pensions – managing risk in volatile economic times€¦ · • partha has a first class honours...
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Pensions – managing risk in volatile economic times3 March 2009
Volatile times sees both sponsoring employers and pension scheme trustees under pressure to manage cash demands, risks and underlying costs more effectively. The future of pension provision, with company motivations waning and auto-enrolment around the corner, could lead to significant change.
Rosie Winterton Minister for Pensions and the Ageing Society, Department for Work and Pensions
• Rosie was appointed Minister of State for Pensions Reform in October 2008. She is also Minister for Yorkshire and The Humber, a position she has held since January 2008.
• Rosie was previously a Minister at the Department of Transport (June 2007-
October 2008) and at the Department of Health (2003-2007). Rosie has also served as Parliamentary Secretary at the Lord Chancellor’s Department from 2001 to June 2003.
• Rosie graduated from Hull University with a degree in History. She started her career as a Constituency Personal Assistant to John Prescott MP.
Partha Dasgupta CEO of the Pension Protection Fund
• Partha Dasgupta was appointed Chief Executive of the Pension Protection Fund in June 2006. He joined the Pension Protection Fund in January 2005 as Director of Investment and Finance where he led the development of the risk based levy and investment strategy.
• Partha spent ten years at Barclays Global Investors most recently as Managing Director, Fixed Income Europe. Partha started his career in 1991 at the Prudential as a valuation analyst. He is also a non-executive director of the Statistics Board.
• Partha has a first class honours degree in mathematics from Heriot-Watt University.
Agenda 2
PwC speakers 3
Guest speakers 5
Managing cash in the downturn 6
Employer Covenant 8
Automatic pension enrolment for all from 2012 10
Are you managing your pensions business? 16
PwC online 27
Contents
‘As well as treating their pension scheme as a major creditor, an increasing proportion of companies are recognising they need to apply the same disciplines to their UK pension scheme as to any other major subsidiary.
That means running the pension scheme as any other business, and ensuring appropriate and quality management of cash, risks, costs and value.’
PwC pensions report, February 2009
Speaker
9.30 - 10.00 Arrive and breakfast
Introduction Philip Wright
What the government expects from employers and trustees Rosie Winterton: Minister for Pensions and the Ageing Society, Department for Work and Pensions
The impact of legislation – old and new PwC perspective: Peter Tompkins
Break
What’s hot?
Launching the results of the 2009 PwC pension decision-makers tracking survey
PwC perspective: Marc Hommel
Optimising decision making in pension schemes: Managing interfaces, risks and conflicts in the new world
PwC facilitator and perspective: Andrew Evans
Trustee perspective: Tony Ashford, Chairman, HSBC Bank (UK) Pension Scheme
Company perspective: Ian Howard, Pensions Director, Siemens plc
Risk transference – how companies should go about formulating their risk or exit strategies and how do trustees respond. Why is buy-out not always the only or best solution?
PwC perspective: Chris Massey
Company perspective: Rita Powell, formerly Group Head of Pensions, P&O
Lunch
Scheme funding in volatile times: An interactive case study covering:
• Negotiation strategies for company and trustees• Measuring employer covenant• Agreeing technical provisions• Link to investment strategy• Use of contingent assets• When to engage with the Pensions Regulator
PwC facilitator and perspective: Jonathon Land
Company perspective: Nigel Casson, formerly General Manager of Invensys Pensions
Trustee perspective: David Davies, Chairman, Nortel Networks (UK) Pension Scheme
Break
Raj Mody quizzes the outgoing CEO of the Pension Protection Fund on levies, life and the (pensions) universe.
PwC facilitator and perspective: Raj Mody
Partha Dasgupta: CEO, Pension Protection Fund
Where’s regulation going, personal accounts, future of pensions in employment, impact of proposed accounting changes, defined contribution challenges, future of advice and advisers
The future of pensions – panel session
End
Agenda
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Philip WrightPartner Telephone: +44 (0)20 7804 5021Mobile: +44 (0) 771 006 3398Email: [email protected]
• Responsible for some of the firm’s major advisory clients, Diageo, HMRC and DwP, BBC and UBM.
• Also responsible for PwC services to non-executive directors and for co-ordinating the initiatives and activities of the firm within the Boardroom.
• From 1997 to 2003, Philip was first European then Global Leader for Corporate Finance & Recovery.
Marc HommelPartner, head of pensions for PwC HR ServicesTelephone: +44 20 7804 6936Mobile: +44 (0) 780 176 7373Email: [email protected]
• Leads PricewaterhouseCoopers HR Services UK pensions practice.
• Fellow of the Institute of Actuaries (England) and Associate of Society of Actuaries.
• Works with a large number of multinational organisations helping them address their benefits and wider reward strategies.
• Lived, worked or conducted assignments in UK, USA, Canada, Belgium, France, Germany, Netherlands, Italy and South Africa.
Andrew EvansPartner, AssuranceTelephone: +44 (0) 20 7804 3887 Mobile: +44 (0) 7710 319449Email: [email protected]
• Provides assurance services including scheme audits to pension schemes with assets from less than £1m to over £10bn.
• Assists trustees in reviewing their governance structures and their evaluation of their effectiveness.
• NAPF Benefits Council co-optee and a Trustee of an ICAEW pension scheme.
Jonathon LandPartner and credit advisory specialist Telephone: +44 (0) 20 7212 8629 Mobile: +44 (0) 787 941 1796Email: [email protected]
• Currently advising a number of high profile clients on the employer covenant of participating employers.
• Completed a secondment to The Pensions Regulator when looking at the practical implication of clearance processes, anti-avoidance powers and notifiable events.
• Specialist in advising banks and other creditors on their structural position and potential negotiation strategies.
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PwC Speakers
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Peter TompkinsPensions and Investment Consultant
• Advises pension trustees on funding and a number of clients in the public sector especially on the implications of 2012 legislation.
• Provides investment advice, especially on choices regarding transfer of pension benefits to insurers.
• He serves as an independent expert witness on a number of high profile legal disputes and is a member of the Council of the Institute of Actuaries.
Raj ModyPartner and Chief Actuary Telephone: +44 (0) 20 7804 0953 Mobile: +44 (0) 7974 969320Email: [email protected]
• Advises major employers and multinationals aswell as large scheme trustee boards on a wide range of UK pensions issues.
• Has successfully helped employers agree acceptable funding plans with trustees, saving significant short-term cash demands.
• Implemented new and creative benefit designs to help sponsors better manage cost and risk while still delivering valuable pensions efficiently.
Chris MasseyPartner and actuaryTelephone: +44 (0) 20 7804 3637 Mobile: +44 (0) 7739 874800Email: [email protected]
• Certified pension scheme actuary advising pension scheme trustees and corporates on financing, investment strategy and accounting for defined benefit schemes.
• Experienced in design and implementation of pension deficit reduction programmes on behalf of corporates.
• Extensive experience of the UK buy-out market having completed the partial buy-in for P&O and the full buy-out for Delta plc, the largest UK buy-out to date.
PwC Speakers
Rita Powell Former P&O Group Head of Pensions (2002 – 2008)
• Responsible for development and implementation of P&O’s plan to purchase an £800m bulk annuity in 2007 – the origins of the term ‘buy-in’.
• 28 years of delivering commercial pension strategies in various corporate sectors.
• Founding director of Inside Pensions – an independent corporate pensions advisory company.
Ian HowardPensions Director, Siemens plc
• 28 years with Siemens in a variety of operational and corporate roles. Became Pensions Director for Siemens plc in October 2005, in addition to managing the Mergers and Acquisitions department.
• Having completed articles with Waterhouse & Co in 1980, Ian joined Siemens plc in 1981 to set up the Legal Department.
• Obtained a law degree in 1977 from Oxford University (Mansfield College). For 18 years he served as an officer in the TA and was awarded the Territorial Decoration (TD) in 1995.
• Member of the CBI Pensions Panel.
David Davies Chairman, Nortel Networks (UK) Pension Scheme
• Currently the Chairman of Nortel Networks (UK) Pension scheme.
• Previously Trustee of BT Pension scheme for 9 years and now non-executive director of Hermes Pensions Management Limited.
• Co-operative Financial Services (including Co-operative Bank and Co-operative Insurance).
• Previously Chief Executive of Pearl Assurance and Sun Life of Canada (UK) qualified as an actuary in 1973.
Nigel Casson General Manager, Invensys Pension Scheme (retired September 2008)
• Currently advising the Invensys Pension Scheme on funding, investment and governance issues, following a five year term as General Manager of this £4billion, 100,000 member, ultra-mature scheme.
• Worked as Pension and Benefits Manager for the T&N plc scheme from 1999 to 2003, during which time the corporate sponsor entered Chapter11/ Administration.
• A qualified accountant since 1974, MBA 1987, who held several appointments as Finance Director of manufacturing and industrial companies.
Tony Ashford Chairman, HSBC Bank (UK) Pension Scheme
• Currently the Chairman of the HSBC Pensions Trust and a non-executive director of AIB (UK) Limited and the Jubilee Sailing Trust.
• Worked for HSBC from 1985 until 2005, rising to the position of General Manager, Personal Banking and Executive Committee member in 2000. Previously worked for Thomas Cook and British Steel Corporation.
• Appointed as a non-executive director to the Board of the Financial Services Compensation Scheme (FSCS) with effect from 1 February 2007.
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Guest Speakers
Helping trustees to take your cashconstraints into accountManaging cash in the downturn18 February 2009
Two of the most important aspects a trustee needs to understand during thedownturn are an employers’ covenant strength and cash availability. There aremany companies that are able to provide trustees with a strong ongoingcovenant (thereby allowing a lower level of prudence in calculating liabilities) butwho are cash constrained in the short term (justifying longer recovery periods topay off any deficit or reduced short-term cash commitments).Companies need to be well prepared and assertive in helping trusteesunderstand the nature of the covenant and their liquidity position and to justifywhere they believe trustees are being overly optimistic or pessimistic. Thisapproach has been confirmed by the Pensions Regulator in a statement issuedto employers today. Employers need to take the lead in helping trustees takethese factors into account to ensure cash commitments to pension schemes donot have a detrimental effect on the company as a whole.
What you need to know1. Trustees are required by law to act
prudently and independently whennegotiating scheme funding. They arerequired to take account of the specificcircumstances of the scheme, includingthe employer’s ability and willingness tomeet its financial commitments to thescheme (employer covenant).
2. The past few years have seen trusteesdemand more cash than ever before.Many companies entered into theircurrent level of cash commitments whenthe economic environment was morebenign and employer pensioncontributions were more affordable.
3. Companies are now facing liquidityshortages and are looking to revisitcurrent cash commitments to pensionschemes.
4. An accurate assessment of covenantand cash affordability is essential tofacilitate sensible funding outcomes inthe interests of trustees and employers.
5. This includes the extent to whichflexibility can be built into existingfunding plans, use of back-end loading;and/or extending the period over whichany deficit is to be removed.
6. The Regulator’s statement to employersstates it will support measures like this incircumstances where, in the short-term,affordability is in doubt or existing
funding agreements are a threat to thecompany’s future.
7. However, the Regulator has stressedthat the pension recovery plan shouldnot suffer in order to enable companiesto continue paying dividends toshareholders.
8. Options exist to reduce the extent ofcurrent cash funding to pensionschemes while meeting trustees’security needs, e.g. use of contingentassets can help the trustees reachagreement on longer and/or back-endloaded recovery plans. Appropriatelyconstructed contingent assets can alsobe used to reduce levies payable to thePension Protection Fund (PPF).
9. Effective information sharing and on-going engagement with trustees isessential in helping trustees understandthe employer’s cash availability.
What you need to do1. Be appropriately assertive in helping
trustees understand your objectives andconstraints, and what is affordable tothe business.
2. Manage the trustees’ perception of youremployer covenant by providing themwith information about companystrength and cash constraints,including:
an analysis of the group structure;
Hel
ping
empl
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cont
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Pension file: Helping trustees to take your cash constraints into account18 February 2009: Page 2
This publication has been prepared for general guidance on matters of interest only, and does not constitute professionaladvice. You should not act upon the information contained in this publication without obtaining specific professionaladvice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the informationcontained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employeesand agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, orrefraining to act, in reliance on the information contained in this publication or for any decision based on it.
PricewaterhouseCoopers provides industry-focused assurance, tax, and advisory services to build public trust andenhance value for its clients and their stakeholders. More than 155,000 people in 153 countries across our networkshare their thinking, experience and solutions to develop fresh perspectives and practical advice.
© 2009 PricewaterhouseCoopers LLP. All rights reserved.”PricewaterhouseCoopers” refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
balance sheet strength;
current and forecast profitability;
market and industry factors;
impact of the scheme fundingposition and potential volatility; and
willingness of the company tosupport the pension scheme.
3. Decide how much cash is available toclear the scheme deficit and provideongoing support of future benefits. Thisneeds to be a rigorous analysispresented to the trustees and shouldcover:
cash resources and financingfacilities;
an assessment of the competingdemands for cash;
forecasts of liquidity in the futureand access to further debt; and
the impact on credit ratings.
4. Consider actions to control pensionscheme cash commitments during thedownturn, including:
renegotiate prior scheme fundingagreements, if necessary, to securethe financial structuring of thesponsoring employer;
consider cash commitments to thepension scheme creditor inconjunction with renegotiation ofdebt to other creditors;
consider offering the trusteescontingent assets or security in lieuof cash, (e.g. second charges onassets, guarantees from a bank orthe parent company); and
assess whether and how you canreduce your levy to the PPF in theway that you structure participatingcompanies, guarantees andcontingent assets.
5. Be prepared to engage with thePensions Regulator as appropriate.
6. Ensure you are using legal, actuarialand financial advisers that areindependent of those advising thetrustees.
Who you can talk to at PwC
The PricewaterhouseCoopers pensionsteam has a successful track record inaddressing complex pension challengesgiven our breadth and depth ofcommercial, financial, HR and pensionsexpertise.
If you wish to discuss how we can helpyou, please call your regular contact oralternatively:
Marc Hommel020 7804 6936
Jonathon Land020 7212 6591
Jeremy May0121 232 2165
Raj Mody020 7804 0953
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Pensions Newsletter October 2008
Employer CovenantNegotiating scheme funding in the credit crunch*
The credit crunch is having a severe impact on the employer covenant of many schemes. At the same time, many scheme funding deficits have significantly increased as asset values have fallen. Against this background it is critical that trustees understand the strength of their employer covenant and the options they have to protect the scheme’s position as a significant unsecured creditor.
The credit crunch, together with higher energy and commodity prices, is having a dramatic impact on many sectors of business and has significantly weakened the employer covenant of many schemes. At the same time many scheme funding deficits have been growing as the stock market has fallen.
Banks have increased their monitoring and are looking to improve their lending position particularly where banking covenants are at risk of being breached. Borrowing costs have increased and refinancing maturing debt facilities has become much more difficult.
Businesses are suffering from poor trading and falling asset values and are finding it increasingly difficult to operate within banking covenants or to refinance. This leads to a focus on cash flow management and possible restructuring which can have implications for creditors such as the pension scheme.
Trustees should be assessing the strength of their employer covenant and monitoring it on a regular basis. Trustees need to understand what options they have to protect the scheme’s position as a significant unsecured creditor of the business from adverse movements in the employer covenant.
Have you assessed how the credit crunch is affecting the employer covenant of your scheme?
What is the current funding position of your scheme?
Do you know when your company’s borrowings are due for renewal?
What would happen to your scheme if your employer went into insolvency?
What steps should you be taking as a trustee to protect your scheme?
*connectedthinking
Pensions Newsletter October 2008
The Regulator’s view The Regulator has said that it is essential that trustees objectively assess the employer covenant when setting scheme funding and the recovery plan and also when considering corporate transactions. The Regulator also stresses the need to monitor the employer covenant.
A deterioration in the employer covenant is a key reason for trustees reviewing the appropriateness of their scheme funding target and recovery plan and also their investment strategy.
The benefit of an objective assessment of employer covenant strength Understanding the employer covenant can be complex and trustees may need to use an independent credit advisory specialist to help them form an objective assessment of the employer covenant.
To minimise the risk to the scheme it is vital to understand how the employer covenant links to the scheme funding target and investment mix. This is particularly important in a down turn when the risks to the scheme increase.
An independent review is particularly helpful where there are possible concerns, or differences of opinion, over the strength of the employer covenant or where those trustees with financial expertise are possibly conflicted.
The advice of our credit advisory specialists can help you protect your scheme.
What banks are doing
• Increasing their monitoring
• Looking to improve their lending position /intervening where covenants are breached
• Increasing borrowing costs
• Seeking to reduce their exposure / renewing facilities on more onerous terms
What businesses are doing
• Rebudgeting and restructuring
• Reviewing the headroom in facilities, covenants and the maturity profile of their debt
• Focusing on cash flow management – including reviewing pension costs and dividends
• Negotiating with their lenders
What trustees should be doing
• Reassessing the strength of their employer covenant
• Establishing monitoring procedures
• Considering actions to protect the scheme’ position
• Speaking to the employer
• Being pro active where necessary
For further advice and information, please contact:
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricwaterhouseCoopers LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
© 2008 PricewaterhouseCoopers LLP. All rights reserved. ‘PricewaterhouseCoopers’ refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. Ref 2008BHM23066
AssuranceAndrew Evans – 020 7804 3887 Duncan Brown – 01727 892 235 Fong Choo Gan – 01727 892 201
Pension Credit Advisory – Employer CovenantJonathon Land – 020 7212 8629 Mark Butler – 020 7213 1120 Barry Ross – 020 7213 1040
Human Resource ServicesMarc Hommel – 020 7804 6936 Richard Cousins – 020 7804 3119 Chris Massey – 020 7804 3637
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*connectedthinking
Automatic pension enrolment for all from 2012
Is your business ready for a new pensions challenge?*
November 2008
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From 2012, the law on pensions is changing radically. Everyone in employment in the UK will have to be enrolled into a pension arrangement.
Pension related costs and administration are likely to rise for many employers. Companies need to consider the overall role that pensions is to play in their employment deal, and take considered action to align their pension strategy to the new circumstances.
As a result of the Pensions Act 2008, from 2012 the law will require employers to enrol every employee between 22 and the state pension age and earning over £5,035 per annum, into a pension with a minimum level of employer contributions or benefits.
This will affect all employers to varying degrees, but most businesses have yet to consider the impact. While 2012 appears to be a long way off, the changes required cover many aspects of pensions and need careful planning that can take years to implement.
The most recent PwC Pensions Survey of pension decision-makers in major UK employers reveals that
many companies already recognise that they will need to make changes to satisfy the new regulations.
Auto-enrolment will have greatest impact on organisations with low pensions participation rates.
The PwC survey found that about half of respondents had more than 10% of their workforce not currently participating in the company’s pension arrangement. Nearly a quarter of the survey respondents expressed concern about increased contribution levels.
Interestingly, the main concern of respondents was not the potential cost or administrative burden but the prospect of confusion among their workforce. This highlights the need for a clear and effective communication plan, and also to understand what employees actually value from their employer’s pension offering.
Current main concerns of employersCurrent views of employers on changes to existing pension schemes to comply with the new employer duties
Auto-enrolment
0% 5% 10% 15% 20% 25% 30%
11%
13%
13%
19%
25%
Eligibility
Employer contributions
Default DC option
Pensionable salary definition
0% 5% 10% 15% 20% 25% 30%
5%
5%
22%
18%
24%
26%
Increased total pensionable
contributions
Increased administrative burden
Confusion among workforce
No concerns
Other
Impact on company arrangement
Source: PwC Pensions Survey 2008Source: PwC Pensions Survey 2008
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Drivers for modernising your pensions strategy within the employment deal
Many organisations are providing pensions to their workforce that, relative to the costs and risks the employer is incurring, neither provide value to the organisation nor are valued by employees.
Companies will need to review their pension philosophy to accommodate the auto-enrolment requirements prior to 2012; therefore now is an opportunity to make and implement decisions about the shape and level of your future pension provision.
You should be evaluating two vital questions:
1. What do we need our pension arrangements to be doing for our business?
2. What value do we want them to provide for our people?
Businesses are under considerable pressure to manage both the costs and the risks of their pension arrangements. In addition, emerging challenges need to be addressed, such as two-tier pension entitlements, the diverse needs and wants of the workforce, and creating a pension offering that supports both the desired reward strategy and organisational culture.
No business can avoid the regulatory and legislative framework surrounding pensions. The Pensions Act 2008 will impact all UK employers and is a catalyst for companies to review and obtain the best value from their future pension offerings.
Which employers will be most affected?
Employers will be affected in different ways, but those that have some or all of the following criteria will be most affected.
• Low take-up of existing pension arrangementsEmployers will be faced with auto-enrolling and making pension contributions for those not currently participating in a company-provided pension arrangement, including temporary workers.
• Total (employer and employee) contributions of less than 8% or employer contribution of less than 3% of total earningsThere is a requirement to pay or increase contributions to the minimum level.
• Only basic earnings pensionable Minimum contributions will be based on total earnings (including overtime, bonuses, commission) between £5,035 and £33,540 a year. Most current pension schemes only cover basic wage or salary, sometimes with an offset.
• EligibilityrequirementssuchasserviceperiodsAll employees from age 22 will need to be enrolled into a pension scheme.
• Highemployeeturnover Employers will need to auto-enrol employees into a
qualifying pension arrangement, which will increase administration.
The future pensions landscape?
Many organisations will use the opportunity of the new regime as a catalyst to review the role pensions play in the employment deal.
• By2012,evenfeweremployersthanatpresentwillbe offering defined benefits (DB) pension provision.
• OurmostrecentPwCPensionSurveyshowsthat80% of DB schemes are already closed to new hires and 16% are also closed to future accrual for existing members. These trends will continue.
• TheGovernmentwillbeofferingPersonalAccountsas a default option for auto-enrolment for those employers who either do not wish to use, or do not have, their own pension arrangements into which to auto-enrol employees.
• Itispossiblethatmanyemployerswillchoosetouse Personal Accounts to provide a basic individual retirement savings account for employees. Some employers may additionally offer better quality arrangements instead of, or on top, of Personal Accounts for certain employees or to cover earnings above the qualifying earning limits.
• LargerandquotedcompaniesarelikelytoofferaGroup Self Invested Personal Pension (GSIPP) as well to provide wide-ranging investment choice, and a mechanism for employees to maintain tax efficiency of company share arrangements.
What do you need to do right now?
There is no requirement to do anything now but if you are considering changing your pension arrangements to improve value and/or reduce costs and risks, ignoring the requirements of the Pensions Act 2008 would be unwise. Waiting until the law forces you to change is unlikely to give you the best value or outcome:
• rushedchangesin2012mightnotbetheonesthatbest meet the business and HR needs;
• opportunitiesforimmediatecostsavingsmightbe lost;
• earlyplanninggivestheopportunityforgoodideasand proper employee consultation focussed on what will best meet employer and workforce needs; and
• makingshorttermchangesinisolationtosatisfythe new regulations will be a missed opportunity to address the value of pensions within the overall employment deal.
You should be taking the opportunity to assess the role of pensions in the employment deal, and how the employer can generate maximum value for its spend.
Analysis required
• Conductanimpactanalysisofthenewregime.This should consider the likely impact of cost and administration to the organisation.
• Considerwhatroleyouwishpensionstoplayaspart of reward in your future employment deal, how much you are prepared to spend, and what value you expect in return. Also, what role pensions will play in the future employment deal, given compulsory auto-enrolment, increasing diversity in employee wants and needs and your desired wider reward strategy?
• Considerwhetherandhowyouwishtomanageany transitional issues, such as managing any disparity in workforce pension provision between those that still receive the build-up of defined benefits and those that don’t. As part of this, you will need to understand what impacts there may be on your cashflows, P&L accounts, trustee and employee relations.
Making an informed choice
A typical three stage approach might look something like the example below
Inputs Outputs Decisions
• Workforcedata(headcount,constituents, payroll)
• Allocationofpensionstreatment of workforce (which arrangement, now and in future)
• Definitionofpensionableearnings
• Eligibilityrequirements
• Contributionsandbenefitsdesign
• Administrationprocesses
• Defaultinvestmentoptions
• Currentemploymentcontractsand employee communications
• Impactoncosts
• Impactonadministrationprocesses and costs
• Impactondesignofcurrentpension arrangements
• Understandingofcontractualconstraints
• Identificationoffutureoptions
• Strategyforupdatedandrefreshed communications
• Rolewewantpensionstoplayin our overall reward deal
• Typeandlevelofpensionprovision for each category of employee in future
• Deliveryvehicle(s)
• Minimumprovisionversustop-up provision
• Employeecostandrisksharingon top-up provision
• Timingofchanges
• Transitionalactionplanning
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New employer pension duties from 2012
Starting date The changes come into effect in 2012. Not all employers will necessarily have to comply with the new requirements immediately – the Government may introduce the new requirements in stages (for example, by employer, size or sector).
Employer registration
Employers may be required to notify the Pensions Regulator (TPR) how they are going to meet their new obligations. This may include the employer providing details of the qualifying scheme(s) into which their workforce is enrolled. TPR will be checking on employers’ compliance with the new duties.
Workforce eligibility
All workers in the UK (age 22 to state pension age (SPA)) and receiving ‘qualifying earnings’, including any current employees who are not a member of an employer’s pension scheme.Employees for whom employers did not previously have a duty to provide pensions (e.g. agency workers).
Workforce automatic enrolment
Automatic enrolment into a qualifying scheme must take place when an individual first meets eligibility requirements. However, ‘high quality’ schemes may be allowed a short waiting period. Current scheme members must be retained in their existing scheme, or moved to another qualifying scheme.
Workers who opt out after automatic enrolment must be paid a refund, and be periodically automatically re-enrolled (expected to be not more than once in a 3 year period).
Workers aged 16 to 22, and from SPA to 75, must be allowed to opt in if they request, with an employer contribution payable on qualifying earnings.
Information Specified information must be provided to employees about the scheme, their automatic enrolment (or right to opt in) to it, and their right to opt out.
Qualifying scheme rules
Qualifying schemes must be HMRC-registered and meet the relevant quality requirements, depending on scheme type as shown below:
Trust BasedDefined Benefit (DB) Schemes
Trust BasedDefined Contribution (DC) Schemes
Trust Based Hybrid Schemes
Contract Based DC pension arrangements(e.g. Group Personal Pensions (GPPs))
Contracted-out schemes which meet reference scheme test will meet requirements. Other schemes need to meet a “test scheme standard”:• provideapensionfor
life from age 65 • basedonnomore
than 40 years of accrual
• atanannualrateof1/120th of average ‘qualifying earnings’ in the last three tax years before leaving
Minimum of 8% of ‘qualifying earnings’ (including tax relief) with an employer’s contribution of at least 3% of qualifying earnings
A default fund must be provided (i.e. one in which the member must not be required to express a choice)
Combination of DB and DC quality requirements
The rules follow DC insofar as the scheme offers DC-style benefits
Satisfy three conditions:• Allbenefitsaremoney
purchase• Minimumof8%of
qualifying earnings with an employer’s contribution of at least 3% of qualifying earnings
• Directpaymentarrangements are in place between employer and employee
Transitional arrangements for all schemes types may apply (for example, for DC schemes, minimum employer contributions may be 1% in 2012, 2% in 2013 and 3% in 2014)
Qualifying earnings ‘Qualifying earnings’ is salary, wages, commission, bonuses and overtime, between £5,035 a year and £33,540 a year (band to potentially be up-rated annually in line with general levels of earnings)
This is a provisional summary of the new requirements on employers’ duties to be set out in the Pensions Act 2008. Employers may also be allowed to meet their new duties by enrolling their UK jobholders into overseas pension arrangements which meet certain quality requirements.
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ContactsThe PricewaterhouseCoopers pensions team has a successful track record in addressing complex pension challenges given our breadth and depth of commercial, financial, HR and pensions expertise.
If you wish to discuss how we can help you, please call your regular contact or alternatively:
Marc Hommel Raj Mody Mark Sprague020 7804 6936 020 7804 0953 020 7213 [email protected] [email protected] [email protected]
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
© 2008 PricewaterhouseCoopers LLP. All rights reserved. ‘PricewaterhouseCoopers’ refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity.Ref 2008BHM22957.
pwc.co.uk/pensions
Financial impact – an example
Certain sectors, such as retail and construction, will be significantly affected due to the make-up of their workforce.
For example, looking at one of the major retail employers today shows a mixed pensions participation among its employees: some with defined benefit (DB), some with defined contribution (DC) and half with no pension provision at all. If all of the 50% who do not participate currently were to be auto-enrolled and choose to stay in a pension arrangement, these cost implications could result:
Current and new annual pension costs
A total pension spend of around £220m a year might grow by £50m (or 23%) following the introduction of the 2012 legislative requirements.
Example retail sector workforce pension scheme membership
No scheme50%
DB 30%
DC 20%
2008 2012 – 23% increase
DB £180m
Additional cost £50m
DC £40m
DB £180m
DC £40m
Source: PwC Pensions practice data
pwc*connectedthinking
Are you managing your pensions business?*Key Results of the Third Survey of Major UK Pension Scheme Governance 2008
16
�
Welcome
We are delighted to introduce the findings of the 2008 PricewaterhouseCoopers Pension Scheme Governance Survey.
The survey builds on the previous PwC Governance Surveys undertaken in 2004 and 2006.
Governance remains a topical subject and this booklet contains the main findings from our survey on the views of Trustee Chairs, as well as our own commentary and interpretation of the results.
More than 80 participants from major UK Pensions Schemes responded. Our survey reveals a unique in-depth picture of Schemes today and shows how Trustees have responded to many of the challenges resulting both from increased regulation and from government and media scrutiny. The challenge for Trustees moving forward is to continue to stay in control of the governance-related demands placed on them.
Our surveys have revealed significant improvements generally over the years, particularly in relation to interaction with sponsors and managing conflicts of interest.
There is more to do to enhance the effectiveness of trustee decision making; more Schemes are recognising this and taking action although this remains challenging for many.
We thank you, the participating Chairs, for your continued support and interest in our survey.
Mark Harris
Andrew Evans
Chantelé Claassen
17
�
Welcome
We are delighted to introduce the findings of the 2008 PricewaterhouseCoopers Pension Scheme Governance Survey.
The survey builds on the previous PwC Governance Surveys undertaken in 2004 and 2006.
Governance remains a topical subject and this booklet contains the main findings from our survey on the views of Trustee Chairs, as well as our own commentary and interpretation of the results.
More than 80 participants from major UK Pensions Schemes responded. Our survey reveals a unique in-depth picture of Schemes today and shows how Trustees have responded to many of the challenges resulting both from increased regulation and from government and media scrutiny. The challenge for Trustees moving forward is to continue to stay in control of the governance-related demands placed on them.
Our surveys have revealed significant improvements generally over the years, particularly in relation to interaction with sponsors and managing conflicts of interest.
There is more to do to enhance the effectiveness of trustee decision making; more Schemes are recognising this and taking action although this remains challenging for many.
We thank you, the participating Chairs, for your continued support and interest in our survey.
Mark Harris
Andrew Evans
Chantelé Claassen
18
2
0� Roles and responsibilities
Chairs are concerned about the ability to deliver on action points within agreed timeframes.
The chart shows that most trustees read the papers in advance yet only 53% felt trustees are fully prepared to contribute to discussions.
Only �8% of Trustees indicated that action points are completed within agreed timeframes, a significant reduction from the 32% in 2006.
Are trustees prepared for trustee meetings?
53%
40%
6%
1%
0%
0% 10% 20% 30% 40% 50% 60%
Trustees read papers and attendthe meetings fully prepared to
contribute to discussions.
The trustees read the papers inadvance of the meetings.
The trustees receive the papers ingood time before the meetings buthave not always read the papers in
advance of meetings.
The trustees regularly do notreceive the papers within good timeto prepare properly for meetings.
Papers are frequently distributed attrustee meetings.
What are the strategic items which the Trustees cannot delegate and therefore must be dealt with at full Trustee meetings?
Is enough time at Trustee meetings being devoted to key strategic issues?
Should more decision making be delegated to sub-committees and to the Pensions Executive?
Are Chairs being proactive where it is felt that all Trustees do not contribute fully?
Topics for discussion with Board
19
3
02 Knowledge and understanding
Continued progress has been made on the assessment of Trustee Knowledge and Understanding (TKU) with Trustee bodies reducing gaps in knowledge.
Trustees have embraced the law and the Pensions Regulator’s emphasis on TKU. 99% of Schemes have formally assessed TKU.
But TKU is only part of the story. Trustees also need appropriate skills to apply TKU effectively. It is perhaps only a matter of time before the Pensions Regulator’s focus turns to this.
Individuals’ knowledge and skills play an integral part in the appointment process for 87% of Schemes. Whilst there has been an increase in the number of Schemes requiring MNTs to demonstrate that they meet the generic knowledge and skills criteria prior to appointment, only �8% have a process in place that ensures that they can identify knowledge gaps and skills for Member Nominated Trustees (MNT) appointments.
There has been a �6% increase over the last 2 years in the number of Schemes requiring MNTs to demonstrate that they meet the generic knowledge and skills requirements prior to appointment.
How do you monitor your process towards meeting the TKU requirements?
Is there too much relative emphasis on TKU rather than enhancing the “softer” decision making skills?
Is there a fair and transparent process that leads to the most appropriate employer and member-nominated Trustees joining the Board?
Topics for discussion with Board
20
4
03 Conflicts of interest and sponsor interactionConflicts of interest are a significant challenge for Trustees. More time is being devoted to addressing them and establishing a formal policy to deal with them.
The chart shows that only 6% of Trustees have not considered a process for managing conflicts compared with 2�% in the 2006 survey.
67% of trustees say they have established an effective process for managing all conflicts of interest that might arise and that their approach to managing conflicts always reflects their obligations as Trustees.
56% of Schemes have a formal policy in place for identifying conflicts, compared with 20% in the 2006 survey but there is clearly work to do to manage conflicts.
We are seeing much greater interest from sponsors in the financial management of their pension Schemes through improved dialogue with Trustees. 88% of Trustees receive regular updates from the sponsor, with half of these also seeking external advice on the strength of the employer covenant, compared to 23% in 2006. The trend is in the right direction although the level of detail into which the Trustees go is in our experience extremely variable.
We further noted a 22% increase in the number of Trustees taking the lead role in all discussions with all parties when setting contribution rates.
The majority of Trustees meet regularly with the sponsor, as was the case in the previous surveys, although 20% of Trustees feel that there is minimal communication or no guaranteed access to decision makers.
How do the trustees manage conflicts of interest?
67%
12%
15%
0%
6%
43%
18%
15%
3%
21%
32%
5%
41%
2%
20%
0% 10% 20% 30% 40% 50% 60% 70%
The trustees have established an effective process for managing allconflicts of interest that might arise. The approach to managing conflicts
always fully ref lects their obligations as trustees.
The trustees have established a process for managing conflicts ofinterest. While the process is effective in complex situations, trusteeobligations, such as sharing all relevant available information, are not
always fulf illed.
The trustees have established a process for managing conflicts ofinterest. The process is always followed, but is not effective in complex
situations.
The trustees have developed a process for managing conflicts ofinterest, but it is not followed in practice.
The trustees have not considered a process for managing conflicts ofinterest.
2004 survey
2006 survey
2008 survey
Does your conflicts of interest policy drive the right behaviours when a conflict arises?
Has the Pensions Regulator’s consultation document on conflicts of interest, issued in February 2008, been scheduled for discussion at a Trustee meeting?
Do you monitor the strength of the employer covenant? Do you take appropriate action as a result?
Do you meet regularly with the employer to establish an effective working relationship to benefit both parties over the long term?
Whilst Trustees are legally responsible for setting investment strategy, is this integrated with funding and covenant discussions with the employer?
Topics for discussion with Board
21
4
03 Conflicts of interest and sponsor interactionConflicts of interest are a significant challenge for Trustees. More time is being devoted to addressing them and establishing a formal policy to deal with them.
The chart shows that only 6% of Trustees have not considered a process for managing conflicts compared with 2�% in the 2006 survey.
67% of trustees say they have established an effective process for managing all conflicts of interest that might arise and that their approach to managing conflicts always reflects their obligations as Trustees.
56% of Schemes have a formal policy in place for identifying conflicts, compared with 20% in the 2006 survey but there is clearly work to do to manage conflicts.
We are seeing much greater interest from sponsors in the financial management of their pension Schemes through improved dialogue with Trustees. 88% of Trustees receive regular updates from the sponsor, with half of these also seeking external advice on the strength of the employer covenant, compared to 23% in 2006. The trend is in the right direction although the level of detail into which the Trustees go is in our experience extremely variable.
We further noted a 22% increase in the number of Trustees taking the lead role in all discussions with all parties when setting contribution rates.
The majority of Trustees meet regularly with the sponsor, as was the case in the previous surveys, although 20% of Trustees feel that there is minimal communication or no guaranteed access to decision makers.
How do the trustees manage conflicts of interest?
67%
12%
15%
0%
6%
43%
18%
15%
3%
21%
32%
5%
41%
2%
20%
0% 10% 20% 30% 40% 50% 60% 70%
The trustees have established an effective process for managing allconflicts of interest that might arise. The approach to managing conflicts
always fully ref lects their obligations as trustees.
The trustees have established a process for managing conflicts ofinterest. While the process is effective in complex situations, trusteeobligations, such as sharing all relevant available information, are not
always fulf illed.
The trustees have established a process for managing conflicts ofinterest. The process is always followed, but is not effective in complex
situations.
The trustees have developed a process for managing conflicts ofinterest, but it is not followed in practice.
The trustees have not considered a process for managing conflicts ofinterest.
2004 survey
2006 survey
2008 survey
Does your conflicts of interest policy drive the right behaviours when a conflict arises?
Has the Pensions Regulator’s consultation document on conflicts of interest, issued in February 2008, been scheduled for discussion at a Trustee meeting?
Do you monitor the strength of the employer covenant? Do you take appropriate action as a result?
Do you meet regularly with the employer to establish an effective working relationship to benefit both parties over the long term?
Whilst Trustees are legally responsible for setting investment strategy, is this integrated with funding and covenant discussions with the employer?
Topics for discussion with Board
5
04 Accountability: communication with members
Engagement with members remains a challenge for many Trustees.
Is there clarity over what and how to communicate with members?
Is the employer doing enough to educate active members on DC investment options? How should the Trustees help?
Is there adequate emphasis on DC data quality, administration capability and efficiency, range of investment options and member communication and education?
A third of Schemes have implemented a communication strategy covering what, to whom, how often and how they communicate with all classes of members. This is a small increase since 2006 but many Schemes are yet to tackle this subject.
39% of Schemes have established a process for responding to feedback from members, however, �2% of Schemes still have no mechanism for seeking and responding to members’ views.
The majority of Schemes offer a range of investment options to members, however only 32% have identified and
selected investment options specifically for members’ needs.
For DC pensions, where members must make investment decisions, good communication of information is important. However, there appears to be less opportunity than in the past for members to attend investment discussions. We were surprised that 5�% of Trustees provide only a list of investment options available together with standard information from the investment manager.
Topics for discussion with Board
22
6
05 Delegates and advisors
Trustees are gradually becoming heavily involved in the assessment of their advisers and delegates.
The chart shows that there has been a 9% increase in Schemes that provide feedback to advisors and delegates to improve performance, in addition to making regular assessments of performance using consistent criteria established by the Trustees. We strongly believe in the importance of establishing criteria for evaluation before embarking on the process to provide clarity and objectivity, but a large number of Schemes still use an ad hoc approach.
There has been a small but, we suggest, significant shift in that more Trustees are now likely to intervene when their advisers or delegates no longer meet the required criteria instead of waiting for a formal performance review.
How is the performance of advisers (e.g. actuary,investment consultant) and delegates (e.g. administrator, fund
manager) assessed?
37%
22%
7%
32%
2%
28%
20%
10%
41%
1%
23%
23%
17%
33%
5%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
Regular assessments of performance are made using consistent criteriaestablished by the trustees and feedback is given to advisers and delegates
to improve their performance.
Regular assessments of performance are made based on consistentcriteria that have been set by the trustees.
Regular assessments of performance are made but the criteria have beeninf luenced by the advisers or delegates.
Assessments of performance are made but are ad hoc and notstandardised.
Assessment of performance has not been considered or is viewed as toodiff icult .
2004 survey
2006 survey
2008 survey
Are objective criteria set for evaluation of delegates and advisors before embarking on the process of assessment?
Are advisers’ responsibilities clearly specified so that there is a clear understanding of expectations of performance?
Is there sufficient coordination of the roles of the various advisers to ensure that they are working together effectively and are you getting synergies and value for money?
Do the Trustees always make a clear distinction between when they are seeking technical expertise from their
advisers and when they are seeking facilitation of a debate?
How can Trustees encourage DC providers to become more focused on their customer’s needs?
Topics for discussion with Board
23
6
05 Delegates and advisors
Trustees are gradually becoming heavily involved in the assessment of their advisers and delegates.
The chart shows that there has been a 9% increase in Schemes that provide feedback to advisors and delegates to improve performance, in addition to making regular assessments of performance using consistent criteria established by the Trustees. We strongly believe in the importance of establishing criteria for evaluation before embarking on the process to provide clarity and objectivity, but a large number of Schemes still use an ad hoc approach.
There has been a small but, we suggest, significant shift in that more Trustees are now likely to intervene when their advisers or delegates no longer meet the required criteria instead of waiting for a formal performance review.
How is the performance of advisers (e.g. actuary,investment consultant) and delegates (e.g. administrator, fund
manager) assessed?
37%
22%
7%
32%
2%
28%
20%
10%
41%
1%
23%
23%
17%
33%
5%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
Regular assessments of performance are made using consistent criteriaestablished by the trustees and feedback is given to advisers and delegates
to improve their performance.
Regular assessments of performance are made based on consistentcriteria that have been set by the trustees.
Regular assessments of performance are made but the criteria have beeninf luenced by the advisers or delegates.
Assessments of performance are made but are ad hoc and notstandardised.
Assessment of performance has not been considered or is viewed as toodiff icult .
2004 survey
2006 survey
2008 survey
Are objective criteria set for evaluation of delegates and advisors before embarking on the process of assessment?
Are advisers’ responsibilities clearly specified so that there is a clear understanding of expectations of performance?
Is there sufficient coordination of the roles of the various advisers to ensure that they are working together effectively and are you getting synergies and value for money?
Do the Trustees always make a clear distinction between when they are seeking technical expertise from their
advisers and when they are seeking facilitation of a debate?
How can Trustees encourage DC providers to become more focused on their customer’s needs?
Topics for discussion with Board
7
06 Compliance and risk management
Preparing and maintaining a comprehensive risk register is increasingly seen as a “need to have” rather than a “nice to have”. This is clearly now best practice and trustees who have not done so should remedy this as a matter of urgency.
66% of Trustees have put in place mechanisms to manage major risks and are updating changes to risks and/or mitigating controls regularly. This represents a 45% increase on the response in the previous survey.
There is no real movement in Myners report compliance. This suggests many Trustees feel this issue has been addressed, although we suspect that there is more to be done, particularly in measuring the Trustees’ own performance.
Where Trustees have arrangements in place to ensure that they are notified of legislative changes, active consideration of the implications of legislative change is carried out by 27% more trustees than in the previous survey.
Are Trustees convinced that they clearly understand their duties and discretionary powers?
Do Trustees refer sufficiently often to the Trust Deed and Rules for guidance in specific scenarios?
Do Trustees identify changes in legislation sufficiently to foresee potential areas of non-compliance?
Has enough been done to embrace the Pension Regulator’s code of practice on internal controls?
For matters other than investment, are the Trustees using the governance principles established by Myners, for example to make decisions effectively, agree objectives and prioritise?
Topics for discussion with Board
24
8
07 Trustee performance
Trustees are moving towards evaluating their own effectiveness but progress is slow.
The chart shows that 44% of Boards have not established mechanisms to evaluate their own effectiveness although the majority of these believe this could lead to improvements.
We have found that although only 7% Schemes have not yet considered establishing a Governance Policy, there are still 40% Schemes that do not have a formal Governance Policy and instead only discuss governance priorities.
90% of Trustees do not have individual trustee objectives and some see it as impractical and inappropriate.
Only �0% of Trustees do not use their Governance Policy as a template for management processes and decision making in comparison to 38% in the previous survey.
Will a governance policy enhance decision-making? To do so, would it need to be action-orientated?
Where a formal governance policy is in place, is there monitoring and does this trigger appropriate action?
Would your governance arrangements withstand scrutiny by the Pensions Regulator?
Is trustee effectiveness firmly on your agenda?
How do the trustees evaluate their own effectiveness?
12%
32%
12%
24%
20%
16%
21%
16%
25%
22%
9%
17%
9%
18%
47%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
As point above and this is because they have a commitment to enhancing thepension scheme’s standards of governance. There has been demonstrable
improvement in effectiveness through change in response to the outcome ofthe process.
The trustees have implemented a formal process to evaluate their owneffectiveness, and all trustees part icipate fully.
The trustees have implemented a formal process to evaluate their owneffectiveness, though not all trustees actively part icipate.
There is recognit ion that an evaluation of their own effectiveness couldlead to improvement, but no mechanismhas been established.
The trustees have not evaluated their own effectiveness.
2004 survey
2006 survey
2008 survey
Topics for discussion with Board
25
pwc.com
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
© 2008 PricewaterhouseCoopers LLP. All rights reserved. “PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity.
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Notes
Notes
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Notes
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pwc.com/ukPricewaterhouseCoopers provides industry-focused assurance, tax, and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 155,000 people in 153 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice.
© 2009 PricewaterhouseCoopers LLP. All rights reserved. ‘PricewaterhouseCoopers’ refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity.
Design Services 23066 (02/09).
If you would like to discuss any of the issues highlighted in this document please contact:
Andrew Evans 0207 804 3887
Marc Hommel0207 804 6936
Jonathan Land 0207 212 8629
Chris Massey0207 804 3637
Raj Mody0207 804 0953