STATE PENSION REFORM – APRIL 2016ONE YEAR LEFT – TIME FOR ACTION

22 APRIL 2015

Alan Baker, PartnerJonathan Repp, PrincipalGlyn Bradley, Senior Associate

POLL QUESTION

2016 State Pension ChangesHow ready are you?

MERCER

2016 State Pension ChangesHow ready are you?

Where are you with your discussions about the end of contracting-out for your definedbenefit scheme?

A. Discussed and concluded no action needed

B. Discussed and agreed to reduce pension benefits

C. Discussed and agreed to increase member contributions

E. Discussed and still considering response

F. Not yet discussed

224 April 2015

D. Discussed and agreed a combination of B and C

MERCER

2016 State Pension ChangesHow ready are you?

Does a DC or other contracted-in scheme need to be reviewed in light of StatePension Changes?

A. Yes

B. No

324 April 2015

MERCER

State Pension Reform – April 2016

What’s Changing?

MERCER5April 24, 2015

What’s changing?State Pensions post-2016

Universal pensioner benefits including Winter Fuel Payments

Current system Single tierDisability and carer benefits e.g. Carer’s allowance,Attendance allowance

Disability and carer benefits: e.g. Carer’sAllowance, Attendance Allowance

Housing Benefit and Council Tax Benefit Housing Benefit and council Tax Benefit

Pensions Creditan income relatedbenefit made upof two differentparts, GuaranteeCredit andSavings Credit.

Guarantee Credit with higher rate for those withadditional needs.

Single-tier pension full amount is above the basiclevel of Guarantee Credit

Additional/Graduated Pension (AP/Grad)

Including Grad, SERPS and S2P, amount can vary dependingon earnings and the years over which contributions were paid(range of AP from £0.01 - £160.92).

Inherited AP onbereavement orshared AP ondivorce.

Contracted-out deduction those incertain occupational pension schemescould contract out of AP.

25p Age addition (80 yrs +)

Derived rights to basic State Pension (BSP) those who donot have a full BSP in their own right may get some BSPbased on the NI record of their spouse or civil partner.

Basic State Pension (BSP) full amount is £115.95

Plus private/workplace pension entitlement where applicable Plus private/workplace pension saving boosted byautomatic enrolment

Meanstestedbenefits

Meanstestedbenefits

Contributory

benefitsC

ontr

ibut

ory

bene

fits

SavingsCredit

GuaranteeCredit – top

up to £151.20 Higherrate for

additionalneeds

MERCER 624 April 2015

What’s changing?State Pensions post-2016

Tax year1961

to1975

1975to

1978

1978to

1988

1988to

1997

1997to

2002

2002to

2009

2009to

2010

2010to

2012

2012to

2016

2016to…

Statebenefitwherecontracted-out

Nil

N/A

Approx. nil asContracted-Out

Deduction ≈ SERPSNil

Residual S2P top-up afterSERPS-style deduction forCOMPS and COSRS. S2P

top-up for APPs whereearnings below LET.

N/ACOSRbenefit EPB Pre ’88

GMPPost ’88

GMPSection 9(2B) rights subject to

Reference Scheme Test

COMPbenefit

N/A N/APre ’97

protectedrights

Post ’97 protected rights N/AAPP benefit

MERCER

State Pension Reform – April 2016

Impact on employees

MERCER 824 April 2015

Impact on employeesWinners and losers from State Pension changes

Con

trac

ted-

out

60,000£ Increase in58,000£ Pension per week56,000£54,000£ £3052,000£50,000£ £1548,000£46,000£ £044,000£42,000£ -£1540,000£38,000£ -£3036,000£34,000£ -£4532,000£30,000£ -£6028,000£26,000£ -£7524,000£22,000£20,000£18,000£16,000£14,000£12,000£10,000£

8,000£6,000£4,000£2,000£

-£16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62

Age

MERCER 9

Impact on employeesWinners and losers from State Pension changes

Con

trac

ted-

in

60,000£ Increase in58,000£ Pension per week56,000£54,000£ £3052,000£50,000£ £1548,000£46,000£ £044,000£42,000£ -£1540,000£38,000£ -£3036,000£34,000£ -£4532,000£30,000£ -£6028,000£26,000£ -£7524,000£22,000£20,000£18,000£16,000£14,000£12,000£10,000£

8,000£6,000£4,000£2,000£

-£16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62

Age

Con

trac

ted-

out

60,000£ Increase in58,000£ Pension per week56,000£54,000£ £3052,000£50,000£ £1548,000£46,000£ £044,000£42,000£ -£1540,000£38,000£ -£3036,000£34,000£ -£4532,000£30,000£ -£6028,000£26,000£ -£7524,000£22,000£20,000£18,000£16,000£14,000£12,000£10,000£

8,000£6,000£4,000£2,000£

-£16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62

Age

24 April 2015

MERCER 10

Impact on employeesWinners and losers from State Pension changes

Con

trac

ted-

out

60,000£ Increase in58,000£ Pension per week56,000£54,000£ £3052,000£50,000£ £1548,000£46,000£ £044,000£42,000£ -£1540,000£38,000£ -£3036,000£34,000£ -£4532,000£30,000£ -£6028,000£26,000£ -£7524,000£22,000£20,000£18,000£16,000£14,000£12,000£10,000£

8,000£6,000£4,000£2,000£

-£16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62

Age

Con

trac

ted-

in

60,000£ Increase in58,000£ Pension per week56,000£54,000£ £3052,000£50,000£ £1548,000£46,000£ £044,000£42,000£ -£1540,000£38,000£ -£3036,000£34,000£ -£4532,000£30,000£ -£6028,000£26,000£ -£7524,000£22,000£20,000£18,000£16,000£14,000£12,000£10,000£

8,000£6,000£4,000£2,000£

-£16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62

Age

24 April 2015

MERCER 11

What’s changing?National insurance impact post-2016

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

£0 £5,000 £10,000 £15,000 £20,000 £25,000 £30,000 £35,000 £40,000 £45,000 £50,000 £55,000 £60,000 £65,000 £70,000

Additional employer NI Additional employee NI Current member contribution

24 April 2015

MERCER 12

Mitigating / managing the additional DB costWinners and losers

24 April 2015

MERCER 1324 April 2015

What’s changing?State Pension Age

60.00

61.00

62.00

63.00

64.00

65.00

66.00

67.00

68.00

69.00

70.00

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

SPA

Year of Birth

State Pension Age Projections(targeting 1/3 of adult lifetime)

SPA (ONS)

SPA (Pensions Act2014)SPA (Female)

MERCER 1424 April 2015

State Pensions post-2016Other implications

BSP and LELOffsets

GMPreconciliation

State PensionDeduction /

Variable PensionOffset

Retirement ages State PensionAge

Booklets andcommunications

MERCER

DC and other contracted-in schemesSeven reasons for review

Equity between DB and DC members

Reputational and workforce management impact of reduction in retirementincomes

Member expectations based on prior illustrations

Review terms of integration with State Benefits

Booklets and other communication need to be updated

The latest step in continued evolution of DC provision

Keep employees informed so they can review their retirement / saving plans

1524 April 2015

MERCER

Scheme design in an ever changing worldConsidering the wider context for retirement saving

1624 April 2015

Low interestrates

Economicuncertainty

Aftermath ofDB closures

Auto-enrolmentCharge caps

RetailDistribution

ReviewDC

flexibilitiesState Pension

ChangesAnnual and

LifetimeAllowances

AgeingPopulations

Shifting TPRfocus

Workforcemanagement

DCinnovation

DefinedAmbition

MERCER

2016 State Pension ChangesHow ready are you?

Having heard the options, which do you think would be the best approachfor your defined benefit scheme?

A. No action needed

B. Reduce level of pension benefits

C. Increase member contributions

D. Combination of B and C

E. Close the DB scheme to accrual

1724 April 2015

MERCER

2016 State Pension ChangesHow ready are you?

Having heard the issues, do you think a DC or other contracted-in scheme need tobe reviewed in light of State Pension Changes?

A. Yes

B. No

1824 April 2015

MERCER

Taking this forwardActions required

1924 April 2015

Initiateplanning

discussionBuild action

timelineCarry out

benefitdesign work

Implementchanges

MERCER

Questions

2024 April 2015

MERCER

Important Notices

References to Mercer shall be construed to include Mercer LLC and/or its associated companies.

© 2015 Mercer LLC. All rights reserved.

• This presentation is confidential and may not be disclosed in whole or in part to any third party without Mercer’s prior writtenconsent, unless required by law or order of a court or regulatory body.

• This presentation is correct as of 22 April 2015. It will not be updated unless requested.

• In providing this presentation, we have considered the broad structure of the state pension system, making a range ofsimplifications and assumptions. We have not taken into account the tax treatment of benefits, the full complexity of the UKsocial security system, or the broader legal landscape etc. It is intended as a broad overview of the 2016 state pensionreforms and should be used for the basis of individual, scheme, or employer advice.

• This presentation is for information purposes. It may be read as informal training and recorded in your training log. The slidesdo not constitute advice specific to you, your scheme or your employer, and you are responsible for obtaining such advice.Mercer does not accept any liability or responsibility for any action taken as a result of solely reading or watching thispresentation.

• For more information about other training available or advice any issue raised in this article, please contact your usual Mercerconsultant.

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