Final results for The Co-operative Group for the 52 weeks ended 4 January 2014

April 17, 2014

Group reports heavy losses reflecting impact of Bank recapitalisation

  • Results also impacted by Somerfield goodwill impairment
  • Food business delivered robust second-half as new strategy boosted like-for-like performance
Group sales (inc. VAT) £10.5bn £11.0bn
Group underlying operating profit**  £210m  £297m
Of which -   
Food    £247m  £269m
Pharmacy  £33m  £28m
Funerals     £62m  £60m
GI  £36m  £13m
Somerfield goodwill impairment  (£226m)  -
Group operating (loss)/profit  (£148m)  £142m
Loss on discontinued operations***  (£2.1bn)  (£511m)
Group comprehensive loss ****  (£2.5bn)  (£529m)
Net debt  £1.4bn  £1.7bn

*The results for 2012 have been restated following the reduction in the Group’s interest in The Co-operative Bank to 30%. Full details are included in Note 9 to the Group accounts. The figures for 2012 also reflect a 53-week trading year, against a 52-week year for 2013

**Underlying operating profit is a non-GAAP measure of segment operating profit before property disposals, change in value of investment properties and one-off costs

***The 2013 loss on discontinued operations of £2.1bn is predominantly made up of the Bank’s trading loss up to the date of disposal of £1.44bn and £625m with regard to the loss on disposal of the Bank. Further details are included in note 9 of the Group accounts

****Group comprehensive loss includes statutory loss of £2.3bn and other comprehensive losses of £0.2bn

Richard Pennycook, Interim Group Chief Executive of The Co-operative Group, said:

“2013 was a disastrous year for The Co-operative Group, the worst in our 150-year history. Today’s results demonstrate that but they also highlight fundamental failings in management and governance at the Group over many years. These results should serve as a wake-up call to anyone who doubts just how serious the challenges we face are.”

Ursula Lidbetter, Chair of The Co-operative Group, said:

“During 2013, it became apparent that our governance had fallen far short of the standards to which we aspire as a co-operative society. Now is the time to put that right through fundamental reform – we have to act with urgency if we are to lay the foundations for a stronger, healthier co-operative business in the future.”


  • Heavy losses for year reflecting:
    • Significant losses at The Co-operative Bank (“the Bank”)
    • Loss on reduction in Group’s shareholding in the Bank
    • Impairment of  goodwill which arose on the Somerfield acquisition
    • Reduced sales in Food, impacted by disposal programme designed to focus business on its core convenience store chain
    • Increased central corporate costs
  • Core businesses delivered solid performance in tough markets:
    • Food saw like-for-like sales fall by 0.2%; LFL sales in core convenience chain rose by 1.6%. Second half LFL performance saw an overall 0.6% increase, with a 5.3% increase in convenience. Revenues and underlying operating profits were lower over the full year, reflecting store disposals, a shorter accounting period and price reductions
    • Funeral sales rose to £370m (£358m) and underlying operating profit increased to £62m (£60m)
    • Pharmacy sales fell to £760m (£764m), with underlying profits up to £33m (£28m)
    • General Insurance sales dropped to £476m (£580m) with underlying profits significantly increased to £36m (£13m), reflecting a better claims experience
  • Trading Group syndicate bank facilities renegotiated as part of move to meet Group obligations under the Bank recapitalisation plan
  • Net debt reduced by £286m to £1.4bn, driven by the disposal and sale and leaseback of property assets and the sale of the remaining motor dealerships
  • Capital expenditure fell to £239m (£410m), reflecting the need to provide capital for the Bank and to reduce debt

Strategic update/timetable:

  • The findings of Sir Christopher Kelly’s independent review into the events that led to the announcement of the Bank’s capital action plan are expected to be reported in the week commencing Monday 28 April. These will also be reported to members at the Annual General Meeting on Saturday 17 May
  • On 14 March, Lord Myners announced a progress update on his independent Governance Review that had been commissioned by the Group Board. Lord Myners is expected to issue his detailed Review following the publication of the Kelly Report. The Co-operative Group Board has committed to leading the governance reform process of the Society and has approved that a resolution will be put to members at a General Meeting on 17 May. This resolution, set out below, will ensure that the key principles of the Governance Review led by Lord Myners will be voted on by The Co-operative Group membership. The Group Board has also established a sub-committee to assist the Board in taking forward the reform initiative and to maintain the pace of change required
  • Resolution to be put to members at a General Meeting on 17 May:
    • The creation of a Board of directors elected by members that is individually and collectively qualified to lead an organisation of the size and complexity of The Co-operative Group
    • The establishment of a structure that gives the Co-operative Group’s members appropriate powers to hold the Board properly to account for the performance of the business and adherence to co-operative values and principles
    • A move to the concept of ‘one member one vote’ with appropriate representation for independent Co-operative societies
    • The inclusion of necessary provisions in the Rules of the Co-operative Group to protect against de-mutualisation
  • The outcome of a wide-ranging review of Group strategy will be outlined in detail to members at the AGM
  • As part of the wider strategic review, the Group has reviewed its approach to financial reporting to ensure it is communicating its performance in the most appropriate ways to all stakeholders. On an on-going basis the Group will announce interim and final results. It will not issue trading statements/updates between these reporting dates


  • The Co-operative Group’s family of businesses have traded consistently with management expectations in the early part of the new financial year
  • In our biggest business, Food, we continue to make progress on our True North strategy, a key aspect of which is to focus on reducing prices for our customers
  • The development of the convenience store estate is ongoing with plans to launch over 100 new convenience stores this year
  • The Co-operative Group is continuing to explore opportunities for the sale of our Farms and Pharmacy businesses
  • On 24 March, The Co-operative Bank announced a plan to raise capital of £400m. This is in addition to its existing £1.5bn recapitalisation plan, towards which the Group last year committed to contribute £333m of capital. The Group has provided £70m to date, with a further £100m due on 30 June 2014, and the remaining £163m to be contributed by 31 December 2014.  When the Board of the Bank has finalised the structure of its capital raising, the Group will decide upon its participation in this exercise

Chair Statement

The Group entered 2013 focused on the future development of the organisation.

Our Food business was developing its True North strategy and underlying performance from our trading businesses was encouraging.

In April, however, following a protracted period of due diligence, we withdrew from the planned expansion of our banking arm by way of the acquisition of branches and accounts from Lloyds Banking Group (Project Verde).

In May, we welcomed our new Chief Executive, Euan Sutherland, recruited from outside the organisation to revitalise the Group for the next generation.

Within days of his joining, an unfolding crisis in our Bank emerged that risked not only its future but that of the entire Group. There followed a six notch downgrade by Moody’s in the credit rating of the Bank, as the extent of a significant capital shortfall became apparent. In order to meet regulatory capital requirements as laid down by the Prudential Regulation Authority (PRA) the Bank was required to raise a further £1.5bn of new Tier 1 capital which it achieved by means of the Liability Management Exercise (LME) explained on page 11 of the Co-operative Group Annual Report 2013. Although this reduced the Group’s ownership in the Bank to a 30% stake, this action was essential in order to safeguard the Bank for customers, colleagues and Members. The battle to save the Bank dominated our activity for the remainder of the year, only concluding on 20 December 2013.

The near-collapse of the Bank led to a wholesale change of leadership at both the Group and Bank. Euan moved decisively to recruit a new team well equipped to deal with the crisis. We were particularly fortunate that Richard Pym agreed to take the role of Chair at the Bank during such a crucial period.

His experience and authoritative leadership have helped steer the Bank through this difficult phase. Appointments to the Group Executive team were equally important, with Richard Pennycook, Alistair Asher and Nick Folland all contributing greatly to the process of recapitalising the Bank. In that effort, they were helped enormously by a large team of professional advisers from UBS, HSBC, Allen & Overy and Alix Partners. Additionally, we could not have succeeded without the support of our syndicate banks and the considered response of our pension trustees, and I thank them too for their contribution.

Finally, I would like to acknowledge the contribution of Andrew Bailey and his team at the PRA for their calm guidance through a difficult time.

It was at this point that I was appointed by the Board as Chair of the Group, with a determination to resolve the weaknesses of our governance structure which had been made plain by the events of the year.

The unprecedented nature of our crisis has inevitably led to the establishment of a number of inquiries by official bodies, including the Financial Conduct Authority, the Treasury, the Prudential Regulation Authority, the Treasury Select Committee and the police. We are co-operating fully with each of these.

We also commissioned our own reviews. The first, by Sir Christopher Kelly, has been examining the circumstances that led to the Bank crisis, and will report its findings ahead of our Annual General Meeting. This will give us detailed and clear insight into what went wrong. Later in the year, Lord Myners agreed to undertake an independent governance review on behalf of the Board, whilst also agreeing to join the Group Board as Senior Independent Non Executive Director. His review produced a preliminary update in March 2014 with the full report expected ahead of the AGM. This will give us clear recommendations for dealing with the governance weaknesses which have been exposed in recent months and which we expect to be highlighted in the Kelly Review.

Lord Myners will stand down from our Board at the AGM in May. We are indebted to him for being so generous with his time and expertise. The near-failure of our Bank also highlighted wider financial weaknesses across the Group. In particular, our overall indebtedness is too high for an organisation of our nature. When the recent problems arose, we had limited resources with which to cover losses. Consequently, and regrettably, we have had to take some difficult decisions to sell some of our businesses. This will change the shape of our Group significantly as we adapt our strategy and cost base accordingly. Our new strategy will be presented to Members at the 2014 Annual General Meeting, along with further plans to reduce our debts.

It is a matter of great regret that Euan Sutherland felt compelled to resign subsequent to the year-end. Without question his leadership saved our Bank, and he built a top-flight team capable of redefining the purpose and relevance of our Co-op. We wish Euan every success in his future career, and we thank Richard Pennycook for agreeing to step in as interim Chief Executive during this difficult time for the Group. We will commence the search for a new permanent Chief Executive once the Governance Reforms have been completed.

As Group Chair, I recognise the scale of the change required to our governance. This essential and urgent work is critical to our future and will enable us to build a more effective organisation which can deliver for all our Members, customers and colleagues.

Group Chief Executive Statement

A disastrous year – 2013

I joined the Group in the summer of 2013 as your Interim Finance Director, and have since taken on the role of Interim Chief Executive. At both points, the Group faced a crisis. This annual report goes some way to explaining how this happened, and what we intend to do about it. It is in the nature of business that crises do occur, and need to be fixed. A large part of my career has been spent in similar situations, having arrived at moments of crisis in six other organisations. Whilst the issues at the Co-operative Group need urgent attention, it is clear to me that with the right, decisive action we can once again restore the Group to financial health. That action will include the need for fundamental reform of the way the Society is governed, if the Group is to be able to navigate successfully the issues that a business of its size and complexity faces. With the continuing support of our Members and colleagues, the Executive team now in place will make that happen.

Equally as important, we need to redefine the fundamental purpose of the organisation. The credibility, trustworthiness and financial strength of the Group built up over nearly 150 years have been stripped away over the past five years. And yet if ever there was a time for the revival of a campaigning organisation owned by its Members, all of whose profits can be put to work in the communities where they live, it is now.

In the detail of our annual report, we provide commentary on the performance of each of our key businesses, some of which performed adequately in 2013. The year itself, though, will always be remembered for an overall statutory comprehensive loss of £2.487bn (2012: loss of £529m). The scale of this disaster will rightly shock our Members, our customers and our colleagues.

The loss arose principally from three causes. Firstly, the continuing losses reported by the Bank as a result of the impairment of corporate loans, conduct issues and failed computer development projects. Secondly, the write-off of our accumulated 115 year investment in the Bank following its emergency recapitalisation, in which we participated but in the process saw our shareholding fall from 100% to 30%. And thirdly, a partial write-off of the goodwill created on the 2009 acquisition of the Somerfield food business following a strategic review of that business.

Whilst 2013 was disastrous for the Group, when set in a longer term context we also have to recognise that underperformance has characterised the past few years. Our Bank also posted heavy losses in 2012 (loss before tax £673m), whilst Trading Group Operating Profit is down 71% over the past three years. Additionally, just under £1.3bn of one-off costs and charges have been recorded over the past five years. The classification of these charges as “significant items” signalled that they were non-recurring, or one-off in nature, but even in 2009 when the lowest level of charges were recorded they totalled over £100m.

Whilst the near-failure of the Bank was a disaster, Members can take some pride in the rescue response by the Group. Had the Bank failed, the consequences would have been far reaching. Current account holders and savers may well have been inconvenienced in accessing their money for a period of time, whilst those saving above the level at which the government provides protection may have faced losses on their savings. Small business customers may have been starved of vital liquidity and there could well have been contagion risks to other small financial institutions. Additionally, the many retail bondholders in the Bank who depend upon their investment with us to provide a pension income would have lost everything. And the effects would not have been limited to the Bank – the impact of cross default provisions in certain of the Group’s borrowing agreements, had they not been addressed, would have put the whole Group at risk of going into administration.

Over a six month period, we worked hard to put in place a solution to save the Bank, and this concluded in December. It was the first rescue of a European Bank since the Banking Crisis began that did not involve recourse to the taxpayer. It required the Group to contribute well above its ‘fair share’ of the rescue funding, in particular in order to protect small bondholders. Without question, this was the Co-operative Group ‘doing the right thing’. In addition, we ensured that, for the first time, the Bank has its ethical agenda enshrined in its constitution. This was vital, given that we were unable to retain our 100% ownership of the Bank. Through this mechanism, we can ensure that the Bank operates in a way that is true to its name, and if this were ever to change, it can no longer call itself the Co-operative Bank.

The operational separation of the Bank from the Group is underway – it is both complex and costly. This is an unfortunate consequence of an ownership change that was never planned for. During the intense and protracted period where key Executives were absorbed with saving the Bank, we were fortunate to have colleagues throughout the wider Group who stuck to the task of delivering for their businesses and their customers. You can learn more about their performance in the business review.

A weakened state

The Group’s balance sheet reflects the recent history of poor results. Debt has risen from £0.6bn five years ago to £1.4bn at 4 January 2014.

At this level, most Group debt ratios are adverse to those recorded by listed company peers, reflected in our sub-investment grade credit rating of B+ awarded by Standard and Poor’s in January 2014. Group debt did in fact reduce by £286m in the year, but as a result of business disposals and a sale and leaseback of the Group’s new head office (itself another form of debt) rather than through solid cash generation by our businesses.

The Group’s balance sheet also reflects the accumulated legacy of obligations taken on in the past, but now holding back our financial progress.

The onerous lease provision of £197m (with over rented provision and holding costs of £232m),  included within note 26 to the accounts reflects an allowance for future rents on 645 units nationwide that are not in use by the Group, but where we have the rental obligation. The net rent liability for these properties through the full term of their leases totals £443m, and we have to work hard to mitigate that by finding sub-tenants for all this surplus property, itself the size of a national retail business.

We reduced the goodwill recorded on the balance sheet relating to the Group’s acquisition of Somerfield by £247m (£226m impairment and £21m relating to 2013 disposals) reflecting our change in strategy for the Food business. By the conclusion of the True North programme, over 60% of the store space acquired in the Somerfield transaction will have been divested by the Group.

Turnaround and transformation – 2014 to 2016

We have stabilised the Group, with the support of many stakeholders, and we are ready to begin the process of recovery, but the deep, sustainable change needed is only deliverable with governance reforms. As Ursula mentions in her report, a combination of the Kelly Inquiry and the Myners Review will help us to ascertain where failings have arisen and what needs to be done to address them. This will be painful for those concerned, but there will be no sugar coating.

Whilst we await the detailed reports, it is clear that they will reveal major failings of governance, leadership and accountability. Eighty seven thousand colleagues and 8.1m Members will look to the Group Board, our Regional Boards and the independent societies for an appropriate response.
Our short term plan for the Turnaround Phase is simple. We need to invest in our retained businesses, and operate them effectively in highly competitive markets. We need to reduce a bloated cost base in order to generate cash for that investment and to enable us to reduce our levels of debt. And finally we need to ensure that we generate good proceeds from the businesses that are for sale in order to accelerate further the necessary debt reduction. All of these activities are under way. In our largest business, Food, the True North strategy announced last year is bearing fruit, and we have seen a sustained period of market outperformance. We have also begun a rigorous programme to take costs out of the business. Whilst there will be difficult decisions ahead, we have made a great start, identifying a budgeted £100m of savings by the end of 2014, with much more required.

The transformation phase of our recovery is ready to begin. A new Executive team is in place and leading the way. Over many months, a detailed review of all our businesses has been undertaken, and plans developed for each. Additionally, a fundamental review of the Purpose of our organisation has been undertaken. Whilst we have no automatic right to exist, it has confirmed to us that in the 21st Century, just as in the 19th, we should have a place in the communities of the United Kingdom. The work has been undertaken co-operatively with the Group Board, with extensive input from colleagues, Members, customers and the general public.

It has been further informed by the Have Your Say poll, conducted on our behalf by YouGov and representing one of the largest such consultations ever undertaken. Over 180,000 people responded and the results are currently being analysed. At the heart of our Purpose will be our determination to be distinct, remain true to the essence of our Co-operative roots and deliver for our Members, customers and the communities in which they live.

We know we need to make that meaningful to everyone who cares about the Co-op.

Looking ahead

When I look back over the last year, while the problems created by a few have made the headlines, the quiet determination of the many gave us much to be proud of. First and foremost, our colleagues worked tirelessly for our customers and Members. In return, they have shown us huge loyalty. I thank them all.

The Group is now very publicly at a crossroads – past mis-management means we lost our way, but we will revitalise our Purpose, improve our commercial operations and rebuild belief in the Co-op. Whilst I am not going to reveal the results of the Have Your Say poll here, I can make clear that we still enjoy the goodwill of the nation, and they are urging us to succeed. We have a huge job ahead of us – transforming this organisation will take at least four years and the path will not always be smooth. Through all the events of the past year, however, I have never lost my faith that this is a great business that holds a special place in the hearts and minds of people in communities up and down the United Kingdom. This country needs a strong Co-op and that is what the management team and I are determined to deliver.

Thank you for your support.

Business Review


  • Revenue £7.24bn (down from £7.44bn)
  • Underlying operating profit £247m (down from £269m)
  • Operating loss (after goodwill impairment charge and other one-off costs): £35m (down £218m)
  • Employees 69,482
  • Stores 2,779

Our Food business is in a period of transition, and the 2013 results reflect this. Sales fell from £7.44bn to £7.24bn as a result of store disposals, a shorter accounting period and price reductions, and underlying operating profit was down from £269m to £247m.

The Food operating loss is after an impairment charge of £226m relating to goodwill which arose on our investment in Somerfield, reflecting the fact that, moving forward, the business’s focus will increasingly be on convenience stores within the estate.

True North Strategy

True North is the start of an exciting, five-year journey to transform our business and the way it operates. It is also part of our long term commitment to providing real value to our customers and putting them at the heart of everything we do as a food retailer: promising fair value, streamlining promotions, developing our own label range to a high standard and refreshing our estate of stores, including new store formats.

Launched in March 2013, the True North journey has been the absolute focus of our activity and has been brought to life for our customers and colleagues in a number of ways.
In September, we began refreshing and revitalising our own brand ranges, launching ‘Loved by Us’ with new lines across Food to Go, Ready Meals, Pizzas and Pies supported by successful multi channel media campaigns.

Pricing has been identified as a key priority and we have launched a number of initiatives to improve our value proposition in the eyes of our customers including reducing nearly 1,000 prices on products that were most out-of-line with our competitors. In the last quarter of the year Members spending between £5 and £100 were given a coupon for 10% of their transaction. The coupons could be used against a future purchase and we saw an exceptional redemption rate of 72%, far ahead of industry standards. We have also continued the use of ‘smart coupons’, issued at the till, to give discounts to our Members.

To attract younger customers and build deeper relationships with them, we became the first supermarket to offer a 10% student discount for holders of the N.U.S. Extra Card. We also launched our first mobile app for customers, members and colleagues: The Co-operative Food Deals app, which allows users to find their closest store and check on our best deals. We intend to do more going forward to look at how our digital offer should best meet our customers’ requirements.

In November we began the roll out of our new store formats and we have been pleased with their early performance. Improving the look and feel of our stores is a key priority and resource continues to be applied to our new formats and the store refit programme. By the end of 2014, 75% of the Food estate will have been refreshed since 2012.

While we have been selling larger stores, we have also been adding new outlets that are more suited to our focus on the convenience store market. In 2013 we opened 32 stores and a further 32 contracts were exchanged for stores that will open in 2014. A large number of these are situated in and around London, where we have traditionally been under-represented. Our London stores in particular have outperformed our initial expectations.

The business successfully improved supply chain processes and reduced stock levels, improving cash flow and enabling our stores to run more smoothly. This was achieved through better ordering disciplines and improved relationships with our suppliers. March 2013 saw the completion of the Logistics service network, which will help drive product availability through the supply chain and into stores, meaning customers will be able to get what they want when they want it.

In early 2014 we confirmed that the Farms division was no longer part of our go-forward strategy, and we are currently exploring options for the sale of this part of the business.

General Insurance

  • Revenue £476m (2012: £580m)
  • Underlying operating profit £36m (2012: £13m)
  • Employees 1,291
  • Sites 5

When we announced our 2012 year-end results we indicated our intention to sell our General Insurance (GI) business to concentrate the Banking Group on its core Bank retail offer. As the scale of the Bank’s capital shortfall became clear, it was decided that the proceeds of the sale of GI would be used as part of the Group’s contribution to the Bank’s refinancing.

Following the recapitalisation, however, we were able to review our plans and we decided to keep this profitable business.

In 2013 GI achieved a significant improvement in underlying operating profit to £36m (2012: £13m) on revenue of £476m sales (2012: £580m) due mainly to better claims experience compared to the prior year, more than offsetting the impact of the fall in premium income and the significant reduction in investment income. The result is driven by the continued strong performance of the Home portfolio, supported by markedly improved profitability in the Motor portfolio. Key successes include our award-winning service, improved underwriting performance and increased customer reach due to our brand campaign and appearance on aggregator, or price comparison websites. We will continue to grow our business around our core proposition of fairness and we believe our General Insurance business can build on its current success and has considerable future potential.

Separation of Banking Group Functions

A key challenge faced by the Group towards the end of 2013 was the work required to separate many of the unified back office functions that were brought together throughout the Group in 2012 as part of Project Unity.

A number of corporate functions were merged as part of this cost saving exercise, which although delivering significant savings for the Group, needed to be reversed as the Co-operative Bank plc became a separate employing entity following separation. This work will continue into early 2014.


  • Revenue £370m (£358m)
  • Underlying operating profit £62m (£60m)
  • Employees 4,230
  • Branches 926

The Co-operative Funeralcare had a successful 2013, with strong sales and healthy profits driven by the expansion of our estate, the introduction of new products and services and the establishment of new channels and partners.

Sales for 2013 were £370 million, 3.4% up on 2012. Underlying operating profit too was also up at £62.1 million, a 3.3% increase on last year. In 2013, we opened 16 new funeral homes, invested £3.1 million in crematoria development and £9.5 million in our fleet of vehicles. We have also invested heavily in our online services. In December, we introduced a new website where clients can purchase, as well as manage, a pre-paid funeral plan online. A significant number of people have taken advantage of this service.

Training and development of colleagues is critical in ensuring clients receive the best service and having officially introduced a National Vocational Qualification in Funeral Operations and Services, 2013 saw 415 employees join Funeralcare as apprentices. We also introduced a new management development programme, MySteps, to support all leaders across our funeral business.


  • Revenue £760m (£764m)
  • Underlying operating profit £33m (£28m)
  • Employees 6,980
  • Branches 782 branches including Out Patient Departments

Our pharmacy business delivered a creditable performance in a tough market, which continued to suffer from the impact of government funding on medicine pricing. Sales were down £4m or 0.5% on 2012, underlying operating profit was up £5m on the prior year which was a 17.9% increase on 2012.

Prescription like-for-like sales were up 2.2% and Over the Counter (OTC) like-for-likes were up 1.7%.

Pharmacy achieved these results as a result of an increased focus on customer care. Success was enabled by market leading like-for-like prescription growth and maintenance of our number one position for customer service. We further improved our OTC offering, again delivering sector-leading growth.

Following a successful pilot in 2012 we have rolled out our Branch Transformation Programme which remodels our branches to provide customers with an improved pharmacy experience. The programme also involves dedicated training to support our focus on excellent customer service.

In total we have remodelled 80 branches as part of the programme. We have successfully relocated 11 branches to maximise market share potential and meet customer demand, with a further 20 identified for 2014. This is in line with our ongoing commitment to protect, grow and enhance our business for the benefit of our customers.

We have maintained our strong scores in the Customer Satisfaction Index – our average score was 93.4% – reflecting our focus and investment in training and colleague engagement and an improvement on the 2012 figure of 93.2%.

Our diversification into new areas has continued and in May we won our first three-year dispensing contract to supply HM Prisons in Nottinghamshire and Doncaster with patient medicines. Medicines are delivered from our nearby existing pharmacies and this has created additional jobs within the business. Our five out-patient contracts in NHS Hospitals continue to perform well with excellent customer service and strong sales across all sites.

As part of the wider strategic review of all its businesses, The Group has decided that the Pharmacy business will not be part of its future strategy. The business is currently being considered partially or in its entirety, for sale. Further updates on this decision will be included in the half year report for the Group.

Co-operative Legal Services

  • Revenue £33m (£33m)
  • Underlying operating loss £9.1m (nil)
  • Employees 560
  • Operating loss after goodwill impairment £22m
  • Sites 3

The Legal Services business remains in the early stages of its development, and this is reflected in the performance for 2013. Sales were broadly flat with losses arising from regulatory change, uncertainty about the future of our General Insurance business, and decisions to invest in future growth.

We are now looking to consolidate and optimise the portfolio, with further restructuring planned, to work more closely with Funeralcare and General Insurance as part of the newly formed Consumer Services division.

Regulatory change, including the Jackson reforms, had the most significant impact upon our Personal Injury business. The restructuring of the PI business announced at the end of 2013 has been completed in line with our plans.

However, following the decision not to sell the General Insurance business we are now able to explore opportunities to work more closely with our insurance business

Goodwill of £13m relating to this business has been impaired during the year following a reassessment of its business plan, which has assumed a slower growth rate than previously applied. This means that the overall operating loss of this business stands at £22m for 2013 (2012: £2m loss).

During 2013 we continued to invest in our Family Law business developing a transparent fixed fee pricing proposition for our customers. The business achieved £1.2m revenue in its first full year of trading; however, we remain focused on ensuring we have an efficient operating model to take the business forward.

Probate and Wills remain key areas for growth and we will continue to work more closely with Funeralcare during 2014.


  • Revenue £88m (£83m)
  • Underlying operating profit £1m (£1m)
  • Employees 118
  • Sites 3

Co-operative Electricals saw a strong sales increase in 2013. The second half of the year saw like-for-like increases in 25 of the 26 weeks. Sales and traffic peaked on ‘Cyber Monday’ (the first Monday in December – the Monday after Thanksgiving in America) and Christmas Day, with a 56% increase in web traffic in December (22% increase overall in 2013). To support customer demand and to enhance our service to customers we provided a free Sunday delivery option for customers. Our profits remain flat, reflecting our commitment to offering customers value in this competitive market.

The year also saw the launch of our social media marketing strategy, using the social media platform ‘Snapchat’ and launching the ‘#FightthePrice’ marketing campaign on twitter.

The UK is expected to see a recovery in the housing market which will lead to an increase in kitchen appliance sales. We also expect to see demand increase this summer, particularly for large screen TVs, thanks to the World Cup.


  • Revenue £28m (£36m)
  • Underlying operating profit £11m (£19m)

The Co-operative Estates generated an income for the Group of £28m at year-end (2012: £36m) with an underlying operating profit of £11m (2012: £19m).

The commercial property market saw signs of improvement in 2013, particularly in the second half of the year, although this varied considerably by geographical region and property sector.

One of the key strategies for Estates in 2013 was to increase non-core property disposals, freeing up funding capital for use in the trading businesses. Examples of this include the exit of 40 properties generating £103m as part of a non-core disposal project. This had an impact on 2013 income and profits, which were therefore lower than in 2012.

Estates also continues to deliver large parts of the Group’s sustainability agenda, with further progress on renewable power and pioneering work onenergy-saving fridge doors in the Food business. Estates has achieved its 2007 target of reducing the Group’s energy usage by 40%, delivering a cost saving of over £100m.

During 2013, 1 Angel Square, the Group’s new business support centre based in Manchester, won a number of prestigious awards and was accredited as the greenest office building in the world during the year.

In November, the building was opened by Her Majesty the Queen and His Royal Highness the Duke of Edinburgh. The sale and leaseback of the building generated cash proceeds during the year of £143m. The Co-operative Group has retained the right to lease the building beyond an initial term of 25 years.

The regeneration of North Manchester will continue through delivery of the NOMA masterplan scheme as the Group’s legacy buildings are vacated and prepared for redevelopment. In April 2014 the Group announced a joint venture partnership with Hermes Real Estate. The deal is expected to complete in mid-May.

A new office base has also been established near St Paul’s in London, allowing for consolidation of Group activities currently based in the capital.

During 2013 a number of longer term collaborative partnerships were developed with core suppliers, with a strategic lifecycle approach to key assets across our stores, branches and office buildings. This approach is exemplified by the launch of a new online facilities helpdesk and wide-ranging related projects in store and depot maintenance, cleaning and refrigeration. In 2013 the Group picked up the prestigious ‘Business Continuity Team of the Year’ at the Continuity Insurance & Risk Awards. A major focus in the second half of the year has been the development of a new risk management system to be rolled out in 2014.

Discontinued operations

The Co-operative Bank Plc

During 2013 a number of now well-documented factors contributed to the Bank’s overall loss of £1,441m. The main factors that continued to significantly impact the profitability of the business were credit impairment, provisions for conduct risk, intangible asset impairment, high operating costs and the overall flat market conditions caused mainly by a low interest environment. Further detail specific to the Bank’s performance can be found in the Co-operative Bank’s separate Annual Report.

Recapitalisation plan

The financial results for the Banking Group in 2013 reflect the underlying issues at the Co-operative Bank that came to light in May 2013 and that were dealt with through the Bank’s LME which was successfully implemented in December 2013 without recourse to Structured State support. Under the terms of the Bank capital recovery plan, the Bank is now a separate, stand alone business with the Group holding a significant shareholding. In this Annual Report for the Group, the Bank’s results are within ‘discontinued operations’ and going forward, the Bank’s result will be shown within the ‘profit/loss from associates’ line.

Through the capital recovery plan, we raised £1.5bn of core Tier 1 equity, as required by the banking regulator (PRA) by December 2013. This was achieved without any government help and is so far a unique solution to resolving a bank crisis in the UK. The Bank’s unique ethical stance has been protected and recognised as central to its future development and has been enshrined within its new constitution.

Life and Savings

In July 2013, The Banking Group successfully completed the sale of the Life and Savings Business to Royal London. To ensure a smooth transition for customers the Banking Group operates a number of Service Level Agreements with Royal London while the infrastructure is embedded with the new owner.

Media Enquiries:

Russ Brady
The Co-operative Group
Tel: 07880 784442

Therese O’Donnell
The Co-operative Group
Tel: 07738 622866 / 08437 540899

Susanna Voyle
Jonathan Sibun
Tulchan Communications
Tel: 020 7353 4200

Notes to Editors:

The Co-operative Group is the UK’s largest mutual business, owned by more than eight million members. It is the UK’s fifth biggest food retailer operating across the country with almost 2,800 local, convenience and medium-sized stores. 

Amongst its other wholly-owned businesses are the UK’s number one funeral services provider, the third largest pharmacy chain, a growing legal services operation and a major general insurer.

As well as having clear financial and operational objectives, the Group, which operates 4,500 outlets and employs approaching 90,000 people, is a recognised leader for its social goals and community-led programmes.

Co-operative Group Limited announces that the Annual Report and Accounts 2013 have today been submitted to the National Storage Mechanism and will shortly be available for inspection at

A copy of the Annual Reports and Accounts are available at

This announcement contains additional information for the purposes of compliance with the Disclosure and Transparency Rules.  This information is extracted, in full unedited text, from the Annual Report and Accounts 2013 (the “Annual Report”).  References to pages and numbers refer to page numbers and notes to the annual accounts in the Annual Report.

Group Risks

Risk  Mitigation
Governance reform

As set out above, Lord Myners has made recommendations in his interim report setting out the need for Governance reform. There is a major risk that if steps are not taken to improve the Group’s Governance and there are further disruptions around how the Group is governed then the reputation of the Group may suffer. This could ultimately affect brand image (see brand and reputation section below) and lead to a negative impact with other stakeholders such as suppliers and our banking syndicate. 

The Board is considering the Lord Myners interim report with a view to submitting the report to a vote at the General Meeting to be held on 17 May 2014. A sub-committee of the Board has been established to consider the findings of the Lord Myners report and to make appropriate recommendations to the Board on the route to reform. The Directors continue to pro-actively engage with its key stakeholders (including customers, suppliers and external lenders) on this matter.
Group’s Interest in the Co-operative Bank plc

The Group is committed to make a capital contribution to the Bank of £333m by 31 December 2014 (of which £263m remains outstanding at 17 April 2014).

Additionally there are risks to the Group’s brand and reputation as the Bank continues to use the Co-operative Brand.

The Group is exposed to the risk that the Bank acts in a way to bring the Co-operative brand into disrepute, which could have a negative impact on the Co-operative Group’s customer base, reducing trade for all businesses by leading to a loss of trust and confidence amongst consumers.

The Group is exposed to a risk that the carrying value of its investment in Bank is impaired. This could happen:

  1. If the Bank’s trading performance were to deteriorate (risks to performance include credit risk, operational risk, liquidity risk and conduct risk).
  2. Through a dilution of the Group’s shareholding in the Bank.
A project team has been established, reporting directly to the CFO, to review and monitor funding plans to support the capital contribution.

The terms of the Group’s banking facilities allow some flexibility in the sources of funds. For example, the plans have recently been flexed following the Group’s decision to withdraw from the GI sale process.

Meeting this commitment is challenging but management is confident of success. In the unlikely event that this is not met, the Group would relinquish its investment in the Bank (more details are provided within the Going Concern paragraphs of the Accounting Policies section).

The Group is entitled to Board representation on the Bank Board to enable it to monitor and control its investment on an ongoing basis. This representation has, however been withdrawn while the Bank conducts its current capital raising exercise.

The Bank recently announced its intention to raise around £400m of additional CET1 in the form of new ordinary shares. This provides the Group with the opportunity, but not an obligation, to subscribe for further shares in the Bank.

The Group will consider the full details of the issue in due course. Should the Group not subscribe, their shareholding will be diluted. The implications of any such dilution on the carrying value of investment will be closely monitored.

Adverse economic conditions

The Group‘s performance could be impacted by the adverse UK economic conditions as well as market trends in the specific business markets it operates. For example, the recent announcement of price reductions by our competitors could impact our margins.
Although the Bank of England has stated that growth is well underway, the Group, along with many other retailers, believes that this growth is fragile.
Consumers’ disposable incomes remain under pressure from price inflation and further government austerity measures. 

Economic indicators and impacts are monitored closely.

The Group’s ranges of goods and services and their price positions are constantly reviewed and adapted to reflect changing customer demands and expectations.
Financial forecasts are frequently updated to reflect prevailing conditions, trends and outlook.

Pro-active management of costs.

As already described, the Co-operative Bank plc incurred significant losses in 2013 partly through not fully monitoring, or understanding, the full implications of economic conditions – particularly in relation to the property market.

Business strategy

Each business in the Group contributes to the risk that if its strategy is not effectively implemented, the long term aims of the Group will not be met and performance will suffer. This includes key areas such as the True North strategy in Food. 

Regular review of strategy by senior management, Executive and Board.

Group Board Strategy Away Days held to review strategy.

Phased implementation of projects so that learnings can be captured.

Communication of strategy through various channels.

Significant resource invested in developing strategy.

Failure of major supplier

As a result of the economic downturn there is a risk of key major suppliers or business partners going into administration, causing a serious interruption to our ongoing business. 

Financial healthchecks of prospective new suppliers during tender process.

Regular monitoring of the financial position of our suppliers, especially those we suspect of having difficulties.

Identification of alternative sources of supply where we are aware of potential difficulties.

Restrictions on the levels of mutual dependency in key supplier relationships.

Brand and reputation

The Group’s reputation is at risk from significant adverse events. 2013 proved a challenging year for Group. Recent events in connection with the Bank have led to increased media scrutiny and negative coverage in all social media which has put pressure on the Co-operative Group brand. 

Robust operational standards and regular compliance audits are undertaken
in each business

Continual monitoring of our corporate reputation and brand standards.

Commitment to our Social Goals Strategy, reported through the annual Sustainability Report.

Monitoring of all social media sites and proactive response to any key issues arising.

Close monitoring by senior management, and proactive PR to manage the impact of key events.

Consideration of brand, ethics and reputation risks in the  decision making processes.

Pension costs

The Group’s pension arrangements are regarded as an important part of the rewards package for employees and a key element in the attraction and retention of our people. The pension funding position is highly sensitive to assumptions for discount rates, inflation and life expectancy.

Therefore, any variation from these assumed values has the potential to introduce volatility to the Group’s results.

Risk also arises from the schemes because the value of their asset portfolios and returns from them may be less than expected.

UK legislation requires the Trustees of the pension arrangements to carry out valuations at least every three years and to target full funding against a basis that prudently reflects the risk exposures of the pension arrangements.

Actions taken by the Pensions Regulator, or changes to European legislation, could result in stronger funding standards, which could materially affect the Group’s cash flow. 

The Group and the schemes’ trustees continue to carefully monitor the pension risks, taking action where necessary to adjust contributions to the schemes and revising the schemes’ investment strategy to mitigate the risks.

The Pace scheme operates a comprehensive risk management framework, including allocating 75% of assets to a liability matching portfolio. The two main objectives of the liability matching portfolio are to hedge interest rate and inflation risk and to generate some excess return above gilts in a risk controlled manner to improve the funding level.

The Pace scheme was awarded “Best Use of Risk Reduction Strategies” at the Professional Pensions Pension Scheme of the Year Awards 2013. The award reflects the growing use of risk reduction strategies by schemes and corporate sponsors and is judged on how the potential risk reduction offerings are assessed and implemented, as well as how the strategy fits with the scheme asset portfolio and possible future developments.

Engagement of external advice and actuaries as appropriate.

 In-house monitoring of the funding positions of all schemes in between statutory triennial actuarial valuations and of changes in legislation so pension strategy can be reassessed as required.

Continuous engagement of employees on all relevant pension issues.

Following the recent separation of the Bank from the Group, a review of the full implications for the future pension strategy is underway. As
described in note 16, a further impact is expected in relation to the disposal of Bank in future years when the split of Pace is determined and the resulting share of surplus/deficit at that time is derecognised.

Business disruption

The Group could be exposed to any significant incident such as a terrorist attack, pandemic or information loss which would adversely affect business operations. 

Robust disaster recovery plans and business continuity developed and tested on a regular basis.

Continuous improvement in the resilience of IT infrastructure.

Progressive premises strategy centred around more modern buildings and facilities.

Energy prices

The Group has significant energy requirements and is constantly exposed to the risk of rising energy prices. 

The Group operates a buying policy under which an agreed proportion of forecast energy requirements is secured at fixed prices.
Business integration and change

The risk of failure to achieve anticipated benefits from various business transformation programmes being implemented across the Group. Failure to manage these change programmes adequately could put at risk our objectives and financial targets. 

Adoption of disciplined project and programme management processes.

Processes to monitor capacity and prioritise projects at business unit and Group level.

Appropriate approval, monitoring and post investment appraisal processes in place.

Effective governance structures for all major programmes with close monitoring by Executive Management and, where appropriate, Board.

Regular reviews of each programme are undertaken considering resource requirements, progress, dependencies between projects, and risks.

Engagement of key stakeholders and colleagues involved in and affected by change.

Data protection

The Group holds a significant volume of confidential personal data and could be adversely affected if any of this data were to be lost or compromised. This could give rise to legal or regulatory penalties as well as commercial costs. 

We have robust data protection policies and procedures in place.

We are undertaking an extensive programme of work across the Group to implement heightened controls against the risk of loss of data and card data compromise.

Continuous improvement in physical and IT security processes.

Thorough investigation of any incidents arising and implementation of corrective action.

Financial capacity and financial risk management

The Group must be able to generate and maintain sufficient funds to meet business needs while managing interest rate, forex and liquidity risks (more details of financial risk management are given in the financial notes included in the Annual Report

The requirement for Group to make a capital contribution to the Bank of £333m by 31 December 2014 has added pressure to its financial covenants.

We have rigorous Treasury policies and procedures to ensure that funding is in place at all times with appropriate covenants to meet the needs of the Group.

The 2013 Liability Management Exercise process and associated disposal of the Bank has led to some amendments to covenants as described in more detail in the Going Concern paragraphs within the General Accounting Policies section.

Short, medium and long term cash flow forecasts are prepared and reviewed on a regular rolling basis.

Diversified sources and maturity of borrowings.

Continuous engagement with banks, bondholders and other finance providers to keep them up to date with business developments and future finance requirements.

Close monitoring of existing facility limits and covenant headroom.

Ongoing review and monitoring of interest-rate and other credit related risks are undertaken by Treasury.
Ethical sourcing

Ethical trading is at the heart of our business. A major incident could undermine this key point of difference; alienate customers and severely damage sales and profits. As our scale and profile grows this brings greater visibility to our brand. 

We have clear sourcing policies in place, comprehensively reviewed and communicated.

Technical auditing and due diligence of new suppliers and ongoing rigorous monitoring of compliance with standards.

Continuing training and development of all employees involved in purchasing.

General widespread communication and awareness of all of our values and principles including ethical sourcing.

Own label food scare

We have successful and extensive own brand ranges of food products. We are at risk of a serious food scare or incident that results in public liability and damages public confidence in our brand. 

The Food business has tightened supply chain controls, and a testing programme has been re-scoped to give better controls and an enhanced level of customer surveillance.

We deploy robust technical quality assurance policies, procedures and audits.

Regulatory compliance

CISGIL, Legal Services and a number of other Trading businesses operate in highly regulated environments. This brings a necessary cost of compliance
and a risk that non-compliance could mean fines, reputational damage and,in extreme, inability to operate. 

Employment of suitably qualified and experienced compliance and risk officers as appropriate to each business area.

Comprehensive risk and audit functions.

Full and continuous engagement with relevant authorities.


Bank Separation risks


Separation risks

Following the LME transaction, plans are in place to separate the Bank from Group and are expected to continue into 2014/15.

This is a complex process with a transitional period during which responsibility and delivery of services and operations currently provided by the Group, will be transferred to the Bank.

Risks to the Group centre around delivery of these services and potential financial exposure should the services be deficient during the transitional period.
The physical separation of resources and assets, particularly IT infrastructure increases this risk.

There are also risks associated with attracting and retaining high calibre employees during this transitional period 

A specific separation programme has been established with a Director appointed to run the programme.

There is an effective governance structure for the programme with close monitoring by Executive Management and, where appropriate, Board.

Regular reviews are undertaken considering resource requirements, progress, dependencies between projects, and risks.

A senior IT Director has been seconded full-time to the separation programme to focus specifically on the IT separation issues.

HR are also represented on the separation programme and are fully aware of the people issues with training, development and talent management being a key focus area for HR going forward.


CISGIL risks

General Insurance risk

General Insurance risk refers to inherent uncertainties as to the occurrence, amount and timing of insurance liabilities. 

The major classes of general insurance business written are motor and property, together with some commercial liability, pecuniary loss, pet insurance and personal accident.

CISGIL’s objectives in managing general insurance risk are: To achieve acceptable returns by ensuring that insurance risks are carefully selected in accordance with risk appetite, underwritten in accordance with risk strategy and priced to reflect the underlying risk; Reserve risk volatility is minimised through robust reserving and modelling approaches and continual review, and; Catastrophe risk is mitigated through the use of appropriate reinsurance arrangements.

Continuing adverse motor claims trends impact both underwriting risk for business being written and reserve risk for existing policies.

Insurance risk is managed through CISGL’s underwriting strategy, reinsurance arrangements, proactive claims handling and claims provisioning process.

Market risk

Market risk is the risk of loss or of adverse change in the financial situation resulting, directly or indirectly, from fluctuations in the level and in the volatility of market risk drivers such as interest rates and market prices of assets and liabilities. 

CISGIL invests primarily in high-quality fixed and variable interest bonds issued by corporations.

CISGIL’s objective is to achieve acceptable returns while minimising volatility through minimal exposure to equities and other volatile instruments.

Interest-rate risk is largely mitigated through investing in fixed interest securities with a similar duration profile to insurance liabilities.

The most significant aspect of market risk to which CISGIL is exposed is changes in credit-spreads, over and above risk-free interest rates, upon corporate bonds. This risk is managed through limits for exposure to credit‑ratings and individual counterparties.

Conduct risk

Conduct risk is the risk that CISGIL’s behaviours, offerings or interactions will result in unfair outcomes for customers. This is related to the overall Group’s regulatory compliance risk and applies specifically for financial services firms. 

Conduct risk may arise from any aspect of the way business is conducted, the sole test being whether the outcome is an unfair one for customers.

CISGIL’s objective is to ensure our conduct and treatment of customers and the quality of our customer experience is maintained through the application of systems and controls in conjunction with ongoing oversight and monitoring from risk functions.

A full review of all products was carried out in 2013, and a rigorous assessment is carried out for all new products and changes.

CISGIL mitigates and prevents emerging conduct risk through established systems and controls including ongoing oversight and monitoring.


Related party transactions and balances

a) Trading Group

The nature of the relationship of related parties and the extent of material transactions and balances with them are set out below or are disclosed elsewhere within the financial statements.



Sales to associated undertakings and joint ventures on normal trading terms  (I)  2.9 1.2
Subscription to Co-operativesUK Limited  (ii)  1.0  1.0

i) Details of the Society’s associates and joint ventures are set out in note 13.
ii) The Society is a member of Co-operativesUK Limited.

The Society’s corporate members include consumer Co-operative societies which, in aggregate, own the majority of the corporate shares with rights attaching as described in note 23. The sales to corporate members, on normal trading terms, were £1,494m (2012: £1,455m) and the amount due from corporate members in respect of such sales was £76m at 4 January 2014 (5 January 2013: £75m). A distribution of £10m (2012: £17m) was paid to Corporate members based on their trade with the Group.

Transactions with directors and key management personnel

Disclosure of key management compensation is set out in the Remuneration Report. A number of trading transactions are entered into with key management in the normal course of business and are at arms length. Key management are considered to be members of the management executive and directors of the Co-operative Group. Other than the compensation set out in the Remuneration Report, there were no transactions greater than £1,000 with the Group’s key management personnel or directors (2012: £13,360).

b) Financial Services

A number of banking transactions are entered into with key management in the normal course of business. These include loans and deposits. The volume of related party transactions, outstanding balances at the period end and related income and expense for the period are as follows:


Loans, credit card and mortgage balances outstanding  0.3  1.0
Deposits at beginning of period   1.1 1.0
Deposits at beginning of period  (0.9)  0.1
Deposits at end of period  0.2  1.1

c) Insurance activities

The Society enters into transactions with key management personnel in the normal course of business. Details of the transactions carried out during the period and balances are as follows:

At beginning of period  0.2  0.5
Net movement  (0.2)  (0.3)
At end of period  0.2

d) Transactions with associates and joint ventures

There were no transactions between the Group and its Travel associate in either period.

The Bank is now an associate and is therefore a related party to the Group. The Group uses the Bank’s banking facilities, including current accounts, deposit accounts, overdrafts and facility loans. At 4 January 2014 the total balance held with the Bank was £26.7m (overdrawn) and, in addition, the Group held a £50m bilateral loan facility. No provision for doubtful debt has been provided in the Group’s accounts nor any bad debt expense in the period.

Undertaking to pay

As at 4 January 2014, the Group, through its subsidiary Co-operative Banking Group Limited, owed £313m (discounted to £300m) to the Bank under an Undertaking to Pay entered into as part of the LME. The total balance was £333m (discounted to £320m) at 20 December 2013 however £20m was paid before the year-end as agreed. The Undertaking to Pay will be satisfied in several tranches during 2014, with £50 million due by no later than 31 January 2014, £100 million due by 30 June 2014 and £163million due by 31 December 2014.

The Undertaking to Pay provides that should the Group fail to meet its obligations:

a) the Group must pay default interest at 9% p.a. accruing on a daily basis;
b) the Group waives all rights in respect of its new ordinary shares;
c) the Group waives all rights under the Relationship Agreement;
d) the Group must procure the resignation of any nominee directors of the Bank appointed by it;
e) the Bank may direct the security trustee to exercise any of its rights under the Intra-group Loan and the associated security; and
f) at the request of the Bank, the Group must transfer all or some of its new ordinary shares to a third party or the Bank for nil consideration in accordance with procedures set out in the Commitment Agreement.

Intra-group Loan

On 4 November 2013, the Bank, the Co-operative Banking Group Ltd (a direct subsidiary of Co-operative Group Ltd) and Co-operative Group Ltd entered into an intra-group loan facility (the Intragroup Loan) whereby the Co-operative Group Ltd will make available to the Co-operative Banking Group Ltd during 2014 a term loan facility of up to £313m to be utilised by way of advances. The maturity date of the loan facility is 27 July 2019. The purpose of the Intra-group Loan is to support the Co-operative Banking Group Ltd’s Undertaking to Pay. The Co-operative Banking Group Ltd is expecting to satisfy its Undertaking to Pay from the deferred proceeds receivable from the sale of the Life and Savings business (the Insurance Proceeds). The Co-operative Banking Group Ltd can draw down under the Intra-group Loan should the Insurance Proceeds not be available to satisfy the Undertaking to Pay. The Co-operative Banking Group Ltd has assigned to the Bank its rights against the Co-operative Group Ltd in the event that the Co-operative Group Ltd fails to provide the Co-operative Banking Group Ltd with a loan under the intra-Group loan agreement. A security assignment in respect of the Insurance Proceeds has been entered into between the Co-operative Banking Group Ltd and the Co-operative Group Ltd as security trustee for itself and the Bank to secure the Co-operative Banking Group Ltd’s Undertaking to Pay and the Co-operative Banking Group Ltd’s obligations as borrower under the Intra-group Loan.

Transactions with CFSMS

The Group has a significant relationship with the Bank through one of its subsidaries, CFS Management Services Limited (CFSMS). CFSMS undertakes the provision of supplies and services on behalf of the Bank. This relationship was in place for the whole of the year but will change over 2014 and beyond as the Bank separates from the Group. Further details are provided below:

CFSMS-Bank Framework Agreement

On 16 February 2006, the Bank and CFSMS entered into the CFSMS-Bank Services Agreement pursuant to which CFSMS provides assets such as office equipment, materials and office space, and other facilities and services, and consultants who act as secondees to the Bank. The Bank provides CFSMS with an indemnity for all liabilities, losses, damages, costs and expenses of any nature as a result of CFSMS entering into and performing the agreement in respect of the assets, services and personnel provided to the Bank.

As a result of the LME, the Bank and CFSMS intend to replace the CFSMS-Bank Services Agreement with appropriate revised arrangements under a CFSMS-Bank Framework Agreement. Once agreed by the Bank and the Group as part of the separation process, the CFSMS-Bank Framework Agreement will establish a flexible contractual framework that will enable the Bank to obtain from CFSMS the existing services and secondees, and procure the supply of third party procured services and assets that CFSMS provides to the Bank under the CFSMS-Bank 2006 Agreement and will also cover any new services for a transitional period.

Under the CFSMS-Bank Framework Agreement, CFSMS will be entitled to provide services on a shared basis to other members of the Co-operative Banking Group Ltd from time to time. CFSMS will be required to provide the services at the same standards as those received before commencement.
An exit plan will be prepared and will be kept updated. During the exit period, CFSMS would be required to provide any reasonable assistance required by the Bank to allow the secondees, assets or third party procured services to continue to be enjoyed without interruption or adverse effect.


CFSMS has previously employed a significant number of employees which perform tasks on behalf of the Bank (either on a full time or part of their time basis).

Staff costs were then recharged to the Bank. The employment contracts of most of the employees that perform all of their tasks on behalf of the Bank have been transferred from CFSMS to the Bank with effect from 23 January 2014. Where CFSMS employees continue to provide services to the Bank, this is covered by service agreements between the companies. The transfer was required to support the legal separation of the Bank from the Group. Further transfers will occur in 2014 as the Bank completes its separation.

Tangible/Intangible Assets

Since its inception in 2006, CFSMS has held legal title to the majority of the tangible and intangible assets of the Co-operative Banking Group. This included the work in progress assets, in particular, the Core IT Banking system replacement. As part of the separation activity, in 2014, the Bank intends to purchase the legal title of all Bank specific assets currently held by CFSMS.


The Group and the Bank have also agreed the basis on which Project Unity and the CFSMS Arrangements will be unwound. Prior to the LME, certain functions of the Bank were centralised and carried out by the Group. There are two key arrangements in place under which the Bank receives the supply of services, assets and/or personnel:

1) Between 2011 and 2013, the Bank transferred a number of functions and a substantial number of personnel to the Group and entered into arrangements whereby the Group would provide certain services to the Bank. This project is known as Project Unity. Two key agreements in connection with Project Unity are:

  • The existing IT Services Agreement in relation to the provision of IT services to the Bank and other members of the Co-operative Banking Group
  • A Professional Master Services Agreement where the same parties entered into a number of individual service contracts in relation to the provision of other services

2) CFSMS was established as a direct subsidiary of the Co-operative Banking Group in 2005 to enable economies of scale through the sharing of employees and sourcing of third party services across the Co-operative Banking Group, including the Bank. CFSMS provides services to the Bank under the CFSMS – Bank Services Agreement referred to above, under which the Bank gives a broad indemnity to CFSMS in respect of activities carried on by CFSMS for the Bank. Following the announcement of the Bank’s recapitalisation plan in June 2013 (the June Plan), the Bank and the Group worked to amend certain provisions of the Project Unity and CFSMS Arrangements. Those amendments were close to finalisation when the Group announced on 21 October 2013 that it was in discussion with bondholders, and that many elements of the June Plan would need to change in material respects to reflect the fact that the Bank would no longer be a subsidiary of the Group. The change to the June Plan meant that there would be significant cost impacts if the Project Unity and CFSMS Arrangements were to continue in the form originally envisaged. In addition, the Bank did not consider it appropriate for the provision of personnel or supply of certain third party services and assets to the Bank to be housed in an entity that has ceased to be part of the same group as the Bank.

Separation principles

Accordingly, the Group and the Bank have been working towards renegotiation of the arrangements under which the Bank receives staff and services from the Group. These negotiations are complex and ongoing. Pending finalisation of the revised arrangements, the Group and the Bank agreed high level principles (the Separation Principles) to govern their separation discussions. The Separation Principles include an overarching agreement to act in good faith and, amongst other things:

  • Until alternative arrangements for Project Unity and the CFSMS Arrangements are agreed, the Group will continue to provide services to the Bank under the same terms that such services are currently provided
  • For those costs allocated by the Group in its sole discretion, the Group and the Bank will take reasonable steps to avoid the Bank incurring costs incremental to those it currently incurs
  • The Group and the Bank will mitigate costs arising for the Group or the Bank from (i) the Group being a less than 50% shareholder of the Bank or (ii) agreed steps taken in connection with the separation process
  • An additional mark-up (of no more than 20%) may be charged by the Group for services provided under Project Unity after the LME but not in respect of the first 12 months in respect of all services
  • Costs will be allocated between the Group and the Bank on an equitable basis
  • A working group consisting of representatives from the Bank and the Group will be established to address and oversee the separation work-stream.

The Group and the Bank have also agreed the basis on which Project Unity and the CFSMS Arrangements will be unwound


On 4 November 2013, the Group and the Bank entered into an undertaking pursuant to which the Group agreed with the Bank, subject to certain exceptions, not to require the Bank to cease to participate in Pace in connection with the Bank’s Liability Management Exercise or any subsequent reduction in the Group’s shareholding in the Bank (including to nil). Should either Group or the Bank so request, the parties will enter into good faith discussions to agree on the separation of Pace, so that the scheme liability properly attributable to the Bank and an equivalent proportion of the scheme’s assets would be transferred to a separate tax registered pension scheme, or a segregated section of Pace. Neither party shall be under an obligation to agree to any separation of the scheme that would result in a requirement to make material payments to or in respect of the scheme.

Project Unity

As part of separation, the Bank will enter into a new IT Services Agreement (the New IT Service Agreement) and a new Master Services Agreement (the New MSA). It is intended that the day to day operational management of the services supplied under the New IT Service Agreement is monitored by a Group contract manager (as the supplier of services), a Bank contract manager (as a customer), functional leads for Group and the Bank and risk, audit and compliance for the Bank. Under the New IT Service Agreement, the Group will provide the Bank with the following services: colleague technology services, network services, core services, service management services and change management services. The New MSA will be a framework agreement intended to establish a flexible contractual arrangement to enable the Bank and CFSMS to obtain certain professional services from Group as agreed from time to time in service contracts. Service contracts will be entered into in relation to secretariat, legal, corporate affairs, marketing, finance, corporate HR, people services, estates, Illius (property management), risk and internal audit.

CFSMS Arrangements

The existing CFSMS- Bank Services Agreement will be terminated once the terms of CFSMS Bank Framework Agreement have been finally agreed.

Statement of Co-operative Group Board responsibilities in respect of the Annual Report and financial statements

The Directors are responsible for preparing the Annual Report in accordance with applicable law and regulations.

Industrial and Provident Society Law requires the Directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the financial statements in accordance with IFRSs as adopted by the EU.

The Group financial statements are required by law to give a true and fair view of the state of affairs of the Group and of the profit or loss of the Group for that period.

In preparing the Group financial statements, the directors are required to:

  • select suitable accounting policies and then apply them consistently
  • make judgements and estimates that are reasonable and prudent
  • state whether applicable IFRSs as adopted by the EU have been followed, subject to any material departures disclosed and explained in the financial statements
  • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business

The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Society and enable them to ensure that its financial statements comply with the Industrial and Provident Society Acts 1965 to 2003. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Society’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Download 2013 financials including consolidated income statement, statement of comprehensive income, balance sheet and cash flow (PDF 1 MB)