QUANTUM News. For more details or help on the Code, please visit or contact us here at Quantum.

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1 QUANTUM News Inside this issue Should pension schemes cut the bull? Issue 39 Spring 2014 PPF to the rescue? Group risk rebroking Expect the unexpected Quantum Chronicles Pensions monitor Shout shout auto enrolment is about Welcome New Code of Practice and Regulatory Guidance for DC Schemes November 2013 brought us the new Code of Practice and Regulatory Guidance on governance and administration for trust based DC schemes. Who does it apply to? DC Schemes DB schemes with a DC section DB schemes with AVCs DC schemes with a DB underpin What do I do now? If you are a trustee of one of the arrangements listed above, you should formally consider the impact of the Code on your scheme and any actions that you need to take as a result. This might range from relatively minor formalisation of existing arrangements through to a wholesale review of process and procedure. The Pensions Regulator is adopting what is called a comply or explain approach, where the trustees will need to complete a governance statement on how their scheme has incorporated the key features of the Code. The statement will be available to both members and sponsors. For more details or help on the Code, please visit or contact us here at Quantum. andrew.reid-jones@quantumadvisory.co.uk Our Spring edition of Quantum News is packed full of topical pension issues, aimed at keeping you up-todate with recent news. Look out for the following signposts, which will help you find articles most relevant to you: Specific information for defined benefit (final salary/care) pension schemes Specific information for defined contribution (money purchase) pension schemes General information about employee benefits 8 Receive Quantum News by Quantum are keen to conserve natural resources and would prefer to distribute Quantum News via in future. If you would like to be added to the distribution list please qnews@quantumadvisory.co.uk with the title , alternatively, if you wish to continue receiving a hard copy please the same address with the title hard copy or call

2 Should pension schemes cut the bull? PPF to the rescue? The Pension Protection Fund (PPF) has been involved in a number of restructuring and insolvency negotiations recently which has led to more scrutiny due to the high-profile nature of these cases. This has resulted in an often misleading view of their role in these deals and speculation as to when they might enter into one. Malcolm Weir, Head of Restructuring and Insolvency for the PPF, recently delivered a message to clarify their position and the extreme circumstances in which they may consider entering into a restructuring or rescue attempt. The pension scheme receives an equity share in the company of: 10% if the future shareholders are not currently involved in the company 33% if the future shareholders are currently involved in the company The scheme would not have been better off if the Pensions Regulator issued a contribution notice or financial support directive. The bank charges must be reasonable if refinancing is involved otherwise this could negate the positives of negotiating the deal. Legal fees are paid by the other party for the trustees and the PPF. The cash sum and the equity share would be used to fund compensation payments. Merely two years ago pension schemes were plagued by large funding deficits with no sign of a lifeline as gilt yields reached new lows. Any hope for a sustained economic recovery appeared firmly relegated to the pages of history. However, since April 2013, we have seen a steady increase in gilt yields in conjunction with a sustained equity bull market, which has resulted in a rapid improvement in some pension scheme funding levels; giving rise to the question is now the appropriate time to de-risk? As schemes de-risk, excess exposure to risky assets (e.g. equities) is transferred to assets that exhibit scheme specific liability matching characteristics (e.g. gilts). Pension schemes that match 100% of their liabilities will see a negative investment return as gilt yields rise. However, if this negative return matches the decrease in the value of liabilities (remember the inverse relationship between scheme liabilities and gilt yields), the funding level would be maintained (and vice versa). The answer to our original question, is now the appropriate time to derisk? is dependent on scheme specific factors. One thing is certain, trustees need to be ready to act. Recent history has shown the swift and significant impact that changing yields can have on scheme funding levels, whether it was 2008 when gilt yields fell or 2013 when they rose. At Quantum we are discussing trigger based de-risking strategies with our clients. The key is to develop a strategy that allows schemes to de-risk quickly and efficiently without hindering their ability to achieve funding level targets. For more information, please speak to one of your usual Quantum contacts. scott.edmunds@quantumadvisory.co.uk Rescue attempts In some cases the PPF becomes involved in the restructuring (or rescue) of a business that is moving toward insolvency in the hope that the pension scheme will be better off than if the business ceased to continue. This process usually involves removing the pension scheme liability from the company so that the company can continue to operate. The PPF are keen to emphasise that they will only partake in such rescue attempts under strict conditions. The conditions The employer s insolvency must be inevitable i.e. if a deal was not made then the pension scheme would fall into the PPF anyway and the levy payers would fund the deficit. The pension scheme will receive money or assets which they would not have received under insolvency - e.g. a substantial cash sum. What the pension scheme is offered in the deal is fair compared to what other creditors and shareholders will receive. In short, if the deal did not go ahead then the PPF would be worse off, and the deficit would have to be funded by the PPF levy payers. victoria.cook@quantumadvisory.co.uk 2 Quantum News Issue 39 Spring 2014 Quantum News Issue 39 Spring

3 Group Risk Rebroking Expect the Unexpected! Quantum chronicles and this strategy demonstrates the government s commitment to rigidly control their expenditure in the long-term absence arena. New arrivals Georgia Brown How can this help with rebrokes that are due this year? 1. Don t be surprised to see increasing premiums; this is a common outcome of unit rate reviews at the moment, due to many of the issues above. Felicity Duke Dan Redwood Paul Roberts Alun Thomas Naval Chawla April is by far the busiest month of the year for group risk rebrokes. This is therefore the perfect time to take a look at what can be expected if you have a policy due for a rate review. Turn back time In order to understand what s driving the insurance market now, we need to consider some events that have changed the landscape of group insurance: Removal of the default retirement age - this has heralded insurance cover for older employees. Employers and trustees are choosing to provide employees with group income protection to age 70, and group life assurance cover up to age 75, increasing premiums. Increasing State Pension Age employers may have had to increase their policy s terminal age from 65, to the greater of State Pension Age and age 65, in order to manage increasing State Pension Ages. This change can usually be made with no effect to the prevailing unit rate for group life assurance policies, but can add an extra 4% to the unit rate of a group income protection scheme. Failing to address this issue can leave pockets of uninsured risk, which could cause problems later. Poor economic performance in the UK and extensive quantitative easing has taken its toll on annuity rates and the investments typically used to secure long-term insurance products. Consequently the cost of securing these types of benefits has risen significantly. Auto enrolment can mean a surge of employees suddenly becoming eligible for life cover. Managing the eligibility for life cover is a tricky balancing act; allow everyone entry and the cost of cover could balloon, restrict cover to a small or closed group of employees and the premium will still rise as the consequences of insuring an ageing group play out. All of the above can increase the annual cost of group insurance cover. Is there any good news? Possibly not a lot! If we look at statistics of the health of UK citizens, this may only bring further cause for concern. The collective poor health of a portion of our workforce further impacts upon the claims experience on group insurance policies. In addition to this, the impact of the government s welfare reform changes means a significant reduction in the provision of benefits during long-term sickness. For the working population, both the State and employee are hoping that the burden of provision is picked up by the employer. In the longer term, employers may have little choice in accepting this responsibility as group income protection will take over from pension as a key differentiator in the recruitment and staff retention process. At least the government has got on board with the idea of incentivising employers who are proactive in helping their employees. The new Health and Work Service (HWS) will allow tax exemptions for employers that help employees who are absent from work, due to illness or injury for more than four weeks get return to work support. Getting employees back to work earlier is better for business and the economy, 2. Ensure that the cover you have meets all of your insurance requirements; for example should you be covering fixed contract employees? Have there been other changes within the business that need to be mirrored in your cover requirements? Organisations are becoming increasingly globalised, and insuring larger groups should bring economies of scale. 3. Use all of the insurer s tools available to help support your employees. Insurers providing group income protection cover offer a wealth of free support and resource for employees and employers, from their Employee Assistance Plans to vocational rehabilitation support and help implementing return to work plans. For those with Group Private Medical Plans there is usually a range of incentives to help employees stay healthy. For those that do not offer income protection or private medical cover, why not consider a Cash Plan an inexpensive way to give employees access to medical treatment quicker than waiting on the NHS. Today s rebrokes should be about helping employers and trustees understand not just where the most competitively priced terms are, but what associated policy features will help them support their employees, and how insurance can help them meet the requirements of the HWS and satisfy their duty of care. Combine all of this with efficient benefit design and the results should be pleasing. If you require any more information or assistance please contact us. pauline.iles@quantumadvisory.co.uk Events We have held 3 events recently Investment seminar, London 24 October 2013 Trustee training course, Cardiff Part 2 14 November 2013 Pensions for Breakfast Seminar, Cardiff 16 January 2014 Upcoming events: Investment seminar, London 15 May 2014 Quantum appoints two new Partners Joanne Eynon and Phil Farrell have been promoted to Partner with effect from 1 January The full press release can be downloaded from our website. 4 Quantum News Issue 39 Spring 2014 Quantum News Issue 39 Spring

4 Pensions monitor Shout shout auto enrolment is about! Proposal to allow switching of annuity providers Pensions minister Steve Webb has caused a stir by suggesting that, in order to secure higher incomes from more competitive insurers, retirees should be able to chop and change their annuity providers in much the same way as they would their car insurance. Whilst the idea seems to be an improvement from the current system, the pensions industry has pointed out it does have one serious flaw: currently, when an annuity is purchased, retirees buy an income guaranteed for their life (and the life of their partner if they wish). If retirees are then able to switch annuities mid-term, the guaranteed income becomes very difficult (for difficult read impossible ) for the insurer to price correctly. The impact of this uncertainty would be to drive down the guaranteed income each time the policy was switched, thus removing any of the potential benefit for the retiree. The Department for Work and Pensions said that the proposals were part of a package of measures being considered in order to ensure that retiring workers obtained a better deal and more choice in a market where few shop around. However, as the industry responded almost immediately outlining the potential pitfalls, it seems that Steve Webb may not wholly be aware of the consequences this idea could have. David Cameron intends to keeps to his pledge David Cameron has said that he intends for the state pension to continue to rise by at least 2.5% a year until 2020 if the Conservatives win the next election. He pledged to keep the triple lock system, which ensures the state pension goes up by the higher of inflation, wages or 2.5%. However, he rejected suggestions that this was a political move aimed at attracting the grey voters back to the Tory fold - although he refused to be drawn on whether he would cut back on other benefits as a means of offsetting the increasing costs i.e. the winter fuel payment, free bus passes and television licences for the over 75s. The Lib Dems and Labour support the triple lock in principle due to its vote-winning powers, but have made no commitment as to whether they would keep it after the next election. Under the triple lock system, the basic state pension would be approximately 440 a year higher from April 2014 than it would have been if it had risen in line with average earnings since The basic state pension rose by 5.2% (or 5.30 a week) in 2012, and by 2.70 to a week in April a rise of 2.5%, which was higher than either earnings or inflation. Two million mark Latest monthly figures just released by the Pensions Regulator show that more than two million workers have now been autoenrolled into a workplace pension scheme. However, industry feedback suggests that this figure could be even higher due to the infiltration of new hires since the employers started the enrolment process. Whilst for some employers the whole process has been fraught with delays and additional costs, it is evident that, at least in these early stages, opt-out rates are very low with more than 90% of eligible staff now enrolled in workplace pension schemes. It remains to be seen as to whether the results will change when smaller employers, who traditionally have fewer resources and less pension awareness, start enrolling staff over the next year or so. FTSE 350 IAS19 deficits increase According to recently released data, the accounting deficit of defined benefit pension schemes for the UK s largest 350 companies increased over The estimated aggregate deficit of 97bn (equivalent to a funding ratio of 85%) at 31 December 2013 is slightly higher than the deficit reported at 31 December 2012, which was 72bn (equivalent to a funding ration of 88%). However, there was a slight improvement over the position at November 2013, when the deficit stood at 102bn. Inflation According to recently released data the latest information from the Office for National Statistics revealed that the UK s Consumer Prices Index rate dropped from 2.1% in November to 2.0% in December, therefore meeting the Bank of England s official long term target of 2.0% in the final month of 2013 for the first time since November The Retail Prices Index rose slightly from 2.6% to 2.7% for December david.deidun@quantumadvisory.co.uk Step back in time Around ten years ago the Government was concerned that over 7 million people in the UK had no private pension provision and would solely rely on benefits provided by the State. As a consequence, the Government commissioned a number of reports to look at this. In November 2005 it was recommended that, to combat this, all employees should be enrolled into a workplace pension scheme. Something new Since 2001 all UK employers with five or more employees have had to provide access to a pension arrangement but the two big changes with this new recommendation were: 1. all eligible employees would be automatically enrolled into a workplace pension scheme, and 2. the employer would also have to contribute to the arrangement. As we are aware, this all came into force from 1 October 2012 when the largest UK employers were required to comply with this new legislation, known as auto enrolment. Changes to State Pension In addition, this change can also be coupled with the new flat rate State Pension that is being introduced from The big difference here is that the State Pension will be at a level that people are expected to be able to live on and no means tested benefits will be provided from State Pension Age. This will ensure that people are rewarded for saving for their retirement provision which was not the case in the past. Engage with employees So, in our view, employers who are approaching their auto enrolment Staging Date should look to engage with their employees so they appreciate and understand auto enrolment, and not see auto enrolment as just another piece of legislation an employer has to adhere to. There is, no doubt, going to be an additional cost to the employer in most cases. However, if they fully engage with employees at the outset so they understand and, more importantly, appreciate why they are being auto enrolled then the employer should see some benefit. It is also important to educate employees about the benefit of saving for retirement and ensure they understand the fact that after tax relief the real cost to them of contributing to a pension is far less than they may realise. A little bit extra Some employers could take things a step further and provide benefits above and beyond that required under the legislation. For example, the employer could match an employee s contributions up to a certain limit to reward those employees who pay above the minimum or couple the pension provision with death in service benefits of say one or two times salary. Employers may be surprised how relatively cheap it is to provide death in service cover yet it is really valued by employees especially those with young families. If you need help in either meeting your auto enrolment obligations or engaging with your employees then we at Quantum are ready to help. stuart.price@quantumadvisory.co.uk 6 Quantum News Issue 39 Spring 2014 Quantum News Issue 39 Spring

5 Who we are Established in 2000, Quantum Advisory is an independent, owner-managed actuarial and employee benefits consultancy that provides straight-talking, no-nonsense advice to employers and pension scheme trustees, all at a competitive price. We design, maintain and review pension schemes and related employee benefits so that they operate efficiently and effectively and are valued by employees. This means that you can get on with doing the things that you do best, therefore saving you time and money. Products and services We offer a range of services to companies and pension trustees, all designed to focus on your specific needs, including: Actuarial services Administration of defined contribution and defined benefit pension schemes Banking, accounting and pensioner payroll Company advice Employee benefits consultancy Governance Investment consultancy Pension and employee benefit communications Risk benefits advice Pension scheme wind up Secretarial services to trustees Trustee training Getting in contact We have offices in Amersham, Birmingham, Cardiff and London. Give us a call to see how we can help with your pension and employee benefit challenges. Andrew Reid-Jones Summers House Pascal Close, St Mellons Cardiff CF3 0LW andrew.reid-jones@quantumadvisory.co.uk Karen Kendall 117 Fenchurch Street London EC3M 5DY karen.kendall@quantumadvisory.co.uk Rhidian Williams St Mary s Court, The Broadway Amersham Bucks HP7 0UT rhidian.williams@quantumadvisory.co.uk David Deidun One Victoria Square Birmingham B1 1BD david.deidun@quantumadvisory.co.uk Produced by Carrick Quantum Actuarial LLP, trading as Quantum Advisory, Registration Number: OC & Quantum Advisory Limited, Company Number: , registered in England and Wales. Quantum Actuarial LLP is authorised and regulated by the Financial Conduct Authority. Registered office: Summers House, Pascal Close, St Mellons, Cardiff CF3 0LW. A list of all members is available for inspection at our registered office.