lessons so far and what to watch out for helping iod members comply with automatic enrolment into...
TRANSCRIPT
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