SMART PENSIONS Wednesday 26 May 2010
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1 BDO TAX SMART PENSIONS Wednesday 26 May 2010
2 CONTENTS WHY BDO? AN INTRODUCTION TO SMART PENSIONS YOUR POTENTIAL SAVINGS YOUR POSITION PRE SMART PENSIONS IMPLEMENTATION YOUR POSITION POST SMART PENSIONS IMPLEMENTATION ISSUES AFFECTING THE DB AND DC SCHEMES EMPLOYEE PARTICIPATION SOME FURTHER ISSUES FREQUENTLY ASKED QUESTIONS OUR APPROACH PROFESSIONAL FEES OUR TEAM OUR AWARDS
3 WHY BDO? When we identified the potential savings to be gained in the implementation of SMART pension schemes as part of our audit assist PAYE review, we were pleased to learn that this was high on Macmillan s agenda too. We are delighted to have been invited to discuss with your team the potential introduction of SMART pensions at Macmillan. We have provided our initial thinking on the project in this document but would like to begin by outlining three key reasons why we think our BDO team is the right choice for this assignment. 1.Working with a firm which already understands Macmillan We have been working as external auditors to Macmillan for over seven years and, consequently, are very well placed to deliver and implement SMART Pensions. As a firm BDO have formidable credentials in the charity and education sector and we have already worked with a number of clients (Faber & Faber and The Train Line) in successfully implementing SMART Pensions. 2. A potential 425,000 in savings In this document we have sought to provide you with an introduction to the approach we would take if appointed. It s the combination of our not for profit expertise together with our experience advising clients on the introduction of SMART Pensions which we think makes our team the right choice. In our initial planning for this opportunity we have identified combined annual savings of 140,000, or 425,000 over three years. We hope we get the opportunity to see this additional revenue in action with you. 3. A long term view We believe that in our conversations to date with you we have demonstrated our enthusiasm to work with Macmillan in this area and we look forward to the opportunity to discuss our ideas, both for the three year work plan outlined in this document and for the longer term, at the presentation. 3
4 AN INTRODUCTION TO SMART PENSIONS We know that Macmillan is aware of the concept of SMART Pensions and has already investigated the potential savings to be made. However, we would like to begin by outlining the key attributes of such schemes. SMART Saves Money and Reduces Tax (NIC). SMART Pensions can be applied to both your final salary DB and money purchase DC schemes, currently administered by Legal & General. Employee pension contributions tax efficient but still liable to NIC. Employer pension contributions effective for both tax and NIC relief. SMART Pensions replace employee contributions with enhanced employer contributions. Funded by salary sacrifice. Cost savings to employer/employee arising from reduction in NIC. Employees benefit from increased net pay and/or increased pension funding. Key attraction/retention tool. This type of scheme is already offered by a number of large charities, including both Barnardo s and RSPCA. 4
5 SMART PENSIONS Potential savings Year One (2011/12) Year Two (2012/13) Year Three (2013/14) E'ees NIC E'ers NIC Annual Savings 63,275 77, ,152 63,275 77, ,152 63,275 73, ,152 Total 423,456 Assumptions Total Annual Employee s Contribution of 608, compatible schemes; (Defined Benefit: 336,067, Defined Contribution: 272,352). Based on figures provided by Macmillan for the year ending 31 December Assume COSR (Table D) and COMP (Table F) Employee s NIC at 10.4 per cent. Employer NIC 12.8 per cent, fixed amount irrespective of earnings. 1 per cent over 43,888 ( UEL ). 100 per cent take up. From 2011/2012 (Year 1) Class 1 Primary NIC will increase by 1 per cent per cent E ees and 12.8 per cent E ers ersrespectively. respectively 5
6 YOUR POSITION PRE SMART PENSIONS IMPLEMENTATION A worked example for both the DB scheme and two DC schemes Macmillan Employer pension contribution 900 (6 per cent of 15,000) Salary 15,000 Pension Fund Employer s NIC Employee Employee pension contribution 900 (6 per cent of 15,000) 1,280 (12.8 per cent of 10,000) 1,040 NIC (10.4 per cent of 10,000) HMRC Conclusion Pension fund has received 1,800. Total NIC on employee s salary of 15,000 is 2,320. Assume NIC Earnings Threshold of 5,000. The 6 per cent contribution rate is for illustration only. The employer s contribution to the Pension may not be 6 per cent but will be the balance of the cost of benefits as assessed actuarially from time to time. Net pay arrangement for tax relief at source. COSR/COMP (Letters D and F). 6
7 YOUR POSITION POST SMART PENSIONS IMPLEMENTATION A worked example for both the DB scheme and two DC schemes Macmillan Employer pension contribution 1,800 (12 per cent of 15,000) Salary 14,100 (sacrificed 900) Pension Fund Employer s NIC Employee (12.8 per cent x 9,100) NIC (10.4 per cent of 9,100) HMRC Employer s NICs Employee s NICs Total Pre SMART Pensions 1, , , Post SMART Pensions , Saving See assumptions on previous page 7
8 SMART PENSIONS Issues affecting the DB and DC Schemes Are our existing pension schemes compatible with salary sacrifice? How will employees retain the overall value of their salary but still sacrifice a proportion of earnings? How difficult will this change be to implement? In respect of your DB and Legal and General DC schemes the answer is most likely, yes. We would, however, need to first check the scheme rules to confirm this. In our experience the only types of schemes which are not compatible for salary sacrifice are the Local Government Pension Scheme ( LGPS ), NHS or Teacher s Pension. These are all final salary DB schemes which require a mandatory employee contribution. By including the salary sacrifice in the definition of Earnings for HR purpos ses. For employees who participate, their actual earnings will be lower than their Earnings (e.g. Notional salary). Employee s take home pay will actually increase. The amendments to the pension scheme rules should be very simple. Good and effective planning is the key to a smooth implementation. Involvement of Pensions Specialists from BDO Investment Management will ensure that the technical cal issues are covered ed efficiently e and effectively. Liaison with Scheme Trustees and Pension Administrators, through BDO, is essential and their input will be valuable. 8
9 SMART PENSIONS Employee participation Should we make SMART Pensions mandatory for all our employees? Positive consent ( opt in )? Presumed consent ( opt out )? Amending the terms and conditions of employment requires informed consent. Effective communication of the benefits to Macmillan staff is key. Employment law requires a comprehensive consultation process. Separate legal l advice is recommended. d Requires employee s express consent. With hundreds of potential participants for whom consent forms are required, this could cause an administrative burden for the charity. Usually attracts fewer participants staff may not be good at returning forms! Takes place after communication of proposed changes to terms and conditions. In the absence of employee opt out there is a presumed consent to the changes. In our experience there is less administration and a higher participation rate. Relies on effective communication to employees, including Q&A sessions, with practical examples provided. As both employee and employer benefit from scheme this is the more popular option. 9
10 SMART PENSIONS Some further issues National Minimum Wage ( NMW ) Entitlement to State Benefits Statutory Maternity Pay Tax Credits (Working Tax Credit/Child Tax Credit)/Misc Under current legislation no employee over the age of 22 can earn less than 5.80 an hour. Full time staff earning less than the minimum wage (approx 11,000 per annum) will not be able to participate, as a salary sacrifice would reduce this pay to below the current NMW rate. Very important to consider earnings (pre and post) on a pro rata basis. The entitlement to some state benefits is based on earnings for NIC purposes. Important to consider whether sacrifice will affect current or future entitlement. Must have paid NIC for 26 weeks prior to the 15th week before due date. To maintain entitlement, in some circumstances, may require salary top up. Employees earning just above the Lower Earnings Limit ( 97 pw) may be affected. SMP is calculated based on NICable pay therefore it is important to consider the scheme rules. Entitlement is based on gross and not net income like predecessor scheme. The implementation of SMART Pensions is very unlikely to have any negative impact on Tax Credits. Will only affect entitlement tle e t if savings are passed on to employees to increase salary. Loan/Mortgage Applications which consider actual gross earnings as per an employee s P60. 10
11 SMART PENSIONS Frequently Asked Questions What if the Government changes the law? Will this cause us an increase in administration and costs? How can we ensure our staff will understand the changes? If we reduce the salary will employees miss out on future pay-rises/bonuses etc? We consider this unlikely as self funding of pensions is high on the political agenda. Salary sacrifice arrangements are actively supported by HMRC e.g. Childcare Vouchers, Bike To Work Scheme. Salary sacrifice arrangements are not considered to be avoidance schemes but good tax planning. There will be upfront implementation costs but ongoing costs are minimal. Detailed feasibility report will address this and look at cost/benefit analysis. NIC savings within first year should more than cover professional o fees. Effective communication and engagement with staff is key throughout the process. Employee Roadshows plus Q&A sessions with takeaway materials will assist. Salary sacrifice ce now common o in employment market place. Use of notional pay will ensure this is not the case. Indemnities/opt out mechanism can be used. 11
12 OUR APPROACH Methodology PHASE I Feasibility Study PHASE II Scheme Design PHASE III Communication PHASE IV Implementation PHASE I Feasibility study In our experience it is important that a feasibility study is carried out prior to moving into implementation stage. The study and resulting report will encompass the main areas Macmillan need to consider to make a Stop/Go decision in relation to the arrangements. The report will cover: financial modelling using software to analyse and identify both employer and employee savings together with the implications of sharing a proportion of the savings system issues identifying changes needed to HR, pension administration and payroll systems design issues timing, branding, eligibility, documentation employment law issues National Minimum Wage issues pension/actuarial issues timeline for implementation likely costs Tax/NIC implications identification of potentially adversely affected employees employee communication recommendations input on other benefits such as state pension and tax credits. PHASES II TO IV Design to Implementation The implementation phase will be based on the factors and issues identified during Phase I and will cover: design issues system changes payslip design testing changes employee communication roll out including help line and intranet page plus engagement with trade unions employment law work amending documentation pension/actuarial work general project management and advice HMRC liaison/clearance. 12
13 PROFESSIONAL FEES We are committed to providing a quality service to Macmillan that represents value for money and is completely transparent when it comes to fees. To this end we have provided our fee for the feasibility study only at this stage. As we have outlined in the previous section, our aim in this first phase is to provide you with everything your Board needs to make a decision on whether to proceed with this project or not. It will also help you decide how much external support you will need should you decide to go ahead. At this stage we can then, together, define our further input and agree a separate budget for this. As with the audit work we currently do, we want you to feel able to contact us at any point without worrying that the clock is ticking so we won t charge for ad hoc advice and support provided over the phone. We value a collaborative relationship with you and are committed to investing time to identify potential issues that may impact you and your business. We believe in complete transparency which means: we do not quote unrealistically low fees to win work, in the hope of recovering our costs through h selling additional i services at inflated rates or increasing i fees significantly in subsequent years you can be assured that you will not be charged over and above our agreed fees unless we discuss and agree an additional fee due to a change in scope we will agree a fee with you in advance of any work being undertaken. Feasibility study (PHASE I) 10,000 to 12,000 Meetings with key stakeholders. Review of scheme rules/policies. Financial modelling. Scheme Design (PHASE II) to be agreed Review member population. Consider impact on pay elements. Legal review of amendments. Communication (PHASE III) to be agreed Engagement with employee representation. Produce FAQ Booklet. Staff Q&A sessions. Employee helpline/intranet page. Implementation (PHASE IV) to be agreed Draft letter effecting changes to terms and conditions. Legal review of changes. Dummy run of payroll. HMRC approval post-implementation. 13
14 OUR TEAM AMANDA FLINT Partner Human Capital, South JO GILBEY Partner Not for Profit, Southern KEITH BRECKELL Human Capital Director STEPHEN BAKER Employment Tax Manager t e amanda.flint@bdo.co.uk t e jo.gilbey@bdo.co.uk t e keith.breckell@bdo.co.uk t e stephen.baker@bdo.co.uk Amanda Flint is one of the leading UK advisers on share incentives and Reward. She joined BDO in 2007 and is now Tax Partner specialising in Reward in the Human Capital group. Previously Amanda had been working at one of the Big 4 where she was a partner in the People Services team, having earlier qualified as a solicitor (although now non-practising). Her g headquartered multinationals to UK listed and larger unlisted companies. Jo is a Chartered Accountant and Chartered Tax Adviser with over 20 years experience in providing tax services. She is the lead tax partner to our Charities sector and for other notfor-profit organisations. Jo has a broad spectrum of clients including charities and other not-forprofit clients, as well as large corporates. As a result of this, Jo is in a strong position to blend the knowledge and approach of both charitable and commercial sectors creating value for her clients through the synergies this overview brings. clients have ranged from UK and non-uk p g She speaks regularly at external conferences and also other events organised by share scheme administrators and other professional organisations. 14 Keith heads the Southern Region Human Capital Group consisting of specialists able to advise clients on employment taxes and NIC, the Construction Industry Scheme, approved and unapproved share incentives and incentive and remuneration planning. Keith has 36 years of experience within tax including 17 years with HMRC. He has extensive experience in providing advice on all aspects of planning and compliance within employment taxes. Keith has considerable experience of working with clients in the charity and NFP sector. Stephen joined BDO in March 2007 after six years with HM Revenue & Customs and qualifying as an Inspector of Taxes. Prior to this Stephen also worked as both an Employer Compliance and Status Officer. He has a broad range of clients in both the commercial and NFP sector, but over the last year has specialised in employment tax advisory services to the firm s charity and education clients.
15 OUR AWARDS 'TAX TEAM OF THE YEAR' ACCOUNTANCY AGE AWARDS 2009 AND 2008 'AUDIT TEAM OF THE YEAR' ACCOUNTANCY AGE AWARDS 2008 'CORPORATE FINANCE DEAL OF THE YEAR' ACCOUNTANCY AGE AWARDS 2008 The firm clearly listens to clients and offers a more personalised service. This echoes the firm's 'we listen we deliver we grow' philosophy p and is exemplified through the Client Listening Programme. THE ACCOUNTANCY AGE 2008 AWARDS JUDGES AUDIT TEAM OF THE YEAR TAX TEAM OF THE YEAR CORPORATE FINANCE TEAM OF THE YEAR 15
16 The proposal contained in this document is made by BDO LLP ("BDO") and is in all respects subject to the negotiation, agreement and signing of a specific contract. It contains information that is commercially sensitive to BDO, which is being disclosed to you in confidence and is not to be disclosed to any third party without the written consent of BDO. Client names and statistics quoted in this proposal include clients of BDO and BDO International. BDO LLP, a UK limited liability partnership registered in England and Wales under number OC305127, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. A list of members' names is open to inspection at our registered office, 55 Baker Street, t London W1U 7EU. BDO LLP is authorised and regulated by the Financial Services Authority to conduct investment business. BDO is the brand name of the BDO network and for each of the BDO Member Firms. BDO Northern Ireland, a partnership formed in and under the laws of Northern Ireland, is licensed to operate within the international BDO network of independent member firms. Copyright 2010 BDO LLP. All rights reserved. wwwbdocouk Tax Team of the Year 2009 and 2008 Audit Team of the Year 2008 Corporate Finance Deal of the Year
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