BDO TAX

SMART PENSIONSWednesday 26 May 2010

BDO TAX

Wednesday 26 May 2010

CONTENTS

WHY BDO?

AN INTRODUCTION TO SMART PENSIONS

YOUR POTENTIAL SAVINGS

YOUR POSITION PRE SMART PENSIONS IMPLEMENTATION

YOUR POSITION POST SMART PENSIONS IMPLEMENTATION

ISSUES AFFECTING THE DB AND DC SCHEMES

EMPLOYEE PARTICIPATIONEMPLOYEE PARTICIPATION

SOME FURTHER ISSUES

FREQUENTLY ASKED QUESTIONS

OUR APPROACH

PROFESSIONAL FEES

OUR TEAM

OUR AWARDS

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WHY BDO? WHY BDO?

When we identified the potential savings to be gained in the implementation of SMART pension schemes as part of our audit assist PAYE review, we were pleased to learn that this was high on Macmillan’s agenda too. We are delighted to have been invited to discuss with your team the potential introduction of SMART pensions at Macmillan.

We have provided our initial thinking on the project in this document but would like to begin by outlining three key reasons why we think our BDO team is the right choice for this assignment.

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1.Working with a firm which already understands Macmillan

We have been working as external auditors to Macmillan for over seven years and, consequently, are very well placed to deliver and implement SMART Pensions. As a firm BDO have formidable credentials in the charity and education sector and we have already worked with a number of clients (Faber & Faber and The Train Line) in already worked with a number of clients (Faber & Faber and The Train Line) in successfully implementing SMART Pensions.

2. A potential £425,000 in savings

In this document we have sought to provide you with an introduction to the approach we would take if appointed. It’s the combination of our not for profit expertise together with our experience advising clients on the introduction of SMART Pensions which we with our experience advising clients on the introduction of SMART Pensions which we think makes our team the right choice.

In our initial planning for this opportunity we have identified combined annual savings of £140,000, or £425,000 over three years. We hope we get the opportunity to see this additional revenue in action with you.

3. A long term view3. A long term view

We believe that in our conversations to date with you we have demonstrated our enthusiasm to work with Macmillan in this area and we look forward to the opportunity to discuss our ideas, both for the three year work plan outlined in this document and for the longer term, at the presentation.

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AN INTRODUCTION TO SMARTAN INTRODUCTION TO SMART

We know that Macmillan is aware of the concept of SMART Pensions and has already investigated the potential savings to be made. However, we would like to begin by outlining the key attributes of such schemes.

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T PENSIONST PENSIONS

• “SMART” – Saves Money and Reduces Tax (NIC).

• SMART Pensions can be applied to both your final salary DB and money purchase DC schemes, currently administered by Legal & General.

• Employee pension contributions – tax efficient but still liable to NIC.

• Employer pension contributions – effective for both tax and NIC relief.

• SMART Pensions replace employee contributions with enhanced employer contributions.

• Funded by salary sacrifice.

• Cost savings to employer/employee arising from reduction in NIC.

• Employees benefit from increased net pay and/or increased pension funding.

• Key attraction/retention tool.

• This type of scheme is already offered by a number of large charities, including both Barnardo’s and RSPCA. Barnardo s and RSPCA.

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SMART PENSIONSSMART PENSIONSPotential savings

E'ees NIC E'ers NIC Annual Savings

Year One (2011/12) £63,275 £77,877 £141,152

Y T Year Two (2012/13) £63,275 £77,877 £141,152

Year Three (2013/14) £63,275 £73,010 £141,152

Total £423,456,

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Assumptions

• Total Annual Employee’s Contribution of £608,419.

• 2 compatible schemes; (Defined Benefit: £336,067, Defined Contribution: £272 352)£272,352).

• Based on figures provided by Macmillan for the year ending 31 December 2009.

• Assume COSR (Table D) and COMP (Table F) Employee’s NIC at 10.4 per cent.

• Employer NIC 12 8 per cent fixed amount irrespective of earnings 1 per • Employer NIC 12.8 per cent, fixed amount irrespective of earnings. 1 per cent over £43,888 (“UEL”).

• 100 per cent take up.

• From 2011/2012 (Year 1) Class 1 Primary NIC will increase by 1 per cent.

• 10 4 per cent E’ees and 12 8 per cent E’ers respectively• 10.4 per cent E ees and 12.8 per cent E ers respectively.

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YOUR POSITION PRE SMART PYOUR POSITION PRE SMART PA worked example for both the DB sche

Macmillan

Salary£15,000

EmployeeEmployer’sNIC

£1 040 NIC£1,280 (12.8 per

HMRC

£1,040 NICcent of £1

£1,280 (12.8 per cent of £10,000)

HMRC

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PENSIONS IMPLEMENTATIONPENSIONS IMPLEMENTATIONeme and two DC schemes

Employer pension contribution £900 (6 per cent of £15,000)

PensionFund

Employee pension contribution £900 (6 per cent of £15,000)

C (10 4 C (10.4 per 10,000)

Conclusion

P i f d h i d £1 800• Pension fund has received £1,800.

• Total NIC on employee’s salary of £15,000 is £2,320.

• Assume NIC Earnings Threshold of £5,000.

• The 6 per cent contribution rate is for illustration only.

• The employer’s contribution to the Pension may not be 6 per cent but will • The employer s contribution to the Pension may not be 6 per cent but will be the balance of the cost of benefits as assessed actuarially from time to time.

• Net pay arrangement for tax relief at source.

• COSR/COMP (Letters D and F).

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YOUR POSITION POST SMARTYOUR POSITION POST SMARTA worked example for both the DB sche

Macmillan

Salary £14(sacrificed

EmployeeEmployer’sNIC

£946 40 N£1164.80

HMRC

£946.40 N(10.4 per

£1164.80 (12.8 per cent x

£9,100)

HMRC

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T PENSIONS IMPLEMENTATION T PENSIONS IMPLEMENTATION eme and two DC schemes

Employer pension contribution £1,800 (12 per cent of £15,000)

PensionFund

4,100d £900)

NIC

Employer’s NICs£

Employee’s NICs£

Total£

NIC cent of £9,100)

See assumptions on previous page

Pre SMART Pensions 1,280.00 1,040.00 2,320.00

Post SMART Pensions 1164.80 946.40 2,111.20

Saving 115.20 93.60 208.80

See assumptions on previous page

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SMART PENSIONSSMART PENSIONSIssues affecting the DB and DC Schemes

How will employees

• In respect of your DB and Legal and General DC schemes the answer is most likely yes We would

Are our existing pension schemes compatible with salary sacrifice?

• By including the salary sa“Earnings” for HR purpos

p yvalue of their salary proportion of earnin

schemes the answer is most likely, yes. We would, however, need to first check the scheme rules to confirm this.

• In our experience the only types of schemes which are not compatible for salary sacrifice are the Local Government Pension Scheme (“LGPS”), NHS or T h ’ P i Th ll fi l l DB

Earnings for HR purpos

• For employees who particearnings will be lower thNotional salary).

• Employee’s take home pa

Teacher’s Pension. These are all final salary DB schemes which require a mandatory employee contribution.

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s

retain the overall

acrifice in the definition of ses

but still sacrifice a gs?

• The amendments to the pension scheme rules should be very simple

How difficult will this change be to implement?

ses.

cipate, their actual an their “Earnings” (e.g.

ay will actually increase.

be very simple.

• Good and effective planning is the key to a smooth implementation.

• Involvement of Pensions Specialists from BDO Investment Management will ensure that the technical issues are covered efficiently and tec cal ssues a e cove ed e c e tly a d effectively.

• Liaison with Scheme Trustees and Pension Administrators, through BDO, is essential and their input will be valuable.

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SMART PENSIONSSMART PENSIONSEmployee participation

• Amending the terms and conditions of employment requires “informed consent”

Should we make SMART Pensions mandatory for all our employees?

• Requires employee’s exp

Positive consent (“op

requires informed consent .

• Effective communication of the benefits to Macmillan staff is key.

• Employment law requires a comprehensive consultation process.

S t l l d i i d d

• With hundreds of potenticonsent forms are requireadministrative burden fo

• Usually attracts fewer pabe good at returning form

• Separate legal advice is recommended.

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ress consent.

pt in”)?

• Takes place after communication of proposed changes to terms and conditions

Presumed consent (“opt out”)?

ial participants for whom ed, this could cause an r the charity.

articipants – staff may not ms!

changes to terms and conditions.

• In the absence of employee opt out there is a presumed consent to the changes.

• In our experience there is less administration and a higher participation rate.

R li ff ti i ti t l • Relies on effective communication to employees, including Q&A sessions, with practical examples provided.

• As both employee and employer benefit from scheme this is the more popular option.

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SMART PENSIONSSMART PENSIONSSome further issues

• Under current legislation no employee over the age of 22 can earn

National Minimum Wage (“NMW”)

• The entitlement to some state benefits is based on “earnings” for

Entitlement to State Benefits

employee over the age of 22 can earn less than £5.80 an hour.

• Full time staff earning less than the minimum wage (approx £11,000 per annum) will not be able to participate, as a salary sacrifice

ld d thi t b l th

benefits is based on earnings for NIC purposes.

• Important to consider whether sacrifice will affect current or future entitlement.

would reduce this pay to below the current NMW rate.

• Very important to consider earnings (pre and post) on a pro rata basis.

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• Must have paid NIC for 26 weeks prior to the 15th week before due date

Statutory Maternity Pay

• Entitlement is based on “gross” and not “net” income like predecessor

Tax Credits (Working Tax Credit/Child Tax Credit)/Misc

to the 15th week before due date.

• To maintain entitlement, in some circumstances, may require salary “top up”.

• Employees earning just above the Lower Earnings Limit (£97 pw) may be

not net income like predecessor scheme.

• The implementation of SMART Pensions is very unlikely to have any negative impact on Tax Credits.

• Will only affect entitlement if savings owe a gs t ( 9 pw) ay be affected.

• SMP is calculated based on “NICable” pay therefore it is important to consider the scheme rules.

W ll o ly a ect e t tle e t sav gs are passed on to employees to increase salary.

• Loan/Mortgage Applications which consider “actual” gross earnings as per an employee’s P60.

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SMART PENSIONSSMART PENSIONSFrequently Asked Questions

• We consider this unlikely as self funding of pensions is high on the

What if the Government changes the law?

• There will be upfront implementation costs but ongoing costs are minimal

Will this cause us an increase in administration and costs?

funding of pensions is high on the political agenda.

• Salary sacrifice arrangements are actively supported by HMRC e.g. Childcare Vouchers, Bike To Work Scheme.

costs but ongoing costs are minimal.

• Detailed feasibility report will address this and look at cost/benefit analysis.

• NIC savings within first year should more than cover professional fees.

• Salary sacrifice arrangements are not considered to be “avoidance schemes” but good tax planning.

o e t a cove p o ess o al ees.

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If we reduce the salary will

• Effective communication and engagement with staff is key

How can we ensure our staff will understand the changes?

• Use of “notional” pay will ensure this is not the case

yemployees miss out on future pay-rises/bonuses etc?

engagement with staff is key throughout the process.

• Employee Roadshows plus Q&A sessions with takeaway materials will assist.

• Salary sacrifice now common in

is not the case.

• Indemnities/opt out mechanism can be used.

Sala y sac ce ow co o employment market place.

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OUR APPROACHOUR APPROACHMethodology

PHASE IIScheme Design

PHASE IFeasibility Study

PHASE I Feasibility study

In our experience it is important that a feasibility study is carried out prior to In our experience it is important that a feasibility study is carried out prior to moving into implementation stage. The study and resulting report will encompass the main areas Macmillan need to consider to make a Stop/Go decision in relation to the arrangements.

The report will cover:

fi i l d lli i f l d id if b h l d • financial modelling using software to analyse and identify both employer and employee savings together with the implications of sharing a proportion of the savings

• system issues – identifying changes needed to HR, pension administration and payroll systems

design issues timing branding eligibility documentation• design issues – timing, branding, eligibility, documentation

• employment law issues

• National Minimum Wage issues

• pension/actuarial issues

• timeline for implementation

• likely costs

• Tax/NIC implications

• identification of potentially adversely affected employees

• employee communication recommendations

• input on other benefits such as state pension and tax credits.

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PHASE IVImplementation

PHASE IIICommunication

PHASES II TO IV Design to Implementation

The implementation phase will be based on the factors and issues identified during The implementation phase will be based on the factors and issues identified during Phase I and will cover:

• design issues

• system changes

• payslip design

• testing changes

• employee communication roll out including help line and intranet page plus engagement with trade unions

• employment law work

• amending documentation

• pension/actuarial work

• general project management and advice

• HMRC liaison/clearance.

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PROFESSIONAL FEESPROFESSIONAL FEES

We are committed to providing a quality service to Macmillan that represents value for money and is completely transparent when it comes to fees.

To this end we have provided our fee for the feasibility study only at this stage. As we have outlined in the previous section, our aim in this first phase is to provide you with everything your Board needs to make a decision on whether to proceed with this project everything your Board needs to make a decision on whether to proceed with this project or not. It will also help you decide how much external support you will need should you decide to go ahead. At this stage we can then, together, define our further input and agree a separate budget for this.

As with the audit work we currently do, we want you to feel able to contact us at any point without worrying that “the clock is ticking” so we won’t charge for ad hoc advice and support provided over the phone. We value a collaborative relationship with you and are committed to investing time to identify potential issues that may impact you and your business.

We believe in complete transparency which means:

• we do not quote unrealistically low fees to win work, in the hope of recovering our h h lli ddi i l i i fl d i i f costs through selling additional services at inflated rates or increasing fees

significantly in subsequent years

• you can be assured that you will not be charged over and above our agreed fees unless we discuss and agree an additional fee due to a change in scope

• we will agree a fee with you in advance of any work being undertaken.

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Feasibility study (PHASE I) £10,000 to £12,000

• Meetings with key stakeholders .

• Review of scheme rules/policies.

• Financial modelling.

Scheme Design (PHASE II) £ to be agreed

• Review member population.

• Consider impact on pay elements.

• Legal review of amendments.

Communication (PHASE III) £ to be agreed

• Engagement with employee representation.

• Produce FAQ Booklet.

• Staff Q&A sessions.

• Employee helpline/intranet page.

Implementation (PHASE IV) £ to be agreed

• Draft letter effecting changes to terms and conditionsand conditions.

• Legal review of changes.

• Dummy run of payroll.

• HMRC approval post-implementation.

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OUR TEAMOUR TEAM

JO GILBEYPartner

h

AMANDA FLINTPartner

l h Not for Profit, Southern

t 01293 591022e jo.gilbey@bdo.co.uk

Human Capital, South

t 020 7893 3019e amanda.flint@bdo.co.uk

Jo is a Chartered Accountant and Chartered Tax Adviser with over 20 years’ experience in providing tax services. She is the lead tax partner to our Charities sector and for other not-for-profit organisations.

Amanda Flint is one of the leading UK advisers on share incentives and Reward. She joined BDO in 2007 and is now Tax Partner specialising in Reward in the Human Capital group.

P i l A d h d b ki for profit organisations.

Jo has a broad spectrum of clients including charities and other not-for-profit clients, as well as large corporates. As a result of this, Jo is in a strong position to blend the knowledge and

Previously Amanda had been working at one of the ‘Big 4’ where she was a partner in the People Services team, having earlier qualified as a solicitor (although now non-practising). Her clients have ranged from UK and non-UK p g

approach of both charitable and commercial sectors – creating value for her clients through the synergies this overview brings.

gheadquartered multinationals to UK listed and larger unlisted companies.

She speaks regularly at external conferences and also other events organised by share scheme administrators

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g yand other professional organisations.

KEITH BRECKELLHuman Capital Director

STEPHEN BAKEREmployment Tax Manager

t 01293 591006 e keith.breckell@bdo.co.uk

t 01293 591019e stephen.baker@bdo.co.uk

Keith heads the Southern Region Human Capital Group consisting of specialists able to advise clients on employment taxes and NIC, the Construction Industry Scheme, approved and unapproved share incentives and incentive and

i l i

Stephen joined BDO in March 2007 after six years with HM Revenue & Customs and qualifying as an Inspector of Taxes. Prior to this Stephen also worked as both an Employer Compliance and Status Officer.remuneration planning.

Keith has 36 years of experience within tax including 17 years with HMRC. He has extensive experience in providing advice on all aspects of planning and compliance within employment taxes.

Officer.

He has a broad range of clients in both the commercial and NFP sector, but over the last year has specialised in employment tax advisory services to the firm’s charity and education clients.within employment taxes.

Keith has considerable experience of working with clients in the charity and NFP sector.

y

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OUR AWARDSOUR AWARDS

'TAX TEAM OF THE YEAR' ACCOUNTANCY AGE AWARDS 2009 AND 2008

'AUDIT TEAM OF THE YEAR' ACCOUNTANCY AGE AWARDS 2008 ACCOUNTANCY AGE AWARDS 2008

'CORPORATE FINANCE DEAL OF THE YEAR' ACCOUNTANCY AGE AWARDS 2008

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“The firm clearly listens to clients and offers a more personalised service. This echoes the firm's 'we listen…we deliver…we grow' philosophy and g p p yis exemplified through the Client Listening Programme.”g gTHE ACCOUNTANCY AGE 2008 AWARDS JUDGES

– AUDIT TEAM OF THE YEAR

– TAX TEAM OF THE YEAR

CORPORATE FINANCE TEAM OF THE YEAR– CORPORATE FINANCE TEAM OF THE YEAR

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The proposal contained in this document is made by BDO LLP ("BDO") and is in all respects subject to the negotiationand signing of a specific contract. It contains information that is commercially sensitive to BDO, which is being discloconfidence and is not to be disclosed to any third party without the written consent of BDO. Client names and statistthis proposal include clients of BDO and BDO International.

BDO LLP, a UK limited liability partnership registered in England and Wales under number OC305127, is a member of International Limited, a UK company limited by guarantee, and forms part of the international BDO network of indep

b fi A li t f b ' i t i ti t i t d ffi 55 B k St t L d W1U member firms. A list of members' names is open to inspection at our registered office, 55 Baker Street, London W1U is authorised and regulated by the Financial Services Authority to conduct investment business.

BDO is the brand name of the BDO network and for each of the BDO Member Firms.

BDO Northern Ireland, a partnership formed in and under the laws of Northern Ireland, is licensed to operate within international BDO network of independent member firms.

Copyright ©2010 BDO LLP. All rights reserved.

www bdo co ukwww.bdo.co.uk

‘Tax Team of the Year’ 2009 and 2008 ‘Audit Team of the Year’ 2008 ‘Corporate Finance Deal of the Year’ 2008

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n, agreement osed to you in tics quoted in

BDO pendent 7EU BDO LLP 7EU. BDO LLP

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