Lessons So Far and What to Watch Out For

Helping IoD members comply with automatic enrolment into

pension saving

Andy Cheseldine, 13 May 2014

Agenda

In the news…

The potential impact on the UK

Scoping the issues

Some important lessons so far

What about the 2014 Budget (and other) reforms?

2

In the news…

3

“Few will opt out, but AE will not boost

engagement” DWP

“Pensions are far too important to be the preserve of the few”

Steve Webb

“The UK is drifting towards an iceberg when it comes to paying for its old age pensioners, and we need radical reform like this” NAPF

“Key to success will be to ‘keep it simple’” Financial Times

“If [employees] join an existing defined-

contribution scheme, they could face very

high charges and poor investment

returns”

The Pensions Institute

“Once automatically enrolled, less than one-third will take the active decision to opt-out” DWP

“Hundreds of thousands are missing

out on millions of pounds worth of

pension contributions because of

confusion surrounding auto-

enrolment rules”

The Sunday Times

“If we can get between 6 and 9 million more

people saving in a pension by the time all

employers are in, that’s a genuine savings

revolution” Steve Webb

“28% of large private sector employers [>250

employees] believe automatic enrolment

preparations will take less than three months” The

Pensions Regulator

“Based on what we’ve seen

so far, we estimate that it

will take the average large

business about

18 months to plan and

get ready”

The Pensions Regulator

“Businesses with staging dates in the next 12 months should already have in place a detailed plan of action” The Pensions Regulator

How many workers are affected?Coverage before 2012

4Source: ONS & LCP

5

Who needs to be auto-enrolled?Identifying different types of worker (2014/15 thresholds)

Age

Earnings

75

SPA

22

16

OPT IN

No employer

contribution

(Entitled

worker)

OPT IN

Employer

contribution

(Non-eligible

jobholder)

AUTO-ENROL

Eligible

jobholder

OPT IN Employer contribution (Non-

eligible jobholder)

OPT IN Employer contribution (Non-

eligible jobholder)

Qualifying Earnings (QE)

£41,865UpperLimit

10,000Earnings Trigger

£5,772Qualifying Earnings Threshold

6

Quality requirements - DC DC and personal pensions – alternatives allowing certification

8% of Qualifying Earnings (including minimum of 3%

from employer) Qualifying earnings must include all

variable earnings

9% of pensionable pay

(including minimum of 4% from employer)

Pensionable pay can exclude variable earnings

8% of pensionable pay

(including minimum of 3% from employer)

Pensionable pay can exclude variable earnings subject

to pensionable pay constituting at least 85% of total pay

bill

7% of pensionable pay

(including minimum of 3% from employer)

Subject to 100% of earnings being pensionable

Phasing applies in all approaches

“Basic pay” can include other elements of pay that

do not vary (eg London Allowance) so potentially

not just basic salary

7

Staging and DC phasing

30 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

Employer 1%Total 2%

ER 2%Total 5%

ER 3%Total 8%

Required DC contribution rate

(% of QE)

October 2018

October 2017

How does auto-enrolment of non-members affect UK plc?Headcount and earnings in ‘000s, 2013/14 thresholds, 15% opt out rates

8Source: ONS 2011 data & LCP

Auto Enrolment ModellerUK PLc

Executive Summary

Membership summary

HeadcountTotal annual earnings (£) Earnings %

Current scheme membership 0 0 0.0% Non-members Eligible for auto-enrolment (eligible jobholders) 8,475 184,965,040 82.1%

Eligible to opt-in with employer contribution (non-eligible jobholders) 2,841 29,949,400 13.3%

Eligible to join without employer contribution (entitled workers) 2,197 10,409,880 4.6%

Total 13,513 225,324,320 100.0%

Summary of results

Net annualised cost increase/(decrease) - assuming no change for current scheme membersAll employees (incl current scheme members) Before 2017 2017/18 2018/19

£pa £pa £paMinimum Contributions based on Qualifying Earnings 1,170,793 2,341,585 3,512,3789% Certification 2,745,487 4,118,231 5,490,9748% Certification 1,372,744 2,745,487 4,118,2317% Certification 1,592,382 3,184,765 4,777,147Existing scheme design 644,659 644,659 644,659Alternative scheme design 9,313,755 9,313,755 9,313,755

Scheme design

Parameters

Detailed results

Charts and printing

Numbers of employees

Current scheme membership

Eligible jobholders

Non-eligible jobholders

Entit led workers

9

Employer numbers (1)PAYE schemes by staging date – Oct 2012 to May 2015

Source: NEST, 2013

Oct

-12

Nov-1

2

Dec-1

2

Jan-

13

Feb-1

3

Mar

-13

Apr-1

3

May

-13

Jun-

13

Jul-1

3

Aug-1

3

Sep-1

3

Oct

-13

Nov-1

3

Dec-1

3

Jan-

14

Feb-1

4

Mar

-14

Apr-1

4

May

-14

Jun-

14

Jul-1

4

Aug-1

4

Sep-1

4

Oct

-14

Nov-1

4

Dec-1

4

Jan-

15

Feb-1

5

Mar

-15

Apr-1

5

May

-15

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

These figures are from the Pensions Regulator and reflect the number of PAYE schemes not the number of employers. Employers may have more than one PAYE scheme.

10

Employer numbers (2)PAYE schemes by staging date – Oct 2012 to Feb 2018

Source: NEST, 2013

Oct

-12

Dec-1

2

Feb-1

3

Apr-1

3

Jun-

13

Aug-1

3

Oct

-13

Dec-1

3

Feb-1

4

Apr-1

4

Jun-

14

Aug-1

4

Oct

-14

Dec-1

4

Feb-1

5

Apr-1

5

Jun-

15

Aug-1

5

Oct

-15

Dec-1

5

Feb-1

6

Apr-1

6

Jun-

16

Aug-1

6

Oct

-16

Dec-1

6

Feb-1

7

Apr-1

7

Jun-

17

Aug-1

7

Oct

-17

Dec-1

7

Feb-1

8-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

These figures are from the Pensions Regulator and reflect the numbers of PAYE schemes not the numbers of employers. Employers may have more than one PAYE scheme.

Market capacity constraints

11

Source: DWP, TPR, BIS, ONS, LCPEvent transactions include: opt outs, opt ins, leavers (personal decision & employer insolvency), retirements & deaths. They exclude calls to helplines, changes of address, changes of name, divorce and transfersAssumes steady state private sector employment, 12% pa private sector DB closure & no use of waiting periods

Oct-12

Dec-12

Feb-13

Apr-13

Jun-13

Aug-13

Oct-13

Dec-13

Feb-14

Apr-14

Jun-14

Aug-14

Oct-14

Dec-14

Feb-15

Apr-15

Jun-15

Aug-15

Oct-15

Dec-15

Feb-16

Apr-16

Jun-16

Aug-16

Oct-16

Dec-16

Feb-17

Apr-17

Jun-17

Aug-17

Oct-17

Dec-17

Feb-18

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

Estimated numbers of auto-enrolments and event transactions (Public & Private sector )

Number of AE events

Number of event transactions

Date

Num

ber o

f AE

even

ts

Some important lessons

12

Pre–assessmentAre you confident

of identifying all your workers?

Opt out ratesAre lower than

many expected – Less than 10% but….

Scheme leaver ratesAre likely to be at least as important

as opt outs

Focus on the dataHow good is your employee data?

The boring stuff matters

Payroll providersAre crucial to the success of any

AE project

MitigationsMost employers, so far, are using

postponement

ProvidersMay not want your

business, at least on the terms you expect

Early engagementInternally an externally is likely to save money

and worry

Contribution costsAre the least

of your worries

13

The old landscape

25% tax free lump sum

AnnuityFull withdrawal

(at marginal rate)Full withdrawal

(55% tax charge)Capped

DrawdownFlexible

Drawdown

Small pots or trivial pensions

Big pots

Pension pot

14

Immediate changes in Budget 2014 With effect from 27 March 2014…

Small pension pots:

£10,000

Trivial commutation:

£30,000

Flexible drawdown:

£12,000

Small pots as lump sums:

3 schemes

Capped drawdown:

150%

15

The new landscapeAfter April 2015

25% tax free lump sum

Pension pot

Full withdrawal (at marginal rate)

AnnuityDrawdown / other

products

16

DC investment funds for the new worldWhat decisions do you need to make?

Importance of liquidity

Is more than one lifestyle needed?

Is current default strategy appropriate?

Limitations of your provider / administrator

What is the exposure to growth assets during

retirement?

Key decision agesInteraction with

communication plan

What is the target “retirement” age now?

Member demographic

Key decisions

Key considerations

17

Unintended (?) consequences

17

Members have flexibility to take 100% cash at age 55

Raithatha v Williamson (4 April 2012) [Bankruptcy] and Blight and others v Brewster (9 February 2012) [Judgment Creditors] meant creditors can enforce debtors to take tax free cash• Will the same rule apply to taxable cash?• Irrespective of resulting marginal tax rate?• What about Local Councils seeking social care funding for nursing homes?• Is that a problem?

Do they understand it is no longer protected from inheritance tax?If members take that

cash

Guidance guarantee

Potential unintended consequencesWhat

What will it cover? Who will provide it? What will it cost? Who will pay for it?When will it be provided (and how often)? Who will regulate it?

Taxed at marginal rate in that year

Well informed members will want to retire near the beginning of a tax yearWhat does that mean for HR/ Succession planning?

Possibly treated as flexible drawdown

If current rules continue, that will mean members are taxed at top marginal rate on all future pension contributions

18

Charges Command paper

18

April 2016

Charges (TERs) capped at 0.75% for default investment option in qualifying pension schemes

No “comply or explain” option

Providers are considering moving to NEST /Now charge design (eg 2.5% contribution charge plus 0.4% AMC)Applies to all qualifying schemes – potentially including historic DC schemes without a “default” but with a “typical” investment choice (with profits?)

April 2017

DWP include as AMD, schemes that pay admin costs for active members but not deferred membersWhat service levels can you expect form commission based IFAs?

April 2015

Active member discounts (“AMD”) banned on qualifying pension schemes

Commission banned on qualifying pension schemes

Charges cap reviewed with intent to reduce and/or include transaction costs

When Potential unintended consequencesWhat

Will that cap include:• Guidance guarantee• Provision of flexible drawdown post NRD• EIOPA governance fees and costs • Financial Transaction Tax (in costs)• Administration of the Scottish Rate of Income

Tax

19

For employees: Greater flexibilities are incentives to save

For providers: Uncertainty over future profit margins (charges and cost of additional services) Fewer annuity sales Impact on gilt and bond market Future tax / legislation also unclear

For employers: Harder to find pension provider willing to take on small schemes

And fewer services available Payroll providers will be tied up with Scottish rate of income tax Possibly harder to find advisers (as some may focus on retirement advice

following Budget) – however unlikely to be too much overlap with corporate

advisers Higher take up from employees

Effect on auto-enrolment?

How successful will auto-enrolment be?

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 95 Wigmore Street, London, W1U 1DQ, 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, the Netherlands, Ireland and the UAE.

Scope

This generic presentation should not be relied upon for detailed advice or taken as an authoritative statement of the law.

If you would like any assistance or further information, please contact the partner who normally advises you.

While this document does not represent our advice, nevertheless it should not be passed to any third party without our formal written agreement.

The tax examples given are purely for illustration and ignore tax allowances and other important details.

© Lane Clark & Peacock LLP 2014

W:\ARC\Non client related\PR\Confrerence presentations\IoD 13 May 2014.pptx

Lessons So Far and What to Watch Out For

Helping IoD members comply with automatic enrolment into

pension saving

Andy Cheseldine, 13 May 2014