Lessons So Far and What to Watch Out For Helping IoD members comply with automatic enrolment into pension saving Andy Cheseldine, 13 May 2014

Agenda In the news… The potential impact on the UK Scoping the issues Some important lessons so far What about the 2014 Budget (and other) reforms? 2

In the news… 3 “Few will opt out, but AE will not boost engagement” DWP “Pensions are far too important to be the preserve of the few” Steve Webb “The UK is drifting towards an iceberg when it comes to paying for its old age pensioners, and we need radical reform like this” NAPF “Key to success will be to ‘keep it simple’” Financial Times “If [employees] join an existing defined- contribution scheme, they could face very high charges and poor investment returns” The Pensions Institute “Once automatically enrolled, less than one-third will take the active decision to opt-out” DWP “Hundreds of thousands are missing out on millions of pounds worth of pension contributions because of confusion surrounding auto- enrolment rules” The Sunday Times “If we can get between 6 and 9 million more people saving in a pension by the time all employers are in, that’s a genuine savings revolution” Steve Webb “28% of large private sector employers [>250 employees] believe automatic enrolment preparations will take less than three months” The Pensions Regulator “Based on what we’ve seen so far, we estimate that it will take the average large business about 18 months to plan and get ready” The Pensions Regulator “Businesses with staging dates in the next 12 months should already have in place a detailed plan of action” The Pensions Regulator

How many workers are affected? Coverage before Source: ONS & LCP

Who needs to be auto-enrolled? Identifying different types of worker (2014/15 thresholds) 5 Age Earnings 75 SPA OPT IN No employer contribution (Entitled worker) OPT IN Employer contribution (Non-eligible jobholder) AUTO-ENROL Eligible jobholder OPT IN Employer contribution (Non-eligible jobholder) Qualifying Earnings (QE) £41,865 Upper Limit 10,000 Earnings Trigger £5,772 Qualifying Earnings Threshold

6 Quality requirements - DC DC and personal pensions – alternatives allowing certification  8% of Qualifying Earnings (including minimum of 3% from employer) Qualifying earnings must include all variable earnings  9% of pensionable pay (including minimum of 4% from employer) Pensionable pay can exclude variable earnings  8% of pensionable pay (including minimum of 3% from employer) Pensionable pay can exclude variable earnings subject to pensionable pay constituting at least 85% of total pay bill  7% of pensionable pay (including minimum of 3% from employer) Subject to 100% of earnings being pensionable Phasing applies in all approaches “Basic pay” can include other elements of pay that do not vary (eg London Allowance) so potentially not just basic salary

7 Staging and DC phasing 30 employees October 2012 October 2013 October 2014 October 2015 October 2016 Staging date dependent on no. of employees October 2012 October 2013 October 2014 October 2015 October 2016 October 2017 Employer 1% Total 2% ER 2% Total 5% ER 3% Total 8% Required DC contribution rate (% of QE) October 2018 October 2017

How does auto-enrolment of non-members affect UK plc? Headcount and earnings in ‘000s, 2013/14 thresholds, 15% opt out rates 8 Source: ONS 2011 data & LCP

Employer numbers (1) PAYE schemes by staging date – Oct 2012 to May Source: NEST, 2013 These figures are from the Pensions Regulator and reflect the number of PAYE schemes not the number of employers. Employers may have more than one PAYE scheme.

Employer numbers (2) PAYE schemes by staging date – Oct 2012 to Feb Source: NEST, 2013 These figures are from the Pensions Regulator and reflect the numbers of PAYE schemes not the numbers of employers. Employers may have more than one PAYE scheme.

Market capacity constraints 11 Source: DWP, TPR, BIS, ONS, LCP Event transactions include: opt outs, opt ins, leavers (personal decision & employer insolvency), retirements & deaths. They exclude calls to helplines, changes of address, changes of name, divorce and transfers Assumes steady state private sector employment, 12% pa private sector DB closure & no use of waiting periods

Some important lessons 12 Pre–assessment Are you confident of identifying all your workers? Opt out rates Are lower than many expected – Less than 10% but…. Scheme leaver rates Are likely to be at least as important as opt outs Focus on the data How good is your employee data? The boring stuff matters Payroll providers Are crucial to the success of any AE project Mitigations Most employers, so far, are using postponement Providers May not want your business, at least on the terms you expect Early engagement Internally an externally is likely to save money and worry Contribution costs Are the least of your worries

The old landscape 13 25% tax free lump sum Annuity Full withdrawal (at marginal rate) Full withdrawal (55% tax charge) Capped Drawdown Flexible Drawdown Small pots or trivial pensions Big pots Pension pot

Immediate changes in Budget 2014 With effect from 27 March 2014… 14 Small pension pots: £10,000 Trivial commutation: £30,000 Flexible drawdown: £12,000 Small pots as lump sums: 3 schemes Capped drawdown: 150%

The new landscape After April % tax free lump sum Pension pot Full withdrawal (at marginal rate) Annuity Drawdown / other products

DC investment funds for the new world What decisions do you need to make? 16 Importance of liquidity Is more than one lifestyle needed? Is current default strategy appropriate? Limitations of your provider / administrator What is the exposure to growth assets during retirement? Key decision ages Interaction with communication plan What is the target “retirement” age now? Member demographic Key decisions Key considerations

Unintended (?) consequences 17 Members have flexibility to take 100% cash at age 55 Raithatha v Williamson (4 April 2012) [Bankruptcy] and Blight and others v Brewster (9 February 2012) [Judgment Creditors] meant creditors can enforce debtors to take tax free cash Will the same rule apply to taxable cash? Irrespective of resulting marginal tax rate? What about Local Councils seeking social care funding for nursing homes? Is that a problem? Do they understand it is no longer protected from inheritance tax? If members take that cash Guidance guarantee Potential unintended consequences What What will it cover? Who will provide it? What will it cost? Who will pay for it? When will it be provided (and how often)? Who will regulate it? Taxed at marginal rate in that year Well informed members will want to retire near the beginning of a tax year What does that mean for HR/ Succession planning? Possibly treated as flexible drawdown If current rules continue, that will mean members are taxed at top marginal rate on all future pension contributions

Charges Command paper 18 April 2016 Charges (TERs) capped at 0.75% for default investment option in qualifying pension schemes No “comply or explain” option Providers are considering moving to NEST /Now charge design (eg 2.5% contribution charge plus 0.4% AMC) Applies to all qualifying schemes – potentially including historic DC schemes without a “default” but with a “typical” investment choice (with profits?) April 2017 DWP include as AMD, schemes that pay admin costs for active members but not deferred members What service levels can you expect form commission based IFAs? April 2015 Active member discounts (“AMD”) banned on qualifying pension schemes Commission banned on qualifying pension schemes Charges cap reviewed with intent to reduce and/or include transaction costs When Potential unintended consequences What Will that cap include: Guidance guarantee Provision of flexible drawdown post NRD EIOPA governance fees and costs Financial Transaction Tax (in costs) Administration of the Scottish Rate of Income Tax

 For employees:  Greater flexibilities are incentives to save  For providers:  Uncertainty over future profit margins (charges and cost of additional services)  Fewer annuity sales  Impact on gilt and bond market  Future tax / legislation also unclear  For employers:  Harder to find pension provider willing to take on small schemes  And fewer services available  Payroll providers will be tied up with Scottish rate of income tax  Possibly harder to find advisers (as some may focus on retirement advice following Budget) – however unlikely to be too much overlap with corporate advisers  Higher take up from employees Effect on auto-enrolment? 19

How successful will auto-enrolment be?

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Lessons So Far and What to Watch Out For Helping IoD members comply with automatic enrolment into pension saving Andy Cheseldine, 13 May 2014