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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
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