DC design What does the future look like

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DC design What does the future look like?

• The Employee Benefits Summit
• 4 6 June 2008

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Helen Dowsey

• Responsible for Aon's trust- and contract-based
  DC consulting
• Developing innovative DC consulting services
• Focus on
• communications
• education for members
• approaching retirement
• Governance
• Client Management
• Pan-European pensions solutions
• Over 20 years DC experience

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Richard Fraser

• DC Sales Manager for Aons Benefits Solutions
• Responsibility for developing relationships with
  new and existing clients
• DC plan design and strategy
• Over 8 years experience working in the pensions
  and employee benefits industry.

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DC design What does the future look like?

• The Employee Benefits Summit
• 4 6 June 2008

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DC Design what does the future look like?

• Governance
• Some background
• DC update
• Voluntary employer engagement
• Member retirement options
• Personal Accounts
• What will they look like?
• Potential impact on pensions
• Next generation DC?
• Other influences
• Conclusions

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DC governance

• The Employee Benefits Summit
• 4 6 June 2008

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DC governance

• The Pensions Regulator is focusing on trust and
  contract-based DC
• Five main areas of risk identified
• Lack of member understanding
• Poor administrative practices
• Poor investment practices
• Unduly high charges
• Poor decisions on retirement choices

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The Pensions Regulator DC update

• Guidance good practice and case studies
• investment
• promote the value of good communication
• raising the standard of administration
• retirement options
• importance in obtaining value for money
• Extensive research findings

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Voluntary employer engagement in work-based
contract-based pension schemes

• Aimed at employers of all sizes
• Put in place arrangements for periodic review
• Many employers choose to rely heavily on their
  advisers
• Over half of employers already have some form of
  governance

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Member retirement options

• Applies to trust-based DC schemes
• The key points in the paper issued in May are
• There should be an appropriate process in place
  to help members and/or dependants
• There should be a scheme-specific approach to the
  open market option
• Members should understand the advantages of
  financial advice
• It includes good practice recommendations
• May be regarded as appropriate for contract-based
  arrangements

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Governance/management committees

• Employer representatives FD, HR and/or Legal
• Employee representatives hand picked or
  elected (staff forum, unions etc)
• Existing trustees
• Adviser
• Provider attendance to report on performance
• 4/6 members in total
• Trustee-type training

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The Pensions Regulator

• Better quality arrangement
• Mitigate risk that employees see it as poor
  which may reflect badly on the employer
• Lever to attract and retain staff
• Can save time and money by preventing problems
  now and in the future
• Improve member understanding and confidence
• Collective employee voice
• Addresses poor member understanding by
  reviewing member education

What does TPR see as benefits?
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Other positives

• Encourages providers to improve/enhance their
  services
• SLAs and/or on line access
• Improve admin capability and reporting
• Improve investment process
• Improve communications
• Use output to report to employees and members
• Assist with future-proofing the arrangement

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DC governance where next?

• Background Governance for contract-based
  arrangements fell between two stools how has
  this changed?
• Will employees engage?
• Approach to date has been voluntary will this
  continue?
• Will Personal Accounts change the marketplace and
  the need for governance?

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Governance - question

• Do you think governance is your responsibility?
• ? Yes
• No
• If no, why not?

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Personal Accounts

• The Employee Benefits Summit
• 4 6 June 2008

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Personal Accounts
what will they look like?
One of the most radical changes in the 100 years
since the first state pension was created

• Funded centralised scheme
• Automatic enrolment
• Contributions 3 employer and balance up to 8
  paid by employee paid on qualifying earnings. Can
  be phased in over 3 years.
• Employers providing a qualifying scheme are
  exempt

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Potential impact on private pension provision

• PAs remove the control of pension provision from
  employers
• May level down pension contributions
• May result in lower/no salary increases
• High opt out rates
• Will PAs deliver to the target market?

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Personal Accounts - question

• Do you evaluating the impact of Personal Accounts
  and any subsequent changes to the scheme design
  is your responsibility?
• ? Yes
• No
• If no, why not?

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DC design Interaction with other savings options

• The Employee Benefits Summit
• 4 6 June 2008

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Why offer other savings options for young
employees?

• Recognising that young employees may not engage
  with pensions when they have other priorities
• Helping young employees pay off student debts
  and/or get on the property ladder
• Supporting young employees in paying their
  mortgages each month when it is likely to be a
  higher proportion of their salaries
• Encouraging them to embrace the savings culture
• Employees will truly value the benefits offered
  to them

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DC as part of a range of savings options

• Next generation DC

DC Trust-based/ GPP/SHP/ GSIPP
Cash Plan
ISA
House Purchase Plans
Share Plans
Total Reward / Flex
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An example of a house purchase plan

• Mortgage Deposit Scheme build deposit for
  first-time buyers
• Mortgage Subsidy Scheme short-term support to
  help with monthly mortgage payments after buying
  first property
• 9 employer contribution, 9 employee
  contribution
• Reducing contribution from the short-term savings
  plans over 3 years and increasing contributions
  to the DC pension

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Advantages and disadvantages

• Advantages
• Engages younger employees and delivers a benefit
  that is appreciated
• Helps employees clear debts and/or get on the
  housing ladder
• Younger employees get accustomed to saving and
  living on a lower net monthly pay
• The employers reputation is enhanced
• Assists with attraction and retention of talented
  employees
• Seamless transition into the pension

• Disadvantages
• Less tax efficient than a pension
• Does not directly engage employees in joining the
  pension arrangement
• Employers may be reluctant to recommend
  alternative savings vehicles

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DC design - question

• Would you consider offering the following options
  to your employees as an alternative to pension?
• House Purchase Plan ? Yes ? No
• Bank/Building society account ? Yes ? No
• Group ISA ? Yes ? No
• Other alternative short-term savings ? Yes ? No

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DC design Other influences

• The Employee Benefits Summit
• 4 6 June 2008

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Other influences

• The future of defined benefit pensions
• Demands from a mobile, more financially-aware
  workforce
• Our ageing population
• Immigrant workers
• The growing maturity of DC

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Conclusions

• DC will evolve, influenced by
• The Pensions Regulators focus on work-based DC
  plans is contract-based versus trust-based a
  thing of the past?!
• Personal Accounts requirements
• Employees putting pressure on their employers to
  deliver the benefits they want and/or need
• External factors, such as the macro-economy