The end of contracting out

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Tyrone Dickerson
6 years ago
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2 How do you see the end of contracting out impacting you company? 1. Nothing to worry about likely to continue with no change 2. A formality likely to make some limited changes to retain current level of pension cost 3. An opportunity to review our defined benefit pensions 4. An opportunity to review our Total Rewards package 13% 23% 31% 33% 2014 Towers Watson. All rights reserved. 2

4 What s happening? Contracting out ceases in April 2016 Introduction of single-tier State pension Pensions Bill is currently going through parliament Royal Assent in the spring Draft Regulations Expected shortly Expected to outline statutory override where Trustee agreement is not needed Option to phase change over period up to April 2021 Changes are likely to require consultation with employees under listed changes rules Without change, costs will certainly increase. So change is essential to maintain the cost profile. Change takes time 60 day consultation. 4

5 Timeline for cessation of contracting out OCT 2012 SPRING 2014 MAY 2015 APR 2016 DEC 2016 OCT 2017 OCT 2018 DEC 2018 APR 2021 Automatic Enrolment :Phase 1 2% Automatic Enrolment: Phase 2 5% Automatic Enrolment: Phase 3 8% Royal Assent for Pensions Bill Defined Ambition Deadline for Bill introducing DA National Insurance rates increase by 4.8% 3.4% employer; and 1.4% employee Draft regulations for Consultation Final regulations laid Evaluate Scheme Design (auto enrolment re cert) Actuary to certify Possibly 3 month gap Power to amend applies Increase contributions or some Reduce accrual combination Changes can be phased but power ceases in 2021 HMRC s Scheme Reconciliation Service Closure Scan NISPI supporting queries 60-day Employer consultation Surrender of contracting out certificate Three months With TUs One month Without TUs Three months to notify HMRC Abolition date 5

6 Member impact example no change in scheme Example member earning 35,000 pa, paying 5% contributions to a DB scheme Take home pay impact Current Contracted in Scheme contributions Adjusted for income tax 35,000 * 5% * (1 20%) 1,400 35,000 * 5% * (1 20%) 1,400 Additional NI Nil 1.4% x (35,000 5,668) 410 Pension costs from net pay But if the employer passes their cost on. 1,400 1,810 equivalent to 6.5% member conts Employer NI impact 3.4% x (35,000 5,668) 996 equivalent to 3.5% member conts If DB benefits are adjusted, the net impact for the member is an increase in contributions from 5% to 10% 6

7 Impact of member benefits Different impact depending on many factors salary level is just one Salary 35,000 Salary 70,000 7% increase in accrual 4% increase in accrual state scheme state scheme Before After Before After Do you think employees will understand they may get a larger State pension? 7

8 Do you think employees will understand they may get a larger State pension? 1. Yes 2. No 35% 65% 8

9 Some problematic groups A) Protected persons: (electricity, rail etc) where legislative protections exist and are not being relaxed B) Outsourced ex public sector staff: Protections generally required contractors to provide a mirror scheme to the public service scheme the members were in Ability to change depends on service contract look at contractual pension commitments look at change in law provisions Contrast with current public sector employees who are undergoing change Specific groups may need special attention 9

10 The range of change Nothing Commensurate change Significant change Close Why? Prevented from change Not material issue Scheme is sustainable now Need to maintain cost profile How? Easy! Use override Consult with employees Technical pension change Scheme is unsustainable now Closure unacceptable Need material change Scheme is unsustainable now Need material change Closure only viable option Amend scheme driven by business case Trustee or contract change Part of wider benefits/reward change Wider sustainability change Where do you fall in the range? 10

12 Wider implications of change Design (auto enrolment?) Consultation and change Ill health benefits Trustees, administration Project coordination Tax planning Salary sacrifice /flex Death benefits Many streams requiring coordination 12

The majority of employers (who have considered this) plan

13 What changes are you planning to make to your DB plan in response to the ending of contracting out in 2016? The majority of employers (who have considered this) plan to make change. What will you do? Source: Pension Strategy Survey

and reward issues to consider? What elements of reward are relevant?

16 Context Looking at pension design a solution for the next 6-10 years rather than reacting just to immediate change What are the people and reward issues to consider? What elements of reward are relevant? Establishing a set of key principles to guide your pension solution 16

Considering plan design in the broader context People Reward Attraction and retention Targeting employee

Differences by business unit Issues raised by Gen Y and Z Future health and wellness considerations

management perspective What do you want employees to say about their benefits package?

17 Considering plan design in the broader context People Reward Attraction and retention Targeting employee segments Primary characteristics of desired employees Typical career profiles Competitive positioning Differences by business unit Issues raised by Gen Y and Z Future health and wellness considerations Future workforce management Objectives for reward package Value for money of current spend Risk management perspective What do you want employees to say about their benefits package? What messages should the benefits programme send? Requirements for harmonising How to help and support employees so they can afford to retire? 17

The ageing workforce implications 43 % Cite growing DB costs as a challenge to making benefit changes 47

primarily responsible for providing retirement provision?

18 The ageing workforce implications 43 % Cite growing DB costs as a challenge to making benefit changes %% Are concerned about the reputational risk of employees not being able to afford to retire Who is primarily responsible for providing retirement provision? 41 % employer 32 % employee 27 % state Source: EIU report sponsored by Towers Watson: Is 75 the new 65? Rising to the challenge of an ageing workforce 18

Short-term incentives Long-term Incentives Share plans Recognition programmes Career and Environmental Rewards

19 Joining the (right) dots to create an effective Total Rewards proposition Foundational rewards Base pay Car/allowance Pension Private health Life and disability EAP Holiday Performance-based rewards Base pay increases Short-term incentives Long-term Incentives Share plans Recognition programmes Career and Environmental Rewards Learning & development Career management programme Wellness framework Voluntary benefits Flexible working Mobility programme 19

20 A more optimum reward package can be identified regardless of cost priorities Increase in indicated retention from current level (Percentage) 3. Increase investment and increase retention 3 points on curve represent best allocation of total investment 1. Maintain current level of retention at lower investment 40% 30% 20% 10% 2. Maintain current level of investment while increasing retention Current levels of retention and reward investment The most effective companies are 3X more likely to be focused on the behaviours that drive organisation success, instead of being focused on programme cost. Source: Change and Communication ROI study 2013/ m - 10m 0 10m 20m 30m Decrease in investment from current level The above graph is an example, rather than based on facts Increase in investment from current level 20

21 What does a Total Rewards pension scheme look like? Design Sustainable DB or DC Benchmark total comp position Outcome from all rewards Ability to flex Communication Linking benefits and other rewards to maximise value Financial education Helping employees understand what they need to do Choice Impact on health, life and disability benefits Other savings options Wellness programmes Total Rewards pensions Administration Technology enabled Modelling tools Links between systems (pensions, share plans etc) Access to all - offering the same deal to everyone 21

23 The emotional journey Shock/anger Agreement Blame Acceptance Leadership/ manager ownership Understanding Proposal pack: booklet, letter, feedback form Website: Q&As, feedback, videos, updates Personal Illustrations Modellers and ready reckoners Financial education tools: games, profilers 23 Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

24 Employee feedback 24

25 What s on UK employees minds 31% of organisations are expecting individual performance expectations to increase. 65% expect them to stay the same 57% 51% of employees are often worried about future financial state Only 34% of employees see clear link between performance and pay 26% felt that employees have been using fewer vacation days or taking less personal time off over the past three years of companies believe their employees have been working more hours than normal over the past three years Only48% think high performing employees are rewarded Source: Towers Watson Global Workforce Study

26 Retirement employee perspectives Age Age Age Age 60+ I would like to continue working for my current employer until I retire 37% 38% 55% 74% Source: Towers Watson 2013/2014 Global Benefit Attitudes Survey UK Results 26

Gap in effectiveness on change fundamentals Only 55% of change projects are initially successful, and only one in four are successful in the long run.

Communicating what the change means to individual employees 78 5 Creating a sense of ownership about organizational change initiatives 77 8 Measuring progress against goals

27 Gap in effectiveness on change fundamentals Only 55% of change projects are initially successful, and only one in four are successful in the long run. My organization is effective at: Finding executive sponsorship for organisational change 26 Clearly articulating what employees need to do differently to be successful 80 3 Communicating what the change means to individual employees 78 5 Creating a sense of ownership about organizational change initiatives 77 8 Measuring progress against goals established for change initiatives High effectiveness Low effectiveness Source: Change and Communication ROI study 2013/ Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

28 The pension change checklist Should you go ahead with the change? Do you have visible sponsorship and active support from senior leadership? Have you developed a robust and transparent consultation strategy with effective union engagement? Are your key stakeholders and change champions are engaged? Have you provided a learning environment with programmes and tools in place for employees? Will your employees have a sense of accountability to prepare and save for retirement as a result of the communications you are deploying? Will your plans help employees stay focused on business performance and results, or will this change affect business critical plans? An ongoing dialogue about the importance of having a plan to support personal and financial health and wealth Critical Change Management Objectives when Making Pension Scheme Changes Build acceptance of pension changes and the need for change Drive engagement and appropriate decisionmaking in pension planning Improve understanding and appreciation of Total Rewards and enhance the employer-employee relationship Persuade employees to take an active role in achieving their future financial security Increase utilisation of the tools, resources and benefits the company offers to help employees manage their retirement savings Best Practice Communication Tips Create experiences, not just materials Say it simply many people don t understand pensions and financial matters Give people the chance to talk as well as listen and read Respect the different things people may hear Recognise that people may travel this journey at different paces Respond to feedback continuously keep people informed, even if there is nothing new to say Face time shows commitment leaders need to be visible but do not overuse leaders as symbols Help people understand that they have a responsibility to engage and they have a personal stake in providing for their own future 28

29 Pension as part of financial education 29

30 Pension as part of financial education 30

Aviva Staff Pension Scheme: a holistic approach to Engagement and Education Decision path tool Research showed members don t know how to make an impact on their pension Profilers Helps show you your

31 Aviva Staff Pension Scheme: a holistic approach to Engagement and Education Decision path tool Research showed members don t know how to make an impact on their pension Profilers Helps show you your own attitudes to control, risk and reviewing Gaming Using current gaming techniques to engage and educate Vox pops Colleague stories make it personal Educational Films Short, fun investment education films Engagement Films Viral, fun, educational and thought provoking Action buttons Now you know more, here s what you can do. 31

33 Key elements of your change No change Commensurate change Large change Closure or beyond? Technical change employer over ride Pension change single issue Reshaping benefit strategy 33

SHPS Forums Q&As October 2016

SHPS Forums Q&As October 2016 Financial update How do the Committee decide on valuation assumptions? The Scheme Actuary advises the SHPS Committee (the Committee) on the financial and demographic assumptions