National Housing Federation Finance Conference …doc.housing.org.uk.s3.amazonaws.com/Presentations...scheme to supplement or even replace the existing funding arrangements. The sponsor

Pension Session

Jaime Norman

National Housing Federation Finance Conference

November / December 2012

© 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent

member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

What are the 4 big cost issues?

Cost

pressures

■ 30 September 2011 valuation results

■ Introduction of alternative CARE benefits

■ Changes to DC benefits structure

■ Revision of the closed employer loading

■ Decisions to make before 31 January 2013

■ Employer duty

■ Prescriptive legislation

■ Fines for non-compliance

■ Systems implications

■ Employee engagement

■ Staging dates approaching

■ March 2013 funding valuation

■ Change in future benefits

■ Protection of past benefits

■ 50/50 option

■ Change in pensionable salary definition

■ Funding position deterioration

■ Liability management / risk reduction

■ Asset Backed Funding

■ Investment strategy

■ Maximise cash flexibility

■ Review participation

SHPS LGPS

Auto-enrolment Own scheme

Social Housing Pension

Scheme (SHPS)



SHPS valuation – what do the results mean?

■ Challenging market conditions – although assets have performed creditably

■ Past:

■ Deficits higher so increase in contributions

■ Change in approach to allocating deficits – big losers are those with proportionally small

active membership

■ Future: £ cost of future service increasing by 10% to 20%, depending upon benefits provided

-1500

-1000

-500

0

500

1000

1500

2000

2500

3000

3500

Assets Liabilities Deficit

30/09/2008

30/09/2011

£’0

00

s

3,017

2,198 2,062

1,527

(1,035)

(663)



SHPS valuation – NHF / KPMG Report

■ Funding position has moved in line with “typical” private sector schemes

■ The funding assumptions are broadly in line with occupational schemes with a

reasonably strong employer

■ Markets have further deteriorated and so costs are likely to rise further

■ Increases in costs are also expected as a result of the future increase in the

earnings growth assumption following the 2014 valuation.

■ SHPS future service costs are generally lower than occupational schemes

■ Change in closed employer loading will increase costs for some

■ New 120th CARE section or DC section could be used to reduce future costs

■ Decisions on future benefits need to be confirmed by 31 January 2013



SHPS valuation – Discussion

■ How many in the audience have employees in SHPS?

■ Has everyone confirmed what benefits they are going to provide for members

from April 2013?

■ How many people have reduced their future benefits?

■ How many remain on Final Salary / CARE / DC?

■ Has anyone considered leaving SHPS?

■ How many are paying the closed employer loading?

■ What are the views on how SHPS operates / communicates?

■ How many saw / read the paper? Any feedback?

Local Government Pension

Scheme (LGPS)



Costs and risks Manage the message Review your strategy

■ Future costs and risks can

now be better quantified

■ Take into account auto-

enrolment

■ Allow for current market

conditions

■ Shape your communication

strategy

■ Impact on employee

engagement

■ Employee surveys

■ Total reward

■ Taking on public service

contracts

■ Consider future accrual

■ Plan for future exit

Take control

LGPS 2014 – what do the benefit changes mean?

■ Seek guarantees from the council

■ Negotiate departicipation terms

■ Challenge funding assumptions (on a group / sector basis)

■ Assess non-cash solutions (e.g. guarantees / security /bonds)



LGPS valuation – snippets from the regional LGPS conference

■ 50% increase in deficit primarily due to falling gilt yields

■ Increase in average future service costs partially mitigated by 2014 reforms

■ Mitigating effect will vary depending upon profile of membership. Employers with

high staff turnover and/or low pay growth will have a smaller “gain”

■ Pensionable Salary definition now to include contractual overtime

■ Still awaiting details of the crucial cost control mechanism

-3000

-1000

1000

3000

5000

7000

9000

Assets Liabilities Deficit

31/03/2010

30/09/2012

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

Current rate Updated to 2012 Post 2014reforms

Past Service Future Service

11.6% 12.1%

13.8%

£’0

00s

Em

plo

yer

contr

ibution r

ate

Source: Merseyside Pension Fund 2012 Annual Conference



LGPS – Discussion points

■ How many in the audience have employees in LGPS?

■ How many are still open to new entrants?

■ Has anyone costed what the benefit changes could mean to them?

■ Would a significant increase in the employer contribution trigger consideration

of providing benefits from elsewhere? Is there a “trigger” cost?

■ How have these changes been communicated to your employees?

■ How popular do you think the 50/50 option will be?

Auto Enrolment



Auto-enrolment – what are the basics?

Auto-enrolment

Employers must identify and automatically enrol

eligible jobholders into a qualifying pension scheme

Employees can opt-out if they wish but must be re-

enrolled every three years

Very specific rules for required processes and

deadlines specific

Obligations apply from the employer’s staging date

Employer (by PAYE

scheme size)

Staging

date

120,000 or more 1 Oct 2012

50,000-119,999 1 Nov 2012

30,000-49,999 1 Jan 2013

20,000-29,999 1 Feb 2013

10,000-19,999 1 Mar 2013

6,000-9,999 1 April 2013

4,100-5,999 1 May 2013

4,000-4,099 1 June 2013

3,000-3,999 1 July 2013

2,000-2,999 1 Aug 2013

1,250-1,999 1 Sept 2013

800-1,249 1 Oct 2013

Minimum contributions (% of qualifying earnings)

Date Employer rate Total rate

From staging date 1% 2%

Oct 2017 2% 5%

Oct 2018 3% 8%



Auto-enrolment – what are the issues for the sector?

LGPS

Own DB scheme

Own DC scheme

SHPS

Multiple Schemes

Full-time staff

Contractors

Part-timers

TUPE transferees

Casual Workers

Agency staff

Variety of

employees



Auto-enrolment – Assess your workforce

ELIGIBLE JOBHOLDERS

Must be automatically enrolled

NON ELIGIBLE JOB HOLDERS

Have the right to opt in

ENTITLED WORKERS

Have the right to join

16 AGE 22 SPA 75

£5,564

£8,105

EA

RN

ING

S



Auto-enrolment – Three key workstreams

Financial impact

• Review data quality

• Profile workforce

• Estimate cost impact

Systems

• Payroll

• Pension administration

• HR/other third party

Communications

• Identify requirements

• Review timing

• Consider wider employee engagement strategy

Key decisions

• Transitional period

• Deferral period

• Minimum

compliance?



Auto enrolment – discussion points

■ Where are people up to in terms of planning? Have you set up a project

team?

■ What is the average take-up of employees?

■ What costs for this (and the SHPS/LGPS valuations) been built into future

budgets?

■ How many have new employees eligible to join LGPS? Were you aware that

any new employees may need to be auto enrolled into the LGPS?

■ Have your payroll department held discussions with your payroll provider

regarding their auto enrolment capabilities?

■ How are you planning to communicate with employees?

Own Scheme



Own scheme – what are the options?

Optimise

Investment

strategy

Fully

funded

Scheme

Assets

Ongoing

liabilities

Reduced

ongoing

liabilities

Insured

benefits

Ongoing

funding

"gap”

Increased

Assets

“Insured

assets”

Route to self-sufficiency

Central

Asset

Reserve

Liability management exercises can

reduce liabilities significantly

Buy-out / hedging

Monitor buy-out /

hedging

opportunities

Ongoing

Consider

aligning

investment

strategy with

long-term

pensions

strategy Enhanced

transfer

values

Pension

Increase

exchange

Early

retirement

CAR may be

utilised to

maximise cash

flexibility and

to support de-

risking

strategy



CAR: Key steps involved

Sponsor Pension Scheme

1

2

3

Central Asset Reserve

■ Step 1: sponsor capitalises CAR with assets.

■ There are a number of possible structures and the most efficient will depend on the circumstances

involved.

■ Step 2: Sponsor transfers an interest in the CAR to the pension scheme.

■ This attracts a corporation tax deduction.

■ The pension scheme’s interest in the CAR counts as an asset.

■ Step 3: assets of the CAR are distributed.

■ These are passed either to the pension scheme or back to the sponsor.

■ Distribution of assets depends on triggers set initially by the sponsor.



Central Asset Reserve how it can help

How CAR can help

Efficient use of

sponsor resources

■ Existing sponsor assets (e.g. property, brand names, intra-company debt ) that generate a regular

income stream are placed within a partnership structure (the CAR).

■ The income from these assets over an agreed term (at least 10 years) is assigned to the pension

scheme to supplement or even replace the existing funding arrangements.

■ The sponsor retains control of the assets and continues to record them on the balance sheet.

De-risk investment

strategy

■ The increase in support for the scheme means that the investment strategy followed by the

trustees can be de-risked without requiring further increases in contributions.

■ Depending on the income available from the assets within the CAR, it may be possible for trustees

to follow a “self-sufficiency” type investment strategy.

Increased security for

trustees

■ Trustees can recognise the present value of the payments assigned to them from the CAR as a

scheme asset straight away, leading to an immediate improvement in the funding position and

security of members’ benefits.

Rationalise legacy

schemes

■ A CAR structure can be used to equalise the funding level of a group of pension schemes and

hence allow legacy schemes to be merged without requiring one-off contributions.

Facilitates insurance

solutions

■ Insurance solutions, such as buy-in products, can be put in place more easily if a CAR structure is

established. Any one-off costs of purchasing such a product can be spread over a longer term and

do not need to be funded immediately.



Own Scheme – discussion points

■ How many have looked at actively managing down their liabilities?

■ Does anyone have a medium term strategy to derisk over time?

■ Have there been difficult discussions with the trustees regarding sponsor

covenant or deficit recovery periods?

■ Have any of the audience considered using contingent funding?

Summary



Pensions – key themes and questions

■ Unprecedented changes in the pension environment leading to higher costs

- LGPS changes – winners and losers

- General market deterioration leading to increased costs

- Auto enrolment

- General review of remuneration and T&C’s

■ You should be asking:

- Are you ready for auto enrolment? You need at least 12 months to

ensure it is considered fully and implemented properly.

- Have you considered ways to mitigate pension costs ahead of the next

funding valuation?

- Could an asset backed funding arrangement significantly reduce your

pension costs?

- Are the potential long term cost impact of the LGPS changes

affordable?

- Do your employees understand and appreciate the benefits they are

receiving?

Questions?

Presenter

Jaime Norman

+44 (0) 117 905 4044

[email protected]

© 2012 KPMG LLP, a UK Limited Liability Partnership

and a member firm of the KPMG network of

independent member firms affiliated with KPMG

International Cooperative (KPMG International), a

Swiss entity. All rights reserved.

The KPMG name, logo and ‘cutting through

complexity’ are registered trademarks or trademarks

of KPMG International Cooperative (KPMG

International).

Documents

National Housing Federation Finance Conference …doc.housing.org.uk.s3.amazonaws.com/Presentations...scheme to supplement or even replace the existing funding arrangements. The sponsor