2.
The value of loans reported within stage 2 as a result of being in arrears by 30 days or more has reduced to £338 million, 0.18% of total gross balances (2020: £514 million, 0.27% of total gross
balances). Management has judged this to be a temporary position due to the availability of government support and payment deferral schemes and an adjustment has been made to recognise the
underlying risk where modelled provisions would otherwise have been reduced.
Stage 2 loans include all loans greater than 30 days past due (DPD), including those where the original reason for being classified as stage 2 was other than arrears over 30 DPD. The total value of
loans in stage 2 due solely to payment status is less than 0.1% (2020: <0.1%) of total stage 2 balances.
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Risk report (continued)
Risk report (continued)
Credit risk – Residential mortgages (continued)
Credit quality
Annual Report and Accounts 2021
158
The residential mortgages portfolio comprises many small loans which are broadly homogenous, have low volatility of credit risk outcomes and are geographically diversified. The table below shows
the loan balances and provisions for residential mortgages held at amortised cost, by PD range. The PD distributions shown are based on 12-month IFRS 9 PDs at the reporting date.
Loan balance and provisions by PD (notes i and ii)
2021
(Audited)
PD Range
0.00 to < 0.15%
0.15 to < 0.25%
0.25 to < 0.50%
0.50 to < 0.75%
0.75 to < 2.50%
2.50 to < 10.00%
10.00 to < 100%
100% (default)
Total
Loan balance and provisions by PD (note i and ii)
2020
(Audited)
PD Range
0.00 to < 0.15%
0.15 to < 0.25%
0.25 to < 0.50%
0.50 to < 0.75%
0.75 to < 2.50%
2.50 to < 10.00%
10.00 to < 100%
100% (default)
Total
Stage 1
£m
156,099
10,402
7,334
2,326
2,442
143
1
-
178,747
Stage 1
£m
168,240
4,756
2,317
1,227
1,109
105
-
-
177,754
Gross balances
Stage 2
Stage 3
and POCI
£m
52
44
29
22
60
70
324
948
1,549
Stage 3
and POCI
£m
103
23
35
12
54
111
203
878
1,419
£m
2,573
1,369
1,298
636
1,085
823
2,875
-
10,659
£m
5,124
945
477
287
866
1,102
794
-
9,595
Gross balances
Stage 2
Total
Stage 1
Stage 2
Provisions
£m
158,724
11,815
8,661
2,984
3,587
1,036
3,200
948
190,955
£m
34
7
9
3
10
3
-
-
66
£m
28
13
19
10
19
16
71
-
176
Total
Stage 1
Stage 2
Provisions
£m
173,467
5,724
2,829
1,526
2,029
1,318
997
878
188,768
£m
33
3
2
1
1
-
-
-
40
£m
40
9
7
5
18
19
27
-
125
Stage 3
and POCI
£m
-
-
-
-
-
-
8
67
75
Stage 3
and POCI
£m
-
-
-
-
-
-
2
34
36
Total
£m
62
20
28
13
29
19
79
67
317
Total
£m
73
12
9
6
19
19
29
34
201
Provision
coverage
%
0.04
0.17
0.31
0.44
0.82
1.81
2.48
7.07
0.17
Provision
coverage
%
0.04
0.20
0.29
0.37
0.96
1.51
2.97
3.80
0.11
Notes:
i.
ii.
Includes POCI loans of £148 million (2020: £155 million).
In recognition of the financial impact that Covid-19 may have on our borrowers, an additional provision of £51 million was included in the impairment provisions for residential mortgages at 4 April 2020. This
additional provision was not allocated to underlying loans or attributed to stages and is therefore excluded from this table. During the year this provision has been assigned across the stages and is reflected in the
allocations for 4 April 2021. The additional provision resulted in a 4 April 2020 total provision coverage of 0.13%
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Risk report (continued)
Risk report (continued)
Credit risk – Residential mortgages (continued)
Annual Report and Accounts 2021
159
At 4 April 2021, 97% (2020: 98%) of the portfolio had a PD of less than 2.5%, reflecting the high quality of the residential mortgage portfolios. The provisions allocated to the lowest PD range
primarily reflect the fact that the majority of loans are in this range. The increase during the year within the 10.00% to 100% band is largely a result of an increase in the PD assigned to the higher
risk loans with payment deferrals within the prime portfolio. The reduction in the stage 2 balance within the 0.00% to < 0.15% band is due to lower risk interest only cases within the buy to let and
legacy portfolio moving from stage 2 to 1, as described below the residential mortgages staging analysis table on page 152.
Distribution of new business by borrower type (by value)
Distribution of new business by borrower type (by value) (note i)
Prime:
First time buyers
Home movers
Remortgages
Other
Total prime
Buy to let:
Buy to let new purchases
Buy to let remortgages
Total buy to let
Total new business
2021
%
27
28
19
1
75
9
16
25
100
2020
%
33
24
20
1
78
6
16
22
100
Note:
i. All new business measures exclude further advances and product switches.
The proportion of lending by borrower type has been impacted by the pandemic with the house purchase market virtually closed during the initial lockdown. Following the lockdown, the housing
market recovered strongly but the lower maximum LTV caps that were introduced (see LTV and credit risk concentration below) had a bigger impact on prime than buy to let. This is most evident in
the proportion of lending to first time buyers which has reduced to 27% (2020: 33%).
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Risk report (continued)
Risk report (continued)
Credit risk – Residential mortgages (continued)
LTV and credit risk concentration
Annual Report and Accounts 2021
160
Loan to value (LTV) is calculated by weighting the borrower level LTV by the individual loan balance to arrive at an average LTV. This approach is considered to reflect most appropriately the
exposure at risk.
LTV distribution of new business (by value) (note i)
Average LTV of new business (by value) (note i)
0% to 60%
60% to 75%
75% to 80%
80% to 85%
85% to 90%
90% to 95%
Over 95%
Total
2021
%
26
36
7
17
12
2
-
100
2020
%
22
34
7
11
22
4
-
100
Notes:
i. The LTV of new business excludes further advances and product switches.
ii. The average LTV of loan stock includes both amortised cost and FVTPL balances. There have been no
new FVTPL advances during the year.
Prime
Buy to let
Group
Average LTV of loan stock (by value) (note ii)
Prime
Buy to let and legacy
Group
2021
%
71
67
70
2021
%
55
57
56
2020
%
74
65
72
2020
%
58
59
58
The average LTV of prime new business completed in the period has reduced to 71% (2020: 74%), reflecting the withdrawal from higher LTV lending at the start of the pandemic. The maximum LTV
was initially reduced to 85% in April 2020 and has since been increased back to 90% (2020: 95%). The average LTV of buy to let new business increased from 65% to 67% due to higher
proportion of loans being originated close to the maximum allowable LTV of 75%. With house price increases during the year, the average indexed LTV of total loan stock has reduced to 56% (2020:
58%).
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Risk report (continued)
Risk report (continued)
Credit risk – Residential mortgages (continued)
Residential mortgage balances by LTV and region
Geographical concentration by stage
The following table shows residential mortgages, excluding FVTPL balances, by LTV and region across stages 1 and 2 (non credit-impaired) and stage 3 (credit-impaired).
Residential mortgage gross balances by LTV and region
2021
Greater
London
Central
England
Northern
England
South East
England
South West
England
Scotland
Wales
Northern
Ireland
Total
£m
£m
£m
£m
£m
£m
£m
£m
£m
24,487
10,968
11,326
9,537
6,129
118
62,565
8
7
1
12,484
6,432
7,119
6,147
2,828
53
35,063
4
3
1
9,340
5,630
6,351
5,826
1,914
50
29,111
28
25
3
8,930
4,137
4,653
4,262
2,132
14
24,128
1
1
-
6,454
3,263
3,653
3,276
1,741
33
18,420
2
2
-
3,526
2,103
2,427
2,354
974
32
11,416
18
16
2
1,944
1,245
1,311
1,109
359
3
5,971
1
1
-
995
391
446
469
237
49
2,587
83
73
10
68,160
34,169
37,286
32,980
16,314
352
189,261
145
128
17
62,573
35,067
29,139
24,129
18,422
11,434
5,972
2,670
189,406
0.13
264
110
67
36
32
2
511
1
1
-
100
60
61
37
11
1
270
1
1
-
86
51
58
51
25
10
281
5
4
1
77
31
28
22
10
-
168
1
1
-
44
31
30
14
7
-
126
-
-
-
24
16
17
15
8
2
82
2
2
-
16
9
12
9
3
-
49
-
-
-
13
5
6
6
5
3
38
14
12
2
624
313
279
190
101
18
1,525
24
21
3
Total stage 3 and POCI loans
Total residential mortgages
Total geographical concentrations
512
63,085
33%
271
35,338
19%
286
29,425
15%
169
24,298
13%
126
18,548
10%
84
11,518
6%
49
6,021
3%
52
2,722
1%
1,549
190,955
100%
(Audited)
Stage 1 and 2 loans
Fully collateralised
LTV ratio:
Up to 50%
50% to 60%
60% to 70%
70% to 80%
80% to 90%
90% to 100%
Not fully collateralised
Over 100% LTV
Collateral value
Negative equity
Total stage 1 and 2 loans
Stage 3 and POCI loans
Fully collateralised
LTV ratio:
Up to 50%
50% to 60%
60% to 70%
70% to 80%
80% to 90%
90% to 100%
Not fully collateralised
Over 100% LTV
Collateral value
Negative equity
Annual Report and Accounts 2021
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Provision
Coverage
(note i)
%
0.06
0.10
0.13
0.18
0.20
2.82
0.12
15.07
1.72
2.90
4.60
8.15
12.49
26.42
4.31
41.07
4.80
0.17
Annual Report and Accounts 2021
162
Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Credit risk – Residential mortgages (continued)
Residential mortgage gross balances by LTV and region
2020
Greater
London
(Audited)
Stage 1 and 2 loans
Fully collateralised
LTV ratio:
Up to 50%
50% to 60%
60% to 70%
70% to 80%
80% to 90%
90% to 100%
Not fully collateralised
Over 100% LTV
Collateral value
Negative equity
Total stage 1 and 2 loans
Stage 3 and POCI loans
Fully collateralised
LTV ratio:
Up to 50%
50% to 60%
60% to 70%
70% to 80%
80% to 90%
90% to 100%
Not fully collateralised
Over 100% LTV
Collateral value
Negative equity
Central
England
Northern
England
South East
England
South West
England
Scotland
Wales
Northern
Ireland
Total
£m
£m
£m
£m
£m
£m
£m
£m
£m
22,883
10,973
10,701
9,018
8,360
764
62,699
5
4
1
10,946
6,151
6,871
5,659
4,047
562
34,236
5
4
1
7,695
4,726
6,552
5,593
3,665
249
28,480
16
13
3
8,033
4,051
4,180
3,795
3,448
386
23,893
2
2
-
5,713
3,080
3,418
3,030
2,375
503
18,119
3
2
1
3,040
1,715
2,351
2,466
1,574
269
11,415
6
6
-
1,606
1,004
1,386
1,085
666
46
5,793
-
-
-
913
373
412
419
346
91
2,554
123
106
17
60,829
32,073
35,871
31,065
24,481
2,870
187,189
160
137
23
62,704
34,241
28,496
23,895
18,122
11,421
5,793
2,677
187,349
0.09
214
109
52
27
16
2
420
-
-
-
81
48
61
48
13
1
252
1
1
-
70
46
53
55
44
15
283
4
3
1
66
32
31
16
7
-
152
1
1
-
40
26
29
20
5
-
120
-
-
-
20
13
19
17
8
3
80
1
1
-
12
9
8
14
8
1
52
1
1
-
11
4
4
6
3
5
33
19
16
3
514
287
257
203
104
27
1,392
27
23
4
Total stage 3 and POCI loans
Total residential mortgages
Total geographical concentrations
420
63,124
34%
253
34,494
18%
287
28,783
15%
153
24,048
13%
120
18,242
10%
81
11,502
6%
53
5,846
3%
52
2,729
1%
1,419
188,768
100%
Note:
i.
In recognition of the financial impact that Covid-19 may have on our borrowers, an additional provision of £51 million was included in the impairment provisions for residential mortgages at 4 April 2020. This
additional provision was not allocated to underlying loans or attributed to stages and is therefore excluded from this table. During the year this provision has been assigned across the stages and is reflected in the
allocations for the year.
Provision
Coverage
(note i)
%
0.03
0.06
0.09
0.12
0.11
0.32
0.08
11.27
0.73
1.01
1.79
3.51
4.85
15.46
1.99
32.00
2.57
0.11
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Risk report (continued)
Risk report (continued)
Credit risk – Residential mortgages (continued)
Annual Report and Accounts 2021
163
Over the year, the geographical distribution of residential mortgages across the UK has remained stable, with the highest concentration continuing to be in Greater London, at 33% of the total
(2020: 34%).
In addition to balances held at amortised cost shown in the table above, there are £68 million (2020: £71 million) of residential mortgages held at FVTPL which have an average LTV of 38% (2020:
39%). The largest geographical concentration within the FVTPL balances is also in Greater London, at 54% (2020: 49%).
Arrears and possessions
Residential mortgage lending continues to have a low risk profile as demonstrated by the low level of arrears compared to the industry average:
Number of cases more than 3 months in arrears as % of total book (note i)
Number of properties in possession as % of total book
Prime
Buy to let and legacy
Total
UK Finance (UKF) industry average
2021
%
0.35
0.72
0.43
0.85
2020
%
0.33
0.74
0.41
0.74
Prime
Buy to let and legacy
Total
UKF industry average
2021
2020
Number of
properties
33
51
84
Number of
properties
98
150
248
%
0.00
0.01
0.00
0.01
%
0.01
0.05
0.02
0.03
Note:
i. The methodology for calculating mortgage arrears is based on the UKF definition of arrears, where
months in arrears is determined by dividing the arrears balance outstanding by the latest monthly
contractual payment.
During the year, the proportion of cases more than 3 months in arrears has increased to 0.43% (2020: 0.41%). Whilst payment deferrals have helped supress the flow of cases into arrears, the
ability of some borrowers to recover from arrears has slowed given the pressures on income. In addition, cases have remained in arrears as a result of the suspended flow of cases from arrears to
possessions following the introduction of Nationwide's Home Support Package, which included flexibility for mortgage repayments and a pledge for no repossessions before 31 May 2021. Another
factor explaining the increase in the number of cases more than 3 months in arrears is that under the UKF definition, as monthly payments reduced following the reduction in bank base rate from
0.75% to 0.1%, the arrears balance on mortgages linked to bank base rate will now represent a greater number of monthly payments.
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Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Credit risk – Residential mortgages (continued)
Residential mortgages by payment status
The following table shows the payment status of all residential mortgages.
Residential mortgages gross balances by payment status
(Audited)
Not past due
Past due 0 to 1 month
Past due 1 to 3 months
Past due 3 to 6 months
Past due 6 to 12 months
Past due over 12 months
Possessions
Total residential mortgages
2021
2020
Prime Buy to let and
legacy
£m
40,460
278
159
121
108
113
10
41,249
£m
148,285
842
259
149
113
123
3
149,774
Total
£m
188,745
1,120
418
270
221
236
13
191,023
Prime
£m
149,387
1,062
311
177
112
82
9
151,140
Buy to let and
legacy
£m
36,684
356
307
142
109
81
20
37,699
Total
£m
186,071
1,418
618
319
221
163
29
188,839
%
98.8
0.6
0.2
0.2
0.1
0.1
-
100
%
98.5
0.8
0.3
0.2
0.1
0.1
-
100
The balance of cases past due by up to 3 months has decreased to £1,538 million (2020: £2,036 million). Management has judged this to be a temporary position due to the availability of
government support and payment deferral schemes and an adjustment has therefore been made to recognise the underlying risk, retaining provisions of £21 million which would have otherwise
been released.
The balance of cases past due by more than 12 months has increased to £236 million (2020: £163 million); this is principally due to the possession moratorium. The moratorium will remain in place
until the end of May 2021 and has reduced possession balances to £13 million (2020: £29 million).
Interest only mortgages
Interest only balances for prime residential mortgages relate primarily to historical balances which were originally advanced as interest only mortgages or where a subsequent change in terms to an
interest only basis was agreed. Maturities on interest only mortgages are managed closely, engaging regularly with borrowers to ensure the loan is redeemed or to agree a strategy for repayment.
90% of the buy to let and legacy portfolio relate to interest only balances (2020: 89%) and buy to let remains open to new interest only lending under standard terms. Nationwide also re-entered
the prime market for interest only lending under a newly established credit policy in April 2020.
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Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Credit risk – Residential mortgages (continued)
Interest only mortgages (gross balance) – term to maturity (note i)
2021
Prime
Buy to let and legacy
Total
2020
Prime
Buy to let and legacy
Total
Term expired
(still open)
Due within one
year
£m
74
175
249
£m
68
134
202
£m
303
271
574
£m
258
211
469
Due after one
year and before
two years
£m
357
338
695
Due after two
years and before
five years
£m
1,256
1,360
2,616
£m
370
334
704
£m
1,412
1,236
2,648
Due after more
than five years
£m
6,757
34,963
41,720
£m
7,726
31,737
39,463
Total
£m
8,747
37,107
45,854
£m
9,834
33,652
43,486
% of
book
%
5.8
90.0
24.0
%
6.5
89.3
23.0
Note:
i. Balances subject to forbearance with agreed term extensions are presented based on the latest agreed contractual term.
Interest only loans that are term expired (still open) are not considered to be past due where contractual interest payments continue to be met, pending renegotiation of the facility. These loans are,
however, treated as credit impaired and categorised as stage 3 balances from three months after the maturity date.
Forbearance
Nationwide is committed to supporting borrowers facing financial difficulty by working with them to find a solution through proactive arrears management and forbearance. In addition, we are
supporting borrowers financially affected by the Covid-19 pandemic. Further details of this support are provided at the end of this forbearance section.
The Group applies the European Banking Authority (EBA) definition of forbearance.
The following concession events are included within the forbearance reporting for residential mortgages:
Past term interest only concessions
Nationwide works with borrowers who are unable to repay the capital at term expiry of their interest only mortgage. Where a borrower is unable to renegotiate the facility within six months of
maturity, but no legal enforcement is pursued, the account is considered forborne. Should another concession event such as a term extension occur within the six month period, this is also classed
as forbearance.
Interest only concessions
Where a temporary interest only concession is granted the loans do not accrue arrears for the period of the concession and these loans are categorised as impaired.
Capitalisation
When a borrower emerges from financial difficulty, provided they have made at least six full monthly instalments, they are offered the option to capitalise arrears. This results in the account being
repaired and the loans are categorised as not impaired provided contractual repayments are maintained.
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Risk report (continued)
Risk report (continued)
Credit risk – Residential mortgages (continued)
Annual Report and Accounts 2021
166
Capitalisation – temporary suspension of payments following notification of death of a borrower
On notification of death, we offer a 12 month capitalisation concession to allow time for the estate to redeem the account. The loan does not accrue arrears for the period of the concession although
interest will continue to be added. Accounts subject to this concession will be classed as forborne if the full contractual payment is not received.
Term extensions (within term)
Customers in financial difficulty may be allowed to extend the term of their mortgage. On a capital repayment mortgage this will reduce their monthly commitment; interest only borrowers will
benefit by having a longer period to repay the capital at maturity.
Permanent interest only conversions
In the past, some borrowers in financial difficulty were granted a permanent interest only conversion, normally reducing their monthly commitment. This facility was withdrawn in March 2012; it
remains available for buy to let lending in line with Nationwide’s new business credit policy.
The table below provides details of residential mortgages held at amortised cost subject to forbearance. Accounts that are currently subject to forbearance are assessed as in either stage 2 or stage
3:
Gross balances subject to forbearance (note i)
Past term interest only (note ii)
Interest only concessions
Capitalisation
Capitalisation – notification of death of borrower (note iii)
Term extensions (within term)
Permanent interest only conversions
Total forbearance (note iv)
Of which stage 2
Of which stage 3
Impairment provisions on forborne loans
2021
Prime Buy to let and
legacy
£m
123
41
37
91
15
41
348
£m
126
725
71
103
35
2
1,062
200
635
19
66
258
18
Total
£m
249
766
108
194
50
43
1,410
266
893
37
Prime
£m
117
533
75
156
34
2
917
160
472
5
2020
Buy to let and
legacy
£m
120
48
42
70
13
35
328
53
188
12
Total
£m
237
581
117
226
47
37
1,245
213
660
17
Notes:
i. Where more than one concession event has occurred, balances are reported under the latest event.
ii.
Includes interest only mortgages where a customer is unable to renegotiate the facility within six months of maturity and no legal enforcement is pursued. Should a concession event such as a term extension occur
within the six-month period, this will also be classed as forbearance.
iii. The prior period comparative for Capitalisation - notification of death of borrower has been restated for buy to let and legacy lending, increasing the balance by £10 million to £70 million.
iv. For loans subject to concession events, accounts are transferred back to stage 1 or 2 only after being up to date and meeting contractual obligations for a period of 12 months.
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Risk report (continued)
Risk report (continued)
Credit risk – Residential mortgages (continued)
Annual Report and Accounts 2021
167
Over the year, total balances subject to forbearance have increased to £1,410 million (2020: £1,245 million) driven largely by interest only concessions which accounts for the increase in stage 3
balances. Interest only concession balances have increased as some borrowers require further support following the expiry of their second payment deferral. However, this proportion is low with
only 1% of borrowers exiting a payment deferral currently having gone on to take an interest only concession.
The average LTV for forborne accounts is 50% (2020: 50%).
In addition to the amortised cost balances above, there are £68 million FVTPL balances (2020: £71 million), of which £8 million (2020: £9 million) are forborne.
Support for borrowers impacted by Covid-19
Payment deferrals continue to be offered to impacted borrowers in accordance with regulatory guidance; in isolation these payment deferrals are not recorded as forbearance and do not
automatically have an impact on the default status of borrowers. For borrowers who continue to need financial support after completion of a payment deferral period, Nationwide offers tailored
concessions. Under regulatory guidance, where these concessions are not arrears-bearing they are treated as forbearance and are included, as applicable, in the reported staging balance.
The following table shows the value of residential mortgages with a payment deferral related to Covid-19, showing total deferrals granted and those still in place at year end.
Payment and interest deferrals granted due to Covid-19
(Audited)
Prime
Number of properties (000s)
Balance (£m)
Share of book, balance (%)
Weighted average LTV (%)
Buy to let and legacy
Number of properties (000s)
Balance (£m)
Share of book, balance (%)
Weighted average LTV (%)
Total Residential
Number of properties (000s)
Balance (£m)
Share of book, balance (%)
Weighted average LTV (%)
4 April 2021
Payment
deferrals
granted
to date
Payment
deferrals
outstanding
4 April 2020
Payment
deferrals
outstanding
211
26,919
18%
59%
45
5,968
15%
59%
256
32,887
17%
59%
8
1,151
1%
61%
1
208
1%
60%
9
1,359
1%
61%
167
23,541
16%
63%
37
5,037
13%
61%
204
28,578
15%
62%
The outstanding balances of borrowers on a payment deferral have reduced to 1% (2020: 15%) of the total portfolio. The majority of the payment deferrals which have expired to date have resumed
payments. For residential mortgages, a provision of £36 million (2020: £22 million) has been recognised in respect of Covid-19 payment deferrals; this includes payment deferrals taken during the
period that have since expired but where risk is judged to remain elevated.
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Risk report (continued)
Risk report (continued)
Credit risk – Consumer banking
Summary
Annual Report and Accounts 2021
168
The consumer banking portfolio comprises balances on unsecured retail banking products: overdrawn current accounts, personal loans and credit cards. Over the year, total balances across these
portfolios have decreased by £590 million to £4,404 million (2020: £4,994 million), equating to a 12% reduction. The reduction in balances primarily reflects lower customer spending during the
Covid-19 pandemic, as well as reduced customer demand for new borrowing and the implementation of controls that reduce new lending in response to the increased risk arising from Covid-19.
To date arrears remain low and credit quality is stable; however, this performance has benefited from the impact of government support schemes, payment deferrals and the low base rate
environment.
2020
£m
280
3,030
1,684
4,994
%
5
61
34
100
Consumer banking gross balances
(Audited)
Overdrawn current accounts
Personal loans
Credit cards
Total consumer banking
2021
£m
233
2,797
1,374
4,404
All consumer banking loans are classified and measured at amortised cost.
Impairment losses and write-offs for the year
(Audited)
Overdrawn current accounts
Personal loans
Credit cards
Total iimmppaaiirrmmeenntt lloosssseess
Impairment charge as a % of average gross balance
Gross write-offs
2021
£m
19
76
30
125
%
2.68
£m
124
%
5
64
31
100
2020
£m
21
82
56
159
%
3.27
£m
87
Impairment losses for the year include the impact of updating macroeconomic assumptions and weightings to reflect the impact of the Covid-19 pandemic; further details are included in note 10 of
the financial statements. Updates to the severe downside scenario assumptions increased provisions by £20 million in the year, primarily in relation to personal loans. Another factor in the charge
for impairment losses is the number of loans with payment deferrals and interest holidays granted in the year; provisions against these loans total £38 million (2020: £17 million). The performance
of those loans where the concession has ended remains in line with our expectations. The prior year impairment losses included a £43 million charge reflecting the estimated impact of Covid-19 at
4 April 2020.
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Risk report (continued)
Credit risk – Consumer banking (continued)
Annual Report and Accounts 2021
169
The following table shows consumer banking balances by stage, with the corresponding impairment provisions and resulting provision coverage ratios:
Consumer banking product and staging analysis
Stage 1
Stage 2
Stage 3
Total
Stage 1
Stage 2
Stage 3
2021
2020
(Audited)
Gross balances
Overdrawn current accounts
Personal loans
Credit cards
Total
Provisions
Overdrawn current accounts
Personal loans
Credit cards
Total
Provisions as a % of total balance
Overdrawn current accounts
Personal loans
Credit cards
Total
£m
121
2,144
876
3,141
5
25
18
48
%
3.89
1.18
2.00
1.51
£m
78
521
391
990
23
77
108
208
%
29.38
14.81
27.68
21.04
£m
34
132
107
273
32
118
96
246
%
93.36
89.06
89.99
89.97
£m
£m
233
2,797
1,374
4,404
60
220
222
502
%
25.64
7.87
16.13
11.39
149
2,597
1,111
3,857
2
15
15
32
%
1.75
0.56
1.33
0.82
£m
89
296
442
827
17
33
91
141
%
19.06
11.15
20.67
17.09
£m
42
137
131
310
37
119
122
278
%
87.02
86.78
92.86
89.39
Additional
provision
(note i)
£m
-
-
-
-
3
23
17
43
%
-
-
-
-
Total
£m
280
3,030
1,684
4,994
59
190
245
494
%
21.21
6.27
14.55
9.90
Note:
i.
In recognition of the financial impact that Covid-19 may have on our borrowers, an additional provision of £43 million was included in the impairment provisions for consumer banking at 4 April 2020. This additional
provision was not allocated to underlying loans and therefore was not been attributed to stages. During the reporting period this provision has been assigned across the stages and is reflected in the allocations for 4
April 2021.
At 4 April 2021, 71% (2020: 77%) of the consumer banking portfolio is in stage 1. This reduction is largely the result of a change to our staging criteria from a multiple of 4 times origination PD to a
multiple of 2, thus making the models more sensitive to relative PD changes over time. This change resulted in an increase in the proportion of stage 2 balances to 23% (2020: 17%), with no
significant impact on provisions given the strong quality of the loans affected. The proportion of total balances in stage 3 is unchanged at 6% (2020: 6%), reflecting broadly stable underlying credit
performance. The increase in provisions to £502 million (2020: £494 million) is due to the uncertain economic outlook and how the impact of the Covid-19 pandemic is reflected in the economic
scenarios used to model expected credit losses.
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Risk report (continued)
Credit risk – Consumer banking (continued)
Annual Report and Accounts 2021
170
Consumer banking stage 3 gross balances and provisions include charged off balances. These are accounts which are closed to future transactions and are held on the balance sheet for an extended
period (up to 36 months) whilst recovery activities take place. Excluding these charged off balances and related provisions, provisions amount to 7.2% (2020: 5.7%) of gross balances.
The table below summarises the movements in the Group’s consumer banking balances held at amortised cost. The movements within the table are an aggregation of monthly movements over the
year.
Reconciliation of movements in gross consumer banking balances and impairment provisions
(Audited)
At 5 April 2020 (note i)
Stage transfers:
Transfers from Stage 1 to Stage 2
Transfers to Stage 3
Transfers from Stage 2 to Stage 1
Transfers from Stage 3
Net remeasurement of ECL arising from transfer of stage
Net movement arising from transfer of stage
New assets originated or purchased
Net impact of further lending and repayments
Changes in risk parameters in relation to credit quality
Other items impacting income statement
charge/(reversal) (including recoveries)
Redemptions
Removal of year-end additional provision for Covid-19
(note i)
Income statement charge for the year
Decrease due to write-offs
Other provision movements
4 April 2021
Net carrying amount
Non-credit impaired
Subject to 12-month ECL
Stage 1
Subject to lifetime ECL
Stage 2
Credit impaired
Subject to lifetime ECL
Stage 3
Total
Gross balances
£m
3,857
Provisions Gross balances
£m
827
£m
32
Provisions Gross balances
£m
310
£m
141
Provisions Gross balances
£m
4,994
£m
278
Provisions
£m
494
(1,960)
(10)
1,506
2
(462)
1,611
(1,210)
-
-
(655)
-
-
3,141
(46)
-
219
2
(161)
14
35
(50)
17
-
-
-
-
48
3,093
1,960
(118)
(1,506)
17
353
-
(29)
-
-
(161)
-
-
990
46
(87)
(219)
13
230
(17)
-
(29)
118
-
(5)
-
-
208
782
-
128
-
(19)
109
-
(17)
-
-
(5)
(124)
-
273
-
87
-
(15)
9
81
-
(19)
31
(6)
(2)
(124)
7
246
27
-
-
-
-
-
1,611
(1,256)
-
-
(821)
(124)
-
4,404
-
-
-
-
78
78
35
(98)
166
(6)
(7)
(43)
125
(124)
7
502
3,902
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Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Credit risk – Consumer banking (continued)
Reconciliation of movements in gross consumer banking balances and impairment provisions
(Audited)
At 5 April 2019
Stage transfers:
Transfers from Stage 1 to Stage 2
Transfers to Stage 3
Transfers from Stage 2 to Stage 1
Transfers from Stage 3
Net remeasurement of ECL arising from transfer of stage
Net movement arising from transfer of stage
New assets originated or purchased
Net impact of further lending and repayments
Changes in risk parameters in relation to credit quality
Other items impacting income statement
charge/(reversal) (including recoveries)
Redemptions
Income statement charge for the year
Additional provision for Covid-19 (note i)
Decrease due to write-offs
Other provision movements
4 April 2020 (note i)
Net carrying amount
Non-credit impaired
Subject to 12-month ECL
Stage 1
Subject to lifetime ECL
Stage 2
Credit impaired
Subject to lifetime ECL
Stage 3
Total
Gross balances
£m
3,538
Provisions Gross balances
£m
761
£m
27
Provisions Gross balances
£m
287
£m
132
Provisions Gross balances
£m
4,586
£m
259
Provisions
£m
418
(1,505)
(15)
1,334
2
(184)
2,248
(1,123)
-
1
(623)
-
-
3,857
(25)
-
160
2
(132)
5
26
(23)
(3)
-
-
-
-
32
3,825
1,505
(141)
(1,334)
14
44
-
77
-
-
(55)
-
-
827
25
(79)
(160)
10
189
(15)
-
(11)
38
-
(3)
-
-
141
686
-
156
-
(16)
140
-
(27)
-
(1)
(2)
(87)
-
310
-
79
-
(12)
29
96
-
(16)
28
(4)
(2)
(87)
4
278
32
-
-
-
-
-
2,248
(1,073)
-
-
(680)
(87)
-
4,994
-
-
-
-
86
86
26
(50)
63
(4)
(5)
43
159
(87)
4
494
4,500
Note:
i. At 4 April 2020, an additional provision for credit losses of £43 million was recognised to reflect the estimated impact of the Covid-19 pandemic on ECLs. At 4 April 2020, this additional provision was not allocated to
underlying loans and therefore was not attributed to stages. During the year, this provision has been allocated to underlying loans and is reflected in the movements within the table and the 4 April 2021 position.
The change to the staging criteria from a multiple of 4 times origination PD to a multiple of 2 drove the increase in the proportion of stage 2 balances to 23% (2020: 17%). As the staging of
individual loans is assessed monthly, the gross movements between stages 1 and 2 include the cumulative impact of transfers caused by changes in PD leading to the loans breaching the criteria for
transferring assets to stage 2 and vice versa.
Further information on movements in total gross loans and advances to customers and impairment provisions, including the methodology applied in preparing the table, is included in note 14 to the
financial statements.
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Risk report (continued)
Credit risk – Consumer banking (continued)
Annual Report and Accounts 2021
172
Reason for consumer banking balances being included in stage 2 (note i)
2021
Overdrawn current accounts
Personal loans
Credit cards
Total
Gross balances
£m
Provisions Gross balances
£m
£m
Provisions Gross balances
£m
£m
Provisions Gross balances
£m
£m
Provisions
£m
Quantitative criteria:
Payment status (greater than 30 DPD) (note ii)
Increase in PD since origination (less than 30 DPD)
Qualitative criteria:
Forbearance (less than 30 DPD) (note iii)
Other qualitative criteria (less than 30 DPD)
Total Stage 2 gross balances
3
66
1
8
78
2
20
-
1
23
6
510
-
5
521
5
72
-
-
77
4
364
-
23
391
3
101
-
4
108
13
940
1
36
990
10
193
-
5
208
Reason for consumer banking balances being included in stage 2
2020
Overdrawn current accounts
Personal loans
Credit cards
Total
Gross balances
£m
Provisions Gross balances
£m
£m
Provisions Gross balances
£m
£m
Provisions Gross balances
£m
£m
Provisions
£m
Quantitative criteria:
Payment status (greater than 30 DPD) (note ii)
Increase in PD since origination (less than 30 DPD)
Qualitative criteria:
Forbearance (less than 30 DPD) (note iii)
Other qualitative criteria (less than 30 DPD)
Total Stage 2 gross balances
4
74
2
9
89
3
13
-
1
17
12
278
-
6
296
5
28
-
-
33
7
399
-
36
442
5
78
-
8
91
23
751
2
51
827
13
119
-
9
141
Notes:
i.
In recognition of the financial impact that Covid-19 may have on our borrowers, an additional provision of £43 million was included in the impairment provisions for consumer banking at 4 April 2020. This additional
provision was not allocated to underlying loans and therefore was not attributed to stages. During the reporting period this provision has been assigned across the stages and is reflected in the allocations for 4 April
2021.
ii. This category includes all loans greater than 30 DPD, including those whose original reason for being classified as stage 2 was not arrears over 30 DPD.
iii. Stage 2 forbearance relates to cases where full repayment of principal and interest is still anticipated.
Balances reported within stage 2 are those which have experienced a significant increase in credit risk since origination. The significant increase is determined through both quantitative and
qualitative indicators. Of the £990 million stage 2 balances (2020: £827 million), only 1% (2020: 3%) are in arrears by 30 days or more, with the majority of balances in stage 2 due to an increase in
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Risk report (continued)
Credit risk – Consumer banking (continued)
Annual Report and Accounts 2021
173
PD since origination. The increase in personal loans stage 2 balances is largely the result of a change to staging criteria from a multiple of 4 times origination PD to a multiple of 2, thus making the
models more sensitive to relative PD changes over time. The reductions in credit cards and overdrawn current accounts are consistent with the reduction in total balances for these products in the
year.
The table below outlines the main criteria used to determine whether a significant increase in credit risk since origination has occurred.
Criteria
Quantitative
Detail
The primary quantitative indicators are the outputs of internal credit risk assessments. For consumer banking exposures, PDs are derived using scorecards, which use external
information such as that from credit reference agencies, as well as internal information such as known instances of arrears or other financial difficulty. While different approaches are
used within each portfolio, current and historical data relating to the exposure are combined with forward-looking macroeconomic information to determine the likelihood of default.
12-month and lifetime PDs are calculated for each loan.
The 12-month and lifetime PDs are compared to pre-determined benchmarks at each reporting date to ascertain whether a relative or absolute increase in credit risk has occurred. The
indicators for a significant increase in credit risk are:
• Absolute measures:
-
-
The 12-month PD exceeds the benchmark 12-month PD that is indicative, at the assessment date, of an account being in arrears.
The residual lifetime PD exceeds the benchmark residual lifetime PD, set at inception, which represents the maximum credit risk that would have been accepted at that point.
• Relative measure:
-
The residual lifetime PD has increased by at least 75 basis points and a multiple of 2 (2020: 4x multiple).
Qualitative
Backstop
Qualitative criteria include both forbearance events and, within the credit card portfolio, recognition of the risk related to borrowers in persistent debt.
In addition to the primary criteria for stage allocation described above, accounts that are more than 30 days past due are also transferred to stage 2.
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Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Credit risk – Consumer banking (continued)
Credit quality
Nationwide adopts robust credit management policies and processes designed to recognise and manage the risks arising from the portfolio.
The following table shows gross balances and provisions for consumer banking balances held at amortised cost, by PD range. The PD distributions shown are based on a 12-month IFRS 9 PDs at the
reporting date.
Consumer banking gross balances and provisions by PD (note i)
2021
(Audited)
PD range
0.00 to <0.15%
0.15 to < 0.25%
0.25 to < 0.50%
0.50 to < 0.75%
0.75 to < 2.50%
2.50 to < 10.00%
10.00 to < 100%
100% (default)
Total
Stage 1
£m
913
361
614
303
682
261
7
-
3,141
Gross balances
Stage 2
£m
3
21
79
84
297
302
204
-
990
Stage 3
£m
-
-
-
-
1
3
12
257
273
Consumer banking gross balances and provisions by PD
2020
(Audited)
PD range
0.00 to <0.15%
0.15 to < 0.25%
0.25 to < 0.50%
0.50 to < 0.75%
0.75 to < 2.50%
2.50 to < 10.00%
10.00 to < 100%
100% (default)
Total
Stage 1
£m
934
479
719
376
970
371
8
-
3,857
Gross balances
Stage 2
£m
4
6
19
26
205
378
189
-
827
Stage 3
£m
-
-
-
-
-
1
4
305
310
Total
£m
916
382
693
387
980
566
223
257
4,404
Total
£m
938
485
738
402
1,175
750
201
305
4,994
Stage 1
£m
9
4
6
4
13
11
1
-
48
Stage 1
£m
3
2
3
2
11
10
1
-
32
Provisions
Stage 2
£m
-
1
6
6
31
54
110
-
208
Provisions
Stage 2
£m
-
-
1
2
18
54
66
-
141
Stage 3
£m
-
-
-
-
-
-
5
241
246
Stage 3
£m
-
-
-
-
-
-
3
275
278
Total
£m
9
5
12
10
44
65
116
241
502
Total
£m
3
2
4
4
29
64
70
275
451
Provision
coverage
%
1.01
1.30
1.73
2.66
4.53
11.54
51.57
93.57
11.39
Provision
coverage
%
0.36
0.40
0.61
1.05
2.44
8.47
34.51
90.28
9.02
Note:
i.
In recognition of the financial impact that Covid-19 may have on our borrowers, an additional provision of £43 million was included in the impairment provisions for consumer banking at 4 April 2020. This additional
provision was not allocated to underlying loans and therefore was not attributed to stages. During the reporting period this provision has been assigned across the stages and is reflected in the allocations for 4 April
2021.
The credit quality of the consumer banking portfolio has remained stable with 89% of the portfolio (2020: 90%) considered good quality with a PD of less than 10%.
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Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Credit risk – Consumer banking (continued)
Consumer banking balances by payment due status
Credit risk in the consumer banking portfolios is primarily monitored and reported based on arrears status which is set out below.
Consumer banking gross balances by payment due status
(Audited)
Not past due
Past due 0 to 1 month
Past due 1 to 3 months
Past due 3 to 6 months
Past due 6 to 12 months
Past due over 12 months
Charged off (note i)
Total
Overdrawn
current
accounts
£m
189
9
3
3
2
3
24
233
Personal
loans
2021
Credit
cards
£m
2,616
34
10
16
11
12
98
2,797
£m
1,259
11
8
7
2
-
87
1,374
Total
£m
4,064
54
21
26
15
15
209
4,404
Overdrawn
current
accounts
£m
226
11
5
4
3
3
28
280
%
92.3
1.2
0.5
0.6
0.3
0.3
4.8
100
Personal
loans
£m
2,830
53
12
11
14
12
98
3,030
2020
Credit
cards
£m
1,528
23
13
9
2
-
109
1,684
Total
£m
4,584
87
30
24
19
15
235
4,994
%
91.8
1.7
0.6
0.5
0.4
0.3
4.7
100
Note:
i. Charged off balances relate to accounts which are closed to future transactions and are held on the balance sheet for an extended period (up to 36 months, depending on the product) whilst recovery procedures take
place.
Total balances subject to arrears, excluding charged off balances, have reduced to £131 million (2020: £175 million), representing 3.1% (2020: 3.7%) of the total balance excluding charged off
balances. The arrears performance has benefited from Covid-19 government support schemes and payment deferrals, as well as reduced spending on current account and credit cards. It is
management’s judgement that the arrears reduction is temporary and therefore this improvement in portfolio performance has not been reflected within the provisions at 4 April 2021.
Forbearance
Nationwide is committed to supporting customers facing financial difficulty, including those impacted by Covid-19, by working with them to find a solution through proactive arrears management
and forbearance.
The Group applies the European Banking Authority definition of forbearance.
The following concession events are included within the forbearance reporting for consumer banking:
Payment concession
This concession consists of reduced monthly payments over an agreed period and may be offered to customers with an overdraft or credit card. For credit cards subject to such a concession, arrears
do not increase provided the payments are made.
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Risk report (continued)
Risk report (continued)
Credit risk – Consumer banking (continued)
Interest suppressed payment arrangement
Annual Report and Accounts 2021
176
This temporary interest payment concession results in reduced monthly payments and may be offered to customers with an overdraft, credit card or personal loan. Interest payments and fees are
suppressed during the period of the concession and arrears do not increase. Cases subject to this concession are classified as impaired.
Balances re-aged/re-written
As customers repay their debt in line with the terms of their new arrangement, their accounts are re-aged, bringing them into an up-to-date and performing position. For personal loans we will
re-write the loan to extend the term and thus maintain a reduced monthly payment. For credit cards we re-age the account and set the payment status to ‘up-to-date’, at which point the customer
is treated in the same way as any other performing account.
The table below provides details of consumer banking balances subject to forbearance. Accounts that are currently subject to a concession are all assessed as either stage 2, or stage 3 (credit-
impaired) where full repayment of principal and interest is no longer anticipated.
Gross balances subject to forbearance (note i)
Payment concession
Interest suppressed payment concession
Balance re-aged/re-written
Total forbearance
Of which stage 2
Of which stage 3
Impairment provisions on forborne loans
Overdrawn
current
accounts
£m
7
6
-
13
5
7
8
2021
Personal
loans
Credit
cards
Total
£m
-
42
1
43
2
41
31
£m
1
13
2
16
4
12
11
£m
8
61
3
72
11
60
50
Overdrawn
current
accounts
£m
14
7
-
21
11
9
12
2020
Personal
loans
Credit
cards
£m
-
39
1
40
4
31
27
£m
1
15
3
19
3
15
13
Total
£m
15
61
4
80
18
55
52
Note:
i. Where more than one concession event has occurred, balances are reported under the latest event.
Over the year, total balances subject to forbearance have reduced to £72 million (2020: £80 million), with forborne balances as a percentage of the total consumer banking lending remaining stable
at 1.6% (2020: 1.6%). The balance reduction is likely to be temporary as borrowers have utilised payment deferrals as a method of support during the pandemic. These payment deferrals are not
reported as forbearance. The forbearance position has not increased as most customers have not required immediate further support following the expiry of their payment deferral.
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Risk report (continued)
Risk report (continued)
Credit risk – Consumer banking (continued)
Support for borrowers impacted by Covid-19
Annual Report and Accounts 2021
177
The ongoing impact of Covid-19 continues to be a concern for our consumer banking customers, and for those financially impacted we have offered additional help and continued support in these
challenging times.
In response to Covid-19, and in accordance with regulatory guidance, Nationwide has been offering payment deferrals on credit cards and personal loans, as well as interest holidays on current
accounts, since March 2020. For borrowers applying for an initial payment deferral, the deadline for applications was March 2021; payment deferrals can be taken beyond this point if they are
consecutive, but all must end by July 2021.
In line with Financial Conduct Authority (FCA) guidance during the period, no arrears or forbearance will be reported on the customer’s credit file as a result of these measures. In isolation these
concessions are not reported as forbearance and do not automatically impact the reported stage allocation.
The following table shows the value of consumer credit products with a payment deferral or using an interest-free period related to Covid-19.
Gross balances subject to a payment deferral or interest holiday due to Covid-19
(Audited)
Payment deferral
Personal Loans
Credit Cards
Interest holiday
Current Accounts
Total
Granted to date
Outstanding ((nnoottee ii))
2021
2020
Outstanding (note i)
Percentage of
gross balance
%
11
6
9
9
£m
301
85
20
406
Percentage of
gross balance
%
1
1
-
1
£m
20
7
-
27
Percentage of
gross balance
%
7
4
3
6
£m
225
64
8
297
Note:
i.
Includes consumer credit products with a payment deferral or using an interest-free period related to Covid-19 as used in the calculation of expected credit losses.
The outstanding balances of borrowers on a payment deferral have reduced to 1% (2020: 6%). The majority of customers have not required immediate further support following the expiry of their
payment deferral. For consumer banking, provisions include £38 million (2020: £17 million) in respect of Covid-19 payment deferrals and interest holidays.
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Risk report (continued)
Risk report (continued)
Credit risk – Commercial
Summary
Annual Report and Accounts 2021
178
The commercial portfolio comprises loans which have been provided to meet the funding requirements of registered social landlords, commercial real estate investors and project finance initiatives.
The commercial real estate and project finance portfolios are closed to new business.
Nationwide continues to support commercial borrowers where income has been disrupted through the impacts of Covid-19. Credit quality is stable, although portfolio performance has benefited
from the impact of government support schemes, payment deferrals and the low interest rate environment.
Commercial gross balances
(Audited)
Registered social landlords (note i)
Commercial real estate (CRE)
Project finance (note ii)
Commercial balances at amortised cost
Fair value adjustment for micro hedged risk (note iii)
Commercial balances – FVTPL
Total
2021
£m
4,828
769
670
6,267
653
52
6,972
2020
£m
5,425
996
712
7,133
741
57
7,931
Notes:
i.
ii.
iii. Micro hedged risk relates to loans hedged on an individual basis.
Loans to registered social landlords are secured on residential property.
Loans advanced in relation to project finance are secured on cash flows from government or local authority backed contracts under the Private Finance Initiative.
Over the year, total balances across the commercial portfolios continued to reduce, most significantly in the registered social landlords portfolio where loan amortisation and repayments exceeded
drawdowns on new lending to this sector. The reduction in commercial real estate balances is driven by amortisation and early repayments, reflecting the closed book strategy.
Impairment reversals and write-offs for the year
(Audited)
Total impairment reversals
Gross write-offs
2021
£m
(6)
3
2020
£m
(3)
1
The reduction in impairment is driven by improvements to the collateral value or anticipated cashflows for a small number of individually assessed exposures.
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Risk report (continued)
Risk report (continued)
Credit risk – Commercial (continued)
Annual Report and Accounts 2021
179
The following table shows commercial balances carried at amortised cost on the balance sheet, with the stage allocation of the exposures, impairment provisions and resulting provision coverage
ratios.
Commercial product and staging analysis
Stage 1
Stage 2
Stage 3
Total
Stage 1
Stage 2
Stage 3
2021
2020
(Audited)
Gross balances
Registered social landlords
CRE
Project finance
Total
Provisions
Registered social landlords
CRE
Project finance
Total
Provisions as a % of total balance
Registered social landlords
CRE
Project finance
Total
£m
4,782
574
595
5,951
1
1
-
2
%%
0.01
0.19
0.02
0.03
£m
46
120
53
219
-
2
2
4
%%
0.13
1.89
2.97
1.78
£m
-
75
22
97
-
23
4
27
%%
-
29.81
21.86
28.01
£m
4,828
769
670
6,267
1
26
6
33
%%
0.01
3.34
0.97
0.52
£m
5,385
791
616
6,792
1
2
-
3
%
0.02
0.25
0.02
0.04
£m
40
155
73
268
-
2
1
3
%
0.12
1.29
1.37
1.12
£m
-
50
23
73
-
18
9
27
%
-
36.00
39.13
36.99
Additional
provision
(note i)
£m
-
-
-
-
-
7
-
7
%
-
-
-
-
Total
£m
5,425
996
712
7,133
1
29
10
40
%
0.02
2.91
1.40
0.56
Note:
i.
In recognition of the financial impact that Covid-19 may have on our borrowers, an additional provision of £7 million was included in the impairment provisions for the CRE portfolio at 4 April 2020. This additional
provision was not allocated to underlying loans and therefore was not attributed to stages. At 4 April 2021 all provisions have been attributed to underlying loans and stages.
Over the year, the performance of the commercial portfolio has remained stable, with 95% (2020: 95%) of balances remaining in stage 1. Of the £219 million (2020: £268 million) stage 2 loans,
which represent 3.5% (2020: 3.8%) of total balances, £6 million (2020: £1 million) were in arrears by 30 days or more, with the remainder in stage 2 due to a deterioration in risk profile.
A number of loans have been impacted by a disruption to rental income as a result of the impacts of Covid-19; some of this disruption is considered temporary in nature and short-term concessions
have been applied. A small number of loans which are considered to have been adversely impacted in the longer term have contributed to an increase in stage 3 (credit-impaired) CRE loans to £75
million (2020: £50 million), equating to 10% (2020: 5%) of the total CRE exposure.
Within the registered social landlord portfolio, there are no stage 3 assets, and only 1% (2020: 1%) of the exposure is in stage 2.
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Risk report (continued)
Risk report (continued)
Credit risk – Commercial (continued)
Annual Report and Accounts 2021
180
Loans in the project finance portfolio benefit from long-term cash flows, which typically emanate from the provision of assets such as schools, hospitals, police stations, government buildings and
roads, procured under the Private Finance Initiative. 97% of these balances are in respect of fully developed assets. During the year, the project finance stage 3 provisions have reduced to £4 million
(2020: £9 million).
Credit quality
Nationwide applies robust credit management policies and processes to identify and manage the risks arising from the portfolio.
The following table shows the CRE portfolio by risk grade and the provision coverage for each category. The table includes balances held at amortised cost only.
CRE gross balances by risk grade and provision coverage
(Audited)
Strong
Good
Satisfactory
Weak
Impaired
Total
Stage 1
Stage 2
Stage 3
Total
2021
£m
343
192
39
-
-
574
£m
4
37
24
55
-
120
£m
-
-
-
-
75
75
£m
347
229
63
55
75
769
Provision
coverage
%
0.1
0.2
1.4
3.1
31.1
3.3
Stage 1
Stage 2
Stage 3
Total
2020
£m
433
289
69
-
-
791
£m
18
67
10
60
-
155
£m
-
-
-
-
50
50
£m
451
356
79
60
50
996
Provision
coverage
%
0.1
0.6
1.7
1.2
36.2
2.3
The risk grades in the table above are based upon the IRB supervisory slotting approach for specialised lending exposures, under which exposures are classified into categories depending on the
underlying credit risk, with the assessment based upon financial strength, asset characteristics, strength of the sponsor and the security. The credit quality of the CRE portfolio has declined slightly
with 83% (2020: 89%) of the portfolio rated as satisfactory or better. This reflects the run-off of the portfolio combined with limited migration to the weaker grades driven by cashflow volatility and
reduced asset values.
Risk grades for the project finance portfolio are also based upon supervisory slotting approach for specialised lending, with 90% of the exposure rated strong or good.
The registered social landlord portfolio is risk rated using an internal PD rating model with the major drivers being financial strength, evaluations of the borrower’s oversight and management, and
their type and size. The distribution of exposures is weighted towards the stronger risk ratings and against a backdrop of zero defaults in the portfolio, the credit quality remains high, with an
average 12-month PD of 0.04% across the portfolio.
In addition to the above, £52 million (2020: £57 million) of commercial lending balances are classified as FVTPL.
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Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Credit risk – Commercial (continued)
CRE balances by LTV and region
The following table includes both amortised cost and FVTPL CRE balances.
CRE lending gross balances by LTV and region (note i)
(Audited)
Fully collateralised
LTV ratio (note ii):
Less than 25%
25% to 50%
51% to 75%
76% to 90%
91% to 100%
Not fully collateralised:
Over 100% LTV
Collateral value
Negative equity
Total CRE loans
Geographical concentration
London
£m
2021
Rest of UK
£m
56
214
141
15
20
446
-
-
-
446
55%
45
154
104
20
11
334
38
25
13
372
45%
Total
££mm
101
368
245
35
31
780
38
25
13
818
100%
London
£m
2020
Rest of UK
£m
62
315
167
3
-
547
-
-
-
547
52%
59
254
115
43
-
471
32
19
13
503
48%
Total
£m
121
569
282
46
-
1,018
32
19
13
1,050
100%
Notes:
i. A CRE loan may be secured on assets located in different regions, with the allocation being based upon the value of the underlying assets in each region.
ii. The approach to revaluing assets charged as security is determined by the industry sector, the loan balance outstanding and the indexed value of the most recent independent external collateral valuation, with higher
risk loans subject to more frequent revaluations to determine provision requirements. The LTV ratio is calculated using the on-balance sheet carrying amount of the loan divided by the indexed value. The Investment
Property (IPD) monthly index is used.
Changes to the regional distribution of the CRE portfolio reflect the managed reduction of the portfolio, with 55% (2020: 52%) of the CRE exposure now being secured against assets located in
London. The LTV distribution of CRE balances has also changed as a result of reduced CRE property values, with 87% (2020: 93%) of the portfolio now having an LTV of 75% or less, and 57% (2020:
66%) of the portfolio having an LTV of 50% or less.
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Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Credit risk – Commercial (continued)
Credit risk concentration by industry sector
The following table includes balances held at amortised cost only.
CRE lending gross balances and provisions by industry sector (note i)
Retail
Office
Residential
Industrial and warehouse
Leisure and hotel
Other
Total CRE lending
2021
2020
Gross balances
£m
166
148
331
46
66
12
769
Provisions
£m
3
19
1
-
1
2
26
Gross balances
£m
202
222
419
56
84
13
996
Provisions
£m
3
12
1
2
-
4
22
Note:
i. The £7 million additional Covid-19 provision at 4 April 2020 was not allocated to underlying loans and is therefore excluded from this table.
Credit risk exposure by industry sector is broadly unchanged from the prior year. Where a CRE loan is secured on assets crossing different sectors, the sector allocation is based upon the value of the
underlying assets in each sector. For CRE exposures, excluding FVTPL balances, the largest exposure is to the residential sector, which represents 43% (2020: 42%) of the total CRE portfolio
balance. The exposure to retail assets has reduced to £166 million (2020: £202 million), with a weighted average LTV of 63% (2020: 53%). Exposure to the leisure and hotel sector has reduced to
£66 million (2020: £84 million), with a weighted average LTV of 55% (2020: 46%).
In addition to the amortised cost balances, there are £49 million (2020: £54 million) of FVTPL CRE commercial lending balances, of which £36 million (2020: £42 million) relates to the office sector
and £13 million (2020: £12 million) relates to the retail sector.
CRE balances by payment due status
Of the £818 million (2020: £1,050 million) CRE exposure, including FVTPL balances, £61 million (2020: £14 million) relates to balances with arrears. Of these, £32 million (2020: £6 million) have
arrears greater than 3 months. The increase in arrears balances is driven principally by a small number of loans that are being actively managed.
Forbearance
Nationwide is committed to supporting borrowers facing financial difficulty by working with them to find a solution through proactive arrears management and forbearance. In addition, we are
supporting borrowers financially affected by the Covid-19 pandemic. Further details of this support are provided at the end of this forbearance section.
Forbearance is recorded and reported at borrower level and applies to all commercial lending, including impaired exposures and borrowers subject to enforcement and recovery action. The Group
applies the European Banking Authority definition of forbearance.
For commercial customers in financial difficulty, the following concession events are included within forbearance reporting:
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183
Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Credit risk – Commercial (continued)
Refinance
Debt restructuring, either mid-term or at maturity, will be considered where asset sales or external refinance cannot be secured to repay facilities in full and where a restructure is considered to
provide the best debt recovery outcome for both the customer and Nationwide.
Interest concession
The temporary postponement of interest or a reduction to the interest rate charged, during which period the loans do not accrue arrears, may be considered where the customer is experiencing
payment difficulties.
Capital concession
Capital concessions consist of temporary suspensions to capital repayments to allow the customer time to overcome payment difficulties, the full or partial consolidation of previous payment arrears
or the partial write-off of debt.
Security amendment
Where a borrower seeks the release of assets charged to Nationwide as security for their commercial loan, this will be treated as forbearance where Nationwide’s position is weakened in terms of
either the loan to value of the remaining exposure or the level of interest cover available.
Extension at maturity
Borrowers who are unable to repay the loan at term expiry may be given short-term maturity extensions to allow them time to negotiate the repayment of facilities in full either via asset sales or
external refinance.
Breach of covenant
Where a borrower is unable to comply with either financial or non-financial covenants, as specified in their loan agreement, a temporary waiver or amendment to the covenants will be considered,
as appropriate.
The table below provides details of commercial loans that are currently subject to forbearance by concession event.
Gross balances subject to forbearance (note i)
Refinance
Modifications:
Payment concession
Security amendment
Extension at maturity
Breach of covenant
Total
Total impairment provision on forborne loans
2021
£m
8
100
6
7
123
244
29
2020
£m
43
31
8
19
126
227
14
Note:
i. Loans where more than one concession event has occurred are reported under the latest event.
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Risk report (continued)
Risk report (continued)
Credit risk – Commercial (continued)
Annual Report and Accounts 2021
184
The increase in payment concessions during the year reflects the measures put in place to support borrowers financially affected by the Covid-19 pandemic. The increase in the total impairment
provision on forborne loans to £29 million (2020: £14 million) is reflective of a reduction in asset values and apportionment of the £7 million Covid-19 provision overlay at 4 April 2020 to individual
borrowers where appropriate at 4 April 2021.
In addition to the amortised cost balances included in the table above, there are £52 million (2020: £57 million) of FVTPL commercial lending balances, none (2020: none) of which are forborne..
Support for borrowers impacted by Covid-19
Support continues to be offered to impacted borrowers via payment deferrals, interest only concessions and loan extensions.
No concessions have been applied for in the registered social landlord or project finance portfolios.
The following table shows the amortised cost balances of the CRE portfolio with a concession related to Covid-19 at the balance sheet date:
Gross CRE balances subject to a concession due to Covid-19
(Audited)
3 month capital and interest repayment holiday
6 month capital repayment holiday
Extension at maturity
Total
Loan
Balance
£m
37
58
84
179
2021
Percentage
of book
%
4.8
7.6
10.8
23.2
Weighted
Average LTV
%
85
59
47
59
Loan
Balance
£m
113
100
1
214
2020
Percentage
of book
%
11.3
10.1
0.1
21.5
Weighted
Average LTV
%
49
41
29
45
Balances subject to Covid-19 related temporary measures, at £179 million (2020: £214 million), represent 23.2% (2020: 21.5%) of the CRE portfolio balances and 9% (2020: 11%) of our CRE
borrowers. The cases that have received these temporary concessions have a weighted average LTV of 59% (2020: 45%), and £61 million (2020: £2.2 million) of the loan balances have an LTV
greater than 65%. Concessions have been agreed across all industry sectors, with a weighting towards the residential sector, which accounts for 42% (2020: 47%) of the balances subject to a
concession due to Covid-19, reflecting the portfolio concentration to this industry sector. The increase in maturity extensions is driven by the closed book status of this portfolio requiring support for
borrowers by allowing additional time to source an alternative lender or other means of repayment at a time of reduced market appetite for CRE lending.
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185
Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Credit risk – Treasury assets
Summary
The treasury portfolio is held primarily for liquidity management and, in the case of derivatives, for market risk management. As at 4 April 2021 treasury assets represented 19.5% (2020: 17.0%) of
total assets. There are no exposures to emerging markets, hedge funds or credit default swaps. The table below shows the classification of treasury asset balances.
Treasury asset balances
(Audited)
Cash
Loans and advances to banks and similar institutions
Investment securities (note i)
Investment securities (note i)
Investment securities
Liquidity and investment portfolio
Derivative instruments (note ii)
Treasury assets
Classification
Amortised cost
Amortised cost
FVOCI
FVTPL
Amortised cost
FVTPL
2021
£m
16,693
3,660
24,218
12
1,243
45,826
3,809
49,635
2020
£m
13,748
3,636
18,367
12
1,625
37,388
4,771
42,159
Notes:
i.
Investment securities at FVOCI include £20 million (2020: £6 million) and investment securities at FVTPL include £12 million (2020: £12 million) which relate to investments not included within the Group’s liquidity
portfolio. These investments primarily relate to investments made in Fintech companies which are being held for long-term strategic purposes.
ii. Derivatives are classified as assets where their fair value is positive and liabilities where their fair value is negative. As at 4 April 2021, derivative liabilities were £1,622 million (2020: £1,924 million).
Investment activity remains focused on high quality liquid assets, including assets eligible for central bank operations. The size of the portfolio has increased predominantly in cash balances and
government bond holdings. Derivatives are used to economically hedge financial risks inherent in core lending and funding activities and are not used for trading or speculative purposes.
Managing treasury credit risks
Credit risk within the treasury portfolio arises from the instruments held and transacted by the Treasury function for operational, liquidity and investment purposes. In addition, counterparty credit
risk arises from the use of derivatives to reduce exposure to market risks; these are only transacted with highly-rated organisations and are collateralised under market standard documentation. The
Treasury Credit Risk function manages all aspects of credit risk in accordance with Nationwide’s risk governance frameworks, under the supervision of the Credit Committee. No changes in policy or
risk appetite have been made or are proposed as a result of Covid-19.
A monthly review is undertaken of the current and expected future performance of treasury assets that determines expected credit loss (ECL) provision requirements. There were no impairment losses
for the year ended 4 April 2021 (2020: £nil). For financial assets held at amortised cost or at FVOCI, all exposures within the table below are classified as stage 1, reflecting the strong and stable credit
quality of treasury assets.
Impairment provisions on treasury assets
(Audited)
Loans and advances to banks and similar institutions
Investment securities – FVOCI
Investment securities – amortised cost
2021
Gross balances
£m
3,660
24,218
1,243
Provisions
£m
-
-
-
2020
Gross balances
£m
3,636
18,367
1,625
Provisions
£m
-
-
-
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Annual Report and Accounts 2021
186
Europe
%
Japan
%
Other
%
Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Credit risk – Treasury assets (continued)
Liquidity and investment portfolio
The liquidity and investment portfolio of £45,826 million (2020: £37,388 million) comprises liquid assets and other securities as set out below.
£m
Liquidity and investment portfolio by credit rating (note i)
2021
(Audited)
Liquid assets:
Cash and reserves at central banks
Government bonds (note ii)
Supranational bonds
Covered bonds
Residential mortgage backed securities (RMBS)
Asset backed securities (other)
Liquid assets total
Other securities (note iii):
RMBS FVOCI
RMBS amortised cost
Other investments (note iv)
Other securities total
Loans and advances to banks and similar institutions
Total
16,693
20,310
1,053
1,748
474
301
40,579
291
1,243
53
1,587
3,660
45,826
AAA
%
-
28
75
100
100
100
22
100
83
-
83
-
22
AA
%
100
60
25
-
-
-
72
-
14
38
12
65
70
A
%
-
12
-
-
-
-
6
-
3
-
3
34
8
Other
%
-
-
-
-
-
-
-
-
-
62
2
1
-
UK
%
100
39
-
62
72
75
65
100
100
62
99
89
68
US
%
-
18
-
-
-
-
9
-
-
-
-
2
8
-
26
-
25
28
25
14
-
-
38
1
8
13
%
%
%
%
%
%
%
£m
13,748
14,914
983
1,583
483
351
32,062
2020
(Audited)
Liquid assets:
Cash and reserves at central banks
Government bonds (note ii)
Supranational bonds
Covered bonds
Residential mortgage backed securities (RMBS)
Asset backed securities (other)
Liquid assets total
Other securities (note iii):
RMBS FVOCI
RMBS amortised cost
Other investments (note iv)
Other securities total
Loans and advances to banks and similar institutions
Total
Notes:
i. Ratings used are obtained from Standard & Poor’s (S&P) and from Moody’s or Fitch if no S&P rating is available. For loans and advances to banks and similar institutions, internal ratings are used.
ii. Balances classified as government bonds include government guaranteed and agency bonds.
iii. Includes RMBS (UK buy to let and UK Non-conforming) not eligible for the Liquidity Coverage Ratio (LCR).
iv. Includes investment securities held at FVTPL of £12 million (2020: £12 million).
17
1,625
48
1,690
3,636
37,388
100
47
-
68
72
59
70
100
58
13
-
-
-
70
-
34
87
100
100
100
26
100
100
38
98
92
73
100
83
-
81
-
26
-
16
-
16
28
41
9
-
25
-
-
-
-
11
-
12
62
13
79
69
-
-
38
2
1
-
-
-
62
2
4
9
-
5
-
4
20
5
-
-
-
-
3
10
-
8
-
-
-
-
4
-
-
-
-
-
-
-
-
10
-
-
-
-
5
-
-
-
-
-
5
%
-
7
-
-
-
-
3
-
-
-
-
-
3
-
7
100
13
-
-
7
-
-
-
-
1
6
%
-
5
100
16
-
-
7
-
-
-
-
1
5
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Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Credit risk – Treasury assets (continued)
Country exposures
This table summarises the exposure (shown at the balance sheet carrying value) to institutions outside the UK.
Annual Report and Accounts 2021
187
Country exposures
2021
(Audited)
Austria
Belgium
Finland
France
Germany
Ireland
Netherlands
Spain
Total Eurozone
USA
Japan
Rest of world (note i)
Total
2020
(Audited)
Austria
Belgium
Finland
France
Germany
Ireland
Netherlands
Spain
Total Eurozone
USA
Japan
Rest of world (note i)
Total
Government
Bonds
(note i)
£m
545
645
606
1,505
1,069
154
503
-
5,027
3,722
2,116
1,510
12,375
£m
369
390
381
265
639
44
194
-
2,282
3,703
1,024
934
7,943
Mortgage backed
securities
Covered
bonds
Supranational
bonds
Loans and advances
to banks and
similar institutions
Other
assets
£m
-
-
-
-
-
-
133
-
133
-
-
-
133
£m
-
-
-
-
-
-
133
-
133
-
-
-
133
£m
-
-
24
108
44
-
-
-
176
-
-
494
670
£m
-
-
25
22
31
-
-
-
78
-
-
424
502
£m
-
-
-
-
-
-
-
-
-
-
-
1,053
1,053
£m
-
-
-
-
-
-
-
-
-
-
-
983
983
£m
-
-
-
147
151
-
-
-
298
80
-
28
406
£m
-
-
-
-
162
-
-
1
163
94
-
43
300
£m
-
-
-
20
76
-
-
-
96
-
-
-
96
£m
-
-
-
30
144
-
-
-
174
-
-
-
174
Total
£m
545
645
630
1,780
1,340
154
636
-
5,730
3,802
2,116
3,085
14,733
£m
369
390
406
317
976
44
327
1
2,830
3,797
1,024
2,384
10,035
Note:
i. Rest of world exposure is to Canada, Denmark, Norway and Sweden (2020: Australia, Canada, Denmark, Norway and Sweden)
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Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Credit risk – Treasury assets (continued)
Derivative financial instruments
Annual Report and Accounts 2021
188
Derivatives are used to manage exposure to market risks, and not for trading or speculative purposes, although the application of accounting rules can create volatility in the income statement in a
given financial year. The fair value of derivative assets as at 4 April 2021 was £3.8 billion (2020: £4.8 billion) and the fair value of derivative liabilities was £1.6 billion (2020: £1.9 billion).
To comply with EU regulatory requirements, Nationwide, as a direct member of a central counterparty (CCP), has central clearing capability which it uses to clear standardised derivatives. Where
derivatives are not cleared at a CCP they are transacted under the International Swaps and Derivatives Association (ISDA) Master Agreement. A Credit Support Annex (CSA) is always executed in
conjunction with the ISDA Master Agreement. Under the terms of a CSA, collateral is passed between parties to mitigate the market-contingent counterparty risk inherent in the outstanding
positions. CSAs are two-way agreements where both parties post collateral dependent on the exposure of the derivative. Collateral is paid or received on a regular basis (typically daily) to mitigate
the mark to market exposures. Market standard CSA collateral allows GBP, EUR and USD cash, and in some cases, extends to high grade sovereign debt securities; both cash and securities are
currently held as collateral by the Society.
Nationwide’s CSA legal documentation for derivatives grants legal rights of set-off for transactions with the same counterparty. Accordingly, the credit risk associated with such positions is reduced
to the extent that negative mark to market values offset positive mark to market values in the calculation of credit risk within each netting agreement.
Under the terms of CSA netting agreements, outstanding transactions with the same counterparty can be offset and settled on a net basis following a default, or another predetermined event. Under
these arrangements, netting benefits of £1.4 billion (2020: £1.6 billion) were available and £2.4 billion (2020: £3.0 billion) of collateral was held.
This table shows the exposure to counterparty credit risk for derivative contracts after netting benefits and collateral.
Derivative credit exposure
Counterparty credit quality
(Audited)
Gross positive fair value of contracts as reported on the balance sheet
Netting benefits
Net current credit exposure
Collateral (cash)
Collateral (securities)
Net derivative credit exposure
AA
£m
742
(249)
493
(489)
-
4
2021
A
£m
3,052
(1,187)
1,865
(1,775)
(84)
6
BBB
£m
15
(4)
11
(11)
-
-
Total
£m
3,809
(1,440)
2,369
(2,275)
(84)
10
AA
£m
1,470
(481)
989
(982)
-
7
2020
A
£m
3,291
(1,157)
2,134
(1,924)
(91)
119
BBB
£m
10
(10)
-
-
-
-
Total
£m
4,771
(1,648)
3,123
(2,906)
(91)
126
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Risk report (continued)
Risk report (continued)
Liquidity and funding risk
Summary
Annual Report and Accounts 2021
189
Liquidity risk is the risk that Nationwide is unable to meet its liabilities as they fall due and maintain member and external stakeholder confidence. Funding risk is the risk that Nationwide is unable
to maintain diverse funding sources in wholesale and retail markets and manage excessive concentrations of funding types.
Liquidity and funding risks are managed within a comprehensive risk framework which includes policies, strategy, limit setting and monitoring, stress testing and robust governance controls. This
framework ensures that Nationwide maintains stable and diverse funding sources and a sufficient holding of high-quality liquid assets such that there is no significant risk that liabilities cannot be
met as they fall due.
Liquidity and funding levels continued to be within Board risk appetite and regulatory requirements throughout the year. This includes the Liquidity Coverage Ratio (LCR), which ensures that
sufficient high-quality liquid assets are held to survive a short term severe but plausible liquidity stress. Nationwide’s average LCR over the 12 months ending 4 April 2021 increased to 159% (2020:
152%). The LCR as at 4 April 2021 was 165% (2020: 163%). Nationwide continues to manage its liquidity prudently, with its internal risk appetite well within regulatory requirements.
The position against the longer-term funding metric, the Net Stable Funding Ratio (NSFR) is also monitored. Based on current interpretations of expected regulatory requirements and guidance, the
NSFR at 4 April 2021 was 141% (2020: 134%), well in excess of the expected 100% minimum future requirement.
Funding risk
Funding strategy
Nationwide’s funding strategy is to remain predominantly retail funded, as set out below.
Funding profile
Assets
(note i)
Retail mortgages
Treasury assets (including liquidity portfolio)
Commercial lending
Consumer lending
Other assets
Total
2021
£bn
190.7
45.8
6.9
3.9
7.6
254.9
2020 Liabilities
£bn
188.6 Retail funding
37.4 Wholesale funding
7.9 Other liabilities
4.5 Capital and reserves (note ii)
9.6
248.0 Total
Notes:
i. Figures in the above table are stated net of impairment provisions where applicable.
ii.
Includes all subordinated liabilities and subscribed capital.
2021
£bn
170.3
59.5
3.2
21.9
254.9
2020
£bn
159.7
62.3
3.5
22.5
248.0
At 4 April 2021, Nationwide’s loan to deposit ratio, which represents loans and advances to customers divided by the total of shares and other deposits, was 115.3% (2020: 122.4%).
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Risk report (continued)
Risk report (continued)
Liquidity and funding risk (continued)
Wholesale funding
Annual Report and Accounts 2021
190
The wholesale funding portfolio comprises a range of secured and unsecured instruments to ensure that a stable and diversified funding base is maintained across a range of instruments,
currencies, maturities and investor types. Part of Nationwide’s wholesale funding strategy is to remain active in core markets and currencies. A funding risk limit framework also ensures that a
prudent funding mix and maturity concentration profile is maintained and limits the level of encumbrance to ensure enough contingent funding capacity is retained in the event of a stress.
Wholesale funding has decreased by £2.8 billion to £59.5 billion during the year. The decrease is primarily driven by £4.8 billion decrease in covered bonds, due to a debt buy-back exercise and
maturities during the year, along with a decrease in short-term wholesale funding. This decrease was partially offset by increased repo activity. The wholesale funding ratio (on-balance sheet
wholesale funding as a proportion of total funding liabilities) was 26.7% at 4 April 2021 (2020: 28.5%).
The table below sets out Nationwide’s wholesale funding by currency.
Wholesale funding by currency
Repos
Deposits
Certificates of deposit
Commercial paper
Covered bonds
Medium term notes
Securitisations
Term Funding Scheme with additional incentives for SMEs (TFSME)
Term Funding Scheme (TFS)
Other
Total
GBP
£bn
4.2
6.4
0.1
-
5.4
2.0
2.0
16.4
-
0.2
36.7
EUR
£bn
0.8
0.6
-
-
8.5
3.2
0.5
-
-
0.5
14.1
2021
USD
£bn
2.9
-
-
-
0.7
3.4
0.4
-
-
0.1
7.5
Other
£bn
0.2
-
-
-
0.4
0.6
-
-
-
-
1.2
Total
£bn
8.1
7.0
0.1
-
15.0
9.2
2.9
16.4
-
0.8
59.5
% of
total
14
12
-
-
25
15
5
28
-
1
100
GBP
£bn
0.5
6.2
1.5
-
5.0
1.9
2.2
-
17.0
0.2
34.5
EUR
£bn
0.1
1.2
0.4
-
13.4
2.5
0.9
-
-
0.8
19.3
2020
USD
£bn
-
1.3
0.1
1.6
0.8
2.2
1.1
-
-
0.2
7.3
Other
£bn
-
-
-
-
0.6
0.6
-
-
-
-
1.2
Total
£bn
0.6
8.7
2.0
1.6
19.8
7.2
4.2
-
17.0
1.2
62.3
% of
total
1
14
3
3
31
12
7
-
27
2
100
The residual maturity of wholesale funding, on a contractual maturity basis, is set out on the next page.
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191
Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Liquidity and funding risk (continued)
Wholesale funding – residual maturity
22002211
Repos
Deposits
Certificates of deposit
Commercial paper
Covered bonds
Medium term notes
Securitisations
TFSME
Other
Total
Of which secured
Of which unsecured
% of total
Not more than
one month
£bn
77..99
44..66
00..11
--
--
00..22
00..55
--
--
1133..33
88..44
44..99
2222..44
Wholesale funding – residual maturity
2020
Not more than
one month
Repos
Deposits
Certificates of deposit
Commercial paper
Covered bonds
Medium term notes
Securitisations
TFS
Other
Total
Of which secured
Of which unsecured
% of total
£bn
0.6
5.2
0.1
-
-
-
0.3
-
-
6.2
0.9
5.3
10.0
Over one
month but not
more than
three months
£bn
00..22
00..77
--
--
--
--
--
--
--
00..99
00..22
00..77
11..55
Over three
months but not
more than
six months
£bn
--
11..66
--
--
--
00..66
--
--
--
22..22
--
22..22
33..77
Over six
months but not
more than
one year
£bn
--
00..11
--
--
22..55
--
00..11
--
00..11
22..88
22..77
00..11
44..77
Over one
month but not
more than
three months
£bn
-
1.6
1.7
0.9
-
-
-
-
-
4.2
1.2
3.0
6.7
Over three
months but not
more than
six months
£bn
-
1.9
0.2
0.7
0.9
-
0.5
-
-
4.2
1.4
2.8
6.7
Over six
months but not
more than
one year
£bn
-
-
-
-
2.6
0.2
0.4
6.0
-
9.2
9.0
0.2
14.8
Subtotal less
than one year
£bn
88..11
77..00
00..11
--
22..55
00..88
00..66
--
00..11
1199..22
1111..33
77..99
3322..33
Subtotal less
than one year
£bn
0.6
8.7
2.0
1.6
3.5
0.2
1.2
6.0
-
23.8
12.5
11.3
38.2
Over one
year but not
more than
two years
£bn
--
--
--
--
22..66
22..00
11..11
--
00..11
55..88
33..88
22..00
99..77
Over one
year but not
more than
two years
£bn
-
-
-
-
2.6
0.7
0.7
11.0
0.2
15.2
14.5
0.7
24.4
Over two years
Total
£bn
--
--
--
--
99..99
66..44
11..22
1166..44
00..66
3344..55
2288..00
66..55
5588..00
£bn
88..11
77..00
00..11
--
1155..00
99..22
22..99
1166..44
00..88
5599..55
4433..11
1166..44
110000..00
Over two years
Total
£bn
-
-
-
-
13.7
6.3
2.3
-
1.0
23.3
16.8
6.5
37.4
£bn
0.6
8.7
2.0
1.6
19.8
7.2
4.2
17.0
1.2
62.3
43.8
18.5
100.0
At 4 April 2021, cash, government bonds and supranational bonds included in the liquid asset buffer represented 157% of wholesale funding maturing in less than one year, assuming no rollovers
(2020: 122%).
During the year, Nationwide fully repaid its £17.0 billion of TFS drawings and drew £16.4 billion from the TFSME, which has a four-year flexible maturity.
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Annual Report and Accounts 2021
192
Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Liquidity and funding risk (continued)
Liquidity risk
Liquidity strategy
Sufficient liquid assets, both in terms of amount and quality, are held to meet daily cash flow needs as well as simulated stressed requirements driven by the Society’s risk appetite and regulatory
assessments. This includes prudent management of the currency mix of liquid assets to ensure there is no undue reliance on currencies not consistent with the profile of stressed outflows.
Liquid assets are held and managed centrally by the Treasury function. A high-quality liquidity portfolio is maintained, predominantly comprising reserves held at central banks and highly-rated debt
securities issued by a restricted range of governments, central banks and supranationals.
The Society’s risk appetite, as set by the Board, defines the size and mix of the liquid asset buffer, and is translated into a set of liquidity risk limits. The buffer composition is also influenced by other
relevant considerations such as stress testing and regulatory requirements.
Liquid assets
The table below sets out the sterling equivalent fair value of the liquidity portfolio, by issuing currency. It includes off-balance sheet liquidity, such as securities received through reverse repurchase
(repo) agreements, and excludes securities encumbered through repo agreements and for other purposes.
Liquid assets
Cash and reserves at central banks
Government bonds (note ii)
Supranational bonds
Covered bonds
Residential mortgage backed securities (RMBS) (note iii)
Asset-backed securities and other securities
Total
2021
EUR
USD
£bn
--
44..55
00..55
11..11
00..11
00..11
66..33
£bn
--
11..22
00..44
00..11
--
--
11..77
JPY
£bn
--
22..11
--
--
--
--
22..11
Other
(note i)
£bn
--
00..77
--
--
--
--
00..77
GBP
£bn
1166..77
44..22
--
00..55
00..88
00..33
2222..55
Total
£bn
1166..77
1122..77
00..99
11..77
00..99
00..44
3333..33
GBP
£bn
13.7
6.8
0.3
0.5
0.5
0.2
22.0
EUR
£bn
-
2.3
0.4
1.0
0.1
0.1
3.9
2020
USD
£bn
-
3.8
0.2
0.1
0.1
-
4.2
JPY
£bn
-
1.0
-
-
-
-
1.0
Other
(note i)
£bn
-
0.5
-
-
-
-
0.5
Total
£bn
13.7
14.4
0.9
1.6
0.7
0.3
31.6
Notes:
i. Other currencies primarily consist of Canadian dollars.
ii. Balances classified as government bonds include government guaranteed and agency bonds.
iii. Balances include all RMBS held by the Society which can be monetised through sale or repo.
The average combined month end balance during the year of cash and reserves at central banks, and government and supranational bonds, was £42.1 billion (2020: £29.3 billion).
Nationwide also holds a portfolio of high quality, central bank eligible covered bonds, RMBS and asset-backed securities. Other securities are held that are not eligible for central bank operations but
can be monetised through repurchase agreements with third parties or through sale.
During the year, Nationwide set its first Environmental, Social and Governance (ESG) Investment policy for treasury assets. This includes annual investment targets with the aim of holding £1.5 billion
of ESG assets by 4 April 2023. Nationwide has met its 2021 target of £750 million. Nationwide’s criteria for ESG assets are currently restricted to bonds issued by Multilateral Development Banks.
ESG investment criteria are subject to ongoing review.
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Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Liquidity and funding risk (continued)
Annual Report and Accounts 2021
193
Nationwide undertakes securities financing transactions in the form of repurchase agreements. This demonstrates the liquid nature of the assets held in its liquid asset buffer as well as satisfying
regulatory requirements. Cash is borrowed in return for pledging assets as collateral and because settlement is on a simultaneous ‘delivery versus payment’ basis, the main credit risk arises from
intra-day changes in the value of the collateral. This is largely mitigated by Nationwide’s collateral management processes.
Repo market capacity is regularly assessed and tested to ensure there is sufficient capacity to monetise the liquid asset buffer rapidly in a stress.
For contingent purposes, Nationwide pre-positions unencumbered mortgage assets at the Bank of England which can be used in the Bank of England’s liquidity operations if market liquidity is
severely disrupted.
RReessiidduuaall mmaattuurriittyy ooff ffiinnaanncciiaall aasssseettss aanndd lliiaabbiilliittiieess
The table below segments the carrying value of financial assets and financial liabilities into relevant maturity groupings based on the final contractual maturity date (residual maturity):
Residual maturity (note i)
2021
Financial assets
Cash
Loans and advances to banks and similar institutions
Investment securities
Derivative financial instruments
Fair value adjustment for portfolio hedged risk
Loans and advances to customers
Total financial assets
Financial liabilities
Shares
Deposits from banks and similar institutions
Of which repo
Of which TFSME
Other deposits
Fair value adjustment for portfolio hedged risk
Secured funding – ABS and covered bonds
Senior unsecured funding
Derivative financial instruments
Subordinated liabilities
Subscribed capital (note iii)
Total financial liabilities
Off-balance sheet commitments (note iv)
Net liquidity difference
Cumulative liquidity difference
Due less than
one month
(note ii)
£m
Due between
one and
three months
£m
Due between
three and
six months
£m
Due between
six and
nine months
£m
Due between
nine and
twelve months
£m
Due between
one and
two years
£m
Due between
two and
five years
£m
Due after
more than
five years
£m
16,693
2,815
39
119
4
2,616
22,286
149,985
10,417
7,984
-
2,234
1
467
202
50
29
1
163,386
13,259
(154,359)
(154,359)
-
-
136
26
23
1,515
1,700
1,976
166
165
-
642
6
23
48
3
-
1
2,865
-
(1,165)
(155,524)
-
-
197
39
62
2,188
2,486
2,501
-
-
-
1,568
3
29
561
16
29
1
4,708
-
(2,222)
(157,746)
-
-
47
62
59
2,204
2,372
2,085
9
-
-
34
-
892
-
10
3
-
3,033
-
(661)
(158,407)
-
-
137
475
83
2,128
2,823
2,312
-
-
-
24
1
1,780
5
10
-
-
4,132
-
(1,309)
(159,716)
-
-
938
331
295
8,462
10,026
6,864
-
-
-
15
9
3,715
2,053
144
-
-
12,800
-
(2,774)
(162,490)
-
-
8,101
1,183
322
23,359
32,965
3,495
16,430
-
16,430
5
5
5,816
5,072
443
3,114
-
34,380
-
(1,415)
(163,905)
-
845
15,878
1,574
98
159,075
177,470
1,095
-
-
-
-
-
5,783
1,477
946
4,400
240
13,941
-
163,529
(376)
Total
£m
16,693
3,660
25,473
3,809
946
201,547
252,128
170,313
27,022
8,149
16,430
4,522
25
18,505
9,418
1,622
7,575
243
239,245
13,259
(376)
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Annual Report and Accounts 2021
194
Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Liquidity and funding risk (continued)
Residual maturity (note i)
2020
Financial assets
Cash
Loans and advances to banks and similar institutions
Investment securities
Derivative financial instruments
Fair value adjustment for portfolio hedged risk
Loans and advances to customers
Total financial assets
Financial liabilities
Shares
Deposits from banks and similar institutions
Of which repo
Of which TFS
Other deposits
Fair value adjustment for portfolio hedged risk
Secured funding – ABS and covered bonds
Senior unsecured funding
Derivative financial instruments
Subordinated liabilities
Subscribed capital (note iii)
Total financial liabilities
Off-balance sheet commitments (note iv)
Net liquidity difference
Cumulative liquidity difference
Due less than
one month
(note ii)
£m
Due between
one and
three months
£m
Due between
three and
six months
£m
Due between
six and
nine months
£m
Due between
nine and
twelve months
£m
Due between
one and
two years
£m
Due between
two and
five years
£m
Due after
more than
five years
£m
13,748
2,832
18
33
25
2,856
19,512
139,870
3,610
638
-
2,164
5
242
150
152
32
1
146,226
11,416
(138,130)
(138,130)
-
-
495
77
65
1,395
2,032
1,205
1,202
-
-
377
2
26
2,673
95
-
1
5,581
-
(3,549)
(141,679)
-
-
376
347
124
2,067
2,914
1,905
-
-
-
1,881
1
1,475
824
12
729
1
6,828
-
(3,914)
(145,593)
-
-
107
35
150
2,152
2,444
2,003
2,000
-
2,000
17
2
548
-
33
2
-
4,605
-
(2,161)
(147,754)
-
-
137
212
122
2,129
2,600
1,932
4,000
-
4,000
23
-
2,474
117
44
-
-
8,590
-
(5,990)
(153,744)
-
-
373
862
388
8,629
10,252
5,219
11,000
-
11,000
10
7
3,425
750
29
-
-
20,440
-
(10,188)
(163,932)
-
-
4,715
978
554
23,624
29,871
6,377
-
-
-
10
12
10,062
3,866
266
2,577
-
23,170
-
6,701
(157,231)
-
804
13,783
2,227
346
158,126
175,286
1,180
-
-
-
-
-
6,703
2,628
1,293
5,977
250
18,031
-
157,255
24
Total
£m
13,748
3,636
20,004
4,771
1,774
200,978
244,911
159,691
21,812
638
17,000
4,482
29
24,955
11,008
1,924
9,317
253
233,471
11,416
24
-
Notes:
i. The analysis excludes certain non-financial assets (including property, plant and equipment, intangible assets, other assets, deferred tax assets and accrued income and prepaid expenses) and non-financial liabilities
(including provisions for liabilities and charges, accruals and deferred income, current tax liabilities and other liabilities). The retirement benefit surplus and lease liabilities have also been excluded.
ii. Due less than one month includes amounts repayable on demand.
iii. The principal amount for undated subscribed capital is included within the due after more than five years column.
iv. Off-balance sheet commitments include amounts payable on demand for undrawn loan commitments, customer overpayments on residential mortgages where the borrower can draw down the amount overpaid, and
commitments to acquire financial assets.
In practice, customer behaviours mean that liabilities are often retained for longer than their contractual maturities and assets are repaid earlier. This gives rise to funding mismatches on the
balance sheet. The balance sheet structure and risks are managed and monitored by Nationwide’s Assets and Liabilities Committee (ALCO). Judgement and past behavioural performance of each
asset and liability class are used to forecast likely cash flow requirements.
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Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Liquidity and funding risk (continued)
Annual Report and Accounts 2021
195
The 4 April 2021 table above includes the impact of a debt buy-back exercise that involved the Society repurchasing seven outstanding series of covered bonds totalling £2 billion (GBP equivalent).
This exercise followed the issuance of senior unsecured debt predominantly for the purpose of securing our credit rating with Moody’s. The impact of unwinding associated derivative financial
instruments is also reflected.
Financial liabilities – gross undiscounted contractual cash flows
The tables below provide an analysis of gross contractual cash flows. The totals differ from the analysis of residual maturity as they include estimated future interest payments, calculated using
balances outstanding at the balance sheet date, contractual maturities and appropriate forward-looking interest rates.
Amounts are allocated to the relevant maturity band based on the timing of individual contractual cash flows.
Gross contractual cash flows
2021
(Audited)
Shares
Deposits from banks and similar institutions
Other deposits
Secured funding – ABS and covered bonds
Senior unsecured funding
Subordinated liabilities
Subscribed capital (note ii)
Total non-derivative financial liabilities
Derivative financial liabilities:
Gross settled derivative outflows
Gross settled derivative inflows
Gross settled derivatives – net flows
Net settled derivative liabilities
Total derivative financial liabilities
Total financial liabilities
Off-balance sheet commitments (note iii)
Total financial liabilities including off-balance sheet
commitments
Due less than
one month
(note i)
£m
149,985
10,417
2,234
469
203
32
1
163,341
Due between
one and
three months
£m
2,017
170
643
32
51
-
1
2,914
Due between
three and
six months
£m
2,540
4
1,568
51
588
91
4
4,846
Due between
six and
nine months
£m
2,122
13
34
918
3
39
3
3,132
Due between
nine and
twelve months
£m
2,346
4
24
1,860
64
86
4
4,388
Due between
one and
two years
£m
6,966
16
15
3,883
2,172
248
13
13,313
Due between
two and
five years
£m
3,631
16,455
5
6,119
5,298
3,606
43
35,157
(2,803)
2,798
(5)
(104)
(109)
163,232
13,259
176,491
(337)
333
(4)
(175)
(179)
2,735
-
(416)
385
(31)
(183)
(214)
4,632
-
(199)
178
(21)
(189)
(210)
2,922
-
(571)
553
(18)
(222)
(240)
4,148
-
(3,584)
3,371
(213)
(583)
(796)
12,517
(8,449)
8,136
(313)
(1,037)
(1,350)
33,807
2,735
4,632
2,922
4,148
12,517
33,807
12,445
249,697
-
-
-
13,259
Due after
more than
five years
£m
1,095
-
-
5,899
1,528
4,765
247
13,534
(6,752)
6,461
(291)
(798)
(1,089)
12,445
Total
£m
170,702
27,079
4,523
19,231
9,907
8,867
316
240,625
(23,111)
22,215
(896)
(3,291)
(4,187)
236,438
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Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Liquidity and funding risk (continued)
Gross contractual cash flows
2020
(Audited)
Shares
Deposits from banks and similar institutions
Other deposits
Secured funding – ABS and covered bonds
Senior unsecured funding
Subordinated liabilities
Subscribed capital (note ii)
Total non-derivative financial liabilities
Derivative financial liabilities:
Gross settled derivative outflows
Gross settled derivative inflows
Gross settled derivatives – net flows
Net settled derivative liabilities
Total derivative financial liabilities
Total financial liabilities
Off-balance sheet commitments (note iii)
Total financial liabilities including off-balance sheet
commitments
Due less than
one month
(note i)
£m
139,870
3,610
2,164
247
151
36
1
146,079
Due between
one and
three months
£m
1,260
1,206
382
34
2,681
-
1
5,564
Due between
three and
six months
£m
1,958
4
1,883
1,506
871
806
4
7,032
Due between
six and
nine months
£m
2,052
2,004
17
581
4
43
3
4,704
Due between
nine and
twelve months
£m
1,977
4,003
23
2,644
182
96
4
8,929
Due between
one and
two years
£m
5,358
11,005
10
3,589
890
276
13
21,141
Due between
two and
five years
£m
6,597
-
10
10,526
4,145
3,188
40
24,506
(1,124)
1,101
(23)
(70)
(93)
145,986
11,416
157,402
(967)
928
(39)
(175)
(214)
5,350
-
(791)
771
(20)
(174)
(194)
6,838
-
5,350
6,838
(165)
142
(23)
(258)
(281)
4,423
-
4,423
(665)
621
(44)
(300)
(344)
8,585
-
(427)
387
(40)
(865)
(905)
20,236
(6,495)
6,146
(349)
(1,373)
(1,722)
22,784
-
-
-
11,416
8,585
20,236
22,784
15,435
241,053
Annual Report and Accounts 2021
196
Due after
more than
five years
£m
1,180
-
-
6,609
2,621
6,304
255
16,969
(5,915)
5,605
(310)
(1,224)
(1,534)
15,435
Total
£m
160,252
21,832
4,489
25,736
11,545
10,749
321
234,924
(16,549)
15,701
(848)
(4,439)
(5,287)
229,637
Notes:
i. Due less than one month includes amounts repayable on demand.
ii. The principal amount for undated subscribed capital is included within the due more than five years column.
iii. Off-balance sheet commitments include amounts payable on demand for undrawn loan commitments, customer overpayments on residential mortgages where the borrower is able to draw down the amount
overpaid and commitments to acquire financial assets.
Asset encumbrance
Encumbrance arises where assets are pledged as collateral against secured funding and other collateralised obligations and therefore cannot be used for other purposes. The majority of asset
encumbrance arises from the use of prime mortgage pools to collateralise the Covered Bond and securitisation programmes (further information is included in note 14 to the financial statements)
and from participation in the Bank of England’s TFS and TFSME.
Certain unencumbered assets are readily available to secure funding or meet collateral requirements. These include prime mortgages and cash and securities held in the liquid asset buffer. Other
unencumbered assets, such as non-prime mortgages, are capable of being encumbered with a degree of further management action. Assets which do not fall into either of these categories are
classified as not being capable of being encumbered.
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Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Liquidity and funding risk (continued)
Annual Report and Accounts 2021
197
An analysis of Nationwide’s encumbered and unencumbered on-balance sheet assets is set out below. This disclosure is not intended to identify assets that would be available in the event of a
resolution or bankruptcy.
Asset encumbrance
2021
Cash
Loans and advances to banks and similar institutions
Investment securities
Derivative financial instruments
Loans and advances to customers
Non-financial assets
Other financial assets
Total
2020
Cash
Loans and advances to banks and similar institutions
Investment securities
Derivative financial instruments
Loans and advances to customers
Non-financial assets
Other financial assets
Total
Assets encumbered as a result of transactions with
counterparties other than central banks
Other assets (comprising assets encumbered at the
central bank and unencumbered assets)
Total
Assets not positioned
at the central bank
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628
-
-
-
23,611
-
-
24,239
£m
600
-
-
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28,003
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28,603
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12,779
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657
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15,177
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70,697
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-
1,355
-
-
42,217
-
-
43,572
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1,549
1,218
8,621
-
36,390
-
-
47,778
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1,257
1,555
2,506
-
43,180
-
-
48,498
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14,963
-
15,676
-
43,970
-
-
74,609
£m
12,193
-
16,006
-
65,687
-
-
93,886
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1,176
3,809
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298
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1,492
4,771
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3,130
1,774
12,191
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15,144
2,442
16,852
3,809
165,157
2,786
946
207,136
£m
12,491
2,081
17,498
4,771
157,798
3,130
1,774
199,543
£m
16,693
3,660
25,473
3,809
201,547
2,786
946
254,914
£m
13,748
3,636
20,004
4,771
200,978
3,130
1,774
248,041
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Annual Report and Accounts 2021
198
Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Liquidity and funding risk (continued)
Managing liquidity and funding risk
Nationwide’s management of liquidity and funding risks aims to ensure that there are sufficient liquid assets at all times, both as to amount and quality, to:
cover cash flow mismatches and fluctuations in funding
retain public confidence
•
•
• meet financial obligations as they fall due, even during episodes of stress.
This is achieved through the management and stress testing of business cash flows, and through the translation of Board risk appetite into appropriate risk limits. This ensures a prudent funding
mix and maturity profile sufficient levels of high-quality liquid assets and appropriate encumbrance levels are maintained.
The liquidity and funding risk framework is reviewed by the Board as part of the annual Internal Liquidity Adequacy Assessment Process (ILAAP). ALCO is responsible for managing the balance
sheet structure, including the Funding Plan, and its risks. This includes setting and monitoring more granular limits within Board limits. A consolidated cash flow forecast is maintained and
reviewed weekly to support ALCO in monitoring key risk metrics.
A Liquidity Contingency Plan (LCP), which is part of the wider recovery plan framework, is maintained which describes early warning triggers for indicating an emerging liquidity or funding stress as
well as escalation procedures and a range of actions that could be taken in response to ensure sufficient liquidity is maintained. The LCP is tested annually to ensure it remains robust. Nationwide’s
Recovery Plan describes potential actions that could be utilised in a more extreme stress.
Liquidity stress testing
To mitigate liquidity and funding risks generated by its business activities, Nationwide aims to maintain a liquid asset buffer of at least 100% of the anticipated outflows seen under internal stress
test scenarios and the regulatory-prescribed LCR.
Potential contractual and behavioural stress outflows are assessed across a range of liquidity risk drivers over 30 calendar days, with the key assumptions shown below. An assessment over three
months is also performed against which LCP capacity is assessed. Internal stress assumptions are reviewed regularly with changes approved by ALCO and approved annually by the Board as part of
the ILAAP.
Liquidity risk driver
Retail funding
Wholesale funding
Off-balance sheet
Intra-day
Liquid assets
Modelling assumptions used
Significant unexpected outflows are experienced with no new deposits received.
Following a credit rating downgrade:
•
•
•
zero roll-over of maturing long-term wholesale funding;
zero roll-over of maturing short-term funding received from financial counterparties and partial roll-over from non-financial counterparties; and
no new wholesale funding received.
Contractual outflows occur in relation to secured funding programmes due to credit rating downgrades.
Lending commitments continue to be met.
Collateral outflows arise due to adverse movements in market rates.
Expected inflows from mortgages or retail and commercial loans are recognised.
Liquidity is needed to pre-fund outgoing payments.
Asset values are reduced in recognition of the stressed conditions assumed.
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Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Liquidity and funding risk (continued)
Annual Report and Accounts 2021
199
At 4 April 2021, under the most severe internal 30 calendar day stress test (a combined market-wide and Nationwide-specific stress scenario), the liquid asset buffer as a percentage of stressed net
outflows equated to 138% (2020: 140%).
External credit ratings
The Group’s long-term and short-term credit ratings are shown in the table below. The long-term rating for both Standard & Poor’s (S&P) and Moody’s is the senior preferred rating. The long-term
rating for Fitch is the senior non-preferred rating.
Credit ratings
Standard & Poor’s
Moody’s
Fitch
Senior
preferred
A
A1
A+
Short-term
A-1
P-1
F-1
Senior
non-preferred
BBB+
Baa2
A
Tier 2
BBB
Baa2
BBB+
Date of last rating
action / confirmation
January 2021
July 2020
February 2021
Outlook
Stable
Stable
Negative
In January 2021, Standard & Poor’s affirmed Nationwide’s Issuer Credit Rating and stable outlook.
In July 2020, Moody’s revised Nationwide’s outlook to stable from negative, following Nationwide’s €1 billion senior preferred issuance.
In September 2020 and February 2021, Fitch affirmed Nationwide’s Long-Term Issuer Default Rating and negative outlook.
The table below sets out the amount of additional collateral Nationwide would need to provide in the event of a one and two notch downgrade by external credit rating agencies.
2021
2020
Cumulative adjustment for
a one notch downgrade
£bn
0.8
0.2
Cumulative adjustment for
a two notch downgrade
£bn
2.3
3.8
The contractually required cash outflow would not necessarily match the actual cash outflow as a result of management actions that could be taken to reduce the impact of the downgrades.
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Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Solvency risk
Annual Report and Accounts 2021
200
Solvency risk is the risk that Nationwide fails to maintain sufficient capital to absorb losses throughout a full economic cycle and sufficient to maintain the confidence of current and prospective
investors, members, the Board and regulators. Capital is held to protect members, cover inherent risks, provide a buffer for stress events and support the business strategy. In assessing the
adequacy of capital resources, risk appetite is considered in the context of the material risks to which Nationwide is exposed and the appropriate strategies required to manage those risks.
Managing solvency risk
A number of tools are employed to support the management of solvency risk. The Board is responsible for setting risk appetite with respect to solvency risk, which is articulated through its risk
appetite statements, and it defines minimum levels of capital, including leverage, that it is willing to operate with. These are translated into specific risk metrics, which are monitored by the Board
Risk Committee (BRC), Assets and Liabilities Committee (ALCO) and other internal management reviews.
The capital structure is managed to ensure that Nationwide continues to meet minimum regulatory requirements, as well as meeting the expectations of other key stakeholders. As part of the risk
appetite framework, strong capital ratios are targeted relative to both regulatory requirements and major banking peers. Any planned changes to the balance sheet, potential regulatory
developments and other factors (such as trading outlook, movements in the fair value through other comprehensive income reserve and defined benefit pension deficit) are all considered.
The capital strategy is to manage capital ratios through retained earnings, supplemented by external capital where appropriate. With general reserves forming the majority of capital resources,
profitability is an important factor when considering the ability to meet capital requirements. A return on capital framework is in place, based upon an allocation of overall capital requirements,
which forms part of the Society’s Board risk appetite metrics as well as forming part of the performance monitoring activity for individual product segments. In recent years, Nationwide’s ability to
supplement retained earnings through the issuance of Common Equity Tier 1 (CET1) and Additional Tier 1 (AT1) capital instruments has been demonstrated.
Capital is held to meet Pillar 1 requirements for credit, operational and market risks. In addition, the PRA requires firms to hold capital to meet Pillar 2A requirements, which form an Individual
Capital Requirement (ICR). This is a point in time estimate, set by the PRA on an annual basis based on the submission of the results of the annual Internal Capital Adequacy Assessment Process
(ICAAP). This process confirms the amount of capital required to be held to meet risks partly covered by Pillar 1 such as credit concentration and operational risk, and risks not covered by Pillar 1
such as pension and interest rate risk. The combination of Pillar 1 and Pillar 2A requirements form Nationwide’s Total Capital Requirement (TCR).
Nationwide’s latest Pillar 2A ICR and TCR were received in December 2020. The ICR equates to £2.7 billion, of which at least £1.5 billion must be met by CET1 capital. Nationwide’s ICR was
equivalent to 8.3% of risk weighted assets (RWAs) as at 4 April 2021 (2020: 7.6% of RWA), largely reflecting the low average risk weight, given that approximately 75% (2020: 76%) of total assets
are in the form of secured residential mortgages.
To protect against the risk of consuming Pillar 1 and Pillar 2A requirements (thereby breaching TCR), firms are subject to regulatory capital buffers which are set out in Capital Requirements
Directive IV (CRD IV). The PRA may set an additional firm-specific PRA buffer based upon supervisory judgement informed by the results of the Bank of England’s stress testing scenarios. This
assessment will consider the impacts on a firm’s capital requirements and resources and other factors including leverage, systemic importance and any weaknesses in firms’ risk management and
governance procedures. The ICAAP also considers appropriate internal capital buffers to ensure that the impact of a severe but plausible stress can be absorbed.
Regular stress tests are undertaken, covering Nationwide and its subsidiaries, to enhance the understanding of potential vulnerabilities and how management actions might be deployed in the event
of stressed conditions developing. These stress tests project capital resources and requirements over a multi-year period, during severe but plausible scenarios that cover a range of macro-economic
or market-wide stresses, and idiosyncratic scenarios that test particular risks to Nationwide’s business model. Stress test results are reported to the Board Risk Committee.
Nationwide aims to be in a position to maintain strong capital and leverage ratios in the event of a severe but plausible economic or idiosyncratic stress. Embedded in the risk appetite framework is
an expectation to maintain CET1 and leverage ratios in excess of regulatory minima under stressed conditions.
Nationwide maintain a Recovery Plan under UK regulatory rules implementing the European Bank Recovery and Resolution Directive (BRRD). This contains a set of management actions that would
be available to support our capital position in the event of a breach of one or more of our risk metrics. In addition, reverse stress testing is carried out where management identify and assess the
likelihood of tail risk events occurring in order to test business model viability.
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Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Solvency risk (continued)
Annual Report and Accounts 2021
201
As part of the Bank of England announcement on 20 March 2020 in relation to Covid-19, the planned concurrent stress testing activities for 2020 were cancelled. This was intended to aid
participants in their continued focus on the provision of services during the Covid-19 pandemic, where the Bank of England and PRA noted that the 2019 stress test showed that the UK banking
system was resilient to periods of stress that are more severe overall than that caused by the 2007-08 global financial crisis. In October 2020, the Bank of England published the results of their
stress tests of the major UK banks, which showed that the banking system was strong enough to keep lending to UK households and businesses, even in the face of severe economic difficulties given
the increases in CET1 capital buffers.
During 2019, the major UK banks and building societies, including Nationwide, took part in the PRA’s annual concurrent stress test (CST), which included two scenarios. The main scenario, the
Annual Cyclical Scenario (ACS), assessed firms’ resilience to a severe economic downturn, characterised by an increase in the Bank of England base rate to 4%, a 33% fall in UK house prices and a
4.7% fall in UK GDP. The Financial Policy Committee (FPC) uses these results to assess the resilience of participating firms to periods of severe but plausible stress.
Despite the severity of the ACS, the results illustrate the strength and resilience of Nationwide, with low point CET1 and UK leverage ratios of 13.1% and 4.8% respectively after the application of
management actions. Whilst the leverage ratio remained relatively stable, risk weighted assets increased significantly causing a reduction in the CET1 ratio, largely due to the use of Point in Time (PiT)
modelling approaches for secured portfolios.
In January 2021 the Bank of England announced the Solvency Stress Test which the major UK banks and building societies will be undertaking. The results will act as a cross-check on the Financial
Policy Committee’s (FPC’s) judgement of how severe the current stress would need to be in order to jeopardise banks’ resilience and challenge their ability to absorb losses and continue to lend. The
Bank of England noted that there will be no regulatory response from the results in terms of PRA capital buffer requirements. In addition, it was stated the outcome of the test will be used to update
the FPC’s judgements about the most appropriate ways in which the banking system can continue to support the economy through the stress. It will also be used as an input into the PRA’s
transition back to its standard approach to capital-setting and shareholder distributions through 2021.
Whilst the future economic impact of Covid-19 continues to be unclear, the potential for increased levels of unemployment and lower house prices over the coming financial year may lead to some
RWA inflation as well as some migration of loans into IFRS 9 Stage 3. This could therefore lead to a lower CET1 ratio in the medium term. The changes to Nationwide’s IRB Mortgage models in by
January 2022 (see ‘regulatory developments’ section below) are expected to have a larger impact, with the CET1 ratio expected to fall by around a third. Nationwide continues to undertake planning
activities which reflect a range of potential outcomes. However, the current capital position and the published stress testing results show that we are well capitalised and positioned to meet such
periods of financial stress.
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Risk report (continued)
Risk report (continued)
Solvency risk (continued)
Capital position
Annual Report and Accounts 2021
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The capital disclosures included in this report are in line with CRD IV and on an end point basis with IFRS 9 transitional arrangements applied. This assumes that all CRD IV requirements are in force
during the period, with no CRD IV transitional provisions permitted. In addition, the disclosures are on a consolidated Group basis, including all subsidiary entities, unless otherwise stated.
Capital ratios
Solvency
Common Equity Tier 1 (CET1) ratio
Total Tier 1 ratio
Total regulatory capital ratio
Leverage
UK leverage exposure
CRR leverage exposure
Tier 1 capital
UK leverage ratio
CRR leverage ratio
2021
%
36.4
40.5
49.1
£m
248,402
265,079
13,343
%
5.4
5.0
2020
%
31.9
33.7
43.6
£m
240,707
254,388
11,258
%
4.7
4.4
Risk-based capital ratios remain in excess of regulatory requirements with the CET1 ratio of 36.4% (2020: 31.9%) above Nationwide’s CET1 capital requirement of 12.7%. This includes a minimum
CET1 capital requirement of 9.2% (Pillar 1 and Pillar 2A) and the CRD IV combined buffer requirements of 3.5% of RWAs.
The increase in the CET1 ratio results from an increase in CET1 capital of £1.3 billion and a reduction in RWAs of £0.4 billion. The CET1 capital increase was driven by £0.6 billion profit after tax and a
£0.1 billion increase in IFRS 9 transitional capital relief. In addition, £0.6 billion of software intangible assets are no longer deducted from capital due to a regulatory change; the PRA is expected to
reverse this change in future as explained further below. The reduction in RWAs was driven by unsecured loan RWAs linked to decreasing total loan balance and reduced probability of default (PD).
In addition, modifications were made to risk weights for small and medium-sized enterprises (SMEs) and infrastructure loans in line with EU Regulation 2020/873, culminating in a reduction of
commercial loan RWAs. Further detail is included in the total regulatory capital table and risk weighted asset table on pages 204 and 205.
On 27 June 2020, EU Regulation 2020/873 came into force amending CRR and CRR II in a number of areas in response to the Covid-19 pandemic, including an extension to the IFRS 9 relief on
increases in Stage 1 and Stage 2 expected credit losses from 1 January 2020 for two years. The Covid-19 package also brought forward the implementation date of the application of certain more
favourable treatments that had previously been due to apply from June 2021. As noted above, this included a reduction in risk weights for exposures to SMEs and for infrastructure lending.
Also included in the package was the option to temporarily remove specific fair value gains or losses, accrued since 31 December 2019, from CET1 capital resources. This primarily relates to central
government debt and is in place to neutralise any potential impact of fair value movements on capital ratios. Nationwide has opted to apply the temporary treatment, and as an unrealised gain was
recognised in the period, a £41 million deduction to CET1 capital was applied.
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Risk report (continued)
Risk report (continued)
Solvency risk (continued)
Annual Report and Accounts 2021
203
On 23 December 2020, EU Regulation 2020/2176 also came into force providing an amendment to the deduction of intangible assets from CET1 items for ‘prudently valued software assets, the
value of which is not negatively affected by resolution, insolvency or liquidation of the institution’, and instead calculate a risk weighted asset value of 100% to those assets not deducted. The PRA
confirmed as part of CP5/21 ‘Implementation of Basel standards’ that they found no credible evidence that software assets would absorb losses effectively in a stress. Consequently, they have
confirmed their intention to modify the applicable regulation and reverse this change by 1 January 2022. If the revised rules had not been applied, Nationwide’s CET1 ratio and UK Leverage ratio at 4
April 2021 would have been 35.4% and 5.2% respectively.
CRD IV requires firms to calculate a leverage ratio, which is non-risked based, to supplement risk-based capital requirements. The UK leverage ratio increased to 5.4% (2020: 4.7%), with Tier 1
capital increasing by £2.1 billion as a result of the CET1 capital movements outlined above and the issuance of £0.7 billion of AT1 capital instruments in June 2020. Partially offsetting the impact of
this, there was an increase in UK leverage exposure of £7.7 billion, primarily as a result of net retail lending and treasury investments in the period. This position remains in excess of Nationwide’s
capital requirement of 3.6%, which comprises a minimum Tier 1 capital requirement of 3.25% and buffer requirements of 0.35%. The buffer requirement reflects a 0% countercyclical leverage ratio
buffer announced as part of the Bank of England responses to the impacts of Covid-19 made on 11 March 2020.
The CRR leverage ratio increased by 0.6%, closing at 5.0% (2020: 4.4%). The difference between the Capital Requirements Regulation (CRR) leverage ratio and the UK leverage ratio is driven by the
exclusion of qualifying central bank claims from the UK leverage exposure measure as per the PRA Rulebook.
Leverage requirements continue to be Nationwide’s binding capital constraint, as they are in excess of risk-based requirements, and it is expected that this will continue despite the impact of IRB
mortgage model changes, proposed mortgage risk weight floors in 2022 and Basel III reforms on risk-based capital requirements in 2023 (see the ‘regulatory developments’ section below). Our
internal assessment, however, is still subject to PRA IRB mortgage model approval and the forthcoming PRA consultation on the Basel III reforms. The expected impact of the reforms on
Nationwide’s UK leverage ratio is negligible. The risk of excessive leverage is managed through regular monitoring and reporting of the leverage ratio, which forms part of risk appetite.
Further details on the leverage exposure can be found in the Group’s annual Pillar 3 Disclosure 2021 at nationwide.co.uk
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Risk report (continued)
Risk report (continued)
Solvency risk (continued)
Annual Report and Accounts 2021
204
The table below shows how the components of members interest and equity contribute to total regulatory capital calculated on an end-point basis and so does not include non-qualifying
instruments.
Total regulatory capital
(Audited)
General reserve
Core capital deferred shares (CCDS)
Revaluation reserve
Fair value through other comprehensive income (FVOCI) reserve
Cashflow hedge and other hedging reserves
Regulatory adjustments and deductions:
FVOCI reserve temporary relief (note i)
Cashflow hedge and other hedging reserves (note ii)
Foreseeable distributions (note iii)
Prudent valuation adjustment (note iv)
Own credit and debit valuation adjustments (note v)
Intangible assets (note vi)
Goodwill (note vi)
Defined-benefit pension fund asset (note vi)
Excess of regulatory expected losses over impairment provisions (note vii)
IFRS 9 transitional arrangements (note viii)
Total regulatory adjustments and deductions
Common Equity Tier 1 capital
Other equity instruments (Additional Tier 1)
Total Tier 1 capital
Dated subordinated debt (note ix)
Excess of impairment provisions over regulatory expected losses (note vii)
IFRS 9 transitional arrangements (note viii)
Tier 2 capital
Total regulatory capital
2021
£m
11,140
1,334
44
110
149
(41)
(149)
(71)
(39)
(3)
(525)
(12)
(112)
(1)
183
(770)
12,007
1,336
13,343
2,833
144
(144)
2,833
16,176
2020
£m
10,749
1,325
48
(17)
264
-
(264)
(61)
(54)
(3)
(1,200)
(12)
(190)
-
80
(1,704)
10,665
593
11,258
3,265
113
(58)
3,320
14,578
Includes a temporary adjustment to mitigate the impact of volatility in central government debt on capital ratios, in line with the Covid-19 banking package.
In accordance with CRR article 33, institutions shall not include the fair value reserves related to gains or losses on cash flow hedges of financial instruments that are not valued at fair value.
Notes:
i.
ii.
iii. Foreseeable distributions in respect of CCDS and AT1 securities are deducted from CET1 capital under CRD IV.
iv. A prudent valuation adjustment (PVA) is applied in respect of fair valued instruments as required under regulatory capital rules.
v. Own credit and debit valuation adjustments are applied to remove balance sheet gains or losses of fair valued liabilities and derivatives that result from changes in our own credit standing and risk, as per CRD IV rules.
vi.
vii. Where capital expected loss exceeds accounting provisions, the excess balance is removed from CET1 capital, gross of tax. In contrast, where provisions exceed capital expected loss, the excess amount is added to
Intangible, goodwill and defined-benefit pension fund asset (excluding applicable software assets) are deducted from capital resources after netting associated deferred tax liabilities.
Tier 2 capital, gross of tax. This calculation is not performed for equity exposures, in line with Article 159 of CRR. The expected loss amounts for equity exposures are deducted from CET1 capital, gross of tax.
viii.The transitional adjustments to capital resources apply scaled relief due to the impact of the introduction of IFRS 9 and increases in expected credit losses due to the Covid-19 pandemic. Further detail regarding these
adjustments is provided in the annual Pillar 3 disclosures at nationwide.co.uk
ix. Subordinated debt includes fair value adjustments related to changes in market interest rates, adjustments for unamortised premiums and discounts that are included in the consolidated balance sheet, and any
amortisation of the capital value of Tier 2 instruments required by regulatory rules for instruments with fewer than five years to maturity.
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Risk report (continued)
Risk report (continued)
Solvency risk (continued)
Annual Report and Accounts 2021
205
As part of the Bank Recovery and Resolution Directive (BRRD), the Bank of England, in its capacity as the UK resolution authority, has published its policy for setting the minimum requirement for
own funds and eligible liabilities (MREL) and provided firms with indicative MREL. From 1 January 2020, Nationwide is required to hold twice the minimum capital requirements (6.5% of UK
leverage exposure), plus the applicable capital requirement buffers, which amount to 0.35% of UK leverage exposure.
At 4 April 2021, total MREL resources were equal to 8.5% (2020: 8.4%) of UK leverage ratio exposure, in excess of the 2021 loss-absorbing requirement of 6.85% described above.
Risk weighted assets
The table below shows the breakdown of risk weighted assets (RWAs) by risk type and business activity. Market risk has been set to zero as permitted by the CRR, as the exposure is below the
threshold of 2% of own funds.
Risk weighted assets
Retail mortgages
Retail unsecured lending
Commercial loans
Treasury
Counterparty credit risk (note iii)
Other (note iv)
Total
Credit Risk
(note i)
£m
14,523
5,503
2,671
1,588
1,491
2,365
28,141
2021
Operational
Risk (note ii)
£m
2,966
965
116
327
-
455
4,829
Total Risk
Weighted Assets
£m
17,489
6,468
2,787
1,915
1,491
2,820
32,970
Credit Risk
(note i)
£m
14,498
6,029
3,183
1,541
1,619
1,783
28,653
2020
Operational
Risk (note ii)
£m
3,145
887
143
304
-
267
4,746
Total Risk
Weighted Assets
£m
17,643
6,916
3,326
1,845
1,619
2,050
33,399
Notes:
i. This column includes credit risk exposures, securitisations, counterparty credit risk exposures and exposures below the thresholds for deduction that are subject to a 250% risk weight.
ii. RWAs have been allocated according to the business lines within the standardised approach to operational risk, as per article 317 of CRR.
iii. Counterparty credit risk relates to derivative financial instruments, securities financing transactions (repurchase agreements) and exposures to central counterparties.
iv. Other relates to equity, fixed, intangible software and other assets.
RWAs reduced by £0.4 billion driven by unsecured loan RWAs linked to decreasing total loan size and reduced probability of default (PD). In addition, there was a reduction in commercial loan
RWAs due to decreasing total loan size but also due to the application of more favourable treatments for SME and infrastructure lending in line with Regulation 2020/873. In contrast, RWAs for
‘Other’ assets increased due to the new application of risk weights to intangible software assets deducted from capital, as per EU Regulation 2020/2176.
More detailed analysis of RWAs is included in the Group’s annual Pillar 3 Disclosure 2021 at nationwide.co.uk
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Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Solvency risk (continued)
IRB model risk
Annual Report and Accounts 2021
206
The performance and accuracy of IRB models is critical to the calculation of credit risk capital requirements. The effectiveness of the models is achieved through clear allocation of roles and
responsibilities covering model ownership, approval and governance, ongoing model monitoring, review and independent validation. Further information can be found in the ‘model risk
management of IRB risk ratings systems’ section of the Group’s annual Pillar 3 Disclosure at nationwide.co.uk
Regulatory developments
Key areas of regulatory change are set out below. Nationwide will remain engaged in the development of the regulatory approach to ensure it is prepared for any resulting change.
New residential mortgage IRB models were submitted to the PRA for approval in 2021 with the expectation that these models will be implemented by 1 January 2022. This is in line with the revised
deadline set by the Bank of England on 20 March 2020 which delays implementation by 1 year from the original January 2021 implementation date set out in PS13/17. The new models will also
reflect the PRA’s approach to implementing the European Banking Authority’s (EBA’s) recommendations relating to PD and LGD estimation, and the treatment of defaulted exposures. This is as part
of the IRB approach to credit risk as set out in PS 11/20. The PRA is currently consulting on the application of risk weight floors to mortgage assets (7% for individual loans and 10% for all UK
residential mortgages to which the firm applies the IRB approach), also to be implemented in January 2022. It is currently estimated that the impact of these new model changes, together with the
7% risk weight floor, will be to reduce the reported CET1 ratio by approximately one third from the current level, given the material increase in risk weighted assets. This is based on Nationwide’s
assessment of the consultation which is yet to be concluded by the PRA.
On 12 February 2021, the PRA published CP5/21 ‘Implementation of Basel standards’. The purpose of these rules is to implement the remaining Basel international standards. The consultation paper
includes a revised standardised approach to counterparty credit risk (SA-CCR) and the revised Basel framework for exposures to central counterparties (CCPs) amongst other changes due for
implementation on 1 January 2022.
The Basel Committee published their final reforms to the Basel III framework in December 2017, now denoted by the PRA as Basel 3.1. The amendments include changes to the standardised
approaches for credit and operational risks and the introduction of a new RWA output floor. The rules are subject to a lengthy revised transitional period from 2023 to 2028 and will lead to a
significant increase in Nationwide’s RWAs relative to both the current position and that expected under the new mortgage IRB models, mainly due to the application of standardised floors for
mortgages. Following the IRB model implementation and Basel III reforms, the total estimated impact on the reported CET1 ratio will be a reduction of approximately a half relative to the position at
4 April 2021. This impact is before organic earnings in the period to 2028 which will partly mitigate the reduction in the CET1 ratio. The Basel III reforms represent a re-calibration of regulatory
requirements with no underlying change in the capital resources held or the risk profile of assets. Final impacts are uncertain as they are subject to future balance sheet size and mix, and because
the final detail of some elements of the regulatory changes remain at the PRA’s discretion. We are expecting the PRA to consult on the UK implementation of Basel 3.1 by autumn of 2021.
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Risk report (continued)
Risk report (continued)
Market risk
Summary
Annual Report and Accounts 2021
207
Market risk is the risk that the net value of, or net income arising from, assets and liabilities is impacted as a result of changes in market prices or rates, specifically interest rates, currency rates or
equity prices. Nationwide has limited appetite for market risk and does not have a trading book. Market risk is closely monitored and managed to ensure the level of risk remains within appetite.
Market risks are not taken unless they are essential to core business activities and they provide stability of earnings, minimise costs or enable operational efficiency.
The principal market risks, linked to Nationwide’s balance sheet assets, liabilities, capital and reserves are listed in the table below, irrespective of materiality.
Market risk linkage to the balance sheet
Assets
Cash
Loans and advances to banks and similar institutions
Investment securities
Derivative financial instruments
Loans and advances to customers
Other assets (note i)
Total assets
Liabilities
Shares (customer deposits)
Deposits from banks and similar institutions
Other deposits
Debt securities in issue
Derivative financial instruments
Subordinated liabilities
Other liabilities
Total liabilities
Total members’ interests and equity
2021
£bn
16.7
3.7
25.5
3.8
201.5
3.7
254.9
170.3
27.0
4.5
27.9
1.6
7.6
1.9
240.8
14.1
Interest rate
risk
Basis risk
Swap spread
risk
Market risk
Currency risk
Inflation risk Product option
risk
Structural risk
●
●
●
●
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●
●
●
●
●
●
●
●
●
●
●
Note:
i. Other assets include the difference between the assets and liabilities of the Nationwide Pension Fund (a defined benefit pension scheme). Nationwide’s obligations to the Nationwide Pension Fund result in Pension
risk, which includes exposure to market risk factors such as interest rate risk, inflation risk, and equity risk (share prices). Pension risk is managed separately from the market risk arising from Nationwide’s core
business. For further details, see the ‘Pension risk’ section of this report.
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Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Market risk (continued)
Global market conditions
During the year, markets were dominated by the impacts of Covid-19, with political uncertainty from Brexit having a more muted impact than might otherwise have been expected.
Swap rates trended down and remained low throughout 2020, as the impact of Covid-19 and the steps taken to mitigate its impact took hold. On the back of positive vaccine news and better than
expected economic measures, 2021 has seen an uptick in Sterling Overnight Index Average (Sonia) swap rates with the 2-year swap rate down 0.01% at 0.11% and the 5-year swap rate increasing
from 0.20% to 0.44% in the year. At 1 April 2021, the year on year movement for Sterling was up 3.6% against the Euro and up 13% against the US Dollar.
During the year, the Bank of England (BoE) left the bank base rate unchanged at 0.1%, citing continued, albeit less severe than expected, economic weakness. The first serious consideration to
cutting to negative rates was well publicised. The year saw the BoE continue its quantitative easing programme, with an additional £100 billion in June 2020 and a further £170 billion in November,
which included £20 billion of non-financial investment grade corporate bonds.
Economies globally followed similar patterns to the UK, as the impacts from Covid-19, and latterly the vaccine, dominated the economic landscape. UK equities have not performed as well as those in
other major developed economies, despite the UK’s resurgence in the past year, remaining some way off their 2019 highs. In contrast, other global markets have set new or are near all-time highs.
Regulation
Following the announcement by the FCA in 2017 that panel banks will not be compelled to submit Libor rates after 2021, the Society has made significant progress in its transition away from Libor.
Libor had previously been the primary benchmark to which the Society would manage its balance sheet risk and its financial planning process. In the UK, as a replacement for GBP Libor, the BoE has
nominated Sonia as the preferred alternative risk-free-rate. Nationwide’s Libor Working Group (LWG) identified three key areas of focus for transition: mortgages, commercial lending and treasury.
Nationwide does not offer Libor-linked mortgage products; however, a small proportion of the residential portfolio consists of legacy Libor-referencing loans. The Society, working alongside industry
bodies and regulators, is considering options for the transition of these loans to an alternative reference rate, with fair and legal treatment of our members and customers at the forefront of these
considerations. Similar activity is also underway with legacy commercial loans linked to Libor, with new social housing lending now referencing Sonia, in line with the Working Group on Sterling
Risk-Free Reference Rates (RFRWG) milestones.
Treasury activity, in terms of balance sheet hedging, bond issuance and asset purchases, is no longer transacted referencing Libor. In wholesale funding markets, Nationwide has been a pioneer in
the adoption of Sonia in its issuances across markets and has successfully converted the majority of legacy Libor bonds by seeking the consent of investors. For derivatives, the Society has adopted
the ISDA fallback protocols and is working to ensure a smooth and successful switchover of all Libor swaps later in 2021. A risk-based approach to manage existing Libor positions in the interim
period means that new Libor swaps are only entered into to ensure a neutral net position is maintained.
Please see note 15 to the financial statements for additional information relating to quantitative Libor exposures.
Market risk appetite
Nationwide’s market risk exposure arises in the banking book; it does not have a trading book. Most of the exposure to market risk arises from fixed rate mortgages or savings and changes in the
market value of the liquidity portfolio. There is a limited amount of currency risk on non-sterling financial assets and liabilities held.
The Board is responsible for setting market risk appetite and ALCO is responsible for managing Nationwide’s market risk profile within this defined risk appetite. Market risk is managed within a
comprehensive risk framework which includes policies, limit setting and monitoring, stress testing and robust governance controls. This includes setting and monitoring more granular limits within
Board limits with relevant market risk metrics reported monthly to ALCO.
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Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Market risk (continued)
Market risk management
The principal market risks that affect Nationwide are listed below together with the types of risk reporting measures used:
Market risk
exposure
Interest rate risk
Basis risk
Swap spread risk
Inflation risk
Currency risk
Product option risk
Structural interest
rate risk
Definition
The impact of market movements in interest rates, which affect interest rate margin realised from lending and borrowing
activities. Volatility in short-term interest rates can also impact net income contribution from rate insensitive liabilities.
Reporting measure
Value sensitivity / Value at risk / Net interest
income sensitivity / Economic value of equity
sensitivity
The impact on earnings of relative changes in short-term interest rate benchmarks, for example between Bank Base Rate and
Sonia
Earnings sensitivity
The impact on the market value of treasury investments arising from changes in the spread between bond yields and swap rates
Value at risk
The impact on the market value of treasury investments arising from changes in the spread between asset prices and swap rates Value sensitivity
The impact on earnings due to changes in exchange rates
Value sensitivity / Value at risk
The impact from changes to hedging which may be required when customer behaviour deviates from expectations, principally
resulting from early repayment of fixed rate loans
Value at risk / Economic value of equity
sensitivity
The impact of market movements in interest rates, which affect the income arising from balance sheet items that have stable
balances, have an interest rate that is fixed, or are non-interest bearing or insensitive to changes in market rates, and have no
defined maturity date. This includes the asymmetric risk which arises in very low or negative interest rate scenarios.
Duration / Value at risk / Net interest income
sensitivity
Nationwide has a capital requirement for each of the above market risks. In addition, stress analysis is used to evaluate the impact of more extreme, but plausible events. These analytical techniques
are described below with a review of the exposures during the year.
Value and earning sensitivities
Sensitivity analysis is used to assess the change in value of the net exposure to defined parallel and non-parallel shifts in interest rates. For example, a one basis point (0.01%) shift is measured using
PV01. This analysis is performed daily by currency. Earning sensitivity metrics are used to measure and quantify exposure to interest rate risks, including basis risk. These techniques assess the
impact on earnings when rate shocks are applied to the rates paid on liabilities and to the rates earned on assets.
Nationwide also measures interest rate risk through Net Interest Income (NII) and Economic Value of Equity (EVE) measures, under a range of shock scenarios which include behavioural
assumptions for retail products as interest rates change. These measures are assessed based on the standard shocks prescribed, as well as against internally generated shock scenarios.
• NII sensitivities assess the impact to earnings in different interest rate shocks over a one-year period. Sensitivities are calculated based on a static balance sheet, where all assets and liabilities
•
maturing within the year are reinvested in like for like products. The sensitivity also includes the impact arising from off-balance sheet exposures.
EVE sensitivities measure the change in value of interest rate sensitive items, both on and off-balance sheet, under a range of interest rate shocks. Sensitivities are calculated on a run-off balance
sheet basis.
Both NII and EVE sensitivities are measured periodically, with risk limits set against the various shocks.
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Risk report (continued)
Risk report (continued)
Market risk (continued)
Value at Risk (VaR)
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VaR is a technique that estimates the minimum potential losses that could occur from risk positions because of future movements in market rates and prices, over a specified time horizon, to a
given level of statistical confidence. VaR is based on historic market behaviour and uses a series of recorded market rates and prices to derive plausible future scenarios. This considers inter-
relationships between different markets and rates.
The VaR model incorporates risk factors based on historic interest rate and currency movements. A 10-day horizon and a 99% confidence level is typically used in day to day VaR monitoring. VaR is
used to monitor interest rate, swap spread, currency and product option risks and is not used to model income. Exposures against limits are reviewed daily by management. Actual outcomes are
monitored on an ongoing basis by management to test the validity of the assumptions and factors used in the VaR calculation. The values reported below are on the same basis as those used
internally.
Although VaR is a valuable risk measure, it needs to be viewed in the context of the following limitations which may mean that exposures could be higher than modelled:
•
The use of a 99% confidence level, by definition, does not take account of changes in value that might occur beyond this level of confidence;
• VaR models often under-predict the likelihood of extreme events and over-predict the benefits of offsetting positions in those extreme events;
•
The VaR model uses historical data to predict future events. Extreme market moves outside of those used to calibrate the model will deliver exceptions. In periods where volatility is increasing,
the model is likely to under-predict market risks and in periods where volatility is decreasing it is likely to over-predict market risks; and
• Historical data may not adequately predict circumstances arising from government interventions and stimulus packages, which increase the difficulty of evaluating risks.
To seek to mitigate these limitations, backtesting of the VaR model is undertaken regularly to ensure that the model is appropriate. This process compares actual performance against the estimated
VaR numbers. An exception is created when a loss occurs that is greater than the VaR on any given day. The chart below shows the results of this backtesting. The loss exceptions seen were both
driven by significant movements in market rates, the earliest exception in reaction to lockdown and the later exception following vaccine news. In 2020/21, the backtesting and broader model
governance did not highlight any model deficiencies.
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Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Market risk (continued)
VVaaRR bbaacckktteessttiinngg 9999%%//11--ddaayy
££mm
2.00
1.00
0.00
-1.00
-2.00
-3.00
Apr-20
Key:
Actual return
Backtesting loss exception
99% 1-day VaR
Jul-20
Oct-20
Jan-21
The model will continue to be subject to an annual review process to ensure it remains appropriate for risk reporting. The types of risks not captured in VaR include:
• Market liquidity risk – this has a limited impact because, whilst Nationwide requires an appropriate level of market liquidity to manage market risk, it does not have a high ongoing dependency
•
•
on liquidity for market risk purposes as it does not operate a trading book;
Level 3 asset valuation uncertainty – only a very small portfolio of these assets is held so the impact is limited. Any valuation uncertainty is included within the Prudent Valuation Adjustment
reflected in capital resources; and
Interest rate movements that can impact valuation adjustments, including credit, debit and funding valuation adjustments (CVA/DVA/FVA) – these are not captured in the VaR or sensitivity
analysis but are negligible.
Stress analysis
To evaluate the potential impact of more extreme but plausible events or movements in a set of financial variables, the standard VaR metric is supported with sensitivity and stress analysis. For
example, for interest rate risk exposures, the standard PV01 sensitivity analysis is supplemented by the production of stressed sensitivity measures. A more severe 200 basis point (2.0%) parallel
shift in interest rates is calculated in a similar manner to PV01; this sensitivity analysis is known as PV200. PV200 numbers are generated and monitored daily. In addition, stressed VaR is used to
estimate the potential loss arising from unfavourable market movements in a stressed environment. It is calculated in the same way as standard VaR, calibrated over a two-year period with a 99%
confidence level and on a 10-day basis, but uses market data from a period of significant financial stress.
Annual Report and Accounts 2021
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Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Market risk (continued)
Interest rate risk
Nationwide’s main market risk is interest rate risk. Market movements in interest rates affect the interest rate margin realised from lending and borrowing activities. To reduce the impact of such
movements, hedging activities are undertaken by Nationwide’s Treasury function. For example, interest rate risks generated by lending to and receiving deposits from customers are offset against
each other internally where possible. The remaining net exposure is managed using derivatives, within parameters set by ALCO. In addition to our primary lending and borrowing activities, income
volatility arising from certain rate insensitive products (including reserves and CCDS) are structurally hedged. Nationwide’s interest rate risk is measured using a combination of value-based
assessments and earnings sensitivity assessments.
The table below highlights Nationwide’s limited exposure to interest rate risk, shown against a range of value-based assessments. The risk exposure is calculated each day and summarised over the
financial year:
Interest rate risk
VaR (99%/10-day) (audited)
Sensitivity analysis (PV01) (audited)
Stress testing (PV200: all currencies)
Average
£m
1.3
(0.0)
16.1
2021
High
£m
4.5
0.1
40.5
Low
£m
0.4
(0.1)
(15.5)
Average
£m
1.3
0.0
6.1
2020
High
£m
4.2
0.1
22.6
Low
£m
0.4
0.0
(14.1)
The interest rate sensitivities in the table above do not include retail product behavioural changes, which are captured by other measures.
The fall in interest rates during 2020 led to the increase in PV200. This is caused by floating rate wholesale funding instruments where the coupon is assumed to be floored at zero. A large
downward shock in interest rates can cause these instruments to behave like fixed rate instruments and therefore the interest rate risk as measured by the PV200 metric has increased.
Net Interest Income sensitivity (NII)
Earnings sensitivity assessments measure the risk that income is adversely affected by changes in interest rates. The sensitivity of earnings to changes in interest rates is measured monthly using a
forecasting model and potential interest rate scenarios.
The table below sets out the sensitivity of pre-tax future earnings over a one-year period to instantaneous parallel rises and falls in interest rates. For 2021, the size of the interest rate shifts has been
adjusted to better reflect the prevailing interest rate environment, with a significant rate shock less probable, alongside a number of behavioural assumption changes. These changes reduced the
2021 sensitivity by £36 million in the -25 basis point shift; the prior year number has not been restated.
Potential favourable/(adverse) impact on annual earnings
((AAuuddiitteedd))
+25 basis points shift
-10 basis points shift
-25 basis points shift
Note:
2021
£m
8
(34)
(100)
2020
£m
(note i)
(note i)
(70)
i. +25 and -10 basis point shifts have not been run for prior year sensitivities.
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Risk report (continued)
Risk report (continued)
Market risk (continued)
Annual Report and Accounts 2021
213
The increased sensitivity to a -25 basis point shift in 2021 compared to 2020 is due to an increase in retail savings balances paying less than 25 basis points. Savings balances are assumed to pay
zero basis points when the bank base rate would be -15 basis points.
The following key judgements should be noted in respect of the table above:
•
•
•
•
•
•
the interest rate sensitivities are illustrative only and are based on a static balance sheet; all assets and liabilities maturing within the year are assumed to reinvest in like for like products;
the reported sensitivities will vary over time due to several factors, such as the timing of maturing assets and liabilities, product pricing, market conditions, and strategic changes to the balance
sheet mix, and should not therefore be considered a guide to future performance;
the sensitivity analysis includes all financial assets and liabilities held;
the model assumes that changes in interest rates are fully passed through to managed rate variable products, unless a 0% floor is reached;
the sensitivities do not take account of any management actions; and
the values above are reported on a pre-tax basis.
Economic Value of Equity (EVE)
Nationwide also measures interest rate risk through EVE sensitivity which identifies the change in value of interest rate sensitive items, both on and off-balance sheet, under a range of interest rate
shocks prescribed by the PRA. This measure includes behavioural assumptions using a run-off balance sheet basis. EVE is managed against internal and regulatory risk limits and is monitored by
ALCO.
Basis risk
Basis risk arises where variable rate assets and liabilities re-price with reference to differing short-term interest rate benchmarks. The primary interest rates that Nationwide is exposed to are the
Bank of England base rate, Sonia and three-month sterling Libor. If the difference between these interest rates changes over time, this may impact earnings.
Assets and liabilities are offset when their reference rate, or ‘basis’ type, is matched. Exposure to the net mismatch is mitigated, where required, by transacting basis swaps to ensure Nationwide
remains within internally agreed risk limits.
Swap spread risk
A liquidity portfolio is held to manage Nationwide’s liquidity risk. These assets are predominantly fixed rate sovereign debt securities. Interest rate swaps are used to hedge the interest rate risk
associated with these assets. However, there remains a residual risk associated with the possible movement in the spread between sovereign debt yields and swap rates. This ‘swap spread risk’
reflects the fact that the market value of the liquidity portfolio assets can change due to movements in bond yields and the swaps due to movements in swap rates. In economic terms, this risk is
only realised if a bond is sold and the swap is cancelled ahead of maturity.
Swap spread risk is monitored using a historical VaR metric and the risk is controlled via internal limits linked to capital requirements. Exposures are monitored daily and are reported monthly to
ALCO.
Inflation risk
The risk arising from Nationwide's inflation-linked investments is mitigated using inflation swaps. Residual inflation risk is monitored on these investments using IE01 metrics, calculated as the
impact of a one basis point parallel shift in inflation swaps rates. Inflation risk is captured within our swap spread VaR risk measurement.
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Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Market risk (continued)
Currency risk
Annual Report and Accounts 2021
214
Currency exposure is managed through natural offsetting on the balance sheet, with derivatives used to maintain the net exposures within limits. ALCO sets and monitors limits on the net currency
exposure. The table below sets out the limited extent of the residual exposure to currency risk:
Currency risk
(Audited)
VaR (99%/10-day)
Product option risk
Average
£m
0.0
2021
High
£m
0.5
Low
£m
0.0
Average
£m
0.0
2020
High
£m
0.3
Low
£m
0.0
Market risk also arises when customers exercise options contained within fixed rate products which can require changes to hedging. The key product risks are prepayment risk (early redemption or
under- or over-payment of fixed rate mortgages), access risk (early withdrawal of fixed rate savings), and take-up risk (higher or lower completions of fixed rate mortgages than expected). These risk
exposures are quantified under a range of stress scenarios using models that predict customer behaviour in response to changes in interest rates. The potential impacts are then closely monitored.
These stressed risk measures are subject to a set of limits and are reported to ALCO, along with proposed management actions where necessary to bring the exposures within limits. This approach
is also used to assess internal capital requirements for product option risks.
Structural interest rate risk
Nationwide has structural hedging programmes in place to stabilise earnings as interest rates change. Structural hedging is transacted to manage the interest rate risk from balance sheet items
that have stable balances have an interest rate that is fixed or are non-interest bearing, and have no defined maturity date. The most material hedging programmes are in place to manage liabilities,
including reserves and customer deposits. During 2020, asset structural hedging programmes were put in place for balances which meet these criteria.
Without hedging, the returns earned on these balances are subject to the volatility of short-term interest rates. The structural hedging programme smooths the volatility in net interest margin
arising from changes in interest rates. The structural hedges convert the return, through a rolling hedge, into a more stable medium-term return.
Structural hedging is managed to a target duration. A two-and-a-half-year target duration is applied to eligible reserves and customer deposit balances. Nationwide’s approach to financial planning
assumes that structural hedging will be maintained in line with the target duration, with risk limits in place to mitigate deviation from the target duration.
In addition to the structural hedging programmes, Nationwide also undertakes other balance sheet hedging to mitigate the asymmetric risk which arises in very low or negative interest rate
scenarios.
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Risk report (continued)
Risk report (continued)
Pension risk
Summary
Annual Report and Accounts 2021
215
Pension risk is defined as the risk that the value of the pension schemes’ assets will be insufficient to meet the estimated liabilities, creating a pension deficit. Pension risk can negatively impact
Nationwide’s capital position and may result in increased cash funding obligations to the pension schemes.
Nationwide has funding obligations to a number of defined benefit pension schemes, the largest of which is the Nationwide Pension Fund (the Fund) which represents over 99% of the Society’s
pension obligations. The Fund has over 29,000 participants (Fund members), the majority of whom are deferred members (former employee members, not yet retired). The Fund closed to new
entrants in 2007 and closed to future accrual on 31 March 2021. Further detail is set out below and in note 30 to the financial statements.
In accordance with UK legislation, the assets of the Fund are held in a legally separate trust from Nationwide’s assets and are administered by a board of trustees (the Trustee) which has fiduciary
responsibilities to Fund members.
Nationwide has a responsibility to ensure that Fund members are paid the pension they have been promised. To support this aim, Nationwide has a specialist pensions team to ensure that pension
risk is appropriately monitored and managed, whilst helping to educate and engage Fund members about their pension benefits.
Risk factors
Volatility in investment returns from the assets and the value of the liabilities both affect the Fund’s net deficit or surplus position. The key risk factors which impact this position are set out below.
These factors can have a positive or negative effect on the position.
Asset performance
The Fund’s liabilities are calculated using a discount rate set with reference to high quality bond yields. This creates a risk that the Fund’s assets perform worse than those bond yields, resulting in
the Fund’s net position being volatile or worsening.
The Fund holds a significant proportion of return-seeking assets, including equities and credit investments. Return seeking assets are expected to outperform liabilities in the long-term, but they are
risky and volatile in the short to medium-term. Investments in return-seeking assets are monitored by both the Trustee and Nationwide to ensure they remain appropriate given the Fund’s long-
term objectives. Further details are set out in note 30 to the financial statements.
Liabilities
There is a risk that the Fund’s liabilities increase to a level which is not supported by asset performance, whether through discount rate changes, increases in long-term inflation expectations, or
increases in the life expectancy (longevity) of Fund members.
Actuarial assumptions
There is a risk that a change in the methodology used to derive key actuarial assumptions (for example, the discount rate or longevity assumptions) results in a step change in the assessment of the
liabilities and therefore in the net surplus or deficit (potentially impacting Nationwide's capital and/or deficit funding requirements). The ultimate cost of providing pension benefits over the life of
the Fund will depend on actual future events, rather than assumptions made.
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Risk report (continued)
Risk report (continued)
Pension risk (continued)
Changes in the year
Annual Report and Accounts 2021
216
The Fund closed to future accrual from 1 April 2021. This resulted in active members’ benefits being linked to the Consumer Prices Index (CPI) before retirement rather than the Retail Prices Index
(RPI) and salary increases.
In November 2020, Nationwide and the Trustee entered into an arrangement whereby Nationwide has agreed to provide £1.7 billion of collateral (a contingent asset) in the form of retained notes
issued by Silverstone Master Issuer plc to provide additional security to the Fund. The Fund would have access to these notes in the case of certain events such as insolvency of Nationwide.
During the year, Nationwide and the Trustee agreed to a new Schedule of Contributions and Deficit Recovery Plan following the finalisation of the Fund’s 31 March 2019 actuarial valuation. Employer
contributions in respect of employee benefit accrual were paid in line with the new Schedule of Contributions, until closure to future accrual on 31 March 2021. As a consequence of entering into the
contingent asset arrangement, no employer deficit contributions were required in the year ended 4 April 2021 nor will be required in the year ending 4 April 2022. The next actuarial valuation of the
Fund will be as at 31 March 2022.
On 25 November 2020, the UK Government and UK Statistics Authority confirmed that the change from RPI to the CPI Index including owner occupiers’ housing costs (CPIH) cannot be
implemented until after 2030. Following this announcement, a review of the actuarial assumptions was performed. The estimated impact of the RPI reform has been taken into account in the
calculation of the pension surplus.
The retirement benefit position on the balance sheet as at 4 April 2021 is a £172 million surplus within assets (2020: £294 million surplus) as set out below:
Changes in the present value of net defined benefit asset/(liability)
At 5 April
Pension (charge)/credit
Net interest credit
Actuarial remeasurement
Employer contributions (including deficit contributions)
At 4 April
2021
£m
294
(83)
7
(112)
66
172
2020
£m
(105)
74
3
195
127
294
The movement in the retirement benefit obligation is primarily driven by the narrowing of credit spreads over the year which increases the liabilities relative to the assets. This has been partially
offset by an increase in the value of equities and illiquid assets held by the Fund.
The actuarial remeasurement quantifies the impact on the net obligation from updating financial assumptions (e.g. discount rate and long-term inflation), demographic assumptions (e.g. longevity),
reflecting up-to-date membership data, and the return on Fund assets being greater than expected. Further details can be found in note 30 to the financial statements.
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Risk report (continued)
Risk report (continued)
Pension risk (continued)
Outlook
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217
Regular analysis, insight and monitoring supports pension risk management and helps Nationwide to anticipate any management actions that may be required. This includes risk appetite
articulation and regular reporting to governance committees. In addition, pension risk is embedded into Nationwide’s Enterprise Risk Management Framework and stress testing processes.
Nationwide monitors all pension regulation and legislation change which may impact Nationwide’s obligations to the Fund.
Over the long term, the Trustee intends to further reduce the Fund’s risk factors, and Nationwide actively engages with the Trustee to ensure broad alignment on investment objectives and
implementation. This is supported by Nationwide’s representation at the Trustee’s Investment and Funding Committee and investment working groups, and the sharing of management information
between Nationwide and the Trustee in order to consider specific risk management initiatives.
Potential risk management initiatives include, but are not limited to, adjusting the asset allocation (for example reducing the allocation to equities and increasing the allocation to bonds),
implementing derivative and other hedging strategies and adjusting contribution levels.
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Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Business risk
Summary
Nationwide defines business risk as the risk that achievable volumes or margins decline relative to the cost base, affecting the sustainability of the business and the ability to deliver the strategy, due
to macro-economic, geopolitical, industry, competitor, regulatory or other external events. We actively manage this risk so that we continue to provide value to our current and future members, with
a focus on long-term sustainability rather than short-term benefit. Nationwide ensures that it can generate sustainable profits by focusing on recurrent sources of income that provide value
commensurate with risk appetite. The Society monitors this risk as part of ongoing business performance reporting to, and through regular discussion of business model risks by, senior
management and the Board.
Nationwide’s business model is reliant on generating net interest margin – primarily the difference between the interest rate paid to savers and that received from mortgage holders. In the
competitive and low interest environment over recent years, this margin has been squeezed. Whilst this pressure has eased slightly during the pandemic, the Society continues to consider ways to
mitigate the risk of future margin compression through increasing efficiency and diversifying income streams.
Managing business risk
Business risks are identified as part of the Society’s strategy and financial planning processes and through regular horizon scanning exercises. These risks inform potential areas of strategy
development and are assessed using a range of sensitivities to the financial plan.
This activity is complemented by ongoing financial forecasting and monitoring as well as a range of stress testing activity to consider tail risks or longer-term risks to the Society. Ongoing strategy
development ensures that the strategy and associated plans continue to evolve to address risks to the business model by considering changes in the external environment including new technology,
consumer behaviour, regulation, or market conditions/disruption.
These risks are assessed against Board risk appetite, which ensures the right balance between distributing value to members, investing in the business, and maintaining financial strength. Business
risk is managed and mitigated through a range of measures which include:
• Financial forecasting – As part of the financial planning process Nationwide forecasts income and costs over a five-year period with an updated forecast reviewed by management regularly,
taking into consideration the key risks and sensitivities.
• Monitoring of financial and business performance – The various components of financial performance are monitored monthly against internal forecasts and key indicators across a variety of
committees and forums, which consider potential risks and possible mitigating actions. In addition, business areas monitor the demand for products and services to ensure we continue to
provide propositions that our members want and need, and which provide value to the Society and our members.
• Stress testing and sensitivity analysis – Business risk is regularly stress tested as part of internal management reporting such as the financial plan downside and upside scenarios, Internal
Capital Adequacy Assessment Process, and reverse stress tests. In addition, the Prudential Regulatory Authority’s solvency stress testing scenarios provide a test of the business model and the
risks it is exposed to. As an output from these activities the Society identifies potential actions that can be taken if risks crystallise. To effectively manage more extreme events the Society
maintains a Recovery Plan, in line with regulatory guidance, that contains a range of indicators which are regularly monitored, and a list of strategic actions that could be taken, if necessary, to
protect the Society from severe stresses and ensure it remains sustainable over the long term.
Outlook
Business risks are closely linked to the top and emerging risks outlined on page 56 of the Risk overview. The Covid-19 outbreak, and the global response to it, has materially impacted the economic
environment and consumer behaviours, including a move to digital channels of engagement. Internal stress testing exercises undertaken since the pandemic emerged have demonstrated that
Nationwide has the financial strength to be resilient against the potential economic shocks which may develop.
The continued vaccine rollout, extension of government support measures and the easing of lockdown restrictions are giving a boost to economic confidence. Whilst the competitive environment
has eased slightly in the last six months, we expect interest rates to remain at current low levels and competition to return as confidence in the housing market increases; this will in turn increase
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Risk report (continued)
Risk report (continued)
Business risk (continued)
Annual Report and Accounts 2021
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the level of business risk for Nationwide. During the year we completed a reverse stress test exercise focusing on the resilience of our business model to external threats and heightened competition
in our core markets. This reinforced the importance of the Society’s current strategic priorities and the need to focus on efficiency.
Operational and conduct risk
Summary
Nationwide defines operational and conduct risk as the risk of impacts resulting from inadequate or failed internal processes, conduct and compliance management, people and systems, or from
external events. We manage our operational and conduct risks through the operation of proportionate controls embedded within processes to identify and prevent failures affecting our members,
colleagues or the Society. This is operated as detailed in the Managing risk section on page 142.
Over the last year, the Society’s operational and conduct risk profile has been impacted by Covid-19, while we have faced the additional challenges of a high volume of complex regulatory
developments and the UK’s exit from the European Union. During this time, the Society has continued to meet the high standards expected by members and regulators in the management of
operational and conduct risk across key areas as detailed below.
Current Environment
Covid-19
In response to the pandemic, it was necessary to implement new ways of working and adapt operational processes, the associated risks of which have been actively assessed for mitigation or
acceptance as appropriate. The overall operational and conduct risk profile has remained relatively stable but is subject to ongoing review as the situation unfolds and the longer-term impacts of
Covid-19 are fully understood. The Society continues to plan for, and respond to, further developments to ensure continuity of service, minimise the impact on the risk profile, keep our colleagues
and members safe and comply with UK Government guidance. While the roll-out of Covid-19 vaccines is underway, it will be some time before this materially reduces the impact of the pandemic on
our day-to-day operations, and those of our suppliers.
As a result of the financial and economic impact of Covid-19, governments and regulators have introduced a number of support measures to ensure customers are protected and markets continue
to function well. While we have undertaken significant work to successfully implement these measures, their rapid introduction has a number of associated conduct risk implications, which are
ongoing and are likely to be heightened as support schemes are unwound. These considerations primarily relate to the fair treatment of customers in financial difficulty. We are committed to
ensuring the right customer outcomes are achieved in all circumstances.
The UK’s exit from the European Union
On 31 December 2020, the transition period following the UK’s departure from the European Union (EU) ended. Both the Financial Conduct Authority (FCA) and Prudential Regulation Authority
(PRA) have worked to ensure a robust regulatory system remains in place, and working with the Government have implemented a number of measures to minimise the potential for disruption. As
Nationwide is a UK-domiciled and UK-focused building society, exit from the EU does not have material implications for our business model, financial soundness, or ability to continue to provide
services to our UK-based members. For the small number of EU resident members, we continue to provide services where local regulation allows.
IT and operational resilience
The Society’s focus on operational resilience continues to grow in line with members’ expectations, the Society’s strategy, and the regulatory environment. Members rightly expect services to be
available when they want to use them. The demand for contactless payments and the rapid increase in transaction volumes driven by customer behaviour, for example, have led the Society to
embark on a multi-year modernisation programme of its IT estate. This will deliver increased capacity and availability of service and build resilience for future growth. We continue to invest in new
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Risk report (continued)
Risk report (continued)
Operational and conduct risk (continued)
Annual Report and Accounts 2021
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systems and processes to make further improvements to member experience and continue to test internal capability through a series of resilience exercises to ensure an effective response to
incidents should they occur. This ongoing investment in technology ensures the Society remains resilient and secure, while also delivering new features and services to our members at speed.
There continues to be significant regulatory interest in this area from the Bank of England (BoE) and regulators, and financial services providers are increasingly expected to have a deep
understanding of the impact of service disruptions on their customers. This includes identifying their most important services, defining acceptable levels of interruption to these services
and ensuring these are not exceeded. Nationwide has developed a suite of impact tolerances defining the maximum tolerable level of disruption to important services and these will be subject to
ongoing validation against regulatory and member expectations.
Cyber security
As we manage our IT systems and deliver new technology for the future, the impact that a successful cyber attack could have on our members’ ability to manage their finances remains under
constant review. Significant effort is put into our cyber risk management capabilities, including investment in the prevention and detection of attacks, and the testing of our response should an
attack be successful. The decision to move colleagues to a work from home arrangement as a result of Covid-19 considered the inherent risks and the additional security measures needed to
manage these.
As Nationwide continues its adoption of new third party and cloud services, we will be working to understand the associated risk profile and ensure appropriate risk mitigations are in place. We
continue to build in security controls when adopting these services. We ensure these services are introduced with minimal risk through the delivery of existing and, where required, new security
controls. The large cloud providers continue to invest significant levels of capital to ensure these environments are safe and secure. Security standards are rigorously reviewed when adopting new
member services supported by third parties.
Applying lessons learned is critical to managing cyber risk effectively. Testing of our multi-layered approach to protect our information is undertaken on an ongoing basis, including the use of
techniques and procedures practiced by individuals and organisations that attempt to conduct malicious activity. This provides the Society with confidence in its controls and allows a better
understanding of how to prevent future attacks, ensuring technical controls are constantly improved, resource is repositioned and funding is allocated appropriately.
We continue to work closely with the National Cyber Security Centre, other government bodies and our peers in financial services and the wider industry. This enables us to remain informed about
both the potential threats and responses, while sharing best practice in combatting cyber crime. We continue to increase cyber security awareness across both our member and employee
landscape.
Data
We are committed to protecting member and employee data. To ensure this is achieved we have implemented three key control frameworks which span data privacy, data governance and security,
helping us to protect the data we hold now and will hold in the future. Investment in data architecture and technology continues, allowing strategic solutions to be implemented and enabling the
Society to store, manage and protect personal data more effectively in an evolving digital environment. Progress continues to be made on data quality and member data processes to improve
member experience and reduce the likelihood of a data breach.
The complexity and cost of managing data securely and effectively increases as the data used in digital services expands and continues to be impacted by the steady flow of regulation influencing
data management. The General Data Protection Regulation (GDPR) adequacy decision post-Brexit will determine whether transfers of personal data from the EU to the UK are permitted. This is an
important milestone, in addition to the arrangements to be put in place for the transfer of data between countries outside of the EU. The Society remains agile in its response to these changing
requirements and development of the control landscape.
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Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Operational and conduct risk (continued)
People
The safety and wellbeing of our colleagues are at the forefront of our people agenda. The Society relies on the talent and dedication of its people to deliver its strategy, provide first class service, and
operate a strong risk and control culture - never has this been more evident than during the ongoing Covid-19 crisis. We are adapting the way we work as lessons are learned and are rethinking
future ways of working as and when restrictions are lifted. We continue to monitor and manage closely the impact of the pandemic on our resourcing as we deliver the products, services and
experience members want, to ensure the required levels of skill, knowledge and engagement are maintained. Support for colleagues to date has included the delivery of enabling technology and key
equipment to support working from home arrangements, and allowing flexibility around domestic situations with the offer of additional paid leave where necessary. Physical measures within our
branches and offices comply with the UK Government Covid-19 guidelines to protect those unable to work from home. An internally led campaign called ‘sticks and stones’ has emphasised zero
tolerance towards verbal and aggressive behaviour and gained momentum as a sharp rise in incidents has been witnessed, alongside the introduction of initiatives to help maintain the mental
health of all our colleagues.
External fraud
We continue to work hard in a constantly evolving environment to minimise the impact of fraud and scams on our members as financial crime levels rise in the industry. We are working closely with
regulatory bodies and our banking peers to collaboratively drive improvements in prevention, education, and fair outcomes.
Card fraud remains the largest driver of cases and overall losses. This has been driven by increasing transaction volumes as a result of business growth and member behaviour, including a sustained
material shift of point of sale (POS) transactions to online shopping during the pandemic. Online losses have also increased this year, in line with industry trends, as fraudsters increasingly target
consumers with scams to obtain personal information, often spanning multiple channels. Our round-the-clock operation reacts quickly to the fraudsters’ changing tactics, minimising the impact to
members, and we continue to invest in system defences to ensure we maintain a strong position in the industry.
The Society is one of nine firms which have signed up to the Lending Standards Board (LSB)’s Contingent Reimbursement Model (CRM) voluntary code and we are fully committed to its principles.
We are continually developing our approach to helping members protect themselves from Authorised Push Payment (APP) scams, focusing on improving detection, warnings and intervention
where appropriate, as well as dealing sympathetically and consistently with those impacted. We are working openly with the LSB on areas where the industry can improve consumer protection.
Use of third parties
The Society continues to rely on a network of third parties to provide both core and non-core services covering IT infrastructure, back office, and member-facing services. When outsourcing activities
to our partners, we retain responsibility for all services and the associated risks. Significant work has been undertaken to focus resource on our most critical suppliers, including uplifting our risk
assessment processes and tightening our contractual arrangements to meet enhanced regulatory requirements under the European Banking Association’s Guidelines on Outsourcing. These
improvements increasingly help the Society to deliver resilience across the supply chain.
The use of cloud-based solutions is a key strategic enabler and offers the potential to improve aspects of the Society’s operational risk profile. Given the increasing reliance on cloud services,
alongside the shared responsibility model which underpins such arrangements, it is important we clearly understand and manage the associated risks and delivery aspects. Significant progress
continues to be made in addressing these risks.
Digital services
The Society continues to invest and innovate in a range of everyday services which have members’ needs at their heart. Investment was prioritised in the 2020/21 financial year to address
exceptional demand during the pandemic for our online banking services; for example the mortgage payment deferral process was redesigned to make it easier for our members to use.
We have further developed our Banking app and internet bank which allow our members to complete transactions in the safety of their own homes, at a time convenient to them. Protecting
members’ money during such transactions is critical, and the enhancements resulting from the introduction of Confirmation of Payee and Strong Customer Authentication rules, such as one-time
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Operational and conduct risk (continued)
Annual Report and Accounts 2021
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passcodes for digital payments, help to reduce fraud and give members greater assurance that they are sending payments to the intended recipient. These will be further developed in line with
regulatory timelines.
The Society supports Open Banking, which allows members a view of all their financial holdings in one place and is developing our offering in line with regulatory requirements. The FCA has opened
a discussion on ‘Open Finance’, which would extend this approach to other financial products and sectors to give consumers more control over a wider range of their financial data. The Society will
engage closely with the industry and regulators in the development of this, ensuring lessons are learned from the implementation of Open Banking.
Pace of change
Over the last year, a significant degree of change has been delivered at pace to meet the demands which the pandemic has placed on the way the Society operates, and we expect this high volume
and pace of change to continue. Agile ways of working are being embedded to support varied and rapidly evolving requirements, making it easier for members to transact through a range of
channels. We remain focused on the management of associated risks, developing in-house capabilities and reducing reliance on third parties and contingent workers where we can.
Vulnerable customers
As Covid-19 continues to impact the wellbeing of our members, supporting vulnerable customers remains a key focus for the Society. It also remains a priority for the FCA, which has set out best
practice guidance for firms to do more to protect vulnerable consumers, providing greater detail on expectations of firms at all stages of the product lifecycle. Our strategic focus is on embedding
consideration of the additional needs of vulnerable consumers into our culture, making it the responsibility of all colleagues whose work impacts our member products and services.
Access to cash
While cash use is declining, cash remains important for many of our members. Nationwide is committed to supporting a cash system that works for those who need it most, and is working with
regulators, policymakers, and other stakeholders to ensure a flexible, cost effective solution that meets changing customer needs.
Resolvability Assessment Framework
Since the last financial crisis, significant steps have been taken to ensure that banks and building societies are fully resolvable (able to fail without wider economic consequences), an outcome which
the PRA and BoE are required to achieve by 2022. The Resolvability Assessment Framework is the final major piece of this work. While regulatory deadlines have been delayed due to the impact of
Covid-19, work is ongoing to ensure the Society will be resolvable and compliant with the incoming rules. In due course, we will finalise an assessment of our resolvability and make a subsequent
public disclosure of this assessment.
The transition away from Libor
Significant work has been undertaken to prepare for the planned discontinuation of Libor benchmarks by the end of 2021. We have a relatively small number of legacy retail and commercial loans
which reference Libor, and work is ongoing to manage the impact on the Society and its customers. We are also engaged with both the PRA and FCA, and with industry bodies, to work towards an
industry solution. Further information can be found on page 208.
Bank of England base rate
Members of the BoE’s Monetary Policy Committee have begun to set out their thoughts on the potential reduction of the bank base rate to (or below) zero. Nationwide continues to prepare for this
possibility, considering the Society’s own operational readiness, the extent to which we are reliant on third party providers to accommodate any necessary changes, and the impact that this could
have on our members.
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Annual Report and Accounts 2021
Risk report (continued)
Risk report (continued)
Operational and conduct risk (continued)
Operational and conduct risk experience
The Society monitors and reports on the operational and conduct risk events which have occurred, to better understand those exposures and drive sustainable mitigation to prevent recurrence. For
the purposes of this report, events include only those where a financial loss arises from an incident. Internally the Society records events against causal categories, in addition to reporting them
against the categories defined by the Basel Committee on Banking Supervision in Basel II. This allows comparison of risk experience with our main banking competitors.
0perational risk events by Basel risk category, % of total events by value (note i)
Clients, products and business practices
External fraud
Execution, delivery and process management
Internal fraud
Business disruption and system failure
Damage to physical assets
Employment practices and workplace safety (note iii)
TToottaall
2021
%
28.9
15.8
40.9
0.1
0.6
0.0
13.7
100.0
2020 (note ii)
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58.0
11.9
30.0
0.0
0.0
0.0
0.1
100.0
Operational risk events by Basel risk category, % of total events by number (note i)
Clients, products and business practices
External fraud
Execution, delivery and process management
Internal fraud
Business disruption and system failure
Damage to physical assets
Employment practices and workplace safety
TToottaall
2021
%
1.1
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6.7
0.4
0.3
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1.0
100.0
2020 (note ii)
%
1.8
89.6
7.6
0.2
0.0
0.1
0.7
100.0
Notes:
i. Risk events with aggregated gross losses of £5,000 and over (excluding monies recovered); multiple losses relating to the same event are counted once.
ii. Comparatives were restated to include additional historic data where more information has been received.
iii. Following guidance provided by Operational Riskdata eXchange Association (ORX), costs enabling restoration of operations following the impact of Covid-19 are reportable as operational risk events. It includes the
costs of keeping our colleagues and members safe, for example, Personal Protective Equipment (PPE), and enabling new ways of working, for example, laptops and software licenses to continue to provide the service
our members expect. Employment practices and workplace safety was considered the most appropriate category for the Society’s spend on Covid-19.
The value of losses against the ‘clients, products and business practices’ category decreased in 2021 predominantly due to the significant reduction in the number of Payment Protection Insurance
(PPI) claims processed. Due to treating these losses as a single event, this is not reflected in the number of instances.
The increase in the value of risk events recorded in the ‘execution, delivery and process management’ category compared to last financial year relates primarily to one risk event which did not lead
to a significant financial loss.
Outlook
The Society’s operational and conduct risk outlook is impacted by the environment it operates in and its strategy. The drivers of operational and conduct risk are expected to remain broadly
consistent, with the main themes being:
•
•
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• development of our understanding and approach to the operational risk elements of climate change and how it sits within our Enterprise Risk Management Framework; and
•
ongoing operational challenges, conduct considerations and long-term impact of Covid-19 and Brexit;
the volume of complex regulatory developments impacting the financial services industry;
the scale and pace of change, particularly in a digital environment, partly driven by the Society’s technology strategy and impacted by changes to customer behaviour and expectations;
IT resilience, the continued increase in the sophistication of cyber security threats and external fraud;
continued reliance on strategic third-party partners, including increased adoption of cloud-based solutions;
the possibility of the bank base rate being reduced to (or below) zero.
The Society continues to invest to maintain and develop appropriate controls in all these areas to ensure residual risk exposures are managed within appetite.
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Risk report (continued)
Risk report (continued)
Model risk
Summary
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Model risk is the risk of an adverse outcome as a direct result of weaknesses or failures in the development, implementation or use of a model. A model is defined as ‘a simplification of a business
system using assumptions and mathematical concepts to help describe, predict or forecast’ and may include approaches which are partially or wholly qualitative, or based on expert judgement.
There is an inherent risk associated with models because, by their very nature, they are imperfect and incomplete representations that rely on assumptions and theoretical methodologies, and use
historic data which may not represent future outcomes, leading to the potential for errors and uncertainty.
Model errors can arise when models are implemented incorrectly or misused, for instance when applied to uses that they were not designed for, or where there is a failure to update key
assumptions where appropriate. Model errors and uncertainty are the primary sources of model risk and, if crystallised, could result in poor lending decisions, holding inappropriate levels of capital
or provisions, inappropriate pricing decisions or financial loss.
Nationwide relies on models to support a broad range of business and risk management activities across the Society. Key examples include the use of model outputs in the credit approval process,
capital and liquidity assessments, stress testing, financial planning, loss provisioning and pricing strategies.
Model risk is heightened due to the significant change in the economic environment and uncertainty arising out of the Covid-19 pandemic. This has led to enhanced monitoring of the models and
greater reliance on model adjustments.
Managing model risk
These unprecedented economic conditions and disruption to economic activity mean that the historical data on which some models have been built and calibrated to operate has become less
representative of the current environment and there are challenges regarding the relationship between economic assumptions and model outputs. In addition, some existing models were not
designed to deal with the complexities arising from regulatory guidance on the treatment of members who have been impacted by the pandemic, such as the granting of payment holidays. Our
short-term mitigating actions have included bespoke model monitoring focusing on certain sub-populations, enhanced communication of model weaknesses and limitations to senior management
committees, and increased use of model adjustments based on judgement.
Nationwide manages model risk at an enterprise level through the Model Risk Framework and within a defined risk appetite set by the Board. The framework prescribes Society-wide requirements
including roles and responsibilities, governance, independent oversight, risk appetite, monitoring and independent assurance.
The framework is supported by model risk policies and standards covering documentation, development, implementation, validation, change processes and monitoring. This ensures that all models
are developed consistently, are of sufficient quality, adequately maintained and controlled to support effective business decisions and meet regulatory requirements where applicable.
Responsibility for oversight of model risk is delegated from the Executive Risk Committee to the Model Risk Oversight Committee (MROC). MROC assesses whether models are fit for purpose and
monitors model risk exposure on a Society-wide aggregated basis.
Model risk appetite is expressed through assessments of the most material models. This considers the percentage of models that have been independently assessed as meeting internal standards.
Issues are escalated to the Executive Risk Committee when necessary, or where a breach of risk appetite has occurred.
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Risk report (continued)
Risk report (continued)
Model risk (continued)
Responsibilities under the three lines of defence
Each model is required to have a first line model owner who is responsible for ensuring that their models comply with the requirements of the framework. Responsibility for approving the use of
material models resides with first line risk committees, such as the Asset & Liability Committee and Credit Committee. The role of these committees is to review, approve and monitor all material
aspects of the models within their remit.
The second line oversight of model risk is performed by the Model Risk Oversight (MRO) function which provides independent validation, setting of model standards, reporting of the model risk
profile and maintenance of the Society’s model inventory. The scope of independent validation includes a review of model inputs, model design and model outputs. This is further broken down into
detailed dimensions covering areas such as data, methodology, performance, use and documentation. The outcome of the validation is a report which includes a model risk score, key risks, model
capabilities, conditions for use, limitations, validation findings and a recommendation as to whether models are fit for purpose or not.
While all material models are reviewed and re-approved for continued use each year, the validation frequency and level of challenge applied by MRO is tailored to the materiality and complexity of
each model. Once validated and correctly implemented, models are subject to regular monitoring. A central model inventory is used to maintain data on models and validation issues raised by MRO
are tracked through to resolution. An annual model universe assessment is used ensure the completeness and accuracy of the model inventory.
Nationwide’s Internal Audit function, the third line of defence, considers model risk to be an area of focus and the Model Risk Framework is subject to review through a cyclical programme of audits
that assess the appropriateness of its design and overall effectiveness, and may assess how specific models used in Nationwide comply with it. The findings of the audit reviews are reported to
model owners, senior management, first line committees and appropriate stakeholders.
Developments in the year
Over the past year Nationwide has enhanced the models used to quantify key risks and continued to make improvements in the management of model risk across several areas including:
• development of a number of Internal Rating Based (IRB) rating systems to comply with the regulatory roadmap;
• developed a capability to assess the impact of aspects of climate change risk;
• delivered a number of new IFRS 9 model redevelopments;
• built the capability to assess the value of Nationwide in the event of resolution;
•
enhanced the frequency and scope of model risk reporting provided to senior management committees to ensure they are aware of model weaknesses and limitations, particularly those arising
from the impact of the Covid-19 pandemic; and
enhanced the standards and policies covering model adjustments and data to reflect a greater reliance on the use of model adjustments and importance of data quality respectively.
•
Outlook
The pandemic will continue to have a material impact on our model risk profile. In the medium term, we expect model changes and modifications to reflect the ongoing extreme economic shocks,
but these will take time to develop and need more data on which models can be calibrated. We have robust internal governance structures to regularly monitor the application of model adjustments
and, where possible, to reduce the reliance on these through model recalibration or redevelopment, as appropriate. Depending on the path of the pandemic and the shape of the economic recovery,
we will continue to assess the extent of these changes and identify which models will require redevelopment.
The Society remains subject to ongoing significant levels of regulatory change and scrutiny related to models. Regulatory change continues to be a significant factor driving model development,
validation and model risk management activity. The IRB models, used in credit risk capital calculations, are undergoing significant regulatory reform as regulators drive for greater consistency
across the industry. Nationwide is well advanced through the programme of work designed to redevelop all the IRB models to ensure compliance with the new regulations when they come into
force from 1 January 2022. The Valuation in Resolution models are in the final stages of development and going through validation, ready to support our resolution capability during 2021.
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Annual Report and Accounts 2021
226
Financial statements
Independent auditor’s report
Income statements
Statements of comprehensive income
Balance sheets
Statements of movements in members’
interests and equity
Cash flow statements
Notes to the financial statements
227
241
242
243
244
246
247
Note 1 – Statement of accounting policies
Note 2 – Judgements in applying accounting policies
and critical accounting estimates
Performance
Note 3 – Interest receivable and similar income
Note 4 – Interest expense and similar charges
Note 5 – Fee and commission income and expense
Note 6 – Other operating income
Note 7 – Gains/losses from derivatives and hedge accounting
Note 8 – Administrative expenses
Note 9 – Employees
Note 10 – Impairment losses and provisions on loans
and advances to customers
Note 11 – Taxation
Financial assets and liabilities
Note 12 – Classification and measurement
Note 13 – Investment securities
Note 14 – Loans and advances to customers
Note 15 – Derivative financial instruments
Note 16 – Deposits from banks and similar institutions
Note 17 – Other deposits
Note 18 – Debt securities in issue
Note 19 – Subordinated liabilities
Note 20 – Subscribed capital
Note 21 – Fair value hierarchy of financial assets
and liabilities held at fair value
Note 22 – Fair value of financial assets and liabilities
held at fair value – Level 3 portfolio
Note 23 – Fair value of financial assets and liabilities
measured at amortised cost
Note 24 – Offsetting financial assets and financial liabilities
Other assets and investments
Note 25 – Intangible assets
Note 26 – Property, plant and equipment
Provisions, contingent and other liabilities
Note 27 – Provisions for liabilities and charges
Note 28 – Leasing
Note 29 – Contingent liabilities
Note 30 – Retirement benefit obligations
Capital and equity instruments
Note 31 – Core capital deferred shares (CCDS)
Note 32 – Other equity instruments
Scope of consolidation
Note 33 – Investments in Group undertakings
Note 34 – Structured entities
Other disclosure matters
Note 35 – Related party transactions
Note 36 – Notes to the cash flow statements
Note 37 – Capital management
Note 38 – Registered office
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Annual Report and Accounts 2021
227
Annual Report and Accounts 2021
Independent auditor’s report
to the members of Nationwide Building Society
Independent auditor’s report to the members of Nationwide Building Society
Report on the audit of the financial statements
Opinion
In our opinion, the financial statements:
•
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Give a true and fair view of the state of the Group’s and the Society’s affairs as at 4 April 2021 and of the Group’s and the Society’s income and expenditure for the year then ended; and
Have been properly prepared in accordance with International Accounting Standards, which have been adopted for use within the UK, in conformity with the requirements of the Building
Societies Act 1986; and, as regards the Group financial statements, International Financial Reporting Standards adopted pursuant to Regulation (EC) No. 1606/2002 as it applies in the
European Union (EU); and
Have been prepared in accordance with the requirements of the Building Societies Act 1986.
We have audited the financial statements, included within the Annual Report and Accounts 2021 (the ‘Annual Report’) of Nationwide Building Society, which comprise:
Group
• Consolidated balance sheet as at 4 April 2021;
• Consolidated income statement for the year then ended;
• Consolidated statement of comprehensive income for the year then ended;
• Consolidated statement of movements in members’ interests and equity for the
Society
• Balance sheet as at 4 April 2021;
• Income statement for the year then ended;
• Statement of comprehensive income for the year then ended;
• Statement of movements in members’ interests and equity for the year then
year then ended;
ended;
• Consolidated cash flow statement for the year then ended;
• Related notes 1 to 38 to the financial statements, including a statement of
• Cash flow statement for the year then ended;
• Related notes 1 to 38 to the financial statements, including a statement of
accounting policies;
accounting policies.
• Information identified as ‘audited’ in the Report of directors on remuneration; and
• Information identified as ‘audited’ in the Risk report.
The financial reporting framework that has been applied in their preparation is applicable law and International Accounting Standards in conformity with the requirements of the Building Societies
Act 1986 and, as regards the Group financial statements, International Financial Reporting Standards adopted pursuant to Regulation (EC) No. 1606/2002 as it applies in the EU.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s
responsibilities for the audit of the financial statements section of our report below. We are independent of the Group and Society in accordance with the ethical requirements that are relevant to
our audit of the financial statements in the UK, including the Financial Reporting Council’s (FRC)’s Ethical Standard as applied to public interest entities, and we have fulfilled our other ethical
responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
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Annual Report and Accounts 2021
Independent auditor’s report to the members of Nationwide Building Society (continued)
Independent auditor’s report to the members of Nationwide Building Society (continued)
Conclusions relating to going concern
Annual Report and Accounts 2021
228
The directors have voluntarily complied with the UK Corporate Governance Code (the ‘Code’) and Listing Rule 9.8.6(R)(3)(a) of the Financial Conduct Authority (FCA) and provided a statement in
relation to going concern, required for companies with a premium listing on the London Stock Exchange.
In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate. Our evaluation of
the directors’ assessment of the Group’s and Society’s ability to continue to adopt the going concern basis of accounting included the following:
• We obtained management’s going concern assessment for the Group, including forecasts for the going concern period covering 12 months from the date of signing this audit opinion.
• We confirmed that the opening position in the Group forecast agreed to the audited balances as at 4 April 2021.
• We evaluated the reasonableness of the Group’s forecasts. We used EY financial modelling specialists in assessing the assumptions used to develop forecasted results using relevant peer
and sector comparatives. We challenged the trading volume assumptions and assessed the refinancing risk of wholesale funding maturing in the 12 months from the date of signing our
opinion.
• We used economic specialists in assessing the macroeconomic assumptions in the forecast through benchmarking to institutional and HM Treasury consensus forecasts and Bank of
England fan charts.
• Management has modelled adverse scenarios in order to incorporate unexpected changes to forecasted liquidity and capital positions of the Group. We reviewed these scenarios to identify
whether they indicated significant issues that might impact the Group’s and Society’s ability to continue as a going concern or impact its viability in the window of assessment.
• We evaluated the results of management’s stress testing, including its reverse stress testing exercise, to assess the reasonableness of the economic assumptions in light of the impact of
the Covid-19 pandemic (‘Covid-19’), and their impact on the Group’s solvency and liquidity. We also considered the impact of Covid-19 on considerations relating to operational resilience,
third-party and other non-financial risks.
• We compared previous periods’ budgeted financial information with historical actual results, in order to form a view on the reliability of the forecasting process.
• We considered whether there were other events subsequent to the balance sheet date which could have a bearing on the going concern conclusion.
• We reviewed regulatory correspondence and committee and board meeting minutes to identify events or conditions that may impact the Group’s and Society’s ability to continue as a
going concern.
• We reviewed the Group’s going concern disclosures included in the Annual Report in order to assess that the disclosures were appropriate and in conformity with the reporting standards.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the Group’s
and Society’s ability to continue as a going concern for a period up to 20 May 2022, being not less than 12 months from when the financial statements are approved for issue.
In relation to the Group’s and Society’s reporting on how they have applied the UK Corporate Governance Code, we have nothing material to add or draw attention to in relation to the directors’
statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report. However, because not all future events or conditions
can be predicted, this statement is not a guarantee as to the Group’s or Society’s ability to continue as a going concern.
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Annual Report and Accounts 2021
Independent auditor’s report to the members of Nationwide Building Society (continued)
Independent auditor’s report to the members of Nationwide Building Society (continued)
Annual Report and Accounts 2021
229
Overview of our audit approach
Key audit matters
• Measurement of IFRS 9 expected credit losses
• Recoverability of capitalised software costs
• Customer redress provisioning
• Risk of fraud in revenue recognition relating to effective interest rate (EIR) accounting
• Measurement of the net defined benefit pension asset
Audit scope
• We performed an audit of the complete financial information of two entities within the Nationwide Group and audit procedures on specific balances for a further three
entities.
• The entities where we performed audit procedures over complete financial information or over specific balances accounted for 87% of the adjusted profit before tax
measure used to calculate materiality, 100% of revenue, and 100% of total assets.
Materiality
• Overall Group materiality of £39.5 million and Society materiality of £21.9 million represents, in both cases, 5% of adjusted profit before tax.
An overview of the scope of our audit
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each entity within the Group. Taken together, this enables us to
form an opinion on the consolidated financial statements. We take into account size and risk profile, when assessing the level of work to be performed in respect of each entity.
In assessing the risk of material misstatement to the Group financial statements, and to ensure we had adequate quantitative coverage of significant accounts in the financial statements of the
Group, we selected five entities, which represent the principal business units within the Group.
Of the five entities selected, we performed an audit of the complete financial information of two entities (‘full scope entities’) which were selected based on their size or risk characteristics. For the
remaining three entities (‘specific scope entities’), we performed audit procedures on specific accounts within each entity that we considered had the potential for the greatest impact on the
significant accounts in the financial statements either because of the size of these accounts or their risk profile.
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Annual Report and Accounts 2021
Independent auditor’s report to the members of Nationwide Building Society (continued)
Independent auditor’s report to the members of Nationwide Building Society (continued)
Key audit matters
Annual Report and Accounts 2021
230
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant
assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on the overall audit strategy, the allocation of
resources in the audit, and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole and in our opinion thereon,
and we do not provide a separate opinion on these matters.
Measurement of IFRS 9 expected credit losses
Group and Society; Refer to the Audit Committee report (page 97); Accounting policies (page 247); and note 10 of the consolidated financial statements (page 269)
Key audit matter
Our response to the key audit matter
Provisions for impairment losses on loans and advances to customers: £852 million
(2020: £786 million)
The degree of uncertainty in estimating expected credit losses (ECLs), and thus the subjectivity of
management’s judgements and estimates related to ECLs remains elevated in the current year as
a result of the consequences of the ongoing pandemic. The risk of material misstatement of the
Group’s and Society’s financial statements within ECLs manifests itself across the following five
areas:
Staging:
The qualitative and quantitative criteria applied by management may not completely and
accurately identify a significant increase in credit risk or credit impairment on a timely basis in
accordance with IFRS 9; and the criteria may not adequately reflect the impact of Covid-19 on
underlying significant deterioration in credit risk.
Modelling:
ECL component models, including probability of default (PD), loss given default (LGD) and
exposure at default (EAD) models, may be inaccurate due to accounting interpretations applied,
modelling assumptions or techniques used, models implemented incorrectly or complexities of
data flows to and from the models.
Staging:
We reviewed the Group’s accounting policies and tested their application to ensure they remained
compliant with the requirements of IFRS 9.
We tested the design and effectiveness of controls used by management to assess staging
criteria.
We assessed the appropriateness of the staging criteria and their logical application through the
modelled environment, and then independently recalculated staging results for the entire retail
portfolio by recreating the staging model code and recreating the results in our own environment.
In performing this work, we considered the impact on staging of government pronouncements,
such as payment deferrals. We also tested the staging of the commercial portfolio on a sample
basis.
Modelling:
We tested the design and effectiveness of controls, with a focus on governance and control over
model validation and monitoring.
We incorporated EY model risk specialists into our team to lead the qualitative and quantitative
risk assessment of the models, and to perform a combination of desktop reviews, model
implementation testing, model reperformance testing, model assumptions testing and model
sensitivity analyses, based on the risk designated to each model.
We took a fully substantive approach to testing the critical data inputs to the ECL models as the
key data quality scorecard solutions to be used by the Society over model inputs are still being
developed. We substantively tested the accuracy of all critical data items, and a sample of non-
critical data items, as well as the accuracy of loan data lineage from the ECL models back to the
source systems.
Multiple Economic Scenarios (MES):
ECLs may be inaccurate because the range of scenarios considered and the probability
weightings applied to them are not sufficient or appropriate to capture all relevant factors
required, including the expected impacts of Covid-19 and Brexit, or because the MES may not be
incorporated into the estimation of PD, LGD, and EAD appropriately.
MES:
With support of EY economic specialists, we considered both the appropriateness of the scenario
weightings and the underlying macroeconomic variables, with specific focus on the impact of
Covid-19. In addition, we evaluated management's approach to lagging and smoothing GDP
within the models due to unprecedented movements in the year. We carried out comparison to
consensus forecasts and other independently derived assumptions.
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Annual Report and Accounts 2021
231
Annual Report and Accounts 2021
Independent auditor’s report to the members of Nationwide Building Society (continued)
Independent auditor’s report to the members of Nationwide Building Society (continued)
Measurement of IFRS 9 expected credit losses
Group and Society; Refer to the Audit Committee report (page 97); Accounting policies (page 247); and note 10 of the consolidated financial statements (page 269)
In-model adjustments and post model adjustments (PMAs):
In-model adjustments and PMAs could be inappropriate, incomplete, or in the case of in-model
adjustments, incorrectly incorporated into the estimation of PD, LGD, and EAD. This risk is
elevated as additional significant adjustments have been incorporated in the current year, most of
which adjust for expected ongoing impacts of Covid-19 and related government measures.
Individually impaired assets:
Individual impairment may not be identified on a timely basis, or the provisions recognised may
be incorrectly measured taking into account the impact of Covid-19 on exit strategies, collateral
valuations and time to collect.
We tested the design and effectiveness of controls, including key governance forums where the
MES assumptions and scenario weightings are reviewed and challenged; and we independently
tested the appropriate application of the MES data within the models.
In-model adjustments and PMAs:
With the help of credit risk and modelling specialists, we assessed whether the inventory of
adjustments was complete considering the evolution of external factors, including the pandemic,
climate change, Brexit and cladding remediation requirements and whether each adjustment
included was appropriate.
In performing the desktop review for a sample of models, we considered whether there were
shortcomings that could require further adjustment. We reviewed risk registers and governance
meeting materials to identify potential risks not captured in existing models, and we performed a
benchmarking exercise between management’s model adjustment register and those seen in the
market.
We also evaluated the appropriate application of each in-model adjustment and PMA and
independently re-calculated the amounts to confirm they were recorded correctly.
We reviewed the model scripts for each in-model adjustment and PMA and independently
recalculated the output which we reconciled to the reported balance. For the severe downside
scenario PMA we established a reasonable range within which we would expect the PMA to fall.
Individually impaired assets:
We utilised EY real estate specialists in our assessment of the completeness and reasonableness of
impairment recorded for individually assessed loans. We selected a sample to recalculate the
expected credit loss, and as part of this recalculation we independently recalculated the impact
through the application of various scenarios after considering the collateral values estimated by
management in reviewing the individual provision assessments.
Key observations communicated to the Audit Committee
Based on the work we performed, we were satisfied that the staging, modelling, MES, in-model adjustments and PMAs and individually impaired assets were reasonably measured and that IFRS 9
expected credit losses were reasonably stated.
•
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Our independent model testing showed that IFRS 9 ECL models performed as expected and were aligned to the standard requirements, and that the external data, internal data and
assumption data feeding into the IFRS 9 ECL models are complete and accurate.
Economic assumptions and probability weightings assigned to the multiple economic scenarios used within the models were concluded to be reasonable.
Staging criteria were appropriate and the results of staging reperformance indicated their application was complete and accurate.
Our independently replicated PMA calculations confirmed they had been accurately recorded, and we were satisfied that they were complete and appropriate.
Individual provisions recorded for the stage 3 commercial portfolio were in line with the industry-specific risks highlighted by our EY real estate specialists; and
Our assessment of the overall provision balance through peer benchmarking and analysis of key indicators, such as the ratio of provisions to loan balances, indicated the provisions
recorded as at year end were appropriately aligned.
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Annual Report and Accounts 2021
232
Annual Report and Accounts 2021
Independent auditor’s report to the members of Nationwide Building Society (continued)
Independent auditor’s report to the members of Nationwide Building Society (continued)
Recoverability of capitalised software costs
Group and Society; Refer to the Audit Committee report (page 97); Accounting policies (page 247); and note 25 of the consolidated financial statements (page 305)
Key audit matter
Our response to the key audit matter
Intangible assets: £1,101 million (2020: £1,239 million)
The Group capitalises significant software and IT costs associated with serving its members. These
costs are subsequently amortised over the useful economic lives of the related assets.
Management undertakes bi-annual impairment assessments to determine whether the
capitalised costs should be written down to lower recoverable amounts. We identified the
following risks associated with capitalised software costs:
Project costs capitalised for newly created software could be inappropriate if economic benefits to
the Group have not been established.
Amounts recorded for amortisation rely on judgements made in determining useful economic
lives of capitalised software and IT assets and in periodic impairment assessments undertaken by
management. There is therefore a risk that management override of controls could result in a
material misstatement to amortisation.
We reviewed changes to the application of the software capitalisation policy, ensured compliance
with the requirements of IFRS, and audited its application to individual projects on a sample basis.
We tested the design and effectiveness of key controls over the Group’s asset capitalisation
process.
We assessed the appropriateness of capitalised costs for a sample of asset additions during the
year, including both externally generated and internally generated costs, and assets in use as well
as work in progress, by obtaining evidence to challenge whether the asset will lead to future
economic benefit.
We assessed the reasonableness of the amortisation charge by testing and validating the
underlying calculations and performing substantive analytical review.
We reviewed the impairment assessment at both the individual project level and the cash
generating unit level, taking into account the impacts of changes to the technology strategy and
likely future use of assets. For those assets deemed to be impaired, we reviewed and recalculated
the impairment charge and challenged the completeness of, and rationale for impairments
recorded.
Key observations communicated to the Audit Committee
We are satisfied that the Society’s accounting policies and their application to the capitalisation of new software assets and the determination of related impairments are in compliance with the
accounting standards, IAS 38 and IAS 36, and we concluded that the amounts that the Society has newly capitalised, impaired and amortised in the current period are materially appropriate.
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Annual Report and Accounts 2021
Independent auditor’s report to the members of Nationwide Building Society (continued)
Independent auditor’s report to the members of Nationwide Building Society (continued)
Annual Report and Accounts 2021
233
Customer redress provisioning
Group and Society; Refer to the Audit Committee report (page 97); Accounting policies (page 247); and note 27 of the consolidated financial statements (page 308)
Key audit matter
Our response to the key audit matter
Provisions for liabilities and charges – certain customer redress provisioning: £38 million
(2020: £nil)
In our risk assessment, we considered the degree of uncertainty inherent in each estimated
provision on account of the risks not being fully known, or where there was a higher degree of
uncertainty over the redress cost across the impacted population. This key audit matter is focused
on a redress project arising from historical quality control procedures, for which the degree of
uncertainty necessitated a greater degree of audit focus.
We assessed the completeness and accuracy of the customer accounts identified as eligible for
redress under the project. This included testing management’s assumptions in arriving at this
population. We reconciled the relevant population to that used in management’s models to
measure the provision and reperformed the underlying calculations supporting the provision in
the financial statements. We reviewed a sample of redress payments to ensure they were
appropriate and accurately recorded.
We considered the risk within the provision, including the reasonableness of assumptions used in
estimating the population for the provision, the appropriate measurement of the redress,
associated administration costs, and the associated disclosures.
We involved EY conduct risk specialists to help assess compliance with relevant financial conduct
requirements and to challenge whether all relevant assumptions were being included within
management’s provisioning model.
We tested the key assumptions applied in the model and performed sensitivity analysis to better
understand the impact of changes in assumptions on the provision. Where there was a higher
degree of uncertainty in management’s assumptions, we assessed them collectively as well as
individually by comparison to observed or implied ranges.
We reviewed the disclosures relating to the populations excluded from the provision, where
further testing is required to support a best estimate, to confirm the disclosure appropriately
meets the requirements of IAS 37.
Key observations communicated to the Audit Committee
Based on the procedures performed and evidence obtained, we found the judgements applied to calculate the provision for customer redress and the associated disclosures to be appropriate.
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Annual Report and Accounts 2021
Independent auditor’s report to the members of Nationwide Building Society (continued)
Independent auditor’s report to the members of Nationwide Building Society (continued)
Annual Report and Accounts 2021
234
Risk of fraud in revenue recognition relating to effective interest rate (EIR) accounting
Group and Society; Refer to the Audit Committee report (page 97); Accounting policies (page 247); and note 3 of the consolidated financial statements (page 260)
Key audit matter
Our response to the key audit matter
EIR adjustment to loans and advances: £108 million (2020: £180 million)
Significant management judgement is required in initially recognising financial instruments under
the EIR method, and assumptions made by management will also impact subsequent
amortisation of EIR adjustments. This leads to a heightened risk that management override of
controls could result in a material misstatement of the financial statements.
We understood and tested the design and effectiveness of the Group’s controls over revenue
recognition, including key reconciliations and processes to ensure complete and accurate capture
of fees, interest charges, payments and balances.
We tested the data extracted from systems to be used in the EIR models, including
historical data used to analyse historical customer behaviours.
We assessed two elements of the EIR calculation as most critical and requiring increased audit
focus:
•
The period over which to defer upfront fees and costs, which is determined based on
analysis of historical customer behaviours; and
The extent to which early redemption charges (ERC) and variable interest expected to be
collected in the future should be recognised as revenue/assets now.
•
We reviewed the appropriateness of the accounting policy and the types of fees and expenses
being deferred and amortised. For those fees and expenses that were deferred, we assessed the
reasonableness of the period over which they were being amortised by assessing the behavioural
lives of the loans with reference to historical behaviour and challenging the basis on which
assumptions have been made as to future customer behaviours, including additional
considerations related to the pandemic.
We involved EY risk specialists in the verification of complete and accurate extraction of historical
data from the mortgage systems to validate the historical data that is used within the Group’s
calculations.
We benchmarked key assumptions used within the EIR calculation to equivalent assumptions
made by peers, performed sensitivity analyses over key assumptions and judgements, and
extended the analysis in line with the increased uncertainty and irregularities in behaviour arising
from the backlog of purchasing and switching activity attributable to Covid-19.
We also reviewed the accuracy of the amortisation model, confirmed its inputs, and recalculated a
sample of the amortisation profiles used to amortise the fees and expenses.
Key observations communicated to the Audit Committee
We concluded that the fees and costs being deferred are reasonable and complete, the average lives used in the EIR model are reasonable, the extent of ERC fees recognised upfront is reasonable
and the data populating the EIR model is complete and accurate.
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Annual Report and Accounts 2021
235
Annual Report and Accounts 2021
Independent auditor’s report to the members of Nationwide Building Society (continued)
Independent auditor’s report to the members of Nationwide Building Society (continued)
Measurement of the net defined benefit pension asset
Group and Society; Refer to the Audit Committee report (page 97); Accounting policies (page 247); and note 30 of the consolidated financial statements (page 311)
Key audit matter
Our response to the key audit matter
Retirement benefit asset: £172 million (2020: £294 million)
The Society has a net defined benefit pension asset which represents the fair value of pension
plan assets less the present value of defined benefit obligations after applying the asset ceiling
test as required by IFRIC 14. This includes one material defined benefit (‘DB’) pension fund, which
is a contributory DB scheme, with both final salary and career average revalued earnings (‘CARE’)
sections. The pension fund was closed to new entrants in 2007 and ceased to accrue benefits for
active members on 31 March 2021.
The net defined benefit pension asset is sensitive to changes in key judgements and estimates.
Those which we consider to be higher risk and that form part of this key audit matter include:
• Assumptions - Actuarial assumptions and inputs, including discount rate, inflation, and
longevity, which are used to determine the valuation of retirement benefit liabilities;
• Valuations - Pricing inputs and calibrations for illiquid or complex valuations of certain
investments held by the fund.
We involved EY actuarial specialists in the audit to help evaluate the actuarial assumptions
including the discount rate used to calculate the pension liability.
We assessed the impact on pension liabilities of changes in financial, demographic and longevity
assumptions over the year, including any effects of Covid-19 on retail price index (RPI) and
mortality, and whether these assumptions were supported by objective external evidence and
rationale.
We considered the appropriateness of the Society’s recognition of a pension asset in accordance
with IFRIC 14. Specifically, we assessed whether Nationwide was entitled to an unconditional right
of refund. We assessed this by reference to the terms of the pension agreement and confirmed
that the Society did have such a right.
We involved valuation specialists to assess the appropriateness of management’s valuation
methodology and the significant assumptions used in the valuation of complex and illiquid
pension assets.
We tested the fair value of scheme assets by calculating an independent fair value for a sample of
the assets held.
Key observations communicated to the Audit Committee
Based on the procedures performed and the evidence obtained, we were satisfied with the valuation of plan assets and the present value of the defined benefit obligations after applying the asset
ceiling test. We were also satisfied that the net pension asset was recognisable in accordance with the terms of IFRIC 14.
In the prior year, our auditor’s report included a key audit matter in relation to IT access management. We did not consider this to be a key audit matter in the current year as the majority of the remediation
work around privileged access management that was in flight when we started the 2020 audit has been completed. As such, this matter had less impact on our overall audit strategy and the amount of audit
effort was comparatively less.
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Annual Report and Accounts 2021
Independent auditor’s report to the members of Nationwide Building Society (continued)
Independent auditor’s report to the members of Nationwide Building Society (continued)
Our application of materiality
Annual Report and Accounts 2021
236
We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in forming our audit opinion.
Materiality
The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of the financial statements.
Materiality provides a basis for determining the nature and extent of our audit procedures.
We determined materiality for the Group to be £39.5 million (2020: £31.2 million) which is 5% (2020: 5%) of adjusted profit before tax, and 0.3% (2020: 0.2%) of net assets. We determined
materiality for the Society to be £21.9 million (2020: £13.3 million), which is 5% (2020: 5%) of adjusted profit before tax, and 0.2% (2020: 0.1%) of net assets.
We assessed adjusted profit before tax to be an appropriate basis for materiality given the users of the financial statements, including the Society’s members and regulators, focus on pre-tax profit in
assessing the Society’s performance. Profit before tax was adjusted in 2021 to take into account estimated impacts of non-recurring items during the year, including certain redundancy and office
closure costs, and establishment of new conduct provisions, and in 2020 to take into account estimated impacts of Covid-19 in the last 6 weeks of the year.
Performance materiality
The application of materiality at the individual account or balance level. Performance materiality is set at an amount to reduce to an appropriately low level the probability that the aggregate of
uncorrected and undetected misstatements exceeds materiality.
On the basis of our risk assessment, together with our assessment of the Group’s overall control environment, our judgement was that performance materiality was £19.7 million for the Group and
£10.9 million for the Society (2020: £15.6 million and £6.6 million), in both cases being 50% (2020: 50%) of our planning materiality.
Audit work for underlying entities for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken based on a percentage of total performance materiality. The
performance materiality set for each entity is based on the relative scale and risk of the entity to the Group as a whole and our assessment of the risk of misstatement in that entity. In the current
year, the range of performance materiality allocated to entities was £10.9 million to £19.7 million.
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Annual Report and Accounts 2021
Independent auditor’s report to the members of Nationwide Building Society (continued)
Independent auditor’s report to the members of Nationwide Building Society (continued)
Reporting threshold
An amount below which identified misstatements are considered as being clearly trivial.
Annual Report and Accounts 2021
237
We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of £1.9 million for the Group and £1.0 million for the Society, as well as differences
below that threshold that, in our view, warranted reporting on qualitative grounds. We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above
and in light of other relevant qualitative considerations in forming our opinion.
Other information
Other information comprises the information included in the Annual Report, other than the financial statements as defined above and our auditor’s report thereon. The directors are responsible for
the other information. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in this report, we do not express any form of
assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the
financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are
required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we
conclude that there is a material misstatement of the other information, we are required to report that fact.
We have nothing to report in this regard.
Opinion on other matters prescribed by the Building Societies Act 1986
In our opinion:
•
•
•
The Annual business statement and the Directors’ report have been prepared in accordance with the requirements of the Building Societies Act 1986;
The information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the accounting records and the financial statements; and
The information given in the Annual business statement (other than the information upon which we are not required to report) gives a true representation of the matters in respect of which it
is given.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Building Societies Act 1986 requires us to report to you if, in our opinion:
Proper accounting records have not been kept by the Society; or
The Group’s or Society’s financial statements are not in agreement with the accounting records; or
•
•
• We have not received all the information and explanations and access to documents we require for our audit.
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Annual Report and Accounts 2021
Independent auditor’s report to the members of Nationwide Building Society (continued)
Independent auditor’s report to the members of Nationwide Building Society (continued)
Annual Report and Accounts 2021
238
Voluntary reporting matters
Corporate governance statement
The directors have voluntarily complied with the UK Corporate Governance Code (the ‘Code’) and prepare a Corporate Governance Statement in accordance with the Disclosure Guidance and
Transparency Rules of the Financial Conduct Authority (‘FCA’).
The directors have requested that we review the parts of the Corporate Governance Statement relating to the Society’s compliance with the Code, containing provisions specified for review by the
auditor in accordance with Listing Rule 9.8.10R(2) as if the Society were a premium listed company. The Listing Rules require us to review the directors’ statement in relation to going concern,
longer-term viability and that part of the Corporate Governance Statement relating to the Group and Society’s compliance with the provisions of the UK Corporate Governance Statement specified for
our review.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate Governance Statement are materially consistent with the financial
statements or our knowledge obtained during the audit:
•
•
•
•
•
•
The directors’ statement with regards to the appropriateness of adopting the going concern basis of accounting and any material uncertainties identified, set out on page 139;
The directors’ statement on fair, balanced and understandable, set out on page 140;
The directors’ explanation as to its assessment of the company’s prospects, the period this assessment covers and why the period is appropriate, set out on page 58;
The board’s confirmation that it has carried out a robust assessment of the emerging and principal risks, set out on page 56;
The section of the annual report that describes the review of effectiveness of risk management and internal control systems, set out on page 96; and;
The section describing the work of the Audit Committee, set out on page 98.
Report of the directors on remuneration
The Society voluntarily prepares a Report of the directors on remuneration in accordance with the provisions of the Companies Act 2006. The directors have requested that we audit the part of the
Report of the directors on remuneration specified by the Companies Act 2006 to be audited as if the Society were a quoted company.
In our opinion, the part of the Report of the directors on remuneration to be audited has been properly prepared in accordance with the Companies Act 2006.
Responsibilities of directors
As explained more fully in the directors’ responsibilities statement set out on page 139, the directors are responsible for the preparation of the financial statements and for being satisfied that they
give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether
due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the Group’s and Society’s ability to continue as a going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or the Society or to cease operations, or have no realistic alternative but to do so.
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Annual Report and Accounts 2021
Independent auditor’s report to the members of Nationwide Building Society (continued)
Independent auditor’s report to the members of Nationwide Building Society (continued)
Auditor’s responsibilities for the audit of the financial statements
Annual Report and Accounts 2021
239
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s
report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of these financial statements.
Explanation as to what extent the audit was considered capable of detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined below, to detect irregularities, including
fraud. The risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example,
forgery or intentional misrepresentations, or through collusion. The extent to which our procedures are capable of detecting irregularities, including fraud, is detailed below.
However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management.
Our approach was as follows:
− We obtained an understanding of the legal and regulatory frameworks that are applicable to the Group and determined that the most significant were the regulations, licence conditions and
supervisory requirements of the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). We also considered those laws and regulations that have a direct impact on the
preparation of the financial statements such as the Building Societies Act 1986.
− We understood how the Group complies with these legal and regulatory frameworks by making enquiries of management, internal audit, and those responsible for legal and compliance matters. We
also reviewed correspondence between the Group and UK regulatory bodies; reviewed minutes of the Board and Board Risk Committee; and gained an understanding of the Group’s approach to
governance, demonstrated by the Board’s approval of the Group’s governance framework and the Board’s review of the Group’s operational risk framework and internal control processes.
Based on this understanding we designed our audit procedures to identify non-compliance with such laws and regulations identified in the paragraphs above. Our procedures involved inquiries of
legal counsel, executive management, internal audit, and focused testing, as referred to in the Key audit matters section above.
−
− We assessed the susceptibility of the Group’s financial statements to material misstatement, including how fraud might occur by considering the controls that the Group has established to address
risks identified by the entity, or that otherwise seek to prevent, deter or detect fraud. We made enquiries of management and internal audit and held a fraud-focused discussion with EY forensic
specialists and members of the Board to supplement our assessment of how fraud might occur. We also considered performance and incentive plan targets and their potential to influence
management to manage earnings or influence the perceptions of investors and stakeholders. Our procedures to address the risks identified also included incorporation of unpredictability into the
nature, timing and/or extent of our testing, challenging assumptions and judgements made by management in their significant accounting estimates, and testing year end adjustments and other
targeted journal entries.
The Group operates in the banking industry which is a highly regulated environment. As such the Senior Statutory Auditor considered the experience and expertise of the engagement team to ensure
that the team had the appropriate competence and capabilities, which included the use of specialists where appropriate.
−
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at https://www.frc.org.uk/auditorsresponsibilities This
description forms part of our auditor’s report.
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Annual Report and Accounts 2021
Independent auditor’s report to the members of Nationwide Building Society (continued)
Independent auditor’s report to the members of Nationwide Building Society (continued)
Other matters we are required to address
Annual Report and Accounts 2021
240
• We were appointed by the Society at the Annual General Meeting in July 2019 and engaged on 2 August 2019 to audit the financial statements for the year ending 4 April 2020 and
subsequent financial periods.
The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the Society and we remain independent of the Group and the Society in conducting the
audit.
The audit opinion is consistent with our additional report to the Audit Committee.
•
•
Use of our report
This report is made solely to the Society’s members, as a body, in accordance with Section 78 of the Building Societies Act 1986. Our audit work has been undertaken so that we might state to the
Society’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility
to anyone other than the Society and the Society’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Javier Faiz (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London, United Kingdom
20 May 2021
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Annual Report and Accounts 2021
Income statements
For the year ended 4 April 2021
Interest receivable and similar income/(expense):
Calculated using the effective interest rate method
Other
Total interest receivable and similar income
Interest expense and similar charges
Net interest income
Fee and commission income
Fee and commission expense
Other operating (expense)/income
Gains/(losses) from derivatives and hedge accounting
Total income
Administrative expenses
Impairment losses on loans and advances to customers
Provisions for liabilities and charges
Profit before tax
Taxation
Profit after tax
Group
2021
£m
Notes
3
3
3
4
5
5
6
7
8
10
27
11
4,122
2
4,124
(978)
3,146
379
(231)
(9)
34
3,319
(2,218)
(190)
(88)
823
(205)
618
2020
£m
5,157
(27)
5,130
(2,320)
2,810
439
(270)
67
(7)
3,039
(2,312)
(209)
(52)
466
(101)
365
Society
2021
£m
3,806
2
3,808
(1,153)
2,655
375
(231)
48
(21)
2,826
(2,216)
(158)
(89)
363
(121)
242
2020
£m
4,792
(27)
4,765
(2,412)
2,353
435
(270)
105
19
2,642
(2,309)
(170)
(53)
110
(30)
80
The notes on pages 247 to 325 form part of these financial statements.
Annual Report and Accounts 2021
241
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Annual Report and Accounts 2021
Statements of comprehensive income
For the year ended 4 April 2021
Profit after tax
Other comprehensive (expense)/income:
Items that will not be reclassified to the income statement
Remeasurements of retirement benefit obligations:
Retirement benefit remeasurements
Taxation
Revaluation of property:
Revaluation losses
Taxation
Movements in fair value of equity shares held at fair value through other
comprehensive income:
Fair value movements taken to members' interests and equity
Taxation
Items that may subsequently be reclassified to the income statement
Cash flow hedge reserve
Fair value movements taken to members’ interests and equity
Amount transferred to income statement
Taxation
Other hedging reserve
Fair value movements taken to members’ interests and equity
Amount transferred to income statement
Taxation
Fair value through other comprehensive income reserve:
Fair value movements taken to members’ interests and equity
Amount transferred to income statement
Taxation
Other comprehensive (expense)/income
Total comprehensive income
The notes on pages 247 to 325 form part of these financial statements.
Notes
Group
2021
£m
618
2020
£m
365
Society
2021
£m
242
2020
£m
80
30
11
26
11
11
11
11
11
(112)
40
(72)
(9)
11
2
4
(1)
3
(67)
(98)
(54)
41
(111)
(4)
(2)
2
(4)
215
(40)
(47)
128
(54)
564
195
(76)
119
(13)
2
(11)
-
-
-
(112)
40
(72)
(9)
11
2
-
-
-
108
(70)
56
(65)
(5)
(14)
(57)
-
15
(42)
(51)
(40)
24
(67)
(15)
350
(83)
2
24
(57)
20
(6)
2
16
215
(40)
(47)
128
17
259
195
(76)
119
(13)
2
(11)
-
-
-
108
64
(12)
(16)
36
(21)
-
15
(6)
(51)
(40)
23
(68)
70
150
Annual Report and Accounts 2021
242
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Annual Report and Accounts 2021
Balance sheets
At 4 April 2021
Notes
Group
2021
£m
Assets
Cash
Loans and advances to banks and similar institutions
Investment securities
Derivative financial instruments
Fair value adjustment for portfolio hedged risk
Loans and advances to customers
Investments in Group undertakings
Intangible assets
Property, plant and equipment
Accrued income and prepaid expenses
Deferred tax
Current tax assets
Other assets
Retirement benefit assets
Total assets
Liabilities
Shares
Deposits from banks and similar institutions
Other deposits
Fair value adjustment for portfolio hedged risk
Debt securities in issue
Derivative financial instruments
Other liabilities
Provisions for liabilities and charges (note i)
Accruals and deferred income (note i)
Subordinated liabilities
Subscribed capital
Deferred tax
Current tax liabilities
Total liabilities
Members’ interests and equity
Core capital deferred shares
Other equity instruments
General reserve
Revaluation reserve
Cash flow hedge reserve
Other hedging reserve
Fair value through other comprehensive income reserve
Total members’ interests and equity
Total members’ interests, equity and liabilities
13
15
14
33
25
26
11
30
16
17
18
15
27
19
20
11
31
32
The notes on pages 247 to 325 form part of these financial statements.
16,693
3,660
25,473
3,809
946
201,547
-
1,101
1,018
213
72
-
210
172
254,914
170,313
27,022
4,522
25
27,923
1,622
933
159
307
7,575
243
150
7
240,801
1,334
1,336
11,140
44
195
(46)
110
14,113
254,914
2020
£m
13,748
3,636
20,004
4,771
1,774
200,978
-
1,239
1,172
205
76
65
79
294
248,041
159,691
21,812
4,482
29
35,963
1,924
915
146
340
9,317
253
207
-
235,079
1,325
593
10,749
48
306
(42)
(17)
12,962
248,041
Society
2021
£m
16,693
3,633
25,451
3,185
946
160,366
38,252
1,089
1,018
864
62
1
187
173
251,920
170,313
26,453
5,670
25
24,470
2,502
3,192
159
299
7,575
243
62
-
240,963
1,334
1,336
8,122
44
4
10
107
10,957
251,920
2020
£m
13,748
3,617
19,996
3,636
1,774
163,206
35,207
1,227
1,172
1,660
62
62
69
296
245,732
159,691
20,636
6,024
29
30,894
3,673
4,513
146
337
9,317
253
108
-
235,621
1,325
593
8,102
48
61
(6)
(12)
10,111
245,732
Approved by the Board of directors on 20 May 2021.
D L Roberts Chairman
J D Garner Chief Executive Officer
C S Rhodes Chief Financial Officer
Note:
i. Comparatives have been restated as detailed in note 1.
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244
Annual Report and Accounts 2021
Group statement of movements in members’ interests and equity
For the year ended 4 April 2021
At 5 April 2020
Profit for the year
Net remeasurements of retirement benefit obligations
Net revaluation of property
Net movement in cash flow hedge reserve
Net movement in other hedging reserve
Net movement in FVOCI reserve
Total comprehensive income
Reserve transfer
Issuance of core capital deferred shares
Issuance of Additional Tier 1 capital
Distribution to the holders of core capital deferred shares
Distribution to the holders of Additional Tier 1 capital
At 4 April 2021
For the year ended 4 April 2020
At 5 April 2019
Profit for the year
Net remeasurements of retirement benefit obligations
Net revaluation of property
Net movement in cash flow hedge reserve
Net movement in other hedging reserve
Net movement in FVOCI reserve
Total comprehensive income
Reserve transfer
Issuance of Additional Tier 1 capital
Redemption of Additional Tier 1 capital
Distribution to the holders of core capital deferred shares
Distribution to the holders of Additional Tier 1 capital
At 4 April 2020
Core capital
deferred
shares
Other equity
instruments
General
reserve
Revaluation
reserve
Cash flow
hedge
reserve
Other
hedging
reserve
FVOCI
reserve
£m
1,325
-
-
-
-
-
-
-
-
9
-
-
-
1,334
£m
593
-
-
-
-
-
-
-
-
-
743
-
-
1,336
£m
10,749
618
(72)
-
-
-
-
546
10
-
-
(108)
(57)
11,140
£m
48
-
-
2
-
-
-
2
(6)
-
-
-
-
44
£m
306
-
-
-
(111)
-
-
(111)
-
-
-
-
-
195
£m
(42)
-
-
-
-
(4)
-
(4)
-
-
-
-
-
(46)
£m
(17)
-
-
-
-
-
131
131
(4)
-
-
-
-
110
Core capital
deferred
shares
Other equity
instruments
General
reserve
Revaluation
reserve
Cash flow
hedge
reserve
Other
hedging
reserve
FVOCI
reserve
£m
1,325
-
-
-
-
-
-
-
-
-
-
-
-
1,325
£m
992
-
-
-
-
-
-
-
-
593
(992)
-
-
593
£m
10,418
365
119
-
-
-
-
484
5
-
(8)
(108)
(42)
10,749
£m
64
-
-
(11)
-
-
-
(11)
(5)
-
-
-
-
48
£m
320
-
-
-
(14)
-
-
(14)
-
-
-
-
-
306
£m
-
-
-
-
-
(42)
-
(42)
-
-
-
-
-
(42)
£m
50
-
-
-
-
-
(67)
(67)
-
-
-
-
-
(17)
Total
£m
12,962
618
(72)
2
(111)
(4)
131
564
-
9
743
(108)
(57)
14,113
Total
£m
13,169
365
119
(11)
(14)
(42)
(67)
350
-
593
(1,000)
(108)
(42)
12,962
The notes on pages 247 to 325 form part of these financial statements.
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245
Annual Report and Accounts 2021
Society statement of movement in members’ interests and equity
For the year ended 4 April 2021
At 5 April 2020
Profit for the year
Net remeasurements of retirement benefit obligations
Net revaluation of property
Net movement in cash flow hedge reserve
Net movement in other hedging reserve
Net movement in FVOCI reserve
Total comprehensive income
Reserve transfer
Issuance of core capital deferred shares
Issuance of Additional Tier 1 capital
Distribution to the holders of core capital deferred shares
Distribution to the holders of Additional Tier 1 capital
At 4 April 2021
For the year ended 4 April 2020
At 5 April 2019
Profit for the year
Net remeasurements of retirement benefit obligations
Net revaluation of property
Net movement in cash flow hedge reserve
Net movement in other hedging reserve
Net movement in FVOCI reserve
Total comprehensive income
Reserve transfer
Issuance of Additional Tier 1 capital
Redemption of Additional Tier 1 capital
Distribution to the holders of core capital deferred shares
Distribution to the holders of Additional Tier 1 capital
At 4 April 2020
Core capital
deferred
shares
Other equity
instruments
General
reserve
Revaluation
reserve
Cash flow
hedge
reserve
Other
hedging
reserve
FVOCI
reserve
Total
£m
1,325
-
-
-
-
-
-
-
-
9
-
-
-
1,334
£m
593
-
-
-
-
-
-
-
-
-
743
-
-
1,336
£m
8,102
242
(72)
-
-
-
-
170
15
-
-
(108)
(57)
8,122
£m
48
-
-
2
-
-
-
2
(6)
-
-
-
-
44
£m
61
-
-
-
(57)
-
-
(57)
-
-
-
-
-
4
£m
(6)
-
-
-
-
16
-
16
-
-
-
-
-
10
£m
(12)
-
-
-
-
-
128
128
(9)
-
-
-
-
107
Core capital
deferred
shares
Other equity
instruments
General
reserve
Revaluation
reserve
Cash flow
hedge
reserve
Other
hedging
reserve
FVOCI
reserve
£m
1,325
-
-
-
-
-
-
-
-
-
-
-
-
1,325
£m
992
-
-
-
-
-
-
-
-
593
(992)
-
-
593
£m
8,056
80
119
-
-
-
-
199
5
-
(8)
(108)
(42)
8,102
£m
64
-
-
(11)
-
-
-
(11)
(5)
-
-
-
-
48
£m
25
-
-
-
36
-
-
36
-
-
-
-
-
61
£m
-
-
-
-
-
(6)
-
(6)
-
-
-
-
-
(6)
£m
56
-
-
-
-
-
(68)
(68)
-
-
-
-
-
(12)
£m
10,111
242
(72)
2
(57)
16
128
259
-
9
743
(108)
(57)
10,957
Total
£m
10,518
80
119
(11)
36
(6)
(68)
150
-
593
(1,000)
(108)
(42)
10,111
The notes on pages 247 to 325 form part of these financial statements.
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Cash flow statements
For the year ended 4 April 2021
Notes
36
36
Cash flows generated from/(used in) operating activities
Profit before tax
Adjustments for:
Non-cash items included in profit before tax (note i)
Changes in operating assets and liabilities (note i)
Taxation
Net cash flows generated from operating activities
Cash flows (used in)/generated from investing activities
Purchase of investment securities
Investment in subsidiary share capital
Sale and maturity of investment securities
Purchase of property, plant and equipment
Sale of property, plant and equipment
Purchase of intangible assets
Net cash flows used in from investing activities
Cash flows (used in)/generated from financing activities
Distributions paid to the holders of core capital deferred shares
Issuance of core capital deferred shares
Distributions paid to the holders of Additional Tier 1 capital
Issuance of Additional Tier 1 capital
Redemption of Additional Tier 1 capital
Issue of subordinated liabilities
Redemption of subordinated liabilities
Interest paid on subordinated liabilities
Interest paid on subscribed capital
Repayment of lease liabilities
Net cash flows (used in)/generated from financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase in cash and cash equivalents
Cash and cash equivalents at start of year
Cash and cash equivalents at end of year
36
Group
2021
£m
823
1,009
9,368
(138)
11,062
(14,360)
-
7,173
(96)
23
(245)
(7,505)
(108)
9
(57)
743
-
-
(661)
(166)
(4)
(27)
(271)
(55)
3,231
14,474
17,705
2020
£m
466
924
2,273
(252)
3,411
(13,162)
-
10,138
(264)
27
(403)
(3,664)
(108)
-
(42)
593
(1,000)
1,603
-
(202)
(5)
(27)
812
41
600
13,874
14,474
Society
2021
£m
363
1,037
9,739
(74)
11,065
(14,349)
(22)
7,173
(96)
23
(245)
(7,516)
(108)
9
(57)
743
-
-
(661)
(166)
(4)
(27)
(271)
(55)
3,223
14,455
17,678
2020
£m
110
866
2,590
(139)
3,427
(13,156)
(24)
10,138
(267)
27
(403)
(3,685)
(108)
-
(42)
593
(1,000)
1,603
-
(202)
(5)
(27)
812
42
596
13,859
14,455
Note:
i.
Comparatives have been restated to reflect the change in presentation of the bank levy as detailed in note 1.
The notes on pages 247 to 325 form part of these financial statements.
Annual Report and Accounts 2021
246
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Annual Report and Accounts 2021
Notes to the financial statements
1. Statement of accounting policies
Basis of preparation
The Group and Society financial statements are prepared in accordance with international
accounting standards in conformity with the requirements of the Building Societies Act 1986
and with those parts of the Building Societies (Accounts and Related Provisions) Regulations
1998 (as amended) that are applicable. International accounting standards which have been
adopted for use within the UK have also been applied in these financial statements.
The Group financial statements are also prepared in accordance with International Financial
Reporting Standards (IFRS) adopted pursuant to Regulation (EC) No. 1606/2002 as it applies
in the European Union.
The financial statements have been prepared under the historical cost convention as modified
by the revaluation of investment properties, branches and non-specialised buildings, financial
assets measured at fair value through other comprehensive income (FVOCI), and derivatives
and certain other financial assets and liabilities measured at fair value through profit and loss
(FVTPL). As stated in the Directors’ report, the directors consider that it is appropriate to
continue to adopt the going concern basis in preparing the financial statements.
A summary of the Group’s accounting policies is set out below. The accounting policies have
been consistently applied, except for changes arising from adoption of new and revised IFRSs
and certain voluntary changes in accounting policy, as described below.
Further information about judgements in applying accounting policies and critical accounting
estimates is provided in note 2.
Adoption of new and revised IFRSs
With effect from 5 April 2020 the Group has adopted the Interest Rate Benchmark Reform –
Phase 2 amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16. Further information on
the impacts of adopting these amendments is set out below.
In addition, a number of amendments and improvements to accounting standards have been
issued by the International Accounting Standards Board (IASB) with an effective date of
1 January 2020. Those relevant to these financial statements include minor amendments to
IAS 1 ‘Presentation of Financial Statements’, IAS 8 ‘Accounting Policies, Changes in
Accounting Estimates and Errors’, and the Conceptual Framework. The adoption of these
amendments and interpretations had no significant impact on the Group.
Annual Report and Accounts 2021
247
Interest Rate Benchmark Reform – Phase 2 amendments to IFRS 9, IAS 39, IFRS 7, IFRS
4 and IFRS 16
In August 2020, the IASB issued amendments arising from Phase 2 of its work on Interest
Rate Benchmark Reform. The amendments focus on accounting for the replacement of
existing benchmark interest rates, and provide relief allowing entities:
•
•
not to recognise significant modification gains or losses on financial instruments if a
change results directly from IBOR reform and occurs on an 'economically equivalent'
basis; and
to continue existing hedging relationships despite changes to hedge documentation for
modifications required as a direct consequence of IBOR reform.
These amendments, which were endorsed by the EU and UK in January 2021, are applicable
to the Group from 5 April 2021, with early adoption permitted. The Group has early adopted
the amendments in these financial statements, with no significant impact. The disclosures
required by these amendments have been included in note 15.
Change in presentation of bank levy
To reflect better the nature of liabilities associated with the UK Bank Levy, a liability of
£12 million at 4 April 2021 has been reclassified to be presented within accruals and deferred
income on the balance sheet. Previously, this liability was included within provisions for
liabilities and charges.
Comparatives at 4 April 2020 have been restated as shown below.
Balance sheet extract at 4 April 2020
Group
Provisions for liabilities and charges
Accruals and deferred income
Society
Provisions for liabilities and charges
Accruals and deferred income
Previously
published
£m
176
310
176
307
Adjustment
Restated
£m
(30)
30
(30)
30
£m
146
340
146
337
This change had no impact on the Group or Society’s net assets or members’ interests and
equity at 4 April 2020.
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Notes to the financial statements (continued)
Notes to the financial statements (continued)
1. Statement of accounting policies (continued)
Annual Report and Accounts 2021
248
Future accounting developments
Securitisation and covered bond transactions
The IASB has issued a number of minor amendments to IFRSs that become effective from 1
January 2021 or subsequent years, some of which have not yet been endorsed for use in the
UK. These amendments are not expected to have a significant impact for the Group.
IFRS 17 ‘Insurance Contracts’ establishes the principles for the recognition, measurement,
presentation and disclosure of insurance contracts within the scope of the standard. IFRS 17 is
effective for accounting periods beginning on or after 1 January 2023 and has not yet been
endorsed for use by the UK. The requirements of IFRS 17 are currently being assessed;
however, it is not expected that the new standard will have a significant impact for the Group.
Basis of consolidation
The assets, liabilities and results of the Society and its undertakings, which include
subsidiaries and structured entities, are included in the financial statements on the basis of
accounts made up to the reporting date.
The Group consolidates an entity from the date on which the Group: (i) has power over the
entity; (ii) is exposed to, or has rights to variable returns from its involvement with the entity;
and (iii) has the ability to affect those returns through the exercise of its power. The
assessment of control is based on all facts and circumstances. The Group reassesses whether
it controls an entity if facts and circumstances indicate that there are changes to one or more
of the three elements of control. The Group ceases to consolidate subsidiaries from the date
that control ceases.
A structured entity is an entity in which voting or similar rights are not the dominant factor in
deciding control. Structured entities are consolidated when the substance of the relationship
indicates control. The Group considers factors such as the purpose and design of the entity,
size and exposure to variability of returns and nature of the relationship.
Upon consolidation, all intra-Group assets and liabilities, equity, income, expenses and cash
flows relating to transactions between members of the Group are eliminated.
Investments in subsidiary undertakings are stated in the Society accounts at cost less
provisions for any impairment in value. The directors consider it appropriate for
administrative and commercial reasons that subsidiary undertakings have financial years
ending on 31 March. Adjustment is made for individually significant transactions arising
between 31 March and the Society’s year end.
The Group has securitised certain mortgage loans by the transfer of the loans to structured
entities controlled by the Group. The securitisation enables a subsequent issuance of debt,
either by the Society or the structured entities, to investors who gain the security of the
underlying assets as collateral. Those structured entities are fully consolidated into the Group
accounts.
The transfers of the mortgage loans to the structured entities are not treated as sales by the
Society. The Society continues to recognise the mortgage loans on its own balance sheet after
the transfer because it retains their risks and rewards through the receipt of substantially all
of the profits or losses of the structured entities. In the accounts of the Society, the proceeds
received from the transfer are accounted for as a deemed loan repayable to the structured
entities.
For covered bonds, the Society itself and not the structured entity issues the covered bonds
and then lends the proceeds to the structured entity on back to back terms. The structured
entity then uses these proceeds as consideration for the loans transferred from the Society. In
the accounts of the Society, neither the loan to the structured entity nor the consideration for
the transfer of mortgage loans is recognised separately as an additional asset and liability.
The Group has also entered into self-issuances of debt to be used as collateral for repurchase
(‘repo’) and similar transactions. Investments in self-issued debt and the related obligation,
together with the related income, expenditure and cash flows, are not recognised in the
Society’s or Group’s financial statements. This avoids the ‘grossing-up’ of the financial
statements that would otherwise arise.
To manage interest rate risk, the Society enters into derivative transactions with the
structured entities, receiving a rate of interest based on the securitised mortgages and paying
a rate inherent in the debt issuances. These internal derivatives are treated as part of the
deemed loan and not separately fair valued because the relevant mortgage loans are not
derecognised. All other derivatives relating to securitisations are treated as explained in the
derivatives and hedge accounting policy below.
Interest receivable and interest expense
For instruments measured at amortised cost the effective interest rate (EIR) method is used
to measure the carrying value of a financial asset or liability and to allocate associated interest
income or expense over the relevant period. The effective interest rate is the rate that exactly
discounts estimated future cash payments or receipts over the expected life of the financial
instrument or, when appropriate, a shorter period, to the net carrying amount of the financial
asset or financial liability.
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249
Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
1. Statement of accounting policies (continued)
In calculating the effective interest rate, the Group estimates cash flows considering all
contractual terms of the financial instrument (for example early redemption penalty charges)
and anticipated customer behaviour but does not consider future credit losses. The
calculation includes all fees received and paid and costs incurred that are an integral part of
the effective interest rate, transaction costs, and all other premiums or discounts above or
below market rates.
Interest income is calculated by applying the EIR to the gross carrying amount of non-credit
impaired financial assets. For credit-impaired financial assets the interest income is
calculated by applying the EIR to the amortised cost of the credit-impaired financial assets
(i.e. net of the allowance for expected credit losses (ECLs)). Where loans are credit impaired
on origination, or when purchased from third parties, the carrying amount at initial
recognition is net of the lifetime ECL at that date. For these assets the EIR reflects the ECLs in
determining the future cash flows expected to be received from the financial asset.
Interest receivable and similar income/(expense) calculated using the effective interest rate
method also includes interest on financial assets classified as fair value through other
comprehensive income, and on derivatives in qualifying hedge relationships.
Trail commission relating to investments under administration, general insurance and
protection products sold on behalf of third parties may include variable consideration. Where
this is the case the trail commission is recognised either on the accruals basis over the period
to which the commission relates or, if the uncertainties are more significant, once the
uncertainties are resolved.
Fee and commission income is generally earned from short-term contracts with payment
terms that do not include a significant financing component.
Segmental reporting
The Nationwide Leadership Team (NLT) is responsible for allocating resources and assessing
the performance of the business and is therefore identified as the chief operating decision
maker.
The Group has determined that it has one reportable segment as the NLT reviews
performance and makes decisions based on the Group as whole. No segmental analysis is
required on geographical lines as substantially all of the Group’s activities are in the United
Kingdom. As a result, no segmental disclosure is provided.
Interest income not calculated using the effective interest rate method, including interest on
financial assets classified as fair value through profit or loss and derivatives not in qualifying
hedge relationships, is presented as other interest receivable and similar income/(expense).
Leases
Fees and commissions
Fees and commission income and expense includes fees other than those that are an integral
part of EIR. Fees and commissions relating to current accounts, mortgages and credit cards
are either:
•
•
transaction-based and therefore recognised when the performance obligation related to
the transaction is fulfilled, or
related to the provision of services over a period of time and therefore recognised on a
systematic basis over the life of the agreement as services are provided.
The transaction prices and provision of services are defined within the product terms and
conditions.
At inception, the Group assesses whether a contract is or contains a lease. This assessment
involves exercising judgment as to whether the contract conveys the right to control the use
of an identified asset, and the right to obtain substantially all of the economic benefits from
this asset, for a period of time. The leases held by the Group as a lessee consist primarily of
property contracts for branches and office buildings.
The Group recognises a right-of-use (RoU) asset and a lease liability at the commencement of
the lease, except for short-term leases (defined as leases with a lease term of less than 12
months) and leases of low value assets. Payments for short-term leases and leases of low
value assets are generally recognised in the income statement on a straight-line basis.
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
1. Statement of accounting policies (continued)
The lease liability is initially measured at the present value of the payments over the lease
term, with the rate used to discount the payments reflecting the rate implicit in the lease or, if
this is not readily determinable, the Group’s incremental borrowing rate. The lease term
includes the non-cancellable period of the lease, together with an assessment of any
extension or termination options which are reasonably certain to be exercised. After the
commencement date, the amount of lease liabilities is increased to reflect the accretion of
interest and reduced for the lease payments made. In addition, the carrying amount of lease
liabilities is remeasured (with a corresponding adjustment to the RoU asset) when there is a
change in future lease payments due to a modification of lease terms, changes to an index or
rate, or a reassessment of options.
The RoU asset is initially measured based on the value of the corresponding lease liability,
plus any initial direct costs and any lease payments made at or before the commencement,
less any incentives received. The RoU asset is subsequently measured at cost less
depreciation and any accumulated impairment. Assets are depreciated over the shorter of the
lease term or the useful life of the underlying asset. The Group applies IAS 36 to determine
whether a RoU asset is impaired, as described in the property, plant and equipment
accounting policy. RoU assets are included in the ‘Property, plant and equipment’ balance
sheet line item and the lease liabilities are included in the ‘Other liabilities’ line item.
All leases of owned properties where the Group is lessor are classified as operating leases, as
substantially all risks and rewards of ownership have been retained. When the Group is an
intermediate lessor, it accounts for the head lease and the sublease as two separate
contracts. The sublease is classified as a finance or operating lease by reference to the RoU
asset arising from the head lease.
Rental income from operating leases is recognised on a straight-line basis over the term of
the lease. Amounts due from lessees under finance leases are recognised as receivables at
the amount of the Group’s net investment in the leases and finance lease income is allocated
to accounting periods so as to reflect a constant periodic rate of return.
Intangible assets
Intangible assets held by the Group consist primarily of externally acquired and internally
developed computer software which is held at cost less accumulated amortisation and
impairment. In accordance with IAS 38 ‘Intangible Assets’, software development costs are
capitalised if it is probable that the asset created will generate future economic benefits and
those benefits can be controlled by the Group. Costs incurred to establish technological
feasibility or to maintain existing levels of performance are recognised as an expense.
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Web development costs are capitalised where the expenditure is incurred on developing an
income generating website.
Where applicable, directly attributable borrowing costs incurred in the construction of
qualifying assets are capitalised.
Computer software intangible assets are amortised using the straight-line method over their
estimated useful lives which generally range between 3 and 10 years. Amortisation
commences when the assets are ready for their intended use. Estimated useful lives are
reviewed annually and adjusted, if appropriate, in the light of technological developments,
usage and other relevant factors.
Intangible assets, including computer software, are reviewed for indicators of impairment at
each reporting date and whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Where the carrying amount is not recoverable the
asset is written down immediately to the estimated recoverable amount. The estimated
recoverable amount is based on value in use calculations where there is no basis for making a
reliable estimate of fair value less costs of disposal.
Property, plant and equipment
Freehold and long leasehold properties comprise mainly branches and office buildings.
Branches and non-specialised buildings are stated at revalued amounts, being the fair value,
determined by market-based evidence at the date of the valuation, less any subsequent
accumulated depreciation and subsequent impairment. Valuations are completed annually as
at 4 April, or more frequently if required, by external, independent and qualified surveyors
who have recent experience in the location and type of properties. Valuations are performed
in accordance with the Royal Institution of Chartered Surveyors Appraisal and Valuation
Standards and are performed on a vacant possession basis, using a comparative method of
valuation with reference to sales prices and observable market rents for similar properties in
similar locations.
Increases in the valuations of branches and non-specialised buildings are credited to other
comprehensive income except where they reverse decreases for the same asset previously
recognised in the income statement, in which case the increase in the valuation is recognised
in the income statement. Decreases in valuations are recognised in the income statement
except where they reverse amounts previously credited to other comprehensive income for
the same asset, in which case the decrease in valuation is recognised in other comprehensive
income.
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
1. Statement of accounting policies (continued)
The Group holds a small number of investment properties comprising properties held for
rental. These properties include both owned properties and leased properties for which the
RoU asset is held for rental under an operating sublease. Investment properties are stated at
fair value, determined by market-based evidence at the date of the valuation. Valuations of
owned properties are completed annually as at 4 April, or more frequently if required, by
independent surveyors. The fair value of an investment property which is a RoU asset reflects
the expected cash flows to be received under its sublease. Changes in fair value are included
in the income statement. Depreciation is not charged on investment properties.
Other property, plant and equipment, including specialised administration buildings, are
included at historical cost less accumulated depreciation and impairment. Historical cost
includes expenditure that is directly attributable to the acquisition of the items, major
alterations and refurbishments.
Where applicable, directly attributable borrowing costs incurred in the construction of
qualifying assets are capitalised.
Land is not depreciated. The depreciation of other assets commences when the assets are
ready for their intended use and is calculated using the straight-line method to allocate their
cost or valuation over the following estimated useful lives:
Branches and non-specialised buildings
Specialised administration buildings
Plant and machinery
Equipment, fixtures, fittings and vehicles
60 years
up to 60 years
5 to 15 years
3 to 10 years
Estimated useful lives and residual values are reviewed annually and adjusted, if appropriate,
in light of technological developments, usage and other relevant factors.
Assets are reviewed for indicators of impairment at each reporting date and whenever events
or changes in circumstances indicate that the carrying amount may not be recoverable.
Where the carrying amount is not recoverable the asset is written down immediately to the
estimated recoverable amount.
Gains and losses on disposals are included in other operating income/(expense) in the
income statement.
Annual Report and Accounts 2021
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Taxation
Current tax payable on profits, based on the applicable tax law in each jurisdiction, is
recognised as an expense in the period in which profits arise. Current tax assets and liabilities
are measured at the amount expected to be recovered from, or paid to, the taxation
authorities.
Deferred tax is provided in full on temporary differences arising between the tax bases of
assets and liabilities and their carrying amounts in the financial statements. Deferred tax is
determined using tax rates and laws that have been enacted or substantively enacted by the
balance sheet date and are expected to apply when the related deferred tax asset is realised
or the deferred tax liability is settled.
Deferred tax assets are recognised where it is probable that future taxable profits will be
available against which the temporary differences can be utilised. The tax effects of tax losses
available for carry forward are recognised as a deferred tax asset when it is probable that
future taxable profits will be available against which these losses can be utilised.
Deferred tax assets and liabilities are offset where there is a legally enforceable right to offset
current tax assets against current tax liabilities and where the deferred tax assets and
liabilities relate to income taxes levied by the same taxation authority on either the same
taxable entity or different taxable entities where there is an intention to settle on a net basis.
Current and deferred tax are charged or credited in the income statement except to the
extent that the tax arises from a transaction or event which is recognised, in the same or a
different period, outside the income statement (for example, in other comprehensive income
or directly in equity). In this case, the tax appears in the same statement as the transaction
that gave rise to it. An exception to this principle relates to the tax consequences of the
Group's distributions on other equity instruments. Although such distributions are recognised
directly in equity, the tax consequences are credited to the income statement, where the
profit being distributed originally arose.
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
1. Statement of accounting policies (continued)
Employee benefits
(a) Pensions
The Group operates a number of defined benefit and defined contribution pension
arrangements.
Defined benefit pension arrangements
A defined benefit plan is one that defines the benefit an employee will receive on retirement,
depending on such factors as age, length of service and salary.
The net defined benefit asset or liability represents the present value of defined benefit
obligations reduced by the fair value of plan assets, after applying the asset ceiling test, where
a net defined benefit surplus is limited to the present value of available refunds and
reductions in future contributions to the plan. Refunds of a surplus are not considered to be
available if the right to a surplus depends on the occurrence or non-occurrence of one or
more uncertain future events not wholly within an entity’s control. The rights of third parties,
such as trustees, are considered in assessing the extent to which a surplus can be recognised.
The defined benefit obligation is calculated by independent actuaries using the projected unit
credit method. The present value of the defined benefit obligation is determined by
discounting the estimated future cash flows derived from yields of high-quality corporate
bonds that have terms to maturity approximating to the terms of the related pension liability.
Actuarial remeasurements arise from experience adjustments (the effects of differences
between previous actuarial assumptions and what has actually occurred) and changes in
forward looking actuarial assumptions. Actuarial remeasurements are recognised in full, in
the year they occur, in other comprehensive income.
(b) Other post-retirement obligations
The Group provides post-retirement healthcare to a small number of former employees. The
Group recognises this obligation and the actuarial remeasurement in a similar manner to the
defined benefit pension plans.
(c) Other long-term employee benefits
The cost of bonuses and other long-term employee benefits payable 12 months or more after
the end of the year in which they are earned is accrued over the period from the start of the
performance year until all relevant criteria have been met.
(d) Short-term employee benefits
The cost of short-term employee benefits, including wages and salaries, social security costs
and healthcare for current employees, is recognised in the year of service.
Provisions
A provision is recognised where there is a present obligation as a result of a past event, it is
probable that the obligation will be settled, and it can be reliably estimated. This includes
management’s best estimate of amounts payable for customer redress.
The Group has an obligation to contribute to the Financial Services Compensation Scheme
(FSCS) to enable the FSCS to meet compensation claims from, in particular, retail depositors
of failed banks. A provision is recognised, to the extent that it can be reliably estimated, when
the levy is legally enforceable, in line with IFRIC 21 ‘Levies’. The amount provided is based on
information received from the FSCS and the Group’s historic share of industry protected
deposits.
Past service costs are recognised immediately in the income statement.
Defined contribution pension arrangements
Financial assets
A defined contribution arrangement is one into which the Group and the employee pay fixed
contributions, without any further obligation to pay additional contributions. Payments to
defined contribution schemes are charged to the income statement as they fall due.
Financial assets comprise cash, loans and advances to banks and similar institutions,
investment securities, derivative financial instruments and loans and advances to customers.
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
1. Statement of accounting policies (continued)
Recognition and derecognition
(a) Amortised cost
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All financial assets are recognised initially at fair value. Purchases and sales of financial assets
are accounted for at trade date. Financial assets acquired through a business combination or
portfolio acquisition are recognised at fair value at the acquisition date. Financial assets are
derecognised when the rights to receive cash flows have expired or where the assets have
been transferred and substantially all the risks and rewards of ownership have been
transferred.
The fair value of a financial instrument on initial recognition is normally the transaction price
(plus directly attributable transaction costs for financial assets which are not subsequently
measured at fair value through profit or loss). On initial recognition, it is presumed that the
transaction price is the fair value unless there is observable information available in an active
market to the contrary. Any difference between the fair value at initial recognition and the
transaction price is recognised immediately as a gain or loss in the income statement where
the fair value is based on a quoted price in an active market or a valuation using only
observable market data. In all other cases, any gain or loss is deferred and recognised over
the life of the transaction, or until valuation inputs become observable.
Modification of contractual terms
An instrument that is renegotiated is derecognised if the existing agreement is cancelled and
a new agreement is made on substantially different terms (such as renegotiations of
commercial loans). Residential mortgages reaching the end of a fixed interest deal period are
deemed repricing events, rather than a modification of contractual terms, as the change in
interest rate at the end of the fixed rate period was envisaged in the original mortgage
contract.
Where an instrument is renegotiated and not derecognised, the change is considered a
modification of contractual terms. Where this arises, the gross carrying amount of the loan is
recalculated as the present value of the renegotiated or modified contractual cash flows,
discounted at the loan’s original effective interest rate. Any gain or loss on recalculation is
recognised immediately in the income statement.
Classification and measurement
The classification and subsequent measurement of financial assets is based on an assessment
of the Group’s business models for managing the assets and their contractual cash flow
characteristics. Financial assets are classified into the following three categories:
Financial assets held to collect contractual cash flows and where contractual terms comprise
solely payments of principal and interest (SPPI) are classified as amortised cost. This category
of financial assets includes cash, loans and advances to banks and similar institutions, the
majority of the Group’s residential and commercial mortgage loans, all unsecured lending,
and certain investment securities within a ‘hold to collect’ business model.
Financial assets within this category are recognised on either the receipt of cash or deposit of
funds into one of the Group’s bank accounts (for cash and loans and advances to banks and
similar institutions), when the funds are advanced to borrowers (for residential, commercial
and unsecured lending) or on the trade date for purchases of investment securities. After
initial recognition, the assets are measured at amortised cost using the effective interest rate
method, less provisions for expected credit losses.
(b) Fair value through other comprehensive income
Debt instruments held in a business model whose objective is achieved by both collecting
contractual cash flows and selling financial assets, and where contractual terms comprise
solely payments of principal and interest (SPPI), are classified and measured at FVOCI. This
category of financial assets includes most of the Group’s investment securities which are held
to manage liquidity requirements.
Financial assets within this category are recognised on trade date. The assets are measured
at fair value using, in the majority of cases, market prices or, where there is no active market,
prices obtained from market participants. In sourcing valuations, the Group makes use of a
consensus pricing service, in line with standard industry practice. In cases where market
prices or prices from market participants are not available, discounted cash flow models are
used.
Interest on FVOCI assets is recognised in interest receivable and similar income in the income
statement, using the effective interest rate method.
Unrealised gains and losses arising from changes in value are recognised in other
comprehensive income. Provisions for expected credit losses and foreign exchange gains or
losses are recognised in the income statement.
Cumulative gains or losses arising on sale are recognised in the income statement within
other operating income/(expense), net of any credit or foreign exchange gains or losses
already recognised.
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
1. Statement of accounting policies (continued)
(c) Fair value through profit or loss
All other financial assets are measured at FVTPL. Financial assets within this category
primarily include derivative instruments and a small number of residential and commercial
loans and investment securities with contractual cash flow characteristics which do not meet
the SPPI criteria. The contractual terms for these cash flows include contingent or leverage
features, or returns based on movements in underlying collateral values such as house prices.
Fair values are based on observable market data, valuations obtained by third parties or,
where these are not available, internal models. Gains or losses arising from changes in the fair
value of these instruments and on disposal are recognised in the income statement within
other operating income.
Hedge accounting is not applied to assets classified as FVTPL; however, hedging may be
applied for economic purposes. Gains or losses arising from changes in the fair value of
derivatives economically hedging FVTPL financial assets is also included within other
operating income.
Impairment of financial assets
Financial assets within the scope of IFRS 9 expected credit loss (ECL) requirements comprise
all financial debt instruments measured at either amortised cost or FVOCI. These include
cash, loans and advances to banks and similar institutions, and the majority of investment
securities and loans and advances to customers. Also within scope are irrevocable undrawn
commitments to lend and intra-group lending (the latter being eliminated on consolidation in
the Group accounts).
The ECL represents the present value of expected cash shortfalls following the default of a
financial instrument, including any undrawn commitment. A cash shortfall is the difference
between the cash flows that are due in accordance with the contractual terms of the
instrument and the cash flows that the Group expects to receive.
The allowance for ECLs is based on an assessment of the probability of default, exposure at
default and loss given default, discounted at the effective interest rate to give a net present
value. The estimation of ECLs is unbiased and probability weighted, taking into account all
reasonable and supportable information, including forward looking economic assumptions
and a range of possible outcomes. ECLs are typically calculated from initial recognition of the
financial asset for the maximum contractual period that the Group is exposed to the credit
risk. However, for revolving credit loans such as credit cards and overdrafts, the Group’s
credit risk is not limited to their contractual period and therefore the expected life of the loan
and associated undrawn commitment is calculated based on the behavioural life of the loan.
Annual Report and Accounts 2021
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For financial assets recognised in the balance sheet at amortised cost, the allowance for ECLs
is offset against the gross carrying value so that the amount presented in the balance sheet is
net of impairment provisions. For financial assets classified as FVOCI, any credit losses
recognised are offset against cumulative fair value movements within the other
comprehensive income reserve. For separately identifiable irrevocable loan commitments,
where the related financial asset has not yet been advanced, the provision is presented in
provisions for liabilities and charges in the balance sheet.
Forward looking economic inputs
ECLs are calculated by reference to information on past events, current conditions and
forecasts of future economic conditions. Multiple economic scenarios are incorporated into
ECL calculation models. These scenarios are based on external sources where available and
appropriate, and internally generated assumptions in all other cases. To capture any non-
linear relationship between economic assumptions and credit losses, a minimum of three
scenarios is used. This includes a central scenario which reflects the Group’s view of the most
likely future economic conditions, together with an upside and a downside scenario
representing alternative plausible views of economic conditions, weighted based on
management’s view of their probability.
Credit risk categorisation
For the purpose of calculating ECLs, assets are categorised into three 'stages' as follows:
Stage 1: no significant increase in credit risk since initial recognition
On initial recognition, and for financial assets where there has not been a significant increase
in credit risk since the date of advance, provision is made for losses from credit default events
expected to occur within the next 12 months. Expected credit losses for these stage 1 assets
continue to be recognised on this basis unless there is a significant increase in the credit risk
of the asset.
Stage 2: significant increase in credit risk
Financial assets are categorised as being within stage 2 where an instrument has
experienced a significant increase in credit risk since initial recognition. For these assets,
provision is made for losses from credit default events expected to occur over the lifetime of
the instrument.
Whether a significant increase in credit risk has occurred is ascertained by comparing the
probability of default at the reporting date to the probability of default at origination, based
on quantitative and qualitative factors. Quantitative considerations take into account changes
in the residual lifetime probability of default (PD) of the asset. As a backstop, all assets with an
arrears status of more than 30 days past due on contractual payments are considered to be in
stage 2.
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
1. Statement of accounting policies (continued)
Qualitative factors that may indicate a significant change in credit risk include concession
events where full repayment of principal and interest is envisaged, on a discounted basis.
Further information about the identification of significant increases in credit risk is provided
in note 10.
Stage 3: credit impaired (or defaulted) loans
Financial assets are transferred into stage 3 when there is objective evidence that an
instrument is credit impaired. Provisions for stage 3 assets are made on the basis of credit
default events expected to occur over the lifetime of the instrument. Assets are considered
credit impaired when:
•
•
•
contractual payments of either principal or interest are past due by more than 90 days;
there are other indications that the borrower is unlikely to pay such as signs of financial
difficulty, probable bankruptcy, breaches of contract and concession events which have a
detrimental impact on the present value of future cash flows; or
the loan is otherwise considered to be in default.
Interest income on stage 3 credit impaired loans is recognised in the income statement on
the loan balance net of the ECL provision. The gross balance sheet value of stage 3 loans
reflects the contractual terms of the assets, and continues to increase over time with the
contractually accrued interest.
Purchased or originated credit impaired (POCI) loans
Where loans are credit impaired on origination, or when purchased from third parties,
lifetime ECLs are incorporated into the calculation of the effective interest rate on initial
recognition. Consequently, POCI assets do not carry an impairment allowance on initial
recognition, and the amount recognised as a loss allowance subsequently is equal to the
changes in lifetime ECLs since initial recognition of the asset discounted at the credit
impaired EIR. POCI loans are separately disclosed as credit impaired loans and cannot be
transferred out of the POCI designation, even if there is a significant improvement in credit
quality.
Transfers between stages
Transfers from stage 1 to 2 occur when there has been a significant increase in credit risk and
from stage 2 to 3 when credit impairment is indicated as described above.
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For assets in stage 2 or 3, loans can transfer back to stage 1 or 2 once the criteria for a
significant increase in credit risk or impairment are no longer met. For loans subject to
concession events such as forbearance, accounts are transferred back to stage 1 or 2 only
after being up to date for a period of 12 months.
Write-off
Loans remain on the balance sheet, net of associated provisions, until they are deemed to
have no reasonable expectation of recovery. Loans are generally written off after realisation of
any proceeds from collateral and upon conclusion of the collections process, including
consideration of whether an account has reached a point where continuing attempts to
recover are no longer likely to be successful. Where a loan is not recoverable, it is written off
against the related provision for loan impairment once all the necessary procedures have
been completed and the amount of the loss has been determined. Subsequent recoveries of
amounts previously written off decrease the value of impairment losses recorded in the
income statement.
Financial liabilities
Borrowings, including shares, deposits, debt securities in issue, subordinated liabilities and
permanent interest-bearing shares (subscribed capital) are recognised initially at fair value,
being the issue proceeds net of premiums, discounts and transaction costs incurred.
All borrowings are subsequently measured at amortised cost using the effective interest rate
method. Amortised cost is adjusted for the amortisation of any premiums, discounts and
transaction costs. The amortisation is recognised in interest expense and similar charges
using the effective interest rate method.
Derivative financial liabilities are measured at FVTPL. Borrowings that are designated as
hedged items are subject to measurement under the hedge accounting requirements
described in the derivatives and hedge accounting policy below.
Financial liabilities are derecognised when the obligation is discharged, cancelled or has
expired. The financial liabilities of dormant shares and deposit accounts are extinguished
when balances have been transferred to the Government-backed unclaimed asset scheme
under the terms of the Dormant Accounts and Building Society Accounts Act 2008 with no
impact on the income statement.
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Notes to the financial statements (continued)
Notes to the financial statements (continued)
1. Statement of accounting policies (continued)
Annual Report and Accounts 2021
256
Fair value of assets and liabilities
Derivatives and hedge accounting
IFRS 13 ‘Fair Value Measurement’ requires an entity to classify assets and liabilities held at fair
value, and those not measured at fair value but for which the fair value is disclosed, according
to a hierarchy that reflects the significance of observable market inputs in calculating those
fair values. The three levels of the fair value hierarchy are defined below:
Level 1 – Valuation using quoted market prices
Assets and liabilities are classified as Level 1 if their value is observable in an active market.
Such instruments are valued by reference to unadjusted quoted prices for identical assets or
liabilities in active markets where the quoted price is readily available, and the price reflects
actual and regularly occurring market transactions on an arm’s length basis. An active market
is one in which transactions occur with sufficient volume and frequency to provide pricing
information on an ongoing basis.
Level 2 – Valuation technique using observable inputs
Assets and liabilities classified as Level 2 have been valued using models whose inputs are
observable in an active market. Valuations based on observable inputs include derivative
financial instruments such as swaps and forward rate agreements which are valued using
market standard pricing techniques, and options that are commonly traded in markets where
all the inputs to the market standard pricing models are observable. They also include
investment securities valued using consensus pricing or other observable market prices.
Level 3 – Valuation technique using significant unobservable inputs
Assets and liabilities are classified as Level 3 if their valuation incorporates significant inputs
that are not based on observable market data. A valuation input is considered observable if it
can be directly observed from transactions in an active market, or if there is compelling
external evidence demonstrating an executable exit price. An input is deemed significant if it
is shown to contribute more than 10% to the valuation of a financial instrument.
Derivatives are entered into to reduce exposures to fluctuations in interest rates, exchange
rates, market indices and credit risk, and are not used for speculative purposes.
(a) Derivative financial instruments
Derivatives are carried at fair value with movements in fair values recorded in the income
statement. Derivative financial instruments are principally valued by discounted cash flow
models using yield curves that are based on observable market data or on valuations obtained
from third parties. For collateralised positions the Group uses discount curves based on
overnight indexed swap rates such as Sonia, and for non-collateralised positions the Group
uses discount curves based on term Libor rates.
In the first instance fair values are calculated using mid prices. An adjustment is then made to
derivative assets and liabilities to value them on a bid and offer basis respectively. The bid-
offer adjustment is calculated on a portfolio basis and reflects the costs that would be
incurred if substantially all residual net portfolio market risks were closed out using available
hedging instruments or by disposing of or unwinding actual positions. The methodology for
determining the bid-offer adjustments involves netting between long and short positions and
the grouping of risk by type, in accordance with hedging strategy. Bid-offer spreads are
derived from market sources such as broker data and are reviewed periodically.
In measuring fair value, separate credit valuation and debit valuation adjustments are made
for counterparty or own credit risk to the extent not already included in the valuation.
Funding valuation adjustments are also made to reflect an estimate of the adjustment a
market participant would make to incorporate funding costs and benefits that arise in relation
to derivative exposures.
All derivatives are classified as assets where their fair value is positive and liabilities where
their fair value is negative. Where there is the legal right and intention to settle net, then the
derivative is classified as a net asset or liability, as appropriate.
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
1. Statement of accounting policies (continued)
Where cash collateral is received, to mitigate the risk inherent in amounts due to the Group, it
is included as a liability within deposits from banks and similar institutions. Similarly, where
cash collateral is given, to mitigate the risk inherent in amounts due from the Group, it is
included as an asset in loans and advances to banks and similar institutions. Where securities
collateral is received the securities are not recognised in the accounts as the Group does not
obtain the risks and rewards of the securities. Where securities collateral is given, the
securities have not been derecognised as the Group has retained substantially all the risks
and rewards of ownership.
(b) Embedded derivatives
Some complex contracts may be hybrid in nature, in that a derivative element is included
within a non-derivative host contract, in which case the derivative is termed an embedded
derivative. If the host contract is an asset within the scope of IFRS 9 the entire contract has its
accounting classification assessed under IFRS 9. If the host contract is a liability or an asset
which does not fall within the scope of IFRS 9, the embedded derivative is separated and
treated as a standalone derivative instrument if:
•
•
•
its economic characteristics are not closely related to the host,
a separate instrument with the same terms would meet the definition of a derivative, and
the hybrid contract is not already being fair valued through the income statement.
(c) Hedge accounting
The Group has adopted the general hedge accounting requirements of IFRS 9 but continues
to apply the scope exception which allows ongoing application of IAS 39 for fair value hedge
accounting for a portfolio (macro) hedge of interest rate risk. When transactions meet the
criteria specified in IFRS 9, the Group can apply two types of hedge accounting: either hedges
of the changes in fair value of the financial asset or liability (fair value hedge accounting) or
hedges of the variability in cash flows of the financial asset or liability (cash flow hedge
accounting). The Group does not have hedges of net investments.
At inception each hedge relationship is formally documented, including a description of the
hedged item (a financial asset or liability which is being economically hedged) and the
hedging instrument (a derivative), as well as the methods which will be used to assess the
effectiveness of the hedge. Hedges accounted for under IFRS 9 are required to be effective on
a prospective basis, in line with risk management strategy. Macro hedges which continue to
be accounted for under IAS 39 are required to be highly effective on both a retrospective and
a prospective basis.
Annual Report and Accounts 2021
257
Fair value and cash flow hedges may have residual hedge ineffectiveness. This is the degree
to which the change in fair value of the hedging instrument does not offset the change in fair
value of the hedged item. This ineffectiveness is recognised in the income statement and
typically arises from:
i)
differences in the magnitude or timing of future expected cash flows in the hedged
item and hedging instrument;
ii) differences in the market curves used to value the hedged item and hedging
instrument;
iii) unexpected adjustments to either the hedged item or hedging instrument, due to
iv)
early repayments or disposals;
the ongoing amortisation of any existing balance sheet mismatch between the fair
value of the hedged item and hedging instrument.
The Group discontinues hedge accounting when:
i)
it is evident from testing that a hedging instrument ceases to meet the hedge
effectiveness requirements;
the hedging instrument expires, or is sold, terminated or exercised;
ii)
iii) the hedged item matures or is sold or repaid or, in the case of a forecasted item, is
no longer deemed to be highly probable to occur.
For macro hedges which continue to be accounted for under IAS 39, the Group may also
decide to cease hedge accounting even though the hedge relationship continues to be highly
effective by ceasing to designate the financial instrument as a hedge. For hedges accounted
for under IFRS 9, the Group is unable to voluntarily de-designate hedging relationships,
unless there has been a change to risk management objectives.
Fair value hedge accounting
Fair value hedge accounting results in the carrying value of the hedged item being adjusted
to reflect changes in fair value attributable to the risk being hedged. This creates an offset to
the fair value movements of the hedging instrument. Changes in the fair value of the hedged
items and hedging instruments are recorded in the income statement, except for changes in
the fair value of hedging instruments accounted for under IFRS 9 which are attributable to
foreign currency basis spreads. Where foreign currency basis spreads are excluded from
hedge designation, this element of fair valuation of the hedging instrument is instead
recognised directly within equity within the ‘other hedging reserve’.
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
1. Statement of accounting policies (continued)
For larger and distinctively identifiable assets and liabilities, such as investment securities and
debt securities in issue, a single or small number of hedging instruments may be used. This is
referred to as a micro fair value hedge. If the hedge is effective, the Group adjusts the carrying
value of that specific asset or liability to reflect changes in its fair value due to movements in
the designated benchmark rate, such as Libor or Sonia. This creates an offset to the fair value
movement of the hedging instruments.
For hedged items which are classified as FVOCI, such as investment securities, there is no
further need to adjust their carrying value as they are already held at fair value. Instead,
hedge accounting results in an amount being removed from the FVOCI reserve and instead
reported in the income statement, to create an offset to the change in fair value of the
hedging instrument.
For balances within portfolios of homogeneous instruments, such as mortgages, savings and
commercial loans, derivatives may be used to hedge risks on a portfolio basis. The Group
creates separate portfolio (macro) hedges for assets and liabilities. The Group determines the
hedged item by identifying portfolios of similar assets or liabilities and scheduling the
expected future cash flows from these items into repricing time buckets, based on expected
rather than actual repricing dates. A portion of the total cash flow from each time bucket is
then included in the hedged item. The size of this portion is set so that it is expected to create
a highly effective fair value offset to the equivalent future cash flows from the hedging
instruments. If the hedge is highly effective the Group records an adjustment in the fair value
adjustment for portfolio hedged risk category on the balance sheet. Macro hedges are
frequently rebalanced to include new business.
In fair value hedge accounting relationships, if the hedging instrument no longer meets the
criteria for hedge accounting, the cumulative fair value hedge adjustment is amortised over
the period to maturity of the previously designated hedge relationship. If the hedged item is
sold or repaid, the unamortised fair value adjustment is immediately recognised in the
income statement.
Cash flow hedge accounting
In a cash flow hedge accounting relationship, the portion of the hedging instrument’s fair
value movement that is deemed to be an effective hedge is deferred to the cash flow hedge
reserve, instead of being immediately recognised in the income statement. The ineffective
portion of the derivative fair value movement is recognised immediately in the income
statement.
Annual Report and Accounts 2021
258
Amounts deferred to the cash flow hedge reserve are subsequently recycled to the income
statement. This recycling occurs when the underlying asset or liability being hedged impacts
the income statement, for example when interest payments are recognised. In cash flow
hedge accounting relationships, if the derivative no longer meets the criteria for hedge
accounting, the cumulative gain or loss from the effective portion of the movement in the fair
value of the derivative remains in other comprehensive income until the cash flows from the
underlying hedged item are recognised in the income statement. If the hedged item is sold or
repaid, the cumulative gain or loss in other comprehensive income is immediately recognised
in the income statement.
Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported on the balance sheet if,
and only if, there is a currently enforceable legal right to set off the recognised amounts and
there is an intention to settle on a net basis, or to realise an asset and settle the liability
simultaneously.
Sale and repurchase agreements (including securities borrowing and lending)
Investment and other securities may be lent or sold subject to a commitment to repurchase
them at a pre-determined price (a repo). Such securities are retained on the balance sheet
when substantially all the risks and rewards of ownership (typically, the interest rate risk and
credit risk on the asset) remain within the Group, and the counterparty liability is included
separately on the balance sheet within deposits from banks and similar institutions as
appropriate.
Similarly, where the Group borrows or purchases securities subject to a commitment to resell
them (a reverse repo) but does not acquire the risks and rewards of ownership, the
transactions are treated as collateralised loans within loans and advances to banks and
similar institutions, and the securities are not included on the balance sheet.
The difference between sale and repurchase price is accrued over the life of the agreements
using the effective interest rate method.
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
1. Statement of accounting policies (continued)
Equity instruments
Issued financial instruments are classified as equity instruments where the contractual
arrangement with the holder does not result in the Group having a present obligation to
deliver cash, another financial asset or a variable number of equity instruments. Where the
Group does have a present obligation, the instrument is classified as a financial liability.
The proceeds of the issuance of equity instruments are included in equity. Costs incurred that
are incremental and directly attributable to the issuance are deducted from the proceeds (net
of applicable tax).
Distributions to holders of equity instruments are recognised when they become irrevocable
and are deducted from the general reserve.
Foreign currency translation
The consolidated financial statements are presented in sterling, which is the functional
currency of the Society. Items included in the financial statements of each of the Group’s
entities are measured using sterling which is also the functional currency of each entity.
Foreign currency transactions are translated into sterling using the exchange rates prevailing
at the dates of the transactions.
Annual Report and Accounts 2021
259
Monetary items denominated in foreign currencies are retranslated at the rate prevailing at
the balance sheet date. Foreign exchange gains and losses resulting from the retranslation
and settlement of these items are recognised in the income statement as disclosed in note 7.
Cash and cash equivalents
For the purposes of the cash flow statement, cash and cash equivalents comprise balances
with less than three months maturity from the date of acquisition, included within cash and
loans and advances to banks and similar institutions on the balance sheet.
Contingent liabilities
Contingent liabilities are possible obligations whose existence will be confirmed only by the
outcome of uncertain future events, and present obligations where the outflow of resources is
uncertain or cannot be measured reliably. Contingent liabilities are not recognised on the
balance sheet but are disclosed unless the likelihood of an outflow of economic resources is
remote.
IFRS disclosures
The audited sections in the Risk report and the Report of the directors on remuneration form
an integral part of these financial statements. These disclosures (where marked as ‘audited’)
are covered by the Independent auditor’s report for this Annual Report and Accounts.
2. Judgements in applying accounting policies and critical accounting estimates
The preparation of the Group’s financial statements in accordance with IFRS involves management making judgements and estimates when applying those accounting policies that affect the
reported amounts of assets, liabilities, income and expense. Actual results may differ from those on which management’s estimates are based. Estimates and assumptions are continually evaluated
and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable. For the year ended 4 April 2021, this evaluation has considered
the ongoing impacts of Covid-19.
The key areas involving a higher degree of judgement or areas involving significant sources of estimation uncertainty made by management in applying the Group’s accounting policies are disclosed
in the following notes, including any additional information relating to Covid-19 where relevant.
Impairment losses and provisions on loans and advances to customers
Provisions for customer redress
Retirement benefit obligations (pensions)
Judgements
Note 10
Estimates
Note 10
Note 27
Note 30
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
3. Interest receivable and similar income
On financial assets measured at amortised cost:
Residential mortgages
Connected undertakings
Other loans
Other liquid assets
Investment securities
On investment securities measured at FVOCI
On financial instruments hedging assets in a qualifying hedge
accounting relationship
Total interest receivable and similar income calculated using
the effective interest rate method
Interest on net defined benefit pension asset (note 30)
Other interest and similar expense (note i)
Total
Group
Society
2021
£m
4,246
-
557
35
16
137
(869)
4,122
7
(5)
4,124
2020
£m
4,553
-
655
152
27
172
(402)
5,157
3
(30)
5,130
2021
£m
3,110
833
548
31
16
137
(869)
3,806
7
(5)
3,808
2020
£m
3,407
798
642
148
27
172
(402)
4,792
3
(30)
4,765
Note:
i.
Includes interest on financial instruments hedging assets that are not in a qualifying hedge accounting relationship.
4. Interest expense and similar charges
On shares held by individuals
On subscribed capital
On deposits and other borrowings:
Subordinated liabilities
Connected undertakings
Other
On debt securities in issue
Net income on financial instruments hedging liabilities
Total
Group
Society
2021
£m
527
14
281
-
56
539
(439)
978
2020
£m
1,361
14
309
-
240
745
(349)
2,320
2021
£m
527
14
281
25
56
505
(255)
1,153
2020
£m
1,361
14
309
54
241
678
(245)
2,412
Annual Report and Accounts 2021
260
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Annual Report and Accounts 2021
261
Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
5. Fees and commission income and expense
Group
Current account and savings
General insurance
Protection and investments
Mortgage
Credit card
Other fees and commissions
Total
2021
Income Expense
£m
(183)
-
-
(8)
(34)
(6)
(231)
£m
228
46
52
18
30
5
379
Net
£m
45
46
52
10
(4)
(1)
148
Income
£m
266
50
59
15
44
5
439
2020
Expense
£m
(217)
-
-
(6)
(43)
(4)
(270)
Net
£m
49
50
59
9
1
1
169
The Society’s fee and commission income and expense is as shown above for the Group, except that it excludes £4 million (2020: £4 million) of mortgage income.
6. Other operating expense/income
Gains/(losses) on financial assets measured at FVTPL
Gains on disposal of FVOCI investment securities
Recharges for services to connected undertakings
Other (expense)/income
Total
Group
Society
2021
£m
-
41
-
(50)
(9)
2020
£m
17
40
-
10
67
2021
£m
(1)
41
54
(46)
48
2020
£m
17
40
38
10
105
Other (expense)/income in the year ended 4 April 2021 includes losses of £37 million realised from the repurchase of £2.1 billion of covered bonds that were issued under the Nationwide Covered
Bond programme. Other (expense)/income also includes fair value movements on balances relating to previous investment disposals, the net amount of rental income, profits or losses on the sale of
property, plant and equipment and increases or decreases in the valuations of branches and non-specialised buildings which are not recognised in other comprehensive income.
There were no gains or losses on disposal of financial assets measured at amortised cost in the year ended 4 April 2021 (2020: £nil).
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
7. Gains/losses from derivatives and hedge accounting
Annual Report and Accounts 2021
262
As a part of its risk management strategy, the Group uses derivatives to economically hedge financial assets and liabilities. More information on how the Group manages market risk can be found in
the Risk report. Hedge accounting is employed by the Group to minimise the accounting volatility associated with the change in fair value of derivative financial instruments. This volatility does not
reflect the economic reality of the Group’s hedging strategy. The Group only uses derivatives for the hedging of risks; however, income statement volatility can still arise due to hedge accounting
ineffectiveness or because hedge accounting is either not applied or is not currently achievable. The overall impact of derivatives will remain volatile from period to period as new derivative
transactions replace those which mature to ensure that interest rate and other market risks are continually managed.
Note 1 describes how fair value and cash flow hedge accounting affect the financial statements and the main sources of the residual hedge ineffectiveness remaining in the income statement.
Further information on the current derivative portfolio and the allocation to hedge accounting types is included in note 15.
Gains from fair value hedge accounting
Losses from cash flow hedge accounting
Fair value gains/(losses) from other derivatives (note i)
Foreign exchange retranslation (note ii)
Total
Group
Society
2021
£m
-
(1)
45
(10)
34
2020
£m
61
(2)
(74)
8
(7)
2021
£m
38
(1)
(46)
(12)
(21)
2020
£m
24
(1)
(13)
9
19
Notes:
i.
This category includes derivatives used for economic hedging purposes, but which are not currently in a hedge accounting relationship, as well as valuation adjustments which are applied at a portfolio level and so
are not allocated to individual hedge accounting relationships.
ii. Gains or losses arise from the retranslation of foreign currency monetary items not subject to effective hedge accounting.
Gains from fair value hedge accounting include gains of £50 million (2020: £53 million) from macro hedges, due to hedge ineffectiveness and the amortisation of existing balance sheet amounts,
and losses of £50 million (2020: gains of £8 million) relating to micro hedges which arise due to a combination of hedge ineffectiveness, disposals and restructuring, and the amortisation of existing
balance sheet amounts. Fair value gains from other derivatives include gains of £49 million (2020: losses of £51 million) caused by a narrowing of bid-offer spreads. These gains are largely a reversal
of bid-offer spread losses reported in the Annual Report and Accounts 2020, which were caused by spreads widening at the end of the financial year as financial markets reacted to Covid-19.
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
7. Gains/losses from derivatives and hedge accounting (continued)
Fair value hedge accounting
Annual Report and Accounts 2021
263
Interest rate and currency derivatives are used to economically hedge the fair value of fixed rate assets and liabilities. The market risk from fixed rate assets and liabilities may be netted down before
deciding to use derivatives. The derivatives used are predominantly interest rate swaps, which convert fixed rate cash flows to a benchmark floating rate such as Libor or Sonia, and cross currency
swaps which convert foreign currency cash flows to GBP cash flows. In addition, bond forwards are used to reduce swap spread risk within the investment securities portfolio and inflation swaps are
used to economically hedge contractual inflation risk within investment securities. The table below provides further information on the Group’s fair value hedges.
Fair value hedge accounting
2021
Group
Hedged item balance sheet
classification
Assets:
Loans and advances to customers (note ii)
Investment securities
Investment securities
Investment securities
Investment securities
Total assets
Liabilities:
Shares (note iii)
Debt securities in issue
Debt securities in issue
Subordinated liabilities
Subscribed capital
Total liabilities
Total fair value hedges
Change in fair value used
for determining hedge
ineffectiveness
Hedge
ineffectiveness
recognised in
the income
statement
Carrying
amount
of the
hedged item
Of which:
accumulated
fair value
adjustment
Hedging instrument
Risk category
Interest rate swaps
Interest rate swaps, bond forwards
Interest rate swaps, cross currency
interest rate swaps
Interest rate swaps, inflation swaps,
cross currency interest rate swaps
Inflation swaps
Interest rate
Interest rate
Interest rate and foreign
exchange
Interest rate, inflation and
foreign exchange
Interest rate and inflation
Interest rate swaps
Interest rate swaps,
Interest rate swaps, cross currency
interest rate swaps
Interest rate swaps, cross currency
interest rate swaps
Interest rate swaps
Interest rate
Interest rate
Interest rate and foreign
exchange
Interest rate and foreign
exchange
Interest rate
Hedged
item
£m
Instrument
(note i)
£m
(915)
(547)
(260)
(10)
5
(1,727)
4
41
339
330
10
724
(1,003)
967
551
282
10
(4)
1,806
(6)
(41)
(390)
(355)
(11)
(803)
1,003
£m
52
4
22
-
1
79
(2)
-
(51)
(25)
(1)
(79)
-
£m
102,777
4,900
12,527
822
4,171
125,197
25
3,272
18,824
6,010
233
28,364
£m
1,599
(141)
92
(10)
63
1,603
25
150
626
305
33
1,139
S
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a
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t
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t
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r
i
n
f
o
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a
t
i
o
n
Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
7. Gains/losses from derivatives and hedge accounting (continued)
Annual Report and Accounts 2021
264
Fair value hedge accounting
2020
Group
Hedged item balance sheet
classification
Assets:
Loans and advances to customers (note ii)
Investment securities
Investment securities
Investment securities
Total assets
Liabilities:
Shares (note iii)
Debt securities in issue
Debt securities in issue
Subordinated liabilities
Subscribed capital
Total liabilities
Total fair value hedges
Change in fair value used
for determining hedge
ineffectiveness
Hedge
ineffectiveness
recognised in
the income
statement
Carrying
amount
of the
hedged item
Of which:
accumulated
fair value
adjustment
Hedging instrument
Risk category
Hedged item
Interest rate swaps
Interest rate swaps, bond forwards
Interest rate swaps, cross currency
interest rate swaps
Inflation swaps
Interest rate
Interest rate
Interest rate and foreign
exchange
Interest rate and inflation
Interest rate swaps
Interest rate swaps,
Interest rate swaps, cross currency
interest rate swaps
Interest rate swaps, cross currency
interest rate swaps
Interest rate swaps
Interest rate
Interest rate
Interest rate and foreign
exchange
Interest rate and foreign
exchange
Interest rate
£m
1,220
158
277
39
1,694
(46)
(11)
(503)
(598)
(3)
(1,161)
533
Instrument
(note i)
£m
(1,169)
(159)
(291)
(41)
(1,660)
48
19
508
611
2
1,188
(472)
£m
51
(1)
(14)
(2)
34
2
8
5
13
(1)
27
61
£m
106,163
6,322
8,439
2,427
123,351
4,562
3,309
22,961
9,304
243
40,379
£m
2,514
406
352
58
3,330
29
191
965
635
43
1,863
Notes:
i.
ii.
iii.
The Group does not include cross currency basis spreads within its hedge accounting relationships. The change in fair value is instead deferred to an ‘other hedging reserve’ and so is not included in the change in
value of the hedging instrument.
Some of the Group’s loans and advances to customers have been included as hedged items in macro fair value hedges of interest rate risk. £946 million (2020: £1,774 million) of the accumulated fair value hedge
adjustment is recognised in the separate balance sheet asset ‘fair value adjustment for portfolio hedged risk.’ The remaining amount relates to the fair value adjustment to commercial loans in a micro fair value
hedge accounting relationship and is included in the carrying value of these loans as shown in note 14.
In the year ended 4 April 2020, some of the Group's shares were included as hedged items in macro fair value hedges of interest rate risk, with the accumulated fair value hedge adjustments recognised in the
separate balance sheet liability 'fair value adjustment for portfolio hedged risk'. As at 4 April 2021, shares were no longer designated in a fair value hedge accounting relationship. As a result, the carrying amount at
4 April 2021 is the value of the historic hedge adjustments remaining from previous hedge relationships, which are amortising over the life of the shares.
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
7. Gains/losses from derivatives and hedge accounting (continued)
Cash flow hedge accounting
Annual Report and Accounts 2021
265
The Group’s risk management approach may involve creating future cash flow certainty. The Group uses cross currency interest rate swaps to hedge non-sterling debt securities in issue and
subordinated liabilities. A portion of the interest rate flows within these derivatives has been included as a hedging instrument in cash flow hedges. In addition, inflation swaps are used to hedge
RPI-linked debt securities in issue. The table below provides further information on the Group’s cash flow hedges.
Cash flow hedge accounting
2021
Group
Hedged item balance sheet
classification
Liabilities:
Hedging instrument
Risk category
Hedged item
Debt securities in issue
Inflation swaps
Debt securities in issue
Cross currency interest rate swaps
Subordinated liabilities
Cross currency interest rate swaps
Interest rate and
inflation
Interest rate and
foreign exchange
Interest rate and
foreign exchange
Total liabilities
Total cash flow hedges
Change in fair value used
for determining hedge
ineffectiveness
Changes in instrument fair value
reported as
Hedge
ineffectiveness
recognised in
the income
statement
£m
Net amounts
deferred to other
comprehensive
income
(note i)
£m
Amounts accumulated
in the cash flow hedge reserve
(excluding deferred taxation)
Continuing
hedges
£m
Discontinued
hedges
£m
(1)
-
-
(1)
(1)
3
(20)
(71)
(88)
(88)
1
(9)
(16)
(24)
(24)
-
263
29
292
292
Hedging
instrument
£m
2
(20)
(71)
(89)
(89)
£m
(3)
20
71
88
88
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
7. Gains/losses from derivatives and hedge accounting (continued)
Annual Report and Accounts 2021
266
Hedging instrument
Risk category
Hedged item
Cash flow hedge accounting
2020
Group
Hedged item balance sheet
classification
Assets:
Loans and advances to customers
Total assets
Liabilities:
Interest rate swaps
Interest rate
Debt securities in issue
Inflation swaps
Debt securities in issue
Cross currency interest rate swaps
Subordinated liabilities
Cross currency interest rate swaps
Interest rate and
inflation
Interest rate and
foreign exchange
Interest rate and
foreign exchange
Total liabilities
Total cash flow hedges
Change in fair value used for
determining hedge
ineffectiveness
Hedging
instrument
£m
(3)
(3)
(7)
9
55
57
54
£m
2
2
8
(11)
(55)
(58)
(56)
Changes in instrument fair value
reported as
Hedge
ineffectiveness
recognised in
the income
statement
£m
Net amounts
deferred to other
comprehensive
income
(note i)
£m
Amounts accumulated
in the cash flow hedge reserve
(excluding deferred taxation)
Continuing
hedges
£m
Discontinued
hedges
£m
(1)
(1)
1
(2)
-
(1)
(2)
(2)
(2)
(8)
11
55
58
56
-
-
(2)
11
55
64
64
-
-
-
318
37
355
355
Note:
i.
The net deferral to other comprehensive income of losses before tax of £88 million (2020: gains of £56 million) is shown within the cash flow hedge reserve section of the statements of comprehensive income. The
cash flow hedge reserve also includes amounts previously deferred on instruments which have since been migrated to fair value hedges. Amortisation of these amounts of £61 million (2020: £65 million) is presented
within the fair value hedge accounting table within the change in fair value of the hedging instrument.
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
8. Administrative expenses
Employee costs:
Wages and salaries
Bonuses
Social security costs
Pension costs (note i)
Other administrative expenses:
Other staff related costs (note i)
Property lease rental
Other property running costs
Printing, postage and stationery (note ii)
IT and communications
Marketing and advertising (note ii)
Product operating costs
Legal, professional and consultancy (note ii)
Other operating costs (note ii)
Bank levy
Depreciation, amortisation and impairment
Total
Notes
30
Group
2021
£m
2020
£m
Society
2021
£m
2020
£m
570
30
72
180
852
54
6
98
30
294
62
45
78
75
742
27
597
2,218
561
21
65
15
662
178
9
96
40
323
58
48
97
80
929
55
666
2,312
570
30
72
180
852
54
6
98
30
294
62
45
78
73
740
561
21
65
15
662
178
9
96
40
323
58
47
96
79
926
27
597
2,216
55
666
2,309
Notes:
i.
In the year ended 4 April 2020, pension costs are net of a gain of £164 million and other staff related costs include an expense of £60 million relating to the closure of the Nationwide Pension Fund to future accrual
on 31 March 2021. Further information is included in note 30.
ii. Expense categories have been updated to better align with how the Group manages and monitors expenses. Comparatives have been restated to present £13 million of costs previously in ‘marketing and advertising’
within other categories to align with the current year presentation.
The bonus expense within employee costs in the above table includes £4 million (2020: £4 million) of long-term bonuses which will be paid more than one year from the balance sheet date.
Executive directors and certain senior executives are entitled to bonus payments under the Directors’ Performance Award (DPA) scheme. Under this scheme, awards are based on current year
results but are paid over a period of up to seven years, with part of the awards linked to the value of Nationwide’s core capital deferred shares (CCDS). The payment of deferred elements remains
subject to further discretion by the Remuneration Committee. These bonuses are recognised in the income statement over the period from the start of the performance year until all relevant criteria
have been met.
Annual Report and Accounts 2021
267
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Annual Report and Accounts 2021
268
Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
8. Administrative expenses (continued)
The table below shows actual and expected charges to the income statement in respect of all DPA bonuses for each relevant scheme year.
Income statement charge for long-term bonuses
Directors Performance Award:
2018/19 and previous years
2019/20
2020/21
Income statement charge for long-term bonuses
Actual
2019/20
Group and Society
Actual
2020/21
(note i)
Expected
2021/22
(note ii)
£m
7.8
-
-
7.8
£m
6.7
-
4.7
11.4
£m
1.4
-
2.6
4.0
Expected
2022/23 and
beyond
(note ii)
£m
1.7
-
1.4
3.1
Notes:
i.
In the year ended 4 April 2021, £6 million (2020: £4 million) was recognised in the income statement in relation to awards linked to share based payments, being amounts dependent on the performance of the
Group’s CCDS. An element of this cost has been deferred and therefore included in accruals and deferred income on the balance sheet.
The amount expected is an estimate based on past performance together with current assumptions of future leaver rates and future CCDS performance.
ii.
Directors’ emoluments, including details of the bonus scheme, are shown in the Report of the directors on remuneration in accordance with Schedule 10A, paragraphs 1 to 9 of the Building Societies
Act 1986.
PricewaterhouseCoopers LLP (PwC) stepped down as auditor to the Group at the AGM in July 2019 and were succeeded by Ernst & Young LLP (EY). The figures shown in the table below relate to
fees paid to PwC until July 2019, and to EY as external auditor to the Group for both full financial years.
External auditors’ remuneration
Audit fees for the Group and Society statutory audit (note i)
Fees payable for other services:
Audit of Group subsidiaries
Audit-related assurance services (note ii)
Total audit and audit-related assurance services
Other non-audit services
Total
Group
Society
2021
£m
4.3
0.3
0.6
5.2
-
5.2
2020
£m
3.5
0.3
0.8
4.6
0.8
5.4
2021
£m
4.3
-
0.6
4.9
-
4.9
2020
£m
3.5
-
0.8
4.3
0.8
5.1
Notes:
i.
ii. Audit-related assurance services fees of £0.8 million include £0.3 million relating to services provided by PwC for the year ended 4 April 2020.
In the year ended 4 April 2020, audit fees of £3.5 million include £0.3 million relating to the PwC audit for the year ended 4 April 2019.
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p
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Annual Report and Accounts 2021
269
Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
9. Employees
The average number of persons employed during the year was:
Full time
Part time
Total
Society:
Central administration (notes i, ii)
Branches (note ii)
Subsidiaries
Total
Group
2021
14,066
4,578
18,644
12,667
5,971
6
18,644
2020
13,980
4,594
18,574
11,810
6,757
7
18,574
Society
2021
14,060
4,578
18,638
12,667
5,971
-
18,638
2020
13,973
4,594
18,567
11,810
6,757
-
18,567
Notes:
i.
ii.
Includes employees engaged in direct customer facing operations in administrative centres.
The reduction in branch employees and corresponding increase in central administration employees is linked to the Group’s response to the Covid-19 pandemic, during which certain branch employees have been
redeployed to better support customers through virtual and telephone services.
10. Impairment losses and provisions on loans and advances to customers
The following tables set out impairment losses and reversals during the year and the closing provision balances which are deducted from the relevant asset values in the balance sheet.
Impairment losses/(reversals)
Prime residential
Buy to let and legacy residential
Consumer banking
Commercial and other lending
Total
Impairment provisions
Prime residential
Buy to let and legacy residential
Consumer banking
Commercial and other lending
Total
Group
Society
2021
£m
39
32
125
(6)
190
2020
£m
13
40
159
(3)
209
2021
£m
38
1
125
(6)
158
Group
Society
4 April
2021
£m
93
224
502
33
852
4 April
2020
£m
56
196
494
40
786
4 April
2021
£m
92
5
502
33
632
2020
£m
13
1
159
(3)
170
4 April
2020
£m
55
4
494
40
593
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
10. Impairment losses and provisions on loans and advances to customers (continued)
Critical accounting estimates and judgements
Annual Report and Accounts 2021
270
Impairment is measured as the impact of credit risk on the present value of management’s estimate of future cash flows. In determining the required level of impairment provisions, the Group uses
outputs from statistical models, incorporating a number of estimates and judgements to determine the probability of default (PD), the exposure at default, and the loss given default (LGD) for each
loan.
The most significant areas of estimation uncertainty are:
•
•
•
•
the impact on expected credit losses of Covid-19 (including government furlough and other support initiatives)
the performance of interest only mortgages at maturity
the level of future recoveries for retail lending
the use of forward looking economic information
The most significant area of judgement is:
•
the approach to identifying significant increases in credit risk and impairment.
The table below shows the impact on impairment provisions at 4 April 2021 of the most significant areas of estimation uncertainty, with further details provided on the following pages.
Significant areas of estimation uncertainty
Impact on expected credit losses of Covid-19 (including government
furlough and other support initiatives)
Economic impact of Covid-19 scenario at 4 April 2020 (note i)
Relationship between GDP and expected defaults
Suppressed credit risk associated with payment deferrals
Temporary reduction in arrears
Performance of interest only mortgages at maturity
Level of future recoveries for retail lending
Residential mortgages: collateral values
Consumer banking: future recoveries
2021
£m
2020
£m
-
25
74
57
69
56
22
62
-
39
-
72
-
21
Use of forward looking economic information
Impact of applying multiple economic scenarios (note ii)
159
123
Notes:
i.
ii. £159 million is the total impact of applying multiple economic scenarios, £41 million of which is also included in the values disclosed for other key judgements in the table.
The economic impact of Covid-19 as separately disclosed as at 4 April 2020; during the year ended 4 April 2021 this has been integrated into modelled provisions.
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Annual Report and Accounts 2021
271
Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
10. Impairment losses and provisions on loans and advances to customers (continued)
Critical accounting estimates and judgements (continued)
Impact on expected credit losses of Covid-19 (including government furlough and other support initiatives)
As at 4 April 2020, an additional provision for credit losses totalling £101 million was recognised to reflect the estimated impact of the Covid-19 pandemic on ECLs. This additional provision
comprised £62 million for economic impacts (£55 million from revised economic assumptions and £7 million relating to commercial lending) and £39 million to reflect suppressed credit risk
associated with payment deferrals. These risks have been integrated into the IFRS 9 provision process where required.
Relationship between GDP and expected defaults
The impact of Covid-19 on the UK economy is unprecedented, with the significant GDP fall, impact of government support and use of payment deferrals creating a unique combination of economic
impacts. These factors have changed the relationships between economic variables, such as GDP and unemployment, and the subsequent expected defaults. GDP is an input into consumer banking
ECL modelling, and the GDP fall during 2020 would ordinarily be expected to result in an increase in defaults in the short term. However, due to government intervention, the increase in defaults is
expected to be delayed. A change has therefore been made to increase the assumed time lag between GDP changes and defaults within the IFRS 9 models and thus reflect the judgement that the
consequent credit losses have been delayed but not avoided. Had this change not been made, the ECL on consumer banking portfolios would have been lower by £25 million.
Suppressed credit risk associated with payment deferrals
Payment deferrals or other similar concessions have been offered on all retail products as a result of Covid-19. The Group recognises that in some cases borrowers will experience longer-term
financial difficulty as a result of the pandemic, and additional ECLs have therefore been recognised in respect of some borrowing with payment deferrals. Unlike other concessions granted to
borrowers in financial difficulty, these payment deferrals have not been subject to detailed affordability assessments, and therefore the degree of financial difficulty experienced by the members and
customers who apply for them requires estimation.
During the year, additional payment deferrals have been granted and the payment deferral schemes have been extended. For all retail portfolios the additional provision has been updated to reflect
additional requests received during the year. Further analysis of the risk characteristics of the retail payment deferral population has been carried out using internal and external credit risk data, to
estimate the proportion of loans judged to carry increased risk which may not be evident due to payment deferrals suppressing arrears. The probability of default has been increased where
appropriate. These changes have increased the total provision for this risk across all lending portfolios to £74 million (2020: £39 million). The proportion of payment deferrals to which the
adjustment was applied varied between 10% to 27%, depending on the portfolio; an increase in this proportion by 5 percentage points would have increased provisions by £27 million.
As a result of the recognition of increased probability of default in respect of payment deferrals, £2 billion of residential mortgages have transferred to stage 2.
Temporary reduction in arrears
Arrears balances across all products have reduced during the year, leading to a reduction in modelled provisions. Management has judged this to be a temporary position due to the availability of
government support and payment deferral schemes, and an adjustment has therefore been made to recognise the underlying risk, retaining provisions of £57 million (residential mortgages
£21 million, consumer banking £36 million) which would have otherwise been released. This adjustment is expected to reduce once government support schemes come to an end and arrears start
to return to the levels associated with prevailing economic conditions. This adjustment has been allocated to stage 2 loans.
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Annual Report and Accounts 2021
272
Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
10. Impairment losses and provisions on loans and advances to customers (continued)
Critical accounting estimates and judgements (continued)
Performance of interest only mortgages at maturity
There is a risk that a proportion of interest only mortgages will not be redeemed at their contractual maturity date, because a borrower does not have a means of capital repayment or has been
unable to refinance the loan. Buy to let mortgages are typically advanced on an interest only basis. Interest only balances for prime residential mortgages relate primarily to historical balances which
were originally advanced as interest only mortgages or where a change in terms to an interest only basis has been agreed. The impact of the allowance for unredeemed interest only mortgages at
contractual maturity in the central scenario amounts to £45 million (2020: £44 million), with an additional impact of £24 million (2020: £28 million) reflecting the impact of forward looking
economic information. Interest only loans which are judged to have a significantly increased risk of inability to refinance at maturity are transferred to stage 2. The ability of a borrower to refinance is
calculated using current lending criteria which considers LTV and affordability assessments. If the interest rate used within the affordability assessment was increased by 1%, provisions would
increase by £8 million.
Level of future recoveries for retail lending
Residential mortgages: collateral values
For residential mortgages, the estimate of future collateral values is a key source of estimation uncertainty. During the year ended 4 April 2021, two new model adjustments have been introduced to
reflect risks which are not reflected in the modelled outputs.
Firstly, an adjustment has been introduced to reflect the risks associated with flats subject to fire safety risks such as unsuitable cladding. The current government funding available is anticipated to
be below the amount required to remediate such properties, and the desirability of the properties is expected to be severely affected for several years. Due to limited data availability to identify
affected properties individually, it is assumed that a proportion of the flats securing loans in the residential mortgage portfolios are affected, in line with UK market exposure estimates. Assumptions
relating to property values have been applied based upon the height of the affected buildings. The ECL adjustment is £23 million, of which £6 million relates to buildings with six or more stories.
Secondly, an adjustment has been introduced to reflect the idiosyncratic risk relating to recovery values for repossessed properties over the next few years. The uncertainty has arisen from shifts in
the housing market, partly due to Covid-19, with the expectation that future repossessed properties may be more difficult to sell and may not follow the modelled HPI recovery assumed for the wider
market. This adjustment has been applied by reducing modelled property valuations, and also by increasing the expected variance in valuations achieved across the portfolio. The ECL adjustment
totals £33 million, which equates to a 2% increase in the stage 3 provision coverage ratio.
Consumer banking: future recoveries
For consumer banking, the estimate of future recoveries is a key source of estimation uncertainty. The Group uses a combination of both historical data and management judgement in estimating
the level and timing of future recoveries. It is management’s judgement that the recovery experience over recent years is not sustainable in the future, and therefore additional provisions totalling
£22 million (2020: £21 million) are held on charged off assets to reflect a future reduction in recovery rates. This represents 11% of total charged off balances.
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Notes to the financial statements (continued)
Notes to the financial statements (continued)
10. Impairment losses and provisions on loans and advances to customers (continued)
Critical accounting estimates and judgements (continued)
Use of forward looking economic information
Management exercises judgement in estimating future economic conditions which are incorporated into provisions through modelling of multiple scenarios. The economic scenarios are reviewed
and updated on a quarterly basis. The provision recognised is the probability-weighted sum of the provisions calculated under a range of economic scenarios. The scenarios and associated
probability weights are derived using external data and statistical methodologies, together with management judgement, to determine scenarios which span an appropriately wide range of
plausible economic conditions. The Group continues to model four economic scenarios, which together encompass an appropriate range of potential economic outcomes. The impact of applying
multiple economic scenarios (MES) is to increase provisions by £159 million (2020: £123 million), compared with provisions based on the central economic scenario.
At 4 April 2021, the probability weightings for each scenario were reviewed and the probabilities allocated to the upside, central and downside scenarios remain unchanged from 30 September
2020. The increase in the upside weighting during the year reflects that this scenario now includes the impact of Covid-19, therefore incorporating more conservative economic assumptions than at
4 April 2020. The probabilities allocated to the central and downside scenarios reflect the uncertainty of the potential outcomes regarding Covid-19. The probability weightings applied to the
scenarios are shown in the table below.
Scenario probability weighting (%)
Upside
scenario
Central
scenario
Downside
scenario
4 April 2021
30 September 2020
4 April 2020
10
10
5
40
40
50
40
40
35
Severe
downside
scenario
10
10
10
All four economic scenarios reflect the potential impact of Covid-19 to differing degrees. There is continued uncertainty regarding the economic impacts that could arise from new variants of Covid-
19, offset by the effectiveness of the vaccination programme, and also uncertainty over the extent to which government support schemes will have avoided or merely delayed the adverse credit
consequences of the pandemic. The scenarios also reflect the fact that the UK reached a free trade agreement deal with the EU at the end of 2020, consistent with the assumptions incorporated in
the prior year central scenario. In the central scenario at 4 April 2021, GDP recovers to levels slightly higher than those used in the central scenario at 4 April 2020. For unemployment the impacts
are comparable to previous assumptions, albeit the adverse impacts are delayed and the peak of unemployment is slightly higher at 8.0%. The house price forecast reflects the 7% growth during
2020, with reductions expected in 2022 across the central and downside scenarios. The bank base rate is forecast to remain at 0.1% across all scenarios between 2020 and 2025, with the exception
of the upside scenario, where an increase to 0.25% is forecast in 2024. The downside scenario reflects both a higher peak level of unemployment and a more gradual recovery in the economy. The
severe downside scenario continues to be aligned with internal stress testing and reflects a severe and long-lasting impact on the UK economy.
During the year, the severe downside scenario has been incorporated into the core provision models. However, due to the severity of the scenario it is management’s judgement that the modelled
outputs do not reflect the non-linear impacts that would arise from the economic assumptions. Using information from internal and external stress testing exercises, management have derived
adjustments to probability of default and loss given default at a portfolio level, which increased provisions by £102 million (2020: £77 million).
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Notes to the financial statements (continued)
Notes to the financial statements (continued)
10. Impairment losses and provisions on loans and advances to customers (continued)
Critical accounting estimates and judgements (continued)
Annual Report and Accounts 2021
274
The graphs below show the historical and forecasted GDP level, average house price and unemployment rate for the Group’s economic scenarios, including the previous central economic scenario.
The GDP level has been indexed at December 2019 to show the GDP reductions experienced during 2020.
The tables below provide a summary of the values of the key UK economic variables used within the economic scenarios over the first five years of the scenario.
Economic variables
Rate/annual growth rate at December 2020-2025
4 April 2021
GDP growth
Upside scenario
Central scenario
Downside scenario
Severe downside scenario
HPI growth
Upside scenario
Central scenario
Downside scenario
Severe downside scenario
Unemployment
Upside scenario
Central scenario
Downside scenario
Severe downside scenario
Actual
2020
%
(7.8)
(7.8)
(7.8)
(7.8)
7.0
7.0
7.0
7.0
5.1
5.1
5.1
5.1
2021
%
10.6
7.2
2.0
(3.2)
7.5
1.9
(2.2)
(5.9)
5.3
8.0
9.5
12.0
Forecast
2022
%
2023
%
2024
%
2025
%
2.6
2.9
4.6
3.9
3.0
(7.8)
(14.7)
(22.8)
4.3
5.9
7.4
10.0
2.0
2.0
2.8
2.0
3.9
6.9
8.0
(3.5)
3.9
4.7
5.8
8.6
2.0
1.8
2.0
2.0
3.5
4.9
4.7
8.8
3.9
4.3
5.1
7.0
1.6
1.2
1.6
1.6
3.5
4.7
3.5
7.2
3.9
4.3
5.0
5.7
5-year
average
(note i)
%
3.7
3.0
2.6
1.2
4.3
2.0
(0.5)
(4.0)
4.4
5.4
6.5
8.5
Dec-20 to
peak
(notes ii
and iii)
%
Dec-20 to
trough
(notes ii
and iii)
%
20.0
16.0
13.6
6.3
23.4
10.2
1.9
0.8
5.7
8.0
9.5
12.0
(3.2)
(4.0)
(6.2)
(8.5)
2.0
(6.6)
(16.9)
(29.9)
3.9
4.3
5.0
5.7
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
10. Impairment losses and provisions on loans and advances to customers (continued)
Critical accounting estimates and judgements (continued)
Rate/annual growth rate at December 2020-2024
Forecast
2020
2021
2022
2023
2024
5-year
average
(note i)
%
2.0
(9.6)
0.4
(4.7)
5.0
(10.0)
(1.0)
(11.1)
3.8
6.9
4.4
7.2
%
2.4
6.1
(1.7)
0.7
5.5
2.0
(5.0)
(16.4)
3.7
5.6
5.7
9.2
%
2.9
4.1
1.2
1.3
6.0
4.0
(4.0)
(8.9)
3.6
4.9
6.0
8.7
%
2.0
2.0
1.6
0.9
4.6
3.5
0.0
5.5
3.6
4.7
5.8
8.1
%
2.4
1.8
1.7
1.1
4.1
3.5
1.4
5.7
3.5
4.6
5.7
7.4
%
2.4
0.7
0.7
(0.2)
5.0
0.5
(1.7)
(5.5)
3.7
5.3
5.4
7.8
Dec-19 to
peak
(notes ii
and iii)
%
Dec-19 to
trough
(notes ii
and iii)
%
12.3
3.7
3.4
(0.4)
27.9
3.0
(0.6)
(1.0)
3.8
7.4
6.0
9.2
0.9
(9.6)
(1.2)
(4.7)
0.5
(13.8)
(10.7)
(32.4)
3.5
3.9
3.8
3.8
4 April 2020
GDP growth
Upside scenario
Central scenario
Downside scenario
Severe downside scenario
HPI growth
Upside scenario
Central scenario
Downside scenario
Severe downside scenario
Unemployment
Upside scenario
Central scenario
Downside scenario
Severe downside scenario
Notes:
i. The average rate for GDP and HPI is based on the cumulative annual growth rate over the forecast period. Average unemployment is calculated using a simple average using quarterly points.
ii. GDP growth and HPI are shown as the largest cumulative growth/fall from 31 December over the forecast period.
iii. The unemployment rate is shown as the highest/lowest rate over the forecast period from 31 December.
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276
Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
10. Impairment losses and provisions on loans and advances to customers (continued)
Critical accounting estimates and judgements (continued)
To give an indication of the sensitivity of ECLs to different economic scenarios, the table below shows the ECL and stage 2 balance proportion if 100% weighting is applied to each scenario.
Sensitivity analysis impact of multiple economic scenarios
Upside
scenario
Central
scenario
Downside
scenario
Severe
downside
scenario
£m
158
428
29
615
£m
136
432
37
605
£m
212
449
32
693
£m
149
438
37
624
£m
261
458
34
753
£m
254
466
40
760
£m
998
916
38
1,952
£m
674
736
55
1,465
4 April 2021
Residential mortgages
Consumer banking
Commercial lending
Total
4 April 2020
Residential mortgages
Consumer banking
Commercial lending
Total
Reported
provision
Proportion of balances in stage 2
Upside
scenario
Central
scenario
Downside
scenario
%
5.9
20.1
3.5
%
5.4
22.1
3.5
%
5.9
26.1
3.7
£m
317
502
33
852
£m
252
494
40
786
Severe
downside
scenario
(note i)
%
6.4
31.0
3.9
Reported
%
5.6
22.5
3.5
Note:
i.
The severe scenario stage 2 proportion reflects only the modelled output and not the additional ECL added on through judgement.
The ECL for each scenario multiplied by the scenario probability will not reconcile to the overall provision. Whilst the stage allocation of loans varies in each individual scenario, each loan is allocated
to a single stage in the overall provision calculation; this is based on a weighted average PD which takes into account the economic scenarios. A probability weighted 12 month or lifetime ECL (which
takes into account the economic scenarios) is then calculated based on the stage allocation.
The table below shows the sensitivity at 4 April 2021 to some of the key assumptions used within the ECL calculation.
Sensitivity to key forward looking information assumptions
2021
Single-factor sensitivity to key economic variables (note i)
10% decrease in HPI at 4 April 2021 and throughout the forecast period (note ii)
1% increase in unemployment at 4 April 2021 and throughout the forecast period (note iii)
Sensitivity to changes in scenario probability weightings
10% increase in the probability of the downside scenario (reducing the upside by a corresponding 10%)
5% increase in the probability of the severe downside scenario (reducing the downside by a corresponding 5%)
Increase in provision
£m
36
21
14
61
Notes:
i. As these are single-factor sensitivities, they should not be extrapolated due to the likely non-linear effects.
ii. Central scenario impact on LGD.
iii. Central scenario impact on PD.
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277
Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
10. Impairment losses and provisions on loans and advances to customers (continued)
Critical accounting estimates and judgements (continued)
Identifying significant increases in credit risk (stage 2)
Loans are allocated to stage 1 or stage 2 according to whether there has been a significant increase in credit risk. The Group has used judgement to select both quantitative and qualitative criteria
which are used to determine whether a significant increase in credit risk has taken place. These criteria have been detailed within the credit risk report. The primary quantitative indicators are the
outputs of internal credit risk assessments. While different approaches are used within each portfolio, the intention is to combine current and historical data relating to the exposure with forward
looking economic information to determine the probability of default (PD) at each reporting date. For retail loans, the main indicators of a significant increase in credit risk are either of the following:
•
•
the residual lifetime PD exceeds a benchmark determined by reference to the maximum credit risk that would have been accepted at origination
the residual lifetime PD has increased by at least 75bps and a 2x multiple of the original lifetime PD (2020: 4x multiple).
The change to the staging criteria from a multiple of 4 times origination PD to a multiple of 2 has made the models more sensitive to relative PD changes, and has therefore transferred £4 billion of
residential mortgages and £0.3 billion of consumer banking balances from stage 1 to 2. The impact on provisions was an increase of £10 million (residential mortgages £7 million, consumer banking
£3 million).
These complementary criteria have been reviewed through detailed back-testing, using management performance indicators and actual default experience, and found to be effective in capturing
events which would constitute a significant increase in credit risk. The sensitivity of ECLs to stage allocation is such that a transfer of 1% of current stage 1 balances to stage 2 would increase
provisions by £18 million for residential mortgages, and £5 million for consumer banking.
Identifying credit impaired loans (stage 3)
The identification of credit impaired loans is an important judgement within the IFRS 9 staging approach. A loan is credit impaired where it has an arrears status of more than 90 days past due,
is considered to be in default or it is considered unlikely that the borrower will repay the outstanding balance in full, without recourse to actions such as realising security.
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
11. Taxation
Tax charge in the income statement
Current tax:
UK corporation tax
Adjustments in respect of prior years
Total current tax
Deferred tax:
Current year credit
Adjustments in respect of prior years
Effect of deferred tax provided at different tax rates
Total deferred taxation
Tax charge
Group
2021
2020
Society
2021
2020
£m
226
(6)
220
(26)
16
(5)
(15)
205
£m
168
(4)
164
(48)
2
(17)
(63)
101
£m
134
(6)
128
(13)
11
(5)
(7)
121
£m
86
(4)
82
(35)
2
(19)
(52)
30
Annual Report and Accounts 2021
278
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Notes to the financial statements (continued)
Notes to the financial statements (continued)
11. Taxation (continued)
The actual tax charge differs from the theoretical amount that would arise using the standard rate of corporation tax in the UK as follows.
Reconciliation of tax charge
Group
2021
2020
Society
2021
2020
Profit before tax:
Tax calculated at a tax rate of 19%
Adjustments in respect of prior years
Tax credit on distribution to the holders of Additional Tier 1 capital
Banking surcharge
Temporary differences where no deferred tax is recognised
Expenses not deductible for tax purposes/(income not taxable):
Depreciation on non-qualifying assets
Bank levy
Effect of results of LLP structured entity (note i)
Customer redress
Other
Effect of deferred tax provided at different tax rates
Tax charge
£m
823
156
10
(12)
38
2
2
5
-
8
1
(5)
205
£m
466
89
(2)
(9)
24
-
3
11
-
4
(2)
(17)
101
£m
363
69
5
(12)
38
2
2
5
9
8
-
(5)
121
Note:
i.
The Society is liable for tax on the results of Nationwide Covered Bonds LLP, the profit or loss of which is reported within that entity.
The tax on items through other comprehensive income is as follows.
Tax (credit)/charge on items through other comprehensive income
Relating to:
FVOCI investment securities
Cash flow hedges
Other hedging
Unrealised revaluation gains
Retirement benefit obligations
Total
Group
Society
2021
£m
48
(41)
(2)
(11)
(40)
(46)
2020
£m
(24)
5
(15)
(2)
76
40
2021
£m
47
(24)
(2)
(11)
(40)
(30)
£m
110
21
(2)
(9)
24
-
3
11
(7)
4
1
(16)
30
2020
£m
(23)
16
(15)
(2)
76
52
Annual Report and Accounts 2021
279
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280
Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
11. Taxation (continued)
Deferred tax
Deferred tax is determined using tax rates and laws that are expected to apply in the period when the deferred tax asset is realised or deferred tax liability is settled based on rates enacted or
substantively enacted at the balance sheet date, including the banking surcharge where applicable. It was announced in the Budget on 3 March 2021 that the main rate of corporation tax of 19%
would be increased to 25% with effect from April 2023. It was also announced that a review of the current bank surcharge rate will take place later this year to ensure that the combined level of
corporation tax applicable to banking entities does not increase significantly from its current level. Since this review is yet to take place, it is not possible to quantify any potential impact on the
deferred tax balances of the Group.
The movements on the deferred tax account are as follows.
Deferred tax assets and liabilities are attributable to the following items.
Movements in deferred taxation
Deferred tax assets and liabilities
At 5 April
Deferred tax credit/(charge) in the income
statement:
Fixed assets timing differences
Temporary differences where no deferred tax is
recognised
Effect of deferred tax provided at different tax rates
Other items
Taxation on items through the income statement
Deferred tax (charge)/credit in other
comprehensive income:
FVOCI investment securities
Cash flow hedges
Other hedging
Unrealised revaluation losses
Retirement benefit obligations
Effect of deferred tax provided at different tax rates
Other
Taxation on items through other comprehensive
income
At 4 April
Group
Society
2021
2020
2021
2020
£m
(131)
£m
(91)
£m
(46)
£m
6
13
(10)
2
10
15
(31)
17
1
9
23
18
1
10
-
17
36
63
18
(9)
10
3
(76)
(49)
-
13
(9)
3
-
7
(31)
17
1
9
23
19
1
10
-
19
23
52
18
(10)
10
3
(76)
(49)
-
38
(103)
39
(104)
(78)
(131)
-
(46)
The majority of deferred tax assets are anticipated to be recoverable after one year. Deferred
tax assets have not been recognised in respect of gross temporary differences of £52 million
(2020: £nil). These differences relate primarily to revalued properties, for which capital losses
realised on disposal can be carried forward indefinitely. Deferred tax assets have not been
recognised in respect of these items because it is not considered probable that future taxable
gains will be available against which they can be utilised.
Deferred tax assets
Fixed assets timing differences
IFRS 9 transition
Unrealised revaluation losses
Cash flow hedges
Other hedging
FVOCI investment securities
Other items
Deferred tax liabilities
Unrealised revaluation gains
Cash flow hedges
Retirement benefit obligations
Other items
Net deferred tax liability
Group
Society
2021
2020
2021
2020
£m
£m
£m
£m
32
35
-
-
17
(40)
28
72
-
(75)
(61)
(14)
(150)
(78)
13
39
1
(24)
15
4
28
76
(6)
(98)
(104)
1
(207)
(131)
32
23
1
-
17
(40)
29
62
-
-
(61)
(1)
(62)
-
13
26
-
(24)
15
4
28
62
(6)
-
(104)
2
(108)
(46)
For deferred tax assets recognised on the balance sheet, the Group considers that there will be
sufficient future trading profits in excess of profits arising from the reversal of existing taxable
temporary differences to utilise the deferred tax assets.
As a result of exemptions on dividends from subsidiaries and on capital gains on disposal there
are no significant taxable temporary differences associated with investments in subsidiaries.
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
12. Classification and measurement
Annual Report and Accounts 2021
281
As the majority of the Group’s assets and liabilities are held within the Society, the disclosures in this note and notes 21 to 24 are on a consolidated basis. The following table summarises the
classification of carrying amounts of the Group’s financial assets and liabilities.
Classification of financial assets and liabilities
Group
Financial assets
Cash
Loans and advances to banks and similar institutions
Investment securities
Derivative financial instruments
Fair value adjustment for portfolio hedged risk
Loans and advances to customers
Total financial assets
Other non-financial assets
Total assets
Financial liabilities
Shares
Deposits from banks and similar institutions
Other deposits
Fair value adjustment for portfolio hedged risk
Debt securities in issue
Derivative financial instruments
Subordinated liabilities
Subscribed capital
Lease liabilities
Total financial liabilities
Other non-financial liabilities
Total liabilities
Amortised
cost
£m
16,693
3,660
1,243
-
946
201,427
223,969
170,313
27,022
4,522
25
27,923
-
7,575
243
262
237,885
2021
Fair value
through other
comprehensive
income
£m
Fair value
through profit
or loss
(note i)
£m
Total
Amortised
cost
£m
£m
2020
Fair value
through other
comprehensive
income
£m
Fair value
through profit
or loss
(note i)
£m
-
-
24,218
-
-
-
24,218
-
-
-
-
-
-
-
-
-
-
-
-
12
3,809
-
120
3,941
-
-
-
-
-
1,622
-
-
-
1,622
16,693
3,660
25,473
3,809
946
201,547
252,128
2,786
254,914
170,313
27,022
4,522
25
27,923
1,622
7,575
243
262
239,507
1,294
240,801
13,748
3,636
1,625
-
1,774
200,850
221,633
159,691
21,812
4,482
29
35,963
-
9,317
253
265
231,812
-
-
18,367
-
-
-
18,367
-
-
-
-
-
-
-
-
-
-
-
-
12
4,771
-
128
4,911
-
-
-
-
-
1,924
-
-
-
1,924
Total
£m
13,748
3,636
20,004
4,771
1,774
200,978
244,911
3,130
248,041
159,691
21,812
4,482
29
35,963
1,924
9,317
253
265
233,736
1,343
235,079
Note:
i.
As at 4 April 2021 and 4 April 2020 the Group had no financial assets or liabilities for which it had taken the option to designate at FVTPL.
Further information on the fair value of financial assets and liabilities is included in notes 21 to 23.
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282
Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
13. Investment securities
Government, government guaranteed and supranational
investment securities
Other debt investment securities
Investments in equity shares
Total
Group
Society
2021
£m
21,363
4,083
27
25,473
2020
£m
15,897
4,094
13
20,004
2021
£m
21,363
4,081
7
25,451
2020
£m
15,897
4,092
7
19,996
The Group may use its investment securities as collateral. Investment securities with a fair value of £8,608 million (2020: £2,506 million) have been used as collateral in short term repurchase
agreements. The Group also holds £867 million (2020: £1,824 million) of investment securities as collateral under reverse repurchase agreements which are not recognised in the table above.
Further information on investment securities is included in the ‘Credit risk - Treasury assets’ section of the Risk report.
14. Loans and advances to customers
2021
Loans held at amortised cost
Gross Provisions
Group
Prime residential mortgages
Buy to let and legacy residential mortgages
Consumer banking
Commercial and other lending
Total
£m
149,706
41,249
4,404
6,267
201,626
£m
(93)
(224)
(502)
(33)
(852)
Total
Other
(note i)
£m
£m
149,613
-
41,025
-
3,902
-
653
6,887
653 201,427
2021
Loans held at amortised cost
Gross Provisions
Society
Prime residential mortgages
Buy to let and legacy residential mortgages
Consumer banking
Commercial and other lending
Total
£m
149,444
477
4,404
5,913
160,238
£m
(93)
(4)
(502)
(33)
(632)
Total
Other
(note i)
£m
£m
149,351
-
473
-
3,902
-
653
6,533
653 160,259
Loans held
at FVTPL
Total
2020
Loans held at amortised cost
Gross
Provisions
£m
£m
£m
151,069
68 149,681
37,699
- 41,025
4,994
3,902
-
7,133
52
6,939
120 201,547 200,895
£m
(56)
(196)
(494)
(40)
(786)
Total
Other
(note i)
£m
£m
151,013
-
37,503
-
4,500
-
741
7,834
741 200,850
Loans held
at FVTPL
Total
£m
£m
151,084
71
37,503
-
4,500
-
57
7,891
128 200,978
Loans held
at FVTPL
Total
2020
Loans held at amortised cost
Gross
Provisions
Loans held
at FVTPL
Total
Total
£m
£m
68 149,419
473
-
3,902
-
39
6,572
107 160,366
£m
150,740
526
4,994
6,682
162,942
£m
(55)
(4)
(494)
(40)
(593)
£m
150,685
522
4,500
7,383
163,090
£m
71
-
-
45
116
£m
150,756
522
4,500
7,428
163,206
Other
(note i)
£m
-
-
-
741
741
Note:
i.
‘Other’ represents a fair value adjustment for micro hedged risk for commercial loans that were previously hedged on an individual basis.
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
14. Loans and advances to customers (continued)
Annual Report and Accounts 2021
283
The tables below summarise the movements in gross loans and advances to customers held at amortised cost, including the impact of ECL impairment provisions and excluding the fair value
adjustment for micro hedged risk. The lines within the tables are an aggregation of monthly movements over the year. Residential mortgages represent the majority of the Group’s loans and
advances to customers. Additional tables summarising the movements for the Group’s residential mortgages and consumer banking are presented in the Credit risk section of the Risk report.
The reasons for key movements shown in the table below are as follows:
•
The movement in gross balances is principally a result of £32,014 million of new lending, offset by a reduction of £31,138 million from repayments and redemptions. The majority of these
movements relate to residential mortgages.
• Of the £136 million of write-offs, £124 million relates to unsecured lending, £9 million to residential mortgages and £3 million to commercial and other lending.
•
Impairment provisions increased by £66 million in the period to £852 million. Further detail on the impairment provisions and losses by portfolio is shown in note 10.
Reconciliation of movements in gross balances and impairment provisions
Group
At 5 April 2020 (note ii)
Stage transfers:
Transfers from Stage 1 to Stage 2
Transfers to Stage 3
Transfers from Stage 2 to Stage 1
Transfers from Stage 3
Net remeasurement of ECL arising from transfer of stage
Net movement arising from transfer of stage (note iii)
New assets originated or purchased (note iv)
Net impact of further lending and repayments (note v)
Changes in risk parameters in relation to credit quality (note vi)
Other items impacting income statement charge/(reversal) including recoveries
Redemptions (note vii)
Reversal of additional Covid-19 provision (note ii)
Income statement charge for the year
Decrease due to write-offs
Other provision movements
4 April 2021
Net carrying amount
Non-credit impaired
Subject to 12 month ECL
Stage 1
Subject to lifetime ECL
Stage 2
Credit impaired (note i)
Subject to lifetime ECL
Stage 3 and POCI
Gross
balances
£m
188,403
(19,556)
(419)
16,910
257
(2,808)
32,014
(10,100)
-
-
(19,670)
-
-
187,839
Provisions
£m
75
(61)
-
320
2
(244)
17
45
(52)
37
-
(6)
-
-
116
187,723
Gross
balances
£m
10,690
19,556
(972)
(16,910)
560
2,234
-
(162)
-
-
(894)
-
-
11,868
Provisions
£m
269
61
(126)
(320)
25
360
-
-
(26)
157
-
(12)
-
-
388
11,480
Gross
balances
£m
1,802
-
1,391
-
(817)
574
-
(58)
-
-
(252)
(147)
-
1,919
Provisions
£m
341
-
126
-
(27)
(9)
90
-
(21)
78
(12)
(4)
(136)
12
348
1,571
Total
Gross
balances
£m
200,895
-
-
-
-
-
32,014
(10,320)
-
-
(20,816)
(147)
-
201,626
Provisions
£m
786
-
-
-
-
107
107
45
(99)
272
(12)
(22)
(101)
190
(136)
12
852
200,774
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Annual Report and Accounts 2021
284
Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
14. Loans and advances to customers (continued)
Reconciliation of movements in gross balances and impairment provisions
Group
At 5 April 2019
Stage transfers:
Transfers from Stage 1 to Stage 2
Transfers to Stage 3
Transfers from Stage 2 to Stage 1
Transfers from Stage 3
Net remeasurement of ECL arising from transfer of stage
Net movement arising from transfer of stage (note iii)
New assets originated or purchased (note iv)
Net impact of further lending and repayments (note v)
Changes in risk parameters in related to credit quality (note vi)
Other items impacting income statement charge/(reversal) including recoveries
Redemptions (note vii)
Additional provision for Covid-19 (note ii)
Income statement charge for the year
Decrease due to write-offs
Other provision movements
4 April 2020 (note ii)
Net carrying amount (note ii)
Non-credit impaired
Subject to 12 month ECL
Stage 1
Subject to lifetime ECL
Stage 2
Credit impaired (note i)
Subject to lifetime ECL
Stage 3 and POCI
Gross
balances
£m
187,368
(16,930)
(330)
14,397
202
(2,661)
34,049
(9,947)
-
-
(20,406)
-
-
188,403
Provisions
£m
68
(39)
-
226
2
(184)
5
31
(24)
(1)
-
(4)
-
-
75
188,328
Gross
balances
£m
9,539
16,930
(938)
(14,397)
554
2,149
-
(77)
-
-
(921)
-
-
10,690
Provisions
£m
261
39
(110)
(226)
23
262
(12)
-
(10)
42
-
(12)
-
-
269
10,421
Gross
balances
£m
1,797
-
1,268
-
(756)
512
-
(81)
-
(1)
(302)
(123)
-
1,802
Provisions
£m
336
-
110
-
(25)
18
103
-
(21)
26
(11)
(4)
(99)
11
341
1,461
Total
Gross
balances
£m
198,704
-
-
-
-
-
34,049
(10,105)
-
(1)
(21,629)
(123)
-
200,895
Provisions
£m
665
-
-
-
-
96
96
31
(55)
67
(11)
(20)
101
209
(99)
11
786
200,109
Notes:
i.
Group gross balances of credit impaired loans include £148 million (2020: £155 million) of purchased or originated credit impaired (POCI) loans, which are presented net of lifetime ECL impairment provisions of
£5 million (2020: £6 million).
ii. At 4 April 2020, an additional provision for credit losses of £101 million was recognised to reflect the estimated impact of the Covid-19 pandemic on ECLs. At 4 April 2020, this additional provision was not allocated
to underlying loans nor was it attributed to stages. During the period, this provision has been allocated to underlying loans and is reflected in the movements within the table and the 4 April 2021 position.
iii. The remeasurement of provisions arising from a change in stage is reported within the stage to which the assets are transferred.
iv.
v.
If a new asset is generated in the month, the value included is the closing gross balance and provision for the month. All new business written is included in Stage 1.
This comprises further lending and capital repayments where the asset is not derecognised. The value for gross balances is calculated as the closing gross balance for the month less the opening gross balance for the
month. The value for provisions is calculated as the change in exposure at default (EAD) multiplied by opening provision coverage for the month.
vi. This comprises changes in risk parameters, and changes to modelling inputs and methodology. The provision movement for the change in risk parameters is calculated for assets that do not move stage in the
month.
vii. For any asset that is derecognised in the month, the value disclosed is the provision at the start of that month.
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
14. Loans and advances to customers (continued)
Reconciliation of movements in gross balances and impairment provisions
Society
At 5 April 2020 (note i)
Stage transfers:
Transfers from Stage 1 to Stage 2
Transfers to Stage 3
Transfers from Stage 2 to Stage 1
Transfers from Stage 3
Net remeasurement of ECL arising from transfer of stage
Net movement arising from transfer of stage (note ii)
New assets originated or purchased (note iii)
Net impact of further lending and repayments (note iv)
Changes in risk parameters related to credit quality (note v)
Other items impacting income statement charge/(reversal) including recoveries
Redemptions (note vi)
Reversal of additional Covid-19 provision (note i)
Income statement charge for the year
Decrease due to write-offs
Other provision movements
4 April 2021
Net carrying amount
Annual Report and Accounts 2021
285
Non-credit impaired
Subject to 12 month ECL
Stage 1
Subject to lifetime ECL
Stage 2
Credit impaired
Subject to lifetime ECL
Stage 3 and POCI
Gross
balances
£m
158,612
(12,258)
(296)
7,896
149
(4,509)
25,015
(9,650)
-
-
(17,082)
-
-
152,386
Provisions
£m
62
(51)
-
251
2
(190)
12
40
(51)
8
-
(3)
-
-
68
152,318
Gross
balances
£m
3,183
12,258
(639)
(7,896)
340
4,063
-
(143)
-
-
(513)
-
-
6,590
Provisions
£m
157
51
(95)
(251)
16
290
11
-
(25)
119
-
(6)
-
-
256
6,334
Gross
balances
£m
1,147
-
935
-
(489)
446
-
(50)
-
(1)
(144)
(136)
-
1,262
Provisions
£m
312
-
95
-
(18)
9
86
-
(21)
62
(9)
(3)
(128)
9
308
954
Total
Gross
balances
£m
162,942
-
-
-
-
-
25,015
(9,843)
-
(1)
(17,739)
(136)
-
160,238
Provisions
£m
593
-
-
-
-
109
109
40
(97)
189
(9)
(12)
(62)
158
(128)
9
632
159,606
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286
Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
14. Loans and advances to customers (continued)
Reconciliation of movements in gross balances and impairment provisions
Society
At 5 April 2019
Stage transfers:
Transfers from Stage 1 to Stage 2
Transfers to Stage 3
Transfers from Stage 2 to Stage 1
Transfers from Stage 3
Net remeasurement of ECL arising from transfer of stage
Net movement arising from transfer of stage (note ii)
New assets originated or purchased (note iii)
Net impact of further lending and repayments (note iv)
Changes in risk parameters related to credit quality (note v)
Other items impacting income statement charge/(reversal) including recoveries
Redemptions (note vi)
Additional provision for Covid-19 (note i)
Income statement charge for the year
Decrease due to write-offs
Other provision movements
4 April 2020 (note i)
Net carrying amount (note i)
Non-credit impaired
Subject to 12 month ECL
Stage 1
Subject to lifetime ECL
Stage 2
Credit impaired
Subject to lifetime ECL
Stage 3
Gross
balances
£m
159,592
(7,137)
(226)
6,480
120
(763)
27,441
(9,575)
-
-
(18,083)
-
-
158,612
Provisions
£m
54
(27)
-
176
2
(147)
4
30
(23)
-
-
(3)
-
-
62
158,550
Gross
balances
£m
3,243
7,137
(568)
(6,480)
302
391
-
(42)
-
-
(409)
-
-
3,183
Provisions
£m
148
27
(85)
(176)
13
209
(12)
-
(11)
37
-
(5)
-
-
157
3,026
Gross
balances
£m
1,117
-
794
-
(422)
372
-
(60)
-
(1)
(180)
(101)
-
1,147
Provisions
£m
304
-
85
-
(15)
28
98
-
(20)
24
(7)
(4)
(89)
6
312
835
Total
Gross
balances
£m
163,952
-
-
-
-
-
27,441
(9,677)
-
(1)
(18,672)
(101)
-
162,942
Provisions
£m
506
-
-
-
-
90
90
30
(54)
61
(7)
(12)
62
170
(89)
6
593
162,349
Notes:
i.
At 4 April 2020, an additional provision for credit losses of £62 million was recognised to reflect the estimated impact of the Covid-19 pandemic on ECLs. At 4 April 2020, this additional provision was not allocated to
underlying loans nor was it attributed to stages. During the period, this provision has been allocated to underlying loans and is reflected in the movements within the table and the 4 April 2021 position.
The remeasurement of provisions arising from a change in stage is reported within the stage to which the assets are transferred.
If a new asset is generated in the month, the value included is the closing gross balance and provision for the month. All new business written is included in stage 1.
ii.
iii.
iv. This comprises further lending and capital repayments where the asset is not derecognised. The value for gross balances is calculated as the closing gross balance for the month less the opening gross balance for the
v.
month. The value for provisions is calculated as the change in exposure at default (EAD) multiplied by opening provision coverage for the month.
This comprises changes in risk parameters, and changes to modelling inputs and methodology. The provision movement for the change in risk parameters is calculated for assets that do not move stage in the
month.
vi. For any asset that is derecognised in the month, the value disclosed is the provision at the start of that month.
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
14. Loans and advances to customers (continued)
Maturity analysis
The following table shows the residual maturity of loans and advances to customers, based on their contractual maturity.
Residual maturity of loans and advances to customers
Repayable:
On demand
In not more than three months
In more than three months but not more than one year
In more than one year but not more than five years
In more than five years
Impairment provision on loans and advances
Fair value adjustment for micro hedged risk
Total
Group
2021
£m
1,608
2,540
6,548
31,925
159,125
201,746
(852)
653
201,547
2020
£m
1,965
2,302
6,371
32,352
158,033
201,023
(786)
741
200,978
Society
2021
£m
1,608
2,313
6,318
30,087
120,019
160,345
(632)
653
160,366
2020
£m
1,965
2,137
6,182
30,669
122,105
163,058
(593)
741
163,206
The maturity analysis is produced on the basis that where a loan is repayable by instalments, each such instalment is treated as a separate repayment. The analysis is based on contractual maturity
rather than actual redemption levels experienced, which are likely to be materially different. Arrears are spread across the remaining term of the loan.
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Notes to the financial statements (continued)
Notes to the financial statements (continued)
14. Loans and advances to customers (continued)
Asset backed funding
Annual Report and Accounts 2021
288
Certain prime residential mortgages have been pledged to the Group’s asset backed funding programmes or utilised as whole mortgage loan pools for the Bank of England’s (BoE) Term Funding
Scheme with additional incentives for SMEs (TFSME) and other short-term liquidity facilities. The programmes have enabled the Group to obtain secured funding. Mortgages pledged and the
carrying values of the notes in issue are as follows.
Mortgages pledged to asset backed funding programmes
Group
Covered bond programme
Securitisation programme
Whole mortgage loan pools
Total
Mortgages
pledged
(note i)
£m
23,611
12,779
21,479
57,869
Held by
third parties
(note ii)
£m
15,640
2,865
-
18,505
2021
Notes in issue
Held by the Group
Drawn
(note iii)
£m
-
-
16,430
16,430
Undrawn
(note iv)
£m
-
2,505
-
2,505
Total notes
in issue
£m
15,640
5,370
16,430
37,440
Mortgages
pledged
(note i)
£m
28,003
15,177
23,570
66,750
Held by
third parties
(note ii)
£m
20,740
4,215
-
24,955
2020
Notes in issue
Held by the Group
Drawn
(note iii)
£m
-
-
18,183
18,183
Undrawn
(note iv)
£m
-
2,533
-
2,533
Total notes
in issue
£m
20,740
6,748
18,183
45,671
Notes:
i. Mortgages pledged include £13.9 billion (2020: £14.3 billion) in the covered bond and securitisation programmes that are in excess of the amount contractually required to support notes in issue.
ii. Notes in issue which are held by third parties are included within debt securities in issue. Further information on debt securities is included in note 18.
iii. Notes in issue, held by the Group and drawn are whole mortgage loan pools securing amounts drawn with the BoE under the TFSME and, in the prior year, the BoE’s Term Funding Scheme (TFS) and US dollar (USD)
funding operations. At 4 April 2021 the Group had outstanding TFSME drawings of £16.4 billion (2020: TFS £17.0 billion) and USD funding operations of £nil (2020: £1.2 billion).
iv. Notes in issue, held by the Group and undrawn, are debt securities issued by the programmes to the Society and mortgage loan pools that have been pledged to the BoE but not utilised.
Mortgages pledged under the Nationwide Covered Bond programme provide security for issues of covered bonds made by the Society. During the year ended 4 April 2021, £1.0 billion (sterling
equivalent) of notes were issued, and £5.5 billion (sterling equivalent) of notes matured or were repurchased.
The securitisation programme notes are issued by Silverstone Master Issuer plc and are not included in the accounts of the Society. Silverstone Master Issuer plc is fully consolidated into the
accounts of the Group. The issuance proceeds are used to purchase, for the benefit of note holders, a share of the beneficial interest in the mortgages pledged by the Society. The remaining
beneficial interest in the pledged mortgages of £7.2 billion (2020: £8.2 billion) stays with the Society and includes its required minimum seller share in accordance with the rules of the programme.
The Group is under no obligation to support losses incurred by the programme or holders of the notes and does not intend to provide such further support. The entitlement of note holders is
restricted to payment of principal and interest to the extent that the resources of the programme are sufficient to support such payment and the holders of the notes have agreed not to seek
recourse in any other form. During the year ended 4 April 2021 £1.2 billion (sterling equivalent) of notes matured.
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Notes to the financial statements (continued)
Notes to the financial statements (continued)
14. Loans and advances to customers (continued)
Annual Report and Accounts 2021
289
The whole mortgage loan pools are pledged at the BoE Single Collateral Pool. Notes are not issued when pledging the mortgage loan pools at the BoE. Instead, the whole loan pool is pledged to the
BoE and drawings are made directly against the eligible collateral, subject to a haircut. At 4 April 2021, £21.5 billion (2020: £23.6 billion) of pledged collateral supported £16.4 billion of TFSME
drawdowns (2020: TFS £17.0 billion) and £nil (2020: £1.2 billion) of USD Funding Operations.
In accordance with accounting standards, notes in issue and held by the Group are not recognised in the Group’s or Society’s balance sheets. Mortgages pledged are not derecognised from the
Group or Society balance sheets as the Group has retained substantially all the risks and rewards of ownership. The Group and Society continue to be exposed to the liquidity risk, interest rate risk
and credit risk of the mortgages. No gain or loss has been recognised on pledging the mortgages to the programmes.
The following table sets out the carrying value and fair value of the transferred assets and liabilities for the Silverstone Master Trust.
At 4 April 2021
At 4 April 2020
Transferred
assets
£m
12,779
15,177
Carrying value
Associated
liabilities
£m
(5,370)
(6,748)
Total
£m
7,409
8,429
Transferred
assets
£m
12,828
15,210
Fair value
Associated
liabilities
£m
(5,429)
(6,604)
Total
£m
7,399
8,606
The Society holds cash deposited by the Nationwide Covered Bond programme of £0.6 billion (2020: £0.6 billion) and by the Silverstone programme of £0.9 billion (2020: £0.7 billion).
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Notes to the financial statements (continued)
Notes to the financial statements (continued)
15. Derivative financial instruments
Annual Report and Accounts 2021
290
All of the Group’s derivative financial instruments are used to manage economic risk, although not all of the derivatives are subject to hedge accounting. Note 7 sets out the link between economic
risk management and the hedge accounting applied by the Group. The table below provides an analysis of the notional amount and fair value of derivatives by both hedge accounting type and
instrument type. The amount of ineffectiveness recognised for each hedge type is shown in note 7. Contract/notional amount is the amount on which payment flows are derived and does not
represent amounts at risk.
Derivatives by instrument and hedge type
2021
Group
Fair value
Assets
Liabilities
Contract/
notional
amount
Society
Fair value
Assets
Liabilities
£m
1,075
1,915
53
52
3,095
118
118
4
41
45
376
136
20
19
551
£m
7
696
-
41
744
703
703
59
-
59
27
64
12
13
116
£m
£m
39,461
33,072
1,439
4,970
78,942
167,515
167,515
23,480
280
23,760
125,139
9,453
4,663
3,827
143,082
867
1,443
53
52
2,415
118
118
4
41
45
377
191
20
19
607
£m
7
599
-
41
647
703
703
47
-
47
715
365
12
13
1,105
Contract/
notional
amount
(note i)
£m
47,955
35,392
1,650
2,340
87,337
148,610
148,610
28,661
280
28,941
77,250
3,534
5,860
741
87,385
Contract/
notional
amount
(note i)
£m
43,885
37,834
1,439
4,970
88,128
167,515
167,515
28,242
280
28,522
120,000
4,489
4,663
3,827
132,979
2020
Group
Fair value
Assets
Liabilities
Contract/
notional
amount
Society
Fair value
Assets
Liabilities
£m
1,512
2,876
-
10
4,398
1
1
71
36
107
80
58
126
1
265
£m
129
371
94
42
636
991
991
60
-
60
59
118
44
16
237
£m
£m
40,462
28,024
1,650
2,340
72,476
148,610
148,610
21,293
280
21,573
84,852
11,262
5,860
741
102,715
1,181
1,928
-
10
3,119
1
1
69
36
105
80
204
126
1
411
£m
129
385
94
42
650
991
991
28
-
28
983
961
44
16
2,004
Micro fair value hedges:
Interest rate swaps
Cross currency interest rate swaps
Bond forwards
Inflation swaps
Macro fair value hedges:
Interest rate swaps
Cash flow hedges:
Cross currency interest rate swaps
Inflation swaps
Not subject to hedge accounting:
Interest rate swaps
Cross currency interest rate swaps
Foreign exchange swaps
Other derivatives
Total
417,144
3,809
1,622
413,299
3,185
2,502
352,273
4,771
1,924
345,374
3,636
3,673
Note:
i. Where the same derivative contract has been used in more than one hedge type, for example where one risk component has been included in a fair value hedge and another risk component has been included in a
cash flow hedge, the Group has included the full notional amount in both categories.
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Notes to the financial statements (continued)
Notes to the financial statements (continued)
15. Derivative financial instruments (continued)
Annual Report and Accounts 2021
291
The contractual maturity of derivatives used as hedging instruments in micro fair value and cash flow hedges is provided in the table below. As described in note 1, macro fair value hedges are
frequently rebalanced to include new business. As a result, these hedges have not been included in the analysis below.
Between one
and five
years
£m
More than
five years
Total
Less than
one year
£m
£m
£m
Society
Between one
and five
years
£m
More than
five years
Total
£m
£m
Contractual maturity of hedging instruments (contract/notional amount)
2021
Group
Micro fair value hedges
Interest rate swaps
Cross currency interest rate swaps
Bond forwards
Inflation swaps
Cash flow hedges
Cross currency interest rate swaps
Inflation swaps
Less than
one year
£m
3,255
3,368
1,439
-
8,062
3,139
160
3,299
20,368
19,369
-
1,692
41,429
15,117
120
15,237
20,262
15,097
-
3,278
38,637
9,986
-
9,986
Contractual maturity of hedging instruments (contract/notional amount)
2020
Group
Micro fair value hedges
Interest rate swaps
Cross currency interest rate swaps
Bond forwards
Inflation swaps
Cash flow hedges
Cross currency interest rate swaps
Inflation swaps
Less than
one year
£m
Between one
and five years
£m
More than
five years
£m
5,422
4,869
1,650
-
11,941
4,755
-
4,755
18,422
16,073
-
716
35,211
14,065
280
14,345
24,111
14,450
-
1,624
40,185
9,841
-
9,841
43,885
37,834
1,439
4,970
88,128
28,242
280
28,522
Total
£m
47,955
35,392
1,650
2,340
87,337
28,661
280
28,941
1,553
2,022
1,439
-
5,014
1,793
160
1,953
18,497
16,832
-
1,692
37,021
12,580
120
12,700
19,411
14,218
-
3,278
36,907
9,107
-
9,107
Society
Less than
one year
£m
Between one
and five years
£m
More than five
years
£m
3,439
3,178
1,650
-
8,267
3,065
-
3,065
13,794
11,275
-
716
25,785
9,267
280
9,547
23,229
13,571
-
1,624
38,424
8,961
-
8,961
39,461
33,072
1,439
4,970
78,942
23,480
280
23,760
Total
£m
40,462
28,024
1,650
2,340
72,476
21,293
280
21,573
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Notes to the financial statements (continued)
Notes to the financial statements (continued)
15. Derivative financial instruments (continued)
Annual Report and Accounts 2021
292
The weighted average rates of hedging instruments which achieve fixed rates are summarised in the table below. Fair value and cash flow hedging instruments which do not achieve a fixed rate have
not been included in this analysis.
Average rates achieved
2021
Cross currency interest rate swaps
Average EUR/GBP rate
Average USD/GBP rate
Average JPY/GBP rate
Average NOK/GBP rate
Average HKD/GBP rate
Average CHF/GBP rate
Average CAD/GBP rate
Inflation swaps
Average fixed interest rate (GBP %)
Average inflation rate (RPI index)
Average rates achieved
2020
Cross currency interest rate swaps
Average EUR/GBP rate
Average USD/GBP rate
Average JPY/GBP rate
Average NOK/GBP rate
Average HKD/GBP rate
Average CHF/GBP rate
Inflation swaps
Average fixed interest rate (GBP %)
Average inflation rate (RPI index)
Group
Less than
one year
Between one
and five
years
More than
five years
1.38
1.30
134.35
-
-
-
-
1.19
1.34
138.15
10.06
12.13
1.24
1.71
1.18
1.32
135.12
11.23
11.52
1.24
1.74
Total
1.21
1.33
137.5
11.05
11.85
1.24
1.73
Society
Less than
one year
Between one
and five
years
More than
five years
1.26
1.30
134.35
-
-
-
-
1.17
1.34
138.15
10.06
12.13
1.24
1.71
1.19
1.32
135.12
11.23
11.52
1.24
1.74
Total
1.19
1.33
137.50
11.05
11.85
1.24
1.73
3.37
255.90
3.79
256.30
-
-
3.55
256.07
3.37
255.90
3.79
256.30
-
-
3.55
256.07
Group
Society
Less than
one year
Between one
and five years
More than
five years
Total
Less than
one year
Between one
and five years
More than
five years
Total
1.25
1.36
142.20
9.19
-
-
1.26
1.32
137.46
10.06
11.89
-
1.23
1.35
137.62
11.23
11.85
1.24
1.25
1.33
138.04
10.59
11.85
1.24
1.20
1.36
142.20
9.19
-
-
1.23
1.32
137.46
10.06
11.89
-
1.26
1.35
137.62
11.23
11.85
1.24
1.23
1.34
138.04
10.59
11.85
1.24
-
-
3.55
256.07
-
-
3.55
256.07
-
-
3.55
256.07
-
-
3.55
256.07
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Notes to the financial statements (continued)
Notes to the financial statements (continued)
15. Derivative financial instruments (continued)
Annual Report and Accounts 2021
293
A variety of benchmark interest rates are used in global financial markets to calculate interest payments and fair values for derivative contracts. The Group’s derivative portfolio includes contracts
which reference GBP Libor and other benchmark rates, which are expected to either be reformed or be replaced by alternative reference rates. GBP Libor is expected to be discontinued on 31
December 2021, with the alternative benchmark rate being the reformed sterling overnight index average (Sonia). The Group is already using Sonia as the reference rate for new derivative contracts
where it is possible to do so.
The Group’s Libor Transition Working Group, which reports to the Assets and Liabilities Committee (ALCO), is managing the full range of transition-related issues, including the conversion of
existing contracts and the impact on valuations and systems. The Group has used basis swaps, which convert one benchmark rate to another, to reduce the economic exposure to affected
benchmark rates within the portfolio of existing contracts. For new transactions which mature after an expected discontinuation date, the Group is avoiding the use of affected benchmark rates. The
Group has signed up to the ISDA fallback protocols for derivative contracts which were launched in October 2020. This, alongside a transition mechanism which is in place with the London Clearing
House, ensures that outstanding Libor derivatives are contractually ready for transition.
A number of the Group’s current fair value and cash flow hedge accounting structures are expected to be affected by benchmark rate reforms. In the year ended 4 April 2020, the Group adopted the
amendments to IFRS 9, IAS 39 and IFRS 7 arising from Phase 1 of the IASB’s work on Interest Rate Benchmark Reform, which provide relief to the potential adverse hedge accounting impacts in the
period until benchmark rates are replaced.
In August 2020, the IASB issued further amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 arising from Phase 2 of its work on Interest Rate Benchmark Reform. These amendments focus on
the accounting for the replacement of existing benchmark interest rates. The Group has early adopted these amendments for the year ended 4 April 2021.
The table below summarises the current notional amount of financial instruments expected to be affected by benchmark reform.
Contact/notional amount of financial instruments affected by benchmark reform
Current benchmark
(note i)
Expected future benchmark
GBP Libor
USD Libor
GBP Libor and USD Libor (note ii)
Other benchmarks (note ii)
Total
Sterling overnight index average (Sonia)
Secured overnight financing rate (Sofr)
Sonia and Sofr
Various
Loans and
advances to
customers
£m
3,167
-
-
-
3,167
Investment
securities
£m
1,124
1
-
-
1,125
Debt
securities
in issue
£m
-
515
-
-
515
Subscribed
capital
£m
10
-
-
-
10
Derivative
financial
instruments
£m
105,275
16,590
14,759
1,952
138,576
Notes:
i.
ii.
The Group expects that Euribor will continue as a benchmark rate for the foreseeable future; Euribor hedging instruments and hedged items have therefore been excluded from the table.
Some hedging instruments, such as cross currency swaps, may reference more than one affected benchmark rate.
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Notes to the financial statements (continued)
Notes to the financial statements (continued)
16. Deposits from banks and similar institutions
Deposits from banks and similar institutions are repayable from the balance sheet date in the ordinary course of business as follows.
Accrued interest
Repayable:
On demand
In not more than three months
In more than three months but not more than one year
In more than one year but not more than five years
Total
Group
2021
£m
-
2,433
8,150
9
16,430
27,022
2020
£m
-
2,957
1,855
6,000
11,000
21,812
Society
2021
£m
-
1,864
8,150
9
16,430
26,453
2020
£m
-
1,781
1,855
6,000
11,000
20,636
For the Group and Society, deposits from banks and similar institutions include £16.4 billion drawn down against the TFSME (2020: TFS £17.0 billion).
Event after the reporting period
During April 2021, the Society drew down a further £5.3 billion against the Bank of England’s TFSME.
17. Other deposits
Other deposits are repayable from the balance sheet date in the ordinary course of business as follows.
Accrued interest
Repayable:
On demand
In not more than three months
In more than three months but not more than one year
In more than one year but not more than five years (note i)
Total
Group
2021
£m
-
2,081
794
1,627
20
4,522
2020
£m
1
1,977
563
1,921
20
4,482
Society
2021
£m
-
3,229
794
1,627
20
5,670
2020
£m
1
3,519
563
1,921
20
6,024
Note:
i.
Includes £14 million (2020: £9 million) of other financial liabilities relating to contractual indemnity obligations.
Annual Report and Accounts 2021
294
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e
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n
a
n
c
e
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i
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k
r
e
p
o
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t
i
F
n
a
n
c
i
a
l
s
t
a
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e
m
e
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t
s
O
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i
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f
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a
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i
o
n
Other deposits primarily comprise wholesale and commercial deposits. The Society’s other deposits as at 4 April 2021 include £1,148 million (2020: £1,542 million) of deposits from subsidiary
undertakings.
Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
18. Debt securities in issue
Certificates of deposit and commercial paper
Medium term notes
Covered bonds
Asset backed securities
Fair value adjustment for micro hedged risk
Total
Debt securities in issue are repayable from the balance
sheet date in the ordinary course of business as follows:
Accrued interest
Residual maturity repayable:
In not more than one year
In more than one year
Fair value adjustment for micro hedged risk
Total
Group
Society
2021
£m
81
9,196
15,005
2,865
27,147
776
27,923
2020
£m
3,613
7,157
19,826
4,211
34,807
1,156
35,963
2021
£m
81
9,196
15,009
-
24,286
184
24,470
2020
£m
3,613
7,157
19,832
-
30,602
292
30,894
133
167
130
156
3,807
23,207
27,147
776
27,923
8,328
26,312
34,807
1,156
35,963
3,195
20,961
24,286
184
24,470
7,056
23,390
30,602
292
30,894
The total for debt securities in issue in the Group includes £18,505 million (2020: £24,955 million), and in the Society includes £15,009 million (2020: £19,832 million), secured on certain loans and
advances to customers. Further information is given in note 14.
Annual Report and Accounts 2021
295
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c
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k
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p
o
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t
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F
n
a
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c
i
a
l
s
t
a
t
e
m
e
n
t
s
O
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a
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i
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Annual Report and Accounts 2021
296
Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
19. Subordinated liabilities
Senior non-preferred
3.766% senior non-preferred notes (US Dollar 1 billion)
1.5% senior non-preferred notes (Euro 1 billion)
4.302% senior non-preferred notes (US Dollar 0.75 billion)
4.363% senior non-preferred notes (US Dollar 1 billion)
3.4675% senior non-preferred notes (Norwegian Kroner 1 billion)
0.805% senior non-preferred notes (Japanese Yen 1 billion)
0.9925% senior non-preferred notes (Japanese Yen 4 billion)
3.875% senior non-preferred notes (Norwegian Kroner 0.3 billion)
3.9% senior non-preferred notes (Norwegian Kroner 1 billion)
1.2775% senior non-preferred notes (Japanese Yen 3 billion)
3.622% senior non-preferred notes (US Dollar 1 billion)
3.96% senior non-preferred notes (US Dollar 1 billion)
0.85% senior non-preferred notes (Japanese Yen 5 billion)
Tier 2 eligible
6.75% subordinated notes (Euro 0.75 billion)
4% subordinated notes (US Dollar 1.25 billion)
2% subordinated notes (Euro 1 billion)
4.125% subordinated notes (US Dollar 1.25 billion)
Fair value hedge accounting adjustments
Unamortised premiums and issue costs
Total
Issuance date
Next call date
Maturity date
8 March 2018
8 March 2018
8 March 2018
1 August 2018
5 October 2018
24 October 2018
30 October 2018
13 November 2018
13 November 2018
14 November 2018
26 April 2019
18 July 2019
16 August 2019
8 March 2023
8 March 2025
8 March 2028
1 August 2023
24 October 2023
30 October 2025
14 November 2028
26 April 2022
18 July 2029
16 August 2029
8 March 2024
8 March 2026
8 March 2029
1 August 2024
5 October 2026
24 October 2024
30 October 2026
13 November 2028
13 November 2028
14 November 2029
26 April 2023
18 July 2030
16 August 2030
22 July 2010
14 September 2016
25 July 2017
18 October 2017
25 July 2024
18 October 2027
22 July 2020
14 September 2026
25 July 2029
18 October 2032
Group and Society
2021
£m
726
852
544
729
86
7
26
26
86
20
735
730
33
-
907
863
922
7,292
305
(22)
7,575
2020
£m
818
882
613
822
79
7
30
23
79
23
829
822
38
692
1,022
894
1,039
8,712
635
(30)
9,317
Senior non-preferred notes are a class of subordinated liability which rank equally with each other and behind the claims against the Society of all depositors, creditors and investing members other
than holders of Tier 2 eligible subordinated notes, permanent interest-bearing shares (PIBS), Additional Tier 1 (AT1) instruments and core capital deferred shares (CCDS). Senior non-preferred notes
contribute to meeting the Society’s minimum requirement for own funds and eligible liabilities (MREL) and loss absorbing requirements.
The Tier 2 eligible subordinated notes rank equally with each other and ahead of claims against the Society of holders of PIBS, AT1 instruments and CCDS. During the year, Euro 750 million
(£692 million equivalent) of Tier 2 subordinated notes matured.
The interest rate and foreign exchange risks arising from the issuance of fixed rate and foreign currency subordinated liabilities have been mitigated through the use of derivatives.
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k
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p
o
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i
F
n
a
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c
i
a
l
s
t
a
t
e
m
e
n
t
s
O
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f
o
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a
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i
o
n
Annual Report and Accounts 2021
297
Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
20. Subscribed capital
7.25% permanent interest-bearing shares
6.25% permanent interest-bearing shares
5.769% permanent interest-bearing shares
7.859% permanent interest-bearing shares
Floating rate (6-month Libor + 2.4%) permanent interest-bearing shares
Notes
i
i
i
i
ii
Next call date
5 December 2021
22 October 2024
6 February 2026
13 March 2030
Fair value hedge accounting adjustments
Unamortised premiums and issue costs
Total
Group and Society
2021
£m
34
45
84
39
10
212
33
(2)
243
2020
£m
34
45
84
39
10
212
43
(2)
253
Notes:
i.
Repayable, at the option of the Society, in full on the initial call date or every fifth anniversary thereafter. If not repaid on a call date, then the interest rate is reset at a margin to the yield on the then prevailing five-
year benchmark gilt rate.
ii. Only repayable in the event of winding up the Society.
All PIBS are denominated in sterling and only repayable with the prior consent of the PRA.
PIBS rank equally with each other and the Group’s AT1 instruments. They are deferred shares of the Society and rank behind the claims against the Society of all noteholders, depositors, creditors
and investing members of the Society, other than the holders of CCDS.
The interest rate risk arising from the issuance of fixed rate PIBS has been mitigated through the use of interest rate swaps.
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p
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F
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a
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c
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
21. Fair value hierarchy of financial assets and liabilities held at fair value
Annual Report and Accounts 2021
298
As the majority of the Group’s assets and liabilities are held within the Society, the disclosures in notes 21 to 24 are on a consolidated basis. The following tables show the Group’s financial assets and
liabilities that are held at fair value by fair value hierarchy, balance sheet classification and product type.
Financial assets
Government, government guaranteed and
supranational investment securities
Other debt investment securities
Investments in equity shares
Total investment securities (note i)
Interest rate swaps
Cross currency interest rate swaps
Foreign exchange swaps
Inflation swaps
Bond forwards
Total derivative financial instruments
Loans and advances to customers
Total financial assets
Financial liabilities
Interest rate swaps
Cross currency interest rate swaps
Foreign exchange swaps
Inflation swaps
Bond forwards
Swaptions
Total derivative financial instruments
Total financial liabilities
2021
Fair values based on
2020
Fair values based on
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
21,363
1,748
-
23,111
-
-
-
-
-
-
-
23,111
-
1,087
-
1,087
1,569
2,055
20
-
53
3,697
-
4,784
-
-
-
-
-
-
-
-
(737)
(819)
(12)
-
(2)
-
(1,570)
(1,570)
-
21,363
15,897
5
27
32
-
-
-
112
-
112
120
264
-
-
-
(52)
-
-
(52)
(52)
2,840
27
24,230
1,569
2,055
20
112
53
3,809
120
28,159
(737)
(819)
(12)
(52)
(2)
-
(1,622)
(1,622)
1,583
-
17,480
-
-
-
-
-
-
-
17,480
-
-
-
-
-
-
-
-
-
881
-
881
1,593
3,005
126
46
1
4,771
-
5,652
(1,179)
(549)
(44)
(52)
(94)
(6)
(1,924)
(1,924)
-
15,897
5
13
18
-
-
-
-
-
-
128
146
-
-
-
-
-
-
-
-
2,469
13
18,379
1,593
3,005
126
46
1
4,771
128
23,278
(1,179)
(549)
(44)
(52)
(94)
(6)
(1,924)
(1,924)
Note:
i.
Investment securities exclude £1,243 million of investment securities held at amortised cost (2020: £1,625 million).
The Group’s Level 1 portfolio comprises government and other highly rated securities for which traded prices are readily available. Asset valuations for Level 2 investment securities are sourced from
consensus pricing or other observable market prices. None of the Level 2 investment securities are valued using models. Level 2 derivative assets and liabilities are valued using observable market data for
all significant valuation inputs. More detail on the Level 3 portfolio is provided in note 22.
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
21. Fair value hierarchy of financial assets and liabilities held at fair value (continued)
Transfers between fair value hierarchies
Annual Report and Accounts 2021
299
Instruments move between fair value hierarchies primarily due to increases or decreases in market activity or changes to the significance of unobservable inputs to valuation, and are recognised at
the date of the event or change in circumstances which caused the transfer. There were no transfers between the Level 1 and Level 2 portfolios during the year. At 30 September 2020, £51 million
of inflation swap derivative assets and £116 million of inflation swap derivative liabilities were transferred from Level 2 to Level 3 as detailed in note 22.
22. Fair value of financial assets and liabilities held at fair value – Level 3 portfolio
The main constituents of the Level 3 portfolio are as follows:
Loans and advances to customers
Certain loans and advances to customers have been classified as FVTPL. Level 3 assets in this category include a closed portfolio of residential mortgages and a small number of commercial loans.
Investment securities
The Level 3 items in this category primarily include investments made in FinTech companies, of which £21 million (2020: £6 million) are equity investments which have been designated at FVOCI as
the investments are being held for long term strategic purposes.
Derivative financial instruments (inflation swaps)
Inflation swaps are used to hedge the Group’s investments in index-linked government debt. Adjustments to the inflation curve to reflect seasonality in inflation index publications is required to
determine a valuation; however, unlike most derivative valuation inputs, this market data is not available and therefore the input is internally derived rather than observable. During the year, the
Group began transacting Euro and US Dollar inflation swaps, for which seasonality is a more significant input than for equivalent sterling swaps. As a result, seasonality has become significant to the
valuation of the inflation swap portfolio as a whole, and the portfolio was therefore transferred from Level 2 to Level 3 from 30 September 2020.
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a
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O
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Annual Report and Accounts 2021
300
Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
22. Fair value of financial assets and liabilities held at fair value – Level 3 portfolio (continued)
The tables below set out movements in the Level 3 portfolio, including transfers in and out of Level 3.
Movements in Level 3 portfolio
At 5 April
Gains/(losses) recognised in the income statement, within:
Net interest income
Gains from derivatives and hedge accounting (note i)
Other operating income/(expense)
Gains/(losses) recognised in other comprehensive income, within:
Fair value through other comprehensive income reserve
Additions
Disposals
Settlements/repayments
Transfers into Level 3 portfolio
At 4 April
Investment
securities
£m
18
-
-
-
4
10
-
-
-
32
2021
2020
Derivative
financial
assets
£m
-
Derivative
financial
liabilities
£m
-
Loans and
advances to
customers
£m
128
(56)
110
2
-
-
(2)
7
51
112
(17)
81
1
-
-
(1)
-
(116)
(52)
3
-
(1)
-
-
-
(10)
-
120
Investment
securities
£m
81
-
1
11
(1)
6
(80)
-
-
18
Loans and
advances to
customers
£m
129
3
-
7
-
-
-
(11)
-
128
Note:
i.
Includes foreign exchange revaluation gains/losses.
Level 3 portfolio sensitivity analysis of valuations using unobservable inputs
The fair value of financial instruments is, in certain circumstances, measured using valuation techniques based on market prices that are not observable in an active market or significant
unobservable market inputs. Reasonable alternative assumptions can be applied for sensitivity analysis, taking account of the nature of valuation techniques used, as well as the availability and
reliability of observable proxy and historic data. The following table shows the sensitivity of the Level 3 fair values to reasonable alternative assumptions (as set out in the table of significant
unobservable inputs below) and the resultant impact of such changes in fair value on the income statement or members’ interests and equity.
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a
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a
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Annual Report and Accounts 2021
301
Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
22. Fair value of financial assets and liabilities held at fair value – Level 3 portfolio (continued)
Sensitivity of Level 3 fair values
Investment securities
Derivative financial instruments - assets
Derivative financial instruments - liabilities
Loans and advances to customers
Total
2021
Income statement
Favourable
changes
£m
13
21
28
2
64
Unfavourable
changes
£m
(6)
(21)
(28)
(3)
(58)
Fair value
£m
32
112
(52)
120
212
2020
Income statement
Favourable
changes
£m
2
--
--
4
6
Unfavourable
changes
£m
(1)
--
--
(5)
(6)
Fair value
£m
18
--
--
128
146
Alternative assumptions are considered for each product and varied according to the quality of the data and variability of the underlying market. The following table discloses the significant
unobservable inputs underlying the above alternative assumptions for assets and liabilities recognised at fair value and classified as Level 3, along with the range of values for those significant
unobservable inputs. Where sensitivities are described the inverse relationship will also generally apply. Some of the significant unobservable inputs used in fair value measurement are
interdependent. Where this is the case, a description of those interrelationships is included below.
Significant unobservable inputs
Total
assets
Total
liabilities
Valuation
technique
£m
32
112
120
£m
-
Discounted
cash flows
(52)
Discounted
cash flows
-
Discounted
cash flows
Investment securities
Derivative financial
instruments
Loans and advances to
customers
2021
Significant
unobservable
inputs
Discount rate
Cash flow
projections
Range
(note i)
Weighted
average
(note ii)
Units
Total
assets
Valuation
technique
2020
Significant
unobservable
inputs
Range
(note i)
Units
Weighted
average
(note ii)
10.00
15.00
12.70
95.00 105.00
100.00
Seasonality
0.00
0.81
0.22
Discount rate
2.09
9.75
3.87
%
%
%
%
£m
18
Discounted
cash flows
Discount rate
10.00
15.00
12.70
%
128
Discounted
cash flows
Discount rate
2.94
9.75
4.33
%
Notes:
i.
ii. Weighted average represents the input values used in calculating the fair values for the above financial instruments.
The range represents the values of the highest and lowest levels used in the calculation of favourable and unfavourable changes as presented in the table of sensitivities above.
Discount rate
The discount rate is used to determine the present value of future cash flows. The level of the discount rate takes into account the time value of money, but also the risk associated with the
investment at the time the investment was made. Typically, the greater the risk, the higher the discount rate. A higher discount rate leads to a lower valuation and vice versa.
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n
a
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c
i
a
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s
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a
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
22. Fair value of financial assets and liabilities held at fair value – Level 3 portfolio (continued)
Cash flow projections
Annual Report and Accounts 2021
302
Cash flow projections for certain investments held at 4 April 2021 represent a significant unobservable input. Where the fair value of an investment is derived using a discounted cash flow model,
the total amount of projected cash flows is estimated according to the overall expectation of performance of the entity to which the investment is made. The lower the cash flow projection, the
lower the valuation and vice versa.
Seasonality
An inflation swap curve is built using inflation swap quotes to forecast the UK retail price index and EU and US consumer price indices. This curve is used to calculate future cash flows. While these
instruments give a good indication of annual growth in inflation, monthly index fixings throughout the year tend to behave differently and so the inflation swap curve is adjusted for this seasonality
accordingly. The higher the seasonality, the greater the adjustment to the inflation swap curve.
23. Fair value of financial assets and liabilities measured at amortised cost
The following table summarises the carrying value and fair value of financial assets and liabilities measured at amortised cost on the Group’s balance sheet.
Fair value of financial assets and liabilities (note i)
Financial assets
Loans and advances to banks and similar institutions
Investment securities
Loans and advances to customers:
Residential mortgages
Consumer banking
Commercial and other lending
Total
Financial liabilities
Shares
Deposits from banks and similar institutions
Other deposits
Debt securities in issue
Subordinated liabilities
Subscribed capital
Total
Carrying
value
£m
3,660
1,243
190,638
3,902
6,887
206,330
170,313
27,022
4,522
27,923
7,575
243
237,598
2021
Fair values based on
Level 1
£m
Level 2
£m
Level 3
£m
Total fair
value
£m
Carrying
value
£m
2020
Fair values based on
Level 1
£m
Level 2
£m
Level 3
£m
Total fair
value
£m
-
-
3,660
1,245
3,636
1,625
-
-
-
-
-
-
3,660
1,245
-
-
-
4,905
193,645
3,866
6,638
204,149
193,645
3,866
6,638
209,054
-
-
-
13,455
-
-
13,455
170,415
27,022
4,508
15,178
7,833
233
225,189
-
-
14
-
-
-
14
170,415
27,022
4,522
28,633
7,833
233
238,658
-
-
-
-
-
-
-
-
-
19,618
-
-
19,618
3,636
1,594
-
-
-
5,230
159,891
21,810
4,474
16,396
8,658
230
211,459
-
-
3,636
1,594
190,580
4,452
8,010
203,042
-
-
9
-
-
-
9
190,580
4,452
8,010
208,272
159,891
21,810
4,483
36,014
8,658
230
231,086
188,516
4,500
7,834
206,111
159,691
21,812
4,482
35,963
9,317
253
231,518
Note:
i.
The tables above exclude cash for which fair value approximates to carrying value.
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
Annual Report and Accounts 2021
303
23. Fair value of financial assets and liabilities measured at amortised cost (continued)
The fair values of loans and advances to customers are further analysed, between those credit-impaired and those non-credit impaired, as follows.
Fair value of loans and advances to customers
Non-credit impaired
(Stages 1 and 2)
2021
Credit-impaired
(Stage 3 and POCI)
(note i)
Total
Non-credit impaired
(Stages 1 and 2)
2020
Credit-impaired
(Stage 3 and POCI)
(note i)
Residential mortgages
Consumer banking
Commercial and other lending
Total
Carrying
value
Fair
value
Carrying
value
Fair
value
Carrying
value
Fair
value
Carrying
value
Fair
value
Carrying
value
£m
189,164
3,875
6,817
£m
192,147
3,839
6,564
199,856 202,550
£m
1,474
27
70
1,571
£m
1,498
27
74
1,599
£m
190,638
3,902
6,887
£m
193,645
3,866
6,638
201,427 204,149
£m
187,184
4,511
7,795
199,490
£m
189,233
4,463
7,966
201,662
£m
1,383
32
46
1,461
Fair
value
£m
1,398
32
51
1,481
Notes:
i.
ii.
POCI loans are those which were credit-impaired when purchased or originated.
For the year ended 4 April 2020, an additional provision for Covid-19 was recognised; this has not been allocated to a provisioning stage.
Covid-19
additional
provision
(note ii)
Carrying
and Fair
value
£m
(51)
(43)
(7)
(101)
Total
Carrying
value
£m
188,516
4,500
7,834
200,850
Fair
value
£m
190,580
4,452
8,010
203,042
Loans and advances to banks and similar institutions
The fair value of loans and advances to banks and similar institutions is estimated by discounting
expected cash flows at a market discount rate.
Investment securities
The fair value of investment securities is sourced from consensus pricing or other observable market
prices..
Loans and advances to customers
The fair value of loans and advances to customers is estimated by discounting expected cash flows at
rates that reflect current rates for similar lending. Consistent modelling techniques are used across the
different loan books. The estimates take into account expected future cash flows and future lifetime
expected losses, based on historic trends and discount rates appropriate to the loans, to reflect a
hypothetical exit price value on an asset by asset basis. Variable rate loans are modelled on estimated
future cash flows, discounted at current market interest rates. Variable rate retail mortgages are
discounted at the currently available market standard variable interest rate (SVR) which, for example, in
the case of the Group’s residential base mortgage rate (BMR) mortgage book, generates a fair value
lower than the amortised cost value as those mortgages are priced below the SVR.
For fixed rate loans, discount rates have been based on the expected funding and capital cost applicable
to the book. When calculating fair values on fixed rate loans, no adjustment has been made to reflect
interest rate risk management through internal natural hedges or external hedging via derivatives.
Shares, deposits and amounts due to customers
The estimated fair value of shares, deposits and amounts due to customers with no stated maturity,
including non-interest-bearing deposits, is the amount repayable on demand. For items without quoted
market prices the fair value represents the discounted amount of estimated future cash flows based on
expectations of future interest rates, customer withdrawals and interest capitalisation. For variable
interest rate items, estimated future cash flows are discounted using current market interest rates for
new debt with similar remaining maturity. For fixed rate items, the estimated future cash flows are
discounted based on market offer rates currently available for equivalent deposits.
Debt securities in issue
The estimated fair values of longer dated liabilities are calculated based on quoted market prices where
available or using similar instruments as a proxy for those liabilities that are not of sufficient size or
liquidity to have an active market quote. For those notes for which quoted market prices are not
available, a discounted cash flow model is used based on a current yield curve appropriate for the
remaining term to maturity.
Subordinated liabilities and subscribed capital
The fair value of subordinated liabilities and subscribed capital is determined by reference to quoted
market prices of similar instruments.
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
24. Offsetting financial assets and financial liabilities
Annual Report and Accounts 2021
304
The Group has financial assets and liabilities for which there is a legally enforceable right to set off the recognised amounts, and there is an intention to settle on a net basis or realise the asset and
liability simultaneously. In accordance with IAS 32 ‘Financial Instruments: Presentation,’ where the right to set off is not unconditional in all circumstances this does not result in an offset of balance
sheet assets and liabilities. The following table shows the impact on financial assets and financial liabilities relating to transactions where:
•
•
•
there is an enforceable master netting arrangement or similar agreement in place, an unconditional right to offset is in place and there is an intention to settle net (‘amounts offset’),
there is an enforceable master netting arrangement or similar agreement in place, but the offset criteria are otherwise not satisfied (‘master netting arrangements’), and
financial collateral is paid and received (‘financial collateral’).
Offsetting financial assets and financial liabilities
2021
2020
Gross
amounts
recognised
Amounts
offset
(note i)
£m
£m
5,021
883
(1,212)
(477)
5,904
(1,689)
4,075
8,626
12,701
(2,453)
(477)
(2,930)
Net amounts
reported on
the balance
sheet
£m
3,809
406
4,215
1,622
8,149
9,771
Master
netting
arrangements
Financial
collateral
(note ii)
Net
amounts
Gross
amounts
recognised
Amounts
offset
(note i)
£m
£m
£m
£m
£m
Net amounts
reported on
the balance
sheet
£m
(1,440)
(2,359)
-
(406)
(1,440)
(2,765)
(1,440)
-
(1,440)
(104)
(8,148)
(8,252)
10
-
10
78
1
79
6,376
1,805
8,181
5,049
2,443
7,492
(1,605)
(1,805)
(3,410)
(3,125)
(1,805)
(4,930)
4,771
-
4,771
1,924
638
2,562
Master
netting
arrangements
Financial
collateral
(note ii)
Net
amounts
£m
£m
(1,648)
(2,997)
-
-
(1,648)
(2,997)
(1,648)
-
(1,648)
(161)
(637)
(798)
£m
126
-
126
115
1
116
Financial assets
Derivative financial assets
Reverse repurchase
agreements
Total financial assets
Financial liabilities
Derivative financial liabilities
Repurchase agreements
Total financial liabilities
Notes:
i.
ii.
Amounts offset for derivative financial assets of £1,212 million (2020: £1,605 million) include cash collateral netted of £258 million (2020: £416 million). Amounts offset for derivative financial liabilities of
£2,453 million (2020: £3,125 million) include cash collateral netted of £1,499 million (2020: £1,936 million).
The balances presented for financial collateral on repurchase agreements and reverse repurchase agreements are less than the financial collateral balances reported in note 13, as the amounts disclosed above are
limited to the net amounts reported on the balance sheet after amounts offset as shown in the table.
Master netting arrangements consist of agreements such as an International Swaps and Derivatives Association (ISDA) Master Agreement, global master repurchase agreements and global master
securities lending agreements, whereby outstanding transactions with the same counterparty can be offset and settled net, either unconditionally or following a default or other predetermined
event.
Financial collateral on derivative financial instruments consists of cash settled, typically daily or weekly, to mitigate the credit risk on the fair value of derivative contracts. Financial collateral on
repurchase agreements typically comprises highly liquid securities which are legally transferred and can be liquidated in the event of counterparty default.
The net amounts after offsetting presented above show the exposure to counterparty credit risk for derivative contracts after netting benefits and collateral, and are not intended to represent the
Group’s actual exposure to credit risk. This is due to a variety of credit mitigation strategies which are employed in addition to netting and collateral arrangements.
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
25. Intangible assets
Group
2021
Cost
At 5 April 2020
Additions
Disposals
At 4 April 2021
Accumulated amortisation and
impairment
At 5 April 2020
Amortisation charge
Impairment in the year
Disposals
At 4 April 2021
Net book value
At 4 April 2021
Group
2020
Cost
At 5 April 2019
Additions
Disposals
At 4 April 2020
Accumulated amortisation and impairment
At 5 April 2019
Amortisation charge
Impairment in the year
Disposals
At 4 April 2020
Net book value
At 4 April 2020
Computer software
Externally acquired
£m
Internally developed
£m
Total computer
software
£m
405
28
(34)
399
241
58
2
(34)
267
132
2,262
205
(123)
2,344
1,199
278
33
(123)
1,387
957
2,667
233
(157)
2,743
1,440
336
35
(157)
1,654
1,089
Computer software
Externally acquired
£m
Internally developed
£m
Total computer
software
£m
362
80
(37)
405
217
60
1
(37)
241
164
2,089
307
(134)
2,262
922
270
141
(134)
1,199
1,063
2,451
387
(171)
2,667
1,139
330
142
(171)
1,440
1,227
Goodwill
£m
12
-
-
12
-
-
-
-
-
12
Goodwill
£m
12
-
-
12
-
-
-
-
-
12
Total
£m
2,679
233
(157)
2,755
1,440
336
35
(157)
1,654
1,101
Total
£m
2,463
387
(171)
2,679
1,139
330
142
(171)
1,440
1,239
Annual Report and Accounts 2021
305
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
25. Intangible assets (continued)
Annual Report and Accounts 2021
306
Computer software capitalised during the year primarily relates to the Group’s investment in digital services and data capabilities, together with ensuring the resilience and simplification of the
technology estate. The total cost at 4 April 2021 includes £96 million (2020: £216 million) of assets in the course of construction which, to the extent that they are not yet ready for use by the
business, have no amortisation charged against them. For all other computer software capitalised the estimated useful life of individual assets is predominantly 5 years.
An impairment loss of £35 million (2020: £142 million) was recognised in the year primarily in respect of assets relating to the Society’s ongoing activity to simplify its technology estate.
The Society’s intangible assets are as shown above for the Group, except that they exclude £12 million (2020: £12 million) of goodwill relating to the acquisition of The Mortgage Works (UK) plc
which is only recognised at Group level. Capital expenditure contracted for but not accrued at 4 April 2021 was £9 million (2020: £22 million).
26. Property, plant and equipment
Group
2021
Cost or valuation
At 5 April 2020
Additions
Transfers (note i)
Revaluation
Disposals
At 4 April 2021
Accumulated depreciation and
impairment
At 5 April 2020
Depreciation charge
Transfers (note i)
Impairment
Disposals
At 4 April 2021
Net book value
At 4 April 2021
Branches and non-
specialised buildings
£m
195
-
-
(15)
(16)
164
-
-
-
-
-
-
164
Specialised
administration
buildings
£m
176
-
-
-
(10)
166
89
3
-
-
(10)
82
84
Investment
properties
Plant and machinery Equipment, fixtures,
fittings and vehicles
£m
2
-
20
(4)
-
18
-
-
-
-
-
-
18
£m
291
19
-
-
(13)
297
197
25
-
11
(13)
220
77
£m
1,131
75
-
-
(115)
1,091
580
135
-
14
(111)
618
473
Right-of-use
branches and non-
specialised buildings
£m
274
18
(28)
-
(1)
263
31
26
(8)
12
-
61
202
Total
£m
2,069
112
(8)
(19)
(155)
1,999
897
189
(8)
37
(134)
981
1,018
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
26. Property, plant and equipment (continued)
Annual Report and Accounts 2021
307
Group
2020
Cost or valuation
At 5 April 2019
Additions
Revaluation
Disposals
At 4 April 2020
Accumulated depreciation and impairment
At 5 April 2019
Depreciation charge
Impairment
Disposals
At 4 April 2020
Net book value
At 4 April 2020
Branches and non-
specialised buildings
£m
222
2
(17)
(12)
195
-
-
-
-
-
195
Specialised
administration
buildings
£m
176
-
-
-
176
86
3
-
-
89
87
Investment properties
Plant and machinery
Equipment, fixtures,
fittings and vehicles
£m
9
-
-
(7)
2
-
-
-
-
-
2
£m
278
16
-
(3)
291
176
24
-
(3)
197
94
£m
1,010
225
-
(104)
1,131
544
127
9
(100)
580
551
Right-of-use
branches and non-
specialised buildings
£m
181
93
-
-
274
-
25
6
-
31
243
Total
£m
1,876
336
(17)
(126)
2,069
806
179
15
(103)
897
1,172
Note:
i.
During the year, there has been a transfer of a leased building from right-of-use branches and non-specialised buildings to investment properties, following its permanent vacation and subsequent marketing for
sub lease.
Group property, plant and equipment at 4 April 2021 includes £2 million (2020: £2 million) of specialised administration buildings held by subsidiary undertakings.
Property, plant and equipment includes £71 million (2020: £116 million) of assets in the course of construction. Capital expenditure contracted for but not accrued at 4 April 2021 was £8 million
(2020: £33 million).
As at 4 April 2021, branches and non-specialised buildings includes £8 million (2020: £10 million) of properties which are classified as held for sale.
An impairment loss of £37 million (2020: £15 million) was recognised in the year, due largely to the decision to vacate three leased right-of-use administrative buildings and the associated write
down of capitalised improvements to these buildings.
Branches and non-specialised buildings are valued annually at the balance sheet date by independent surveyors. The current use of all branches and non-specialised buildings equates to highest
and best use, and there have been no changes to the valuation technique during the year.
IFRS 13 requires that all assets held at fair value are classified according to a hierarchy that reflects the significance of observable market inputs in calculating those fair values. Branches and non-
specialised buildings valuations are classified within Level 2 of the fair value hierarchy.
Branches and non-specialised buildings revalued annually would have a carrying value under the historic cost model of £73 million (2020: £75 million).
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Annual Report and Accounts 2021
308
Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
27. Provisions for liabilities and charges
Group
At 5 April 2020 (note i)
Provisions utilised
Charge for the year
Release for the year
Net income statement charge (note ii)
At 4 April 2021
Customer
redress
£m
114
(77)
100
(13)
87
124
Other
provisions
£m
32
(54)
63
(6)
57
35
Total
£m
146
(131)
163
(19)
144
159
Notes:
i.
ii.
Comparatives have been restated to reflect the change in presentation of the bank levy as detailed in note 1.
The net income statement charge relating to customer redress is included in provisions for liabilities and charges. The net income statement charge relating to other provisions is recognised in administrative
expenses, with the exception of £1 million in respect of obligations under the Financial Services Compensation Scheme which is included in provisions for liabilities and charges.
The Society’s provisions for liabilities and charges are the same as shown above for the Group.
Customer redress
During the course of its business, the Group receives complaints from customers in relation to past sales or ongoing administration. The Group is also subject to enquiries from and discussions
with its regulators and governmental and other public bodies, including the Financial Ombudsman Service (FOS), on a range of matters. Customer redress matters may also exist in relation to
other aspects of past sales and administration of customer accounts, quality control issues and non-compliance with consumer credit legislation or other regulatory matters. Consideration of such
customer redress matters may result in a provision, a contingent liability or both, depending upon relevant facts and circumstances. No provision is made where it is concluded that it is not
probable that a quantifiable payment will be made; this will include circumstances where the facts are unclear or further time is required to reasonably quantify the expected payment.
At 4 April 2021, the Group holds provisions of £124 million (2020: £114 million) in respect of the potential costs of remediation and redress in relation to past sales of PPI, issues relating to
administration of customer accounts, issues relating to historical quality control procedures, non-compliance with consumer credit legislation and other regulatory matters.
Within provisions for customer redress, £38 million is held as a result of the Group’s investigations into its historical quality control procedures. The provision has been based on detailed reviews
completed to date into specific areas of concern and represents the Group’s best estimate of the liability. As further work is undertaken on these areas, it is possible that the ultimate liability may
be higher or lower than the amount provided at 4 April 2021. An estimate of the potential impact of any contingent liabilities associated with the ongoing investigations has not been provided as it
is not practicable to do so.
Other provisions
Other provisions primarily include amounts for severance costs, a number of property-related provisions and expected credit losses on irrevocable personal loan and mortgage lending
commitments.
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
27. Provisions for liabilities and charges (continued)
Critical accounting estimates and judgements
Annual Report and Accounts 2021
309
There is significant estimation uncertainty in estimating the probability, timing and amount of any cash outflows associated with customer redress provisions.
Provisions are recognised for matters relating to customer redress where an outflow is probable and can be estimated reliably. Amounts provided are based on management’s best estimate of the
number of customers impacted and anticipated remediation. As any new matters emerge, an estimate is made of the outcome, although in some cases uncertainties remain as to the eventual costs
given the inherent difficulties in determining the number of impacted customers and the amount of any redress applicable.
Provisions relating specifically to PPI mis-selling are no longer considered to contain significant estimation uncertainty due to the time elapsed since the PPI claims deadline in August 2019. Sources
of significant estimation uncertainty in provisions for customer redress relate specifically to matters in respect of administration of customer accounts and quality control procedures. A number of
assumptions are applied in estimating provisions relating to the past administration of customer accounts, including the identification and segmentation of customer groups expected to receive
redress and the amount of redress payable for each customer group. If the total number of customers expected to receive redress changed by 10%, the provision would change by £3 million. If the
amount of redress expected to be payable changed by 10%, the provision would change by £2 million. For provisions relating to quality control procedures, if the number of customers expected to
receive redress changed by 10%, the provision would change by £5 million. Provisions will be adjusted in future periods as further information becomes available.
28. Leasing
The Group leases various offices, branches and other premises under leasing arrangements. The following tables show the amounts recognised in the income statement and on the balance sheet
arising from these leases.
Leasing amounts recognised in the income statement
Income statement classification
Interest expense and similar charges
Interest expense
Administrative expenses
Depreciation and impairment of right-of-use assets
Lease expense in respect of short term and low value leases
Administrative expenses
Amounts receivable under leases where the Group is a lessor Other operating income
Leasing amounts recognised at the balance sheet date
Right-of-use assets
Lease liabilities
Balance sheet classification
Property, plant and equipment
Other liabilities
Group
2021
£m
(5)
(38)
(9)
2
Group
2021
£m
202
(262)
2020
£m
(5)
(31)
(6)
4
2020
£m
243
(265)
In addition to the above, the Society holds a lease liability and right-of-use asset of £2 million (2020: £2 million) relating to the lease of an investment property owned by one of its subsidiaries which
is eliminated on consolidation.
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
28. Leasing (continued)
Annual Report and Accounts 2021
310
Total leasing cash outflows in the year were £38 million (2020: £34 million). £5 million (2020: £4 million) of lease commitments were entered into but had not yet commenced at the balance sheet
date. Future undiscounted minimum payments under lease liabilities were as follows:
Leasing commitments
Amounts falling due:
Within one year
Between one and two years
Between two and three years
Between three and four years
Between four and five years
After five years
Total
Group and
Society
2021
£m
Group and
Society
2020
£m
26
32
31
29
28
165
311
20
26
29
29
28
185
317
At the balance sheet date £10 million (2020: £11 million) of future minimum lease payments were receivable under leases where the Group is a lessor, of which £2 million (2020: £3 million) were
receivable under non-cancellable subleases.
29. Contingent liabilities
During the ordinary course of business, the Group may be subject to complaints and threatened or actual legal proceedings brought by or on behalf of current or former employees, customers,
investors or other third parties, as well as legal and regulatory reviews, challenges, investigations and enforcement actions. Any such material cases are periodically reassessed, with the assistance of
external professional advisers where appropriate, to determine the likelihood of incurring a liability.
The Group does not disclose amounts in relation to contingent liabilities associated with such claims where the likelihood of any payment is remote. The Group also does not disclose an estimate of
the potential financial impact or effect on the Group of contingent liabilities where it is not currently practicable to do so. The Group does not expect the ultimate resolution of any current
complaints, threatened or actual legal proceedings, regulatory or other matters to have a material adverse impact on its financial position.
Contingent liabilities associated with redress provisions are discussed further in note 27.
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
30. Retirement benefit obligations
Annual Report and Accounts 2021
311
The Group operates two defined contribution pension schemes in the UK – the Nationwide Group Personal Pension Plan (GPP) and the Nationwide Temporary Workers Pension Scheme. New
employees are automatically enrolled into one of these schemes. Outside of the UK, there is a defined contribution pension scheme for a small number of employees in the Isle of Man.
The Group also has funding obligations to several defined benefit pension schemes, which are administered by boards of trustees. Pension trustees are required by law to act in the interests of all
relevant beneficiaries and are responsible for the investment policy of fund assets, as well as the day to day administration. The Group’s largest pension scheme is the Nationwide Pension Fund (the
Fund). This is a contributory defined benefit pension scheme, with both final salary and career average revalued earnings (CARE) sections. The Fund was closed to new entrants in 2007 and since
that date employees have been able to join the GPP. In line with UK pensions legislation, a formal actuarial valuation (‘Triennial Valuation’) of the assets and liabilities of the Fund is carried out at
least every three years by independent actuaries.
The Fund was closed to future accrual on 31 March 2021, with affected employees being moved to the GPP for future pension savings. From 1 April 2021, members moved from active to deferred
status, with future indexation of deferred pensions before retirement measured by reference to the Consumer Price Index (CPI). In the year ended 4 April 2020, a gain of £164 million was
recognised as a past service credit within administrative expenses relating to the closure, and £60 million was accrued within ‘administrative expenses – other staff related costs’ for the cost of
one-off payments to be made to affected members in the form of cash or as contributions to their pensions.
In November 2020, Nationwide and the Trustee of the Fund entered into an arrangement whereby Nationwide has agreed to provide £1.7 billion of collateral (a contingent asset) in the form of
self-issued Silverstone notes to provide additional security to the Fund. The Fund would have access to these notes in the case of certain events such as insolvency of Nationwide.
Further information on the Group’s obligations to defined benefit pension schemes is set out below.
Defined benefit pension schemes
Retirement benefit obligations on the balance sheet
Fair value of fund assets
Present value of funded obligations
Present value of unfunded obligations
Surplus at 4 April
Group
2021
£m
7,033
(6,853)
(8)
172
2020
£m
6,530
(6,228)
(8)
294
Most members of the Fund can draw their pension when they reach the Fund’s retirement age of 65. The methodology for calculating the level of pension benefits accrued before 1 April 2011 varies;
however, most are based on 1/54th of final salary for each year of service. Pension benefits accrued after 1 April 2011 are usually based on 1/60th of average earnings, revalued to the age of
retirement, for each year of service (also called CARE). As noted above, there will be no further accrual of benefits from 1 April 2021, and future indexation of previously accrued benefits will be
valued on the basis of CPI.
On the death of a Fund member, benefits may be payable in the form of a spouse/dependant’s pension, lump sum (paid within five years of a Fund member beginning to take their pension), or
refund of Fund member contributions. Prior to 1 April 2021, Fund members were able to place redundancy severance into their pension.
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
30. Retirement benefit obligations (continued)
Annual Report and Accounts 2021
312
Approximately 68% of the Fund’s pension obligations have been accrued in relation to deferred Fund members (current and former employees not yet drawing their pension) and 32% for current
pensioners and dependants. The average duration of the Fund’s pension obligation is approximately 22 years, reflecting the split of the obligation between deferred members (25 years) and current
pensioners (14 years).
The Group’s retirement benefit obligations include £1 million (2020: £2 million) recognised in a subsidiary company, Nationwide (Isle of Man) Limited. This obligation relates to a defined benefit
scheme providing benefits based on both final salary and CARE, which was closed to new entrants in 2009. The Group’s retirement benefit obligations also include £8 million (2020: £8 million) in
respect of unfunded legacy defined benefit arrangements.
The amounts recognised in the income statement are as follows:
Retirement benefit obligations recognised in the income statement
Defined contribution cost
Defined benefit schemes
Current service cost
Past service (cost)/credit (note i)
Administrative expenses
Included in employee costs (note 8)
Interest on net defined benefit asset (note 3)
Total
Group
2021
£m
(97)
(72)
(5)
(6)
(180)
7
(173)
2020
£m
(89)
(90)
169
(5)
(15)
3
(12)
Note:
i.
In the year ended 4 April 2020, the past service credit reflects a gain of £164 million relating to the closure of the Fund to future accrual on 31 March 2021.
Changes in the present value of the net defined benefit asset/(liability), including unfunded obligations, are as follows:
Movements in net defined benefit asset/(liability)
Surplus/(deficit) at 5 April
Current service cost
Past service (cost)/credit
Interest on net defined benefit asset
Return on assets greater than discount rate
Contributions by employer
Administrative expenses
Actuarial (losses)/gains on defined benefit obligations
Surplus at 4 April
Group
2021
£m
294
(72)
(5)
7
467
66
(6)
(579)
172
2020
£m
(105)
(90)
169
3
141
127
(5)
54
294
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
30. Retirement benefit obligations (continued)
Annual Report and Accounts 2021
313
Current service cost represents the increase in liabilities resulting from employees accruing service over the year. This includes salary sacrifice employee contributions.
Past service cost represents a £5 million (2020: £2 million) increase in liabilities arising from Fund members choosing to pay additional contributions (AVCs or pension credits). Included within the
past service credit for the year ended 4 April 2020 is a gain of £164 million relating to the decision to close the Fund to future accrual on 31 March 2021 and a gain of £7 million in respect of Fund
members made redundant during that year.
The interest on the net defined benefit asset represents the interest accruing on the liabilities over the year, offset by the interest income on assets. A net interest credit of £7 million was recognised
in the year ended 4 April 2021 (2020: £3 million).
The £467 million gain relating to the return on assets greater than the discount rate (2020: £141 million) is driven by gains on equities and investments in unlisted asset classes.
During the year, Nationwide and the Trustee agreed to a new Deficit Recovery Plan and Schedule of Contributions following the finalisation of the Fund’s 31 March 2019 actuarial valuation. As a
consequence of entering into the contingent asset arrangement, no employer deficit contributions were required in the year ended 4 April 2021. Additionally, no employer deficit contributions will
be required in the year ending 4 April 2022 or in future years under the terms of the new Deficit Recovery Plan. Employer contributions of £66 million in the year ended 4 April 2021 relate to the
final contributions in respect of benefit accrual prior to the Fund closing to future accrual on 31 March 2021.
The £579 million actuarial loss on defined benefit obligations (2020: £54 million actuarial gain) is due to:
• An experience gain of £43 million (2020: £117 million gain) primarily reflecting the difference between estimates of long-term inflation and membership assumptions compared to actual
long-term inflation.
• A £581 million loss (2020: £34 million loss) from changes in financial assumptions, driven by a 0.50% increase in assumed Retail Price Index (RPI) inflation and 0.75% increase in assumed
Consumer Price Index (CPI) inflation (which increases the value of the liabilities), partially offset by a 0.05% increase in the discount rate (which decreases the value of liabilities).
• A £41 million loss (2020: £29 million loss) arising from updates to reflect the Fund’s new commutation factors, partially offset by the impact of updating to the latest industry standard actuarial
model for projecting future longevity improvements.
Changes in the present value of defined benefit obligations (including unfunded obligations) are as follows:
Movements in defined benefit obligations
At 5 April
Current service cost
Past service (cost)/credit
Interest expense on retirement obligation
Experience gain on plan assumptions
Changes in demographic assumptions
Changes in financial assumptions
Contributions by employees
Benefits paid
At 4 April
Group
2021
£m
(6,236)
(72)
(5)
(120)
43
(41)
(581)
(8)
159
(6,861)
2020
£m
(6,383)
(90)
169
(148)
117
(29)
(34)
-
162
(6,236)
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
30. Retirement benefit obligations (continued)
Changes in the fair value of plan assets for the pension schemes are as follows:
Movements in plan assets
At 5 April
Interest income on assets
Return on assets greater than discount rate
Administrative expenses
Contributions by employer
Contributions by employees
Benefits paid
At 4 April
Group
2021
£m
6,530
127
467
(6)
66
8
(159)
7,033
2020
£m
6,278
151
141
(5)
127
-
(162)
6,530
The Group offers a salary sacrifice arrangement whereby regular employee contributions are deducted from pay before their salary is paid each month, therefore the majority of regular employee
contributions are reflected in contributions by employer. In the year ended 4 April 2021, contributions made directly by employees of £8 million relate to the one-off payment made to scheme
members due to the closure of the Fund to future accrual. Certain members elected to have all or part of their payment directed into the Fund as a voluntary contribution.
The major categories of assets held for the pension schemes, stated at fair value, are as follows:
Categories of plan assets
Listed equities (quoted)
Government bonds (quoted)
Corporate bonds and other credit investments (quoted)
Infrastructure (unquoted)
Property (unquoted)
Private equity investments (unquoted)
Private debt investments (unquoted)
Cash and derivatives
Liability relating to repurchase agreement
Other assets and liabilities
Total
Group
2021
£m
1,055
4,816
644
221
685
484
282
198
(1,411)
59
7,033
2020
£m
626
4,952
504
198
645
404
202
139
(1,263)
123
6,530
The defined benefit pension schemes do not invest in the Group’s own financial instruments or property. Certain investments in private equity, infrastructure and property are not quoted in active
markets or valued based on observable inputs.
Annual Report and Accounts 2021
314
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
30. Retirement benefit obligations (continued)
Annual Report and Accounts 2021
315
The Fund’s liabilities are well hedged by matching assets, primarily government bonds and corporate bonds. In addition, the Fund invests in alternative matching assets such as property ground
rents and property leases (included in property above) that are expected to generate inflation-linked income over the long term.
The Fund also holds return-seeking assets which are primarily listed equities. These are expected to generate a return over and above the Fund’s liabilities in the long term but may create risk and
volatility in the short to medium term.
During the year the Trustee has continued to manage interest rate and inflation risk in the Fund through the use of certain investments and derivative instruments to reduce volatility from changes
to long-term interest rates and inflation expectations. The Fund’s investments also continue to be supported by the utilisation of a repurchase agreement (a loan, collateralised against the Fund’s
government bonds), which totals £1,411 million at 4 April 2021 (2020: £1,263 million).
The investments are monitored by both the Trustee and the Group to ensure they remain appropriate given the Fund’s long-term objectives.
The principal actuarial assumptions used are as follows:
Principal actuarial assumptions
Discount rate
Future salary increases
Future pension increases (maximum 5%)
Retail price index (RPI) inflation
Consumer price index (CPI) inflation
2021
%
2.00
-
3.00
3.10
2.40
2020
%
1.95
2.65
2.55
2.60
1.65
An assumption for future salary increases is no longer required due to the closure of the Fund to future accrual from 1 April 2021.
The assumptions for mortality rates are based on standard mortality tables which allow for future improvements in life expectancies and are adjusted to represent the Fund’s membership. The
assumptions made are illustrated in the table below, showing how long the Group would expect the average Fund member to live for after the age of 60, based on reaching that age at 4 April 2021 or
in 20 years’ time at 4 April 2041.
Life expectancy assumptions (years)
Age 60 at 4 April 2021
Males
Females
Age 60 at 4 April 2041:
Males
Females
2021
2020
27.6
29.4
29.0
30.7
27.6
29.3
29.0
30.6
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Annual Report and Accounts 2021
316
Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
30. Retirement benefit obligations (continued)
Critical accounting estimates and judgements
Retirement benefit obligations
The key assumptions used to calculate the defined benefit obligation which represent significant sources of estimation uncertainty are the discount rate, inflation assumptions and mortality
assumptions. If different assumptions were used, this could have a material effect on the reported surplus. The sensitivity of the results to these assumptions is shown below.
Change in key assumptions at 4 April 2021
0.1% increase in discount rate
0.1% increase in inflation assumption
1 year increase in life expectancy at age 60 in respect of all members
Increase/(decrease)
in surplus from
assumption change
£m
145
(132)
(233)
The above sensitivities apply to individual assumptions in isolation. The 0.1% sensitivity to the inflation assumption includes a corresponding 0.1% increase in the future pension increase
assumptions.
31. Core capital deferred shares
Group and Society
At 4 April 2021
At 4 April 2020
Number of
shares
10,555,500
10,500,000
CCDS
£m
11
11
Share
premium
£m
1,323
1,314
Total
£m
1,334
1,325
During the year ended 4 April 2021, the Society issued 55,500 of £1 core capital deferred shares (CCDS). These CCDS form a single series together with previous issuances. The proceeds of the
issuance were £9 million (gross and net of issuance costs).
CCDS are a form of Common Equity Tier 1 (CET1) capital which have been developed to enable the Group to raise capital from the capital markets. Previously issued Tier 1 capital instruments, PIBS,
no longer meet the regulatory capital requirements of CRD IV and are being gradually phased out of the calculation of capital resources under transitional rules.
CCDS are perpetual instruments. They rank equally to each other and are junior to claims against the Society of all depositors, creditors and investing members. Each holder of CCDS has one vote,
regardless of the number of CCDS held.
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
31. Core capital deferred shares (continued)
Annual Report and Accounts 2021
317
In the event of a winding up or dissolution of the Society and if a surplus was available, the amount that the investor would receive for each CCDS held is limited to the average principal amount in
issue, which is currently £126.39 per share.
There is a cap on the distributions that can be paid to holders of CCDS in any financial year. The cap is currently set at £16.73 per share and is adjusted annually in line with CPI. A final distribution of
£54 million (£5.125 per share) for the financial year ended 4 April 2020 was paid on 22 June 2020 and an interim distribution of £54 million (£5.125 per share) in respect of the period to
30 September 2020 was paid on 21 December 2020. These distributions have been recognised in the statement of movements in members’ interests and equity.
Since the balance sheet date, the directors have declared a distribution of £5.125 per share in respect of the period to 4 April 2021, amounting in aggregate to £54 million. This has not been
reflected in these financial statements as it will be recognised in the year ending 4 April 2022, by reference to the date at which it was declared.
32. Other equity instruments
At 5 April
Redemptions
Issuances
At 4 April
Other equity instruments are Additional Tier 1 (AT1) capital instruments.
Group and Society
2021
£m
593
-
743
1,336
2020
£m
992
(992)
593
593
The Society issued £750 million (£743 million net of issuance costs) of new AT1 capital instruments on 10 June 2020. The AT1 instruments rank equally to each other and are junior to claims against
the Society of all depositors, creditors and investing members, other than the holders of CCDS. The AT1 instruments pay a fully discretionary, non-cumulative fixed interest at an initial rate of 5.75%
per annum. The rate will reset on 20 December 2027 and every five years thereafter to the benchmark gilt reset reference rate plus 5.625% per annum. Coupons are paid semi-annually in June and
December.
The Society issued £600 million (£593 million net of issuance costs) of new AT1 capital instruments on 17 September 2019. The AT1 instruments rank equally to each other and are junior to claims
against the Society of all depositors, creditors and investing members, other than the holders of CCDS. The AT1 instruments pay fully discretionary, non-cumulative fixed interest coupons at an initial
rate of 5.875% per annum. The rate will reset on 20 June 2025 and every five years thereafter to the benchmark gilt reset reference rate plus 5.39% per annum. Coupons are paid semi-annually in
June and December. The Society redeemed £1 billion (£992 million net of issuance costs) of AT1 capital instruments in full on 20 June 2019.
Interest payments totalling £57 million were made in the year ended 4 April 2021 (2020: £42 million), representing the maximum non-cumulative fixed coupon amounts. These payments have been
recognised in the statement of movements in member’s interest and equity. A coupon payment of £39 million is expected to be paid on 22 June 2021 and will be recognised in the statement of
movements in members’ interests and equity in the financial year ending 4 April 2022.
AT1 instruments have no maturity date but are repayable at the option of the Society from the first reset date, and on every fifth anniversary reset date thereafter. If the fully loaded CET1 ratio for the
Society, on either a consolidated or unconsolidated basis, falls below 7% the AT1 instruments convert to CCDS instruments at the rate of one CCDS share for every £100 of AT1 holding.
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
33. Investments in Group undertakings
The Society’s investments in Group undertakings are as follows.
At 5 April
Additions
Disposals, redemptions and repayments
At 4 April
Subsidiary undertakings
Shares
£m
339
22
-
361
2021
Loans
£m
34,868
3,474
(451)
37,891
Total
£m
35,207
3,496
(451)
38,252
Shares
£m
315
24
-
339
2020
Loans
£m
31,905
3,426
(463)
34,868
Total
£m
32,220
3,450
(463)
35,207
The interests of the Society in its subsidiary undertakings as at 4 April 2021 are set out below.
Subsidiary name
Regulated subsidiaries
Derbyshire Home Loans Limited
E-Mex Home Funding Limited
The Mortgage Works (UK) plc
UCB Home Loans Corporation Limited
Other subsidiaries
Dunfermline BS Nominees Limited
First Nationwide
Home Propositions Limited
Jubilee Mortgages Limited
Monument (Sutton) Limited
Nationwide (Isle of Man) Limited
Nationwide Syndications Limited
NBS Ventures Limited
NBS Ventures Management Limited
Piper Javelin Holding Company Limited
Piper Javelin No 1 Limited
The Derbyshire (Premises) Limited
Notes
i
i
i
i
ii
ii
ii
ii
ii
ii
ii
ii
ii
ii
Subsidiary name
Dormant subsidiaries
at.home nationwide Limited
Confederation Mortgage Services Limited
Ethos Independent Financial Services Limited
Exeter Trust Limited
LBS Mortgages Limited
Nationwide Anglia Property Services Limited
Nationwide Financial Service Limited
Nationwide Home Loans Limited
Nationwide Housing Trust Limited
Nationwide International Limited
Nationwide Lease Finance Limited
Nationwide Overseas (UK) Limited
Nationwide Trust Limited
NBS CoSec Limited
NIN1 Limited (formerly Nationwide Investments (No.1) Limited)
Staffordshire Leasing Limited
Annual Report and Accounts 2021
318
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Notes:
i.
ii.
Audited accounts are prepared for regulated entities.
For these companies, the Group has adopted the audit exemption for the year ended 4 April 2021 under Section 479A of the Companies Act 2006. The Society guarantees all outstanding liabilities of the exempted
subsidiary undertakings.
Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
33. Investments in Group undertakings (continued)
Annual Report and Accounts 2021
319
Home Propositions Limited was incorporated on 3 August 2020. The Society directly or indirectly holds 100% of the ordinary share capital for each subsidiary undertaking. All of the subsidiary
undertakings are limited liability companies, with the exception of First Nationwide which is an unlimited company.
The registered office for all subsidiary undertakings, other than those listed in the table below, is Nationwide House, Pipers Way, Swindon, SN38 1NW.
Subsidiary name
Dunfermline BS Nominees Limited
Nationwide (Isle of Man) Limited
Registered office
Caledonia House, Carnegie Avenue, Dunfermline, KY11 8PJ
5-11 St. Georges Street, Douglas, Isle of Man, IM99 1RN
There are no significant restrictions on any of the Society’s subsidiaries in paying dividends or repaying loans, subject to their financial and operating performance and availability of distributable
reserves.
The Group has no material shares in associates. Further details regarding the Group’s interests in equity shares are included in note 13.
Subsidiaries by virtue of control
Details of consolidated and unconsolidated structured entities are set out in note 34.
34. Structured entities
A structured entity is an entity in which voting or similar rights are not the dominant factor in deciding control. Structured entities are consolidated when the substance of the relationship indicates
control.
Consolidated structured entities
Structured entities are assessed for consolidation in accordance with the accounting policy set out in note 1. The following structured entities are consolidated in the Group’s results.
Structured entity name
Nationwide Covered Bonds LLP
Silverstone Master Issuer plc
Silverstone Funding (No.1) Limited
Nature of business
Mortgage acquisition and guarantor of covered bonds
Funding vehicle
Funding vehicle
Registered office
Nationwide House, Pipers Way, Swindon, SN38 1NW
Wilmington Trust SP Services (London) Limited, Third
Floor, 1 King’s Arms Yard, London, EC2R 7AF
Further details on the activities of the above structured entities are included in note 14.
Unconsolidated structured entities
The Group has interests in structured entities which it does not sponsor or control. These largely consist of holdings of mortgage backed securities and covered bonds issued by entities that are
sponsored by other unrelated financial institutions. The entities are financed primarily by investments from investors, such as the purchase of issued notes.
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Notes to the financial statements (continued)
Notes to the financial statements (continued)
34. Structured entities (continued)
Annual Report and Accounts 2021
320
The Group’s direct interests in unconsolidated structured entities comprise primarily investments in asset backed securities which are reported within investment securities on the balance sheet.
The total carrying value of these interests at 4 April 2021 is £4,078 million (2020: £4,089 million). Further details on the credit risk that the Group is exposed to in respect of these asset backed
securities can be found in the ‘Credit risk - Treasury assets’ section of the Risk report.
Management has concluded that the Group has no control or significant influence over these entities and that the carrying value of the interests held in these entities represents the maximum
exposure to loss. During the year the Group has not provided any non-contractual financial or other support to these entities and has no current intention of providing any such support. There were
no transfers to or from these unconsolidated structured entities during the year.
35. Related party transactions
Subsidiary, parent and ultimate controlling party
The Group is controlled by Nationwide Building Society, the ultimate parent, which is registered in England and Wales. Details of subsidiary undertakings are shown in note 33.
Key management personnel compensation
Members of the Nationwide Leadership Team (including executive directors), together with the non-executive directors of the Society, are considered to be the key management personnel as
defined by IAS 24 ‘Related Party Disclosures’. Total compensation for key management personnel for the year was as follows.
Key management personnel compensation
Short term employee benefits
Other long-term benefits
Termination benefits
Share based payments
Total
2021
£’000
8,084
883
253
2,054
11,274
2020
£’000
8,511
782
1,107
1,736
12,136
Other long-term benefits include amounts relating to long-term bonus schemes, some of which will be paid in future periods. Further information on these can be found in note 8. Share based
payments include amounts that are dependent on the performance of the CCDS. Further information is included in the Report of the directors on remuneration.
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Notes to the financial statements (continued)
Notes to the financial statements (continued)
35. Related party transactions (continued)
Transactions with related parties
Annual Report and Accounts 2021
321
A number of transactions are entered into with related parties in the normal course of business. These include loans, deposits and the payment and recharge of administrative expenses. The
outstanding balances for these related party transactions at the year end, and the associated income and expenses for the year are as follows:
Transactions with related parties
Loans payable to the Society
Loans outstanding at 5 April
Loans issued during the year
Loan repayments during the year
Loans outstanding at 4 April
Deposits payable by the Society
Deposits outstanding at 5 April
Deposits placed during the year
Deposit repayments during the year
Deposits outstanding at 4 April
Net interest income
Interest receivable
Interest expense
Other income and expenses
Fees and expenses paid to the Society
Other balance sheet items
Accrued income and prepaid expenses due to the Society
Other liabilities payable by the Society
Right-of-use asset leased from subsidiary
Liability for right-of-use asset leased from subsidiary
Society subsidiaries
2021
£m
34,868
3,474
(451)
37,891
1,785
1
(638)
1,148
833
25
54
650
2,259
2
2
2020
£m
31,905
3,426
(463)
34,868
1,545
240
-
1,785
798
54
38
1,454
3,362
2
2
Key management personnel
2020
£m
2021
£m
0.9
2.1
(0.6)
2.4
5.1
12.5
(12.7)
4.9
-
-
-
-
-
-
-
1.5
0.5
(1.1)
0.9
4.3
12.4
(11.6)
5.1
-
-
-
-
-
-
-
In addition, the Society enters into derivative financial instruments with the consolidated structured entities used in its asset backed funding programmes, which are described in note 14. As at
4 April 2021, the Society held intercompany derivative assets of £55 million and intercompany derivative liabilities of £987 million (2020: £146 million and £1,791 million, respectively) in respect of
these instruments.
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Annual Report and Accounts 2021
Notes to the financial statements (continued)
Notes to the financial statements (continued)
35. Related party transactions (continued)
Transactions with key management personnel
Transactions with key management personnel are on the same terms and conditions applicable to other employees within the Group. A register is maintained by the Society containing details of
loans, transactions and arrangements made between the Society or its subsidiary undertakings and directors of the Society or persons connected with directors of the Society.
The register will be available for inspection by members at the Annual General Meeting on 21 July 2021 and during normal office hours at the Society’s principal office (Nationwide House, Pipers
Way, Swindon, SN38 1NW) during the period of 15 days prior to the meeting.
Transactions with Group companies
Transactions with Group companies arise in the normal course of business. Interest on outstanding loans and deposits accrues at a transfer pricing rate agreed between the Society and its
subsidiary undertakings. The Society does not charge the net defined benefit cost to the subsidiary undertakings that participate in the Nationwide Pension Fund. The pension cost to these
subsidiary undertakings equals the contributions payable to the Fund.
36. Notes to the cash flow statements
Non-cash items included in profit before tax
Net increase in impairment provisions
Net increase/(decrease) in provisions for liabilities and charges (note i)
Amortisation and losses on investment securities
Depreciation, amortisation and impairment
Profit on sale of property, plant and equipment
Loss on the revaluation of property, plant and equipment
Loss on the revaluation of investment properties
Net charge/(credit) in respect of retirement benefit obligations
Interest on subordinated liabilities
Interest on subscribed capital
(Gains)/losses from derivatives and hedge accounting
Total (note i)
Group
2021
2020
Society
2021
2020
£m
66
13
113
597
(2)
6
4
76
166
4
(34)
1,009
£m
121
(30)
18
666
(4)
5
-
(77)
213
5
7
924
£m
39
13
113
597
(2)
6
4
76
166
4
21
1,037
£m
87
(29)
18
666
(4)
6
-
(77)
213
5
(19)
866
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Notes to the financial statements (continued)
Notes to the financial statements (continued)
36. Notes to the cash flow statements (continued)
Changes in operating assets and liabilities
Loans and advances to banks and similar institutions
Net derivative financial instruments
Loans and advances to customers
Other operating assets
Shares
Deposits from banks and similar institutions, customers and others
Debt securities in issue
Contributions to defined benefit pension scheme
Other operating liabilities (note i)
Total (note i)
Cash and cash equivalents
Cash
Loans and advances to banks and similar institutions repayable in 3 months or less
Total
Group
2021
£m
315
(41)
(723)
(135)
10,623
5,630
(6,247)
(66)
12
9,368
16,693
1,012
17,705
2020
£m
(282)
(197)
(2,190)
(26)
5,722
1,030
(1,731)
(127)
74
2,273
13,748
726
14,474
Society
2021
£m
315
(1,360)
2,713
(2,000)
10,621
5,843
(4,996)
(65)
(1,332)
9,739
16,693
985
17,678
2020
£m
(282)
471
1,012
(3,752)
5,722
924
(2,785)
(127)
1,407
2,590
13,748
707
14,455
Note:
i.
Comparatives have been restated to reflect the changes in presentation of the bank levy as detailed in note 1.
Annual Report and Accounts 2021
323
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Notes to the financial statements (continued)
Notes to the financial statements (continued)
36. Notes to the cash flow statements (continued)
Annual Report and Accounts 2021
324
The Group is required to maintain balances with the Bank of England and certain other central banks which, at 4 April 2021, amounted to £1,376 million (2020: £1,355 million). These balances are included
within loans and advances to banks and similar institutions on the balance sheet and are not included in the cash and cash equivalents in the cash flow statement as they are not liquid in nature. The Group
also maintains cash collateral and other deposit balances relating to derivative activities totalling £1,220 million (2020: £1,555 million).
Movements in liabilities arising from financing activities are set out below.
Movements in liabilities arising from financing activities
Group and Society
At 5 April
Issuances/additions
Redemptions/repayments
Foreign exchange
Fair value and other movements
At 4 April
Subordinated
liabilities
£m
9,317
-
(683)
(705)
(354)
7,575
2021
Subscribed
capital
£m
253
-
-
-
(10)
243
Lease
liabilities
£m
265
18
(27)
-
6
262
Total
£m
9,835
18
(710)
(705)
(358)
8,080
Subordinated
liabilities
£m
6,706
1,603
-
390
618
9,317
2020
Subscribed
capital
£m
250
-
-
-
3
253
Lease
liabilities
£m
197
92
(27)
-
3
265
Total
£m
7,153
1,695
(27)
390
624
9,835
The Society’s liabilities arising from financing activities are materially the same as shown for Group.
Derivative financial instruments used to hedge financing liabilities include interest rate and cross-currency swaps. Interest received and proceeds on redemption of these hedging instruments are included
within financing cash flows and for the year ended 4 April 2021 amounted to £156 million and £22 million (2020: £86 million and £nil) respectively. Other changes in the value of these derivatives in the year
ended 4 April 2021 included decreases of £1,005 million (2020: increases of £1,122 million) due to foreign exchange, fair value and other movements.
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Notes to the financial statements (continued)
Notes to the financial statements (continued)
37. Capital management
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325
The Group is subject to the regulatory capital requirements applied by its regulator, the Prudential Regulation Authority (PRA). Regulatory capital comprises the Group’s general reserve, fair value
through other comprehensive income reserve, revaluation reserve, core capital deferred shares, other equity instruments, permanent interest-bearing shares (PIBS) and subordinated debt, subject
to various adjustments and transitional arrangements required by the capital rules.
During the year the Group complied with the capital requirements applied by the PRA. Further unaudited details about the Group’s capital position can be found in the ‘Solvency risk’ section of the
Risk report.
38. Registered office
Nationwide is a building society, incorporated and domiciled in the United Kingdom. The address of its registered office is:
Nationwide Building Society
Nationwide House
Pipers Way
Swindon
SN38 1NW
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Other information
Annual business statement
1. Statutory percentages
2. Other percentages
3. Information relating to directors at 4 April 2021
Underlying profit
Forward looking statements
Glossary
327
330
330
330
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Annual Report and Accounts 2021
Annual business statement for the year ended 4 April 2021
1. Statutory percentages
Statutory percentages
Lending limit
Funding limit
2021 Statutory limit
%
25.00
50.00
%
6.21
26.83
The above percentages have been calculated in accordance with the provisions of the
Building Societies Act 1986 as amended by the Building Societies Act 1997 and the
Modification of the Lending Limit and Funding Limit Calculations Order 2004.
The lending limit measures the proportion of business assets not in the form of loans fully
secured on residential property and is calculated as (X-Y)/X where:
X = business assets, being the total assets of the Group plus impairment provisions on loans
and advances to customers, less liquid assets, property, plant and equipment,
intangible fixed assets and investment properties as shown in the Group balance sheet.
Y = the principal of, and interest accrued on, loans owed to the Group which are fully
secured on residential property.
The funding limit measures the proportion of shares and borrowings not in the form of shares
held by individuals and is calculated as (X-Y)/X where:
X = shares and borrowings, being the aggregate of:
i)
ii)
iii)
the principal value of, and interest accrued on, shares in the Society,
the principal of, and interest accrued on, sums deposited with the Society or any
subsidiary undertaking of the Society excluding offshore deposits in an EEA subsidiary,
and
the principal value of, and interest accrued under, bills of exchange, instruments or
agreements creating or acknowledging indebtedness and accepted, made, issued or
entered into by the Society or any such undertaking, less any amounts qualifying as own
funds.
Y = the principal value of, and interest accrued on, shares in the Society held by individuals
otherwise than as bare trustees (or, in Scotland, simple trustees) for bodies corporate or
for persons who include bodies corporate.
The statutory limits are as laid down under the Building Societies Act 1986 as amended by
the Building Societies Act 1997 and ensure that the principal purpose of a building society is
that of making loans which are secured on residential property and are funded substantially
by its members.
2. Other percentages
Other percentages
As a percentage of shares and borrowings:
Gross capital
Free capital
Liquid assets
Profit for the financial year as a percentage of mean total assets
Management expenses as a percentage of mean total assets
2021
%
9.5
9.0
19.9
0.25
0.88
2020
%
10.2
9.4
16.8
0.15
0.95
The above percentages have been prepared from the Society’s consolidated accounts and in
particular:
•
•
•
•
•
•
‘Shares and borrowings’ represent the total of shares, deposits from banks and similar
institutions, other deposits and debt securities in issue
‘Gross capital’ represents the aggregate of general reserve, revaluation reserve, fair value
through other comprehensive income reserve, cash flow hedge reserve, CCDS, Additional
Tier 1 capital, subscribed capital and subordinated liabilities
‘Free capital’ represents the aggregate of gross capital and provisions for collective
impairment losses on loans and advances to customers less property, plant and
equipment and intangible assets
‘Liquid assets’ represent the total of cash, loans and advances to banks and similar
institutions and investment securities
‘Mean total assets’ represent the amount produced by halving the aggregate of total
assets at the beginning and end of the financial year
‘Management expenses’ represent administrative expenses including depreciation,
amortisation and impairment of property, plant and equipment and intangible assets.
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Annual Report and Accounts 2021
Annual business statement (continued)
3. Information relating to directors at 4 April 2021
Information relating to directors at 4 April 2021
Name and date of birth
Occupation
Date of appointment
Other directorships
D L Roberts CBE
Chair
12 September 1962
J D Garner
23 June 1969
R A Clifton CBE
30 January 1958
R M Fyfield
3 May 1969
A Hitchcock
16 January 1965
D Klein
10 August 1968
K A H Parry OBE
Senior Independent Director
29 January 1962
T Rajah MBE
24 August 1982
Non-executive director
1 September 2014
Campion Willcocks Limited
Beazley plc (Chair)
Beazley Furlonge Limited (Chair)
NHS England (Vice Chair)
Executive director
5 April 2016
UK Finance
Non-executive director
1 July 2012
Non-executive director
2 June 2015
Non-executive director
2 December 2018
Non-executive director
1 March 2021
Non-executive director
23 May 2016
Non-executive director
1 September 2020
Rita Clifton Limited
Ascential plc
The John Lewis Partnership
Leaderbrand Limited
The Green Alliance Trust
Roku, Inc
BBC Commercial Holdings Limited
Asos plc
Daily Mail and General Trust plc
K A H Parry Limited
Royal London Mutual Insurance Society Limited (Chair)
Royal London Asset Management Limited (Chair)
Royal London Asset Management Holdings Limited (Chair)
Holland & Barrett Limited
Live Better With Limited (CEO)
Unforgettable Trading Limited
London & Partners Limited
London & Partners Ventures Limited
Dot London Domains Limited
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Annual business statement (continued)
3. Information relating to directors at 4 April 2021 (continued)
Information relating to directors at 4 April 2021
Name and date of birth
C S Rhodes
17 March 1963
Occupation
Executive director
Date of appointment
20 April 2009
P G Rivett
27 June 1955
T J W Tookey
17 July 1962
G Waersted
16 March 1955
Non-executive director
1 September 2019
Non-executive director
2 June 2015
Non-executive director
1 June 2017
Annual Report and Accounts 2021
329
Annual Report and Accounts 2021
Other directorships
at.home Nationwide Limited
Derbyshire Home Loans Limited
E-Mex Home Funding Limited
Jubilee Mortgages Limited
The Mortgage Works (UK) plc
UCB Home Loans Corporation Limited
NBS Ventures Management Limited
First Nationwide
LBS Mortgages Limited
Nationwide Housing Trust Limited
Nationwide Investment No.1 Limited
Nationwide Syndications Limited
Staffordshire Leasing Limited
Silverstone Securitisation Holdings Limited
Arkose Funding Limited
Standard Chartered plc
Standard Chartered Bank plc
Westmoreland Court Management (Beckenham) Limited
Royal London Mutual Insurance Society Limited
Telenor ASA (Chair)
Petoro AS (Chair)
Lukris Invest AS
Fidelity International
Saferoad ASA
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Directors’ service address
Documents may be served on any of the directors c/o Addleshaw Goddard, One St Peter’s Square, Manchester M2 3DE.
Directors’ service contracts
Executive directors’ terms and conditions of employment are detailed in their individual contracts or service agreements which include a notice period of 12 months from the Society to the individual
and a notice period of six months from the individual to the Society. The notice period offered to any new recruit would be in line with this approach.
Directors’ share options
A proportion of executive directors’ variable pay is linked to the value of the Society’s core capital deferred shares (CCDS), details of which have been provided in the Report of the directors on
remuneration. For 2020/21, the Directors’ Performance Award (DPA) was the only variable pay plan in which directors participated. 20% of awards under the DPA are payable in June 2021 with
20% retained until June 2022. The remaining 60% is deferred, payable between years three and seven following the date of award. 50% of the upfront portion and 60% of the deferred portion is
linked to the performance of the Society’s core capital deferred shares (CCDS). These CCDS linked elements are payable in cash subject to a 12 month retention period. No directors held securities in
Nationwide Building Society during the year.
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Annual Report and Accounts 2021
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Annual Report and Accounts 2021
Underlying profit
Profit before tax shown on a statutory and underlying basis is set out on page 61. The purpose of this measure is to reflect management’s view of the Group’s underlying performance and to assist with
like for like comparisons of performance across periods. Underlying profit is not designed to measure sustainable levels of profitability as that potentially requires exclusion of non-recurring items even
though they are closely related to (or even a direct consequence of) the Group’s core business activities.
Forward looking statements
Certain statements in this document are forward looking with respect to plans, goals and expectations relating to the future financial position, business performance and results of Nationwide.
Although Nationwide believes that the expectations reflected in these forward-looking statements are reasonable, Nationwide can give no assurance that these expectations will prove to be an
accurate reflection of actual results. By their nature, all forward looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond the control of
Nationwide including, amongst other things, UK domestic and global economic and business conditions, market related risks such as fluctuation in interest rates and exchange rates,
inflation/deflation, the impact of competition, changes in customer preferences, risks concerning borrower credit quality, delays in implementing proposals, the timing, impact and other
uncertainties of future acquisitions or other combinations within relevant industries, the policies and actions of regulatory authorities, the impact of tax or other legislation and other regulations in
the jurisdictions in which Nationwide operates. The economic outlook also remains unusually uncertain due to Brexit and the impacts of Covid-19. As a result, Nationwide’s actual future financial
condition, business performance and results may differ materially from the plans, goals and expectations expressed or implied in these forward-looking statements. Due to such risks and
uncertainties Nationwide cautions readers not to place undue reliance on such forward-looking statements.
Nationwide undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.
This document does not constitute or form part of an offer of securities for sale in the United States. Securities may not be offered or sold in the United States absent registration or an exemption
from registration. Any public offering to be made in the United States will be made by means of a prospectus that may be obtained from Nationwide and will contain detailed information about
Nationwide and management as well as financial statements.
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Glossary
The glossary for Annual Report and Accounts 2021 is available at:
https://www.nationwide.co.uk/about/corporate-information/results-and-accounts
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If you have hearing or speech difficulties and are a textphone
user, you can call us direct in text on 0800 37 80 01.
We also accept calls via BT Text Relay. Just dial 18001 followed
by the full telephone number you wish to ring.
Nationwide Building Society
Head Office: Nationwide House, Pipers Way, Swindon, Wiltshire SN38 1NW.
nationwide.co.uk
G101 (A) 2021