Regaining control of your pensions scheme conference


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Blake Lapthorn solicitors' Pensions team held a conference during November 2009 on regaining control of your pensions scheme, taking a look at some of today's challenges and tomorrow's issues.

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Regaining control of your pensions scheme conference

  1. 1. Southern Pensions Conference Regaining control of your pension scheme A fresh look at today's challenges and some of tomorrow's issues Adrian Lamb Consultant, Pensions team
  2. 2. The perfect storm Falling asset values Increasing liabilities Weakening covenants © Blake Lapthorn 2009
  3. 3. Too big too fail… …the year (or more) of living dangerously © Blake Lapthorn 2009
  4. 4. First some questions Cost or value for money? Can you improve investment performance - risk v return? Has the company's attitude towards the scheme changed? Can trustees improve their effectiveness? How can employers engage constructively in the scheme, and how can trustees encourage this to happen? Are the demands and expectations on trustees too great? Can you make better use of information you receive and advisers, managers and administrators that you deal with Can you improve communications with all stakeholders? What else can be done to improve “member experience”? © Blake Lapthorn 2009
  5. 5. R = Recession (Any signs of a) Recovery? (Longer) Recovery Plans Regulator and regulation Risk Reward (Postponed) Retirement (Finite) Resources Realism © Blake Lapthorn 2009
  6. 6. The Trustee’s job is still the same Decide the investment strategy and invest accordingly Decide and Pay the right collect the right amount of money amount of money at to the right person the right time at the right time © Blake Lapthorn 2009
  7. 7. Many of the risks are still the same Sponsor Sponsor Credit Willingness risk ability risk Spread risk Interest rate Catastrophe Mortality risk Risk risk “Growth Liquidity Inflation risk assets” risk risk Sponsor Legislative Operational Relationship risk risk risk © Blake Lapthorn 2009
  8. 8. But some things are very different! © Blake Lapthorn 2009
  9. 9. What has changed? Surpluses to deficits Few schemes open to new members - most closing completely Greater trustee responsibilities Greater demands on time for trustees Statutory requirements for levels of knowledge and understanding and monitoring of funding AND employer covenant Increasing complexity - investment, longevity, legislation Change of corporate attitude to schemes Loss of confidence and trust in savings, including pensions MORE FOCUS ON ‘THE END GAME’ © Blake Lapthorn 2009
  10. 10. Employer Covenant © Blake Lapthorn 2009
  11. 11. Areas of responsibility Trustee Group Overall Governance Advisers 2-4 meetings p.a. Assets How? Liabilities Operational Who with? Powers? Administration Who decides? Employer input Audit Managers and or control Communication Custodians © Blake Lapthorn 2009
  12. 12. Current governance/operational model? Monitoring/reviews at meetings - reports, presentations Long term strategies Day to day management by mix of advisers, pensions manager, other company officers Is this still the right way? – 80/20 v 20/80? © Blake Lapthorn 2009
  13. 13. How things have changed SIMPLE COMPLEX Equities or bonds? Equities, bonds, hedge funds, Triennial valuations commodities, hedging, swaps, Annual administration review fund of funds, manager of managers etc Limited communication Annual funding reviews (at Surpluses or at least no least) deficits? Regular covenant reviews Most of workforce covered by schemes Closer monitoring generally No end in sight Deficits growing Need to understand longevity Two tier workforce © Blake Lapthorn 2009
  14. 14. Conflicts of interest and duty - some ground rules Trustee duty To disclose relevant information acquired whether as a trustee or in another capacity Company officer duty – to keep information confidential – to act in Company’s interests General principle A trustee (fiduciary) should not put himself in a position where his duty conflicts with his personal interests or where a duty he owes to one party conflicts with a duty he owes to another party without informed consent from Parties (or if allowed by rules, articles, etc.) © Blake Lapthorn 2009
  15. 15. Prudence with a purpose © Blake Lapthorn 2009
  16. 16. Key issues Funding (finite/limited resources - limited room for manoeuvre) Contingent Assets – guarantees, charge over assets, etc Managing Conflicts Employer Covenant Operational Management Investment Improving Communication Looking forward © Blake Lapthorn 2009
  17. 17. Understanding the Employer Covenant – what you really need (and what you probably don’t) Guy Jackson
  18. 18. Topics 1. What is the employer covenant? 2. Why do it? 3. Some encouragement 4. Current trends 5. Covenant assessment methods 6. A winning approach
  19. 19. Background - What is it? “Employer’s financial position and prospects as well as his willingness to continue to fund the Scheme’s benefits” (1) (1) TPR Code of practice 03: Funding defined benefits
  20. 20. Covenant Reviews - Why do it? 1. To satisfy The Pensions Regulator - Monitoring the employer covenant is not a legal obligation – good governance? - TPR expects trustees to make their own assessment - Code of Practice No. 3 “Funding Defined Benefits” - “It is intended for the trustees to form an objective assessment of the employer’s financial position and prospects as well as his willingness to continue to fund the scheme’s benefits (the employer’s covenant). This will inform decisions on both the technical provisions and any recovery plan needed” - TPR (if involved) will look for evidence of assessment; increasingly interested in how trustees reach their conclusion on covenant strength and what independent advice has been taken
  21. 21. Covenant Reviews - Why do it? 2. Scheme Specific Funding Review - Testing the employer’s financial durability and its ability and willingness to meet its financial commitments to the Scheme including negotiation of a suitable recovery plan 3. A one-off corporate transaction or event - Likely to have a significant impact on the strength of the covenant offered to the Scheme 4. Reducing the risk - That trustees face in terms of personal liability for a fund’s shortfall in the event the sponsoring employer fails
  22. 22. Some Encouragement “Trustees should aim to correct any shortfall as quickly as the Employer can reasonably afford. We intend to distinguish between those Schemes where rapid elimination of the shortfall would have a serious impact on the Employer’s viability and those where Employers could afford to pay off the shortfall more quickly.”(1) “…best means of delivering Scheme members’ benefits is for the Scheme to have the continued support from a viable employer.” (2) (1) TPR May 2006 (2) TPR October 2006
  23. 23. Some More Encouragement “Assessment of the employer covenant is key to setting and reconsidering technical provisions.”(1) “A regular, structured and open dialogue with the employer is an essential characteristic of a well governed scheme. It is important that the trustees have an understanding and appreciation of the financial position of the sponsor. The extent to which trustees or managers are able to do this will depend on their own skills and the willingness of the employer to engage in open dialogue with them. Regular reviews of the sponsoring employer's covenant and a suitable make-up of the trustee board may help to provide the environment for adequate control in this area.”(2) (1) The Pensions Regulator, Scheme Funding Workshops, Key Messages (2) The Pensions Regulator, Regulatory Guidance, Internal Controls
  24. 24. Some Final Encouragement... “Trustees of schemes with shortfalls need to prepare a recovery plan to show how the shortfall is to be eliminated. The regulator's code of practice 7 indicates that 'Trustees should aim for any shortfall to be eliminated as quickly as the employer can reasonably afford. What is possible and reasonable, however, will depend on the trustees' assessment of the employer's covenant.”(1) “Trustees, like any other creditor, will need to consider the employer's covenant, and its ability to pay. It's clearly in the employer's interest to co-operate fully because if the trustees don't understand the employer's ability to pay, they may be unable to agree a perfectly reasonable recovery plan.(2)” (1) The Pensions Regulator, Regulatory Guidance, Codes and guidance, The Regulator’s Statement May 2006 (2) The Pensions Regulator, Press Releases, Pensions Regulator Chairman addresses annual NAPF Conference
  25. 25. Current Trends Overall, what are the BIG questions we are seeing at the moment: - How much can the sponsor afford to pay and over what period? - What if the sponsor fails as a going concern? - How likely is the sponsor to fail? - What options are available to the Trustees to mitigate any risks faced by the Scheme? But also watch out for.... - Need to look beyond the PEs? – link with the parent/rest of the group. Impact of intra-group trading, debts, dividends, management charges etc on PEs? - Actions by the Employer which could require mitigation and/or clearance from TPR – e.g. restructuring, transactions, giving security - How solid is existing security held by the Scheme?
  26. 26. Current Trends Leading to... - Increase in trustees seeking independent advice – a move away from “in-house”? A need for objectivity and to reduce trustee risk? Alleviate conflicts? Someone to ask the difficult questions? - More frequent monitoring for those having previously taken independent advice. Seek information from the employer on a regular basis - Focus on revised forecasts, cash headroom, banking covenants - Trustees needing CURRENT information to make informed decisions on employer profitability, free cash (reasonable affordability) and employer solvency/viability. A desktop review of historic filed information is redundant and dangerous! - Requests for • revision to recovery plans – back end loading • additional security/guarantees/contingent assets • additional participating employer (s)
  27. 27. Covenant Assessment Methods DIY - Strong Employer/Strong Scheme - Expertise - Time - Liability - Conflicts - ability to negotiate and challenge Outsourced options - Model/Ratings based approach - Independent business review (“IBR”) approach - Invasive v non-invasive - Commercially useful - No preconceptions - Price sensitivity v Trustee/scheme protection
  28. 28. A Winning Approach... We ensure we understand the background first What do the Trustees and their advisors want – listen to Trustees’ needs and discuss; bespoke service not a “one size fits all” approach Scope is determined by RISK; trustees can use collective knowledge of sponsor and sector to make an initial risk assessment to determine how much work is needed to ensure they have met their responsibilities R reasons for the assessment (circumstances triggering the review/general level of trustee concern) I information availability – how easy is it to get information outside the public domain? - what is publicly available? - what information has the FD shared? S scheme position - how well funded/ratio of deficit to sponsor’s net assets/profitability/cash generation) K knowledge of employer’s business and sector - do the trustees have the skills themselves?
  29. 29. A Winning Approach... Components of the Covenant (adding up to the “covenant factors”) Sponsoring Employer(s) The Scheme Profitability/free cash flow Gross assets/liabilities Balance sheet strength (+EOS?) Funding gap Contingent asset capacity Status Business/financial risks Trustees Attitude Group As sponsoring employer Inter group trading Outside the box: Dependence on sponsor Non-sponsor guarantees Market sentiment FSDs/CNs (TPR) Ratings etc
  30. 30. A Winning Approach... View on Interpretation Covenant Strong Covenant factors viewed as good, with no major weak areas identified Risk of failure to honour scheme liabilities currently viewed as low Positive Covenant factors viewed as positive/favourable; no major weaknesses identified Risk of employer default considered on the lower side Moderate Covenant factors viewed as mixed Potential for employer default though probably not high risk nor near term Negative Negative covenant factors outweigh positives; some significant weaknesses identified Need for improvement/change/restructuring if employer to avoid default Weak Covenant factors display major signs of weakness/distress Employer default a strong possibilty and in worst cases insolvency In all cases Where does covenant strength actually sit? Participating employers v group. What is the trend in the covenant? Is it strengthening or weakening?
  31. 31. A Winning Approach... View on Impact of Covenant Rating On: Covenant Recovery Contingent Monitoring Other trustee Funding target period assets activity actions Strong Positive Moderate Negative Weak
  32. 32. Our CAS Credentials Covenant Assessment Services - Operating in the covenant review market following involvement in 2002 in the Bradstock compromise - Work mainly, but not exclusively, for trustees - Current assignment rate: • 60 + per annum (nationally) - Wide ranging experience: • PLC to small employer • Single employer to multi-employer schemes • Schemes from £10m to £1.5bn assets • Frequent contact with Regulator and PPF - Group comprises specialist partners, directors and senior managers supported by qualified analysts - Winner of Sponsor Covenant Assessment Provider of the Year at the UK Pensions Awards 2009 - Winner of Covenant Review Provider at the Pension and Investment Provider Awards 2009
  33. 33. Improving scheme operation Bill Hymas
  34. 34. It is not easy being a trustee, but I am doing my best - although no one seems to notice.
  35. 35. Drivers for governance?
  36. 36. But what is governance?
  37. 37. Wikipedia definition Governance relates to decisions that define expectations, grant power, or verify performance. It consists either of a separate process or of a specific part of management or leadership processes. Sometimes people set up a government to administer these processes and systems. In the case of a business or of a non-profit organisation, governance relates to consistent management, cohesive policies, processes and decision-rights for a given area of responsibility. For example, managing at a corporate level might involve evolving policies on privacy, on internal investment, and on the use of data.
  38. 38. Elements of governance Board effectiveness Assessment of advisors Relationship with the employer Risk management and controls Compliance with legislation Communication strategy
  39. 39. How is it measured?
  40. 40. © 2009 Baker Tilly UK Group LLP, all rights reserved Baker Tilly Tax and Advisory Services LLP, Baker Tilly UK Audit LLP, Baker Tilly Corporate Finance LLP, Baker Tilly Restructuring and Recovery LLP and Baker Tilly Tax and Accounting Limited are not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services because we are members of the Institute of Chartered Accountants in England and Wales. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide. Baker Tilly & Co Limited is authorised and regulated by the Financial Services Authority to conduct a range of investment business activities.
  41. 41. November 2009 Investment – can you be more effective and efficient? David Willers Mercer Limited is authorised and regulated by the Financial Services Authority Registered in England No. 984275 Registered Office: 1 Tower Place West, Tower Place, London EC3R 5BU
  42. 42. Global Stock Market Performance Mercer 42
  43. 43. Opportunity Knocks January 2009 February 2009 May 2009 End 2009 Global Credit Convertible Bonds Recovery Property Secondary Private Equity More diversified Forced selling by UK market has Attractive but also universe hedge funds been hit hardest practical issues Buy and hold Capital protection Focus on funds Secondary funds approach of bonds with no baggage address many of the practical Focus on short Participate in Look to buy high issues dated bonds equity upside at yielding properties no cost from forced sellers Previously performed well at bottom of cycle Mercer 43
  44. 44. Agenda Convertible Bonds Recovery Property Secondary Private Equity Governance Issues Mercer 44
  45. 45. Convertible Bonds
  46. 46. Convertible Bonds What are they? Corporate bonds that provide the option to convert into a company’s underlying shares at a given conversion price. Scenario Convertible Bond Behaviour Share price falls Bond-like Modest increase in Bond-like share price Strong growth in share Equity-like price Usually expect to pay a premium over bond price for a convertible bond Mercer 46
  47. 47. What Was the Opportunity? Forced selling by hedge funds caused a collapse in convertible bond prices. At one stage, more than 50% of convertible bonds were priced more cheaply than the equivalent bond. In these cases, convertible bond holders were being paid to take on the option of converting to an equity rather than paying for it. Pretty good when the option always has a value of zero or better for the holder! Mercer 47
  48. 48. How to Access the Opportunity Pooled fund with a specialist manager Long only investing with no leverage. Benchmark agnostic and should be viewed as an absolute return opportunity. Short maturity (investment horizon of 3-7 years). Globally diversified (and currency hedged). Buy and maintain with a light touch active management and therefore lower active management fees. Limited interest rate sensitivity because of short maturity and so less vulnerable to inflation risk. Mercer 48
  49. 49. UK Property
  50. 50. What is the Opportunity? 14.0 12.0 10.0 8.0 Yield (%) 6.0 4.0 2.0 0.0 Sep 89 Sep 91 Sep 93 Sep 95 Sep 97 Sep 99 Sep 01 Sep 03 Sep 05 Sep 07 Sep 09 Property Income Yield Source: Investment Property Databank FT 5-15 Gilt Yield until 30/11/1996, FTA Gilt Yield thereafter Mercer 50
  51. 51. How Would We Access the Opportunity? UK Recovery Funds New funds with no baggage Closed ended funds with limited fund-raising window 5 year life Target an absolute return of 12-20% p.a. Fees include a performance related element Aiming to be concentrated in most attractive areas Mercer 51
  52. 52. Secondary Private Equity
  53. 53. Private Equity: What is it? Value Manager incentivise d to maximise long term value Years 0 12 Mercer 53
  54. 54. Private Equity: The Current Opportunity Value Additional return for providing liquidity Years 0 12 Median bid in first half of 2009 was 36% of NAV Mercer 54
  55. 55. How Would We Access the Opportunity? Access through a fund of funds manager who will perform due diligence on potential investments. Use a closed ended fund with specified maturity and an absolute return objective. Be wary of Fund of Fund managers looking to raise very large funds. Use a specialised, recognised and experience secondary team with a strong private equity background and track record across market cycles. Pay attention to practicalities and your need for liquidity. Mercer 55
  56. 56. Governance Issues
  57. 57. Challenges Involved Too small Governance Too risky Transparency Expensive Market Conditions These can be overcome Mercer 57
  58. 58. Dealing With Complexity 1. Build in-house resources 2. Introduce or strengthen investment committee 3. Look for an ‘off the shelf’ product 4. Delegate some decision making to investment consultant Mercer 58
  59. 59. Example of a ‘Diversified Beta’ Fund Strategy Target Portfolio Weight (%) Initial Range Infrastructure 20 10 – 35 Global Real Estate 15 10 – 35 Private Equity 20 10 – 35 Timber, Forestry and Agricultural Land 10 5 – 15 Opportunistic: Commodities/ Credit 25 0 – 30 Emerging: Clean Technology 10 0 – 20 TOTAL 100 Mercer 59
  60. 60. Implemented Consulting Board of Directors Executives Department Head Department Head Department Head Department Head Department Head Mercer 60
  61. 61. Delivering against your objectives Strategy Using a diversified beta fund transfers some strategic decision making on growth assets to fund manager. Implemented consulting can transfer decision making for matching portfolio as well. Implementation Using a diversified beta fund transfers implementation responsibility for part of growth portfolio to fund manager. Implemented consulting can transfer implementation responsibility for matching portfolio as well. On-going Both options also transfer some manager monitoring responsibility away from trustees. Mercer 61
  62. 62. Capturing Funding Improvements Funding level (%) 100% 95% 85% 80% 75% 70% Starting point End goal Time Actual funding level Downside protection level Step up in the downside protection level Real world volatility will require a disciplined risk management process Mercer 62
  63. 63. Summary The time is right for considering alternative investments. Convertible bonds have rallied significantly and are now less attractive from an opportunistic viewpoint. Income yield on UK property is attractive on historic measures. Secondary private equity investment funds are available at a significant discounts. The way you access opportunities is very important. Diversified growth funds and implemented consulting offer routes to increased complexity without increased governance. Mercer 63
  64. 64. Risk Warnings This document contains confidential and proprietary information of Mercer and is intended for the exclusive use of the parties to whom it was provided by Mercer. Its content may not be modified, sold or otherwise provided, in whole or in part, to any other person or entity, without Mercer’s written permission. The findings, ratings and/or opinions expressed in this document are the intellectual property of Mercer Ltd and are subject to change without notice. They are not intended to convey any guarantees as to the future performance of the investment products, asset classes or capital markets discussed. Past performance does not guarantee future results. This document does not contain specific investment advice. No . investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances. Information contained herein has been obtained from a range of third party sources. While the information is believed to be reliable, Mercer has not sought to verify it. As such, Mercer makes no representations or warranties as to the accuracy of the information presented and takes no responsibility or liability, (including for indirect, consequential or incidental damages), for any error, omission or inaccuracy in this document. © 2009 Mercer Ltd. All rights reserved. Mercer 64
  65. 65. Mercer Limited is authorised and regulated by the Financial Services Authority Registered in England No. 984275 Registered Office: 1 Tower Place West, Tower Place, London EC3R 5BU
  66. 66. The Second Biggest Lie in Pensions... …COMMUNICATION IS A WASTE OF TIME 12 November 2009 Kevin Shilling Mercer 66
  67. 67. Mercer 67
  68. 68. Mercer 68
  69. 69. The right question... How much do you know about your pension benefits? Mercer 69
  70. 70. The right question... How much do you know about your pension benefits? How do you plan to live when you retire? Mercer 70
  71. 71. Communication Cycle of activity Commitment to communicate Member engagement Confidence Mercer 71
  72. 72. Communication Plan Review • New tools Timescales and costs Objectives • Regularly reinforce Obstacles • Workbook -Best practice Mercer 72
  73. 73. Communication Plan MESSAGE METHOD VALUE PERSONAL LIFE ! Mercer 73
  74. 74. Effective communication MESSAGE METHOD VALUES PERSONAL LIFE! Clear Supplementary Context Call for action Tone of voice Consistency Timescales Ownership Ongoing Mercer 74
  75. 75. Effective communication MESSAGE METHOD VALUES PERSONAL LIFE! Clear Print Supplementary Electronic Context Briefings Call for action Internal comms Tone of voice Branding Consistency Modeller Timescales Unions Ownership Media Ongoing Mercer 75
  76. 76. Effective communication MESSAGE METHOD VALUES PERSONAL LIFE! Clear Print Open, honest Supplementary Electronic Corporate Context Briefings From the top Call for action Internal comms Environment Tone of voice Branding Inclusive Consistency Modeller Timescales Unions Ownership Media Ongoing Mercer 76
  77. 77. Effective communication MESSAGE METHOD VALUES PERSONAL LIFE! Clear Print Open, honest Focus groups Supplementary Electronic Corporate Feedback Context Briefings From the top Q&As Call for action Internal comms Vision Forms Tone of voice Branding Inclusive Grapevine/ blog Consistency Modeller Environment Timescales Unions Ownership Media Ongoing Mercer 77
  78. 78. Effective communication MESSAGE METHOD VALUES PERSONAL LIFE! Clear Print Open, honest Focus groups Legal Supplementary Electronic Corporate Feedback Technical Context Briefings From the top Q&As CEO Call for action Internal comms Vision Forms Acquisition Tone of voice Branding Inclusive Grapevine/ World disaster blog Consistency Modeller Environment Change of PM? Timescales Unions Sporting success Ownership Media Ongoing Mercer 78
  79. 79. REXAM MESSAGE ‘You have choices!’ Flexible contributions to match your lifestyle. Invest what you can afford METHOD Paper based, sent to home addresses. Consistent and regular. Branded VALUES Promotes company products and reflects environmental policy PERSONAL Feedback via publications and internal meetings LIFE Impact of recession Mercer 79
  80. 80. The Cooperative Group MESSAGE ‘Working together.’ Harmonisation of company and equalisation of benefits METHOD Diverse audience. Mix of website, print, modeller andmanagers’ information packs VALUES Commitment from the top. Steering Group. Employers took ownership of problem. PERSONAL Feedback through team briefings, website, internal publications LIFE More acquisitions. Mercer 80
  81. 81. BT MESSAGE Pension scheme for the future. Affordable and sustainable. Fair to DC members METHOD Flexible and immediate. Website, modeller, Q&As, Helpline, briefings, consultation packs. VALUES Commitment from the top, Ian Livingston. Corporate values and environmental policy PERSONAL Feedback through team briefings, website, Helpline, employer presentations LIFE Redundancies, pay freeze. Ongoing disputes Mercer 81
  82. 82. Final thought... Mercer 82
  83. 83. The Second Biggest Lie in Pensions... …COMMUNICATION IS A WASTE OF TIME 12 November 2009 Kevin Shilling Mercer 83
  84. 84. Occupational Pensions Workplace Pensions A new era? Nicola Wynne
  85. 85. Living longer - that’s a good thing, right? Our society is getting older. The number of pensioners will double by 2050 In 1901 there were 10 people working for every pensioner in the UK. By 2050, it is expected that this will change to just 2 workers for every pensioner It has been estimated that around 7 million people are not saving enough to meet their retirement aspirations © Blake Lapthorn 2009
  86. 86. “We need to put in place an affordable, sustainable pensions system which meets the needs of generations to come and encourages people to save for their retirement.” Tony Blair in the foreword to the May 2006 White Paper © Blake Lapthorn 2009
  87. 87. And the answer is… automatic enrolment into workplace pensions (aka ‘personal accounts’) Government’s White Paper of 25 May 2006 The Pensions Act 2008 March 2009 September 2009 Spring 2010 © Blake Lapthorn 2009
  88. 88. Who is responsible for the changes? The Department for Work and Pensions (DWP) The Pensions Regulator The Personal Accounts Delivery Authority (PADA) © Blake Lapthorn 2009
  89. 89. And what do they have to say about it? “More people will have to give greater thought to how they will support themselves in retirement and employers will increasingly find that they need to understand and engage with the pensions choices they offer. We remain fully committed to supporting and enabling employers to meet this challenge.” Tony Hobman, Chief Executive of the Pensions Regulator © Blake Lapthorn 2009
  90. 90. “If we have serious implementation problems in the early days of auto- enrolment that would affect people's confidence in terms of their savings and the whole system.” Yvette Cooper MP - Secretary of State for Work and Pensions © Blake Lapthorn 2009
  91. 91. “The private pensions sector is not well set up to meet all employer and employee needs. Personal Accounts are really catering for those who haven't done anything to prepare for retirement while still giving them the chance to opt out.” Tim Jones, Chief Executive of the PADA © Blake Lapthorn 2009
  92. 92. Another view…….. “The personal account reforms are an appealing idea in theory, but in practice they are a disaster in the making.” Dr Ros Altmann, pensions industry adviser and campaigner of the Pensions Action Group © Blake Lapthorn 2009
  93. 93. So, what does the automatic enrolment/personal accounts regime mean in practice? From 2012, employers will be required to: – automatically enrol all eligible workers – into a qualifying workplace pension – make minimum contributions © Blake Lapthorn 2009
  94. 94. Automatic enrolment If you don’t opt out of the scheme – you are in it! Eligible workers – jobholders in Great Britain over 22 and under 65 who have qualifying earnings Those above and below the target age band can opt-in and require employers to make a contribution Phased in over a three year period – October 2012 - large employers – September 2013 - medium employers – 2013 to 2015 - smaller employers – October 2015 - where a qualifying defined benefit arrangement is offered Re-enrolment every three years © Blake Lapthorn 2009
  95. 95. Qualifying scheme You choose! – Personal accounts – A DB scheme which is either contracted-out or meets the Test Scheme Standard – A DC scheme with contributions of 8% of qualifying earnings, of which the employer contribution is at least 3% © Blake Lapthorn 2009
  96. 96. Contributions Year (from Employer Employee 2012) (including tax relief) Years 1-3 1% 1% Year 4 2% 3% Year 5 3% 5% onwards © Blake Lapthorn 2009
  97. 97. Unanswered questions How does this fit with agency workers? Is this the most appropriate means of saving for everyone? General administration – specific date in the month for automatic enrolment – how to start automatic enrolment early – does the cost of not investing contributions for an initial period in case of opt out outweigh the benefit? – the practicality of registration and 3 year re-registration Will automatic enrolment survive a conservative Government? © Blake Lapthorn 2009
  98. 98. What should employers do now? Identify eligible workers and consider demographic of workforce (age, gender, profession) Consider current pension arrangement and alternatives Visit the Regulator and DWP websites Consider recruitment, HR and record keeping procedures Don’t panic! – the Pensions Regulator is responsible for ensuring employers are aware of their duties and how to comply with them. Targeted communications campaigns will start in 2010. © Blake Lapthorn 2009
  99. 99. Trustees’ circle of interdependencies Employer covenant Funding Investment © Blake Lapthorn 2009
  100. 100. Southern Pensions conference - key questions What is the current governance model? Does this still work? If not what can you do about it? If not, how does it have to change? If you delegate, what can you delegate? What should you delegate? What powers do you hand over? What powers do you keep? How do you monitor? How do you act when you need to? © Blake Lapthorn 2009
  101. 101. Southern Pensions Conference - food for thought Royal Mail? CDs and now DVDs? Modernisation Vested interests Fewer and fewer schemes have any future accrual Most/all benefits are “fixed” or at least “known” subject to inflation (and with caps) Opportunities for – changes in governance approach – economies of scale – “cooperatives” or not for profit? © Blake Lapthorn 2009
  102. 102. Questions to ask - trustees Do I/we understand all of the 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 issue How do we manage conflicts? Have we considered all options and issues? Have we challenged our advisers on these issues? Have we challenged ourselves and assessed our own performance? © Blake Lapthorn 2009
  103. 103. 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? © Blake Lapthorn 2009
  104. 104. To do list Work together - establish and maintain a good working relationship Review governance and operations 2012 is not that far away Be active rather than reactive Keep your nerve © Blake Lapthorn 2009
  105. 105. Private sector DB? Early retirement? Pensions Manager? Trustees? Scheme Actuary? © Blake Lapthorn 2009
  106. 106. If you have questions on this or other related topics, please contact: Blake Lapthorn is an English law firm regulated by the Solicitors Regulation Authority under SRA number 448793 whose rules can be accessed via This presentation is protected by copyright and is not a substitute for detailed advice on specific transactions and problems and should not be taken as providing legal advice on any of the topics discussed. A full list of our partners is available on our website at or at any one of our offices © Blake Lapthorn 2009