KPMG Defined Benefit Pensions Webinar

Transcription

1 KPMG Defined Benefit Pensions Webinar Transcript of Webinar Page 1 - Changes to RBS s UK Defined Benefit pension schemes Good morning. My name is Iain and with me today is my colleague Aideen. We are both pensions consultants at KPMG. KPMG are supporting the Bank with communicating the changes being made to the Bank s UK defined benefit pension schemes. You should have received a letter from the Bank following the completion of the consultation process which confirmed the changes being made to the UK defined benefit pension schemes. The letter also detailed the range of support being made available to help members understand the changes, including this webinar. The changes being made affect different populations of active members of the Bank s defined benefit pension schemes. Throughout the presentation we will refer to the changes for active members of the Main Section of the Royal Bank of Scotland Group Pension Fund. At the end the presentation we will illustrate the differences for the other schemes. You should have a copy of the slides for today s webinar in front of you. This was ed to you a few hours ago, but if you haven t received this yet, you can get a copy of the slides from the intranet by clicking on Human Resources, then Pay and Benefits. Under Retirement Savings, click on UK Defined Benefit Pension Changes. We expect to take around 40 minutes to talk through the slides. There will then be an opportunity for you to ask questions. We will give you instructions on how to raise questions once we ve gone through all the slides. If we run out of time at the end of the webinar to get through all of the questions, or if you have to leave early, you can contact the helpline separately to get your questions answered. A recording of this Webinar is being made and will be available from the UK Defined Benefit Pension Change page on the intranet alongside the copy of the slides. If you now turn over to page 2, we will begin. Page 2 - Contents The purpose of today s Webinar is to provide you with a better understanding of the changes and the options available to you. This webinar is split into 11 sections. We ll start with a brief introduction to pensions and how they work in general. Document classification: Internal 1/13

2 We will then explain the changes the UK government made to state pensions from April and the changes the bank is making to the Defined Benefit pension schemes in response to this and the increasing costs of defined benefit pension provision in general. We will cover the support options that are available to help you understand what the changes mean and where you can get further information. We ll then go through a couple of case studies to illustrate the impact of the changes and the online pension calculator that the bank is providing to help you understand the impact on your specific circumstances. We will then have time at the end for Questions and Answers. I would highlight now that we are able provide guidance on the changes and answers to factual questions, but we are not able to provide you with any personal financial advice or recommendations regarding your personal circumstances. As the consultation process has been completed, we also won t be answering questions on the underlying rationale for the changes. You should now turn over to page 3. Page 3 - Introduction to pensions (1) So what is a pension scheme? It s simply a type of long term savings arrangement to help you save money for later in life. You save regular amounts when you re working to build up benefits which you can receive later at a time when you want to work less or retire. Pensions are a tax efficient way to save for your retirement as the majority of contributions and investment returns are not subject to tax and normally up to 25% of the benefits can be taken tax-free In the UK, there are 3 main elements of pension provision:- Firstly, the State Pension. You receive a state pension from the government when you reach State Pension Age Workplace pensions i.e. Schemes provided by employers for their staff. Both employer and employee pay contributions into these while the employee is working. These can be either Defined Contribution (DC) or Defined Benefit (DB) schemes. We ll cover how each of these type of schemes work on the next two slides Thirdly, there is also personal pension provision any additional retirement savings made by individuals themselves You should now turn to page 4 Page 4 - Introduction to pensions (2) We ll now consider how Defined Contribution (or DC) schemes work. This slide is in relation to DC schemes in general and not specific to the DC schemes provided by the Bank, which we will touch on later in the session. With a defined contribution scheme, member and employer contributions are paid into your individual pension pot, which works a bit like a savings account. The contributions are then invested, with you being able to choose the type of investments that are used. The value of your pot builds up as contributions are paid in and can go up or down depending on how the investments perform. Document classification: Internal 2/13

3 The accumulated amount of your pot at retirement is used to provide your pension benefits. You have flexibility around the form that those benefits take. We will cover the options at retirement in more detail later in the webinar. In summary, the benefits from a defined contribution scheme will depend on how much money is paid in, the investment performance of the fund, and how you decide to take the benefit at retirement. The biggest impact that you can have on your income in retirement from a defined contribution scheme is the level of contributions that you make. You should now turn over to page 5. Page 5 - Introduction to pensions (3) So how do Defined Benefit or DB pension schemes work? Again this covers DB schemes in general as opposed to the DB schemes provided by the Bank. With a defined benefit pension scheme (sometimes referred to as a final salary scheme), the benefit you receive at retirement depends on a formula based on the number of years in the scheme, your pensionable salary and the rate at which the pension builds up while you are an active member of the scheme, This rate is usually referred to as the accrual rate. The accrual rate is most commonly expressed as a fraction, such as 1/50th, 1/60th, 1/80th etc. Your annual pension at retirement is calculated as the number of years service multiplied by your pensionable salary and then by the accrual rate. If you consider the example shown on the slide, if you were in a DB scheme for 20 years and you retire on a pensionable salary of 24,000 a year and your scheme has an accrual rate of 1/60th, your annual pension at retirement would be: 20 times 24,000 times 1/60th, which is equal to a pension of 8,000 a year At retirement, you have the option to give up some of your pension for a tax free cash sum. You should now turn over to page 6. Page 6 - Changes to the UK State Pension So what are the changes the government made to the UK State pension with effect from 6 April 2016? Prior to April 2016, the UK state pension had two elements: Firstly, the Basic State Pension (or BSP) plus an additional earnings-related element; known as the Second Tier State pension (or S2P for short). The full Basic State Pension as at 5 April 2016 was per week. Employers who offer UK defined benefit pension schemes were able to opt out of S2P, which was known as contracting out of S2P, as long as their defined benefit pension scheme provided benefits above a minimum level. The pension you would receive from the Bank s defined benefit pension schemes would have always been higher than the additional state pension you would have received if you hadn t been contracted out. Document classification: Internal 3/13

4 In return, both the employer and the employee paid a lower rate of National Insurance contributions, known as a NI rebate. Similar to the vast majority of UK defined benefit pension schemes, the Bank s defined benefit pension schemes were contracted out of the S2P. From April 2016 there is no longer a two part state pension. Instead, a single-tier state pension operates which is higher than the Basic State Pension (BSP). The full new single tier State Pension is per week, although this will be adjusted down to reflect any periods of service you were in a contracted out scheme. The Second-tier state pension (S2P) no longer exists and as a result, it is no longer possible to contract out of S2P. This means that from April this year, employers and employees who were in a previously contracted out scheme were no longer able to receive the rebate on the National Insurance contributions. Their National Insurance contributions are now at the same level as employees who weren t contracted out of S2P. The increase in National Insurance contributions for members is equivalent to 1.4% of your relevant earnings. Relevant earnings are roughly earnings between 6,000 and 40,000 each year. In return for the increased national insurance contributions you will be building up benefits towards the new higher single-tier state pension. Detailed examples of the increase in national insurance contributions from April 2016 will be covered later. You should now turn over to page 7. My colleague Aideen will now discuss the next couple of sections. Page 7- RBS s response to the changes The cost of providing DB pension schemes has already been rising for some time and there is a significant gap between funding the bank s DB and DC schemes. The government changes to contracting out have further increased the banks costs associated with the DB scheme. The Bank did not feel it was right to absorb these further cost increases and widen the gap between DB and DC pension funding further. Because employers were facing increasing national insurance costs from the removal of the ability to contract out, the government recognised this and legislated to allow them to make limited changes to their pension plans to cover the loss of the rebate. Any changes made through this mechanism can only reduce benefits or increase member contributions to the extent that the Employer s National Insurance costs have increased and not any more. The bank has concluded its consultation and decided to increase the cost of membership of the UK defined benefit pension schemes by 2% of the salary element of your ValueAccount. Where the bank is using the government mechanism to do this it has received independent advice to confirm that it is operating within the legislation. You should now turn over to page 8. Document classification: Internal 4/13

5 Page 8 - What do the bank s changes mean? The bank consulted with employees and employee representatives on these changes and this consultation has now closed. Based on the feedback during the consultation the increase in cost will happen later than proposed and will be done in four increments rather than two to give employees more time to plan for the increases. The 2% increase in basic salary, that is the salary element of your Value Account, will be applied in 0.5% increments in June 2017, December 2017, June 2018 and December You should now turn over to page 9. Page 9 - What do the bank s changes mean? (2) The Bank has also reviewed the arrangements for Additional Pension Contributions or APeCs, which are a way for members to increase their pension savings. For certain members the bank currently increases any APeCs members pay by 7% on a discretionary basis. However, this discretionary top up will stop from June APeCs made before June 2017 will still qualify for the 7% top-up. Any income tax and national insurance relief that currently applies will continue. For example a basic tax rate payer currently gets 107 invested for a net cost of 68. In the future the net cost will still be 68 but 100 will be invested rather than 107. A table setting out who is affected by this change is shown at the end of the presentation. You should now turn over to page 10. Iain will now explain the support available to you and present some case studies to further illustrate the changes. Page 10 - Support available The Bank has arranged support to help you understand the changes. This includes: A Pensions Explained guide which covers what pensions are, how pensions work and how to understand their value to you A short animated film which explains the changes being made is also available There is an online pension calculator, to show you how the increased charge will affect your take home pay and help you understand the value of being a member of the Defined Benefit pension schemes A telephone and helpline is also available, which is provided by pension experts at KPMG. We can provide help with any queries you have on the online calculator and any questions you have on the changes and what they mean for you. Again, as with this webinar, the helpline staff will be able to provide guidance on the changes and factual information but they cannot provide you with personal financial advice. If, after using the online calculator and other support provided, you would like more information about your pension, you can request a Defined Benefit pension statement which will provide you with an estimate of your pension at retirement. All of this can be found at RBSelect or your HR intranet. Document classification: Internal 5/13

6 The next couple of slides show the impact on 2 example members of both the increase in national insurance contributions and the increase in the cost of membership of the UK Defined Benefit Pension Schemes. If you now turn over to page 11, I ll take you through the first case study. Page 11 - Case study 1 Richard In this first example we consider Richard, who has an annual salary of 20,000 which is 1,667 a month. As covered previously, from April 2016 the ability to contract out was removed and National Insurance contributions increased for all members by the previous rebate of 1.4% for relevant earnings (which is monthly earnings between 480 and 3,340). For Richard this meant that his National Insurance contributions increased by about 17 per month from April The figures in the table show the reduction in take home pay compared to the position before the bank changes. For simplicity, we have assumed no increases in salary. In this example, each additional 0.5% member charge will be around 8 per month. This is shown in the row labelled Increase in cost of membership of Defined Benefit pension scheme the additional charge is 8 per month from 1 June 2017, rising to 17 per month from 1 December 2017, 25 per month from 1 June 2018 and 33 per month from 1 December However the impact on take home pay, which is shown in the bottom row of the table, is lower as you receive tax relief on the increased member charge. So for Richard, his take home pay in respect of the introduction of the member increase will be 6 a month lower from 1 June 2017, 13 a month lower from 1 December 2017, 20 a month lower from 1 June 2018 and 26 a month lower from 1 December If you now turn over to page 12, we will consider another example member. Page 12 - Case study 2 Becky This time we consider Becky, who has an annual salary of 40,000 which is 3,333 a month. Again, for simplicity, we have assumed no increases in salary throughout the period. As in the previous example, Becky s National Insurance contributions have increased from April 2016 due to the loss of the contracting out rebate. The National insurance rebate was equal to 1.4% of monthly earnings between 480 and 3,340, which for Becky was around 40 per month Becky has already started paying this and this will have reduced her take home pay by 40 per month from April In this example, each additional 0.5% member charge will be around 17 per month. This is shown in the row labelled Increase in cost of membership of Defined Benefit pension scheme the additional charge is 17 per month from 1 June 2017, rising to 33 per month from 1 December 2017, 50 per month from 1 June 2018 and 67 per month from 1 December Document classification: Internal 6/13

7 However the impact on take home pay, which is shown in the bottom row of the table, is lower as you receive tax relief on the increased member charge. So for Becky, her take home pay in respect of the introduction of the member increase will be 13 a month lower from 1 June 2017, 27 a month lower from 1 December 2017, 40 a month lower from 1 June 2018 and 53 a month lower from 1 December You should now turn over to page 13 where Aideen will present the pensions calculator and what information you will be able to expect from it. Page 13 - Pension Calculator (1) The online pension calculator is designed to help answer three key questions what s the estimated value of membership? what s the charge for membership and how is it changing? ; and how will the changes affect take home pay? The calculator will illustrate this in a simple and straightforward format. The results should help you understand the value of the Defined Benefit pension scheme for you. You can access the calculator on the HR Portal on the intranet under Pay and Benefits/Retirement Savings/UK Defined Benefit Pension Changes. When you start the calculator you will need to enter details of which pension scheme you re in. You can find this in the letter RBS sent to you in October. If you don t have the letter to hand you can go to RBSelectOnline, log in and under Retirement Planning select Pension Information You ll need to know if your Normal Pension Age is 60 or 65. If it s 60 you ll be paying the additional 5% charge to retain a Normal Pension Age of 60. This will show on your payslip as NPA60 CHARGE. If it s 65, you won t see the NPA60 CHARGE on your payslip. You should now turn over to page 14. Page 14 - Pension Calculator (2) You will need to input your age, monthly basic salary, total taxable payments, annual pensionable salary and your tax code. Details of your monthly basic salary, monthly total taxable payments and your tax code can be found on your payslip your most recent one is best. You can find this online at Human Resources/My Documents/My Payslips. You can get details of your current pensionable salary on your annual pay statement which you can get online at Human Resources/My Documents/My pay review statements. Please note your basic salary and total taxable payments are monthly figures. Your pensionable salary is an annual figure. You should now turn to page 15. Document classification: Internal 7/13

8 Page 15 - Pension Calculator (3) You ll also need to enter whether you joined the scheme before or after 1 July 2005 most members joined before this date but benefits are different for those who joined after 1 July 2005 and this will make a difference to your results. You will also need to enter whether you work part time (and if so, what your part time hours are) and whether you have any taxable earnings or offsets outside of your employment with the Bank. These amounts are also monthly figures. You should now turn to page 16. Page 16 - Pension Calculator (4) We ve highlighted in red here where on your payslip you can find your monthly basic salary it is the first entry under the payments section. Your total taxable payments are highlighted in green and your tax code is highlighted in yellow. If you turn to page 17, we ll consider the outputs from the calculator. Page 17 - Pension Calculator (5) Firstly, the calculator shows you the estimated monthly value of your defined benefit pension. Putting a value on a Defined Benefit pension is subjective and may also depend on your personal circumstances. The results produced by the calculator are based on the same calculations used to set the bank s contributions for most members, although they ve been simplified to show everyone an estimate of the value for them. In the example above, the monthly value of membership, that is what has to be contributed to the scheme for this member to build up benefits for another month, is 548 or roughly 33% of their monthly basic salary. Please note, the value of membership of a Defined Benefit pension scheme will change over the period from now until December 2018, but this isn t included in the estimate provided. Please turn over to page 18. Page 18 - Pension Calculator (6) The calculator then shows you the current monthly charge for membership and how this will change as a result of the increases being phased in from June In this example the current monthly charge is 250 or 15% of basic pay. The first 0.5% increase in June 2017 will increase this monthly charge by 8. After the fourth increase has been applied the monthly charge has increased by 33 up to 283. The figures shown here are before Tax and National Insurance are taken into account. There is also a What do these results mean? box. For the vast majority of members we expect the result to be as shown on the slide, that even after the increase in membership charge the estimated value of membership is higher. However for those where the number is closer, or where the charge is higher than the estimated value this will be highlighted in the box instead. Document classification: Internal 8/13

9 Please turn over to page 19. Page 19 Pension Calculator (7) The calculator then estimates how the changes will affect your take home pay. The figures show your net membership charge each month and how this will increase from June 2017 after taking into account tax and national insurance. This will be lower than the gross amount shown on the previous page. In this example the total increase in the gross charge across the 4 increases was 33 but the actual reduction in take home pay is less at 27. After the changes are fully introduced for this member the net monthly charge will be 197. The Bank recommends that you keep a copy of your results from the calculator by clicking on the download your full results button at the bottom of the results page and ing them to you you are able to choose the address you send the output to. Although the calculator s primary purpose is to let you see the impact based on your actual circumstances, you can rerun the calculator using different inputs to see what impact it has on your results. Specifically, if you have a Normal Pension Age of 60 you can use the calculator to consider the impact on the value and charges of moving to Normal Pension Age 65 by changing your Normal Pension Age in the inputs and rerunning the results. That concludes our run through of the online pension calculator. If you now turn to page 20, we ll take a look at what options are available to you. Page 20 - Options available The first thing to make clear is that you don t need to do anything. The increase in your National insurance contributions happened in April 2016 and the increase in your member contributions will be automatically applied, starting in June The Bank will continue to meet the remainder of the cost of providing the UK defined benefit pensions. This is currently around 30% of salaries in the Group Pension Fund and we expect the bank s contribution to the Ulster Bank Scheme to increase to similar levels when the current actuarial valuation is completed next year. The Bank believes that membership of the UK defined benefit schemes remains a valuable benefit. However, there are options to mitigate the increase in member contributions that you may want to consider. If you are a member of the Group Fund and currently paying an additional 5% RBSelect charge to keep your Normal Pension Age at 60, the default position will be that you will continue to pay the 5% charge and will start to pay the additional contributions on top of this from June However, you do have the option of stopping the 5% RBSelect charge. If you do this your Normal Pension Age will be 65 for benefits built up after this date. You won't receive a refund of any existing 5% RBSelect charge you have already paid but the pension you have built up prior to the change will continue to have a Normal Pension Age of 60. If you make this change you will not have the option to return to a Normal Pension Age of 60 in the future. If you make extra savings via Additional Pension Contributions or Additional Voluntary Contributions you may wish to review these in light of the increase in member contributions from June You can change the level of these additional contributions via RBSelect. Document classification: Internal 9/13

10 If you no longer want to be an active member of your UK Defined Benefit pension scheme you can decide to opt out of the scheme. If you opt out of your defined benefit pension scheme you will automatically be enrolled in the defined contribution pension scheme, also called the RBS Retirement Savings Plan with a default contribution set at 10% of your ValueAccount. However you can chose to use your pension funding on other RBSelect benefits or you can take it as cash instead but this choice will have a direct impact on the amount of pension you are building up in future. You need to think carefully about whether to opt out because if you do this you will not be able to rejoin. We ll give you a quick overview of how opting out would work and the key things you need to consider over the next few slides. If you are in any doubt you should consider taking independent financial advice before making any decision. The most significant change you can make is to opt out of the defined benefit pension scheme and [X] will present this option in more detail over the next few slides. You should now turn over to page 21. Page 21 - Options available (2) If you opt out of the DB pension plan you will automatically be enrolled in The RBS Retirement Savings Plan, which is a Defined Contribution pension scheme. As we discussed earlier, this means that the benefits you receive will depend on the contributions paid into your pension pot, the level of investment return on those contributions and how you decide to access your benefits. The default RBSelect contribution is 10% of ValueAccount for the RBS Retirement Savings Plan but you can change it up or down. The value of your pot can go up or down depending on investment returns, and because this impacts directly on the level of benefits which are provided, the risk lies with you as the member. This differs from a Defined Benefit pension scheme where your benefit is based on a formula and the risk that investment returns are lower and the benefits built up to the current date are more expensive to provide than expected lies with the Bank. There is however, greater flexibility around how you can take your benefits in a Defined Contribution Scheme compared to a Defined Benefit pension scheme. If you now turn over to page 22, we will consider the different options you have to take your benefits from the Defined Contribution Schemes. Page 22 - Options available (3) In the UK Retirement Savings Plan you have lots of choices on how to take your benefits when you come to retire. You can use your pension pot to purchase an annual pension, payable for life (known as an annuity). The annuity can be tailored to your needs you can choose to buy an annuity which increases in line with inflation or one that pays a level amount each year. You can also buy a pension that will pay an income to your spouse or civil partner in the event of your death. The level of pension that you can buy may be higher if you suffer from certain medical conditions or, for example, are a smoker. You also have the option to take your pension pot as cash. Normally up to 25% of your pot is available as cash tax free. The remainder of your pot, whether you choose to take it is cash or as a regular income, will be taxed as earned income in the applicable tax year. Document classification: Internal 10/13

11 You could also transfer your pot to an external drawdown account, which provides greater flexibility to keep your pot invested whilst being able to draw money from this whenever required, e.g. in regular instalments or larger one-off sums. You should now turn over to page 23. Page 23 - Options available (4) We ll now look at the impact on your Defined Benefit pension scheme if you opt out and join the RBS Retirement Savings Plan. On the left hand side of this slide, we consider your Defined Benefit pension if you remain in the scheme. Your benefits will continue to be calculated using the same formula, based on your service, salary and accrual rate. As long as you remain in the scheme, the Defined Benefit pension you have already built up based on service to date will continue to be linked to increases in your Pensionable Salary. In addition, if you remain in the Defined Benefit pension scheme, you will build up additional Defined Benefit pension for future service depending on how long you remain in the scheme and the growth in your Pensionable Salary. If you opt out of the Defined Benefit pension scheme, you will become a deferred member of the scheme. Your Defined Benefit pension will be based on the service you built up in the scheme up to the date you opted out and your Pensionable Salary at that point. As a deferred member, your Defined Benefit pension will be linked to increases in inflation. In addition, your future pension saving would be in the RBS Retirement Savings Plan. And as discussed already, the benefits you receive from this Plan will depend on how much contributions are paid into your pot, how well your investments perform and how you decide to access your pension benefits at retirement. To further illustrate this you can request a Defined Benefit pension statement which will provide you with an estimate of your pension at retirement should you decide to remain in the scheme or decide to opt out. You can do this via the HR intranet or by calling HR. There are differences between the assumptions used for producing the statements assuming you remain or you leave. More detail on this and the content of the statements can be found in the Pensions Explained guide. You can contact the helpline if you would like to discuss it in more detail and you may want to seek independent financial advice. If you turn over to page 24, we ll look at some other points you should take into account if considering whether or not to opt out of the Defined Benefit pension scheme. Page 24 - Options available (5) If you opt out, your entitlement to benefits under the Defined Benefit pension scheme will be based on your revised status as a deferred member. In particular:- 1) Should you die whilst an employee of the bank any dependant s and children s pensions will be based purely on your deferred pension. If you remain as an active member, dependant s and children s pensions are based on the potential pensionable service you would have completed if you had stayed in the scheme up to your Normal Pension Date. Document classification: Internal 11/13

12 2) You will no longer be eligible for an enhanced ill health retirement pension; and 3) You will not be eligible to take an undiscounted pension if you leave the bank through redundancy at age 55 and over. Under the Retirement Savings Plan, any life and disability cover will be paid for separately by you by deduction from your ValueAccount. You ll be defaulted in at minimum level of cover so you d need to think about whether this level of cover is sufficient for you. It is your responsibility to make any person who would qualify for dependants benefits on your death aware of your decision to opt out of the defined benefit pension scheme and the potential impact on them. You need to think carefully about whether to opt out because once you have opted out of the Defined Benefit pension scheme, you cannot rejoin. The Bank s view is that the Defined Benefit pension scheme is a valuable benefit to have and want you to make full use of the support services available to understand the value of it to you. If you are in any doubt you should consider taking independent financial advice before making any decision. Leaving the defined benefit pension scheme is a really important decision given how valuable the benefit is. This means that you need to give a full month s notice if you do decide to leave, so once you have informed the Bank you won t leave until the month after next. For example if you decide to opt-out in April you ll actually leave in June. You should now turn over to page 25. Page 25 - Summary of differences The presentation so far has reflected the changes to the Main Section of the Royal Bank of Scotland Group Pension Fund. The first table highlights the differences for members of the bank s other defined benefit schemes. For example the removal of the 7% APeCs uplift will not apply to members of the Ulster Bank pension scheme as the uplift has never applied to them. Also, if you are a Williams and Glyn employee, you should note that some of the definitions referred to earlier in the presentation are different for you. These are summarized in the second table on this page. Please move on to page 26. Page 26 - Questions and answers That concludes the slide presentation. You now have the opportunity to ask any questions you might have. I will now hand you over to the operator who will give you instructions on how you can ask a question. If there are no further questions, we have a couple of quick slides to conclude with. Please turn to page 27. Document classification: Internal 12/13

13 Page 27 - Further support Where there is a useful summary of the various sources of supporting material available and where to find them. Page 28 - Disclaimer And finally, please note the disclaimers on page 28. In summary, the intention of today s webinar was to provide you with a few key facts to help you understand the changes to your scheme and the options available to you. Today s session does not constitute financial advice and you should seek Independent Financial Advice on your own circumstances if necessary. Thank you for joining today s webinar and goodbye. Document classification: Internal 13/13