W E L I S T E N , W E A D V I S E , W E D E L I V E R

Investments | Pensions | Insurance

Northern Ireland PensionsReview 2011

Northern Ireland Pensions Review 2011

ForewordWelcome to this our second survey of Northern Ireland pension provision. It follows the 2007 survey whichwe carried out across the region and reflects the significant developments which have taken place since then,particularly with the introduction of compulsory pension provision in 2012.

The survey was conducted by Mr Colin O’Hare, Senior Teaching Fellow at Queen’s University ManagementSchool and was sponsored by Kerr Henderson (Consultants and Actuaries) Ltd. It aims to provide a picture ofthe current state of pension provision in Northern Ireland, comparing this with the findings from both the2007 survey and a recent pension survey of smaller companies in the UK carried out by the Association ofConsulting Actuaries (ACA).

A glossary of pensions terms used in the survey is included at the end of the report.

For further information on the survey please contact the authors of the report:

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W E L I S T E N , W E A D V I S E , W E D E L I V E R

Investments | Pensions | Insurance

Colin O’Hare MMath DAT CFAhas been working in the pensionssector for over 10 years providingadvice to the trustees andcorporate sponsors of pensionschemes in Northern Ireland,Manchester, London andBirmingham. He moved into theacademic world in 2008 and hasbeen responsible for the creation

and delivery of the actuarial science and risk managementdegree at Queens University where he is currently a seniorteaching fellow. Colin’s research is primarily in the area oflongevity risk, specifically forecasting mortality rates andrelating changes in mortality to the socio-economiccharacteristics of a region or country. He is also interestedin innovative product development for hedging longevityrisk and the pricing of such products.

He can be contacted at Queen’s University ManagementSchool, Riddell Hall, 185 Stranmillis Road, Belfast BT9 5EE or by email at c.ohare@qub.ac.uk

Philip Murray MA (Cantab) FIAhas 20 years experience as anactuarial and investmentconsultant, advising bothtrustees and employers on allaspects of their pensionprovision. After obtaining aMasters degree fromCambridge University, hequalified as a Fellow of the

Institute and Faculty of Actuaries and worked for amajor actuarial consultancy in England. He relocated toNorthern Ireland in 2000 to join Kerr Henderson’snewly established actuarial practice. He currently holdsa number of scheme actuary appointments, and inaddition to his client duties, is responsible for KerrHenderson’s actuarial and investment strategy.

He can be contacted at Kerr Henderson (Consultantsand Actuaries) Ltd, 29-32 College Gardens, Belfast,BT9 6BT, or by email at pmurray@kerrhenderson.com

Pension developmentsCompulsory pension provision

2012 will see one of the most significant changes in pension provision for a generation. For the firsttime, employers will be compelled to enrol their workers into a pension scheme, and make acompulsory pension contribution.

Although what is now referred to as “auto-enrolment” will be phased in gradually over a number ofyears, this additional cost is being imposed at a time of austerity for employers and employees alike.The demographics are hard to argue with: the number of workers supporting each retiree has fallenfrom 10 workers for each retiree at the turn of the 20th Century, to 4 to 1 in 2005 and is expected to fallto just 2 workers for each retiree by 2050, according to the Department of Work and Pensions. TheState simply cannot afford to support pensioners in the future in the same way as it has done in the past.

However, it remains to be seen how many of those who are put into a pension scheme decide to opt-out because the minimum 4% member contribution is unaffordable. If significant numbers do so, theGovernment may be forced to rethink its approach to encouraging pension provision.

Move from defined benefit to defined contribution continues unabated

We have seen a continuation of the trend over the last decade of employers closing their high qualitydefined benefit schemes and replacing them with lower cost defined contribution schemes. There hasbeen little respite in recent years for those employers who have maintained their defined benefitschemes. Historically low interest rates and increasing life expectancy have pushed up the value ofpension liabilities, while, on the asset side, investments have been volatile and stock markets are stilllanguishing at levels below that seen about a decade ago. For these reasons, deficits remain a stubbornproblem for employers with defined benefit schemes.

On the defined contribution side, levels of contribution from both employers and employees continueto be relatively modest, and there is recent evidence to suggest levels are dropping in the face ofausterity. The higher levels of pension once enjoyed by those who retired with defined benefit pensionsare unlikely to be seen by the majority of those who will retire from the defined contributionarrangements that are now the norm.

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ContentsExecutive Summary 6

Pension Provision in Northern Ireland 9

Defined Benefit Pension Provision in Northern Ireland 12

Defined Contribution Pension Provision in Northern Ireland 16

Pensions Reform – Automatic Enrolment into 19

Qualifying Workplace Pension Schemes

Conclusion 22

Glossary of Pensions Terms 23

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Executive summaryExecutive summary

Survey Background

A confidential questionnaire was sent out to Northern Ireland employers in 2011 and over 40 responses wereobtained. The circulation was further increased through an e-zine published by the Northern Ireland Chamberof Commerce and thanks must go to them for supporting the survey. The responses cover pension schemeswith an aggregate membership of over 100,000 employees equating to 15% of the workforce.

Characteristics of NI pension provision

• 27% of firms responding to the survey employ 50 or fewer staff;

• 25% of firms responding to the survey employ 500 or more staff;

• There were significantly higher levels of defined contribution provision compared to defined benefit;

• 23% of firms made no pension provision;

• Where a company has a defined benefit scheme, 58% are closed to new entrants and a further 21% arealso closed to future accrual;

• Across most types of schemes, the membership participation rate is slightly above 60% of employees,although Group Personal Pension and Stakeholder pension participation is lower at, on average, 36% ofeligible employees; and

• 32% of firms have reviewed their pension arrangements in the last 5 years.

Pension spend and contributions

• 62% of firms do not have a target for their pension costs, but of those that do, most are targeting around5-6% of earnings;

• For defined benefit schemes, the average employer contribution is 20% of earnings with a range ofbetween 12% and 30% of earnings;

• For defined contribution schemes, the average employer contribution is 4.8% of earnings with a range ofbetween 3% and 12% of earnings;

• For defined benefit schemes, the average employee contribution is 6.6% of earnings with a range ofbetween 3% and 12% of earnings;

• For defined contribution schemes, the average employee contribution is 3.6% of earnings with a range ofbetween 2% and 8% of earnings;

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• Contributions to defined contribution schemes have increased marginally, with the average employer ratemoving from 4.5% to 4.8% of earnings and the employee rate from 3.5% to 3.6%.

• 73% of those with defined benefit schemes reported that their schemes were in deficit. The averageongoing funding level of these schemes was 74% of scheme liabilities;

• Of those firms with a defined benefit scheme, 40% reported no change to the employer contributions inthe last 5 years. However 27% reported that employer contributions had increased by 5% of earnings ormore;

• Of those firms with a defined benefit scheme, 67% of respondents reported no change to the employeecontributions; and

• Of those firms with a defined benefit scheme, 27% of respondents stated that employee contributionshad increased by 3% of earnings or more in the last 5 years.

Compulsory Pension Provision

• 76% of firms responding to the survey stated that they were aware of the date when their business wasrequired to auto-enrol into a qualifying workplace pension scheme;

• 78% of survey respondents stated as likely or highly likely that they would auto-enrol all eligibleemployees into their existing schemes; and

• 50% of survey respondents stated that the introduction of auto enrolment would have little or no impacton them. However, 27% stated that it would add significantly to their costs.

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average contribution rate

Pension Provision inNorthern Ireland

Pension Provision inNorthern IrelandThe survey targeted a wide range of employer types in Northern Ireland and a distribution of the numbers ofemployees for each respondent is set out in the diagram below. As can be seen below, the vast majority ofthe respondents employ fewer than 250 people, with over 50% of respondents having fewer than 150employees. This is reflective of small and medium sized enterprises which account for a high proportion ofNorthern Ireland businesses.

For this reason, we have compared our survey results to the Association of Consulting Actuaries smaller firmspensions survey which covers UK firms with fewer than 250 employees. It should be noted that there were anumber of responses from larger employers in Northern Ireland with 25% of respondents employing morethan 500 people.

The survey asked about the types of pension arrangements being offered, the participation rates withinpension schemes, and the status of those pension schemes (open, closed to new entrants, closed to futureaccrual). The table overleaf summarises the responses received.

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Many defined benefit schemes are becoming a legacy issue, with almost 80% of these being closed to newentrants or to any future benefit accrual. From the survey responses, we can see that 58% are closed to newentrants only and a further 21% are closed to new entrants and future accrual of benefits. When comparedwith the ACA survey, this looks slightly more optimistic than the picture across the UK. The ACA survey foundthat 45% of UK smaller firms’ defined benefit pension schemes were closed to new entrants, with a further41% closed to future accrual.

A major concern in the shift from defined benefit to defined contribution is that the contribution rates beingpaid into these replacement schemes are relatively low and are likely to provide a much reduced level ofpension in retirement. It was also noted that nearly a quarter of the respondents reported making no pensionprovision at all for their employees.

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Defined BenefitPension Provision inNorthern Ireland

A. Level of benefits

The survey asked for information on the accrual rate, funding level and participation rates for defined benefitschemes. We found that half the defined benefit schemes were offering 1/60th of salary pension accrual foreach year of service whilst almost 20% offered 1/80th and 12% offered 1/100th. Over a 40 year career, theselevels of accrual would provide pensions of 67% of salary, 50% of salary, and 40% of salary respectively. Thepicture was broadly the same as in 2007.

The participation rate of defined benefit schemes was 60%. This is in line with the ACA survey which alsopointed to a participation rate of approximately 60% in the UK.

B. Employee contributions

The contribution rates paid by employees are set out below. The contribution rate paid by employees intodefined benefit schemes ranges from 3% to 12% of earnings with an average rate of 6.6%, compared to 6%in the 2007 survey. This increase may reflect to some extent the increasing cost of running a defined benefitscheme and the need to pass some of the increase on to the members of the scheme.

The most typical employee contribution rate is 5-6% of earnings, which is similar to that shown in the 2007

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The most typical employee contribution rate is 5-6% of earnings, which is similar to that shown in the 2007survey. Comparing with that of the ACA UK-wide survey, we see that Northern Ireland contribution rates aremarginally higher at an average of 6.6% of earnings compared to 5.9% of earnings. It is striking that theproportion of schemes with a contribution rate of 7% of earnings and over has jumped from 10% in 2007 to35% in 2011.

C. Employer contributions

The average employer contribution rate is 20% of earnings which is slightly higher than the figure in 2007(18%) reflecting the continuing higher costs for defined benefit provision. However, the percentage ofemployers paying the highest rate of contributions has fallen from 15% to 10%, probably reflecting the factthat employers have reduced benefits, closed their defined benefit schemes and increased membercontributions.

D. Dealing with the deficit

In the survey we asked employers how scheme deficits were being dealt with. Specifically, we asked whethertheir scheme was in deficit, the level of funding, and the length of the deficit recovery period.

Nearly three quarters of those who responded stated that their scheme was in deficit, with the averagefunding level being just under 74% and ranging from 47% to 99% funded.

For those schemes in deficit, nearly half had a funding level in the range 71-80%, but there were alsoexamples of very poorly-funded schemes. The average planned recovery period was just over 11 years, withscheme recovery periods ranging from under 5 years to over 20 years.14

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E. Defined Benefit investment strategies

To investigate whether current investment market instabilities and the underfunded state of the majority ofdefined benefit pension schemes are affecting investment strategy, we asked whether investments had beenmoved to a more matched position (less in equities and more in bonds) over the last 5 years. We also allowedrespondents to reflect a move away from equities and bonds into alternative asset classes as a further option.We found that in 50% of the cases, there had been no change in investment strategy. 12% of respondentshad reduced their exposure to equities whilst a further 13% had increased this exposure. The remaining 25%of respondents have opted for the “other” option, investing in other asset classes. This result shows thegrowing appetite among defined benefit scheme trustees to invest in asset classes outside their traditionalbase of equities and bonds.

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Defined ContributionPension Provision inNorthern Ireland

A large number of the respondents to the survey reported having a defined contribution scheme, with manyrespondents being in transition with a closed or partially closed defined benefit scheme and an open definedcontribution scheme. Of those with a defined contribution scheme, 17% of respondents stated that theyoperated a defined contribution scheme under trust law with 45% operating a Group Personal Pensionscheme and 38% a Stakeholder scheme. For all these pension schemes, the employer and employeecontribution rates were substantially lower than levels for defined benefit schemes, particularly the employerrates.

A. Level of contributions

Employee contribution rates in defined contribution schemes ranged from 2% to 8% of earnings.

From the graph, we can see that the most common contribution rate for defined contribution schemes is 3%of earnings although a significant number have employee contribution rates of 5% - 6% of earnings.Comparing this to the 2007 survey, the picture looks little changed, with an average employee contributionthen of 3.5% of earnings.

Generally employers providing this form of pension provision will pay a multiple of the employeecontribution rate into the scheme on behalf of the employee. The most common situation was for theemployer to contribute twice the employee contribution rate with the average multiplier at just under 1.5.

The average total contribution rate into a defined contribution scheme is 8.4% of earnings (4.8% employerand 3.6% employee) which was marginally higher than the levels shown in 2007 of 8% in total (4.5%employer and 3.5% employee). However, this compares unfavourably with the average employer contributioninto a defined benefit scheme of 20% of earnings and average employee contribution rate of 6.6% ofearnings.

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The clear implication of this lower level of contribution is that defined contribution schemes are likely toprovide a much lower level of benefit at retirement than would have been the case with defined benefitschemes. This will increasingly become an issue for members of defined contribution schemes as they reachretirement and are faced with low levels of pension provision.

B. Investment strategy

We asked respondents with defined contribution provision whether they offered a default strategy and, if so,whether it was a lifestyle fund (i.e. initially investing in growth assets, but gradually moving to safer, lessvolatile investments as members approach retirement). Almost three quarters of respondents stated that theyoffered a default strategy and, of those, three quarters offered a lifestyle fund as the default strategy.

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Pensions Reform –Automatic Enrolment intoQualifying WorkplacePension Schemes

Pensions Reform – Automatic Enrolment into Qualifying Workplace Pension Schemes

As part of an overall pension reform strategy, the Government is introducing major changes to UK pensionsfrom 2012.

The full proposals include reforming the UK State Pension to make it simpler and more generous, while at thesame time raising the State Pension Age.

The Government estimates that about seven million people are currently under-saving for retirement and amajor part of the reform is to encourage this group to save more for their retirement. The proposals will havewide ranging effects across every field of UK business as the onus will be on employers to help encouragemore people to save:

• Over a phased period from October 2012 to October 2017, depending on employee numbers,employers will be required to automatically enrol employees into a ‘qualifying workplace pensionscheme’. This automatic enrolment could be to existing company pension schemes if they meet certaincriteria. If not, or if there is no company pension scheme, then employees can be enrolled into theNational Employment Savings Trust (NEST);

• All employers will be required to contribute a minimum of 3% of their employees’ band earnings into apension. Employees will need to pay a personal contribution of 5% (4% with a further 1% tax relief beingadded) to make the minimum contribution 8% of band earnings. There are variations around this level,depending on how earnings are defined, and there is a lead-in period of several years where lower ratesapply;

• Employees can opt out of pension provision, but if they do so, the employer will have to re-enrol themafter three years.

With such a material change to pension provision being proposed, we took the opportunity in this survey togauge the position from the employer’s viewpoint in Northern Ireland. We asked a number of questionsrelating to automatic enrolment, including a basic understanding of when it will impact upon employers andtheir likely response to it.

The vast majority of respondents were aware of the date at which they would have to automatically enrolemployees into some form of pension provision. This was a promising result and shows that governmentinitiatives to inform employers about automatic enrolment have been working in the main.

When we asked the question, “what would be your most likely response to the imposition of NEST?” weoffered a range of options. The responses are set out below and range from the least NEST-related solution(to auto-enrol employees in an existing scheme) to the most NEST-related solution (to auto-enrol in NESTwhen required):

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A. We will probably auto-enrol all ‘eligible jobholders’ into the organisation's existing scheme

B. We will review existing scheme(s) benefits to mitigate against the cost of higher scheme membership fromauto-enrolment

C. We have an existing scheme, but we will probably auto-enrol all ‘eligible jobholders’ into a new workplacescheme(s)

D. We will probably restrict entry into our organisation’s scheme and auto-enrol the balance of employeesinto NEST.

E. We will use NEST as a foundation scheme, with a company scheme as a voluntary ‘top up’ arrangement

F. We currently have no scheme, but will probably auto-enrol all 'eligible jobholders' into a new companyscheme(s) rather than NEST.

G. We will probably close our organisation's scheme(s) so all ‘eligible jobholders’ would then be auto-enrolled into NEST

H. We have no scheme, so when required we will auto-enrol all ‘eligible jobholders’ into NEST

The responses suggest that employers will try to meet the new requirements through the current provisionthat they make, rather than by setting up a new scheme or using NEST.

The second question that we asked explored the impact of auto-enrolment on employer costs. Half therespondents stated that this would have either no impact or a marginal impact on costs, although just over aquarter expected a significant increase in costs.

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ConclusionIt is little surprise that defined contribution continues to replace defined benefit as the pension provision ofchoice for many employers. The persistent deficits in defined benefit schemes remain a problem, and themajority of employers have taken action to limit their exposure by closing these schemes to new employees,and increasingly to existing employees as well.

The introduction of automatic enrolment from 2012 will be a major issue for employers. Most employers areaware of their particular auto enrolment date, and have decided to use their own pension scheme rather thanthe National Employment Savings Trust. However, setting up and complying with this new pension regimewill require considerable advance planning, and significant time and effort on the part of employers.

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Glossary of Pension TermsDefined Benefit (DB) scheme

Benefits are worked out using a formula that is usually related to the member’s pensionable earnings andlength of service. The most common types of defined benefit scheme are final salary (FS) and careeraveraged revalued earnings (CARE) schemes.

Defined Contribution (DC) scheme

Benefits are based on the amount of contributions paid, the investment return earned and the amount ofpension this money will buy when a member retires. These schemes are also referred to as money purchaseschemes.

Group Personal Pension (GPP)

Personal Pensions are provided by insurance companies to enable individuals to save for private retirementincome. A Group Personal Pension is a scheme where multiple members accrue benefits in separateaccounts, usually provided by employers to allow their employees to save towards their retirement.

Stakeholder Pension Scheme

A particular type of personal pension scheme, where there are limits on the charges that can be levied fromthe member’s account. The requirement for employers to provide their employees with access to aStakeholder Pension Scheme is being removed as auto enrolment is introduced.

Automatic enrolment

UK employers will be required to automatically enrol employees into a ‘qualifying workplace pensionscheme’. This automatic enrolment could be to existing company pension schemes if they meet certaincriteria. If not, or if there is no company pension scheme, then employees can be enrolled into the NationalEmployment Savings Trust (NEST).

National Employment Savings Trust (NEST)

NEST is a UK-wide pension scheme which employers can use to provide pensions for their employees. Thescheme is managed by a trustee body, NEST Corporation, which is a non-departmental public body thatoperates at arm’s length from government. It is accountable to Parliament through the Department for Workand Pensions (DWP).

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W E L I S T E N , W E A D V I S E , W E D E L I V E R

Investments | Pensions | Insurance

Northern Ireland Pensions Review 2011

The information in this survey is intended as a guide only. Whilst the detail it contains is believed to becorrect it is not a substitute for appropriate professional advice. Kerr Henderson and Queen’s UniversityBelfast can take no responsibility for actions taken based on the information contained in this survey.