WPD Pension Review - MARCH 2019 - Workplace Pensions Direct

WPD Pension Review – MARCH 2019

Background

To be able to fulfil their automatic enrolment duties, employers need to put a Qualifying Workplace Pension scheme in place. The scheme must meet certain criteria. Employers should ensure that the pension scheme they chose is a good quality one that is well run, offers value for money and protects their workers’ retirement savings.

Workplace Pensions Direct (WPD) are independent auto enrolment consultants and will set up an employer’s Qualifying Workplace Pension Scheme, chosen from a range of pension providers.

All of the pension providers we use are scrutinized to ensure they meet with our due diligence criteria.

What Employers need to consider

This review covers the following factors:

  • Charges
    • Additional Employer Charges
    • Employee Charges
  • Tax relief method
  • Fund choice and fund performance
  • Financial Strength & Governance
  • Administration
  • Payroll integration
  • Employee online access
  • Options – At retirement
  • Ease of transferring pension benefits

 

CHARGES

 

ADDITIONAL EMPLOYER CHARGES

Certain pension providers have employer pension charges. These fees are charged by the pension provider to cover the cost of running your pension scheme and providing ongoing administrative support. The additional employer charge can either by an initial ‘one-off” fee or a regular ongoing monthly or annual fee.

Any additional employer charges are over and above the regular fee charged by Workplace Pensions Direct which is for ongoing legislative and technical support and assistance.

 

EMPLOYEE CHARGES

As with all workplace pension schemes, your employees will have to pay an annual fund charge to cover the costs of running their scheme on their behalf. This is deducted directly from their pension plan, so they don’t have to do anything.

Government guidelines specify that this fee will be never be more than 0.75% of the employee’s pension pot per year. That’s the equivalent of just £7.50 for every £1,000 they have invested.

There are two main types of charges:

Annual management / fund charge

This is charged as a percentage of the fund value and generally calculated on a daily basis.

This means that a 0.5% annual fund charge is equivalent to a daily fund charge (0.5%/365) = 0.00137%

Example: A £10,000 fund value would have an annual fund charge of £50 or 13.7p per day.

Contribution Charge

This is paid either as a percentage of each gross contribution made or as a fixed amount. It applies to both employer and employee contributions.

Example, based on £100 per month gross contribution.

NEST’s 1.8% contribution charge is equivalent to £1.80

Smart Pension’s £1.00 is the same for every level of contribution

The contribution charge is not applied to pension transfers.

 

TAX RELIEF METHOD

 

There’s often confusion about the two methods for giving tax relief on employee contributions to workplace pension schemes. These are:

Relief at source: this requires net contributions

Net pay: this requires gross contributions

Relief at source – net contributions

Group personal pensions (GPPs) generally use ‘relief at source’ and occupational pension schemes (OPSs) generally use ‘net pay’. Which method a scheme operates determines how employers must deduct employee pension contributions from earnings when running payroll.

NON TAXPAYERS WILL RECEIVE TAX RELIEF AT SOURCE USING THIS METHOD

Higher and additional rate taxpayers have to claim further tax relief via their self-assessment tax returns.

 

Net pay method – gross contributions

Used primarily by trust-based Occupational Pension Schemes, such as Master Trusts.

The employer deducts the gross member contribution from the employee’s earnings before it deducts income tax via PAYE. The pension contribution doesn’t reduce the amount of earnings subject to NICs.

NON TAXPAYERS WILL NOT RECEIVE TAX RELIEF AT SOURCE USING THIS METHOD

Higher and additional rate taxpayers WILL AUTOMATICALLY OBTAIN tax relief

 

CHARGES & TAX RELIEF – TABLE

FUND CHOICE

Is a wide range of investment funds important to your employees?

Data from the Department of Work and Pensions reveals that over 80% of members in defined contribution schemes opt into a default fund and stay there. We would estimate that auto-enrolment will see this figure rise to nearer 95%.

This means that 5% or more of employees will want to invest in an alternative to the default fund.  Most pension providers have a range of investment funds available allowing members of your scheme decide to choose their own investment funds. They may have to pay additional charges for investing in these funds.

 

FINANCIAL STRENGTH & GOVERNANCE

It’s important that workers’ interests are protected even if they do not regularly make active decisions about their pension savings? Workplace Pension Direct have due diligence criteria designed to ensure that any pension providers we use are financially sound and have robust governance procedures.

The ‘DEFAQTO’ Rating and the Master Trust Assurance Framework help to highlight any potential issues.

 

ONLINE ACCESS

Is online access important to your employees?

Not every pension provider has online access for members, although they will send out annual benefit statements.

Online access can provide employees with:

  • Up to date pension fund value
  • Pension fund data
  • Pension contribution records
  • Retirement income calculators
  • “What if” planning tools

 

TRANSFERRING OLD PENSION BENEFITS

Every time someone changes jobs they will usually join their new employer’s pension scheme. But what happens to the pensions left behind? Over time employees may accumulate a trail of old pensions that they may find difficult to manage and keep track of.

If the ability to transfer old pension benefits into your new workplace pension scheme is important then this must also be considered when choosing a scheme.

 

PAYROLL SOFTWARE

An integral part of the automatic enrolment process is making sure that details of new members & pension contributions are forwarded to your pension provider and payments made before the regulatory deadlines.

Although not essential it is important that your payroll software can easily be set up to provide the data to the pension provider you choose.

All of the schemes on our panel work well with the vast majority of payroll software packages, with the exception of The Corpad Master Trust, which has limited acceptance by the main payroll providers.

 

AT RETIREMENT OPTIONS

The main options at retirement are:

  1. Leave your whole pot untouched
    1. You don’t have to start taking money from your pension pot when you reach your ‘selected retirement age’. You can leave your money invested in your pot until you need it.
  2. Guaranteed income (annuity)
    1. You use your pot to buy an insurance policy that guarantees you an income for the rest of your life – no matter how long you live.
  3. Adjustable income (flexi-access drawdown)
    1. Your pot is invested to give you a regular income. You decide how much to take out and when, and how long you want it to last.
  4. Take cash in chunks (‘Uncrystallised Funds Pension Lump Sum’ (UFPLS))
    1. You can take smaller sums of money from your pot until you run out. Your 25% tax-free amount isn’t paid in one lump sum – you get it over time.
  5. Take your whole pot in one go
    1. You can cash in your entire pot – 25% is tax free, the rest is taxable.

 

IMPORTANT NOTES:

  • Not all pension schemes and providers will offer every option and not all allow access at age 55.
  • You may need to transfer to another scheme or provider to access your preferred retirement income option
  • Be sure to shop around, even if your scheme or provider does offer an option.

PENSION PROVIDER DETAILS

NEST

SMART PENSION

AVIVA

THE PEOPLES PENSION

THE CORPAD MASTER TRUST

SCOTTISH WIDOWS

AEGON

 

NEST – Tax Relief at source – net contributions

NEST Corporation, the Trustee that runs the NEST scheme, is a non-departmental public body. It’s accountable to Parliament through the Department for Work and Pensions but is generally independent of government in its day-to-day decisions.

Being a public body means that there are no owners or shareholders. The trustee runs the scheme in the interests of its members.

NEST Corporation is made up of a Chair and up to 14 Trustee Members. They’re supported by an executive team and a range of specialists who aim to make sure NEST works in the way it should.

DEFAULT FUND

FUND: Retirement Dated Funds – Age specific

Fund objectives

Foundation phase

·         Preserve capital while seeking sufficient return to match inflation and cover all scheme charges

·         Target a long-term volatility average of 7 per cent

·         Significantly reduce the likelihood of extreme investment shocks

·         Take appropriate risk at appropriate times, taking account of current economic and market conditions.

During our research, younger savers told us that they would react very negatively to falls in the value of their savings. For this reason, members who join in their 20s will typically spend up to five years in the Foundation phase. In this phase we concentrate on steadily growing the balance rather than exposing our members to substantial investment risk. This lower volatility approach still aims to at least match inflation after taking charges into account. We use the Consumer Price Index measure for inflation.

Growth phase

  • Target investment returns equivalent to inflation plus 3 per cent and cover all scheme charges
  • Target a long-term volatility average of 11 per cent
  • Aim for steady growth in real terms over the life of the fund
  • Maximise retirement incomes by taking sufficient investment risk at appropriate times while reducing the likelihood of extreme investment shocks
  • manage the risks associated with converting a member’s accumulated savings into a cash lump sum

The Growth phase is the engine room of the NEST Retirement Date Funds and where we concentrate on growing the pot quickly. While we need to take substantial investment risk to generate sufficient investment return, our research suggests that members are intimidated by the idea of extreme investment shocks. For this reason we also manage the volatility of the portfolio throughout the Growth phase. The Growth phase will typically continue until 10 years before the expected retirement date at which time the fund will move into the Consolidation phase. We use the Consumer Price Index measure for inflation

Consolidation Phase

The Consolidation phase prepares a scheme member’s assets for retirement and typically begins ten years before their NEST Retirement Date Fund matures. Investments in this phase are progressively switched out of higher risk assets.

The primary objective of the Consolidation phase for funds maturing from 2021 is to outperform CPI after all charges while aiming to progressively dampen volatility as a scheme member’s fund approaches maturity.

 

 

AVIVA – Tax Relief at source – net contributions

Aviva are one of the UK’s leading workplace pension providers with over 120 years’ experience and expertise Financially strong:  Aviva are rated A (Superior) by AKG Actuarial Consultants, the highest rating available.

Auto-enrolment expertise: By March 2015 Aviva had helped over 1,600 employers through auto-enrolment.

SME specialists: Over 60% of the schemes Aviva run are for small and medium sized enterprises.

A name your workforce will know: Aviva was ranked the UK’s most valuable insurance brand by Brand Finance in 2014.

DEFAULT FUND

FUND: Aviva Future Focus 2 Drawdown Lifestage Approach

Fund objectives

Lifestaging aims to help protect the retirement benefits the member could get and requires little or no input from them. We designed it with the majority of employees in mind, who typically aren’t sophisticated investors and don’t have ready access to financial advice.

 

Growth Phase

FUND: Diversified Assets Fund II

The purpose of this stage is to maximise the growth of the employee’s pension pot, while keeping the risk profile consistent.

 

Consolidation Phase

FUND: Diversified Assets Fund I

It kicks in when the employee reaches 10 years from their chosen retirement age. During this stage, we gradually (and automatically) move the scheme member’s money into the lower volatility Aviva Diversified Assets Fund I.

The purpose of this stage is to move the investments into a lower risk fund as they near their chosen retirement age.

 

Pre-retirement Phase

FUNDS: Diversified Assets Fund I & Deposit Fund

Begins three years from the employee’s chosen retirement age. During this stage, we start moving money into the Aviva Deposit Fund, as well as continuing to move it into the Aviva Diversified Assets Fund I.

This stage is designed to help protect the value of the tax free cash lump sum the employee can choose to take when they take their benefits – along with continuing to move the client’s investments into lower risk funds.

By the time the employee reaches their chosen retirement age, 25% of their pension pot will be invested in the Aviva Deposit Fund, and 75% will be invested in the Aviva Diversified Assets Fund I.

The exact fund split at the start of the investment depends on how far the employee is from their chosen retirement age when they become a scheme member.

 

 

SMART PENSION – Net pay method – gross contributions

A master trust is a multi-employer occupational pension scheme where each employer has its own division within the master arrangement.

Master trusts are relatively cost effective with lower charges and offer greater simplicity and expediency.

Secure Structure. Ringfenced Master Trust. Safe Pension

Master Trust Assurance Framework Accredited

Smart Pension are a specialist pension provider with a very transparent pricing structure. Their investment fund managers, Legal & General, have an excellent reputation.

DEFAULT FUNDS

FUND: Lifestyle, based on age

Default fund 1: 58 years old and under

Default fund 2: 59 & 60 years old

Default fund 3: 61 & 62 years old

Default fund 4: 63 years old and over

Fund Objectives

There are four default funds using an investment process called lifestyling. They aim to perform in line with benchmarking in the early years (the growth stage), and give you more certainty about the amount of pension you can buy via an annuity when you retire (the lifestyle stage).

Growth Phase

During the early years of your investment, the fund aims to achieve returns consistent with the markets it invests in by investing wholly in funds such as:

L&G General UK Stocks Index Linked Gilt Trust

L&G UK 100 Index Trust

L&G US Index Trust

L&G European Index Trust

L&G Japan Index Trust

The Lifestyle Phase

Starts from age 59 and recognises that  priorities may change as retirement approaches.  The investment approach changes. By age 63 the funds used will be:

L&G General UK Stocks Index Linked Gilt Trust

L&G UK 100 Index Trust

L&G Cash

 

 

THE PEOPLE’S PENSION – Tax Relief at source – net contributions

For over 30 years, B&CE has been providing workplace pensions to employers with transient, low-to-moderate earning workforces, both large and small. They have been operating a form of automatic enrolment for over ten years through their stakeholder product.

In November 2011 B&CE launched The People’s Pension as an additional product to help employers comply with their automatic enrolment duties.

It’s the largest private sector pension scheme in the UK with over 1.5 million people auto-enrolled and now provides pensions to people from all walks of life.

DEFAULT FUND

FUND: Balanced Investment Profile

New members are automatically placed into the ‘balanced’ investment profile unless they choose otherwise.

The ‘balanced’ investment profile is designed to provide:

  • Medium risk
  • Potential for long-term growth with some security
  • Moves to lower risk investments approaching retirement
  • Designed for members who prefer to take some risk but would also like some of their investments to be secure.

There are two main stages in the investment profiles. When joining the scheme, members with more than 15 years before their selected retirement age enter a growth phase, where contributions are invested in an equity based fund with the aim of maximising potential investment return for an appropriate level of risk. Members then enter a ‘glidepath’ phase where assets are switched into the Pre-Retirement Fund which has lower volatility (before 6 September 2016, assets were switched into both the Pre-Retirement Fund and the Cash Fund). This phase starts 15 years before their selected retirement age.

 

Growth Phase

FUND: The People’s Pension Global Investments (up to 85% shares)

Fund Objective

The B&CE Global Investments (up to 85% shares) Fund provides diversified exposure to UK and overseas equity markets. The fund invests 50% in the UK stock market and 50% in overseas equity markets. This is a higher risk fund aimed to maximise growth over the long term. The inclusion of overseas assets provides diversification and helps protect by spreading the risk among different markets.

 

Pre – Retirement Phase

FUND:  The People’s Pension Pre-Retirement

Fund Objective

The B&CE Pre-Retirement Fund seeks to provide a balance between capital growth and capital preservation and is intended to be suitable for UK pension scheme members who are approaching retirement and have not yet decided what they want to do with their investments at retirement. The fund aims to achieve a return of approximately 1% (before deduction of fees) in excess of Consumer Price Index inflation, over the medium term.

 

 

SCOTTISH WIDOWS – Tax Relief at source – net contributions

Scottish Widows are one of the largest pension providers in the UK, helping 1.4 million employees save for their

future (as at 30 June 2017). Corporate pensions are a key part of their business.

They administer in excess of 40,000 employer sponsored pension schemes

DEFAULT FUND

FUND: Pension Investment Approach – Lifestyling

Fund objectives

To help employees make a suitable investment choice for their plan Scottish Widows offer three risk categories, each with a different combination of risk and reward:

  • Adventurous
  • Balanced
  • Cautious

As a member gets closer to retirement, Scottish Widows will gradually adjust and move their funds into lower risk investments. Although this reduces the growth potential of their plan, it also aims to help protect its value as they near their selected retirement date.

This is a type of lifestyle switching.

Five years from the selected retirement date they will start to automatically adjust the plan so that it will be invested in one of three ways, depending on whether the members wants to purchase an annuity, keep their pension money invested (including taking withdrawals as an income), or take a cash lump sum.

Growth Phase

FUND: Pension Portfolio 2 +

Up to 15 years from retirement: The Fund aims to provide long term growth by providing exposure predominantly to overseas and UK equities. In addition, it also has some exposure to property and some small exposure to corporate bonds and other fixed interest securities. A small proportion of the fund will use absolute return strategies. The asset mix of the Fund will be reviewed periodically by Scottish Widows, and may be amended if a review indicates that it would be in the investors’ best interest to do so. This means in the future the Fund could be invested in different funds and additional asset types.

Consolidation Phase

FUND: Pension Portfolio 3

From 15 to 5 years from retirement: This fund has the same aims as Pension Portfolio 2 but with less exposure to equities.

 

Pre-retirement Phase

FUNDS: Pension Portfolio 4

From 5 years to retirement: The Fund aims to provide long term growth by providing exposure to a balance of corporate bonds and other  fixed interest securities together with exposure to overseas and UK equities and property. A proportion of the fund will use absolute return strategies. The asset mix of the Fund will be reviewed periodically by Scottish Widows, and may be amended if a review indicates that it would be in the investors’ best interest to do so. This means in the future the Fund could be invested in different funds and additional asset types.

 

THE CORPAD MASTER TRUST – Net pay method – gross contributions

A master trust is a multi-employer occupational pension scheme where each employer has its own division within the master arrangement.

Master trusts are relatively cost effective with lower charges and offer greater simplicity and expediency.

Corpad as a specialist pension provider with a very transparent pricing structure. Their investment fund managers, Aegon, have an excellent reputation.

  • 3 Independent Trustees
    • In house lawyer as Corpad’s representative on the Trustee board
    • External professional who currently acts as Trustee for a c£200m DB scheme
    • Retired professional – lawyer. Former global head of property at the international law firm Clifford

 

DEFAULT FUND

FUND: Scot Eq BlackRock Aquila 75/25 Equity & Bond Index Lifestyle

Fund Objectives

This fund uses a two-stage investment process called lifestyling. It aims to perform in line with its benchmark in the early years (the growth stage), and give you more certainty about the amount of pension you can buy via an annuity when you retire (the lifestyle stage).

Growth Phase

During the early years of your investment, the fund aims to achieve returns consistent with the markets it invests in by investing wholly in our Scottish Equitable BlackRock Aquila 75/25 Equity and Bond Index fund. This fund in turn invests in a number of underlying BlackRock Aquila tracker funds, with approximately 75% invested in UK and overseas equities (shares) and the rest in fixed interest securities (bonds). Lifestyle stage:

The Lifestyle Phase

Starts six years before the start of your target retirement year and recognises that your priorities may change as retirement approaches. It assumes you’ll buy an annuity, to provide yourself with an income for life (or a specified number of years), when you retire. we’ll progressively start switching your investment into the Scottish Equitable BlackRock Aquila Over 15 years UK Gilt Index fund, with the aim of giving you more certainty about the level of annuity you’ll be able to buy when you retire. We’ll also move some of your pension pot into our Cash fund in the final two year of your investment to cater for your tax-free cash entitlement. You can choose how much of your cash entitlement you want to take, but our process assumes you’ll take the maximum tax free amount which, based on current legislation, is 25% of your pension pot.

 

 

 

AEGON – Tax Relief at source – net contributions

Aegon is one of the world’s leading providers of life insurance, pensions and asset management. They started life as Scottish Equitable in 1831.

On 1 January 2017, Cofunds, a UK based investment administration service, became part of Aegon.

 

DEFAULT FUND

FUND: Aegon Workplace Default

Fund objectives

This fund uses a two-stage investment process.

Growth Phase

In the early years (the growth stage) it aims to grow savings over the long term by investing mainly in global equities (company shares) with the remainder (currently around 25%) in UK bonds (a blend of UK corporate, UK index-linked and conventional government bonds). It’s designed to track the markets it invests in, so performance should be similar to those markets.

Lifestyle Stage

In the six years before your target retirement year, we’ll progressively move you into less risky investments. This process assumes that you’ll remain invested at retirement, potentially withdraw some of your fund and keep your options about taking an income

This is Aegon’s default fund, which means it’s designed for use by company pension schemes. We reserve the right to make changes to make sure this fund continues to remain appropriate for use as a scheme default.

 

 

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