H E A L T H W E A L T H C A R E E R
M E R C E R W E B C A S T
C B I / M E R C E R P E N S I O N S
S U R V E Y
12 NOVEMBER 2015
Frank Oldham, Mercer Senior Partner
Neil Carberry, CBI Director
Andy Parker, Mercer Principal
Yvonne Sonsino, Mercer Partner
© MERCER 2015
T O D A Y ’ S S P E A K E R S
Frank Oldham Mercer Senior Partner,
Global Leader of DB Risk
Neil Carberry CBI Director of Employment,
Skills and Public Services
Andy Parker Mercer Principal,
DC & Savings
Yvonne Sonsino Mercer Partner,
EuroPac Innovation Leader
Frank joined Mercer in 1982
and has since worked in
London, having previously had
responsibility for the retirement
business in the UK, he also
advises a number of
multinational as well as trustee
boards in the UK.
Neil is a member of the council
of ACAS and of the Low Pay
Commission, which makes
recommendations about the
level of the National Minimum
Wage. Before becoming
director, Neil spent four years
as Head of Employment and
Pensions Policy.
Andy has 30 years' experience
of advising clients and
managing projects and
relationships for both corporate
and trustee clients on all areas
of defined contribution pension
and AVC provision.
Yvonne Sonsino rejoined
Mercer in 2013 and is now the
Innovation Leader for EuroPac.
She was formerly Head of the
International Consulting Group
in Mercer, leading teams to
deliver global HR projects for
clients across multiple
industries.
© MERCER 2015
A G E N D A
W H A T W E ’ L L C O V E R T O D A Y
• Executive summary
• Key findings in defined benefit
• Key findings in defined contribution
• Key findings in the ageing workforce
• Questions
PLEASE NOTE: ALL DATA QUOTED THROUGHOUT THIS PRESENTATION IS SOURCED FROM THE
CBI/MERCER PENSIONS SURVEY ‘A VIEW FROM THE TOP’, UNLESS STATED OTHERWISE
© MERCER 2015 © MERCER 2015
CBI / MERCER
PENSIONS SURVEY
EXECUTIVE SUMMARY
C B I / M E R C E R P E N S I O N S S U R V E Y W E B C A S T
© MERCER 2015
‘ A V I E W F R O M T H E T O P ’
C B I / M E R C E R P E N S I O N S S U R V E Y 2 0 1 5
Background to the survey:
• It gathers the views of corporate leaders
• 166 respondent organisations
• Increasing share of SME respondents
• Respondents to the survey being responsible for £115bn worth of
assets invested in pensions in the UK
• In 2015, the UK economy is on an even firmer footing. But the last
two years have seen dramatic shifts in the pensions landscape
© MERCER 2015
‘ A V I E W F R O M T H E T O P ’
P E N S I O N S S T A B I L I T Y
“Business leaders are clear that the priority on pensions must be regulatory
stability”
• 52% believe regulatory stability must now be the top pensions priority for
government
• Despite all the recent changes, 96% of respondents believe there is a still a
strong business case for offering pensions
• However, stability is vital in ensuring pensions remain a key employee
benefit
© MERCER 2015
‘ A V I E W F R O M T H E T O P ’
P E N S I O N S T A X A T I O N
‘Changes to the UK pensions taxation system are the greatest threat to the
sustainability of UK pensions’
• Eight in ten respondents (79%) state tax changes should not be a priority for government
• 51% state that the latest cut in the LTA from £1.25m down to £1m will bite into the
savings of managers and middle income earners in their organisations
• Businesses are clear that the current framework of pensions tax relief – while complex – is
the best system for encouraging pension saving
• Businesses need to have national insurance contribution relief on pensions in place – this
relief keeps pensions affordable for business
© MERCER 2015
‘ A V I E W F R O M T H E T O P ’
D E F I N E D B E N E F I T ( D B )
“The costs of DB pension schemes continue to dominate boardroom discussions. In many
firms, pensions remain one of the top risks facing the business”
• The cost of DB schemes is weighing heavily on business activities
• Volatility of DB liabilities remains a particular challenge, with nine in ten (90%) of business
leaders concerned about volatile markets worsening their funding position
• 82% of business leaders say that DB costs are having a negative impact on their results in
company accounts
• Satisfaction among business leaders with the Pensions Regulator’s announcements is at its
highest level ever in our survey, at 84%, reflecting the success of the new growth objective
http://www.google.co.uk/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRxqFQoTCPWzhoOkiMkCFQG6GgodP34Hhg&url=http://www.javacodegeeks.com/2014/08/understanding-volatile-via-example.html&bvm=bv.106923889,d.d2s&psig=AFQjCNH0p0x2UbaceJxqIN5hMSw9bVWX2g&ust=1447328228601913
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‘ A V I E W F R O M T H E T O P ’
A U T O - E N R O L M E N T / D E F I N E D C O N T R I B U T I O N ( D C )
“With two and a half more years to go and 1.8 million employers yet to stage, auto-
enrolment is very much a live issue”
• 97% of businesses with eligible employees are still due to stage
• 82% say they do not believe reviewing statutory minimum contribution levels should be a priority
• Ease of administration as a top priority when looking for an auto-enrolment solution has jumped to nearly
70%, up from 41% in 2013 for medium-sized companies
• Overall the biggest auto-enrolment challenge for firms is on-going compliance, with three quarters
(73%) of respondents citing this as an issue
• The changing regulatory environment has added to the problems of compliance
• 48% of business leaders say that the pension freedoms in the 2014 budget have
made DC pensions more effective in ensuring employees can afford to retire
© MERCER 2015
‘ A V I E W F R O M T H E T O P ’
A G E I N G
9
“Business leaders are clear that a comprehensive crosscutting strategy is needed”
• The Office of Budget Responsibility (OBR) forecasts that 26% of the population of England and Wales
will be more than 65 years old by 2065
• Tax for business and individuals could increase. It is crucial the Government starts shaping an effective
response now
• Government can add value by preparing for an ageing society
• 92% say that the provision of long-term care will become an additional financial concern
• 78% report they will offer more flexible working opportunities to deal with an older workforce
• 93% believe employees will face increased responsibility for financing adequate income in later life
http://www.google.co.uk/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRxqFQoTCMSUlfu-iMkCFRPIGgodcl4Gjg&url=http://abilitygroup.com.au/ageing-workforce-and-workers-compensation/&bvm=bv.106923889,d.d2s&psig=AFQjCNHlyZq0-XNqraUXMZfpY5ajF0Rkvg&ust=1447335470464963
© MERCER 2015 © MERCER 2015
KEY FINDINGS
DEFINED BENEFIT
C B I / M E R C E R P E N S I O N S S U R V E Y W E B C A S T
© MERCER 2015
R I S K Y B U S I N E S S
D B P E N S I O N L I A B I L I T I E S
© MERCER 2015
D B C O S T S R E M A I N T H E B I G I S S U E
I M P A C T I N G O N B U S I N E S S I N V E S T M E N T
Volatility of DB liabilities is a challenge
• 82% of business leaders saying DB
costs are having negative impact on
their results in company accounts
vs. 57% in 2012*
• 90% report a negative impact
(worsening their funding position)
• “We need to compete for investment in
the UK from our group parent. There is
no doubt that our DB pension scheme
makes our business less attractive for
investment.” Large energy firm
*Source: 2012 CFO survey carried out in conjunction with the ICAEW
75
80
85
90
95
100
105
110
115
120
125
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
31/12/2013 31/03/2014 30/06/2014 30/09/2014 31/12/2014 31/03/2015 30/06/2015 30/09/2015
IND
EX
LE
VE
L
AN
NU
ALI
SE
D Y
IELD
S %
FTSE 15 year fixed interest mediums (gilts) FTSE over 5 years index-linked gilts (assuming 5% inflation) (gilts)
FTSE All-Share index (equities) - LHS
Y I E L D S A N D M A R K E T S ( D E C 2 0 1 3 T O O C T 2 0 1 5 )
F T S E 3 5 0 F U N D I N G ( D E C 2 0 1 3 T O O C T 2 0 1 5 )
80%
85%
90%
95%
31/12/2013 30/06/2014 31/12/2014 30/06/2015
FU
ND
ING
LE
VE
L %
IAS19 Funding Level Technical Provisions Funding Level
The calculations are approximate and intended to give a broad indication of the trend in the funding level over time. The assets are updated in line with market indices. The IAS 19 liabilities are updated with corporate bond yields and the implied market rate of inflation.
The Technical Provisions have been re-based at 31 March 2007, 2008 and 2009 so they have the same relative strength to IAS19 liabilities as illustrated by the funding positions in "The Purple Book". The liabilities are then updated with gilt yields and the implied market rate of inflation.
© MERCER 2015
A R E Y O U P R E P A R E D ?
C O U L D Y O U S AY Y E S T O T H E S E S TAT E M E N T S ?
“The risks in our scheme are appropriate given the strength of our business”
“Our scheme is adequately protected against equity market falls”
“Our investment and funding strategies are designed to limit volatility”
“We have considered the risks within our scheme and have taken action to mitigate those risks
which are unsustainably high”
“We are in a position where we could move quickly to further reduce risk if the opportunity arose”
“We have a long term objective and are following a plan to get there”
© MERCER 2015
M A N A G I N G P E N S I O N R I S K
K E Y O P P O R T U N I T I E S A N D D E V E L O P M E N T S
Cashflow driven financing
Member options
Buy-in / Buyout
Longevity hedging
Alternative security
It is important to consider how these tools are put together to form a risk management plan. This will be different
for each scheme depending on the materiality of each risk and the ability to tackle and mitigate those risks
http://www.google.co.uk/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRxqFQoTCJnmwtuHhskCFcS6FAodAzgDSw&url=http://www.teachingnovices.com/free-tools-to-help-you/&psig=AFQjCNEnW3zmT1aP2T1l81XYTujndwmaEQ&ust=1447251911320330
© MERCER 2015
Reform to the end of contracting out has accelerated the ending
of DB - 1 in 5 businesses with DB schemes are closing their
scheme to existing members
Also included was risk transfer such as buy-in / buyout (28%) and
longevity swaps (11%), as well as the use of contingent assets and
other funding methods (17%)
To manage their DB risks, companies are undertaking a range of
strategies to better manage asset risks. 60% of respondents say
one of these will be further de-risking
We have also seen further moves to the delegation of investment
decisions with 15% proposing to increase the use of 3rd party
support
H O W A R E C O M P A N I E S R E S P O N D I N G ?
R I S K R E D U C T I O N A N D C H A N G I N G L I A B I L I T I E S
38%
Increased hedging
of liabilities
Diversification
of assets
5 1 %
http://www.google.co.uk/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRxqFQoTCP7sh72QhskCFYFbFAodwBcOBw&url=http://www.molagers.org/investments.html&psig=AFQjCNH1QRxexlx3_CiOfbqlSC-8Z_Z2cA&ust=1447254129452050
© MERCER 2015
I T H E L P S T O K N O W W H E R E Y O U A R E
M O N I T O R I N G A N D A C L E A R P L A N C R U C I A L
0 100 200 300 400 500
Current position
Contingent contributions
Equity market risk
Longevity swap
Reflex/ Pie/ etc.
Interest & Inflation hedge
Benefit design
Residual
Buyout
End position
Value at Risk (£m)
De - risking Journey
Example
Risk management journey
Agree a plan and progress along as opportunities arise
© MERCER 2015 © MERCER 2015
KEY FINDINGS
DEFINED CONTRIBUTION
C B I / M E R C E R P E N S I O N S S U R V E Y W E B C A S T
© MERCER 2015
M E L B O U R N E M E R C E R G L O B A L P E N S I O N I N D E X
“The decline in the British (UK) score was
primarily caused by the removal of any
requirement for retirees to purchase an
annuity at retirement”
2014: 67.6
2015: 65.0
UK
© MERCER 2015
A U T O - E N R O L M E N T: T A K E T W O
• Opportunity or challenge?
• Process not pension
• Take advantage of the lessons learned
Source: http://www.thepensionsregulator.gov.uk/docs/automatic-enrolment-commentary-analysis-2015.pdf
© MERCER 2015
POLICY PURCHASE BENEFIT PAYMENT
L I F E W I T H “ F R E E D O M A N D C H O I C E ”
Source: Association of British Insurers (Nov 2015)
© MERCER 2015
C A L L T O A C T I O N
Pain free compliance
is possible Futureproof your DC
arrangements to meet
current and (known)
future legislation
Embrace the
engagement challenge
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© MERCER 2015 © MERCER 2015
KEY FINDINGS
AGEING WORKFORCE
C B I / M E R C E R P E N S I O N S S U R V E Y W E B C A S T
© MERCER 2015
S U R V E Y E X A M P L E
© MERCER 2015
C E R T A I N T I E S W I T H A N A G E I N G W O R K F O R C E
Living longer is
becoming the norm
Working longer will
become the norm
E M P L O Y E E S H AV E N E V E R S AV E D E N O U G H B E F O R E
– W H AT ’ S D I F F E R E N T N O W ?
Health changes in
ageing population will
increase costs
Responsibility for financing later life will increase for employees (93%)
http://www.google.co.uk/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRxqFQoTCLvtyYPuiMkCFYgEGgodChkFsQ&url=http://www.waysto.com.au/ways-to-live-longer/&psig=AFQjCNHo3ZbjdyrH74MgycAiV85XPe19Ww&ust=1447348097685962
© MERCER 2015
U N C E R T A I N T I E S W I T H A N A G E I N G W O R K F O R C E
H O W P R E PA R E D A R E Y O U ?
Will it be me?
How long will I live?
Will my pension last?
How much will it cost?
What is the long term government policy?
What will providers offer – and when?
92% of
respondents said
long term care
is an additional
financial
concern
© MERCER 2015
W H O S E P R O B L E M I S I T A N Y W A Y ?
The Government can only do so much
Employers will need to recruit and retain older workers
• 78% report they will need to offer more flexibility
• 63% report that employers responsibility to provide vehicles to finance later life
• 60% believe retraining will become a necessity
• 44% report they will need to review health and safety processes
Employees will also need to play their part
• Keeping skills current
• Understanding the financial implications and taking ownership
• Managing own health
© MERCER 2015
Q U E S T I O N S ?
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Frank Oldham Mercer Senior Partner,
Global Leader of DB Risk
Neil Carberry CBI Director of Employment,
Skills and Public Services
Andy Parker Mercer Principal,
DC & Savings
Yvonne Sonsino Mercer Partner,
EuroPac Innovation Leader
© MERCER 2015
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