Download - Blake Lapthorn and Lane Clark & Peacock LLP Southern Pensions conference - 24 November 2011
Southern Pensions conference
Keeping control in challenging times
Blake Lapthorn, New Kings Court, Chandler’s Ford24 November 2011
Adrian LambBlake [email protected]
Agenda and timetable
9.30 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 Derisking – what could we do tomorrow? What
can we do today?- Richard Murphy10.50 am Making assets work smarter – Kevin Frisby11.15 am Coffee break11.40 am Auto enrolment, etc. - Andrew Cheseldine12.10 pm Dealing with older employees – Clare Walker12.35 pm The future of retirement12.45 pm Questions and open forum1.00 pm Lunch!
Southern Pensions conference 2011
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 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?
Why worry?
‘Sentence first, verdict afterwards’
Danger areas
EqualisationGMP equalisationDrafting problemsClosure to future accrualDataDefined contribution or defined benefit?CPI/RPI
Equalisation
'Ditto' said Tweedledum. 'Ditto, ditto' cried Tweedledee.
GMP Equalisation
‘We’re all mad here’
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--that's the same thing, you know.‘
Scheme closure
“Begin at the beginning and go on till you come to the end: 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!’
CPI/RPI
“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 your head must be off!’
Blake Lapthorn Southern Pensions Conference Richard Murphy – 24 November 2011
What to do today and tomorrow
Agenda
UK plcWhy are there DB pensions?DB liabilities in perspectiveThe challenges for employers and trustees
Steps today or tomorrow
Certainty from uncertainty
Why do employers have defined benefit pension schemes?
Help employees
plan for retirement
Smoothing of outcome between
members and over time
Flexibility of timing on
contributions
Employees like them
Rewards loyalty
Simple for individuals
to understand
Cost effective saving
Flexibility for HR
Rewards high-flyers
Efficient targeting of
death benefits
Pension risks and challenges
Legislation Interest rates
Communication
Inflation
Contingentbenefits
Asset performance
Turnover of employees
Benefit administration
Trapped surplus
Member options
Corporate bond
spreads
Salary growth
Regulatory bodies
Longevity Solvency II for pensions
The big picture
£0bn
£20bn
£40bn
£60bn
£80bnActive accruing - DB
DeferredsPensioners
2011 2021 2031 2041 2051 2061 2071 2081 2091Year
Active accrued - DB
So where are we now?
£0bn
£500bn
£1000bn
£1500bn
£2000bn
Assets Technical provisions
Insurancepremium
Total benefitpayments
£2500bn
£3000bn
£3500bn
£4000bn
How does it all fit together? A long-term plan for UK plc Pension Scheme
Insurance premium
Technical provisions
Assets
2011 2060
Progressive buy-ins Insurance premium and technical provisions
converge
“Liability management”
Non-cash funding solutions
Auto enrolment demands on employer cash flow
RPI to CPI ?
?
2030
24
Equities underperform liabilities by 21% Double whammy over the summer
Source: Bloomberg
70
80
90
100
110
120
31/12/2010 31/03/2011 30/06/2011 30/09/2011
Equities (GBP, TR) vs Index-linked Gilts
Global Equities >5Yr ILG Relative
What can be done?By employersBy trustees
Government announcements CPI might help a bit…
Statutory minimum indexation switching from RPI to CPI
– Average long run difference 0.7% pa
Annual increase in Retail and Consumer Prices Indices (% pa)
-2%
0%
2%
4%
6%
2005 2006 2007 2008 2009 2010 2011
Incr
ease
(% p
a)
Annual RPI inflation Annual CPI inflation
Source: ONS data
£0bn
£500bn
£1000bn
£1500bn
£2000bn
Assets Technical provisions
Insurancepremium
Total benefitpayments
£2500bn
£3000bn
£3500bn
£4000bn
Immediate change Impact on UK Plc Pension Scheme
Projected benefit payments Insurers not currently reducing premiums
for CPIReduction of £360bn
Reduction of £73bn
Pensioners Deferreds Active accrued
2011 2031 2051 2071 2091
Year
£0bn
£20bn
£40bn
£60bn
£80bn
Probably my most important slide of the session The importance of good data
Data issues
Benefits uncertain
Lost records
Spouses’ benefits only on the paper record
Unrecorded benefits
Impact
Cannot proceed with managing risk
Over pay to reduce the risk
Unexpected liabilities emerge
Risk
Paying the wrong benefits
Funding uncertainty
Premium loading on insurance
Good data
required
Pensioner buy-outs and buy-ins Overview
For buy-ins trustee (and company) gain exposure to insurer’s covenantLarger schemes have additional flexibility when structuring transactions
57%37% Equities ResidualLiabilities
Bonds
Insurance Policy
PensionerLiabilities
Before After
EquitiesLiabilities
Bonds
Pensioner buy-in pricing
Quote
“It is currently the case that for pensioners insurance may be cheaper than holding gilts.”
Pension Insurance Corporation – 8 November 2011
2000
4000
6000
8000
Age
065 70 75 80 85
Pen
sion
per
yea
r (£)
“Liability management” Buzzwords for…
Transfer value exercise
Pensionliability
StandardTransfer
Value
Enhancement to transfer
value
Settlement gain
Member option to convert to a level pension
Fixed for lifetime
Higher pension now
Fair value?
Triggers for additional contributions
Negative pledges
Plugging the deficit Asset backed partnerships and the rest …
Scottish Limited Partnership
Property Contracts Whisky Brands
Rental payments
Limite
d Par
tner
Incom
e stre
am
General Partner
Sponsoring employer
Pensionscheme
Charges over assets
Parent company guarantees
Cross-company guarantees
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.
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, Belgium, Switzerland, the Netherlands, Ireland and the UAE.
Blake Lapthorn Southern Pensions Conference Kevin Frisby – 24 November 2011
Making your assets work smarter
Agenda
Fiduciary Management for DB Schemes
DC Scheme InvestingLife-styling Default options
Latest investment ideasEmerging market multi asset funds (EMMAFs)Diversified growth funds (DGFs)Switching triggers
Fiduciary management for DB Schemes
What is Implemented Consulting / Fiduciary Management?
Rationale
Market providers
Pros and cons
Running a pension scheme How hard can it be?
Source: LCP Visualise
31 O
ct 11
£1,000m
(£0m)
(£1,000m)
(£2,000m)
(£3,000m)
(£4,000m)
(£5,000m)
31 D
ec 10
31 Ja
n 11
28 Feb
11
31 M
ar 11
30 A
pr 11
31 M
ay 11
30 Ju
n 11
31 Ju
l 11
31 A
ug 11
30 S
ep 11
Surp
lus
(Def
icit)
39
What is fiduciary management?
Asset managementWith liability benchmarkDifferent things to different people!
Investment objectives cannot be delegated
Advisory
Fund manager selection Fund manager
rotationTactical asset
allocationStrategic asset
allocation
Fiduciary
Rationale for Fiduciary Management Delegated low governance alternative
Designed to overcome perceived weaknesses of traditional model which requires trustees to be ever more knowledgeable about investmentissues in the context of
– Increased complexity of investment strategies– Desired speed of implementation of decisions– Greater governance burden
Fiduciary management– Delegates investment strategy and manager selection decisions to a
single professional provider…– Who can make and implement decisions quickly and reduce trustee
governance burden
Market providers
Investment consultants Asset managers
No two offerings are the same
Pros and cons of Fiduciary Management
Faster decision-makingReduced governance timeGreater professional involvement may lead to superior returnsAccess to “best in class”managers Access to alternative asset classes for smaller Schemes
Responsibility remains with TrusteesConflicts of interestLimited track recordsConcentration of manager riskPotentially higher feesComplex and expensive to unwindStill requires monitoring
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
DC Scheme Investing
Default options / Life-styling
Diversified Lifestyle Option
Relative performance
Investment - what do DC members want?
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
45
Traditional Lifestyle option
0%10%20%30%40%50%60%70%80%90%
100%
25+ 20 15 10 5 0
% A
lloca
tion
Years to retirement
Global equities Bonds Cash
46
Diversified Lifestyle option
0%10%20%30%40%50%60%70%80%90%
100%
25+ 20 15 10 5 0
% A
lloca
tion
Years to retirement
Global equities Diversified growth fundCash Fixed interest giltsCorporate bonds Index-linked gilts
Diversified Lifestyle model
Growth phase – 50% DGFs & 50% passive global equity– Incorporates a more diversified range of assets than just global equities– Adding one or more DGFs reduces the risk of unacceptably low benefits– Passive element keeps costs at a reasonable level
Switching period – 15 years– Longer switching period (rather than the 5/10 years for ‘traditional’ models) – Should give more protection in adverse scenarios, although marginal
reduction in benefits in most other conditions
Pre retirement portfolio – Final portfolio: 75% bonds, 25% cash– Bonds are half ILGs, quarter corporate bonds, quarter fixed gilts – Intended to be a reasonable solution for fixed or inflation linked annuities
Lifestyle strategies risk vs return 3 years to 30 September 2011
Investment ideas
Emerging market multi asset funds
Diversified growth funds
Switching triggers
The EMMAF concept A multi-asset approach to emerging markets
Equities
EMMAF
BondsCurrencies
The multi-asset approach Advantages of multi-asset approach to emerging markets
Diversification – access to a large and growing opportunity set, not confined to one asset class
Potential for attractive returns with lower volatility - efficient use of risk budget
Active management – inefficient markets being targeted by skilful managers
– Managers add value through dynamic asset allocation and stock selection
Wider stock selection opportunities– Pick an attractive company, then invest in most attractive part of its
capital structure
Diversified Growth Funds Strong risk adjusted returns over time
Trigger based switching strategies Automated strategic shifts to capture relative outperformance
-30%
-15%
0%
15%
30%
45%
60%
75%
90%
2009 2010 2011 2012 2013 2014 2015
Year
Rel
ativ
e pe
rfor
man
ce d
iffer
entia
l
Relative performance
TriggersFirst switch implemented on 4 Jan 2011
Locks in outperformance of equities relative to scheme liabilities Locks in outperformance of equities relative to scheme liabilities when affordable to do so
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
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.
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, Belgium, Switzerland, the Netherlands, Ireland and the UAE.
Blake Lapthorn Southern Pensions Conference Andy Cheseldine – 24 November 2011
Auto-enrolment and DC adequacy
Agenda
Why auto-enrolment is necessary – DC adequacyWhat is auto-enrolment?Implementation issues for you
Identifying different types of workerIdentifying your staging dateManaging costsCommunication and administration
Case studies – putting these issues into contextWhat should you be doing now?
Why auto-enrolment is necessary –DC adequacy
The international context Percentage gross replacement rates for average earners from mandatory pensions
Source OECD, Pensions at a Glance 2011
The benefit strain Millions of people aged 60 and over receiving income related benefits
Source: ONS, Pension Trends, Chapter 5, 2011
Source: ONS, Pension Trends, Chapter 7, 2011
Percentage of 16 to 64 year olds contributing to private pensions
Private pensions to the rescue? Millions of active members of occupational pension schemes by sector
Private sector DC provision Distribution of members by employer contribution rate
Source: ONS, Pension Trends, Chapter 8, 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?
What is auto-enrolment?
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
Implementation issues for you
Identifying different types of worker Age
Earnings
75
SPA
22
16
OPT IN
No employer contribution
(“Entitledworkers”)
OPT IN
Employer contribution
AUTO-ENROL
Eligiblejobholder
OPT IN
Employer contribution
OPT IN
Employer contribution
Qualifying Earnings (QE)
£38,185 Upper Limit
£7,475 Earnings Trigger
£5,715 Qualifying Earnings Threshold
Staging date flexibility (1)
PAYE CODE PAYE CODE PAYE CODE
Company A Company B
Staging date flexibility (2)
Company C Company D
PAYE CODE PAYE CODE PAYE CODE
SUBSIDIARY SUBSIDIARY SUBSIDIARY SUBSIDIARY
Quality Requirements - DC DC and personal pensions – the core requirement
Employer must contribute at least 3% of QETotal contributions must be at least 8% of QEThese rates will be phased in between 2012 and 2017
Employer Contribution
3%
Employee Contribution
5%
Staging and DC phasing
120,000 employees
400 employees
October 2012
October 2013
October 2014
October 2015
October 2016
Staging date dependent on no. of employees
October 2012
October 2013
October 2014
October 2015
October 2016
October 2017
ER 1% Total 2%
ER 2% Total 5%
ER 3% Total 8%
Required DC contribution rate (% of QE)
Quality requirements - DC DC 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 earnings
Notes: Phasing applies in all three approaches “Basic pay” is deemed to include all elements of pay that do not vary (so potentially not just basic salary)
Managing costs (2)
Employer contributions
£0
£50,000
£100,000
£150,000
£200,000
£250,000
£300,000
2012/13 2013/14 2014/15 2015/16 2016/17 2017/18
Minimum Contributions based on Qualifying Earnings
9% Certification
8% Certification
7% Certification
Existing scheme design
Alternative scheme design
OutputsFront Sheet
Note: the above is generic output from LCP’s Auto Enrolment Modeller, the output from which is employer and scheme specific.
Managing costs - options
Waiting period for membership
Salary sacrifice
Trust-based scheme (short
service refunds)
Phasing-in of DC contributions
Changes to, or “levelling down”,
of existing pension benefits
At least seven different versions of communication required at staging dateEarly engagementConsultationCommunications review
Communication and disclosure
George Bernard ShawPlaywright, critic, political activist1856 – 1950
The problem with communication is the illusion that it has happened.
Administration processes and systems review
Eligible jobholder?
Regular review
No
Ineligible due to
- Age
- Salary
Opt in notice
- Issued by employer
- One month
- Returned to employer
Jobholder information
- From employer to scheme
Employer required to pay contributions
Administration processes and systems review
Eligible jobholder?
Regular review
No
Ineligible due to
- Age
- Salary
Joining notice
- Issued by employer
- One month
- Returned to employer
Jobholder information
- From employer to a scheme
Employer NOT required to pay contributions
Below Qualifying Earnings Threshold
Eligible jobholder?
Regular review
No
Ineligible due to
- Age
- SalaryEmployer required to pay contributions
Between Qualifying Earnings Threshold and Eligibility Trigger
Opt in notice
- Issued by employer
- One month
- Returned to employer
Jobholder information
- From employer to scheme
Administration processes and systems review
Eligible jobholder?
Yes
Auto-enrolEnrolment information
- Issued by employer
- One week if using waiting period / month otherwise
- Bespoke
- Details of opt-out
Jobholder information
- From employer to scheme
Administration processes and systems review
Eligible jobholder?
Yes
Auto-enrol
Opt-out?
Yes
Opt out form
- Requested by jobholder
- Issued by scheme
- One month
- Prescribed format
- Returned to employer
Employer duty
- Notify scheme of opt out
Administration processes and systems review
Eligible jobholder?
Yes
Auto-enrol
Opt-out?
Yes
Scheme actions- Membership unscrambled
- Contributions returned to employer by “refund date”
Employer actions
- Contributions returned to jobholder
Administration processes and systems review
Case study Putting these issues into context
Earnings “spikes”
The earnings trigger applies pro-rata in every pay period – so £622.92 in a month or £143.75 in a week
For example, John normally earns £460 per month, so is not auto-enrolled as he earns below the Earnings Trigger of £7,475. However in December 2013 (for one month only) John earns £800 – over the £622.92 triggerJohn must be auto-enrolled in December even though his total expected annual earnings are still less than the Trigger. Total contributions are 2% of £323.75 (£800 less £476.25 QET) – ie £6.48 for the pay period
In January to July 2014 he earns £460 each month, below the QET, so no contributions are deducted
In August 2014 he gets a 5% pay rise, and earns £483, so contributions need to be paid in respect of £6.75 of monthly earningsAt 2% that is a contribution of £0.14 for the pay period
Case study (A) A national charity
Background
SolutionOpted for one staging date to simplify communications Considering a master trust Will auto-enrol all employees irrespective of earnings trigger at 5% match on basic earnings (with option for employee to reduce on a 1:1 basis)Introducing salary sacrifice
Characteristics of industry ChallengeMultiple sites and employers Multiple staging dates
Variable earnings System requirements
Paternalistic Cash constrained
Provider update
NEST
Occupational DC scheme set up under trustDesigned to help employers meet DC quality requirements (employer and employees can pay higher contributions)Maximum total contribution of £4,200 pa per memberA 1.8% contribution charge plus 0.3% annual management chargeSix funds available, with Target Date funds as defaultActive members already contributingLimited employer support
Other potential providers
What should you be doing now?
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
Plans?How much will
contributions cost?
Who will / can do the admin and record
keeping?How much will
administration cost?
Who will / can do the project management?
Questions
Appendices
Tota
l ear
ning
s
£38,185 Upper Limit
£7,475 Earnings Trigger
£5,715 Qualifying Earnings Threshold
Identifying different types of worker (1)
Worker
Eligible jobholder
Jobholder
When?
The requirements will apply from October 2012Subject to:
– staging whereby the duty to auto-enrol will be imposed on employers in stages
– for DC schemes, phasing whereby the contribution requirements are phased in
– for DB and hybrid schemes, transitional provisions
Staging
Based on number of PAYE employees as at 1 April 2012Employers due to auto-enrol in 2012 can bring forward their staging date to no earlier than 1 July 2012Others can potentially bring forward their staging date to no earlier than 1 October 2012Example 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
Automatic enrolment scheme
Automatic enrolment scheme
must be a “qualifying scheme”;
must not prevent auto-enrolment, re-enrolment or opting-in
does not require the employee to make any choices or provide any information in order to remain a member
Qualifying scheme
an occupational or personal pension scheme;
a registered pension scheme under Finance Act 2004
meets the quality requirements
Quality requirements
Five types of quality requirement
Certification typically required
DC
personal pension
DB hybrid
non-UK schemes
Quality requirements - DB
The scheme is contracted-out
The scheme satisfies the test scheme
standardOR
Provides a pension for life from
State Pension Age
Accrual rate of at least 1/120th of average
QE in the last three tax years
Quality requirements Qualifying Earnings
Qualifying Earnings (“QE”)– earnings between Qualifying Earnings Threshold (£5,715 in 2010/11
terms) and Upper Limit (£38,185 in 2010/11 terms)– subject to earnings exceeding the Eligibility Trigger of £7,475 (in 2011/12
terms)
Wide earnings definition eg includes commission, bonuses and overtime
£0
£50,000
£100,000
£150,000
£200,000
£250,000
£300,000
2012/13 2013/14 2014/15 2015/16 2016/17 2017/18Auto enrolment year from October
Alternative scheme designExisting scheme design7% Certification8% Certification9% CertificationMinimum Contributions based on Qualifying Earnings
Note: the above is generic output from LCP’s Auto Enrolment Modeller, the output from which is employer and scheme specific.
Managing costs (1)
TUPE implications
The minimum contribution rate is 3% from employers and 5% from employeesIf 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 businessAlternatively, 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
Non-UK nationals
All eligible jobholders must be auto-enrolledBut 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 schemeAmong 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 members
How can you meet your auto-enrolment duties for non-UK nationals?
Case study B A financial services company
Background
SolutionTrust based solution works best for auto-enrolment, but stand-alone, sub-section of existing DB scheme or master trust?
– In this case sub-section of existing scheme– Because it allows transfer from that sub-section to the more generous main DC
section after two years’ service
Characteristics of industry ChallengeHigh earners £4,200 pa limit in NEST
Non-UK nationals GPPs unwilling to accept
Case study C A pub/restaurant chain
Background
SolutionOpted for one staging date to simplify communicationsStill analysing the likely impact of a 2% potential increase in employer contributions on sale (and purchase) prices Trust based for short service refund makes sense while it lastsNEST a likely provider for at least some staffKeep GPP for managers and head office staff
Characteristics of industry ChallengeMultiple sites and employers Multiple staging dates
Frequent buying and selling of premises TUPE requirements
High staff turnover – 30% Administration
High number of non-UK nationals GPPs unwilling to accept
Staging dates
Number of PAYE employees Staging date
120,000 or more 1 October 2012
50,000-119,999 1 November 2012
30,000-49,999 1 January 2013
20,000-29,999 1 February 2013
10,000-19,999 1 March 2013
6,000-9,999 1 April 2013
4,100-5,999 1 May 2013
4,000-4,099 1 June 2013
3,000-3,999 1 July 2013
2,000-2,999 1 August 2013
1,250-1,999 1 September 2013
800-1,249 1 October 2013
500-799 1 November 2013
350-499 1 January 2014
250-349 1 February 2014
240-249 1 March 2014
First tranche with fewer than 50 employees based on last two digits of PAYE reference 1 April 2014
150-239 1 May 2014
90-149 1 June 2014
50-89 1 July 2014
Remaining employers with fewer than 50 employees allocated by last two digits of PAYE reference 1 August 2014-1 February 2016
Different staging dates potentially apply for employers with fewer than 10 (full-time equivalent) employees
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
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.
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, Belgium, Switzerland, the Netherlands, Ireland and the UAE.
The end of the Default Retirement Age (65)
The DRA was abolished on 6 April 2011 so ‘Retirement’ is no longer a ‘fair’ reason for dismissal.Any dismissal because of age will now constitute direct age discrimination (and an unfair dismissal) under the Equality Act 2010 – apart from in rare cases where it can be objectively justified.If it can be objectively justified, the dismissal will fall under SOSR. As most employers accept that they cannot objectively justify = emphasis now on correctly and fairly managing performance/capability issues, whatever the age of the employee.
Choices for employers
Either…..
A - Abandon fixed retirement ages altogether – any dismissal must therefore fall under one of the other five fair reasons fordismissal (eg capability); or
B – Retain a fixed retirement age for all or part of the workforce – but if you do – you must be able to objectively justify why you still need one.
Dealing with an older workforce - Practical Steps
Need to eradicate any age discriminatory practices or if not, you should be able to objectively justify different/unfavourable treatment.Consider the impact and adjust the following:1) Performance management systems; 2) Future planning processes; 3) Various documentation;4) Various benefit policies;
1) Performance Management Systems
Tighten up your performance management, appraisals and capability policies and procedures; Train managers in effective and objective performance management techniques; Keep evidence of discussions and feedback on performance; Provide training and time to improve where appropriate;Beware of inconsistent treatment and managers reluctance to manage older employees - young employees can claim age discrimination too!
2) Future Planning Processes
Pre-retirement courses/tax planning seminars – getting all staff to think about their options and be realistic about how much longer they will need to work;
Workplace discussions – review ACAS Guidance;
2) Future planning processes – workplace discussions
Do:– Hold regular
appraisals/reviews for workforce planning – at least annually
– Discuss employees’ future plans – short, medium, long-term
– Provide training to management on age discrimination
Don’t:– Ask discriminatory questions
such as ‘why don’t you retire to avoid an undignified sacking?’ or indicate that older workers are blocking younger workers
– Focus these discussions only on certain age groups – ask the same questions of all employees
Case Study - Retirement
Sprightly Limited want to retire Wendy, aged 65. They are concerned she is not up to the job as the markets have become so competitive and she has not been meeting her targets. Plus, they don't feel she now fits the ambitious team of managers theyhave recruited over the years. However, they do not want to upset her and because of this, they have turned 'a blind-eye' to some of her failings and have also paid her a discretionary bonus.
Sprightly have received an email from another employee John, aged 34, which raises concerns over how the directors criticisedhis performance in their last quarterly meeting. He states 'other colleagues do not appear to be treated the same'. John was not paid a bonus. Sprightly are not really concerned as it was clear John had not met his targets, the bonus is discretionary and so,they state, 'what is he complaining about?'
Case Study - Retirement
1. What should/could Sprightly have done better, if anything?
2. How should they deal with their concerns with Wendy?
3. How should they deal with John’s concerns?
3) Documentation
Remove fixed retirement ages from contracts and other documentation and notify staff of the change(s).
Revise retirement policy documentation. Positively stating you will not retire at a fixed age will help to defend claims
Share scheme rules may require amendment – good leaver/bad leaver
4) Benefit policies
Typical employee benefits include:– Pension scheme (DB or DC);– Private medical insurance; – Life assurance; – Long-term disability insurance; – Flexible benefits;
What are the options?
The Exemption
Employers can withdraw or not offer group risk insured benefits for employees when they reach 65 years of age without fear of age discrimination. The age at which these benefits can be removed will rise in line with rises to State Pension Age (“SPA”)
SPA rising to age 66 by 2020 (or perhaps earlier)SPA rising to age 67 by 2036 (could be earlier)SPA rising to age 68 by 2046 (could be earlier)
NB – could still be a breach of contract/give rise to constructive dismissal claim
Risk benefits
Risk schemes – benefits can cease
at 65
• Life assurance• Income protection and related financial
services• Private medical, dental and sickness
insurance • Accident insurance
Not exempt
• Uninsured benefits/employers who self-insure
• Cover in non-employment based relationships
• Arguably if the cut off age is higher than 65 or SPA
Useful exemptions
In summary…..the six step process
1. Establish what the treatment is
2. Make sure that there is a relevant comparator
3. Decide if there is any discrimination
4. If there is, see if there is an exemption which covers it
5. If there is not, consider objective justification
6. If this is also not possible, remove discriminatory feature (or risk claims!)
Summary - Objective justification
What is my legitimate aim?
Is there a less discriminatory way to achieve that aim?
Does the policy achieve that legitimate aim?
Is any discrimination outweighed by the benefit?
Do any features of the policy contradict the purported legitimate aim?
Flexible Retirement and Pension Provision
Southern Pensions conference 2011
Adrian LambBlake [email protected]
What do we mean by flexible retirement?
Narrow sense– Essentially, more flexibility over late retirement options
Drawing benefits at 65 whilst continuing to workDrawing benefits at 65 whilst continuing to accrue Not drawing benefits at 65 but continuing to accrue
Wide sense– Drawing benefits in different stages at any permitted age
whilst continuing to accrueCombination of age discrimination and scrapping DRA – but you still have objective justification!
Objective justification
What is my legitimate aim?
Is there a less discriminatory way to achieve that aim?
Does the policy achieve that legitimate aim?
Is any discrimination outweighed by the benefit?
Do any features of the policy contradict the purported legitimate aim?
Legal structure – Employer provides a contract based scheme
Insurance Company
EmployeeEmployer
PRIMARY CONTRACT
(to provide a pension)
SECONDARY CONTRACT
(to contribute)
Legal structure – Employer participates in an occupational pension scheme
Trustees
Members
Employer sponsorTRUST
(governed by deed and rules)
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 narrow flexible retirement?
Narrow flexible retirement– 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
Must you provide wide flexible retirement?
No requirement outside of age discrimination legislation. Could age discrimination be an issue?Original DTI Guidance suggested an indirect discrimination risk:
“A rule which stops members who are already drawing a pension from continuing to accrue benefits may be indirectly discriminatory. For instance, if proportionately more 55 year old members than, say, 64 year old members would like to continue to work, accrue benefits and draw a pension, rather than having to make a choice between drawing a pension and accruing benefits, then the rule disadvantages 55 year olds compared with the 64 year olds and will be indirectly discriminatory, unless it can be objectively justified.”
Age discrimination risks in not providing wide flexible retirement?
The issue was not addressed in the Government’s final guidance.How could age discrimination arise in practice?– Evidential difficulties– Test should be based on actual circumstances rather than
potential interest– There can be no comparator if part payment of benefits is
not allowed to any member at any age– Objective justification?
What should you be doing? - Formulating a Flexible Retirement Strategy
What is your HR strategy on flexible retirement – both wide and narrow?Does your strategy give rise to any age discrimination risks?Do you need the buy-in from of any third party before it can be implemented?Do you understand the costs of implementing your strategy? When and how do you communicate with employees?
What should you be checking? – Implementing your strategy
What does the employment contract say?If an occupational pension scheme – check your rules:– Do they allow additional accrual beyond age 65?– Have they retained a leaving service requirement?– Do they allow for the possibility of wider flexible retirement?– Permissive power or detailed rule amendments?
If a contract based scheme:– Check scope with the provider
The future of retirement
Or ……A future without retirement?Is there a future for retirement?Challenges for employers, trustees, and individuals
TOO BIG TO FAIL! TOO SMALL TO MATTER?
Life expectancy rises by 44 days in just one year
Most of Europe is worse than this!!!!
The future – for individuals?
Live for longer = work for longer Medical advances More than one career/job + mid life gap years?No cliff edge retirementIntegrated savings/debt repayments NEST/auto enrolment Auto escalationcompulsory retirement savings?Tax incentives or just higher taxes?Affordability
WE ARE LIVING LONGER, HEALTHIER LIVES
The future – for employers (1)?
Ageing workforce for UK plc ….. but what is your position?Skills v productivityFlexible recruitment – target different age groups?Different retention policies for different ages?Fewer people able to afford outright retirementFlexible retirement Flexible reward packages
The future – for employers (2)?
Changing role of the state?Segmented workforce – one size fits all consigned to historyPlanning and action neededEmployer facilitates access (and pays/funds)?More unfunded liabilities – explicit or implicit?Review your pay and benefits package and your practices, procedures and performance criteria
Effective HR becomes more importantMore people working is actually better for the economy
A =AsteroidsAttritionAuto enrolmentAccuracyAssets Ageing workforceAffordabilityAction (not activity)
To Do List
Liabilities and dataAssets – 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
Question time
