Introduction to UK Pensions. Delegate Workbook Capita Employee Solutions. For use in conjunction with the Introduction to UK Pensions video series

Transcription

1 Introduction to UK Pensions Delegate Workbook Capita Employee Solutions For use in conjunction with the Introduction to UK Pensions video series

2 Contents AIMS & OBJECTIVES... 3 IMPORTANT UPDATE INFORMATION... 4 VIDEO 1: INTRODUCTION... 5 VIDEO 2: STATE BENEFITS... 8 VIDEO 3: CONTRACTING OUT VIDEO 4: PERSONAL PENSIONS VIDEO 5: OCCUPATIONAL SCHEMES OVERVIEW VIDEO 6: OCCUPATIONAL PENSIONS DEFINED BENEFITS Final Salary Calculation Example VIDEO 7: OCCUPATIONAL PENSIONS - DEFINED CONTRIBUTION The Contribution Cycle Comparison between DB & DC VIDEO 8: KEY ROLES AND RESPONSIBILITIES VIDEO 9: HMRC RULES AND KEY ORGANISATIONS Glossary of Terms and Abbreviations (c) Copyright Capita Limited All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without the prior permission of Capita save that copies may be made for internal, non-commercial, training and informational purposes only. 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, Capita Limited and the author accept no liability and disclaim all responsibility arising as a consequence of any person (whether or not a student for one of the Pensions Management Institute s examinations) acting or refraining to act in reliance upon the information or views contained in this publication. Author: Chris Gettings 2 of 41 14/06/2018

3 Aims & Objectives Aim The aim of this training is to provide an introduction to pension provision in the UK Objectives By the end of this training you will: Understand why pensions are important Be able to state the main pension schemes that are available and the benefits they provide Understand the roles and responsibilities of those involved in providing and running pensions Be aware of Her Majesty s Revenue & Customs (HMRC) rules that apply to occupational pension schemes Instructions This workbook should be completed and used in conjunction with the Introduction to UK Pensions video. There will be sections that will need to be completed to enable you to pass the Assessment for the Award in Pensions Essentials. Upon completion of the video series, if you are undertaking the Award in Pensions Essentials, you will automatically have access to the APE Assessment. Author: Chris Gettings 3 of 41 14/06/2018

4 Important Update Information Legislative Changes As a result of a high volume of legislative changes occurring on or after 5 April 2016, the course content is in the process of being updated. During the interim period, and where applicable, your workbook will include additional information regarding these changes. It is important that you read your workbook fully, and ensure you have understood any information which is included in addition to the course content. If you are unsure of any aspect of this, please speak with your mentor in the first instance. Author: Chris Gettings 4 of 41 14/06/2018

5 Video 1: Introduction What is a Pension? A pension scheme, in its very simplest form, is just a way of putting money aside to provide an income, when a person wants to retire. All pensions work on this basic principle, however, different types of pension operate in different ways. The state pension differs from personal pensions, which differ from occupational schemes and so on. But the essential principle of putting money aside for retirement runs through all of them. Over the course of the video series, you will be learning about the different ways in which a pension can work. Alternatives to Pensions Complete the table with the Alternative from the advantages and disadvantages given. Alternatives to input are: Savings (ISAs) Inheritance Stocks & Shares Property Continuing to work Alternative Advantage Disadvantage Can make huge growth if invested well No guarantee as the price fluctuates. Growth also potentially liable to capital gains tax Less bored in retirement May not be physically capable Don t have to save No guarantee of a job during working life No guarantee of receiving anything, long life No saving required expectancy may mean there is nothing left to pass on Common way of saving, Easy to start a savings account High inflation versus low interest means that value of money is being eroded. Easy access means that it can be dipped into. Rent produces easy income Easy to understand investment Still have to pay mortgage even if no tenants Still have to pay maintenance and upkeep No guarantee of price rise Possible tax liability on selling Author: Chris Gettings 5 of 41 14/06/2018

6 Some Pensions Basics The government is encouraging us all to save by introducing Automatic Enrolment, making it easier for many more people to save for retirement in the future. However, they have had three tax breaks in place for many years that have been designed to encourage people to save, these are set out below. Insert the missing one that is spoken about in the video. 1. Tax free lump sum at retirement 2. Tax relief on investment growth 3. Pension versus Individual Savings Account (ISA) When you save in a pension, you get tax relief on the money that you pay in, please see the example below. ISA Pension Gross (taxable) Salary 1000 per month Gross Salary 1000 per month 20% Pension Saving ISA Saving Taxable salary % Net salary 700 per month Net Salary 720 So you can see that although the same amount goes out for saving in each case ( 100) the person who saves in to a pension actually has 20 more per month. This is because the savings amount comes out of the salary before a member pays tax. This is a definite encouragement to save as you do not get this incentive with any other savings mechanism. Author: Chris Gettings 6 of 41 14/06/2018

7 However, the money must be locked away until you retire; this is generally from age 55 onwards. The aim of this is to ensure that when a member saves into a pension, it is treated as a provision for retirement, and not a bank account. I.e. you cannot take some money when you need it for a new car or holiday. You can see that although the government does offer generous tax breaks on investments and contributions, they also apply a restriction on when you can get your money. A person saving into a pension will therefore have to make a considered decision if they can afford to save, as once they have paid in then the money is generally locked away. Please ensure that you have completed all the parts to this workbook from this video. Author: Chris Gettings 7 of 41 14/06/2018

8 Video 2: State Benefits From 6 April 2016 the government introduced a Single Tier State Pension, payable from the state. This is in place of the former provision, which consisted of two pensions: The Basic State Pension The Additional State Pension The state provisions are payable from State Pension Age (SPA). SPA is currently aged 65 for both males and females, and is set to increase to age 66 for both by March The Single Tier State Pension (the State Pension ) The State Pension (Amendment) Regulations 2016 were laid in Parliament on 24 February 2016 and confirm that the full rate of the State Pension is set at per week with effect from 6 April This rises in line with earnings once in payment, as a minimum, ensuring that those people living off the state benefits do not see their pension eroded over time by inflationary increases. Currently the full rate of the State Pension has increased to per week. How does a person qualify? A person will have to pay National Insurance (NI) contributions for 35 qualifying years during their working life to obtain the full State Pension. Working life starts at 16 and ends at State Pension Age (SPA). Credits are given to a person if they continue full time education up to 18 (you don t get credits whilst at university) and to a person who takes time off work to raise children. A qualifying year is a year in which you have earned enough to pay National Insurance contributions. For more details on this see the government website. Author: Chris Gettings 8 of 41 14/06/2018

9 What about the old state pension provision? 1. The Basic State Pension (BSP) The old BSP is still in force for people who reached SPA prior to 6 April Rates in the 2018/2019 tax year are: Maximum single person amount per week ( 6, per annum) The old BSP is what we call fully inflation proofed, as at a minimum it will increase in line with inflation. This ensures that those people living off the state benefits do not see their pension eroded by cost of living increases. To have qualified for the full Basic State Pension, a person had to have paid National Insurance (NI) contributions for 30 qualifying years during their working life. 2. The Additional State Pension (ASP) The old ASP is still in force for people who reached SPA prior to 6 April It was introduced to give employed people a bigger benefit from the state, essentially giving them and extra state pension linked to how much they earned. The reason it was only for employed people was because they pay a rate of NI that was slightly higher than the rate self-employed people pay. The ASP changed over the years since its inception in 1961; the names of it are detailed below. You will need to fill in the gap with the final name by which the ASP was known: Name Dates (from & to) Graduated State Pension SERPS So a person retiring reaching SPA before 6 April 2016 would receive their BSP and then also the ASP alongside any pensions they had privately saved for. Author: Chris Gettings 9 of 41 14/06/2018

10 What if people haven t qualified for the full state benefit? The Pension Credit Pension Credit is an extra amount given to people who may not reach a minimum income figure as set by the government. It ensures that everyone in the country in retirement has a minimum level of income. If you have saved yourself, you may also be entitled to a higher level of credit than those who have not got their own savings. This is known as Savings Credit. For more information see the government website ( What is the future for state benefits? Changes in the State Pension System Due to increasing cost, largely brought on by increasing life expectancy, the State Pension Age (SPA) is changing. Between 2018 and 2020, the SPA for both males and females is increasing to what age? After that the government has further plans to increase the SPA, this is currently up to 68, but could be higher in the future. Please ensure that you have completed all the parts to this workbook from this video. Author: Chris Gettings 10 of 41 14/06/2018

11 Video 3: Contracting out Changes from 6 April 2016 From 6 April 2016 when the state pension provision changes to a single tier, it is no longer possible for DB schemes to contract out, as there is no Additional State Pension (ASP) to contract out of. You will still need to manage certain rights and benefits arising from having been able to do this historically, so it remains important that you understand what contracting out was up until the 2016 cessation date. What did it mean to be contracted out prior to April 2016? To understand contracting out, we first have to think about what it means to be contracted in; since 6 April 2016, every pension scheme member has been contracted in, and contracting out ceased to exist. What this means in practice, is that all of an individual s National Insurance (NI) contributions are sent to the NI people, to collectively pay for state benefits such as Jobseekers Allowance, Employment and Support Allowance, and the State Pension provisions. Until 2016, it was possible for DB schemes to contract out, which meant that the part of an individual s NI contributions which otherwise went towards the ASP element of the state benefits, was not deducted or paid to the NI people. For schemes which elected to contract out, this meant a number of things: 1) The employer and the member paid a reduced amount of NI contributions 2) The saving that they made could (in theory) be put into the employer s pension scheme 3) The member would give up their right to the State Second Pension (a name for that part of the ASP earned after 2002 see previous table) 4) The pension scheme has to provide a minimum level of pension to a member; this being roughly equal to the State Second Pension that the member is giving up. Author: Chris Gettings 11 of 41 14/06/2018

12 Why would an employer have wanted to do this? 1) The employer would benefit as they would pay lower NI rates, meaning they saved lots of money on a monthly basis, and 2) They could invest the savings made on NI contributions, and potentially make more than they would have to pay out at retirement. For a member, they could save on NI contributions, but there was no guarantee that they would get better benefits than if they had remained contracted in. The decision to contract out or in was made by the scheme, so if members were in a scheme which did this, they had no option but to contract out. What is the future of contracting out? From 2012, DC schemes were no longer able to contract out, leaving only contracted out DB arrangements. Since the abolition of the state second pension in 2016, there was no longer anything to contract out of. At this point, contracting out in its entirety ceased. Contracting out terms The below table details some of the terms that have been given to the benefits a member builds up in a pension scheme for contracted out periods. Name Dates (from & to) Name of benefit if contracted out DB DC (Final Salary/Salary-Related) (Money Purchase) Graduated State Pension Equivalent Pension Benefit (EPB) N/A SERPS GMP/Post 97 S2P Post 97 Protected Rights (from 1988) Protected Rights (until 2012) Please ensure that you have completed all the parts to this workbook from this video. Author: Chris Gettings 12 of 41 14/06/2018

13 Video 4: Personal Pensions Where do they come from? In the early part of the 20 th century the only way you could contribute to a pension scheme and obtain this tax relief was if your employer offered an occupational scheme. If they didn t, or you were self-employed, there was no way for you to join a scheme and make savings, utilising the tax relief discussed in video 1. Insurance companies realised that there was a gap in the market and brought in personal pensions to enable self employed and those without access to an occupational scheme, to save for retirement. These were originally known as RACs but what does RAC stand for? From 1 July 1988 RACs stopped being sold in the market, but anyone who still had one, could carry on contributing. From that date Personal Pensions began to be sold by insurance companies. The way in which they work has largely remained unchanged since that date. Previously, there were certain criteria a person had to meet to be eligible to have a personal pension, but these have mainly been lifted since April Special types of personal pension include Stakeholder plans and Self Invested Personal Pensions. How do Personal Pensions work? 1. A member contributes into their own pot of money. 2. The money will be invested in areas that have been decided on by the member. 3. At retirement, the member will sell their investments to get a fund value. Author: Chris Gettings 13 of 41 14/06/2018

14 What will a member commonly buy when they get to retirement so they can receive their income?* *From April 2015 members have had more options around how they can take an income at retirement, but these are not yet the most common methods. A member will get tax relief on their contributions and also tax relief on any investment growth. They will also be able to take up to 25% of their fund at retirement as a tax free lump sum. What is an annuity? An annuity is an income that is commonly purchased with the fund a member has saved in a pension scheme. These are sometimes called Annuity Plans. The annuity or annuity plan will pay the member a regular income for the rest of their life. These are normally obtained via an insurance provider. A member may go direct to these, or use a financial adviser in order to help them get the best deal for their money. Since April 2015 members have no longer had to buy an annuity at retirement. They can take some of their fund back whilst leaving the rest invested, or perhaps take everything back in one lump sum. How much can a member save? There is no limit to the amount a member can save into a personal pension. But there is a limit to the tax relief they can receive. They will be limited to tax relief on any contributions up to the lower of the amount they earn in a year or the annual allowance (this has been set at 40,000 since the 14/15 tax year). The member will choose investment funds in which they would like to put their money. These can be in a variety of different areas, such as the stock market or property. As these funds can go up or down, there is no guarantee of the value of a members fund increasing. Therefore the risk of investments in a personal pension scheme falls on the member. Author: Chris Gettings 14 of 41 14/06/2018

15 Stakeholder Pensions These are a special type of pension that was introduced in 2001 as a way of the government encouraging people to save for retirement. They have a number of rules and regulations, such as a cap on charges that make them attractive to newer savers. There were also clear guidelines set by the government to ensure that they were easier to understand and be flexible to the needs of the member. A stakeholder pension is aimed what type of earner? Self-Invested Personal Pensions (SIPPs) These are a type of personal pension where the member has more freedom to pick and choose in which areas they would like to invest. With a SIPP, the member has almost total freedom to invest in any area they want. Therefore they are usually only for people who have lots of savings and can afford to have somebody keeping an eye on their investments. What type of earner do you think a SIPP is aimed at, low or high? Please ensure that you have completed all the parts to this workbook from this video. Author: Chris Gettings 15 of 41 14/06/2018

16 Video 5: Occupational Schemes Overview What is an occupational pension scheme? It is a pension scheme that is set up by and employer for their members of staff. The employer will be the scheme sponsor, which means that they will normally pay for the running costs and that they will normally contribute to the scheme as well. With the onset of Automatic Enrolment, all employers (with very few exceptions) are required to enrol the majority of their workforce into a pension scheme. You may have received information on this when you started with the company. For employers, Automatic Enrolment means that most employees will be in a pension scheme and they will have to contribute to the scheme for them. The schemes are there to attract members and encourage them to save for retirement. All schemes will be different as they are set up by each employer for their own members of staff, allowing them to be designed specifically for them. When an employer contributes to the pension scheme, they get tax relief on their contributions as well. Who gives them this tax relief? For a scheme to be eligible to obtain tax relief on the member and employer contributions, earn tax relief on the investment growth and pay a tax-free lump sum at retirement, it must be registered with HMRC. Most occupational schemes are registered. Author: Chris Gettings 16 of 41 14/06/2018

17 The Pensions Regulator The Pensions Regulator is the regulator of all work based pensions schemes in the UK. They have a number of statutory objectives including; A scheme must have an Internal Disputes Resolution Procedure (IDRP) procedure and issue information as contained in the disclosure guidelines. This is to ensure that members can make informed decisions about their pension benefits. Please see the Disclosure and Whistleblowing course for more information on this. The Trustees Most private sector occupational schemes are set up under Trust. This means a number of things: Ultimately the trustees are responsible for the running of the pension scheme as a whole. They are also responsible for looking after the assets in the scheme, and will have to ensure that there is a scheme bank account set up so that the employer cannot dip into the pension fund, like the Robert Maxwell scandal in the 1980s. This ensures that the money in an occupational scheme is completely separate from the company. In public sector schemes (Teachers, Civil Service etc) there will be no trustees, the rules of the scheme are decided by the government and written in legislation. We do administer both public and private sector schemes at Capita Employee Solutions. Author: Chris Gettings 17 of 41 14/06/2018

18 Two types of Occupational Scheme There are two main types of occupational scheme: A DB scheme is one in which the rules of the scheme define how the benefits that the member will receive at retirement are calculated, i.e. defining the benefits. This means the member would have a bit more security of what they might receive at retirement. A DC scheme does not carry this security. All it promises is the level of employer contributions that will be made to the scheme. There is no promise made regarding the level of pension that will be received. What are the benefits? As they are both a type of pension scheme, they generally provide the same type of benefits, it s just the way they are calculated and the amounts are different, with DB schemes normally providing a better level of benefit. The benefits both types may offer could be: 1. At retirement?* 2. On death? 3. On leaving before retirement? a) b) c) *From April 2015 members have had more options around how they can take benefits at retirement, and, in addition to common benefit provisions, can choose whether to take some of their fund back whilst leaving the rest invested or perhaps take everything back in one lump sum. Author: Chris Gettings 18 of 41 14/06/2018

19 Summary An occupational pension scheme is one set up by an employer for their members of staff. We have HMRC and The Pensions Regulator who help ensure schemes are run correctly. In the private sector we commonly have trustees who are responsible for the scheme. There are two main types of pension scheme, DB and DC which although very different in their design, ultimately offer similar types, if not amounts, of benefit. Please ensure that you have completed all the parts to this workbook from this video. Author: Chris Gettings 19 of 41 14/06/2018

20 Video 6: Occupational Pensions Defined Benefits A Defined Benefits (DB) Pension Scheme promises a certain level of pension to its members on retirement; they are generally seen as being the best type of pension scheme you can be in. They are called DB as the way in which the benefits are calculated are defined within the scheme rules, which the trustees have to follow. The most common and famous form of DB scheme is a Final Salary scheme, however, other forms, such as Career Average Revalued Earnings (CARE) schemes are becoming more common. A DB pension is calculated using three key factors what are they? Factor 1: Factor 2: Factor 3: The accrual rate can be anything, but is most commonly 1/60 or 1/80. It is up to the scheme to decide what they want it to be. The formula used to calculate a pension is: Final Pensionable Salary x Service x Accrual rate = Annual Pension. So if a person has an accrual rate of 1/60 it can be described that for every year that they are in the scheme a person earns one sixtieth of their final salary as a pension. If they are in the scheme for 30 years, they will have 30/60ths (or half) of their final salary as an annual pension. Author: Chris Gettings 20 of 41 14/06/2018

21 Tax free lump sum A member will be able to take up to what percentage of their benefits as a tax-free lump sum at retirement? To do this, it is common that a scheme will say that the member has to give up some of their annual pension. This is also called commuting. A scheme will have a commutation factor that will commonly be written as a ratio, such as 12:1. This means that for every 12 that a person takes as a lump sum, they have to give up 1 of annual pension. The commutation factor is decided by the scheme and can be anything. So, for example, if the member was to take a lump sum on 1200, they would have to give up 100 of annual pension (i.e. their annual pension would reduce by 100.) Listen and follow the example on screen. It is also in your packs on the next page. Author: Chris Gettings 21 of 41 14/06/2018

22 Member s details Final Salary: 30,000 Service: 30 years Final Salary Calculation Example Scheme Details: Accrual Rate: 1/60 Commutation Factor: 12:1 Members Pension: Salary x service x accrual rate = 30,000 x 30 x 1/60 => 30,000 x 30/60 Annual Pension = 15,000pa Lump Sum and Reduced Pension If the member wishes to take 12,000 as a tax free lump sum, they may be allowed, but the scheme is likely to say that they have to give up or commute some of their pension for this to happen. This is where the commutation factor of 12:1 comes in. The member s pension would be reduce by 1,000pa This is worked out by dividing the lump sum the member wishes to take by 12: 12,000/12 = 1,000. This figure is then taken away from the original pension figure we calculated above: 15,000pa - 1,000 = 14,000pa So the member will have a choice of taking the full pension of 15,000 pa or taking a lump sum of 12,000 and having a lower pension of 14,000 pa. Try to calculate the reduced pension assuming the member wishes to take 6,000 as a tax free lump sum: Author: Chris Gettings 22 of 41 14/06/2018

23 So what happens to the contributions? All contributions from the member and employer get paid into one big fund. And all payments out of the scheme (pensions, admin fees, death benefits etc) come out of the same fund. So money is continually going in and coming out. If there is more money being paid out than is coming in, it is the employer who has to make up any shortfall that occurs. The cost of running a DB scheme is very high for an employer as they also have to foot any shortfall in the fund that may occur from low investment returns or increasing life expectancy. This has meant that in recent years, many DB schemes have closed to new entrants and employers are commonly offering DC schemes instead. Therefore the risk of investments dropping rests squarely with the employer, as they will have to make up any shortfall. If it all goes very wrong and the employer becomes insolvent, there is the Pension Protection Fund (PPF) which is a statutory fund in the UK, and has the power to take over the running of a pension scheme to ensure that members will get at least 90% of what they are owed (up to a certain cap). This is a form of compensation. In recent years this has helped out Monarch Airlines, UK Coal and the Wildlife Trust. More historically it helped Kodak and Woolworths when they became insolvent. At the end of February 2018: 235,835 Members had transferred to the PPF 132,385 Members were receiving compensation The average annual compensation was 4, per annum The total compensation paid to date amounted to 3.6 billion Author: Chris Gettings 23 of 41 14/06/2018

24 Can a DB scheme Contract out? DB schemes could contract out until 5 April 2016 when contracting out ceased. Summary So DB schemes are good for a member as they get a promise of the level of pension they will receive at the retirement, although recently, the increase costs and risks for the employer has seen them being closed and DC schemes being offered instead. Author: Chris Gettings 24 of 41 14/06/2018

25 Video 7: Occupational Pensions - Defined Contribution A DC scheme is one in which the contribution rate that the employer will pay to the scheme is defined in the Rules hence the term Defined Contribution The way they work is similar to personal pensions. A member will pay a certain amount of money into the scheme each month; usually a percentage of salary, the employer will also put in an amount of money each month as defined in the scheme rules. The money is then invested in certain areas in line with the members wishes (they don t have total freedom, the trustees will say from what areas of investment they can choose. At retirement, what does the member traditionally buy to receive their income? Don t forget that they will be able to get 25% of their fund back tax free too. Since April 2015 members have been able to take all their money back as one lump sum, or take some of it and leave the rest invested. There are more details around this in the DC course but an overview is included below: April 2015 Flexibilities Since April 2015 members who have a DC Benefit (or personal pension) have been able to access their entire pension fund and no longer have to buy an annuity. There will be two ways of doing this: 1) Uncrsytallised Fund Pension Lumps Sum (UFPLS) a member takes some or all of their fund, 25% of the amount they take is tax free, and the rest is taxed and paid to their bank account 2) Flexi-Access Drawdown (FAD) a member chooses how much of the fund they wish to take (could be any amount, even all of it) they then can take 25% of that figure tax free, the remaining amount they can leave invested and take bit by bit when they want, or decide to take it all. Author: Chris Gettings 25 of 41 14/06/2018

26 Advantages of a DC Scheme For the employer there are: More structured. For the member there is more: 1) 2) The disadvantage of a DC scheme for a member is: The risk of investment in a DC scheme falls with the member as there is not employer back up if the fund drops, unlike in a DB scheme. How much can a member contribute? A member can contribute as much as the scheme will allow them to. There is no limit set by the government on how much they can pay in. There is, however, a limit on the amount of money that can be contributed and receive the valuable tax relief. This is set at the greater of a member s annual earnings, or the annual allowance. The annual allowance is a government limit that has been set at 40,000 since the 2014/2015 tax year. Not many people breach this limit, although it is not unknown. If the scheme caps the amount a member can pay, the member can just pay extra as an Additional Voluntary Contribution (AVC), or join a personal pension scheme. The employer will also contribute but this will usually be at a fixed rate and may be capped at a certain level. For example they my match any contributions a member pays up to 5% of their salary, therefore, the employer will not have to contribute any more than 5% of a members salary figure. Author: Chris Gettings 26 of 41 14/06/2018

27 What do we mean by the risk of investment is on the member? As mentioned earlier in the Defined Benefit (DB) video, in a DB scheme, if the investments drop, it is the EMPLOYER who will have to make up the shortfall, and therefore the risks of investments in a DB scheme falls on the employer. If the investments drop in a DC scheme, then it is up to the member to make up any losses (if they choose to do so). The employer has no obligation to make any more payments. This means that unlike in DB, the employer has more closed and predictable costs; they can limit how much they pay. Therefore these types of schemes are more attractive to employers who are looking to save money. With regards to the contributions in a DC scheme, it is vitally important that we keep accurate records of what has been paid in for a member and what investments have been bought for them. It can get quite complex, but luckily the regulator has given us a simple tool to help. Author: Chris Gettings 27 of 41 14/06/2018

28 The Contribution Cycle It is vital that all contributions are correctly allocated to a member s record, and also correctly invested and recorded. This ensures that later down the line we do not have a problem with a member s benefits (or fund value) being incorrect. Stage 1 Processing the contributions Firstly we have to ensure that the system is updated with the correct member details, so all new members, leavers, retirements, and fund switches must be complete. We will also have to check the contribution schedule that the employer sends in matches what we have on our records. If not we will have to make amendments as required. Stage 2 Updating the Systems Once everything is confirmed, we update the records with the amounts that are to be contributed that month. An investment instruction will be produced, and after internal checks are complete, this will be sent to the investment manager. At this point we have to be aware of any members moving toward retirement as they may have to have their funds switched to less risky areas. This is called Lifestyling and it aims to protect investments from potential stock market crashes. Stage 3 Investing the Money The investment manager will receive the money from us or from the employer, and invest this according to the funds shown on the investment instruction. Stage 4 Contract Note The investment manager will send us a contract note confirming what investments they have bought and at what price. We then add this information to our systems, which will automatically update all of the members records with the investments their contributions have bought. Stage 5 Reconciliation The final stage is to ensure that all the updates have gone on the system correctly and that all the figures match up. Anything that is incorrect or mismatched will have to be investigated and resolved. Author: Chris Gettings 28 of 41 14/06/2018

29 Comparison between DB & DC Benefit Basis Securing Benefits Risks Costs Defined Benefit Pension based on salary, service and accrual rate Scheme Pension paid out of the scheme fund Risks are borne by the employer Very expensive for an employer Defined Contribution Pension based on contributions, investment growth and annuity rates Member will take their pot to buy an annuity or take it all as a lump sum Risks are mostly with the member Controlled and cheaper costs for the employer Please ensure that you have completed all the parts to this workbook from this video. Author: Chris Gettings 29 of 41 14/06/2018

30 Video 8: Key Roles and Responsibilities There are many different people involved in running pensions in the UK. It is likely you will interact with some or all of these when working for Capita Employee Solutions. It is therefore important that you have a basic understanding of what roles and responsibilities these people have. The Trustees The trustees could be seen as the most important people in running the pension scheme. They have numerous duties: Look after the assets of the scheme Appoint advisers where necessary Invest the assets of the scheme Run the scheme on a day to day basis They have to act prudently and take reasonable care when discharging their duties and also will help resolve ay administration issues and help when they have to decide on a course of action when their discretion is required. The Administrator The administrator of a pension scheme has many different responsibilities: Process member enquiries Deal with leavers, joiners and member requests Produce communications Keep the member records up to date A third party Administration Company like CES will often do other things like: Offer actuarial and consultancy services Maintain scheme accounts An administrator has to follow the scheme Rules and the relevant legislation and has to ensure that everything is done in an accurate and timely manner. This is to ensure that members and clients are kept happy. An administrator will have Service Level Agreements (SLAs) with the client to ensure they maintain a good standard of work. Author: Chris Gettings 30 of 41 14/06/2018

31 The Employer Another very important role, the employer has many duties: Choose and set up the scheme they wish to run for their staff Fund the scheme Facilitate the member contributions into the scheme Set up the operational structure, and the HR and payroll structure to pay money to the scheme The Scheme Actuary The scheme actuary will mainly be concerned with DB schemes. They will generally: Provide advice to trustees about maintaining and funding these schemes Undertake Actuarial Valuations to see if there is enough money for the future Recommend contribution rates Help calculate other benefits such as transfer values The Scheme Auditor By law, every scheme has to have its own scheme auditor. They must: Ensure the scheme is run correctly Identify and mitigate any risks Audit the accounts of the investment manager and the scheme Check administration is being completed in line with scheme requirements and rules Investment Manager The investment manager is responsible for: Investing the money in line with the trustees goals and guidelines for DB Investing the money in accordance with members wishes for DC schemes Hitting benchmarks to ensure the funding of the scheme is maintained and members are getting a good return. An investment manager may specialise in certain areas, such as UK stock market, US bonds, retail property etc. Author: Chris Gettings 31 of 41 14/06/2018

32 The Scheme Lawyer The lawyer provides advice to the trustees on running the scheme. They will: Draft the rules and also provide advice and update rules if necessary Assist the trustees if there are legislation changes that could affect the scheme Help the trustees make decisions that are consistent with legislation and the Rules of the scheme These are the main parties involved in running pensions in the UK. You may well deal with them in the future. Author: Chris Gettings 32 of 41 14/06/2018

33 Video 9: HMRC rules and key organisations Key Organisations The Department for Work and Pensions (DWP) They are the government department responsible for all the state welfare and pensions policies. They set most of the legislation that dictates how pensions in the UK work and also operate the state benefit system. They were also heavily involved in setting the legislation for Automatic Enrolment. Automatic Enrolment This is the process by which people are automatically put into a workplace pension scheme when they join an employer. If a person is aged between 22 and State Pension Age, and they earn enough to pay income tax, it is likely that they will be put into the pension scheme within three months of joining the employer. The aim of Automatic Enrolment is to ensure that more people save for themselves and that there are fewer burdens on the state in the future. The Pensions Advisory Service (TPAS) They are an independent and voluntary organisation that exists to help anyone who has pension rights in the UK. They help resolve complaints that the member has failed to resolve satisfactorily with the trustees of the scheme. They also have a well written website which can help members understand some of the technicalities behind pensions. Her Majesty s Revenue and Customs (HMRC) They are the UK tax authority and deal with all the tax in the UK, so things like; income tax, capital gains tax, corporation tax and inheritance tax. With regards to pensions, they regulate the tax relief a member can have and also whether or not a scheme can pay a tax free lump sum at retirement. Author: Chris Gettings 33 of 41 14/06/2018

34 Within HMRC there are smaller bodies that we may deal with. 1. National Insurance Contributions Office (NICO) This department maintain records of a person s National Insurance contributions 2. National Insurance Services to the Pensions Industry (NISPI) This department holds records of all formerly contracted out rights that a member may have accrued You may deal with these departments when you are calculating a member s benefit. Citizens Advice Bureau They provide guidance to members on the flexible ways in which they can access their pension, along with TPAS and the Pension Wise website. Pensions Simplification On the 6 April 2006 there was a key change in the tax rules regarding pensions in the UK. Some were replaced, whilst other were changed. These changes were called Pensions Simplification. There were many new rules that came into force, three of the main ones were: Annual Allowance (AA) Benefits Crystallisation Events (BCEs) Lifetime Allowance (LTA) These rules are very much linked together and you may have heard of them already. Annual allowance As the government does not limit the amount you can pay into a pension scheme, they did not want to be exposed to giving potentially unlimited tax relief. Therefore they placed a maximum figure on how much a members benefits can increase by each year. This is called the annual allowance. It is currently 40,000. If a member takes a flexible retirement option (Flexi-access Drawdown or UFPLS) that we have mentioned earlier, then this figure changes. This will be covered in more detail in later courses. Author: Chris Gettings 34 of 41 14/06/2018

35 Benefit Crystallisation Events These are described as being the point at which the member s benefits are paid out of the scheme. By way of example, this could be on retirement, death, or when transferring money overseas. At one of these events, we have to check the value of the member s benefits to ensure they haven t exceeded the limits on the generous tax relief that the government offers people to save for retirement. The limit against which this value is checked or tested is called the Lifetime Allowance. Lifetime Allowance (LTA) This is the maximum amount of pension savings a member can have in their lifetime without incurring an additional tax charge. The lifetime allowance is set quite high, and you can see the figures below. If a member exceeds this LTA they will face a tax charge which has the effect of neutralising the tax relief they received on any value of pension benefit over the LTA. Lifetime Allowance Figures The table below sets out the full history of the LTA figures Tax Year LTA figure 2006/ m 2007/ m 2008/ m 2009/ m 2010/2011 & 2011/ m 2012/2013 & 2013/ m 2014/2015 & 2015/ m 2016/2017 & 2017/ m 2018/ m From the 2018/2019 tax year onwards, the figure will increase each year in line with the Consumer Prices Index (CPI). Author: Chris Gettings 35 of 41 14/06/2018

36 How do we test against the lifetime allowance? It depends on the type of pension scheme: 1. For a DC scheme: We will check the members fund value against the LTA, if the fund value is below the threshold, then the member will not face a tax charge. 2. For a DB scheme: The member does not have a fund value, they have an annual pension figure. In order to give this pension a value, HMRC have said that we multiply this figure by 20. So a pension of 10,000pa would have a value of 20 x 10,000 = 200,000 and as this is below the LTA, the member would not face a tax charge. Author: Chris Gettings 36 of 41 14/06/2018

37 Glossary of Terms and Abbreviations Accrual Rate The rate at which benefits build up for each year of pensionable service in a Defined Benefit (final salary or salary-related) scheme, usually expressed as a fraction, e.g. 1/60 th of salary for each year. Accrued Benefits The benefits built up by a scheme member up to a given point in time. Active Member A member of a scheme who is still accruing benefits, usually through making regular contributions to the scheme. Actuarial Valuation An exercise carried out, for a Defined Benefit scheme, by an Actuary at regular intervals (usually every 3 years) to find out if the assets of the scheme match the liabilities. Additional Voluntary Contributions (AVCs) Contributions made by a member on a voluntary basis over and above the normal contributions. Annuity A series of payments made at stated intervals (often monthly) to the annuitant, usually payable until the death of the person receiving the annuity (i.e. a lifetime annuity). Beneficiary A person, (other than a member), entitled to a benefit from a pension scheme as a result of a specific event. Benefit Crystallisation Event (BCE) One of nine events that trigger a check of benefit levels against the lifetime allowance. Author: Chris Gettings 37 of 41 14/06/2018

38 Contracting out The process prior to 6 April 2016, where a member or scheme could opt out of the additional state pension scheme(s) and either pay lower National Insurance contributions or receive a rebate of their National Insurance contributions. Deferred Member A member who has left the scheme but has benefits preserved in the scheme for payment at a later date. Defined Benefit (DB) Scheme A collective name for final salary schemes, or salary-related arrangements such as CARE schemes. Defined Contribution (DC) Scheme Another name for a money purchase scheme. Disclosure Rules introduced to ensure scheme members receive specific communications and information at the appropriate time. Expression of Wish A form completed by a member to inform the trustees of their preference as to whom should receive any lump sum death benefit (note the expression of wish is not binding on the trustees). Final Salary Scheme A scheme where the benefits are calculated by reference to the member s final salary, pensionable service, and accrual rate. Graduated Pension Scheme (GPS) The state earnings related pension scheme which started on 3 April 1961 and ended on 5 April Author: Chris Gettings 38 of 41 14/06/2018

39 Guaranteed Minimum Pension (GMP) The minimum pension a final salary scheme must provide for service between 1978 and 1997 as a condition of contracting out. HMRC Her Majesty s Revenue & Customs (previously the separate departments of the Inland Revenue and Customs and Excise). Lifetime Allowance (LTA) The overall ceiling on the amount of tax-privileged savings that an individual may draw at a Benefit Crystallisation Event. Lower earnings Limit (LEL) The minimum amount which must be earned before National Insurance contributions are payable. Money Purchase Scheme A scheme where benefits depend on the contributions paid and the amount of investment return on those contributions. Normal Minimum Pension Age The earliest age a member may be allowed to take their pension (currently age 55). Occupational Pension Scheme A scheme organised by an employer for one or more employees. Pension Commencement Lump Sum (PCLS) The term for tax-free cash that may be paid at a Benefit Crystallisation Event. Pension Protection Fund (PPF) A fund set up by the Pensions Act 2004 to provide some level of benefit for scheme members whose employers have become insolvent and whose schemes have insufficient funds to pay benefits. Author: Chris Gettings 39 of 41 14/06/2018

40 Pensionable Service The period of service taken into account when calculating benefits in a DB scheme. Pensions Ombudsman The person who can investigate and determine disputes of entitlement and complaints about maladministration not otherwise resolvable through the scheme complaints procedure. Personal Pension Scheme A scheme taken by an individual, and where historically taken out only for the purpose of contracting out of the state scheme, called an Appropriate Personal Pension. Preserved Benefit A benefit kept in the scheme after a member has left and which becomes payable at normal minimum pension age or later. Protected Rights The benefits formerly held in a DC scheme arising from contracted out membership. These were abolished in 2012 and became Normal Rights but references to the term may still be made. Registered Pension Scheme A pension scheme registered with HMRC. Stakeholder Pension Scheme A type of personal pension scheme set up in 2001, which may also be offered as an employer scheme. Employers must offer a stakeholder scheme if they have 5+ employees and do not already offer any other occupational scheme. State Earnings Related Pension Scheme (SERPS) The additional state pension scheme provided from 1978 to State Pension Age (SPA) The age at which state pensions normally become payable (65 for men and women from 2018 but planned to rise to age 68 by 2046). Author: Chris Gettings 40 of 41 14/06/2018

41 State Second Pension (S2P) The additional state pension, provided from 2002 to State Pension The Single Tier state pension introduced in 2016 replacing the former state pension provisions consisting of the Basic State Pension and the Additional State Pension. The Pensions Advisory Service (TPAS) An independent organisation giving free advice to members of the public if they have problems with their pension scheme. The Pensions Regulator (TPR) An independent body set up by the Pensions Act 2004 to regulate occupational schemes. Trust Deed A legal document that establishes an Occupational Pension Scheme, and may subsequently regulate or amend it. This does not exist for Public Sector schemes such as Teachers Pensions. Trustee An individual or company appointed to carry out the purpose of the trust deed. Author: Chris Gettings 41 of 41 14/06/2018