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Pensions pensions conference slides

  1. 1. 1 Southern pensions conference 10 November 2010 The future of retirement
  2. 2. 2 Southern Pensions Conference The future of retirement Welcome Housekeeping House rules – participate – challenge – interrupt – enjoy
  3. 3. 3 Southern Pensions Conference
  4. 4. 4 Batting order Now Introduction 9.45 am Looking ahead at the past – Richard Murphy 10.15 am Changing the liabilities – Nicola Wynne 10.40 am A smoother investment ride – David Hutchins 11.10 am Coffee 11.30 am Governance and trustees’ workload – John Hamilton 12.00 pm The impact of scrapping default retirement age – Sarah Peacock 12.30 pm Retirement in the future – Adrian Lamb 12.50 pm Q&A 1.00 pm Lunch
  5. 5. 5 Weather forecast
  6. 6. 6 How will the past affect the future Legacy = millstone? Limited time = not enough time for past and future 2012 – levelling down Adequacy Change and manage your liabilities Get smarter with your investments Focus on key governance issues – not box ticking Think and plan ahead – default retirement plus adequacy The past can help with the future - if we let it
  7. 7. 7 Learn from the past Pension schemes used to finance restructuring Little or no inflation protection - and high inflation! Compulsory membership Attraction and retention Part of social fabric? Retirement to working life ratio 1:4 – now?
  8. 8. Lane Clark & Peacock LLP Trustee Consulting Investment Consulting Corporate Consulting Insurance Consulting Business Analytics Blake Lapthorn’s Southern Pensions Conference Wednesday 10 November 2010 Looking ahead to the past: Delivering past service liabilities
  9. 9. The moment of truth for DB pensions “The era of procrastination, of half-measures, of soothing and baffling expedients, of delays, is coming to a close. In its place we are entering a period of consequences.” Winston Churchill (1936)
  10. 10. Legislation Interest rates Communication Inflation Data accuracy Asset performance Pensions knowledge loss Benefits Trapped surplus Perceived value Corporate bond spreads Salary growth Regulatory bodies Longevity Pension risks
  11. 11. Agenda Setting long-term strategies for delivering benefits Managing and securing the liabilities Devising viable recovery plans in difficult times Actions to take now
  12. 12. “Fix it so it stays fixed” Setting the objectives Deliver promised benefits Affordable and practical set up going forward Off the company balance sheet when possible Minimise costs and risks in the meantime Employer’s and members’ interests no longer aligned
  13. 13. Case study: de-risk to wind-up Closed to new entrants Closed to future accrual 2001 2002 2003 2004 2005 2006 2007 2008 2009 Company decision in principle to de-risk over 10 years; deficit £100m Indicative buyout quotations showing opportunity Competitive buyout auction - locked in to deficit of £40m 2010 Completed scheme wind-up Late 2006: started to switch assets
  14. 14. The path for closed DB plans
  15. 15. What is a pensioner buy-in? Trustee purchases an insurance policy as a scheme investment Policy pays a monthly income to the Trustee – equal to the benefit payments that the Trustee is due to make to current pensioners – value of policy can be used for the benefit of all members Trustee gains exposure to insurer’s covenant 57%37% Equities Residual Liabilities Bonds Insurance Policy Pensioner Liabilities Before After Equities Liabilities Bonds
  16. 16. Pension plan pays Insurer takes on uncertainties…. What is a longevity hedge? Longevity improvements relative to expectations
  17. 17. What is a DIY buy-in? Buy-in with insurer Scheme Insurer Assets Interest Rate Risk Inflation Risk Longevity Risk DIY buy-in Scheme Provider(s) Assets Interest Rate Risk Inflation Risk Longevity Risk
  18. 18. Setting your strategic plan Agree objectives Set asset strategy – Manage risks – Set triggers to lock in good performance as it happens Get certainty on benefits Manage liabilities Agree funding strategy Monitor and, when opportunities arise, take action
  19. 19. Managing liabilities now – the options Capping of accrued benefits – Address as part of future changes – Cap the growth of those liabilities – Simplify the benefit structures Closing out the risk – Buyouts and buy-ins – (Enhanced) transfer values
  20. 20. Pension increase exchange Member option Benefit certainty Cost savings Increased PPF levy Watch tax changes Pensions Regulator Uplift now Member option to convert to a level pension Fixed for lifetime
  21. 21. Enhanced transfer values We believe it is possible to design an exercise to benefit both the sponsor and the members smaller scheme reduced deficit lower volatility The platform for win-win Transfer value Liability Enhancement Reduction in liability Net savings Assets Liabilities Assets Liabilities Overall impact from balance sheet perspective Before After
  22. 22. Meeting the funding challenge Using the whole toolkit Longer recovery plans Back-end loaded Contingency on profitability Trigger-based payments Contingent assets Parent company guarantees Anything else! Assets Deficit
  23. 23. Defining Prudence Benchmarking funding strategies Average scheme size £300m Allows for: – Funding assumptions – Asset allocation – Employer covenant Covenant scores have deteriorated since 2006 No obvious link between covenant strength and funding strategy Be satisfied with your position before deciding on your recovery plan Scheme Risk Index against Covenant Risk Index
  24. 24. What’s coming up? Just arrived – clarity on tax regime from 2011/12 Autumn – CPI / RPI implications Autumn/Spring – action to mitigate PPF levy
  25. 25. £50,000 Annual Allowance 16:1 Valuation Factor for DB Reduced Lifetime Allowance £1.5m Decision document Issued 14 October Applies for some savings immediately
  26. 26. The tax calculation: DB A long serving high earner in a 1/60ths scheme £160,000 x 24/60 = £64,000 pa = £65,984 pa £171,000 x 25/60 = £71,250 pa £5,266 pa X 16 = £84,256£5,266 First £50,000 = No tax Excess £34,256 taxed at 50% = NEW TAX £17,128 +3.1% (2011/12) but check carry forward
  27. 27. PIPs - early start to new tax Example with a PIP year ending 30 June Antiforestalling “penalties” still apply here This part tested against £50k 14 October 2010 5 April 2011 30 June 2010 30 June 2011 2011/12 tax year: new regime applies
  28. 28. CPI - BT announcement 4 November 2010 BT today announced the impact of the Government’s decision that the Consumer Prices Index (CPI), rather than Retail Prices Index (RPI), will be used as the basis for determining the rate of inflation for the statutory revaluation and indexation of occupational pension rights.
  29. 29. The change to CPI – the highlights 1. Minimum statutory increases for pensions in payment deferment are (probably) changing from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI) 2. Varies by year but CPI has averaged 0.7% pa lower on average than RPI, which could knock up to 15% off the value of benefits 3. Unusually for UK legislation, this is applying to past service benefits 4. Announcement on the Government’s plans “shortly” but no legislation is needed to change the statutory requirement from 1 January 2011 5. The impact will depend on the wording of your Rules “ the small print lottery” so TAKE LEGAL ADVICE 6. If your pension increase month is January, your administrator needs to know in the next few weeks whether to apply RPI (4.6%) or CPI (3.1%) 7. For deferred pensioners retiring from January 2011 the new increases may apply 8. Do not forget tax-free cash commutation and transfer values 9. We do not know yet how members will react (but it has been surprisingly quiet!)
  30. 30. By 2012 Compliance with auto-enrolment Employer debt regulations? Solvency II? State pension changes? 2012/13 PPF levy DC contracting- out abolished Planning for updated IAS19 GMP equalisation? tPR record keeping deadline
  31. 31. Conclusion Set your strategic plan Manage the liabilities and grab opportunities Update your 2010/11 to do list
  32. 32. Scope LCP is part of the Alexander Forbes Group, a leading independent provider of financial and risk services. Lane Clark & Peacock LLP is a limited liability partnership registered in England and Wales with registered number OC301436. LCP is a registered trademark in the UK (Regd. TM No 2315442) and in the EU (Regd. TM No 002935583). All partners are members of Lane Clark & Peacock LLP. A list of members’ names is available for inspection at 30 Old Burlington Street, London, W1S 3NN, the firm’s principal place of business and registered office. The firm is regulated by the Institute and Faculty of Actuaries in respect of a range of investment business activities. Locations in London, Winchester, Jersey, Belgium, Switzerland, the Netherlands and Ireland. This generic presentation should not be relied upon for detailed advice or taken as an authoritative statement of the law. If you would like any assistance or further information, please ask. While this document does not represent our advice, nevertheless it should not be passed to any third party without our formal written agreement.
  33. 33. How to manage liabilities……… Nicola Walker in a pension scheme
  34. 34. Final Salary Pension Scheme Liabilities .
  35. 35. Dealing with the liabilities The Scheme Trustees The sponsoring employer The members
  36. 36. The options Managing future service liabilities – Accrual/contribution rates/salary cap – Reshaping: DC /CARE/Cash Balance – Review discretionary benefits – Cessation of accrual Managing past service liabilities – Enhanced transfer exercises – Pension increase exchange – Buy ins and buy outs
  37. 37. Managing future liabilities – scheme amendments Amending scheme rules Powers of amendment – Just do what it says on the tin? (but where is it and what does it actually say?!) Deed/ resolution/ “pending” powers using announcements etc Relevant protections and restrictions (“fetters”) NB: Informing members
  38. 38. Overriding legislative protection Section 67 Pensions Act 1995 Prevents “Detrimental modifications” – i.e. A modification of an occupational pension scheme which on taking effect would or might adversely affect any subsisting right of any member of the scheme, or any survivor of a member of the scheme. “Subsisting right” means any right which has accrued to a member – i.e. which he would retain if he left service at the date of the change
  39. 39. I have the power! But do you really?! – “No such alteration which would vary or affect any retirement benefits then already provided – “rights or interests which shall have accrued ” – rights or interests of any Member in benefits secured by contributions
  40. 40. Enhanced transfer exercises What are they? Why use them? Limited time only for contracted-out benefits!
  41. 41. Enhanced transfer exercises Trustee considerations – Security for remaining members’ benefits – Funding of the enhancements – Data protection – Scheme Rules – Compliance with Regulator’s guidance – Informed member consent Clear and accurate communication No misrepresentation of the Trustees’ role Independent financial advice Reasonable deadline
  42. 42. Regulator’s guidance Start from the presumption that it will not be in the member’s interests Five key principles – The offer should be clear, fair and not misleading – The offer should be open and transparent – Conflicts of interest should be identified and managed – Trustees should be involved from the start – Independent financial advice should be made available to members inducement-offers.aspx
  43. 43. Will it be worth it? Fair and reasonable enhancement offer + comprehensive communications + independent financial advice (preferably without fee or restriction) + regard to Regulator’s guidance + right level of take-up = reduced risk and reduced cost (hopefully!)
  44. 44. Pensions Increase exchange What is it? – Members with pension increase entitlements above statutory requirements – Members agree to exchange these increases for; a cash sum; or a higher base pension Why do it? – Funding level usually improves – Reduces risk – May suit certain members (but risk of selection against scheme) Trustee considerations – Rule amendment if higher base pension to be provided – Protecting members’ benefits – Regulator’s guidance on inducements – Data protection
  45. 45. Legal issues Section 67 (Subsisting rights) – Unless member consents Amendment power restrictions? Section 91 Pensions Act – How does this interact with s67? – Express exception for surrendering benefits for the purpose of acquiring entitlement to further benefits under the Scheme Strong communication – Ensure compliance with Regulator’s guidance – Provide Independent Financial Advice Document individual agreement
  46. 46. And here’s one made earlier! ITV Pension Scheme Proposal made to existing pensioners (of which there were 11,000) Ongoing programme of liability management Pension increase option did not require cash injection The offer: – No effect on spouse’s pension – Uplift applied in 5 year age bands – Sharing saved 60/40 in member’s favour
  47. 47. Pensioners offer pack – Personalised leaflet – Generic explanatory leaflet – Form Letters to DB actives ITV Communication strategy: the offer
  48. 48. ITV Communication strategy: the offer
  49. 49. ITV Support JLT helpline Pensions Department Helpline Section on ITV pensions website including FAQ’s
  50. 50. ITV communication strategy: reminders and confirmation Mid decision phase update – Reminder of offer – FAQ’s Final reminder – Postcard Confirmation – No, thanks: confirmation letter to those who declined – Yes, please: confirmation statement sent before first uplifted pension payment
  51. 51. ITV: The challenges and the results Dealing with press interest and ensuring that the offer was seen in a positive light Availability of data Engaging members remotely 10,300 offers were made, of which there were 4,419 acceptances (43% take-up) Liability saving well in excess of original £30 million target
  52. 52. Buy ins and buy outs Buy in – Insurance Policy – Trustees continue to manage scheme with added certainty over pensioner costs – Policy is a scheme asset when held in the name of the trustees Buy out – The ultimate in de-risking! – Scheme assets and liabilities transferred – Insurer writes policies in the names of individual members
  53. 53. And if you get it right…….
  54. 54. November, 2010 The Future of Pension Investing Designing a Smother Ride for both Defined Benefit and Defined Contribution Schemes This presentation is issued by AllianceBernstein Limited, 50 Berkeley Street, London W1J 8HA. AllianceBernstein Limited is authorised and regulated in the UK by the Financial Services Authority (the FSA). This presentation booklet has been provided to you for use in a private and confidential meeting to discuss a potential or existing investment advisory relationship. This presentation is not an advertisement and is not intended for public use or distribution beyond our private meeting. This document is directed at Professional Clients, as defined by the FSA, and the products and services described are only available to such clients. This document is provided for informational purposes only and is not intended to be an offer or solicitation, or the basis for any contract to purchase or sell any security or other instrument, or for AllianceBernstein to enter into or arrange any type of transaction as a consequence of any information contained herein. David Hutchins Head—Investment Research & Design, UK & Ireland
  55. 55. 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 Through September 30, 2009 Source: FTSE, Investment Management Association and AllianceBernstein Markets Have Provided a Bumpy Ride FTSE All Share Index
  56. 56. Sadly Diversification can also Fail As of September 30, 2009 Source: Barclays Capital, Dow Jones, FTSE NAREIT, Global Financial Data, MSCI and AllianceBernstein (54)% (35)% (17)% 9% (19)% (18)% (67)% Global Equities Global Property High Yield Credit Investment Grade Credit Government Bonds Commodities Hedge Funds Cumulative Returns October 2007—February 2009
  57. 57. Who Suffers the Ride? Defined Benefit 1st EmployerAssets 2nd PPF & Members Defined Contribution 1st Assets 2nd EmployerTrustees & Members Source: AllianceBernstein
  58. 58. Asset Allocation Matters For the majority of investors over 80% of returns and 90% of risk is explained by asset allocation rather than individual stock selection. As of September 30, 2009 Source: Barclays Capital, MSCI and AllianceBernstein
  59. 59. Steps to Building a Smoother Ride for DB and DC Set Clear Objectives based on: Need for returns and ability to cope with downside Allocate Assets efficiently using: Liability sensitive assets (LDI funds) and diversifying return sources Manage Assets Dynamically to amend allocation as: Needs and markets change Ensure Effective Oversight is built in via: Efficient implementation and clear accountability Smoother Ride = Happier Members/Employers = Happier Trustees
  60. 60. Objectives Should Consider Need for Returns versus ability to cope with the Potential Downside Coping with Downside / Risk Flexibility of Time Horizon Need for Returns Flexibility of Outcome Outcome Affordability Loss Affordability
  61. 61. A Simple Glidepath will Help Set Benchmark for Asset Allocation Manager (40) (30) (20) (10) 10 RiskCapacity 1 43 2 Expected Retirement Date Source: AllianceBernstein Target Funding Ratio DC = Time DB = Funding Ratio 60% 70% 80% 90% 110%
  62. 62. Liability Sensitive Funds Reduce Risk for DB Schemes Assets Liabilities £20.0 Mil. Assets Liabilities £27.0 Mil. Assets Liabilities £23.5 Mil. £80 Mil. £100 Mil. £83 Mil. £110 Mil. Without LDI With Prudent LDI £86.5 Mil. £110 Mil. £50 Mil. Equities £30 Mil. Bonds/LDI Funds 10% liability increase Source: AllianceBernstein
  63. 63. Risk of a Static Portfolio Changes Significantly with Markets Portfolio Volatility 60% Global Equities / 40% Global Bonds* 1970–2009 0 5 10 15 20 70 73 76 79 82 85 88 91 94 97 00 03 06 09 The results depicted above are hypothetical and are derived from a back-tested simulation. Please read “Note on Simulation Results” in back of presentation for important additional information. Through September 30, 2009 Global Bonds refer to Global Government Bonds Hedged to USD and Global Equities refer to Global Developed Equities Hedged to USD. Static portfolio results are based on a portfolio that is 55% MSCI World Index, 35% Barclays Global Aggregate Index (as adjusted to reflect duration only) and 10% FTSE NAREIT, rebalanced halfway back to target when weights become +/- 5% from their long-term target. Source: Barclays Capital, MSCI and AllianceBernstein; see Disclosures and Important Information 60/40 Average Volatility 9.2% Percent
  64. 64. 8.0% 34.5% S&P 500 Investors Are Not Always Compensated for Elevated Risk 6.5% 4.2% 6.8% 23.9% Global Equity 1.0% 2.4% 2.1% 8.7% Global Bonds 2.0% 1.5% 7.0% 13.1%Foreign Currencies 4.6% 3.7% 6.2% 21.8%Commodity Futures Excess Returns 12 Months Forward Through September 30, 2009 Excess returns refer to returns over cash. All asset classes are sorted by quintile of volatility, showing highest and lowest quintile, except foreign currencies, which are sorted by tercile. Periods covered, by asset class, are: S&P 500—since 1928; global equities—since 1970; fixed income—since 1970; currencies—since 1974; commodity futures—since 1970. Past volatility is an exponentially weighted average using daily data with a three-week half-life (5% decay per day). Source: Barclays Capital, Global Financial Data, FTSE NAREIT, MSCI, S&P and AllianceBernstein; see Disclosures and Important Information. Past Volatility 7.6% 5.3% Highest Quintile Lowest Quintile
  65. 65. A Good Asset Allocation Manager will Look to Smooth the Ride Dynamic Asset Allocation Lower Returns Higher Conventional Asset Allocation Fewer Large Gains Fewer Large Losses Frequency
  66. 66. That is Good Asset Allocation Manager will tend to Reduce Volatility whilst Maintaining Long Term Returns 0 5 10 15 20 70 73 76 79 82 85 88 91 94 97 00 03 06 09 60/40 Rebalanced Dynamic Allocation Through September 30, 2009 The results depicted above are hypothetical and are derived from a back-tested simulation. Please read “Note on Simulation Results” in back of presentation for important additional information. Global Bonds refer to Global Government Bonds Hedged to USD and Global Equities refer to Global Developed Equities Hedged to USD. Static portfolio results are based on a portfolio that is 55% MSCI World Index, 35% Barclays Global Aggregate Index (as adjusted to reflect duration only) and 10% FTSE NAREIT, rebalanced halfway back to target when weights become +/- 5% from their long-term target. Source: Barclays Capital, Global Financial Data, FTSE NAREIT, MSCI and AllianceBernstein; see Disclosures and Important Information. Nifty Fifty 1987 Crash Bank Crisis Russia/ LCTM TMT Bubble Credit Crunc h 60/40Dynamic 9.2% 7.8% Percent Simulated Portfolio Volatility 60% Global Equities / 40% Global Bonds Average Volatility
  67. 67. The Past Equity Holdings Fixed Income Holdings Other Holdings Trustees Select Balanced Manager(s) Manager(s) Manage Asset Allocation Against other Managers
  68. 68. Derivative overlays: Interest Rate Swaps Inflation Swaps Currency Forwards Equity Options Collateral management Proactive de-risking strategies Lifestyling strategy Today AllianceBernstein Equity Holdings Fixed Income Holdings Other Holdings Trustees Manage Asset Allocation Against Scheme Specific Objectives UK Global Small Cap Large Cap UK Global Fixed Index Linked Property Annuities Commoditie s Private Equity Infrastructure Venture Capital Duration CreditActive Passive Style Active Passive Tactical Asset Allocation Hedge Funds
  69. 69. Tomorrow Equity Holdings Fixed Income Holdings Other Holdings Trustee set Scheme Specific Objectives and Select “Fiduciary” Manager(s) Manager(s) Manage Assets against Scheme Specific Objectives “Target Date Funds” in DC
  70. 70. AllianceBernstein Solutions Defined Benefit Schemes *Launching in 4th quarter 2010 Defined Contribution Schemes Retirement StrategiesSM Small schemes + contract based schemes Pre-built Target Date Funds Passive with Volatility Management From December 2010 Customised Retirement StrategiesSM Larger schemes Customised Target Date Funds AB accepts accountability Fully open-architecture ABdb Small schemes Scheme specific liability benchmarked investment strategy which includes: Liability sensitive investments Market sensitive risk management Dynamic de-risking glidepath Full implementation and reporting
  71. 71. Disclosures and Important Information The views and opinions expressed in this presentation are based on AllianceBernstein's internal forecasts and should not be relied upon as an indication of future market performance or any guarantee of return from an investment in any AllianceBernstein services. Past performance is not a guide to future performance. The value of investments and the income from them can fall as well as rise and you may not get back the original amount invested. The value of non-exchange securities may be subject to exchange rate fluctuations.
  72. 72. Pension Scheme Governance How to ease the burden John Hamilton Partner
  73. 73. Why governance is an issue for pension schemes “Good Scheme governance underpins secure pensions and enables the effective management of risk”. The Pension Regulator “Governance is a key issue of our times. As the bar has risen on standards of governance within companies, the NAPF believes that pension schemes – on which million of people depend – should also apply high governance standards” NAPF Discussion Paper (July 2005)
  74. 74. The legal framework for pension scheme governance Trust law Pensions Act 1995 – Member Nominated Trustees – Reports and audited accounts – Record keeping – Relationships with professional advisers Pensions Act 2004 – TKU – new trustees have only 6 months to get up to speed – Duty to report breaches – Notifiable events. – Internal controls.
  75. 75. Other strands of governance Myners principles Data Protection Act 1998 Disclosure regulations FSA regulation
  76. 76. Internal controls Article 14(1) of the European Directive 2003/41 EC Section 249A of the Pensions Act 2004 Regulation: “ The trustees or managers of an occupational pension scheme must establish and operate internal controls which are adequate for the purpose of securing that the scheme is administered and managed: − In accordance with the scheme rules; and − In accordance with the requirements of the law.”
  77. 77. Putting this into practice – what does the Regulator now expect of trustees? Regulators Code of Practice Key themes:- Code provides guidelines rather than a prescription. Schemes must have internal controls but trustees have the flexibility to determine how these internal controls are implemented. Risk-based approach Trustees should consider the circumstances of their own scheme. Proportionate and common sense approach.
  78. 78. Putting this into practice – a risk based review Ask yourselves the question – “What are we trying to achieve?” – Minimising financial and non-financial risk in the running of your scheme. Identify risks – look at processes to see where the main potential for risk arises. Define success – be realistic when setting targets. Assess risk. Produce action plan – e.g. set out ideas for internal controls against each risk. Implement the plan. Monitor and review.
  79. 79. Putting this into practice – identifying the key risks Risk that internal controls don’t work. Risk of fraud Corporate risk Funding/investment risk – the risk that scheme investment strategy is no longer appropriate. Compliance/regulatory risk – failure to comply with scheme rules or breach of legislation. Administration risk – overpayments etc. Computer system and database failures. Poor scheme management. Risk of ineffective decision making – trust law (wrong factors), conflict etc.
  80. 80. Putting this into practice – identifying the key risks Source: based on Watson Wyatt business management cycle Documenting your risk review process
  81. 81. Common pitfalls for trustees – Failing to implement an action plan for controlling risk – compliance should not become a box ticking exercise. – Ineffective management of conflicts. – Ineffective record keeping. Importance of record keeping. Legislative requirements. – Ineffective supervision of delegates and advisers Establish a process for assessing your advisers and delegates. Are their internal controls adequate - don’t be afraid to ask!
  82. 82. Common pitfalls for trustees (contd.) – Forgetting the basics Not understanding the trust deed and rules. Misunderstanding the difference between duties and discretionary powers. Misunderstanding the balance of powers Not acting as a trustee – Forgetting the wider responsibilities Data protection – consents, unauthorised processing, inadequate security measures. Focussing on the present and trying to forget the past! – e.g. equalisation.
  83. 83. What more can trustees be doing? Conduct of trustee meetings – Keep key risk areas on the agenda for every trustee meeting – e.g. conflicts, covenant assessment – Frequency – Manner by which Trustees conduct business – Use of sub-committees – Include legal/technical update as a regular agenda item Composition of your trustee board – Ask yourselves, is the trustee board effectively representing the interest of members? – Having difficulty finding MNTs – ask yourself why? – Consider the appointment of an independent trustee – not necessarily a professional trustee.
  84. 84. What more can trustees be doing? – cont’d Scheme Documentation – Do you understand your deed and rules? – If the answer is no, what action should be taken? Training? Rule rewrite Prepare a working copy Make use of benefit and legal audits Maintain a balance of powers summary Communication – Timescales, manner, content – Open meetings with members? – How can you best make use of modern media?
  85. 85. What lies ahead? Data cleansing and tPR – What are you doing to reach the Regulator’s target deadline? – Is this built into your action plan for internal controls? MNT – will we see a move to 50% as a mandatory requirement? Increased exposure for Trustees under DPA? The impact of Government cut-backs in public spending? Increase in litigation?
  86. 86. And finally … let’s not forget DC! Contract based schemes – “the Governance Vacuum” (NAPF 2005 discussion paper) Pension committee Should there be some risk sharing for the employer?
  87. 87. Scrapping the default retirement age – what does this mean for employers and employees Sarah Peacock
  88. 88. Phasing out from April 2011 Consultation ended on 21 October 2010 and the Government intends to publish a response in November 2010. Proposals: Retirements that have been notified before 6 April 2011 to take effect before 1 October 2011 are valid. If notified before 6 April 2011 to take effect after 1 October 2011 will not be valid.
  89. 89. DRA will cease completely on 1 October 2011 No new notices of intended retirement may be issued after 6 April 2011 Statutory retirement procedures will be abolished
  90. 90. Compulsory Retirement - Objective justification Seldon v Clarkson Wright and Jakes and anor Court of Appeal - September 2010 Rosenbladt v Oellerking Gebaudereinigungsges mBh European Court of Justice - October 2010
  91. 91. Advantages Retain experience Retain knowledge Retain skills Demonstrates equal opportunities Improved attitude towards older workers Lower labour turnover Decreased sickness absence
  92. 92. Disadvantages Fewer opportunities for career development for new/younger employees Reduced capability Performance diminishing with age Difficulties in succession planning Less natural wastage Increased sickness absence Increase cost of insured benefits Impact on pension arrangements
  93. 93. Insured benefits Life assurance Medical cover Income protection schemes Critical illness cover Permanent health insurance Employee Share Schemes – good and bad leavers
  94. 94. Government assurance Most employers agree to requests to work beyond retirement age Most employees only choose to work one or two years past the age of 65 Work performance in most jobs is not affected up to the age of 70
  95. 95. Southern Pensions Conference – is the past any guide to the future?
  96. 96. Is the past any guide to the future? Review what we have covered so far Look at some of the issues that still remain from the “legacy” Some things to be on the look out for
  97. 97. Changing the scheme’s liabilities RPI/CPI – will it be overriding? Ceasing DC contracting out – another transfer window? Liability reduction exercises stay on the agenda Good process, good communications are critical
  98. 98. Investment A key risk! Smarter solutions and options now available to all Diversification, speed of decision making, dynamic adjustments, etc., Trustees to focus on strategy – 80:20 Contributions likely to remain limited so investment performance – risk v. return – more important than ever
  99. 99. Governance Monitoring plan for employer covenant with annual review (minimum) and actions where necessary Focus on the key risks Standing item on their meeting agenda Refer to TPR where relevant TKU burden increasing – think about how best to cope Trustees and employer monitoring role for advisers, administrators, managers, etc. – understand what is possible Don’t forget the data and the TPR deadlines
  100. 100. Default retirement and age discrimination Benefit provision Insurance availability Cost alone is not a justification DB or DC? Life cover, private medical, etc?
  101. 101. 2012 -2016 – auto enrolment and NEST Auto enrolment a reality 3 month window – but how much will this help? Additional costs for employers and employees Will this force more opt outs? Danger of levelling down Application depends on employer size
  102. 102. Employer (by PAYE scheme size or other description) Staging date 120,000 or more 01-Oct-12 50,000-119,999 01-Nov-12 30,000-49,999 01-Jan-13 20,000-29,999 01-Feb-13 10,000-19,999 01-Mar-13 6,000-9,999 01-Apr-13 4,100-5,999 01-May-13 4,000-4,099 01-Jun-13 3,000-3,999 01-Jul-13 2,000-2,999 01-Aug-13 1,250-1,999 01-Sep-13 Auto-enrolment staging
  103. 103. Employer (by PAYE scheme size or other description) Staging date 800-1,249 01-Oct-13 500-799 01-Nov-13 350-499 01-Jan-14 250-349 01-Feb-14 Certain employers with less than 50 01-Mar-14 240-249 01-Apr-14 150-239 01-May-14 90-149 01-Jun-14 50-89 01-Jul-14 Other with less than 50 Aug 2014 to June 2015 Auto-enrolment staging
  104. 104. And Also TPR spreads net – Nortel - Financial Support Directive – Lehman Brothers – Bonas Group – Contribution Notice PPF to be self sufficient by 2030? Act now to get your surplus or at least to make sure you retain the right to get at it
  105. 105. And not forgetting …… Disclosure changes Regulator’s data deadlines Annuitisation deferral – the first step to collectivism? Tax changes – annual allowance, reduced lifetime allowance, etc.
  106. 106. Trustees’ circle of interdependencies Employer covenant Funding Investment
  107. 107. Questions to ask - Trustees Are we focusing on the key risks? Can we get more from our current and future assets? How rigorous is our covenant monitoring? How rigorous does it need to be? Have we reviewed all our liabilities and operational issues Have we considered all options and issues? Have we challenged our advisers on these issues? Have we challenged ourselves and assessed our own performance?
  108. 108. Questions to ask - Employer Are we fully engaged with the Scheme? What is our strategy? Have we thought about the end game? Have we considered all of our options? Have we started to think about 2012 and the effect of the tax changes?
  109. 109. To Do List Work together – establish and maintain a good working relationship Review governance and operations 2012 is even closer now! Be active rather than reactive Keep your nerve
  110. 110. 2020 Vision (or 2040?) No such thing as a normal pension age Retirement commonly age 70 (or later) Older workers DC inadequacy – 10 more years of DC, 10 less of DB! Employers and employees understand the need to save enough Cloud Pensions (Collective DC – double Dutch, going Dutch of just learning from the Dutch) Forced annuitisation a thing of the past
  111. 111. Question time