A better default strategy 100% 90% Allocation of member's assets 80% 70% 60% 50% 40% 30% 20% 10% 0% 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 Years to retirement Global equities Diversified Growth Corporate bonds Index-linked gilts Fixed interest gilts Cash 44
A more reliable outcome 9.0% Current Proposed 8.0% Proportion of outcomes 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% £0 £5,000 £10,000 £15,000 £20,000 £25,000 £30,000 Pension pa 45
Fewer shocks along the way 100% 50/50 31 March 2009 global equities/ equities diversified benefit fund statement -18% -37% 46
47 Case study: Volkswagen UK
Conclusion � As DB declines, spotlight falls on DC � Majority choose the default investment option � Applying DB investment techniques can reduce the risks Review your default design now 48
James Trask Investment for DC schemes Designing an appropriate default fund
t s i l o D o T Get staff to take pensions seriously Im prove default fund � Make statem ents useful Figure out auto-enrolm ent Sort tax changes
Stacy Bold Communicating with members
52 The future for communications Common member behaviour Employee perceptions Overcoming inertia Agenda
What do members expect? Over 76% would like financial guidance from their employer on retirement S o u r c e : S c o t t i s h W i d o w s a e d v i o p r r s e y l o p m e e r e w h a t h t e v e e l i b e % d v i 3 o 4 p r o s a l d u l o h s y h e t e m e h c s n o s i n e p n o i a t c d u e a l c i n a n f i w s o i d W h i s o t t c S e : r c o u S 53
54 Auto-enrolment 2012
Age old question How to m ake pensions m ore interesting!! � Member joiner pack Simples! 55
56 Addressing all members The early years At retirement Mid career
57 Addressing all members The early years At retirement Mid career
58 Addressing all members The early years At retirement Mid career
Common behaviour Influencing decision m aking � Anchoring � Negativity bias � Procrastination 59
Behavioural traits Anchoring Anchoring Rely too heavily or “anchor” on one trait or piece of information when making a decision “The default fund is suitable for most members” 60
61 Behavioural traits Anchoring Anchoring
Behavioural traits Negativity bias Negativity bias The tendency to pay more attention and give more weight to negative than positive experiences 1 year later 62
63 Behavioural traits Negativity bias Negativity bias
Behavioural traits Procrastination Procrastination The counterproductive deferment of actions or tasks to a later time Sex and the City generation Almost as many women surveyed own 30 pairs of shoes, 26%, as have a � Females age 25 - 45 personal pension, 31%. � Limited pension provision Source: Friends Provident � Waiting for Mr Big 64
65 Behavioural traits Procrastination
Behavioural traits Procrastination Procrastination � Targeted / segmented communications – Create a brand 66
67 The future for communications Appealing to Generation Y
Conclusion � Employees’ expectations are high � Pension costs are set to rise � Ensure benefits are valued and recognised � Engage through communications 68
Stacy Bold Communicating with members
t s i l o D o T Get staff to take pensions seriously � Im prove default fund � Make statem ents useful � Figure out auto-enrolm ent Sort tax changes
Karen Goldschmidt & Mark Jackson Pensions strategy from April 2011
April 2009 Budget “It is difficult to justify how a quarter of all the money the country spends on pensions tax relief goes to the top 1.5% of pension savers.” “So from April 2011, I will restrict pension tax relief for those with incomes over £150,000 so it is gradually tapered to the same 20% rate the majority receive.” 72
The Emergency budget June 2010 Labour’s approach has: “unwelcome consequences for pension saving, bring significant complexity to the tax system, and damage to UK business and competitiveness”. � Any alternative must still yield £3.5bn in 2011/12 � An annual allowance £30K - £45K might deliver yield 73
Agenda Latest developments in pensions tax Karen Goldschmidt Impact of the new tax on pension scheme design Mark Jackson 74
Karen Goldschmidt Latest developments in pensions tax
The changes from 2011: savings below the annual allowance Post April 2011: For savings Employer contributions below the AA _________________ Corporation tax relief National Insurance free 25% tax-free lump sum Pension account Pension, subject to income tax Employee contributions _________________ Full income tax relief Investment return mostly tax free 76
The changes from 2011: savings exceeding the annual allowance Employer contributions _________________ Corporation tax relief National Insurance free 25% tax-free lump Benefit in kind income sum tax paid by employee � Pension account Pension, subject to income tax Employee contributions _________________ No tax relief � Full income tax relief Investment return mostly tax free 77
The tax calculation: DC Basic (pensionable) salary £150,000 Employer contribution: 14%, so £21,000 pa � £21,000 is less than £40,000 � New tax: NIL Basic (pensionable) salary £160,000 Employer contribution: 30%, so £48,000 pa � First £40,000: no new tax � £8,000 balance: tax at 50% � New tax: £4,000 The above assumes an annual allowance of £40,000 78
The tax calculation: DB A high earner in a 1/ 60ths schem e £160,000 x 24/60 = £64,000 pa +4% = £66,560 pa £168,000 x 25/60 = £70,000 pa £3,440 pa £3,440 X 20 = £68,800 First £40,000 = No tax NEW TAX £14,400 Excess £28,800 taxed at 50% = The above assumes an annual allowance of £40,000 and a multiplier of 20 and an inflation offset 79
The tax calculation: DB A high earner in a 1/ 60ths schem e £160,000 x 24/60 = £64,000 pa +4% = £66,560 pa £171,000 x 25/60 = £71,250 pa £4,690 pa £4,690 X 20 = £93,800 First £40,000 = No tax NEW TAX £26,900 Excess £53,800 taxed at 50% = The above assumes an annual allowance of £40,000 and a multiplier of 20 and an inflation offset 80
The tax calculation: DB Low er paid… £40,000 x 24/60 = £16,000 pa +4% = £16,640 pa £42,000 x 25/60 = £17,500 pa £860 pa £860 X 20 = £17,200 NO NEW TAX Below £40,000 The above assumes an annual allowance of £40,000 and a multiplier of 20 and an inflation offset 81
The tax calculation: DB Low er paid w ith a prom otion… £40,000 x 24/60 = £16,000 pa +4% = £16,640 pa £45,000 x 25/60 = £18,750 pa £2,110 pa £2,110 X 20 = £42,200 NEW TAX £880 Excess £2,200 taxed at 40% The above assumes an annual allowance of £40,000 and a multiplier of 20 and an inflation offset 82
The tax calculation Ordinary early retirem ent – m aybe? £40,000 x 10/60 = £6,667 pa +4% = £6,933 pa £40,000 x 11/60 at age 55 = £7,333 pa £7,333 X 26 - £6,933 x 20 = £51,998 NEW TAX £4,800 Excess £11,998 taxed at 40% The above assumes an annual allowance of £40,000 and a multiplier of 20 and an inflation offset 83
The tax calculation Ill-health retirem ent – m aybe? £40,000 x 10/60 = £6,667 pa +4% = £6,933 pa £40,000 x 40/60 = £26,667 pa £19,734 pa £19,734 X 20 = £394,680 NEW TAX £177,340 Excess £354,680 taxed at 50% = The above assumes an annual allowance of £40,000 and a multiplier of 20 and an inflation offset 84
“Spikes”: exemptions and other assistance Exemptions � Death � Serious (terminal) ill health Other help � “where schemes are not able to smooth away spikes … there may be a role for the tax system to help …” 85
Possible trade-offs for higher annual allowance � LTA tightened – Down from £1.8m to? – DB factor increased – 2006 protections changed � Relief restriction to 40% Basic (pensionable) salary £150,000 Employer contribution: 14% (£21,000) £21,000 less than £40,000 � New AA tax: NIL � New relief restriction £2,100 (10% x £21,000) The above assumes an annual allowance of £40,000 86
87 Delivery and compliance
Mark Jackson Impact of the new tax on pension scheme design
89 April 2011 and beyond A new landscape for pension design
Case study: DC plan 6% Employer match Annual Allowance 6% Employee match 3% Employer core Issues Solutions Employer and employee contributions Option to take cash exceed annual allowance No limit on AVCs Communicate headroom Bonus sacrifice facility Communicate headroom Ill-health insurance = 5 x salary lump sum Spread lump sum over more than 1 year DC themes: - Relatively simple design changes - Communication exercise is main challenge - Smaller pensions: not just for “high earners” 90
Case study: DB plan Background and issues Tax charge - £40k annual allowance £20,000 £18,000 £16,000 Tax charge £14,000 £12,000 £10,000 £8,000 £6,000 £4,000 £2,000 £0 - 2 5 7 1 1 1 1 2 2 5 0 5 0 2 5 7 0 2 , , , 0 5 0 5 0 5 0 0 0 , , , , , , 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Pensionable Salary (before increase) 91
Case study: DB plan Solutions Objective: No employee can have an increase in pension value above the Annual Allowance Solution: � Limit to pensionable salary of £120,000 “Why are we � Cap increases in pensionable salary at CPI giving more than £40k in pension Deficit reduces from value to anyone?” £100m to £70m DB themes: - Tax charge is a catalyst for wider liability management exercises - Employees who retain DB pensions are unlikely to be compensated for lower pensions 92
Short-term impact… Scheme design Communication with changes employees/presentations/one-to-ones Consultation period for scheme amendments April 2011 Oct Nov Dec Jan Feb Mar Confirmation Draft of Annual Finance Bill Allowance 93
Mark Jackson Impact of the new tax on pension scheme design
t s i l o D o T Get staff to take pensions seriously � Im prove default fund � Make statem ents useful � Figure out auto-enrolm ent Sort tax changes �
David Jones Looking to the future
97 Where is this leading us all? Planning for auto-enrolment Short term action plan Agenda
98 On your marks…
What’s coming up? � Imminently – clarity on tax regime from 2011/12 � Autumn – CPI / RPI implications � Autumn – avoid losing powers to make payments to employers � Autumn/Spring – action to mitigate PPF levy � 5 April 2011 – transitional tax regulations cease to apply 99
In the meantime… DB schemes � Reviewing future benefits � Capping of the past � De-risking exercises � Funding negotiations � Making assets work harder for you DC schemes � Default investment strategy � Governance structure � Communications 100
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