Does the exodus signify genesis?

Transcription

1 Pensions Does the exodus signify genesis? Pensions Survey: tracking the views of key decision makers* 3rd Edition June 2008

2 A key finding of our latest report is the accelerating exodus from defined benefits pension provision. Marc T Hommel Pensions Leader PwC

3 Contents Executive summary 01 Key findings 02 Background and methodology Exiting defined benefits 05 Exodus gains momentum 05 Buying in to buyout Funding and investment 09 Agreeing scheme funding 09 Major concern about volatility 09 Growth in use of contingent assets continues 09 Understanding the Regulator s guidance 09 Longevity shock Future role of pensions 12 Pensions as part of the wider employment deal 12 Group SIPPs are increasingly on the agenda 13 Preparing for Personal Accounts Managing conflicts 16 Independence day for trustees 16 Acknowledgements 17 Contact us 18

4 85% of CEOs consider the ability to anticipate and manage risk to be a critical skill 11th Annual Global CEO Survey

5 1 Pensions Executive summary A key finding of our latest report is the accelerating exodus from defined benefits pension provision. The desire by corporates of all sizes to reduce or rid their balance sheet of defined benefit liabilities continues to accelerate, driven by concerns over their ability to control the associated costs and risks. This is heightened for the 40% of participants that have defined benefits pension liabilities that are more than 25% of the value of the sponsoring corporate including 16% where pension liabilities exceed the value of the company. The desire for change raises further questions about the future for pensions provision, especially given their increasing importance in attracting and retaining staff the very people that determine the success of any company. This report is designed to stimulate discussion and debate, so if you have any views or opinions that you would like to share please get in touch, Marc T Hommel Pensions Leader PwC marc.hommel@uk.pwc.com

6 2 Pensions Key findings 16% of employers say they have closed existing defined benefits schemes to future accrual Exiting from defined benefits 16% of employers say they have closed existing defined benefits schemes to future accrual for existing employees with a further 11% expecting to in future. 35% of companies are looking to buyout some or all their pension liabilities, 19% in the next 5 years compared to 27% and 11% respectively in summer The desire to exit is greater for larger organisations with 43% looking to buyout compared to 27% of smaller employers. 2 Employers are increasingly prepared to use liability reduction programmes with 31% considering offering enhanced transfer values to deferred pensioners and 12% considering offering current pensioners incentives to give up future pension increases. 85% are concerned about the volatility of their funding position Scheme funding and investments 66% of employers have now reached agreement with their trustees on scheme funding within the new regime. Of the 69% of large employers 1 who have reached agreement, a quarter say the process was inefficient. Just 63% of employers are very confident they understand the Pension Regulator s thinking and guidance on scheme funding. 67% say that appropriate allowance has been made in the scheme funding commitments for life expectancy of members notwithstanding that over 90% of schemes are currently breaching the Pension Regulator s most recent trigger on longevity assumptions The use of contingent assets continues to increase with 19% already using them and a further 18% expecting to in the next year, compared to 9% and 12% respectively six months ago. 64% of employers say they have little or no influence over the investment strategy followed by their trustees and 85% are concerned about the volatility of their funding position. 1 Large employer defined as a company with more than 5,000 UK employees 2 Smaller employer defined as a company with 5,000 or less UK employees

7 3 Pensions 43% of large employers implementing a SIPP The future role of pensions in the employment deal 57% of employers say in future their pensions philosophy will take into account their overall financial and wealth management provision for employees 65% of employers say they will take into account that different people value and need different pension provision There continues to be rapidly growing interest in using group self-invested pension plans (SIPPs) to enable tax-effective roll over of company shares into a pension arrangement, with 43% of large employers implementing a SIPP compared to 23% six months ago 39% of employers have already started planning for the arrival of Personal Accounts in % will need to change eligibility or auto-enrolment requirements of their current schemes. The three biggest concerns for employers are confusion among employees (30%), increased total pension costs (23%) and increased administrative burden (22%). Just 3% of large employers now use the same individual actuary to advise both trustees and employer Managing conflicts 60% of employers (75% of larger employers) have now appointed at least one trustee who is independent from the company. In the majority of cases, this includes the chairman. Individual independents are more predominant than firms of independent trustees. 56% of employers (67% of larger employers) have now appointed a firm of pension advisers independent from that which advises the trustees. Just 3% of larger employers still use the same individual actuary to advise both trustee and employer but this number rises to 31% for smaller employers.

8 4 Pensions Background and methodology 28% of FTSE 100 companies participated The third Pensions survey tracks the views of pension decisionmakers across a range of UK employers. The research conducted during February and March 2008, engaged people across 86 organisations including 28 FTSE100 companies. The in-depth research covered a broad range of themes including the current market for buyout, the role of pensions in attracting and retaining employees and the future challenges that lie ahead. The data from the latest survey was analysed by PwC pensions specialists, comparing the trends with responses from previous editions. Our analysis brought forward the key themes that have been discussed in this report, but not all of the data collected could be included. If there are any issues or areas of interest that you would like to discuss, we may have data that could provide insight. Please use the contact list at the back of the report to get in touch. Definitions Please note that throughout this survey we refer to large and small organisations. For the purpose of this research the following definitions apply: Large employer or organisation 5,000 or more UK employees Small employer or organisation Less than 5,000 UK employees Participants By job title 24% Finance director Pension manager 48% 28% HR director Company size by UK employees 10, % 28% Fewer than 1,000 Over 5,000 48% 52% Fewer than 5,000 5,000-9,999 16% 24% 1,000-4,999

9 5 Pensions 1. Exiting defined benefits Exodus gains momentum The full extent of the exodus of companies from defined benefit pension schemes is becoming clear. Ceasing future defined benefits accrual for existing employees Whilst it comes as no surprise that the closure of defined benefits schemes to new employees has continued apace (20% remain open, compared to 33% twelve months ago), there has also been a marked increase in the number that have ceased providing future accrual of benefits to existing employees. 16% of DB schemes now closed to future accruals Fig 1.1 Percentage of respondents with schemes closed to future accrual December % July % March % % Twelve months ago, all respondents said their pension schemes were still providing accrual to existing members. Six months ago, there was an initial movement of 3% that had ceased to do so; but by spring 2008 this had risen markedly to 16% with an even more pronounced trend among smaller companies. There is further evidence of this increasing in the future as 14% of those companies still providing accrual to existing members are now considering ceasing future accrual for existing employees. Fig 1.2 Percentage of respondents with schemes closed to future accrual by company size Less than 5,000 24% March ,000 or more 8% All 16% %

10 6 Pensions 43% of large employers considering buyout Buying in to buyout News of a number of sizeable buyout transactions over the last six months has fuelled a more positive sentiment towards buyout, supported by favourable pricing for opportunistic companies and trustees. In spring 2008, 35% of survey respondents were looking at buying out some or all of their pension liabilities, 19% within the next five years compared with 11% six months ago. Larger companies seem more likely to take action, with 43% considering buying out and a sizeable 27% indicating this could happen within five years. Fig 1.3 Percentage of respondents considering buyout of their pension scheme Number of UK employees Less than 5,000 All 5,000 or more 26% 27% 27% 28% 35% 43% % July 2007 March 2008 Fig 1.4 Percentage of respondents considering buyout of their pension scheme spring 2008 Number of UK employees Less than 5,000 All 5,000 or more 11% 16% 27% 19% 16% 35% 27% 16% 43% % Yes within 5 years Yes beyond 5 years Views on buying out are clearly driven by the perceived burden of the pension scheme in the context of the company s finances. Of those respondents from companies whose pension schemes are known to be more than half the value of the company itself, 50% are considering buying out. This rises to an astonishing 75% where the pension scheme actually exceeds the value of the company. The vast majority of companies in this position express concern about the volatility of their funding position, recognising the potentially high risks to their balance sheet and P&L positions.

11 7 Pensions Fig 1.5 Considering buyout significance of pensions burden has an impact Pension scheme size in relation to company value Less than 50% 50% or more 20% 15% 25% 25% % 30 16% % Yes within 5 years Yes beyond 5 years However, 44% of respondents are not prepared to pay more than the value of liabilities reported in the company s accounts to facilitate a buyout. Fewer than 10% would be willing to pay more than 120%, but 25% say they would be willing to pay more than 110%. The current cost of buying out pensioner liabilities might be only 110% to 120%. Fig 1.6 Greatest premium over liability reported in our accounts that employer would be prepared to pay to buyout or transfer liabilities Premium over accounting measure of liabilities None 0-9% 10-19% 20-29% 30% or over 2% 7% 16% 31% 44% %

12 8 Pensions Buying in to buyout (continued) PwC comment As many of the new buyout providers predicted, the size and increasing volume of transactions announced recently seems to have boosted awareness of and confidence in the market, prompting more serious consideration of buying out. This desire for exit is being fuelled by continued concerns, particularly among finance decision-makers, that the employer no longer has control over the costs and risks of its pension scheme, together with increasing opportunities to obtain terms that are economically justifiable. Understanding the economic drivers behind buyout opportunities is the key to securing the best deal. The competitiveness of different solutions changes week by week as the credit crunch continues. Sponsors and trustees securing the best deals are closely linked in to market developments around alternatives to conventional buyouts. Alternatives to full and partial buyout include: Profit-sharing arrangements, under which some of the buyout premium may be refunded in future years if experience is favourable; Mechanisms developed recently by several banks for hedging longevity risk. Insuring cash flows for a fixed term, say ten years, during which the funding level is underpinned (e.g. at the IAS 19 level, or the level of PPF liabilities) and at the end of which assets calculated on using a pre-determined formula are returned. The Pensions Regulator is focusing strongly on certain forms of buyout, where it is concerned members security may ultimately be at risk. And it is likely to be granted significantly enhanced power to impose contribution notices, sometimes retrospectively. However, it is clear that the Pensions Regulator continues to support innovative arrangements that do not pose unacceptable risks. In-depth understanding on the new clearance procedures is essential. An exit strategy needs to be informed by quality information, adequate preparation and essential stakeholder engagement, including the trustees and, possibly, the Pension Regulator.

13 9 Pensions 2. Funding and investment 21% of companies found the scheme funding negotiation process unsatisfactory Agreeing scheme funding The majority of companies have now reached agreement with their trustees on scheme funding, although, significantly, 21% say the process was not acceptably efficient. Major concern about volatility The asset strategy their trustees are following has left 85% of respondents concerned about the volatility of their funding position. This concern is compounded by the fact 64% say they have little or no influence over investment strategy. Growth in use of contingent assets continues Scheme funding agreements are increasingly involving contingent asset arrangements, enabling a compromise to be attained between the security sought by trustees and the level of cash contributions that is feasible for the business. In December 2006, 8% of companies had implemented contingent asset arrangements, but this has risen to 19% in spring Fig 2.1 Use of contingent assets in last 3 years December % 12% March % 23% % Less than 5,000 5,000 or more

14 10 Pensions Understanding the Regulator s guidance Understanding the complexities and implications of the Pensions Regulator s thinking and guidance is becoming a big issue. And if the last few months are anything to go by, it is not going to get any easier. Over a third of companies do not express complete confidence that they sufficiently understand the Regulator s thinking on scheme funding and 55% are in this position when it comes to clearance and mitigation. Fig 2.2 Lack of understanding of the Regulator s guidance Scheme funding 37% Clearance and mitigation 55% % A number of companies are regretting the agreements they have made PwC comment Most first scheme funding negotiations are complete or nearing completion. A number of companies are regretting the agreements they have made. The evidence suggests many companies have not negotiated robustly enough with trustees, resulting in higher cash commitments than they would wish. Some scheme funding agreements have reduced company flexibility in how they manage capital and implement business transactions. The Pensions Regulator s revised guidance on clearance, published in April 2008, leaves no room for doubt that trustees are firmly at the table when it comes to business planning. Re-organisations, restructurings and a wide range of other business activities will need their involvement, not just on the periphery but as key players. They are being asked to seek mitigation at even higher levels than previously, typically starting at the amount of any scheme funding deficit and in some cases moving up towards buyout measures. Even the 45% of companies who were confident they understood the Regulator s thinking before the revised guidance was published may not yet fully appreciate the extent to which their scheme funding negotiations could affect the difficulty and cost of future business activities. As an added worry, there is increasing uncertainty as to how strong a role the Pensions Regulator will adopt in future, following recent proposals to beef up his powers to issue contribution notices and financial support directions.

15 11 Pensions Longevity shock Assumptions about life expectancy have been the particular focus of recent scrutiny. Despite this uncertainty, 67% of respondents think the contributions that were agreed as part of scheme funding negotiations make realistic allowance for further increases in life expectancy. The majority of companies will be in for a shock PwC comment Future increases in life expectancy are highly uncertain and the subject of much debate within the actuarial profession and more widely. The Pensions Regulator has also weighed in recently by indicating it will introduce a new scheme funding trigger based on life expectancy assumptions. This announcement was made after most of the scheme funding agreements made by the respondents to this survey and is likely to result in trustees seeking higher contributions to meet longer life expectancy assumptions at the next valuation. The majority of companies who expressed comfort with the approaches they have agreed with trustees for life expectancy will be in for a shock. Robust and focused advice, taking account of all the latest statistics on life expectancy, will be essential in future to enable companies to challenge their trustees where they feel they are going beyond the Pensions Regulator s intentions. The specific circumstances of the company and its employees can have a large impact.

16 12 Pensions 3. Future role of pensions Pensions as part of the wider employment deal Despite the clear exodus from defined benefit pension provision, the importance of pensions remains high. According to 88% of respondents, pensions are equally or more important than three years ago in attracting, retaining and motivating employees. So where does the future lie? Fig 3.1 Perceived importance of a company s pensions offering in attracting, retaining and motivating employees below senior executive level change in the last 3 years Finance manager 19% 13% Pensions manager 5% 21% HR director 10% 35% % Decreased Increased Employers are increasingly recognising that going forwards they need to consider the role of pensions in the context of their wider reward and employment deal: Fig 3.2 Pensions viewed in the context of overall financial/wealth management Fig 3.2a Employees should be able to flex pension according to individual needs No 43% No 35% 57% Yes 65% Yes There has been a mass transfer of risk from employers to employees in relation to retirement savings. It is time for companies to help employees manage the consequences. Executive compensation FTSE 100 PwC Review of the year 2007

17 13 Pensions Group SIPPs are increasingly on the agenda 43% of large companies are considering a group SIPP There is significant appetite for SIPPs among large companies with 43% considering setting up a group self-invested pension plan (SIPP) compared with 27% of all respondents. This dramatic increase over the last six months is in line with a significant strategic shift. Although still in their infancy, group SIPPs are rapidly gaining in popularity as highlighted by the 20% increase in large companies considering them. Fig 3.3 Considering setting up a Corporate SIPP <5,000 employees 11% 10% >5,000 employees 23% 43% % March 2008 July 2007 PwC comment Group SIPPs have several advantages over traditional occupational defined contribution arrangements or group personal pensions. They are also available at comparable and sometimes lower charge levels. Members are offered greater investment flexibility, typically providing access to a wider range of investment options than most GPPs and can receive assets in specie including shares from company share and incentive plans and other pension arrangements. Tax breaks can provide a further incentive for members and this can help boost overall retirement savings. This flexibility, combined with options such as salary sacrifice, makes them attractive to companies who are integrating their pension arrangements into a flexible benefits package for employees.

18 14 Pensions Preparing for Personal Accounts: will they require an Olympic effort? The Pensions Bill passing through Parliament at the moment will confirm the finer points of detail about the Government s new Personal Accounts. This will include the qualifying conditions for occupational arrangements to exempt employers from auto-enrolling their employees into the new vehicles. Employers will need to auto-enrol every employee above age 22 into a pension arrangement and there will be a minimum requirement for the level of employer contributions or benefits. Employers who will be most impacted are those with a significant proportion of their workforce who currently do not participate in a pension arrangement and/or where a significant portion of regular earnings comes in the form of non basic-wage. Fig 3.4 Changes required to existing pension schemes in preparation for personal accounts Auto-enrolment 30% Eligibility Employer contributions Default DC option Pensionable salary definition 13% 12% 10% 9% Don t know 26% %

19 15 Pensions Employers main concern is confusion among workforce Up to 47% of respondents have more than 10% of their workforce not currently participating in their company pension arrangement and 43% may need to make changes to their current arrangements to comply with the eligibility or auto-enrolment requirements. There are also cost related concerns with nearly a quarter wary of increased contribution levels. Interestingly, however, the main concern of most respondents is not the potential cost or administrative burden but the prospect of confusion among their workforce. Fig 3.5 The main concerns about Personal Accounts Confusion among workforce 30% Increased administrative burden Increased total pensionable contributions 22% 23% Impact of PAs on company arrangement 15% No concerns 7% Other 3% % PwC comment By the time the Olympic torch returns to London in 2012, Personal Accounts should be up and running. Whilst it is the Government, through the Personal Accounts Delivery Authority, with whom the greatest challenge rests, the impact on company pension schemes cannot be overlooked. There will be material and immediate cost and administrative implications in 2012 particularly for the significant minority of companies with a large proportion of employees who under their existing employment terms are not eligible for the pension scheme. Even where only a few employees fall into this category, there may be significant one-off compliance costs to ensure the new requirements are satisfied, or risk having to contribute to personal accounts. It is not surprising that over half of companies have not started planning, given there are still uncertainties about precisely how the personal account system will operate. However, the fact that over a quarter do not know which potential areas of change may affect their scheme should act as a wake-up call. At least the Olympic site has been cleared and drawings drafted. Communication exercises will be important to reassure employees, even where there will be no immediate impact on their occupational pension. To be successful, these should preferably pre-empt the Government s awareness exercises, whatever form they will take. The need for careful, advance planning is clear to see.

20 16 Pensions 4. Managing conflicts Independence day for trustees A significant number of respondents (40%) say their pension scheme has no trustees who are independent from the company. A further 19% of schemes had a Chairman of trustees who is not independent. Where there are independent trustees, 65% have appointed an independent individual, 25% a firm of independent trustees and 10% have appointed both. With renewed focus on managing conflicts, prompted by the Pensions Regulator s recent consultation on conflicts of interest, trustee bodies will be questioning whether their degree of independence from the employer is adequate. For example, is their ability to act quickly and independently from the company compromised by key trustees not being independent? As a result, companies can expect renewed pressure from trustees to review the nature of some trustee appointments. Companies will need to be clear about where the power lies to determine the structure of the trustee board under the scheme s Trust Deed and Rules, it may not lie solely in the hands of the existing trustee board. PwC comment The Pensions Regulator seems to favour independent trustees as the solution to independence issues. This can have benefits but there are disadvantages too. Independent trustees can themselves have conflicts, such as a desire to remain as a trustee and receiving remuneration for their services. When striving for independence, it is important to remember that there can be significant advantages in having non-independent trustees. Whilst they have to be adept at managing conflicts, their knowledge of the business can bring significant benefits to the decision making process. The key is to put in place a robust policy and procedure for managing conflicts. This provides maximum scope to achieve what we believe should be the primary goal a good mix of skills and experience. This should not be compromised by favouring any one group of trustees over another on independence grounds.

21 17 Pensions Acknowledgements We would like to thank the companies that participated and regularly participate in our pensions survey. Their contribution in terms of time, knowledge and opinions is obviously essential to the success of this survey. We hope that the insight this report provides in to the market place is of significant value and is the beginning of many interesting conversations. If you would like to discuss any of the findings or commentary, then please contact us. We would also like to thank those from PwC who have made this report possible: Janet Davies Frances Dukeson Gary Fairman Kelly Hall Heather Harrison John Hawksworth Andrew Hoddinott Marc Hommel Louise Inward Edward Irwin Jane Kotecha Ian McKinlay Raj Mody Hayley Rimmer Lydia Ruffles Kavita Shah Andrew Smith Keith Smith James Squires Peter Tompkins Ross Wood

22 18 Pensions Contact us To find out more about this report or to discuss any of the issues raised, please contact one of the people listed below. Marc T Hommel marc.hommel@uk.pwc.com Andrew Hoddinott andrew.f.hoddinott@uk.pwc.com Participation in future surveys Edward Irwin edward.c.irwin@uk.pwc.com Media enquiries Lydia Ruffles lydia.r.ruffles@uk.pwc.com

23 19 Pensions Award winning insight from UK PENSIONS AWARDS 2008 PENSIONS & BENEFITS CONSULTANCY OF THE YEAR UK PENSIONS AWARDS 2008 SPONSOR COVENANT ASSESSMENT PROVIDER OF THE YEAR This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. ( provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 146,000 people in 150 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice LLP. All rights reserved. refers to LLP (a limited liability partnership in the United Kingdom) or, as the context requires, the global network or other member firms of the network, each of which is a separate and independent legal entity. Designed by studioec (06/08)

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