Thames Valley Pensions Conference Keeping control in challenging times Seacourt Tower, West Way, Oxford 21 March 2012Adrian LambBlake Lapthorn
Thames Valley Pensions Conference 2012Agenda and timetable9.30 am Introduction9.45 am What really worries me is ……10.00 am Will I ever know what our liabilities really are? - Nicola Walker10.25 am Discrimination, equalisation and GMPs – a personal experience!10.50 am Derisking – what could we do tomorrow? What can we do today?- Richard Murphy11.15 am Coffee break11.35 am Making assets work smarter – Kevin Frisby12.05 pm Auto enrolment and DC adequacy - Andrew Cheseldine12.35 pm The future of retirement – Adrian Lamb12.45 pm Questions and open forum1.00 pm Lunch!
Thames Valley Pensions Conference 2012 Health & safety and housekeeping! Packs and soft copy of slides Feedback forms Ask questions throughout Participate Challenge Enjoy
Thames Valley Pensions Conference 2012 YOU DON’T HAVE TO BE MAD TO BE A TRUSTEE (OR INVOLVED WITH PENSIONS IN ANY WAY) - BUT IT HELPS
Thames Valley Pensions Conference 2012The Perfect Storm - revisited Volatile asset values Increasing liabilities Covenant and finance strains Are we out of the recessionary woods yet?
Alphabet soup SPA &DRA TUPE & TEPP NEST DB and DC PIGS, PIIGS and PIIIGS BRIC QE QE2 QE3/4/5??? MEGO?
C =ComplacencyCancer survival ratesCredit easingCruises?Current account trade balancesCardboardCells (Hayflick limit)CIVETSContributing more and for longer
Questions Is there such a thing as a risk free investment? Can I ever know what our liabilities really are? Data, what data? Can I do anything about this (other than pray)? Is there such a thing as an equity risk premium now … or is it just an equity risk? Can I get smarter with my/our investment strategy?
More questions What does it take to make DC adequate? What is adequate? Is it ever likely to be affordable? Is auto enrolment just a precursor to more tax? Can it work? What do we need to do? How can we cope with more older workers? Who can I blame? Can I sue anybody?
HOPE SPRINGS ETERNAL PLCMain site – Roy Rovers Close, Melchester
Assessing Scheme liabilities……. or falling down the rabbit hole Nicola Walker
Drafting problems Then you should say what you mean, the March Hare went on. I do, Alice hastily replied; at least--at least I mean what I say--thats the same thing, you know.‘
Scheme closure“Begin at the beginning and go on till you come to theend: then stop”
Data It is wrong from beginning to end, said the Caterpillar
Defined benefit or defined contribution‘Let me see: four times five is twelve, and four times six is thirteen, and four times seven is…oh dear! I shall never get to twenty at that rate!’
Government changes:CPI/RPI and Protected Rights“Curiouser and curiouser!”
How to be proactive‘Oh my ears and whiskers, how late it’s getting’
‘Now, I give you fair warning, either you or yourhead must be off!’
Thames Valley Pensions Conference 21 March 2012 Discrimination/equalisation and GMPs- What can I/should I be doing about them? firstname.lastname@example.org
Discrimination – the different issues Age Sex GMPs
Age Discrimination and scrapping thedefault retirement age – flexible retirementNarrow sense – Essentially, more flexibility over late retirement options Drawing benefits at 65 whilst continuing to work Drawing benefits at 65 whilst continuing to accrue Not drawing benefits at 65 but continuing to accrueWide sense – Drawing benefits in different stages at any permitted age whilst continuing to accrueCombination of age discrimination andscrapping DRA – but you still haveobjective justification!
What are employers doing at the moment? Money purchase schemes – Continued employer contributions beyond age 65 Defined benefit schemes – choice at 65 of: – Continued accrual – Immediate pension – Late retirement uplift Can you offer a money purchase alternative at age 65?
Must you provide flexible retirement? Narrow – Probably – no exemption in age discrimination legislation for scheme provision that prevents accrual beyond 65 – Indirect age discrimination risk if rules impose a leaving service requirement before pension can come into payment – Objective justification likely to be difficult No requirement outside of age discrimination legislation. Could age discrimination be an issue? Wide – Original DTI Guidance suggested an indirect discrimination risk:
Sex equality – the legal background European law – equal pay for men and women Barber case – pensions are pay So equal treatment from 17 May 1990 Several cases since then on various aspects Requirement for equality on pensions enshrined in pensions law at s.62 Pensions Act 1995 (not in equality Act 2010
What does equal treatment for men and womenmean in a pensions context?Same benefits for same period of pensionable service – Defined benefit = same accrual basis – Defined contributions = same contribution ratesSame rights in relation to those benefits, e.g. if right to take form ago60 applies it applies to men and women in same categoryIn DB scheme this should mean pension for a man and woman onequal pay should be the same at the start (and should be the samethroughout?)For DC schemes at the moment no need to take account of differentannuity rates which produce unequal benefits for men and women!!!
Equal treatment – some of the recent problems Changes not effective, ie did not follow alteration power correctly – Could mean the Barber gap is still open!! Not all terms and conditions applied equally, eg for stayers and leavers Confusion over what rights are affected Expensive mistakes Time limits!
GMP Equalisation – the issue(important even if it isn’t that interesting!) In schemes where employees contracted out on a GMP basis, there are two elements to the pension – the GMP (replacement for accrual under SERPS) and the excess over GMP Different rates of increase apply to the GMP and non-GMP elements Different rates of revaluation apply to the GMP and non-GMP elements of a deferred pension for an early leaver Revaluation of GMP applies up to SPA which is different for men and women (and possibly different from the Scheme NRD) Because GMP is a replacement for SERPS it has to be paid at the same time as SERPS would be paid – 60 for a woman and 65 for a man So unequal payment dates, pensions and increases!!!
The Williamson case – (1)a landmark overlooked? Williamson (an actuary!) complained to Ombudsman his benefits were lower than an equivalent female employee because unable to receive that part of his pension related to SERPS his GMP) until 65 but woman could take form age Compliant upheld but no directions given on how to best equalise GMP equalisation is a (deliberate) misnomer – any equalisation is to other benefits to compensate for unequal GMPs Trustees and employer challenged on two grounds – jurisdiction and correctness. Because Ombudsman lost on jurisdiction (technical) the correctness of his decision was not ruled on But….
The Williamson case (2) Ombudsman terminology probably wrong – referred to GMP equalisation rather than equalised benefits to compensate for unequal GMPs Judge confirmed that GMPs in a pension scheme should be regarded as calculation factors rather than pensions in themselves Judge confirmed that members should in principle be allowed to complain about matters which brought about potential (not just actual) discrimination Judge also did not accept the broader arguments that s.62 did not require equalisation Judge all but supported the view that some action needed to be taken
The Pension Industry’s view Too difficult! Ambivalence Thankless task Failure to get a consensus Hope it goes away
The Government’s position [Schemes should] reflect the European law position on equal treatment of men and women as it applies in the field of occupational pensions, in so far as any differences result from the GMP provisions in the Pension Schemes Act 1993. Successive Governments have maintained the position that schemes are under an obligation to equalise overall scheme benefits accruing from 17 May 1990 including, in respect of accruals from 17 May 1990 to 5 April 1997, any inequality resulting from the GMP rules, where an opposite sex comparator existed in the scheme. as inequality resulting from the GMP rules results from state legislation, the requirement to remove any unfavourable treatment resulting from those rules is not subject to the requirement that an opposite sex comparator exists.
The Government’s position The Government understands the current situation is that contracted-out schemes which hold GMP liabilities are already under an obligation to: – equalise pensions for the effect of the GMP rules for any accruals from 17 May 1990 to 5 April 1997 (inclusive), apart from where the limited exceptions in the Equality Act 2010 (Sex Equality Rule) (Exceptions) Regulations 2010 apply. This flows from Barber and current domestic legislation; and – assume a comparator exists for the purposes of this exercise. This flows from Allonby itself which imposes EU law obligations directly on schemes.
The Government’s position It is a requirement Have taken advice Are only consulting on technical changes to bring UK law into line with European law PPF have also taken advice (but different considerations there as they pay “compensation”) Only one conclusion can be drawn from this – the advice has made clear it has to be done One possible methodology published with consultation
The PPF …. and insurance companies Compensation, not pensions so law applies directly PPF basis could be described as the “best of both worlds”“The member’s entitlement is the higher of the amount the member would get under the scheme rules in their own sex and the amount their opposite sex notional comparator would be paid.The comparison is undertaken each time the amount of pension in payment is calculated (generally annually) and the scheme pays the higher amount. Some insurers already insisting on it …. and more will now? So affects schemes when buying out, buying in, and winding up Could affect liability reduction exercises, enhanced transfer values, etc.
Administration and other issues The basis – best of both worlds for members, the worst for the scheme? The administration!!! The communication!!!! Member confusion Past cases Materiality Cost Complexity
Conclusions Has to be done Directly applies to pension schemes so Trustees have to ensure compliance PPF is the default basis but other bases may be justifiable – Rolls Royce, Mini, BMW (other car makes are available) Understand the costs – benefits, administration and communication Administrator competence – this won’t be easy Governance/audit “Endgame” focus requires action
Blake Lapthorn Oxford Pensions ConferenceRichard Murphy – 21 March 2012What to do today andtomorrow. 44
AgendaUK plc Why are there DB pensions? DB liabilities in perspective The challenges for employers and trusteesSteps today or tomorrowCertainty from uncertainty 45
Why do employers have defined benefitpension schemes? Help Smoothing of outcome Flexibility of employees Cost effective Rewards between timing on plan for saving members and loyalty contributions retirement over time Simple for Efficient Rewards Flexibility Employees individuals targeting of high-flyers for HR like them to death understand benefits 46
Pension risks and challenges Benefit Interest Asset Legislation Inflation administration rates performance Corporate Contingent Turnover of Solvency II Longevity bond benefits employees for pensions spreads Salary Regulatory Trapped Member Communication growth bodies surplus options 47
The big picture£80bn Active accruing - DB DC Active accrued - DB£60bn Deferreds Pensioners£40bn£20bn£0bn 2012 2022 2032 2042 2052 2062 2072 2082 2092 Year 48
So where are we now? £4000bn £3500bn £3000bn £2500bn £2000bn £1500bn £1000bn £500bn £0bn Total benefit Assets Technical Insurance payments provisions premium 49
How does it all fit together?A long-term plan for UK plc Pension Scheme Progressive buy-ins Insurance premium and technical provisions converge Insurance premium ? TechnicalRPI to CPI ? “Liability provisions management” Assets Non-cash funding solutions Auto enrolment demands on employer cash flow 2012 2030 2060 50
Equities underperform liabilities by 21%Double whammy over the summer Equities (GBP, TR) vs Index-linked Gilts 130 120 110 100 90 80 70 31/12/2010 31/03/2011 30/06/2011 30/09/2011 31/12/2011 Global Equities >5Yr ILG RelativeSource: Bloomberg 51 51
Government announcementsCPI might help a bit… Annual increase in Retail and Consumer Prices Statutory minimum Indices (% pa) indexation switching from RPI to CPI Annual RPI inflation Annual CPI inflation – Average long run difference 0.7% pa Increase (% pa) – Might be increasing to 1.0% pa or moreSource: ONS data 53
Immediate change Impact on UK Plc Pension Scheme Insurers Projected benefit payments only just £4000bn starting to Pensioners Deferreds Active accrued reduce £3500bn Reduction premiums£80bn £3000bn of £360bn for CPI£60bn £2500bn Reduction £2000bn£40bn of £73bn £1500bn£20bn £1000bn £500bn£0bn £0bn 2012 2032 2052 2072 2092 Total benefit Assets Technical Insurance payments provisions premium Year 54
Probably my most important slide ofthe sessionThe importance of good dataRisk Data issues Paying the wrong Benefits uncertain benefits Lost records Good Funding uncertainty data Spouses’ benefits only Premium loading on required on the paper record insurance Unrecorded benefits Impact Cannot proceed with managing risk Over pay to reduce the risk Unexpected liabilities emerge 55
Pensioner buy-outs and buy-insOverview Equities 37% 57% Equities Residual Liabilities Liabilities Bonds Bonds Insurance Pensioner Policy Liabilities Before After For buy-ins trustee (and company) gain exposure to insurer’s covenant Larger schemes have additional flexibility when structuring transactions 56
Quote “It is currently the case that for pensioners insurance may be cheaper than holding gilts.” Pension Insurance Corporation – 8 November 2011 58
“Liability management”Buzzwords for… Transfer value Member option to convert to a level exercise pension 8000 Pension per year (£) Settlement gain 6000 Highervalue? Fair pension Enhancement now to transfer 4000 Pension value Fixed for liability 2000 lifetime Standard Transfer 0 Value 65 70 75 80 85 Age 59
Plugging the deficitAsset backed partnerships and the rest … Parent companySponsoring Pension guarantees employer scheme G R en Negative pledges rtn d am pa ent er Pa mite er al re ym al P st Li en ar e ts tn Triggers for additional m er co contributions In Scottish Limited Partnership Charges over assets Cross-company Property Contracts Whisky Brands guarantees 60
Scope 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 contact the partner who normally advises you. While this document does not represent our advice, nevertheless it should not be passed to any third party without our formal written agreement.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 Englandand 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 ofLane 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, Belgium, Switzerland, theNetherlands, Ireland and the UAE. 61
Blake Lapthorn Oxford Pensions ConferenceKevin Frisby – 21 March 2012Making your assets worksmarter. 62
AgendaFiduciary Management for DB SchemesDC Scheme Investing Life-styling Default optionsLatest investment ideas Emerging market multi asset funds (EMMAFs) Diversified growth funds (DGFs) Switching triggers 63
Fiduciary management for DB SchemesWhat is Implemented Consulting / Fiduciary Management?RationaleMarket providersPros and cons
Running a pension schemeHow hard can it be? £1,000m (£0m) (£1,000m)Surplus (Deficit) (£2,000m) (£3,000m) (£4,000m) (£5,000m) 11 11 11 10 11 1 11 11 1 11 11 r1 l1 n b ar n ec ay p g ct Ju Ap Ja Fe Ju Se Au O M D M 31 30 31 30 31 28 31 31 30 31 31 Source: LCP Visualise 65
What is fiduciary management? Asset management With liability benchmark Different things to different people!Advisory Fiduciary Fund manager Fund manager Tactical asset Strategic asset selection allocation rotation allocation Investment objectives cannot be delegated 66
Market providers Investment consultants Asset managers No two offerings are the same 67
Pros and cons of Fiduciary Management Faster decision-making Responsibility remains with Trustees Reduced governance time Conflicts of interest Greater professional involvement Limited track records may lead to superior returns Concentration of manager risk Access to “best in class” Potentially higher fees managers Complex and expensive to unwind Access to alternative asset Still requires monitoring classes for smaller Schemes Many of the perceived benefits of fiduciary management can be achieved through the traditional advisory model, such as: - Triggers for de-risking and hedging - Diversified growth funds - Adding more expertise to the trustee group - Impromptu ISC meetings 68
DC Scheme InvestingDefault options / Life-stylingDiversified Lifestyle OptionRelative performance
Investment - what do DC memberswant? Focus on outcomes, not inputs – Eventual pension benefit is the key factor – Assets used to produce this are merely the means to an end Most members are risk averse – Big losses are more significant than big gains Most members do not feel comfortable taking investment decisions – Design of the default strategy is therefore crucial – Most appropriate default strategy is a lifestyle option 70
Default investment strategyTypical “lifestyle” option 100% Allocation of members assets 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 Years to retirement Global equities Index-linked gilts Cash 71
A better default strategy 100% 90% Allocation of members assets 80% 70% 60% 50% 40% 30% 20% 10% 0% 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 Years to retirement Global equities Diversified Growth Corporate bonds Index-linked gilts Fixed interest gilts Cash 72
Lifestyle strategies risk vs return3 years to 30 September 2011 73
Investment ideasEmerging market multi asset fundsDiversified growth fundsSwitching triggers
The EMMAF conceptA multi-asset approach to emerging markets Equities EMMAF Currencies Bonds 75
Diversified Growth FundsStrong risk adjusted returns over time 76
Trigger based switching strategiesAutomated strategic shifts to capture relative outperformance 90% 75% Relative performance differential 60% 45% 30% 15% 0% First switch implemented Relative performance -15% on 4 Jan 2011 Triggers -30% 2009 2010 2011 2012 2013 2014 2015 Year Locks in outperformance of equities relative to scheme liabilities when affordable to do so Locks in outperformance of equities relative to scheme liabilities 77
Conclusions Pros and cons to fiduciary management arrangements – May be suitable for some schemes – Most of the benefits can be achieved under the traditional model Lifestyle and default options remain key for DC schemes – Diversification of growth and bond elements – Consider longer switching period to dampen volatility of returns EMMAFs can provide a risk conscious way to access emerging markets DGFs continue to provide a lower risk alternative to equities Automated trigger based switching strategies enable trustees to lock in outperformance relative to scheme’s liabilities 78
Scope 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 contact the partner who normally advises you. While this document does not represent our advice, nevertheless it should not be passed to any third party without our formal written agreement.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 Englandand 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 ofLane 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, Belgium, Switzerland, theNetherlands, Ireland and the UAE. 79
Blake Lapthorn Oxford Pensions ConferenceAndy Cheseldine – 21 March 2012Auto-enrolment and DCadequacy. 80
AgendaWhy auto-enrolment is necessary – DC adequacyWhat is auto-enrolment?Implementation issues for you Identifying different types of worker Identifying your staging date Managing costs Communication and administrationCase study – putting these issues into contextWhat should you be doing now? 81
The benefit strainMillions of people aged 60 and over receivingincome related benefits Source: ONS, Pension Trends, Chapter 5, 2011
Private pensions to the rescue?Millions of active members of occupationalpension schemes by sectorPercentage of 16 to 64 year oldscontributing to private pensions Source: ONS, Pension Trends, Chapter 7, 2011
The answer is auto-enrolment? How many will opt-out? What will 8% of Qualifying Earnings buy at retirement? How many 22 year olds will have a 46 year contribution history at State Retirement Age? What will the 2017 review bring? – Compulsion? – Increase in employer contributions? – Increase in member contributions? – Widening of Qualifying Earnings definition? 85
“What do I get for my money” Median earnings in the UK for full time workers are £24,024 pa (mean of £28,288) as at Q4 2011 (Source ONS) 8% of qualifying earnings (£24,024-£5,564) for this typical worker are £1,477 pa Ignoring pay growth (just to keep it simple) but adding in 3.5% real investment growth net of charges (broadly, SMPI assumptions) Gives a fund after 40 years of saving of £124,864 Which, today, would buy a 65 year old male a joint life, inflation linked annuity of…. £ 307 gross per month (just over 15% of salary) But rich people live longer A 65 year old male retiring today, with a pot of £1,500,000 - the Lifetime Allowance (at least this morning), could buy a joint life, inflation linked annuity of…. £ 2,831 gross per month (£33,972 per year)Annuity rate sources: Money Advice Centre, Comparative Tables 86
In a nutshell… From October 2012 onwards UK employers will be required: – to automatically enrol eligible employees (“eligible jobholders”) into a pension scheme of sufficient quality (an “automatic enrolment scheme”) – to automatically re-enrol them every three years if they opt out – to contribute to that scheme for auto-enrolled employees But it is not “one size fits all” – different quality requirements for DB, DC and Hybrid schemes – clients with dissimilar workforce demographics will probably want fundamentally different solutions – don’t forget your existing scheme members; and – contribution costs will, in many cases, be lower than administration costs in the early years 88
Identifying different types of worker (2) Age 75 OPT IN Employer contribution SPA OPT IN OPT IN AUTO- ENROL No employer Employer contribution contribution Eligible jobholder (“Entitled workers”) Qualifying Earnings (QE) 22 OPT IN Employer contribution 16 Earnings £5,564 £8,105 £39,853 Qualifying Earnings Upper Earnings Trigger Limit Threshold 90
Staging date flexibility (1) Company A Company B PAYE CODE PAYE CODE PAYE CODE 91
Staging date flexibility Company A Company B SUBSIDIARY SUBSIDIARY SUBSIDIARY SUBSIDIARY PAYE CODE 1 PAYE CODE 2 PAYE CODE 1 PAYE CODE 2 92
Quality Requirements - DCDC and personal pensions – the core requirement Employer must contribute at least 3% of QE Total contributions must be at least 8% of QE These rates will be phased in between 2012 and 2017 Employer Employee Contribution Contribution 3% 5% 93
Staging and DC phasingStaging datedependent on no. ofemployees October October October October October October 2012 2013 2014 2015 2016 2017 120,000 400 employees employeesRequired DC ER 1% ER 2% ER 3%contribution rate Total Total Total(% of QE) 2% 5% 8% October October October October October October October 2012 2013 2014 2015 2016 2017 2018 94
Quality requirements - DCDC and personal pensions – alternatives to allow certification 7% of pensionable pay (inc minimum of 3% from employer) - subject to 100% of earnings being pensionable 8% of pensionable pay (inc minimum of 3% from employer) – pensionable pay can exclude variable earnings subject to pensionable pay constituting at least 85% of total pay bill 9% of “basic pay” (inc minimum of 4% from employer) – pensionable pay can exclude variable earningsNotes: Phasing applies in all three approaches “Basic pay” can include other elements of pay that do not vary (eg London Allowance) so potentially not just basic salary 95
Managing costs Front Sheet Outputs Employer contributions Minimum Contributions£300,000 based on Qualifying Earnings£250,000 9% Certification£200,000 8% Certification 7% Certification£150,000 Existing scheme design£100,000 Alternative scheme design£50,000 Which certification route will be most suitable for £0 you? 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Note: the above is generic output from LCP’s Auto Enrolment Modeller, the output from which is employer and scheme specific. 96 96
Managing costs - options Trust-based Phasing-in of DC scheme (short contributions service refunds) Salary sacrifice Changes to, or Waiting period for “levelling down”, membership of existing pension benefits 98
Communication and disclosure George Bernard Shaw At least seven different versions of Playwright, critic, political communication required at staging date activist Early engagement 1856 – 1950 Consultation Communications review The problem with communication is the illusion that it has happened. 99
Administration processes and systemsreview Eligible jobholder? No Opt in notice - Issued by employer Regular review - One month - Returned to employerIneligible due to Jobholder information- Age - From employer to scheme- Salary Employer required to pay contributions 100
Administration processes and systemsreview Eligible jobholder? No Joining notice - Issued by employer Regular review - One month - Returned to employerIneligible due to Below Qualifying Jobholder information Earnings Threshold- Age - From employer to a scheme- Salary Employer NOT required to pay contributions 101
Administration processes and systemsreview Eligible jobholder? No Opt in notice - Issued by employer Regular review - One month Between Qualifying - Returned to employerIneligible due to Earnings Threshold Jobholder information and Eligibility- Age Trigger - From employer to scheme- Salary Employer required to pay contributions 102
Administration processes and systemsreview Eligible jobholder? Yes Enrolment information Auto-enrol - Issued by employer - One month - Bespoke - Details of opt-out Jobholder information - From employer to scheme 103
Administration processes and systemsreview Eligible jobholder? Yes Opt out form - Requested by jobholder Auto-enrol - Issued by scheme - One month - Prescribed format Opt-out? - Returned to employer Yes Employer duty - Notify scheme of opt out 104
Administration processes and systemsreview Eligible jobholder? Yes Scheme actions Auto-enrol - Membership unscrambled - Contributions returned to employer by “refund date” Opt-out? Employer actions - Contributions returned to Yes jobholder 105
Case studyA pub/restaurant chainIssue Solution Multiple sites and employers One staging date for all employers – Multiple staging date Simplified communications Frequent buying and selling of Analysed likely impact of a 2% premises increase in employer contributions on – TUPE requirements sale (and purchase) prices High staff turnover – 30% Considered trust based for short service refund, but…………. High number of non-UK nationals NEST a likely provider for at least some staff Keep GPP for managers / head office staff 107
NEST Occupational DC scheme set up under trust Designed to help employers meet DC quality requirements (employer and employees can pay higher contributions) Maximum total contribution of £4,200 pa per member A 1.8% contribution charge plus 0.3% annual management charge Six funds available, with Target Date funds as default Active members already contributing Limited employer support 109
What should you be doing now? Understand what you need to do Understand when you need to do it Can you / should you use existing How much will Plans? contributions cost? Who will / can do the admin and record How much will keeping? administration cost? Who will / can do the project management? 112
Staging Based on number of PAYE employees as at 1 April 2012 Employers due to auto-enrol in 2012 can bring forward their staging date to no earlier than 1 July 2012 Others can potentially bring forward their staging date to no earlier than 1 October 2012 Example staging dates: Number of employees Staging date 120,000 or more 1 October 2012 50,000 – 119,999 1 November 2012 … … 800 – 1,249 1 October 2013 500 – 799 1 November 2013 … … <50 1 August 2014 – 1 February 2016 115
TUPE implications The minimum contribution rate is 3% from employers and 5% from employees If you use a trust based arrangement to meet your obligations and then transfer employment under TUPE – the employees will typically continue to contribute 5% (through inertia) – and the new employer will need to increase their contributions to 5% – because the TUPE minimum (for trust based schemes) is to match employee contributions up to 6% That increase in employer costs will be reflected in the sale price of the business Alternatively, if you use a contract based arrangement (eg GPP) – the employees will typically continue to contribute 5% (through inertia) – and the new employer will can continue contributing 3% – because the TUPE minimum (for contract based schemes) is to match the existing level of contributions 116
Non-UK nationals All eligible jobholders must be auto-enrolled But of the 29 million people working in the UK, 2.5 million are non-UK nationals (source: ONS) Of those 2.5 million, about 35,000 are secondees from other EU countries (source: DWP). Auto-enrolling these secondees will create a cross-border scheme Among the rest of the 2.5 million, almost all will be tax resident in the UK (by definition). Roughly half (LCP estimate) are likely to be “not ordinarily tax resident in the UK” and, therefore, most commercial providers (especially GPPs) will not accept them as membersHow can you meet your auto-enrolment duties for non-UK nationals? 117
Staging datesBased on number of PAYE employees as at 1 April 2012Number of PAYE employees Staging date120,000 or more 1 October 201250,000-119,999 1 November 201230,000-49,999 1 January 201320,000-29,999 1 February 201310,000-19,999 1 March 20136,000-9,999 1 April 20134,100-5,999 1 May 20134,000-4,099 1 June 20133,000-3,999 1 July 20132,000-2,999 1 August 20131,250-1,999 1 September 2013800-1,249 1 October 2013500-799 1 November 2013350-499 1 January 2014250-349 1 February 201450-249 1 April 2014 to 1 April 2015 (subject to consultation)Employers with fewer than 50 employees 1 April 2017 to 1 April 2017 (subject to consultation)New employers to September 2017 1April 2017 to 1 February 2018 (subject to consultation)New employers from October 2017 Immediate duty (subject to consultation) 118
Regulator powers Regulator will have the power to issue – a compliance notice – a third party compliance notice – an unpaid contributions notice – a fixed penalty notice (up to £50,000) – an escalating penalty notice (up to £10,000 per day) Criminal sanctions for failure to comply with specified duties (up to two years in jail) Legislation also includes safeguards, for example, prohibiting employers from inducing employees to opt-out 119
Scope 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 contact the partner who normally advises you. While this document does not represent our advice, nevertheless it should not be passed to any third party without our formal written agreement.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 Englandand 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 ofLane 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, Belgium, Switzerland, theNetherlands, Ireland and the UAE. 120
The future of retirementOr …… A future without retirement? Is there a future for retirement? Challenges for employers, trustees, and individualsThames Valley PensionsConference 2012
In the budget today? Remove/limit tax free cash – anomalous but ….? Remove higher rate tax relief – Lib Dems like but ….? Reduce annual allowance again ….?
(private sector) Defined benefit pension schemes Funded pension schemes? Retirement? Member nominated trustees? Traditional (simplistic) investment approaches? The euro (at least as we know it now)?Thames Valley PensionsConference 2012
The future – for individuals? Live for longer = work for longer Medical advances More than one career/job + mid life gap years? No cliff edge retirement Integrated savings/debt repayments NEST/auto enrolment Auto escalation compulsory retirement savings? Tax incentives or just higher taxes? AffordabilityWE ARE LIVING LONGER, HEALTHIER LIVESThames Valley PensionsConference 2012
The future – for employers (1)? Ageing workforce for UK plc ….. but what is your position? Skills v productivity Flexible recruitment – target different age groups? Different retention policies for different ages? Fewer people able to afford outright retirement Flexible retirement Flexible reward packagesThames Valley PensionsConference 2012
The future – for employers (2)? Changing role of the state? Segmented workforce – one size fits all consigned to history Planning and action needed Employer facilitates access (and pays/funds)? More unfunded liabilities – explicit or implicit? Review your pay and benefits package and your practices, procedures and performance criteriaEffective HR becomes more importantMore people working is actually better for theeconomyThames Valley PensionsConference 2012
A = Asteroids Attrition Autoenrolment Accuracy Assets Ageing workforce Affordability Action (not activity)Thames Valley PensionsConference 2012
To Do List Liabilities and data Assets – can you make them work better? Know when auto enrolment applies to you and how it will affect you Review your policies for older workers! Be active rather than reactive All of us need to think “outside the box”?Thames Valley PensionsConference 2012
Question timeThames Valley PensionsConference 2012