Helping IoD members comply with automatic enrolment into
pension saving
Andy Cheseldine, 13 May 2014
Lessons So Far and What to
Watch Out For
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…
“Pensions are far too
important to be the
preserve of the few”
Steve Webb
“Few will opt out, but
AE will not boost
engagement” DWP
3
How many workers are affected?
Coverage before 2012
Source: ONS & LCP
4
Who needs to be auto-enrolled?
Identifying different types of worker (2014/15 thresholds)
Age
75
OPT IN Employer contribution
(Non-eligible jobholder)
SPA
OPT IN
OPT IN
No employer Employer
contribution contribution
(Entitled
worker)
(Non-eligible
jobholder)
AUTO-ENROL
Eligible
jobholder
Qualifying Earnings (QE)
22
OPT IN Employer contribution
(Non-eligible jobholder)
16
Earnings
£5,772 10,000
£41,865
Qualifying Earnings
Earnings Trigger
Threshold
Upper
Limit
5
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
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% of pensionable pay
(including minimum of 3% from employer)
Subject to 100% of earnings being pensionable
6
Staging and DC phasing
Staging date
dependent on no. of
employees
October October October October October October
2012
2013
2014
2015
2016
2017
30
employees
Required DC
contribution rate
(% of QE)
Employer 1%
Total 2%
ER 2% ER 3%
Total
Total
8%
5%
October October October October October October October
2012
2013
2014
2015
2016
2017
2018
7
How does auto-enrolment of non-members
affect UK plc?
Headcount and earnings in ‘000s, 2013/14 thresholds, 15% opt out rates
Auto Enrolment Modeller
UK PLc
Executive Summary
Scheme design
Detailed results
Parameters
Charts and printing
Membership summary
Current scheme membership
Non-members
Eligible for auto-enrolment (eligible jobholders)
Eligible to opt-in with employer contribution (non-eligible
jobholders)
Eligible to join without employer contribution (entitled
workers)
Total
Headcount
0
Total annual
earnings (£)
0
Earnings %
0.0%
8,475
184,965,040
82.1%
2,841
29,949,400
13.3%
2,197
10,409,880
4.6%
13,513
225,324,320
100.0%
Numbers of employees
Summary of results
Net annualised cost increase/(decrease) - assuming no change for current scheme members
All employees (incl current scheme members)
Before 2017
2017/18
2018/19
£pa
£pa
£pa
Minimum Contributions based on Qualifying Earnings
1,170,793
2,341,585
3,512,378
9% Certification
2,745,487
4,118,231
5,490,974
8% Certification
1,372,744
2,745,487
4,118,231
7% Certification
1,592,382
3,184,765
4,777,147
Existing scheme design
644,659
644,659
644,659
Alternative scheme design
9,313,755
9,313,755
9,313,755
Source: ONS 2011 data & LCP
Current scheme membership
Eligible jobholders
Non-eligible jobholders
Entitled workers
8
Employer numbers (1)
PAYE schemes by staging date – Oct 2012 to May 2015
14,000
12,000
10,000
8,000
6,000
4,000
2,000
May-15
Apr-15
Mar-15
Feb-15
Jan-15
Dec-14
Nov-14
Oct-14
Sep-14
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Mar-14
Feb-14
Jan-14
Dec-13
Nov-13
Oct-13
Sep-13
Aug-13
Jul-13
Jun-13
May-13
Apr-13
Mar-13
Feb-13
Jan-13
Dec-12
Nov-12
Oct-12
-
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.
Source: NEST, 2013
9
Employer numbers (2)
PAYE schemes by staging date – Oct 2012 to Feb 2018
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
Feb-18
Dec-17
Oct-17
Aug-17
Jun-17
Apr-17
Feb-17
Dec-16
Oct-16
Aug-16
Jun-16
Apr-16
Feb-16
Dec-15
Oct-15
Aug-15
Jun-15
Apr-15
Feb-15
Dec-14
Oct-14
Aug-14
Jun-14
Apr-14
Feb-14
Dec-13
Oct-13
Aug-13
Jun-13
Apr-13
Feb-13
Dec-12
Oct-12
-
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.
Source: NEST, 2013
10
Market capacity constraints
Estimated numbers of auto-enrolments and event transactions
(Public & Private sector )
800,000
700,000
Number of AE events
600,000
500,000
400,000
Number of AE events
300,000
Number of event
transactions
200,000
100,000
Feb-18
Dec-17
Oct-17
Aug-17
Jun-17
Apr-17
Feb-17
Dec-16
Oct-16
Aug-16
Jun-16
Apr-16
Feb-16
Dec-15
Oct-15
Aug-15
Jun-15
Apr-15
Feb-15
Dec-14
Oct-14
Aug-14
Jun-14
Apr-14
Feb-14
Dec-13
Oct-13
Aug-13
Jun-13
Apr-13
Feb-13
Dec-12
Oct-12
0
Date
Source: DWP, TPR, BIS, ONS, LCP
Event 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 transfers
Assumes steady state private sector employment, 12% pa private sector DB closure & no use of waiting periods
11
Some important lessons
Pre–assessment
Are you confident
of identifying all your
workers?
Opt out rates
Are lower than
many expected –
Less than 10% but….
Scheme leaver rates
Are likely to be at
least as important
as opt outs
Payroll providers
Are crucial to the
success of any
AE project
Focus on the data
How good is your
employee data?
The boring stuff matters
Mitigations
Most employers,
so far, are using
postponement
Providers
May not want your
business, at least on
the terms you expect
Early engagement
Internally an externally
is likely to save money
and worry
Contribution costs
Are the least
of your worries
12
The old landscape
25% tax free
lump sum
Full withdrawal
(at marginal rate)
Pension pot
Annuity
Small pots or
trivial pensions
Full withdrawal
(55% tax charge)
Flexible
Drawdown
Capped
Drawdown
Big pots
13
Immediate changes in Budget 2014
With effect from 27 March 2014…
Capped
drawdown:
150%
Flexible
drawdown:
£12,000
Small pots as
lump sums:
3 schemes
Small pension
pots:
£10,000
Trivial
commutation:
£30,000
14
The new landscape
After April 2015
25% tax free
lump sum
Full withdrawal (at
marginal rate)
Pension pot
Annuity
Drawdown / other
products
15
DC investment funds for the new world
What decisions do you need to make?
Key decisions
Is current default
strategy appropriate?
What is the target
“retirement” age now?
Is more than one
lifestyle needed?
What is the exposure to
growth assets during
retirement?
Key considerations
Limitations of your
provider / administrator
Importance of liquidity
Member demographic
Interaction with
communication plan
Key decision ages
16
Unintended (?) consequences
What
Members have flexibility
to take 100% cash at
age 55
Potential unintended consequences
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?
If members take that
cash
Do they understand it is no longer protected from inheritance tax?
Guidance guarantee
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
Possibly treated as
flexible drawdown
Well informed members will want to retire near the beginning of a tax year
What does that mean for HR/ Succession planning?
If current rules continue, that will mean members are taxed at top marginal rate
on all future pension contributions
17
Charges Command paper
When
April 2015
What
Charges (TERs) capped at 0.75% for
default investment option in qualifying
pension schemes
No “comply or explain” option
Active member discounts (“AMD”) banned
on qualifying pension schemes
April 2016
Commission banned on qualifying pension
schemes
Potential unintended consequences
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?)
DWP include as AMD, schemes that pay
admin costs for active members but not
deferred members
What service levels can you expect form
commission based IFAs?
Will that cap include:
April 2017
Charges cap reviewed with intent to reduce
and/or include transaction costs
•
•
•
•
•
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
18
Effect on auto-enrolment?
 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
19
How successful will auto-enrolment be?
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
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.
W:\ARC\Non client related\PR\Confrerence presentations\IoD 13 May 2014.pptx
Helping IoD members comply with automatic enrolment into
pension saving
Andy Cheseldine, 13 May 2014
Lessons So Far and What to
Watch Out For