Pensions the future. James Forrest KPMG

Transcription

1 the future James Forrest KPMG

2 What key pension issues do you face? LGPS 2013 Valuation & reform SHPS valuation 2014 IFRS102 Pensions tax changes 2016 State pension changes Auto-enrolment 1

3 LGPS - accounting update Development in accounting liabilities since 30 June bn Jun 2012 Sep 2012 Dec 2012 Mar 2013 Jun 2013 Assets Liabilities - Accounting 2

4 LGPS funding update Funding valuation bn Approximate deficit of 100bn at the valuation date Developments since the valuation date show a reduction in deficits up to 30 June Considerations Liabilities Budgeting uncertainty of contributions for another 6 months Contact your LGPS and take control Assets 3

5 Changes in future service costs for LGPS Impact on future service costs 4

6 Changes in LGPS The LGPS 2014 Project is reviewing all aspects of the LGPS. This includes reviewing the future benefits, contributions and governance The changes do not change the past service benefits built up Still awaiting confirmation of the crucial cost control mechanism 50/50 option reduces risk but not employer contributions in the short term Increases costs Restructured employee contributions Career Average Revalued Earnings (CARE) NPA equal to SPA Reduces costs 49ths Accrual rate Non- contractual overtime in Pensionable Salary Cost capping arrangements 5

7 LGPS Communications and governance Pensions reform flag 6

8 LGPS and the Education sector Communications and governance Pensions reform flag Argh! Pay Eh? Ouch! Phew! Age 7

9 LGPS what does the future hold? Input into scheme s decision making e.g. investment strategy Structural changes one single LGPS / sub-funds? LGPS extending subsumption agreements & taking back liabilities Use of Asset backed funding (ABF) arrangements 8

10 SHPS - Key dates and funding level 1 April 2013 New contribution rates for SHPS come into effect Sep 2011 Dec 2011 Mar 2012 Mar 2013 Sep September 2011 SHPS valuation date Funding level tracker SHPS deficit 663m at 30 Sept 2008 Note: [ ] Source: [ ] Source: KPMG approximate analysis SHPS deficit 1,035m at 30 Sept September 2014 SHPS valuation date Challenging market conditions persist (deficit 1,241m at 30 September 2012) 1 April 2015 Contracting out ceases Apr January 2015 UK GAAP replaced Deficit Assets Liabilities Key Points Despite positive investment returns deficits continues to increase Increase in deficit due to fall in gilt yield yields (c3.5% at 30 September 2011 to c3.2% at 31 May 2013) Gilt markets anticipating some reversion in yields but may take some time to unwind and reflected in liability values Contributions likely to increase at 30 September 2014 unless significant change in market conditions 9

11 The Future of UK GAAP Pensions Impact Key Points: UK GAAP changing from accounting periods beginning 1 January 2015 (although earlier adoption possible) For participants in a multi-employer scheme where the participants are unrelated (such as SHPS) there will be a requirement to recognise a liability on the organisation s balance sheet (the approach under current UK GAAP is to book all contributions through P&L) The balance sheet liability will reflect cash agreed to fund the deficit (i.e. Deficit Reduction Contributions) adjusted for the time value of money The balance sheet liability will unwind as deficit contributions are paid Any change in balance sheet liability due to re-agreement around deficit contributions flows through P&L in the year of change If there is no change to the deficit reduction contributions agreement in the year of adoption then a liability is reconciled by a prior year adjustment of reserves rather than through P&L 10

12 SHPS options available Continue SHPS DB Transfer out SHPS Cease DB accrual Trigger DB debt Pay debt Use ABF arrangement to manage this process efficiently Continue SHPS DC 11

13 Asset Backed Funding as a financing option 3 Pension contribution - obligation to purchase income stream from CAR Company Pension Scheme 5 Rental payments for use of building CAR 5 Income stream (terms etc agreed in advance) Transfer of building to the CAR Asset Building used to secure residual income stream in the event of company insolvency 12

14 State pension changes Announced in the 2013 Budget: Confirmation that implementation of the single-tier state pension and abolition of contracting-out of the State Second Pension will be brought forward to April 2016 (previously indicated as 2017) Public sector employers cannot pass on the increased cost resulting from loss of contracting-out rebates (either by reducing benefits or increasing employee contributions) National Insurance contributions will increase for employers Employers Employees +3.4% + 1.4% NI contribution increase (of UBE) 13

15 Auto Enrolment A number of challenges Cost issue due to number of non-joiners Systems issues due to multiple pension arrangements? Extent to which can leverage off existing payroll systems Willingness to use existing DB scheme for auto-enrolment population Competitiveness and quality of offerings from DC providers Engaging with members who have previously declined to join the Company s pension arrangements Board decision will be required on key strategy and design issues 14

16 Key considerations for contribution rates Member What do Pension Quality affordability & competitors Mark Award flexibility offer? min 6% from employer Employer cost Ability to obtain competitive terms Type of contribution structure -matching, fixed, age related, etc Minimum and maximum levels of contributions Provision of sufficient pension for employees - Auto piloting 15

17 Delivery vehicle Options Contract based (N.B. not a definitive/exhaustive list) Trust based Master Trust (N.B. not a definitive/exhaustive list) GSHP Bundled (generally speaking, as left) GPP Unbundled SHPS DC Scheme specific Generic GSIPP 16

18 What are the key requirements in respect of the employees? Assessment Enrolment Opt-out 17

19 PENSION TAX WHAT S CHANGING? ANNUAL ALLOWANCE LIFETIME ALLOWANCE 50,000 40, million 1.25 million 2013/ / / /

20 ANNUAL ALLOWANCE PENELOPE CASE STUDY PENELOPE S PENSION SAVINGS OVER THE YEAR PENELOPE S PENSION SAVINGS Pension at the end of the year 22,575 49,600 Pension at the start of the 19,475 year (allowing for inflation) (REVALUED) INCREASE IN PENSION OVER THE YEAR = 3,100 PENSION TYPE DEFINED BENEFIT VALUE OF THE INCREASE IN PENSION OVER THE YEAR: SALARY AT BEGINNING OF THE YEAR: 57,000 SALARY AT END OF THE YEAR: 64,500 50,000 CURRENT ANNUAL ALLOWANCE 40, /15 ANNUAL ALLOWANCE 3,100 X 16: = 49,600 ANNUAL ALLOWANCE - 40,000 AMOUNT LIABLE TO TAX = 9,

21 LIFETIME ALLOWANCE CASE STUDY ROGER AGE 57 CURRENT VALUE OF ROGER S PENSION 1.4M ROGER S PENSION SAVINGS Current pension 70, x20 Value of current pension = 1,400,000 LIFETIME ALLOWANCE - 1,250,000 AMOUNT LIABLE TO TAX = 150,000 PENSION TYPE DEFINED BENEFIT 1.5 million CURRENT LIFETIME ALLOWANCE 1.25 million 2014/15 LIFETIME ALLOWANCE 20 20

22 Summary Engage with Understand d and LGPS to manage your understand costs future risks set and options a strategy Assess whether an ABF arrangement could help Consider impact of tax changes on senior staff Consider impact of FRS102 on your pension accounting disclosures Start considering auto enrolment 6 months before staging 21

23 Questions? 22

24 CONTACT DETAILS: James Forrest Principal Consultant and Actuary Tel: Mob: KPMG LLP St James Place Manchester M2 6DS The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International Cooperative (KPMG International).

25 Key steps to ensuring compliance Project plan identifying workstreams, key milestones and responsibilities Identify PAYE schemes affecting your staging date(s) Whether you will bring forward/align your staging date(s)? Whether and how you will use postponement at staging date (and on an ongoing basis)? Financial analysis to assess potential costs Identify who is classed as a worker within the auto-enrolment legislation Identify your qualifying auto-enrolment pension scheme Confirm the contribution structures (including phasing-in) and Pensionable Pay definitions to be used Consider the use of contractual enrolment Confirm your Pay Reference Periods and Identify what elements of pay constitute Qualifying Earnings for assessment purposes Determine which technology solution you deem most appropriate for the assessment process push (i.e. payroll driven), pull (i.e. pension provider driven), middleware or a combination? Your approach to opt-ins Your approach to opt-outs including the submission of contributions to the pension provider Whether and how you will use salary sacrifice Confirm investment strategy including default fund Your approach to employees with enhanced or transitional protection (if applicable) How you will meet the legal communication requirements including details of automated production and electronic vs paper formats What additional communications you intend to issue How you will meet the record keeping requirements Your approach to the triennial re-enrolment process The phasing in of compliance minimum contributions Your approach to the certification/registration process Your approach to ongoing governance The impact of auto-enrolment on wider reward strategy e.g. life assurance benefits 24