Business Reporter on Pensions by Lyonsdown

Interview

Finance

Employment

Legislation

Man with a plan

Run to the hills

Working 9 to 95

Rock and enrol

We talk to pensions minister Steve Webb about the future of pensions | Page 5

The crisis in Europe has caused investors - and their cash - to flee into new markets | Page 8

How has business been affected by the abolition of a compulsory retirement age? | Page 11

The auto-enrolment clock is ticking. We show you how your business can be prepared for the new law | Page 13

PENSIONS

September 2012 | business-reporter.co.uk

20%

By 2050, 1 in 5 of us will be drawing a pension. Is your business ready?

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This is The One

S&P Capital IQ is delighted to present the S&P Capital IQ UK Fund Awards 2012, an event recognising excellence within the Asset Management industry.

In contrast to quantitative-based awards, the ten award categories have a qualitative focus, identifying those who have demonstrated exceptional skill and flair in the last year.

www.spcapitaliq-fundawards.com

Thursday 25th October, One Mayfair, London

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Publisher Bradley Scheffer info@lyonsdown.co.uk

Project Manager Emmanuel Arthur emmanuel@lyonsdown.co.uk

Editor Ellen Bennett ellen@lyonsdown.co.uk

For more information on any of our supplements please contact us: Telephone 020 8349 4363 Email info@lyonsdown.co.uk

Production Editor Amy Dickson amy@lyonsdown.co.uk Production Assistant Fleur Hollett production@lyonsdown.co.uk

Briefing: Pensions and politics What’s happening?

What the politicians say

What the pundits say

From October, the largest employers in the UK will have to automatically enrol all qualifying workers in a pension scheme, to which both parties contribute. The scheme will be rolled out over the next few years, with all employers having to comply by 2018.

According to pensions minister Steve Webb: “Automatic enrolment will get millions saving, giving many low and middle-income workers access to a pension, with a contribution from their employer, for the first time in their lives.” “We cannot stand by as life expectancy continues to rise dramatically while those saving in a pension fall into as rapid a decline.”

Auto-enrolment has been largely welcomed by the media, employers and unions – although some have warned that it could lead to effective pay cuts. Chartered Institute of Payroll Professionals director Karen Thomas said: “Automatic enrolment will subject some businesses to financial burdens that could potentially jeopardise the livelihoods of thousands of British workers.”

The state pension age will now be linked to rises in life expectancy. The women’s state pension age will increase to 65 between April 2016 and November 2018. From December 2018 the State Pension age for both men and women will start to increase to reach 66 in October 2020. This will increase again to 67 by 2028, and experts predict it will hit 70 by 2052.

Pensions minister Steve Webb said last year: “Everybody knows we are living longer. It is like an express train. I am even more convinced now than I was a year ago that we are running to stand still on all this stuff. In a world [where] you are going to live into your late 80s, and before we know it [into your] 90s, we think now we have got to move on these things.”

While there’s a general acceptance that the state pension age needs to rise, there’s a lack of consensus on how. “Automatic increases are a blunt instrument, because they ignore factors such as regional variations in life expectancy and the availability of work for older workers,” warns Carolyn Saunders of Pinsent Masons. “A better solution is an automatic review, which could then take account of other factors in determining state pension ages.”

The private pension deficit has continued to soar as UK employers struggle to meet their obligations under final salary pension schemes. The total deficit hit £312bn in May 2012, according to the Pension Protection Fund. That was up £24.5bn on just a year earlier.

Pensions minister Steve Webb wants to explore a “third way” with employers – an alternative to defined benefit pensions, whereby they offer a limited guarantee to employees, but stop short of guaranteeing a defined benefit for an indefinite period of time. Meanwhile, companies that cannot meet their current pension commitments are reaching agreements with the Pension Regulator.

“I fear that the government has come to this rather late in the day, ironically at the very point where millions of workers are about to be auto-enrolled into largely bog-standard defined contribution schemes,” said Malcolm McLean, a consultant for Barnett Waddingham.

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Contents Pensions pile up

The number of pensioners will rise as longevity increases, causing problems for pension providers Total

2008

11.8m

2015

Worked into 12.5m the ground? Page 11

2020

12.7m

2030

14.6m

2040

£332bn ● Two out of three employers expect 20% or more of their employees to opt out of auto enrolment – IoD ● In 2010-11, £53.9 billion was subscribed to ISAs, including £15.8 billion to stocks and shares ISAs, up 26% on the previous year. Conversely, personal pensions attracted only £14.3 billion, marginally down on the previous year.

23m

● Private-sector workers in the UK, out of 29m

● Only 3.2m of private sector workers contribute to a workplace pension that their employer also contributes to. This is half the 1991 level.

Global meltdown

It’s not just the UK that is struggling to reform its pension system

France

● Four in ten adults in Britain either do not have a pension or have one which will not pay for a comfortable retirement.

Italy

12%

● Of private sector workers pay into a salary-linked pension, compared with 87% of public sector workers.

Balancing act

It’s the final countdown

A look to the future

Our checklist to meeting auto-enrolment laws

Columnist Michael Johnson: “by 2050, pensions will be history”

● A “typical” personal pension pot of £30,000 could buy an annual annuity of

£1,115

How will the public sector fare after pension reforms?

Source: ONS based projections for people of state pension age and older

● Current pension deficit

The end zone

We look at the effects of the Eurozone crisis on markets

16.1m

Numbers don’t lie

Pensions minister Steve Webb on taming pensions reform

16.1m

2050

Taking it by the horns

Greece

Pensions have been hit hard by the austerity measures imposed on bankrupt Greece. Once the most generous system in Europe, reform began in 2010, when the minimum retirement age was raised from 60 to 65 years on average for both men and women, widespread early retirement under 60 years was curbed and pensions cut. Further reforms, including a law to merge debtstrapped supplementary pension funds, are now on the table.

Socialist president Francois Hollande has rolled back some of the pension reforms made by his predecessor on coming to power this year. In 2010, Sarkozy defied widespread public protests, raising the state retirement age to 62 and putting in a minimum term of 41.5 working years. Hollande has now rolled this back to 60 for some professions.

Protestors took to the streets in Italy in April following rows over pension reform. Workers who took early retirement thinking they would soon receive a state pension have been hardest hit as the pension age has been raised and they are now in limbo. Under the new rules, the statutory retirement age will be raised to 62 for women, and 66 for men, with both retiring at 66 by 2018. The overhaul also bases pensions on contributions rather than salary, and ends inflation indexation for larger pensions.

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Industry view

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Take a look under the bonnet With a vast array of funds to choose from, careful analysis of the reasons for relative performances is increasingly important INDUSTRY VIEW

nvestors would be forgiven for feeling a little overwhelmed when selecting a fund for their private pension or investment portfolio. Although the fund industry is well regulated, the number of available investment tools continues to grow, and with it the need to lift up the bonnet and look inside. At S&P Capital IQ, we believe that while past performance should not be used to make fund selection decisions, it can still serve as an important analytical tool to assess the consistency of a fund manager’s approach and whether the fund is behaving as we would expect. We believe that a qualitative, analytical research approach is essential to assess a fund and ultimately determine its S&P Capital IQ grading (which ranges from Bronze to Platinum designations). The cliché of not judging a book by its cover applies equally to funds. There is a greater need than ever for qualitative fund research, assessment of fund managers, and analysis as to whether relative performances were achieved through luck or judgment. S&P Capital IQ carries out more than 1,100

towards portfolio construction is important. Biases to a specific market capitalisation range need to be understood, together with an insight into portfolio concentration in top holdings and general diversification. If the fund has an index benchmark, how far can the fund deviate from this?

fund manager interviews annually. The criteria that are assessed fall into three categories: the team, the manager and the fund. For the team, we look at its organisation, its experience, research approach and past performance. We consider whether it is proactive in directing the research focus, or obliged to follow its recommendations. This not only helps to understand the dynamics between the fund manager and the analysts, but also examines the organisation’s investment culture.

Focus on the fund

Maintain and adapt An increasing number of funds rely on quant models as opposed to a fund manager and analytical team. Here it is essential to gain an insight into the model, how it is maintained and how it adapts to the changing market conditions. In many cases, however, the named fund manager remains key to the product’s success. Investors need to know how long the manager has been responsible for the fund. Was past performance achieved by them or a previous incumbent? We question the manager’s experience of running such mandates, and whether past performance suggests their

investment style is better suited to certain market conditions. We also examine the manager’s views on cash, currency hedging, use of derivatives and other financial instruments. Fund managers have an increasing array of tools at their disposal, so it is important they know how to use them. An insight into a fund manager’s attitude

An assessment of a manager’s previous roles is important, together with an assessment of their investment experience. The length of time spent as an analyst rather than actually managing money should be considered, and their other responsibilities assessed to ensure they have sufficient time to focus on the fund. Potential investors need to think about the size of the fund they are considering, and feel comfortable that sizeable redemptions could be met without compromising the manager’s style and overall shape of the portfolio. Most difficult to assess, but most critical to a fund’s success, is the fund manager’s skill and flair. Is there a demonstrable enthusiasm for investment? It is important to not only ensure there is a clear and disciplined approach, but that it is consistently implemented. This ensures that the complexion of the portfolio continues to be aligned to the mandate. As such, absolute and relative performance returns should hold no great surprise. 020 7176 8500 www.spcapitaliq-funds.com

Do it yourself – with a little advice Self Invested Personal Pensions are growing in popularity, offering not only investor freedom but flexibility in how income is drawn INDUSTRY VIEW

ver the past few years, Self Invested Personal Pensions (SIPPs) have grown in popularity. If you already invest in a SIPP, there is a good chance that one of the critical factors in your choice was the amount of freedom on offer over where your hardearned pension savings are invested. Among the investments used frequently by SIPP customers are funds offered by leading investment managers, direct stocks and shares, and even commercial property. Many people considering SIPPs are also attracted by the fact that they can make investment decisions themselves – a true DIY pension. Although SIPPs have been around for over 20 years, it is the direct-to-customer SIPPs that have seen the most growth in the last few years. The advances in technology that have made online transactions simple and secure have really helped to fuel this boom.

Of course some people still value the input and expertise of a financial adviser when considering which SIPP company to use, and to help decide which types of investment will meet their specific needs. So while they are often seen

Advisers can help ensure that you are not paying for expensive options on your SIPP as DIY pensions, these days SIPPs also feature strongly on most financial advisers’ radars. Although many people associate SIPPs with saving for retirement, these products can really come into their own when looking to take an income from an existing pension pot. Paying for advice on the best way to take income from a SIPP is often an area where the cost is more

than outweighed by the long-term results. With annuity rates at an all time low, SIPPs offer the advantage of being able to offer an income that may be higher than that available under a conventional annuity and without the need to lock in to this level of income forever (as is often the case with annuity purchase). In some cases, taking some income via annuity – or using some of the new-style annuity products – alongside a SIPP can make a lot of sense, combining an element of guaranteed income with additional longer-term flexibility via the SIPP. There is little doubt that SIPPs’

transparency of costs will sit more comfortably alongside the new rules over the cost of advice following the FSA’s Retail Distribution Review. If you are looking at pensions and are attracted by SIPPs, as well as shopping around for the right SIPP or income

solution in retirement, it is probably worth looking at the services that advisers can offer. A little advice could go a long way in terms of ensuring that your pension pot – SIPP or otherwise – offers the best chance of meeting your long-term retirement income needs. Advisers can also help ensure that you are not paying for expensive options on your SIPP that you may not need. Even the most ardent DIYers sometimes value some professional help! Ray Chinn Head of Pensions at LV= www.lv.com/retirement_plans/ pensions/

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Not retiring any time soon Steve Webb is already the longest-serving pensions minister in memory, and with a remit that includes auto-enrolment, raising the pension age, and launching NEST, he may also be the most ambitious

Joel Chant/UNP

he’s not worried. “The smallest firms don’t even come into it until post-2015,” he says. “If you got a letter saying that in 12 months’ time you had a STEVE WEBB EXUDES a steady, calm competence statutory duty to do something, you’d put it in the – which is what you want, given that he’s the man bin. There’s no point in us writing to them and responsible for overseeing a once-in-a-generation saying: in two and a half years you have to do this.” reform of the pension system. The pensions minister, He adds that the awareness campaign will pick up a Lib Dem reporting to work and pensions secretary speed, with television and other advertising planned. Iain Duncan Smith, greets Business Reporter with “They will become aware, because this is massive,” a firm handshake and poses politely for pictures. he says. “We’re talking 10 or 11 million people – Highly spoken of by the industry and fellow everyone will know someone who has been politicians alike, he’s the longest serving pensions auto-enrolled.” minister in memory, and his grasp of a highly While few argue with the pressing need to reform technical brief is widely acknowledged and admired. pensions in the face of booming life expectancy, There’s a lot to get to grips with. As well as auto- not everyone agrees auto-enrolment is the best enrolment, the massive programme to get all way to go about it. Critics have warned that forcing employees automatically signed up to pensions, employers to contribute to pensions will simply Webb’s brief encompasses the launch of see them freeze or cut wages, hitting the 8% NEST (the National Employers’ Savings poorest workers. Webb says: “Every firm Total pension contribution Trust); the reform of the state pension age will have a different answer. Some might under autoand the simplification of the state pension s ay, you we r e goi ng to get a enrolment system; the debate about index linking 1 per cent pay rise this year, it’s going to be 0 per cent because it’s going into your pension. pensions; and the future of employer’s pensions. Today, he’s here in his office in the monolithic That’s fair enough I think.” Department of Work and Pensions, just near St The contribution under auto-enrolment is set James’s, to talk about how auto-enrolment and his at a total of 8 per cent, with employers contributing other policies will affect businesses. 3 per cent. This too has come under fire. Webb says: Auto-enrolment begins next month, with the “You get both criticisms. There are people saying UK’s biggest businesses obliged to automatically 8 per cent is not enough – bear in mind we’re talking enrol all qualifying workers in pension schemes about millions of people for whom the current rate to which they will contribute. The policy has been is 0 per cent. The other criticism is that the economy’s a long time in the making, and needs to get off to in a difficult state, no one has any spare cash.” The a smooth start. Is Webb confident? “We’re talking trick, says Webb, is to get things started gradually a relatively small number in the first few months,” – “That’s going to take us into the second half of this he says, “we know them by name, and the Pensions decade,” he says. “Then we’ll have another look.” Regulator has been in contact with them for two Webb knows only too well the old adage that years. If anyone can do this well, these firms can.” “everyone’s a critic”. He has also come under fire But does that mean the programme will get for NEST, the simple, state-backed pension provider harder to roll out the further down the food chain set up in tandem with auto-enrolment, specifically it goes? Webb admits that many smaller businesses with smaller firms in mind. Critics accuse Webb have not even heard of auto-enrolment yet – but and his team of watering down the plans for NEST By Ellen Bennett

● Liberal Democrat MP for Thornbury and Yate (previously Northavon) since 1997 ● Lives in constituency with wife and two children ● Liberal Democrat spokesman on works and pensions 1999-2005 ● Minister of state for pensions since May 2010 ● Hobbies include internet/computing, music and supporting West Bromwich Albion

‘I’ve talked to a lot of employers, and I think there’s an appetite to go beyond the bare minimum for their employees’

to appease the pensions industry, which fears state competition. But he says it was necessary to ensure NEST stayed focused on the smaller end of the market, where it was most needed. He adds that the system will be reviewed within five years at the most, and speaks enthusiastically about the idea of employees being able to transfer their individual pension pots in and out of the system as they move jobs. That’s not allowed at the moment, but Webb says he’s talking to the industry and NEST about it. Can he give a date? “I have learned that trying to give dates on those things is a disaster,” he smiles. Webb’s been in his job since 2010, a long time compared to his predecessors – there were 10 pensions minister during New Labour’s 13 years in power – and he clearly enjoys it. One expert enthuses: “He’s the best pensions minister we’ve ever had” – and if he steers through auto-enrolment and NEST, together with the state pension reforms, he’s done more than could have ever been expected. But his plans don’t stop there. Webb’s pet project is what he calls “defined ambition” – an alternative to defined benefit pensions, which are already becoming extinct. “Defined ambition” would offer a “third way”, whereby employees offer some sort of guarantee to employees, without accepting full longevity risk. For example, it may be that employers guarantee an employee’s pension pot never goes below a certain level – which is clearly much more acceptable for business than guaranteeing a regular payout for an unlimited period of time. “I’ve talked to a lot of employers, and I think there’s an appetite to go beyond the bare minimum for their employees,” he says. “Every firm will have a different answer. If firms are willing to do risk sharing, we need be on their side, not on their back.” This could include some deregulation, he suggests. Few business people would argue with the need to overhaul the pensions system. What they need is clarity and simplicity – and Webb seems the man to provide it.

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Evacuating the zone The Eurocrisis has prompted a withdrawal of funds from affected countries and a reliance on non-Eurozone bonds, in turn causing problems for the pensions and insurance industry By Pádraig Floyd IN AUGUST 2011, growing expectation that one or more of the beleaguered Eurozone governments would default on its debt obligations sent the financial markets spinning out of control. Weeks of turmoil followed, and commentators feared things both politically and financially would never be the same. Tatjana Greil Castro, a portfolio manager at specialist fixed income manager, Muzinich & Co, says that Greece falling behind with its repayments and warning it would need another bailout resulted in a lot of investors leaving Europe. “They were beginning to consider Europe

uninvestable as there were risks they felt they could neither quantify nor analyse,” she says. It’s not a view she necessarily shares, but with non-European investors selling up and even Europeans reducing their exposure to European markets, “everyone ran for the door at the same time”, leading to a lack of liquidity and greater concerns about the market. When a run like this happens, says Castro, cash needs to be generated so outflows can be managed. Many investment managers went defensive and sold cyclical holdings – companies whose performance fluctuates with business cycles. This resulted in bond and equity fund managers going defensive, selling the riskier, more speculative holdings in favour of more reliable ones. In Castro’s case, this meant shedding holdings

Getting the most from your pension scheme It’s all change when it comes to company pensions. Here’s how to make your scheme work for you - and your employees INDUSTRY VIEW

“M

y company already offers a pension scheme , what should we do?” With the forthcoming pensions reforms, businesses have to check that their schemes fit with the auto-enrolment criteria, register their schemes, and plan for ongoing monitoring and re-registration every three years to ensure that all the rules are being met. With potential fines for non-compliance and limited time to put a new pension scheme in place if need be, it is essential that schemes are audited well in advance of an employer’s staging date. Staging dates will vary according to employee payroll numbers on 1 April 2012. Richmond House Group (RHG), which specialises in the provision of employee benefits and wealth management services, has developed a methodology for dealing with auto-enrolment ahead of the changes. Ian Jenkins, Corporate Services Director at RHG explains that as a starting point, there are five main questions to ask of a business’s current pension scheme. First, will the scheme actually allow automatic enrolment of new members? If it doesn’t, then an alternative scheme will need to be arranged for some or all of your employees.

Next, does the scheme offer a suitable default investment option? This is a requirement of the new rules. And will this scheme suit ALL workers going forward? In RHG’s experience, some large employers already have a scheme that suits some of their employees but have nothing in place for others. There often isn’t a one-size fits all, and the best solution may comprise more than one scheme or several sections within one scheme. Fourth, can the scheme cope with processing a large number of joiners in a short space of time? Unless you are using the postponement option, you will have one month after the eligible jobholder’s automatic enrolment date to achieve active membership. Finally, and perhaps most importantly, is the pension provider going to offer an automated solution to help you assess and monitor your workforce? Continuous ongoing assessment of your workforce is required - any compliance system should facilitate or

trigger certain actions, including providing the statutory information to the various categories of employees and regulators. A two-tier approach to pension schemes will be appropriate for many companies – a comprehensive scheme with suitable options for certain categories or grades of staff, and a more straightforward, low-cost scheme for other workers.

Covering the costs RHG has identified a number of low-cost schemes that satisfy the requirements and include the software to manage and monitor automatic enrolment. But how will businesses cover the increased costs associated with automatic enrolment? Following a recent relaxation to HMRC rules, salary sacrifice could be a more attractive choice for employees - and the National Insurance savings for the employer will be useful in meeting any increased Jenkins: salary sacrifice could be good option

costs from automatic enrolment without having any detrimental effect on an employee’s take-home pay. Once you have the right schemes in place, you need a plan to fulfil the requirements of auto-enrolment. This includes auditing the workforce, putting the administration procedures in place, informing and enrolling workers into the scheme, and registering the scheme, or schemes. It’s a lot of work and you might well ask what is the benefit to the employer? But at RHG we believe schemes should deliver real benefits to both the employer and the employee. If employees understand and appreciate the benefits provided for them, then their employer will benefit through the effects of improved retention rates and employee satisfaction. RHG has developed a detailed methodology for implementing auto-enrolment including an audit, scheme installation, educational staff presentations and the provision of compliance technology. RHG also offers specialist investment management. Ian Jenkins is corporate services director at RHG www.rhg.co.uk

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in “peripheral” markets – those based in the weaker EU countries of Portugal, Ireland, Greece, Spain and Italy – where the association with a government in a difficult funding position was causing alarm about investments in those markets.

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capital, says Mody. “People are looking at the cost of capital and how much it is costing them, and asking whether there is something more efficient they could do with it,” he says. “Liabilities have gone up but there is an unusual opportunity, as the future prospects of gilts look bleak. Schemes must now ask Early origins themselves if the protection gilts used to offer John Betteridge, director of investments at is now worth the cost.” Prudential, says it is difficult to disentangle the But, says Castro, the lack of confidence in the Euro crisis from the wider financial crisis. He says European markets is not based in fundamental its origins go back far beyond the credit crunch. reasons, but perceptions about the markets. “European monetar y union (EMU ) “It is just the political risk investors can’t implemented an inappropriate currency understand,” she says. “Fundamentally, union in the first place,” he says, “which companies are in good shape. They have “Greatest impact has is OK when things are going well, but solid business models and big cash been on when things go badly, it is always going positions.” sovereign debt to end in tears.” Prudential’s Betteridge agrees that markets” Equity markets went down and became continued volatility in both equity and highly volatile, says Betteridge. They have debt markets is due to a lack of confidence rallied since the end of last year, but the greatest in the governments involved to put their house impact has been on the sovereign debt in order. (government bond) markets. Strong economies with their own currencies Meaningful solution not connected to the Euro – such as UK, US, “I don’t think the muddle through is sustainable Japan, Switzerland, Australia, Canada – have for much longer,” says Betteridge. “Policy-makers seen their government bonds become highly seem incapable of sorting out the problems, and prized, particularly by institutional investors non-European investors have come out of Europe. and other governments. This is because these Private funding is being withdrawn from assets are traditionally considered risk free – it the peripherals [the weaker EU countries] and is thought highly unlikely that the governments will continue to do so until Germany and the backing them will not pay the interest. European Central Bank comes up with a As demand for these bonds increases, their meaningful solution.” price goes up, and the yield –the interest paid Betteridge believes that this “meaningful – is worth less in relative terms. solution” may result in events that would have “These have been sought out like never before,” Euro-sceptics fixing bayonets. These would include says Betteridge, “so yields have fallen to mutualisation of the banking industry and the unprecedented low levels.” These low yield levels particularly affect ‘It may take more riots and insurance companies and pension schemes. Traditionally they have held large amounts of public disorder, like those these bonds, because they pay a rate of interest linked to inflation, allowing these organisations in France and Greece, to to match some of their assets to their ongoing focus politicians’ minds’ liabilities. With low yields, not only do these organisations have less money to meet their liabilities, their financial regulatory regime, the issuance of liabilities also increase since they are calculated common debt, and a common treasury. on the yields. This makes the business or scheme The main legacy of the Euro crisis will be a far more expensive to run. more cautious investment management industry, says Gervais Williams, managing director of MAM Schemes under strain Funds. Cash levels are elevated and managers This distortion in the gilt price has put pension are more cautious about investing in volatile scheme valuations under great strain, says Raj assets, which equities certainly are at the moment. Mody, a partner at consulting firm PwC. Williams says that in the long term there will “An occupational pension scheme is backing be a radical change in the perception of how its pensioner liabilities with gilts [UK government investors make money in every asset class. bonds] with an arguably inflated value,” says “It will be about finding companies that are Mody. “It is becoming cheaper for a scheme “Distortion like 4 x 4 vehicles. In other words, they keep to buy out its liabilities than to hold gilts, on going in all situations,” he says. in gilt prices even if they do offer a perfect match for has put pension Although the funds of pension scheme schemes under the pensioner liabilities and protection members and insurance company great strain” against inflation.” policyholders may be no worse off than This is a novel situation for occupational last year, as a result of action taken by those pension schemes. Holding bonds has been a managing their money or a rally in the relevant fundamental part of their investment strategy; markets, there are still consequences. and buyout – where an individual’s pension The reduced return on investments and the liabilities are covered by an insurance policy pressure on gilt yields will make whole-of-life – has been purely aspirational as few can policies, such as pension annuities, appear very afford the premiums. expensive, says Taylor. “Until politicians act with Various pieces of EU regulation designed conviction, the crisis will rumble on from one to protect consumers – and ultimately diverted catastrophe to another. governments who stand behind financial “It may take more riots and public disorder guarantee schemes – are increasing the like those in France and Greece to focus politicians’ pressure on a finite supply of good quality minds. Once a more positive outcome for Eurozone government debt. As a result, everyone is seen, the position will reverse, equities will rise is becoming more aware of the cost of and the value of gilts will fall rapidly.”

Automatic for the people Automatic enrolment is the biggest change to pensions in a generation. Do you know what the changes mean for you? INDUSTRY VIEW

ccording to the Department for Work and Pensions, only one in four private sector workers has a workplace pension. That’s down from one in three just five years ago. Meanwhile, the amount of time people spend in retirement continues to rise. Automatic enrolment will be a major change for pensions in the UK, with millions of people saving more for their retirement, or saving for the very first time. From October, the largest UK employers will be required to enrol many of their workers into a workplace pension scheme that meets minimum standards. Over the next few years, automatic enrolment will gradually extend to medium-sized and smaller employers too. Minimum contributions for automatically enrolled workers will start at 2 per cent of earnings, of which 1 per cent must come from the employer. This will rise to 8 per cent over time, with the employer contributing a minimum of 3 per cent, although they can choose to contribute more. NEST has been established by legislation as a trust-based scheme run on a not-forprofit basis. It has been designed especially for automatic enrolment, with both employers’ and

members’ needs in mind. It has been set up for the millions of people in the UK who want a pension that is straightforward and great value. As an online pension scheme, NEST is easy to use. Members can see what’s being paid into their retirement pot whenever they want, and employers can use specially designed templates to let their workers know about their new pension rights. NEST’s plain language approach also makes potentially challenging pensions information clear and accessible, even to members with no previous experience of pension saving. NEST is flexible enough to meet the needs of different employers. They can, for example, use it on its own or in partnership with other schemes they offer. It also provides simple default settings to help employers comply with the law. In addition, NEST moves with the member, so if they

change jobs or leave an organisation, there’s no ongoing administration for the employer. For members, NEST’s award-winning investment approach is designed to deliver realistic and sustainable investment growth, while minimising the chances of losses. Fees are low, with annual charges broadly equivalent to 0.5 per cent of a members’ retirement pot, comparing very well with other large workplace schemes. As a not-for-profit scheme, NEST is run in the interests of members, and aims for the very highest standards of governance. NEST approaches its responsibilities as an investor seriously, taking environmental, social and governance issues into account when identifying potential investments, to help deliver better long-term returns for members. Automatic enrolment marks a generational shift in preparing for retirement and NEST is ready to play its part. Tim Jones, left, is chief executive of NEST www.nestpensions.org.uk

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Overcoming the obstacles If employers want to ensure compliance for employee auto-enrolment, they need to start planning now INDUSTRY VIEW

egislation is now in force, requiring all employers to enrol eligible employees into a workplace pension scheme and pay contributions for them, The largest companies must comply from October, phasing in for the smallest employers by 2017. But automatic enrolment isn’t straightforward. The legislation is very complex, employers have different duties for different categories of employee and strict timescales. Employers need to constantly monitor the age and earnings of workers and have robust procedures covering: enrolment, re-enrolment, opt-in and join requests, opt outs, provision of information, payment of contributions, and refund of contributions. This will be further complicated if these processes relate to more than one scheme. It is not even possible to get around the issue of assessing and monitoring employees by enrolling all employees into a pension scheme. For most organisations, compliance with auto-enrolment will require some ‘automation’ to ensure the right people are placed in (or taken out of) the right scheme at the right time. Pension and payroll providers are developing autoenrolment modules and there is also a proliferation of autoenrolment ‘hubs’ or ‘middleware’, all promising to take away the pain of compliance from employers. A successful solution needs to integrate with the payroll cycle and the pension administration systems as well as facilitating effective communication with employees. Companies tend to have unique combinations of payroll, HR and pension systems, and therefore companies are advised to ensure that their chosen solution does ‘what is says on the tin’. Reconciling automatic enrolment duties with ‘salary sacrifice’ arrangements and/or ‘flexible benefits’ is yet another hurdle that employers may need to overcome. So, auto-enrolment is anything but simple. We can reassure that there are solutions to all of these issues – however, there is a lot to do and any employer with a staging date in the next 12 to 18 months that has not already started planning should, if they want to ensure compliance, start now. mark_pemberthy@jltgroup.com www.jltautoenrolment.com

Tightening the belt of public sector pensions Does forthcoming pension reform offer a fairer balance between recipients and taxpayers, or is it simply an extra tax on public sector workers?

PUBLIC SECTOR PENSIONS have been a bone of contention between the various political parties for years, with those on the right believing they are too generous while leftwingers consider them sacrosanct, the reward for a career where pay will never match the heights of the private sector. But times have changed, and public sector pay increased considerably over the life of the previous Labour government, as did the number of public sector workers. The credit crisis threw into sharp relief the costs of those public services, not least their reward structures, as the effect of increased

longevity looked set to create a yawning chasm in the funding of public sector pensions. In light of this deficit, the coalition government commissioned Lord Hutton of Furness to write an independent report on the subject, which was delivered in March 2011. This has provided the blueprint for the public sector pension scheme reform that is about to be put before the House of Commons. John O’Connell, research director of the Taxpayers’ Alliance, said: “An overhaul of public sector pensions has been overdue for decades, and the Hutton Report has set out some fair and robust measures to make pensions more

A fairer deal for all The government accepted Hutton’s report in March 2011 to introduce a new structure for public sector pensions. This would still be a defined benefit pension, that is offering a predetermined level of income, but calculated on a worker’s average salary over their career rather than the level of salary they retired on. Public sector workers would continue to receive a good pension in retirement, equating to an average of two-thirds of pre-retirement salary with state

benefits for the lower paid. The pension rights already earned would be protected and consultation would be undertaken with unions. Hutton, left, argued this would offer greater fairness to the taxpayer because schemes would be better run and, by receiving their future benefits at the normal state retirement age and working longer, public sector workers would be sharing the burden of increased longevity. Any further improvements would

also be reflected in changes to the normal retirement age in the future. He called for the government to set a level for spending on public sector pensions, and to make data on funding more readily available. “A s a package ,” Hutton concluded, “these changes will make public service pension schemes simpler and more transparent, fairer to those on low and moderate earnings, better able to deal with the changes that we know are coming to our economy and our society, and will therefore help ensure greater prospects for sustainability over the long term.”

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Timeline October 2010 June 2010 Hutton publishes his The coalition interim report government asks former secretary for work and pensions, Lord Hutton of Furness, to undertake an independent review of public sector pensions

March 2011 Hutton publishes his final report

www.jonathan-e.com

affordable in the long term.” Government moves for reform In addition to changing the scheme’s basic structure, all those participating will have to pay more. That increase was scheduled to start this year, with anyone earning more than £15,000 a year having to contribute more to their pension. Those at the top would pay the most, seeing a 2.4% increase in their contributions. The level of contribution is one reason for continued negotiation with the unions, because although the increases are being applied across

November 2011 Public sector unions strike over the proposed reforms – David Cameron dismisses claims that millions support the cause as a “damp squib”

May & June 2012 More public sector worker strikes over a lack of progress with government consultation over reforms

August 2012 Danny Alexander, chief secretary to the Treasury, announces his intention to include the reforms in a pensions bill for the autumn session of parliament

August 2012 Unison, the largest union in the Local Government Pension Scheme (LGPS), accepts the reforms following a ballot of its membership

Autumn 2012 Pensions Bill 2012 will contain the public sector pension reforms l Pensions Bil

the public sector, the amount contributed by But not all public sector pension schemes are different professions varies considerably. The unfunded. The Local Government Pension highest paid doctors will contribute almost 11%, Scheme (LGPS) is the significant exception. With 4.6 million members, the scheme is by teachers on top pay grades 8.8%, yet the best paid civil servants will only contribute 5.9% far the largest, with a membership of more of their salary. than one third of all public sector workers. Carl Emmerson, deputy director of It also has positive cash inflows, and so no gaping black hole in its accounts. the Institute for Fiscal Studies, says High earners will see a the post-Hutton reforms will improve The LGPS intends to implement 2.4% rise in the structure of public-service the reforms in 2014, following a ballot contributions pensions. He says a normal pension age by Unison, the union representing the (NPA) that is linked to the rising state largest group of the scheme’s members, pension age is “a coherent response to the public which last month voted to accept the reforms. finance problems caused by increasing “We have come a long way from the original longevity”. starting point,” says Unison national press officer Anne Mitchell, “and a lot of that is down to our Unions argue change is unnecessary members taking action to make changes to the But the unions don’t all agree. Mark Serwotka, original proposals. general secretary of civil servants union the PCS, “Public sector pensions have never been goldsays that with the exception of the local plated, but we want to see a decent pension for government scheme, which is funded differently, all and hope we have done a lot to change public “union members representing the vast majority perception about the pensions the public sector of public servants have voted to reject the workers have got.” proposals. “We’re now on something like our fourth Greater burden on the state ‘final’ offer from the government,” he adds, “but O’Connell makes capital of that the fact that they are all very similar in that they are all some unions have agreed to accept many of the characterised by moves to make public servants reforms. “That shows such steps are crucial to pay more and work longer for less.” make pensions fairer and more sustainable, and Serwotka contends that none of the changes also highlights the hypocrisy of some unions are necessary since, as the Hutton report when they take to the streets,” he says. acknowledged, the cost of public sector pensions But for Serwotka, the fight will continue. He is already falling following reforms agreed says the reforms will leave public servants with the previous government. worse off every month for the rest of their “The government has stated the working lives, forcing many to work up contributions increase is not destined to eight years longer as the normal 4.6m for the schemes,” he says. “The money retirement age moves in line with the members in is going straight to the Treasury for state pension. He warns that this may the LGPS deficit reduction. This is nothing encourage many of the lower paid, more than an extra tax on working in especially younger workers, to opt out of the public sector.” pensions altogether. The cost of running public sector pensions “The wider consequence is that retired public has increased dramatically over the last 40 years. servants will become a greater burden on the In 1970, it was around 0.9% of GDP, rising to state,” says Serwotka, “as they will need to rely 1.2% in 1980, and is around 2% today. Hutton’s more on benefits. So the very concept that this report conceded that the Labour’s reforms would is to make things fairer for taxpayers is not just narrow-sighted, it’s fundamentally flawed.” reduce costs to about 1.4% by 2040.

Flexible pension schemes The defined benefit pension scheme is no longer a creditor – it is also a partner, and needs to work with the employer to keep it alive INDUSTRY VIEW

n 2005, the Pensions Regulator (tPR) issued guidelines indicating that the pension scheme was a material unsecured creditor and, like a bank, should act like one. This was the foundation upon which all the principles for clearance by tPR were laid, and upon which a host of financial advisers (or some say locusts) entered the pension marketplace to offer their services to bewildered trustees and employers.

obligations) is less than the actuary’s The market is still behaving under this estimate of the cost of an insurance assumption today. Seven years on, this company taking on the pension is not good. liabilities (the s.75 buy-out debt), the The problem is that the majority of scheme cannot afford the employer to pension schemes are more than creditors; they are partners. How do be sold. The scheme must be a partner and needs to work alongside the they find out if they are? If the FD’s employer to keep it alive. But how? estimate of the value of the employer Richard Farr When banks are in this situation, on a going concern sale basis they swap some of their debt for equity, insist on (remembering not to include any group significant management changes and transfer company not legally linked to the employer’s

2013 LGPS to begin implementation of the reforms during its valuation year

2014 LGPS to implement the new public sector career-average pension scheme

2012

Public sector pension structure Public sector pensions have been founded upon the principle of a defined benefit structure, whereby an individual can expect a predetermined level of income – largely based on their final salary. Final salary pensions provide an income based upon the salary earned in the last three years of work before retirement, with the actual proportion based upon how long you have been a member. So, in the case of a 1/60th scheme, you would receive a pension of one sixtieth of your final salary for each year you had been a member. If a worker had 30 years service and had been a member throughout that period, they could expect a pension of 30/60ths, or half their salary. The private sector has been seeking to move away from final salary schemes for more than a decade. Following the Robert Maxwell scandal, when the Mirror Group pension fund was raided to shore up a failing business, regulation has strengthened the pension promise into a guarantee, and placed considerable strain on the bottom line of many businesses. Many consider final salary schemes unfair because they allow the highest paid in public sector industries to ratchet up their pensions through promotions and salary increases in the final years of their employment. The new career average scheme offers an accrual rate of 1/49th, but it isn’t as intuitive as final salary. Graeme Muir, partner and head of the public sector actuarial practice at Barnett Waddingham, says the biggest challenge will be the communication. “It doesn’t operate like defined benefit,” he says, “so your pension won’t be 1/49th of your salary multiplied by your years of service. Nobody knows what average pay will be over the next 10 years. It is a lot less intuitive, and so there is a lot of education that will be required.” However, career average could prove better than final salary for many, says Muir, particularly those who do not receive large salary increases, or who take career breaks. “A 52-year-old senior manager, would have had 1/60th in line with pay increases,” he says, “but there won’t be many of those for a while, so 1/49th looks better as long as you don’t get to be CEO three years from retirement.”

their credit risk to their specialised work out sections. So why aren’t schemes doing the same? We believe they should. We would see the rapid emergence of equity-based solutions (what else is there left to take?), with new security structures, which grant schemes much better insolvency protection, but at the same time giving employers - often with rejuvenated management - much more freedom to work their magic in the turnaround plan. The market is starting to realise this change and tPR will need to act accordingly. A “healthy employer, a healthy scheme” will need new guidelines. Richard Farr Head of Pensions Advisory 0207 893 3081 www.bdo.co.uk/pensionsadvisory

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Take control of your pension SIPPs’ flexibility and cost-effectiveness mean they are growing in popularity as a pension strategy INDUSTRY VIEW

he essence of what a SIPP (Self Invested Personal Pension) provides in terms of managing a pension strategy has never been more important. A SIPP gives better control, flexibility and diversification than traditional pension arrangements. The banking and euro crisis have simply strengthened the rationale around its use as an asset management platform. Our faith in relying on household-name institutions has been shattered by these events, and driven a desire to take control of what is often one’s biggest asset, a pension

Murray Smith is director of Mattioli Woods

fund, being able to spread one’s risk throughout a range of institutions, asset classes, vehicles and structures that house

A venture overseas With investment now a global business, many savers are restricted where they can invest INDUSTRY VIEW

nternational markets offer a wide range of opportunities for pension savers. Unfortunately many pension providers restrict where savers can channel their funds, therefore potentially reducing returns. With markets now operating on a global basis, all investors should have the chance

to invest directly in markets otherwise out of reach. Long-term growth of capital and income is of paramount importance for private investors. Access to the most attractive international markets can enhance investment performance through exposure to the strongest available economic growth rates. Many of the world’s fastest growing and

underlying investment themes. A fully bespoke SIPP, carrying trustee, administrative and consultancy fees, can actually be a very cost-effective pension arrangement, particularly for larger funds where there is investment into real and direct assets. It can be surprisingly less expensive than basic Stakeholder arrangements, yet a far more powerful and flexible vehicle. At present, it is confusing for investors as there are a plethora of different SIPP-type products available from numerous providers, with different capabilities and costs. The term “SIPP” is often used to sell a product that only captures an element of a true or full SIPP. Cost

financially strong businesses may be overlooked by a basic investment strategy, potentially jeopardising long-term returns and stability. With interest rates at all time lows, secure returns for pensions have been more difficult to find, particularly in the case of income requirement, yet many global companies now have stronger credit ratings than governments and can provide investors with not only enhanced earnings potential but also added security. Dividends from equities have statistically made up the majority of total return for

Mattioli Woods is one of the UK’s leading SIPP providers and wealth managers www.mattioli-woods.com

managed portfolio. The best pension advice not only covers the planning but equally important is the overall investment strategy. Working closely with independent pension advisers, trustees and their clients, S&T Asset Management LLP find the appropriate investment to meet any strategy and risk profile. Diversifying away from restricted, underperforming or opaque collective funds through the use of direct investment management can not only reduce costs and enhance long-term performance, but allow a better understanding of the underlying strategy. Such a close working relationship between the client, adviser and investment manager taps the complete skills and research pool, affording best advice. James McLellan is partner at S&T Asset Management 0161 484 6789 www.sandtassetmanagement.com

scheme; National Employment Savings Trust; or a combination). We assess various models in terms of potential costs. We consider alternative and practical methods of communication specific to your company and staff. We look under the bonnet of different pension providers’ “middleware” to assess whether any may be appropriate to your company’s needs.

The games may be over but the obstacle course of autoenrolment is just about to start he starting gun for auto-enrolment has sounded and employers are on a deadline to enrol every member of staff in a suitable pension scheme; is your company at the starting blocks, still in the changing rooms, or not even on the team bus yet?

versus benefit analysis is therefore critical in deciding which type of SIPP is appropriate. For individuals with existing pension assets, developed over a number of years in a variety of policies, SIPPs can be used to consolidate pension arrangements in order to take control and better develop a retirement strategy. For some schemes this is straightforward. Older-style arrangements, however, can carry key benefits that are lost on transfer, so one of our key messages is that a full review of existing arrangements is absolutely essential. For example, there can be hidden penalties in transferring, or a loss of guarantees, such as policies with a minimum guaranteed return or guaranteed annuity rate. In the present climate, with exceptionally low gilt yields and therefore annuity rates, these could be highly valuable.

investors, and when received tax-free in a UK pension fund the benefits for long-term savers are obvious. Exposure to the strongest currencies, best growth prospects and economic stability is key to investment strategy. A diversified group of high quality international equities and fixed income securities will aid risk management, exposing a portfolio to a variety of revenue streams, cash flows and economic cycles. Provided the investment time horizon is sufficient, a high level of capital and income growth is likely to be achieved from a correctly

Getting a head start

INDUSTRY VIEW

Key to success

At Broadstone Corporate Benefits Limited (Broadstone) we believe there are three key areas to consider: cost, administration and communication. We also believe that for any employer to successfully complete the course and meet the demands of auto-enrolment, a run-in period of at least 12 months is ideal. Using our proven project management

planning, we are helping a growing number of employers to plan for, and execute, all the aspects of auto-enrolment. Beginning with a comprehensive impact assessment, and using our in-house actuarial capabilities, Broadstone analyse the various permutations and options available to the employer (existing pension scheme; new

Following the impact assessment, we believe the key to success is the establishment, agreement, and meticulous pursuit of the detailed project plan. This plan will involve all parties (including the employer, employees, trades unions, pension provider, Broadstone, payroll provider and legal advisers). At Broadstone, we believe in truly adding value; in preparing our client for the race ahead. Ignoring employer responsibilities is not an option and if employers have not started yet it is time to get on the track. 020 7893 3456 www.broadstoneltd.co.uk

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No limit to your working life Abolition of the compulsory retirement age may present some employers with awkward situations, but for others it is proving beneficial How abolition of default retirement age has affected business

By Ellen Bennett HOW OLD IS too old? It’s a tough question that many employers want to ask – but find they can’t since the law on retirement says there can be no compulsory retirement age. While many companies are reaping great rewards from keeping experienced employees on board for longer, others are struggling to cope with the change in the law. The compulsory retirement age was abolished last April, despite strong protests from employers’ groups. Over-65s are now the single fastest growing employment group in the UK, according to the Office of National Statistics, with many seeing continued employment as necessary to top up their retirement income. As the population continues to age, this trend will only accelerate – so how should employers prepare themselves? Awkward situations First, there are the pitfalls. When lobbying against the change in the law, employers’ groups argued that the abolition of the retirement age would lead to awkward and unpleasant situations, with longstanding employees hav ing to be performance-managed out of the business when they were no longer able to perform their duties satisfactorily. “Most of our members would retain people beyond the DRA [default retirement age] if they wanted to anyway, so we could never understand

Employers’ groups argued that the abolition of the retirement age would lead to awkward and unpleasant situations, with longstanding employees having to be performance-managed out

Increased uncertainty in workforce/succession planning 67 65

Positive impact from retention of skills and knowledge 57 45

Concerns about readiness of line managers to deal with declining performance 56 67

Negative impact on younger employees and fewer promotion opportunities 55 59

Benefits for younger employees of access to experienced employees 47 22

More rigorous application of performance management for older employees 44 64

Increased take-up of flexible retirement packages 33 27

Increase in age-related claims to employment tribunal 21 51

Other 15 4 0

2. Positive impact from retention of skills and knowledge 1%

3. Increased uncertainty in workforce/succession planning

33%

19% 24%

40% 35% Source: CBI

When it comes to retirement, planning is paramount – to fund a future you want, you have to start thinking and acting now

ensions are a bit like Marmite. Mention them in a conversation and there follows a frank exchange of opinions. Irrespective of the polarised view, one thing is certain: they’ll be in the news a lot. It will force millions to think about their provision for retirement but very few will actually make plans. In a little under five years every employee in the UK earning more

than £8,105 will be automatically enrolled into a pension without even being asked. For the average employee this is going to come as a shock. Generally people have no idea of how much money should be saved to provide an adequate income in retirement. A man with a pension fund of around £100,000 could buy an annual income of about £5,000 at 60. Using this rule of thumb it’s easy to estimate the size of fund. An annual income of £25,000 will

Pension planning INDUSTRY VIEW

4. Concerns about readiness of line managers to deal with declining performance

16%

43%

require a fund of £500,000. That sort of saving is just not going to happen without some serious commitment. The commitment manifests itself as a very simple decision: spend or save. It may be that to fund a future Huw Jones

44%

33%

why the law was changed,” says Mike Cherry, policy chairman for the Federation of Small Businesses. “It makes life much, much more awkward.” Larger businesses are also worried about new rules. A recent survey by the Confederation of British Industry found that the abolition of the default retirement age had already caused problems for more than two-thirds of firms. It argued that the government had failed to help businesses manage difficult situations with older workers, and called for businesses to be allowed to talk to their employees about their abilities without fear of legal action. Positive impact Despite their concerns, businesses do recognise the value of having older staff on the workforce. More than half the respondents to the CBI survey said the new rules had led directly to better retention of skills and knowledge – although fewer than one fifth of these said this had had a positive impact to a major or significant extent on the firm. Other research weighs more heavily in favour of older workers. In 2009, McDonald’s commissioned Lancaster University to research business performance across the UK. The results showed marked benefits from employing over 65s – 66% of McDonald’s managers said older employees empathised and connected well with customers, and more than 50% said older workers went the extra mile to deliver customer service. Wetherspoon, the pub operator, has not had a retirement age for several years. Personnel manager Owen Wacker said: “We are interested in recruiting people based on attitude, personality and ability to work in a pub environment, which is obviously very social.” He added that the company had a capability review framework in place, which helped managers deal with any performance issues arising from age.

lifestyle you need to make some choices and cut back now to enable you to fund the lifestyle you want. The long-term discipline required is self-evident and will be beyond all but the seriously committed. For many business owners the solution is to rely on their businesses to fund their retirement. This is something that requires detailed planning, but while they have little trouble in developing a business strategy, often their own financial strategy for the future is left to chance. The essential element of

retirement planning is planning. Too many people opt for accidental retirement income. They eventually get what they’re given, but it’s too late to do anything about it. The fact is though that there are experts and sophisticated tools available to help map out the future. Once legislation is fully operational it’s estimated that £10.7 billion will be invested into workplace pensions each year. More people will have a pension but few will have a plan. Getting to grips with your retirement plan could well be the best investment you’ll ever make. You should plan for your future, not sit back and wait, because it’s where you’ll spend the rest of your life. Huw Jones is a director of Proposito Financial Planning 0845 345 3536 www.proposito.co.uk

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Pension law change ‘will increase business burden’ Changes in legislation mean all employers will have to enrol workers in a pension scheme by 2015 By Ellen Bennett BUSINESSES BEWARE: THE biggest change to the pension laws in a generation comes into force next month. The change, which means that all employers must automatically enrol all qualifying employees into a pension scheme by 2015, leaves chief executives and managing directors with a long to-do list. First, businesses need to know their deadline for compliance. The biggest employers must meet the new regulations by next month, the smallest by 2015, with the rest falling somewhere in between. It is estimated that 380,000 workers will be signed up in October, 420,000 by the end of November and 600,000 by the end of the year. In all 11m people will be eligible for auto-enrolment, with the peak

“With employers expecting costs to increase, twofifths of bosses plan to pass the costs on to employees in the form of reduced wage increases”

enrolment period expected next spring. Even those employers that already offer pensions to their workers will have some new obligations to meet. “Eligible jobholders” are those workers aged over 22, earning more than £8,105 and not already signed up to a workplace pension scheme. They must be enrolled automatically into a scheme that meets new rules on minimum levels of contributions and benefits. Eligible jobholders may choose to opt out of the scheme – but only after they have been automatically enrolled. A new option Employers must then decide who will provide their pensions. In addition to the established pensions industry, there is a new option: the National Employment Savings Trust. This offers a simple and low-cost option particularly for smaller employers that have not run a scheme before. It has been criticised, however, for putting employer contributions at the relatively low level of 4 per cent, and for not allowing savers to transfer money from other pension schemes into their accounts. Employers also bear most of the responsibility for educating their workforce about the new regulations, and making them aware of their rights.

Business checklist Plan ahead: The law comes into force for different businesses at different times, according to size. Make sure you know when your business has to comply. See www.thepensionsregulator. gov.uk Calculate: Work out well in advance what the extra cost to your business will be, so you can determine how to mitigate it Research: Businesses select their own pension plan, so you need to research the options. You may wish to continue with your existing pension provider; choose a new one; or use the government-backed National Employment Savings Trust (www.nestpensions.org.uk)

Cherry: ‘burden for small employers’

All in all, the new regulations are likely to be time consuming and costly for employers – particularly smaller businesses that do not currently offer pensions. Mike Cherry, chair of the Federation of Small Businesses’ policy committee, warned that the cost of auto-enrolment could drive smaller employers out of business, adding: “It’s another burden that’s going to fall disproportionately on smaller employers.” The FSB is lobbying the government to take another look at how much the new rules will cost smaller employers before the final deadline for compliance in 2015. For more information, or to find out by when your business must comply with the new rules, visit www thepensions regulator.gov.uk

Communicate: Communicate early and often – make sure your employees know the options that are open to them under the new system. This will help them to make better decisions Analyse: Categorise your workforce to determine which employees are eligible for the new regime

Honesty in management charges The process of retirement saving in the UK is evolving, and so too must its strategy INDUSTRY VIEW

utomatic enrolment (AE) is the biggest pension reform UK employers and employees will experience in decades, and will see an estimated 10 million employees enrolled into a workplace pension. Its introduction is designed to address the problem of under-saving for retirement in the UK. According to B&CE, provider of The People’s Pension, product charges need to be clear and transparent. Their research found more than

30 different charges being levied on pension schemes that included initial service charges, exit fees and various administration and investment costs. This level of complexity makes it difficult for employers to compare schemes and causes distrust with employees. Quoting an Annual Management Charge (AMC), which is taken as a percentage of the individual’s fund under management, is fairly standard practice but usually only represents a portion of the total charges levied. Also, surprisingly given the extent of regulation in

the UK, there are no consistent regulations governing AMCs across the different pension scheme vehicles which are often quoted as the scheme or sole charge, but can be the tip of the iceberg in terms of total charges levied on a pension pot. The People’s Pension for example, operates a simple and transparent charge of 0.5 per cent AMC. There is no doubt

automatic enrolment is a catalyst for change for retirement saving in the UK, but brings complexities in terms of administration and compliance. Employers must consider what their chosen provider can offer such as an online administrative offering that helps the employer assess their workforce, manage the AE process and meet their regulatory obligations. A further consideration is fund choice for employees. Research shows that too much fund choice can disengage consumers. Keeping things simple such as offering three risk-based investment profiles; not over-complicating the number of investment funds is key to successful engagement. Jamie Fiveash is director of customer solutions at B&CE 0800 612 8080 www.thepeoplespension.co.uk

The elephant you can’t afford to ignore B&CE understands the realities of auto-enrolment and the challenges businesses are facing based on our 10 years’ experience of providing an auto-enrolment style pension.

For the people, for life www.thepeoplespension.co.uk

0800 612 8080 thepeoplespension@bandce.co.uk

B & C E Financial Services Limited, Manor Royal, Crawley, West Sussex, RH10 9QP Registered in England no. 2207140. To help us improve our service, we may record your call. B & C E Financial Services Limited is authorised and regulated by the Financial Services Authority (FSA). However, the People’s Pension is an Occupational Pension Scheme and therefore is not regulated by the FSA.

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Pensions

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Adrienne Hawkes

Realising your dream future Having worked so hard, why should your annuity take a cut? Now you can live the life you deserve by increasing your guaranteed income INDUSTRY VIEW

hen it comes to taking your pension benefits, the very simple step of talking to an independent Chartered Financial Planner pays considerable dividends. Why volunteer for a reduction in your possible income in retirement? Having worked hard and saved for your future via your pension, this dedication deserves to be treated with respect and diligence when the time comes to reap the benefits. You also deserve to live the life you want in your retirement and maximising your guaranteed income is an important step towards this. Much more than scrutinising the size of your retirement pot, what Professional Financial Centre (PFC) are really talking about here is attaining quality of life for you, and perhaps your partner, over the next 10 to 30 years. How do you want to live your life? What would a perfect day, month or year look like? These considerations can, and should, be looked at wherever you are currently standing on your life’s path, be it pre- or post-retirement, and factor

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significantly in our line of questioning with clients. Obviously, the sooner these aspirations are taken into consideration, the more planning can be done with regard to putting strategies into place to achieve them. We all deserve to realise the kind of life we truly aspire to and, with a full appraisal of the available options, it is generally possible to increase the level of

guaranteed income, sometimes by a significant amount. For example, one client so advised has recently retired with a 41 per cent increase in her guaranteed income from that being offered by her existing pension company. This was through the use of an enhanced annuity as she had health issues that could be taken into account. It has been estimated that approximately

60 per cent of the UK population may be eligible for an enhanced annuity. To our mind, this makes it an imperative to at least consider eligibility for each client, given that the positives are so great. Everyone that we talk to about their retirement planning is taken through a meticulous process of enquiry to ensure that nothing is overlooked. One of the key

preliminaries is completion of a detailed health questionnaire. This guarantees that we achieve full disclosure and can assess eligibility for an enhancement as, without it, pertinent information can be so easily overlooked. This level of groundwork and our commitment to guiding our clients through the planning process is key, with the potential to have a lasting impact on their income for many years to come. As a business, PFC fully understand that it takes a leap of faith to place one’s trust in a third party and that is why we operate on such a transparent fee-based approach where the client retains total control throughout the planning process. We are proud of our corporate Chartered Financial Planning status as evidence of our commitment to continuing professional development and our ethics in working for you and with you. Jeremy White is a chartered financial planner 0118 979 7596 www.pfcthamesvalley.co.uk

Business Reporter · September 2012

AN INDEPENDENT REPORT FROM LYONSDOWN, DISTRIBUTED WITH THE SUNDAY TELEGRAPH

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A policy to protect With the right trustee insurance, your pension scheme can be protected against the risk of liability INDUSTRY VIEW

rustees of occupational pension schemes have an increasingly difficult job to do with the expansion of the legislative burden following the Maxwell debacle. This is also borne out by the growth in claims that demonstrates that errors can occur even in the best managed schemes, particularly in the increasingly dominant environment of

defined contribution schemes. Liability for breach of trust is a personal liability and a trustee is liable to both the scheme beneficiaries and to scheme creditors. The risk is potentially greater after a winding up when there may be missing beneficiaries or other contingent liabilities but no assets. A trustee or trustee director is also potentially at risk of having to pay a civil fine for breach of pensions’ legislation. Jonathan Bull is chairman at OPDU

Limited, which provides specialist be of no value upon the company becoming insurance cover and services to trustees and insolvent when the trustees are still having sponsoring employers. He comments, “A to manage the scheme. Insurance, however, trustee’s personal exposure does not cease can stand in front of such indemnity and when they retire and their post retirement exoneration clauses. situation may make them particularly Insurance plays an important role in vulnerable. Problems in pensions protecting trustees, pension scheme also often take a considerable time assets and the balance sheet of the after the event to materialise. sponsoring employer. By It is important, therefore, that the purchasing a properly drafted position of retired trustees and insurance policy, trustees can be pension managers is properly confident that they have protected, and lifetime protection against the liabilities insurance cover is available for that might arise in performing retired trustees.” Bull: protection for their duties while also giving trustees is vital Many trustees will have the members comfort that their benefit of clauses within the trust deed and interests are being looked after properly in rules exonerating them from liability, and in preserving the scheme assets which is many instances, an indemnity may be given particularly important today when deficits by the scheme or the sponsoring employer are common. company. However, it is not always appreciated that such clauses are subject to OPDU is managed by Thomas Miller statutory limits. It should also be realised Jonathan.bull@opdu.com that an indemnity from the employer would www.opdu.com

Step up your retirement

Getting what you deserve

It’s never too late to start a retirement plan. Prepare today for a brighter, more prosperous tomorrow

Finding the right financial solution for your retirement has never been simple, so it’s crucial to investigate all your options

INDUSTRY VIEW

f you’re thinking of the steps you need to take to ensure you have a successful retirement plan, you’re not on your own. Many of us put off thinking about how we are going to deal with our finances during our retirement, but it pays to look at what income you will have once you stop working and you’re reliant on your accumulated pension pots.

Starting point Guidance and support are essential when planning for retirement. Whether you carry out your own research, or you seek the assistance of an independent financial adviser, it is important to determine your current position, because you need a starting point from which to put a plan together. The number of years you have until retirement will determine the flexibility of the action plan that can be put into place, and the suitability of products and investments you can and should consider. The earlier you plan the better off you will be, and you may have the opportunity to use the flexibility of a self-invested personal pension (SIPP) to consolidate, accumulate and diversify your approach to help achieve your ultimate retirement goals.

Consider flexibility If you are close to your retirement, you need to consider the flexibility you want when you’re no longer working. If you have already accrued a reasonable size pension pot you may which to draw down from that and again a SIPP may give you the flexibility you are seeking. However, you may just want certainty until the day you die and while rates

The earlier you plan the better off you’ll be are great, an annuity purchase may be something for you to consider. The question is, do you know what you want? If the answer is ‘no’, then start your investigation into your options today so you are at least prepared and in control of your destiny. Carey Pensions UK is an independent pensions provider, both onshore and offshore, and can provide administration and trustee services for pensions for individuals, partners, families, groups or companies. Christine Hallett is CEO of Carey Pensions UK 01908 336010 www.careypensions.co.uk

recent report by the National Association of Pension Funds (NAPF) and Pensions Institute Research has estimated that pensioners are losing up to £1 billion a year in income because they buy “inappropriate annuities for their circumstances, frequently at the wrong price”. One respondent interviewed in the report suggested that the income being offered by pension providers to existing investors - people who had saved hard for sometimes many years - could be up to 20 per cent lower than if those same investors shopped around. The suggestion is, by staying put, you could be missing out on an additional £1 in every £5. For those who have lifestyle or health issues – which could include anything

from being a smoker, having a condition such as diabetes or suffering from cancer or a stroke – the difference could be even higher, perhaps by another £2. The problem is, the decisions you make when you retire will last for the rest of your life. Every additional £1 of income quickly mounts up and, after 15-20 years, that total becomes a sizeable sum of money. For example, the average Partnership client in 2011 received over £1,000 a year more than they would have received from even the best standard insurer. The actual amount you can gain depends entirely on your personal circumstances – so while this average means

some received less, others received a lot more. It is for this reason that Partnership wants to see everybody seek advice when they come to retirement. The Association of British Insurers found that “access to a trusted adviser is the strategy most likely to improve” the income that a pensioner finally receives. When there is payback like the above to be gained, you can see the sense in at least having a conversation. Thanks to medical advances, we are now living longer than ever before, meaning retirement has become a life stage of its own. Finding the right financial solution for this stage can therefore be complex – perhaps more so than at any other stage of life. Taking time to investigate all your options is therefore paramount - and the benefit of getting expert support to do that should not be overlooked. www.partnership.co.uk

Business Reporter · September 2012

AN INDEPENDENT REPORT FROM LYONSDOWN, DISTRIBUTED WITH THE SUNDAY TELEGRAPH

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A powerhouse for change Engaging and communicating with employees are key to auto-enrolment success INDUSTRY VIEW

uto-enrolment is an opportunity for employees and employers to improve pension provision in the UK and is one we should all embrace. However, set against the growing dissatisfaction with pensions in the private sector, rises in employee contributions and reforms to public sector pensions, the likelihood of people choosing to opt out of pension provision altogether is increasing. High volumes of opt-outs will place a further cost burden on members and taxpayers,

and the legislative intent, not to mention our personal aspirations for later life, would not be realised. Change itself is a powerhouse and requires clarity and shared understanding. MyCSP recently proved the value of communication and engagement when, the leadership team delivered a comprehensive engagement and

Research reveals a lack of understanding of pensions

communication programme to support major transformation. The value of this approach was proven when 72 per cent of employees participated in our first people survey – a positive result given that mature high performing employee-owned organisations expect a 75 to 85 per cent response rate. MyCSP’s work on pension scheme memberinsight tells us employees must

be engaged and understand the pension on offer in order to appreciate its value and make informed decisions. Yet research reveals a lack of understanding of pensions amongst many. Autoenrolment is no exception. Communication and education will be key to its success and employers have a vital part to play in providing this for their

employees. What if there was a service from a pension organisation experienced in significant transformational change, ready to support employers and employees to understand the changes required of them and the benefits of those changes? With this in mind MyCSP has launched its new employer training and engagement service MyCSP training and employee engagement services.

the income you draw each year to suit your changing requirements. If you are in semi-retirement with a fluctuating income, you could ’suspend’ withdrawals from your plan if you don’t need them. In addition, the death benefits from an income drawdown plan give a surviving spouse or civil partner more options than the annuity route. With this type of arrangement however, your investment risk continues. We currently have a very volatile investment climate which may continue for some years; with that said, you could employ a low risk investment strategy. Understanding the composition of the investments within your pension portfolio and the risks involved are a crucial consideration. If this is your only source of income in retirement other than state pension, can you stand the thought of your pension fund fluctuating in value post retirement and the

income you can draw possibly reducing in the future? It is worth noting that the amount you can withdraw from your drawdown plan is limited by HMRC rules, unless you have guaranteed pension income of at least £20,000 per annum, although any income you draw is still subject to tax. Whilst annuity rates are forecast to improve in the future should government gilts fall in value, when will this be? If you are going to consider income drawdown, seek independent advice to make sure it is right for you in your overall circumstances. You must understand the risks involved and the charges levied by your adviser, the provider and fund managers.

Phil Bartlett is CEO at MyCSP 0113 2327616 www.mycsp.co.uk

Tailored to fit With this carefully crafted pension plan, you can have access to the full range of investment options INDUSTRY VIEW

hen we set up our award-winning Financial Planning Practice 10 years ago, pensions were not popular – stock markets were still falling following the burst of the Tech Bubble and financial scandals, like that of Equitable Life were in the news, so not much change there. The one area of pensions that was still attractive to the business owners and professionals that formed our client base were self-invested personal pensions (SIPPs). These still play a major role in most of our clients’ planning as they allow us to set up low-cost but effective tailored investment portfolios and they give us the flexibility at retirement to use income drawdown and phased retirement. SIPPs also provide access to the more

esoteric investment options that can be highly effective tax planning tools, for example commercial property purchase, unquoted shares or third-party loans. Our need for an SIPP that could provide these esoteric investment options - but would also allow our business-owning clients to have the degree of control they needed - led us to set up our own SIPP. However, we only use our own plan where it is the perfect fit for a client who needs an SIPP that offers access to the full range of investments allowed without penalty by HMRC. Our numerous national awards for SIPP and drawdown advice demonstrates our expertise in this area. 0845 0066 204 www.centralfinancialplanning.co.uk

Funding gets flexible? Income drawdown offers significant benefits providing the risks are properly considered INDUSTRY VIEW

hy might you opt for income drawdown with your pension funds rather than the greater security conventional annuities provide? One reason would be to draw your tax-free cash entitlement, typically 25 per cent of your fund value in instalments, if you don’t need it in one amount immediately. This strategy could provide a tax-free ‘income’ for possibly a few years, allowing your remaining fund a chance to grow. You also have the ability to vary

Philip Gough

Philip Gough is managing director at Somerville Financial Services 0207 648 1370 www.somervillefs.co.uk

Business Reporter · September 2012

Pensions

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Last rites for the pension A dysfunctional industry providing a product increasingly at odds with what people want is set to spell the end of the pension as we know it By Michael Johnson COME 2050, IT is likely that no one will be saving for their retirement within a pension framework; indeed, the word “pension” may already have been consigned to history. We will certainly be living in a DB (defined benefit) desert, the last vestige of DB provision (the public sector) having probably collapsed around 2025, care of its unaffordability. Today, at least four distinct forces are acting to strangle pension saving. First, it is at odds with the way that Generation Y, in particular, live their lives. To them, pensions are already from a bygone age. They are preoccupied with the burden of college debt, f ragmented careers and increasingly unaffordable housing. Why put aside pension savings that offer no immediate utility, and a distant, uncertain return? More generally, consumeroriented and financially myopic behaviour is so deeply embedded that, for many people, it occludes any fear of poverty in retirement. And with the state pension age rapidly in retreat, the prospect of “retirement” is receding

anyway. Consequently, the pensions industry’s This pushmi-pullyu position manifests itself as ready access, the ISA brand enjoys a trust next cohort of clients will simply fail to appear. contradictor y policies and ambiguous advantage over pension products and, unlike Second, the industry is widely distrusted. communication, which does nothing to pension-derived income, ISA draw-downs At best, many people only engage with it very stimulate a savings culture. are free of income tax. Consequently, well reluctantly. Its abuse of asymmetric information, Finally, our ageing population is £30bn before 2050, ISAs may become the ludicrous complexity, opacity and moral hazard exerting increasing financial pressure annually spent dominant retirement savings vehicle, by government (together enshrined in the principal-agent on the state. Faced with the prospect particularly for the 89% of the working on tax relief problem) mean that competitive forces (notably of a long-term weak economy, the population who do not pay higher rate pricing tension) fail to operate effectively, resulting government is likely to curtail tax relief income tax. in inefficient markets. This, combined with (£30 billion, annually) on pensions But, in parallel, a savings “third way” may endemic short termism and excessive industry contributions. emerge, perhaps as a single product that serves costs (partly through extended chains of That said, the data suggests that the lure of tax consumers’ two basic needs: discretionary (rainy intermediaries), works against customers’ day) saving and retirement saving. Embodying the merger of today’s disparate ISA and pension interests. Consequently, savers’ capital is “Data suggests the lure of tax worlds, and perhaps branded the Super (as in unnecessarily eroded. In essence, part of ISA, it could be capable of relief is increasingly insufficient “superannuation”) the industry is dysfunctional. Indeed, the automatically differentiating bet ween pursuit of its own self-interest, at the expense to overcome pension discretionary and retirement savings for the of its customers, may prove to be its nemesis. purpose of allocating tax-based incentives. The state is also part of the problem. products’ lack of flexibility ” This would reinforce the (well understood) Successive gover n ment s, principle that giving up access would provide a irrespective of political hue, have relief is increasingly insufficient to overcome higher return. In addition, at annuitisation, exhibited a lack of common pension products’ lack of flexibility. For the first risk pooling could become commonplace, to purpose. The time, in 2010-11, subscriptions to stocks spread longevity risk (along the lines of withDepartment for Work and shares ISAs (£15.8 billion, up 26% profits funds, albeit rebranded); a case of Back and Pensions wants £15.8bn on the previous year) exceeded to the Future? people to save, in subscriptions to subscriptions to personal pensions (£14.3 shares ISAs in whereas the billion, marginally down on the previous l Michael Johnson is a Research Fellow at the 2010-11 Trea su r y wa nt s year), and this without the bribe of up- Centre for Policy Studies (CPS). He is the author front tax relief. people to spend, thereby of Put the Saver First (CPS, July 2012), which increasing VAT receipts. In addition to the crucial advantage of details 104 proposals to revive a savings culture.