pensions – thes3-eu-west-1.amazonaws.com/doc.housing.org.uk/b2... · 2014-10-21 · state pension...

Pensions – the futureJames Forrest

KPMG

PensionsWhat key pension issues do you face?

LGPSLGPS2013

Valuation & reform

IFRS102SHPS valuation2014

reform

Auto-enrolment2016 State Pensions tax Auto enrolmentpension changeschanges

© 2013 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. 1

PensionsLGPS - accounting update

Development in accounting liabilities since 30 June 2012

130

120

110 £bn

90

100

90 Jun 2012 Sep 2012 Dec 2012 Mar 2013 Jun 2013

Assets Liabilities - Accounting


PensionsLGPS funding update

Funding valuation Approximate deficit of £100bn at the valuation

date

240

260

280 £bn

Developments since the valuation date

show a reduction in deficits up to 30

J 2013200

220

240

June 2013

160

180

120

140

Considerations

• Budgeting – uncertainty of contributions for another 6 monthsLiabilities Assets


• Contact your LGPS and take control

PensionsChanges in future service costs for LGPS

Impact on future service costs


PensionsChanges 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■ 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 ReducesCareer Average

Revalued Restructured

employee NPA equal to Increasescosts costsEarnings

(CARE) contributions SPA

49ths Accrual Cost capping Non- contractual

overtime in rate arrangementsPensionable

Salary


LGPS Communications and governance

Pensions reform flag


LGPS and the Education sectorCommunications and governance

Pensions reform flag

Argh!Argh!

Ouch

Pay

!Phew

!Eh?

A


Age

Pensions LGPS – what does the future hold?

Structural changes

Input into scheme’s changes –

one single LGPS / sub-funds?

decision making –e.g. investment

strategy

Use of Asset LGPS extending subsumption backed funding

(ABF) arrangements

subsumptionagreements & taking

back liabilities


PensionsSHPS - Key dates and funding level

1 April 2013New contribution

rates for SHPS come into effect

1 April 2015 Contracting out

ceases

Key Points Despite positive

investment returns

Sep 2011 Dec 2011 Mar 2012 Mar 2013 Sep 2014

30 September 2011

30 September 2014

Apr 2015deficits continues to increase

Increase in deficit due to 1 January 2015UK GAAP

Funding level tracker

2011SHPS valuation

date

2014SHPS valuation

date

Challenging market

fall in gilt yield yields (c3.5% at 30 September 2011 to c3.2% at 31 May 2013)

UK GAAP replaced

SHPS deficit £663m at 30 Sept 2008

SHPS deficit £1,035m at 30

Sept 2011

Challenging market conditions persist (deficit £1,241m at 30 September 2012)

2013)

Gilt markets anticipating some reversion in yields but may take some time

Deficit

Assets

Liabilities

but may take some time to unwind and reflected in liability values

Contributions likely to yincrease at 30 September 2014 unless significant change in

k t ditiNote: […]


market conditionsSource: […]Source: KPMG approximate analysis

PensionsThe Future of UK GAAP – Pensions Impact

Key Points:

• UK GAAP changing from accounting periods beginning 1 January 2015 (although earlier adoption possible)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 ) q g y gsheet (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 moneyContributions) 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• 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


Pensions SHPS – options available

Continue SHPS DBContinue SHPS DB Transfer

outTransfer

out

Trigger DB debt

Trigger DB debtSHPSSHPS Use ABF

arrangementCease DB

accrualCease DB

accrualPay debtPay debt

arrangement to manage

this process efficiently

Continue SHPS DCContinue SHPS DC

efficiently


PensionsAsset Backed Funding as a financing option

Pension contribution -obligation to purchase

3

C P i S h

obligation to purchase income stream from CAR

Company Pension Scheme

1 4

Income stream (terms etc agreed in

Rental payments for se of b ilding

1 45

65

CAR (terms etc agreed in advance)

for use of building

2

Transfer of building to the

Asset

2


CAR Building used to secure residual income stream in the event of company insolvency

PensionsState 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 p y

Employers Employees

+3.4% + 1.4%


NI contribution increase (of UBE)

PensionsAuto Enrolment

A number of challenges…

Cost iss e d e to n mber of non joiners■ Cost issue due to number of non-joiners

■ Systems issues due to multiple pension arrangements?

■ Extent to which can leverage off existing payroll systemsg g p y y

■ 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


PensionsKey considerations for contribution rates

Member affordability &

fl ibilit

What do competitors

ff ?

Pension Quality Mark Award Employer cost

flexibility offer? min 6% from employer

Type of Provision ofAbility to obtain

competitive terms

ypcontribution

structure

-matching, fixed, age

Minimum and maximum levels of

contributions

Provision of sufficient pension

for employeesmatching, fixed, age

related, etc - Auto piloting


PensionsDelivery vehicle – Options

Contract based(N B not a definitive/exhaustive

Trust based Master Trust(N B not a definitive/exhaustive(N.B. not a definitive/exhaustive

list)(N.B. not a definitive/exhaustive

list)

■ SHPS DC■ GSHP ■ Bundled

(generally speaking, as left)

■ Scheme specific

■ GPP ■ Unbundled

G i

■ GSIPP

■ Generic


Pensions What are the key requirements in respect of the employees?

Assessment Opt-outEnrolment p


Pensions

PENSION TAX

WHAT’S CHANGING?

ANNUAL ALLOWANCE LIFETIME ALLOWANCE

£50,000£40,000

£1.5million

£1.25million

2013/14 2014/15 2013/14 2014/15


PensionsANNUAL ALLOWANCE

CASE STUDY

PENELOPE’S PENSION SAVINGS

PENELOPE

PENELOPE’S PENSION

Pension at the end of the year

P i h f h

£22,575

PENELOPE S PENSION SAVINGS OVER THE YEAR

£49 600 Pension at the start of the year (allowing for inflation)

(REVALUED)

– £19,475

INCREASE IN PENSION OVER THE YEAR

= £3,100

£49,600

OVER THE YEAR

VALUE OF THE INCREASE IN PENSION OVER THE YEAR:

PENSION TYPEDEFINED BENEFIT

£3,100 X 16: = £49,600SALARY AT BEGINNING OF THE YEAR: £57,000SALARY AT END OF THE YEAR: £64,500

AMOUNT LIABLE TO TAX £9 600

ANNUAL ALLOWANCE - £40,000 £40,000£50,000

AMOUNT LIABLE TO TAX = £9,6002014/15 ANNUAL

ALLOWANCECURRENT ANNUAL

ALLOWANCE


PensionsLIFETIME ALLOWANCE

CASE STUDY

ROGER AGE 57 CURRENT VALUE OF ROGER’S PENSIONROGER’S PENSION

£1.4MROGER’S PENSION SAVINGS

C t i £70 000Current pension

Value of current pension =

£70,000x 20

£1,400,000

LIFETIME ALLOWANCE - £1,250,000

AMOUNT LIABLE TO TAX = £150,000

PENSION TYPEDEFINED BENEFIT

£1.25million

£1.5million

2014/15 LIFETIME ALLOWANCE

million

CURRENT LIFETIME ALLOWANCE


PensionsSummary

U d t d dE ith Understand and manage your

future risks – set a strategy

Engage with LGPS to

understand costs and options

Assess whether an ABF

arrangement a strategyand options could help

Start considering auto enrolment 6 Consider impact

of tax changes on

Consider impact of FRS102 on your pension months before

staging

of tax changes on senior staff

your pension accounting disclosures


PensionsQuestions?


CONTACT DETAILSCONTACT DETAILS:

James Forrest Principal Consultant and Actuary

Tel: 0161 246 4506Mob: 07917 267 443Email: [email protected]

KPMG LLPKPMG LLPSt James PlaceManchesterM2 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

© 2013 KPMG LLP a UK limited liability partnership is a subsidiary of KPMG

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.

© 2013 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 (KPMGtrademarks or trademarks of KPMG International Cooperative (KPMG International).

Key steps to ensuring compliance

■ Project plan identifying workstreams, key milestones and responsibilities

■ Identify PAYE schemes affecting your staging date(s)

■ Your approach to opt-ins

■ Your approach to opt-outs including the submission ofcontributions to the pension provider

■ 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)?

■ Whether and how you will use salary sacrifice

■ Confirm investment strategy including default fund

■ Your approach to employees with enhanced or transitional■ Financial analysis to assess potential costs

■ Identify who is classed as a ‘worker’ within the auto-enrolment legislation

■ Your approach to employees with enhanced or transitionalprotection (if applicable)

■ How you will meet the legal communication requirements including details of automated production and electronic vs paper formats

■ Identify your ‘qualifying auto-enrolment’ pension scheme

■ Confirm the contribution structures (including phasing-in) and Pensionable Pay definitions to be used

paper formats

■ What additional communications you intend to issue

■ How you will meet the record keeping requirements

■ Consider the use of contractual enrolment

■ Confirm your Pay Reference Periods and

■ Identify what elements of pay constitute Qualifying Earnings for

■ Your approach to the triennial re-enrolment process

■ The phasing in of compliance minimum contributions

■ Your approach to the certification/registration processy p y y g gassessment 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

pp g p

■ Your approach to ongoing governance

■ The impact of auto-enrolment on wider reward strategy e.g. life assurance benefits


driven), pull (i.e. pension provider driven), middleware or a combination?

pensions – thes3-eu-west-1.amazonaws.com/doc.housing.org.uk/b2... · 2014-10-21 · state pension...

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