Pension schemes deficit, sale of non core businesses and taxation

Significant reduction in the Group pension schemes’ deficit

The Group’s defined benefit pension schemes’ gross deficit at 31 December 2007 improved by £1,416 million to £683 million, comprising net recognised liabilities of £2,033 million partly offset by unrecognised actuarial gains of £1,350 million. This improvement reflects an increase in the real discount rate used to value the schemes’ liabilities and Group contributions to the schemes, which exceeded the cost of accruing benefits.

Substantial profit on sale of non-core businesses

During 2007 the Group sold a number of non-core businesses realising profits on the disposal totalling £657 million. This has further strengthened the Group’s capital ratios and improved capital flexibility.

In May 2007, Lloyds TSB Group agreed the sale of the business and assets of Lloyds TSB Registrars to Advent International, subject to completion and other adjustments. The transaction was completed on 30 September 2007, following regulatory approval, and the Group has reported a profit before tax on the sale of this business of £407 million (tax: £nil).

In July 2007, the Group announced an agreement to sell Abbey Life Assurance Company Limited (Abbey Life) to Deutsche Bank AG. This transaction was also completed at the end of September 2007 and the Group has reported a profit before tax on the sale of this business of £272 million (tax: £nil). In addition, a pre-sale dividend of £175 million was paid to Group in June 2007.

Taxation charge

The Group’s tax charge for 2007 was £679 million, which was an effective rate of 17.0 per cent (2006: 31.6 per cent). The effective tax rate is below the standard UK corporation tax rate as a result of the gains on disposals being either exempt from tax or covered by capital losses arising in earlier years, a deferred income tax credit following the reduction in the corporation tax rate announced in the 2007 Finance Act, and credits arising on policyholder interests. Under IFRS, the income statement includes a corresponding charge for policyholder interests within the Group’s profit before tax. Excluding these items the Group’s effective rate of tax was 28.3 per cent.

The 2007 Finance Act reduction in corporation tax rate from 30 per cent to 28 per cent resulted in a one-off impairment charge of £28 million before tax (£20 million after tax), relating to a reduction in future rental income within the Group’s leasing business. In addition, the Group’s deferred tax liabilities at 31 December 2007 were reduced, resulting in a credit to the Group’s tax charge of £110 million. The net impact of these items has been to increase earnings attributable to shareholders by £90 million during the year.