Charity Finance Directors’ Group

Understanding the Impact of Pension

Reform

Presented by Ian Bird

Areas covered1. General Pensions

Update

2. Auto-enrolment in plain english

3. Understanding the National Employment Savings Trust (NEST)

4. How early decisions could save employers huge sums for many years

General Pensions Update Removal of the default retirement ageState Second PensionProposed flat State Pension from 2015/2016Lord Hutton Report and Impact on final salary schemesTupe & Fair Deal

Aims of Pensions ReformTo increase the retirement

savings of the nation

Aimed particularly at the low paid who do not save and small employers

The hope is that many continue to save and not opt out

Auto-enrolment into ‘a’ pension

Key principles:

New employees auto-enrolled after 3 months

All non-pension members enrolled

Employees must join and then can then choose to opt out

Opt outs re-enrolled every 3 years

Employers must auto-enrol into a ‘Qualifying’ pension scheme1. Use NEST

2. ‘Certify’ own existing Group Pension

3. Certified Scheme & Nest

Contribution structureEnrol if over 22 and under State retirement age

with earnings over £7,336

‘Jobholder’- pays 5% of ‘Qualifying Earnings’ and Employer - pays 3%

‘Qualifying’ earnings = total earnings in the band between £5,715 and £38,185 (if earn over £7,336)

Total Earnings include basic salary, commission, bonuses, overtime and statutory payments

Phasing in contributions

Original Phasing proposal

2012 Jobholder 1% Employer 1%

2013 Jobholder 3% Employer 2%

2014 Jobholder 5% Employer 3%

Phasing to help employers with the extra cost

Staging date by employee numbersEmployee No. Staging date120,000 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 500 - 799 1 Nov 2013350 - 499 1 Jan 2014 250 - 349 1 Feb 2014 240 - 249 1 April 2014 150 - 239 1 May 201490 - 149 1 June 2014 50 – 89 1 July 2014 Less than 50 Aug 2014/ Sept 2016

36 Staging Dates

Delayed phasing for early stagers

2012 Jobholder 1% Employer 1%2013 Jobholder 1% Employer 1%2014 Jobholder 1% Employer 1%2015 Jobholder 1% Employer 1%

2016 Jobholder 3% Employer 2%2017 Jobholder 5% Employer 3%

How the numbers work…

£38,185

£5,715

£32,470

8% Total Contribution

£2,597.60

Max £3,600 pa

Salary

£7,336£0

contribution

£20,000

£6,500

8% Total Contribution

£1,142.80

‘Certification’ of existing contributions

Pensiona ble Pay

If more than 85%7%

If less than 85%

Total Pay

Total Pay

Total Pay

8% 9%

Option 1

Option 3Option 2

Consequences of non-compliance

It will be a criminal offence for employer not to:

• set up in first place

• auto-enrol

• re-enrol every 3 years

• make an inducement

Individuals not just employers• Trustees or managers of

pension scheme• Payroll administrators• Accountants• Scheme administrators

Fines:£400 Fixed penalty

Up to £10,000 per day

Up to 2 years in prison

What are the charges?Annual Management Charge

0.3%

Contribution charge 1.8%

Aim to phase out contribution charge but no details of when

Aim to recoup the est. £600m of running costs over 10 years

Who will do NEST investment?

US Group

440 Investment Professionals

28 Worldwide locations

$1.9 Trillion under management

No transfers in or out

Who will do NEST administration?Indian Group into:

• IT• Communications• Engineering• Materials• Services• Energy• Consumer products• Chemicals

Were they selected or last man standing?

Famous for the cheapest new car in the world

What about the Return On Investment?

• Employees might think you are only paying into pension because you have to

• Employee appreciation could reduce

• ‘Certification’ because what you offer is better than NEST?

How do you create and maintain a good ROI?

Internal marketing

Education

Communication

Individual advice

Forecasting and targeting

Leads to higher employee appreciation of pension

Salary SacrificeOne of the most cost-effective ways to get more into employees’ pensionsEmployees elect to reduce their salary and have their sacrificed salary paid into their pension. As the employer will not have to pay National Insurance (NI) on the sacrificed salary, this contribution can be enhanced by redirecting some or all of the NI Saving into the employee’s pension.

£1 of income for a basic rate tax payer, who uses it to make a pension contribution

£1 salary sacrifice with employer paying pension contribution (assuming the full employer’s NI rebate is added)

Employee Earnings £1.00 Nil (no NI on pension contribution)

Employer NI £0.14 £1.14Total cost to employer £1.14 Nil (£1 salary sacrifice instead)Employee income tax (20%) and NI (12%)

£0.32 Nil

Employee net monthly contribution to pension

£0.68 Nil

Employee’s total gross contribution to pension

£0.85 £1.14

Salary Sacrifice

Fees and retainers

Fund based remuneration

Factored fund based remuneration

Combinations of the above

How are employers

paying for advice to employees?

Need for advice will increase

NEST will mean increased administration for employers

Higher numbers of employees auto- enrolled will have questions and ongoing queries

Adviser numbers down after 2012?

Minimum qualifications increased as of Jan 2013

Adviser numbers predicted to drop

Too old to make journey?

No more factoring of commission to cover cost of enrolment and advice out from Jan

2013

Effects of the Retail Distribution review

Preparation for 2012?Decide which type of pension provision to make for staff from 2012 - NEST, employer pension scheme or both. Examine existing pension schemes to determine if they will meet the minimum requirements set out by the act & offer good valueWill you offer salary sacrificeConsider the cost impact of the compulsory minimum 3% employer contribution and your current contribution basisAlso consider the implication of the Retail Distribution Review (RDR) and how employees will pay for any advice

Thank you and questions?

• This presentation is for information purposes only and does not constitute advice or a personalised recommendation

• The value of investments can fall as well as rise

• Past performance is not a reliable indicator of future results

• This presentation is based on our understanding of current and proposed legislation, which may change

• Tax reliefs are those that apply currently, the value of such reliefs will depend on the circumstances of the plan holder and may be subject to change in the future

• What you get back at retirement cannot be guaranteed and will depend on how much you pay in, investment performance and interest rates when you retire

Contact UsFor further information, please contact;

Ian Bird DipFAFoster Denovo LtdTel: 0845 838 6060Email: ian.bird@fosterdenovo.comWeb: www.fdemployeebenefits.com

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