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S:\Dept\Conferences\2010-11\Finance

OS11: Pension strategy: are you ready for auto-enrolment?

Speakers: Peter ShellswellS:\Dept\Conferences\2010-11\Finance 2011\Marketing\HandbookSpeakers: Peter Shellswell

FounderFirst ActurialGlenn AustenAccount ManagerThe Pensions Trust

Chair: Stephen DucksworthFederation RepresentativeSHPS Pensions Committee

NHF Housing Finance Conference 2011

OS11 - Pension Strategy : are you ready for auto-enrolment ?

Pension Strategy – the Government measures

lCPI in place of RPIlDefault retirement age phase out this yearlAuto-enrolment – much as plannedlState Pension, and State Pension AgelState Pension, and State Pension AgelTax relief for high earnerslAnnuitisation flexibilitylContracting-out rebate on defined benefit

schemes reduced

Pension Strategy – the Hutton Report

lFuture of public sector pensionsl27 recommendations : key –¡Honouring accrued rights¡CARE type defined benefit scheme for future ¡CARE type defined benefit scheme for future

service¡Single benefit design across income range¡Normal pension age linked to State Pension

Age¡Fixed cost ceiling¡Admission agreements in principle undesirable

Are you ready for

NHF Housing Finance Conference 2011

Presented by Glenn Austen

24 March 2011

Are you ready for Auto-enrolment?

1. Change from RPI to CPI

2. Auto-Enrolment

3.

Agenda

3. Planning for Termination Debts

4. Change in Annual Allowance

Change from RPI to CPI for pension increases

• Government announced plans:- 22 June 2010 - CPI to be applied to public sector pensions- 8 July 2010 – extend to private sector pension schemes• Impact – reduces liabilities and future pension expectations• As SHPS pension increases are LPI linked, CPI automatically replaces RPI as the index that will apply•• SHPS Committee decided not to reinstate RPI ....but will seek employers views

80

85

90

95

100Funding Level

Auto-enrolment – The “unknown DB impact”

50

55

60

65

70

75

80

30 September 2005

31 March 2007 30 September 2008

30 September 2009

31 March 2010 30 September 2010

30 September 2011

Perc

enta

ge

Auto-enrolment – Criteria

• Who?• All employees between 22 and State Pension Age• Earning (or expected to earn) more than personal allowance (£7,475 in 2011/12)• Is not a member of a ‘qualifying’ pension scheme

• When?•When?• Immediately but employers can operate a 3 month waiting period – employees can opt in during this period

• Every three years or so, employers must re-enrol employees who have opted out

Auto-enrolment – What is a ‘qualifying’ scheme

• Nearly all DB schemes (all SHPS DB options)• A DC scheme would be certified as meeting the requirements if contributions were a minimum of:

• 9% of basic pay (including a 4% employer contribution), or• 8% of basic pay (including a 3% employer contribution) provided basic pay • 8% of basic pay (including a 3% employer contribution) provided basic pay constitutes at least 85% of the total pay bill, or• 7% of pensionable pay (including a 3% employer contribution) provided the total pay bill is pensionable

Auto-enrolment –Has DC taken off in SHPS?

• Currently around 100 employers operate DC for some or all of their employees

• Around a dozen of the 100 employers have moved all staff to DC

• Around a further 180 employers have put DC in place for new staff but have yet to have any new entrants

•• A handful of employers have set up SHPS DC for AVCs

Auto-enrolment – When?

PAYE size ‘Staging date’

2,000+ Between 1 October 2012 and 1 August 2013

1,250 – 1,999 1 September 2013

800 – 1,249 1 October 2013

500 – 799 1 November 2013

350 – 499 1 January 2014

250 – 349 1 February 2014

240 – 249 1 April 2014

150 – 239 1 May 2014

90 – 149 1 June 2014

50 – 89 1 July 2014

Less than 50 1 August 2014 – 1 February 2016

New employer 1 March 2016 – 1 September 2016

From staging date until Sept 2016

Oct 2016 –Sept 2017

From Oct 2017

Minimum 2% 5% 8%

Auto-enrolment – Contribution phasing

Minimum overall contribution

2% 5% 8%

Employer share of overall contribution

1% 2% 3%

of band earnings

Auto-enrolment – Opting out

• Employees can opt out at any time– but not before they have been made a member of the scheme

• Opt out forms via the scheme – not the employer

• Opt out within one month – membership annulled and contributions refunded

• Employers must not induce employees to opt out

Planning for Termination Debts within SHPS

• Different from LGPS as SHPS is non-sectionalised• Deferral of debt – “Period of Grace” Notice• Changing group structure• Statutory Amalgamation – non debt triggering• Other debt triggering changes • Option to undertake a covenant analysis•• Carried out by PwC• Cost between £15k and £25k depending on complexity• About a dozen cases already processed using this approach

Restriction of Annual Allowance

• ‘annual allowance’ (AA) for pension saving reduces from £255,000 to £50,000 from April 2011 – frozen until 2015/16• Factor used to convert DB pension to lump sum for comparison with the AA increases from 10 to 16• Additional ‘DB pension’ earned is net of CPI inflation • SHPS “Pension Input Period” is 1 April to 31 March•• Can use unused allowance from the previous 3 years• The Pensions Trust will notify members caught by the new AA but....we will only know after the event• ‘lifetime allowance’ reduces from £1.8m to £1.5m from April 2012

Any Questions?

LGPS Issues

Peter Shellswell 23 March 2011

Contents

• 2010 LGPS Valuation• Termination Debts• Hutton Report

2010 LGPS Valuations

Headlines• All the results are WRONG

– Just an estimate!• Key features

– Investment returns poor– Investment returns poor– CPI– Who is your actuary?

Key AssumptionsBarnett

WaddinghamAon

HewittHymans Mercer

Discount Rate Av: Gilts + 2.2%

= 6.7%

?Av: Gilts + 1.6%

= 6.1%

Pre: Gilts + 2.0%= 6.5%

Post: Gilts + 1.0%=5.5%

RPI Inflation “market” RPI – 0.3% = 3.5%

? “market” RPI = 3.8%

“market” RPI – 0.3% = 3.5%

CPI Inflation RPI – 0.5% = 3.0%

? RPI – 0.5% = 3.3%

RPI – 0.5% = 3.0%

Salary Increases

0% for 2 yrs, thenRPI + 1% (4.5%)

? 1% for 3yrs, thenRPI + 1.5% (5.3%)

CPI + 1.5%/1.75%[1% for 2yrs for some]

Retirement age

NRA +1 ? NRA NRA

Approximate Comparison

60

80

100

120Li

abili

ties ?

Assets

-

20

40

Barnett Waddingham AonHewitt Hymans Mercer

Liab

ilitie

s

Pensioner Deferred Active

?

Funding StrategyBarnett

WaddinghamAon

HewittHymans Mercer

Open- future- deficits- basis

PUC20 years

No adjustment

? PUC15-20 years

No adjustment

PUC15-25 years

No adjustment

ClosedClosed- future- deficits

- basis

AAM20 years

May vary on security

No adjustment

? AAMFWL-20

Can lengthen with security

Some thinking of “gilts only”

AAMFWL-25

Allow for higher returns

No adjustment

SecurityExample for longer recovery plan

-300,000

-200,000

-100,000

-

100,000

200,000

300,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

£

-800,000

-700,000

-600,000

-500,000

-400,000

Year

Proposed Alternative ShortfallBased on £1m deficit

Termination Debt

Current StrategyCost Estimates - LGPS Closure

4

5

6

7

8

9£M

0

1

2

3

2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 2050

year

ongoing deficit termination

Source: First Actuarial estimate, Nov 2010

Discussion with LGPSCost Estimates - LGPS Closure

4

5

6

7

8

9£M

Source: First Actuarial estimate, Nov 2010

0

1

2

3

2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 2050

year

ongoing deficit termination provision

1.9m

Hutton

Key Recommendations• All public sector schemes move to CARE

– Final salary link with past service maintained– Annual pension amounts increase with average

earnings for actives• Retirement age linked to State Pension Age• Retirement age linked to State Pension Age• Cost ceiling for employers• Publish common data• “undesirable for non public sector workers to

have access”

CAREfigures in today’s terms

Sample MemberCurrent salary = £25,000Current age = 30

Salary Growth

Projected Salary at 65

Projected pension at 65

1/60th

final salary1/60th

CAREGrowth final salary CARELow £30,000 £17,000 £21,000

Average £41,000 £25,000 £25,000

High £58,000 £34,000 £29,000

State Pension AgeState Pension Age (Current)

64

65

66

67

68

60

61

62

63

1945 1950 1955 1960 1965 1970 1975 1980Date of Birth

M (Current) F (Current) Equal

State Pension AgeState Pension Age (Proposed)

64

65

66

67

68

60

61

62

63

1945 1950 1955 1960 1965 1970 1975 1980Date of Birth

M (Proposed) F (Proposed) Equal

Timeframes

• April 2012– Phase in higher employee contributions

• October 2012 – 2016– Auto-enrolment staging dates

• By 2015– All public sector schemes adopted CARE design

Questions

Supporting Older People Conference

S:\Dept\Conferences\2010-11\Finance

OS11: Pension strategy: are you ready for auto-enrolment?

Speakers: Peter ShellswellS:\Dept\Conferences\2010-11\Finance 2011\Marketing\HandbookSpeakers: Peter Shellswell

FounderFirst ActurialGlenn AustenAccount ManagerThe Pensions Trust

Chair: Stephen DucksworthFederation RepresentativeSHPS Pensions Committee