Bandwagon
The BWCI Group Newsletter
Quarter 2 - 2010
Inside this issue:
• BWCI Maths Masterclass
• Awards for Achievement
• DC Investment Principles
• EFRBS
• Another Guernsey annuity
provider
• Pension tax changes
• Record keeping
• Are bonds the best option?
BWCI Maths masterclasses
2
Quarter 2 - 2010
BWCI Maths Masterclasses
We were delighted to be able to support the
series of BWCI Maths Masterclasses for the first
time this year. These were run in Guernsey on 17
and 18 March. Organised in conjunction with
the Education Department, the Masterclasses
were run by Dr Ted Graham, Director of the
Centre for Teaching Mathematics at the
University of Plymouth.
The picture shows Dr Ted Graham teaching Year 5 students
The Centre runs a wide range of activities, for
pupils from school years 5 to 13, which are
designed to stretch and motivate able students
in mathematics. During his two day visit, Dr
Graham gave Masterclasses to around 250
pupils from Island schools.
Intended to help children think about how to use
maths to solve practical problems, the BWCI
Masterclasses support and supplement the maths
curriculum taught in schools. For example, Year 5
pupils were introduced to the concept of
developing a formula using letters to help model a
mathematical pattern. The children really enjoyed
the Masterclass and for many it had been a fun
and thought-provoking introduction to algebra.
Their teachers enjoyed it too!
“designed to stretch and motivate able students”
Dr Ted Graham
Awards for Achievement
The winner of the 2009 BWCI Best Medium
Business Award was Schroders Private Bank.
Schroders also went on to win the overall
Guernsey Business of the Year Award sponsored
by the Commerce and Employment Department.
“Once again the standard of entries
for the BWCI Medium Business
Award was excellent”
Stephen Ainsworth,
BWCI Senior Partner.
The picture shows BWCI’s Senior Partner, Stephen Ainsworth
(right), with the winning team for Schroders Private Bank.
DC Pensions
Survey
BWCI is currently conducting a survey of Channel Islands employers to identify the latest trends in
DC pension provision.
The survey only takes a couple of minutes to complete and can be accessed via our website at
www.bwcigroup.com
Bandwagon The BWCI Group Newsletter
DC Investment Principles
“this will lead to higher
standards in DC schemes”
Diana Simon
Growth of DC schemes
The past two decades have seen a marked trend
towards defined contribution (DC) pensions in the
UK, the Channel Islands and the Isle of Man.
This ever greater focus on DC pensions is expected
to continue, particularly in the UK, with the
introduction of auto-enrolment into UK pension
schemes in 2012.
DC Risks
DC pension provision shifts the risks of pension
provision largely onto individual members. One of
the biggest risks is poor investment returns so it is
vital that DC schemes have strong investment
governance.
Draft Investment Governance
Mindful of these risks, the UK Investment
Governance Group (IGG) has published its
consultation paper on draft investment governance
principles and best practice guidance for both trustbased and contract-based DC pension schemes.
The consultation addresses the following key
areas:
n
roles, responsibilities and accountability
n
fund choices/default strategy
n
communications with pension scheme
members
Investment Principles
Six principles are proposed which are intended to
become the accepted code of practice for
investment decision-making and governance in
DC schemes. The IGG envisages that all parties
involved in setting up, running and advising on DC
schemes should assess their practice against these
principles and, where appropriate, take steps to
improve the quality of their investment decisionmaking, pension fund governance and processes.
The IGG is an industry forum with the remit to
raise standards of investment governance across
the pensions industry.
The framework of the consultation is to provide
practical guidance to help trustees and providers
within the DC pension environment to increase
transparency and to improve the investment
decision-making and governance of DC pension
schemes. It is expected that this will lead to
higher standards in DC schemes.
The IGG proposals aim to maximise the opportunity
of a favourable outcome for members of DC
pension schemes. While directly relevant to any
UK pension scheme which has a DC element, the
proposals can also be regarded as best practice for
other DC schemes.
Trustee Action
Trustees will be required to consider the six
principles and the guidance and assess how their
current governance activities compare. They then
need to consider whether anything further needs
to be done to improve standards in their scheme.
A copy of the consultation document can be found
at www.thepensionsregulator.gov.uk/
pdf/igg-con-doc-2010.pdf.
DC Investment principles:
n
Clear roles and responsibilities for
investment decision-making and
governance
n
Effective decision making
n
Appropriate investment options
BWCI has extensive experience of helping pension
scheme trustees with governance of their DC
schemes. This includes providing advice on the
types of funds to be offered, the selection of
investment funds, advice on appropriate default
options, performance assessment and
communication with members.
n
Appropriate default strategy
n
Effective performance assessment
n
Clear and relevant communication
with members
If you would like details of the services we can
offer to DC schemes, or assistance with reviewing
current governance activities, please contact
Diana Simon. ([email protected])
4
Quarter 2 - 2010
EFRBS : A Pension Solution for UK High Earners
“demand for advice about
establishing EFRBS is
growing”
Debra Smith
The increased tax now levied on UK high earners
has been widely reported in the financial press. In
particular, the introduction of restricted tax relief
for contributions to Registered Pension Schemes
has led to high earners, and their employers,
investigating more tax efficient pension solutions.
Pension Contributions
From April 2011, tax relief on pension
contributions will be restricted to the basic rate of
tax for those earning over £180,000pa. In practice,
employee contributions will receive full tax relief
at source but a “recovery charge” will be levied via
the Self-Assessment tax return to restrict the tax
relief to just the basic rate. Similarly, employer
contributions for high earners will become a
Benefit-in-Kind and a recovery charge will be
applied via the Self-Assessment tax return.
Tax Change Summary:
n
From April 2010, UK taxpayers will be taxed at
50% on any income above £150,000pa.
n
From April 2011, tax relief on pensions savings
for high earners will be restricted, with the
relief being tapered from 50% to 20% (the
basic rate of tax) for those earning between
£150,000pa and £180,000pa. Individuals
earning over £180,000pa will have their tax
relief on pension contributions restricted to
20%.
n
Anti-forestalling rules prevent those earning
more than £130,000pa from accelerating their
pension savings ahead of the April 2011
changes.
The Solution : Employer Financed Retirement
Benefit Schemes (EFRBS)
EFRBS were introduced in the United Kingdom in
April 2006 when the UK “simplified” its pensions
tax regime. An EFRBS is an unregistered
arrangement and this means that contributions to
an EFRBS do not count towards an individual’s
Annual Allowance1 . In addition, benefits paid from
an EFRBS are not tested against the Lifetime
Allowance2 .
To date, because full tax relief has been granted
on contributions to Registered Pension Schemes,
EFRBS have been a little used product. However,
the tax changes mean that EFRBS can now be
more tax-efficient for high earners than
Registered Pension Schemes. As a result, demand
for advice about establishing EFRBS is growing.
Scheme Design
EFRBS are usually set up as Defined Contribution
(DC) arrangements and, in our experience,
companies are typically requesting that their
EFRBS mirrors their existing DC Registered Pension
Scheme as closely as possible.
Employee contributions to an EFRBS will not
receive tax relief but there is no tax charge on the
employee when the employer contributes to the
scheme. Therefore, as the name suggests,
contributions to an EFRBS should be made by the
employer via a salary sacrifice arrangement. The
employer does not receive immediate corporation
tax relief on contributions to an EFRBS but will
receive relief when the member draws benefits
from the scheme.
1
The Annual Allowance is the maximum amount of pension savings that an individual can build up in
a tax year without liability to further tax.
2
The Lifetime Allowance is a ceiling on the amount of tax-privileged pension savings an individual can draw.
Another Guernsey annuity provider
Gary Tansell
Aviva (formerly Norwich Union) have recently
announced that they have re-entered the
pension annuity market in Guernsey. As a result
Aviva is now able to provide annuities for
occupational pension schemes and Retirement
Annuity Trust Schemes (RATS), subject to a
minimum purchase price of £10,000.
Aviva joins Partnership Assurance as the other
main annuity provider in Guernsey.
For further assistance with the availability of
pension annuities please contact Gary Tansell.
([email protected])
Bandwagon The BWCI Group Newsletter
Tax and NI
All the benefits taken from an EFRBS are subject
to income tax. However National Insurance
contributions can be avoided if the benefits
provided are in line with those that are permitted
to be paid from a UK Registered Pension Scheme.
Scheme Location
An EFRBS can be established in the UK or offshore.
Under current tax legislation, it should be more
tax efficient to have the scheme located in an
offshore location such as Guernsey. This is
because no additional tax will be levied on the
investment returns within the scheme.
A further advantage of a Guernsey EFRBS is that
its structure as an International Pension Plan
means that employers can also use the scheme to
make pension provision for any internationally
mobile employees.
Comparison Summary
The table below compares an EFRBS established in
Guernsey with a UK Registered Pension Scheme
What about Small Companies?
Small companies, perhaps where only one or two
employees are affected by the tax changes, may
find the establishment cost of an EFRBS
considered on a “per member” basis
disproportionate.
To address this, we are currently in the process of
adding an EFRBS to our Blue Riband range of
pension products. This will provide employers with
the option of joining the Blue Riband EFRBS, thereby
saving the costs of having to establish their own
scheme.
Further Information
If you would like any further details on EFRBS,
please contact Debra Smith.
([email protected])
Comparison summary
EFRBS established in Guernsey
UK Registered Pension Scheme
Contributions count for Annual Allowance
No
Yes
Benefits tested against Lifetime Allowance
No
Yes
n
n
n
n
Employer Contributions:
Employer National Insurance
Employer Corporation tax relief
Employee taxation
Employee National Insurance
None
When benefit is paid
Full tax-relief
None
None
When contribution is made
Limited tax-relief
None
Investment Returns
Free of additional tax
Free of additional tax
Employee benefits in payment:
Income Tax
National Insurance
Yes (no tax free cash)
None (*)
Yes, but 25% tax free cash
None
n
n
*
Provided benefits are restricted to those that are permitted to be paid from a UK Registered Pension Scheme and the employee has left service
before drawing benefits
New tax arrangements for Channel Islands and UK pensions
David Holmes
There has been a change recently to the tax
treatment of pensions paid between the UK and
the Channel Islands. It affects both Channel
Island residents receiving a pension from the UK
and those UK residents in receipt of a pension
from the Channel Islands.
What are the changes?
Essentially, under the amended double taxation
arrangements between the Channel Islands and
the UK, pensions need only be taxed where the
recipient is resident. Previously pensions had
been taxed at source. The changes came into
effect from the start of the 2010 tax year (1st
January in Guernsey and Jersey and 6th April in
the UK).
From these dates those in receipt of pension
income can apply to the tax authority in the
jurisdiction from which the pension is paid, to
receive the income without deduction of any
tax at source.
How to apply for tax relief
Application forms are available on each of the
Guernsey and Jersey income tax websites for
non resident pensioners. Part of the form needs
to be completed by HMRC to confirm the
individual is UK resident.
For Guernsey and Jersey residents in receipt of
UK pensions the existing HMRC form for all
claims under double taxation treaties can be
used.
6
Quarter 2 - 2010
UK Regulator gets tough on record keeping
“poor record keeping will
lead to enforcement
action”
Andy Bown
The UK Pensions Regulator is focusing on
improving the quality of the membership data
held by pension schemes. Whilst many schemes
may have complete and accurate data, those
with poor data are of concern.
The Regulator’s campaign began in December
2008 with the issue of its guidance “RecordKeeping, Good practice in measuring member
data”. This set out how schemes could measure
the quality of their data and what further action
might be required.
Data types
COMMON DATA
Data items which are necessary and apply
to all members of all schemes (examples
of this would be National Insurance
number, date of birth, gender). The
absence of one or more of these items, or
an error in any of them, is highly likely to
mean that the member cannot be
identified or traced, or the member’s
benefits cannot be correctly established
with any degree of certainty.
The Regulator recommends that every
item of this data should be present in all
schemes. The proposed guidance on
common data is concerned with the
presence of basic information about the
member. It does not enable a member’s
benefits to be calculated.
CONDITIONAL DATA
Data items which are dependent on the
type of scheme and its design, a member’s
status in the scheme and events that have
occurred during the individual’s
membership. A deferred pension amount
would be an example of conditional data.
The guidance on testing this type of data
is less prescriptive, as the Regulator feels
that the trustees/administrators are best
placed to decide on the exact nature of the
tests.
The guidance sets out two types of data
schemes typically hold; common data and
conditional data. The guidance also covers how
data items can be measured/tested.
Overview of Guidance
The guidance sets out proposals that are good
practice in helping to assess risks associated
with member record-keeping. It describes an
approach for measuring the presence of member
data items which are vital in the administration
of a scheme.
This is important because poor record-keeping
may lead to significant additional costs in a
number of areas such as administration, error
correction, claims from members, buy-outs,
wind-ups and, potentially, in more conservative
actuarial valuations and so higher employer
contributions. Poor data can also cause
reputational damage.
The Regulator recommends that providers and
administrators of schemes measure the
presence of some of the most important items
of member data and report on the results. The
proposal is for the measurements to be based on
a limited set of data items, rather than all data.
Simply checking whether a scheme holds a
piece of data is only the first step since this does
not provide any evidence that the data is
accurate.
Trustees and providers need to be satisfied of
the accuracy of their data. Where there are
problems, gaps or inconsistencies in member
data, schemes should develop improvement
plans.
As promised in the 2008 guidance, the Regulator
has been assessing take-up activity of the
guidance during 2009. The results of that review
have now been published and the Regulator was
disappointed with progress made so far,
concluding that “it has successfully raised
awareness of the importance of record-keeping
in some areas and some behaviours are starting
to change, but to a fairly limited extent”.
What next?
The Regulator’s objective for the future is to
raise awareness of “measure and where
necessary improve standards of record-keeping.”
To achieve this, the Regulator believes that the
regulatory approach needs to be strengthened.
New measures, designed to encourage much
broader take up of the guidance than has been
seen so far, will be introduced through
legislation.
Evidence of poor record-keeping will lead to
enforcement action which could range from
issuing directions to carry out certain tasks (to
rectify gaps or errors in member records, for
example), to fines or, in extreme cases,
prohibition of trustees or publishing details of
the actions taken.
Whilst the guidance is intended for schemes
approved in the UK, it is good practice for the
trustees and administrators of any pension
scheme.
We have been actively engaged in carrying out
data audits for a number of schemes. Such an
audit would typically include the provision of
advice to trustees and scheme administrators
around their specific data requirements,
together with a report setting out the quality of
the data that they already hold.
Full details of the Regulator’s Guidance on
recording keeping can be found at:
www.thepensionsregulator.gov.uk/guidance/
recordkeeping/index.aspx
Regulator’s Findings for 2009
n
there is no evidence of a marked
improvement in administration practices
since the guidance was issued
n
there has been little demand to date from
employers and trustees for tools to monitor
data
n
of those schemes surveyed by the Regulator
which had measured their data, only 14%
had tested both common and conditional
member data as recommended in the
guidance
n
within these figures, one third of member
records had less than 80% of common data
fields complete and more than one half had
less than 80% of conditional data fields
complete.
Bandwagon The BWCI Group Newsletter
Are bonds the best option?
“The ideal strategy is one
which limits the downside
risk”
Kirsty Nicolle
One of the primary obligations of a defined
benefit pension fund trustee is to ensure all
financial liabilities to the beneficiaries are met as
they fall due. Reducing the risk of failing to do so
is therefore of paramount importance. In theory
the simplest solution would be to hold assets of a
similar nature to the liabilities to create a
‘matched-strategy’ – for example, holding a bond
which matures when a payment needs to be
made. However, these low risk assets often have a
lower expected return, resulting in higher
expected costs for the sponsoring employer.
Consequently a balance needs to be struck
between risk and return.
Case Study
An asset liability study we recently carried out for a pension scheme
highlighted how its existing investment strategy could be refined. While
this scheme was in deficit, an asset liability study is equally helpful for a
scheme in surplus.
Increasing risk
100%
Overseas Equity
80%
UK Equity
Property
60%
Market Neutral Hedge Funds
Medium Index Linked Gilts
Long Corporates
40%
Medium Corporates
Medium Fixed Interest Gilts
20%
Short Fixed Interest Gilts
0%
1
5
2
4
3
Asset allocation strategy
6
Projected Funding Levels
Median funding level
200%
Funding Level
150%
100%
162%
96%
96%
97%
98%
59%
58%
58%
56%
136%
104%
89%
50%
167%
160%
155%
75%
58%
61%
0%
1
2
3
4
Asset allocation strategy
5
The role of higher risk assets
Investing in higher returning assets reduces the
expected levels of contribution required from the
employer. This, of course, does not come without
risks which need to be considered carefully. An
asset liability study can help to identify the most
appropriate asset mix in a portfolio for a particular
pension liability profile. It can also provide an
objective approach to positioning the portfolio to
minimise the risk of a shortfall.
6
Following an actuarial valuation, it became apparent that the liability
profile of the scheme had changed and so the current investment
strategy might no longer be optimal. Taking the existing asset mix as a
starting point, the alternative strategies to be considered were agreed
with the trustees. These strategies included introducing new asset classes
such as property and index-linked gilts.
Each of the asset mixes was then considered in conjunction with the
liability profile and this relationship projected over future years. These
projections considered thousands of different interest rate, inflation and
asset return scenarios and produced a range of funding level outcomes.
Impact on projected funding level
Each investment strategy produced a different range of funding
outcomes and therefore a different likelihood of a funding shortfall
occurring at the next valuation date. This is illustrated in the chart. (The
lighter the colour of a band, the less likely these outcomes are).
Strategy 1 was the most closely matched strategy and therefore the one
with the lowest perceived risk. The range of expected funding levels at
the next valuation date lay between 58% and 104%. The median funding
level was just 75%. By contrast, each of strategies 3 to 6 produced a
projected median funding level of almost 100%. (The ‘median’ value
means there was an equal number of values above and below it).
The ideal strategy is one which limits the downside risk without
adversely affecting the median funding level. Therefore, strategies 3
(reduced the downside risk without altering the median funding level)
and 5 (increased the median without increasing the downside risk) were
of interest.
Similar projections can be used to illustrate the ranges of employer
contributions and funding deficits/surpluses.
Conclusion
Strategy 1 highlighted that a closely matched
portfolio of gilts was expensive as it has a median
projected funding level of only 75% and so
greater employer contributions would be highly
likely.
After considering the results of the study, the
trustees agreed to change the investment
strategy. They also held a fund manager review to
select the manager felt to be best placed to
implement this new strategy.
In some cases the asset liability study may
confirm that the current strategy is the most
appropriate to meet the scheme’s liabilities and
no further action is required. However, even in
these instances, a study would allow the trustees
to demonstrate that they have exercised their
responsibility to the scheme and obtained
comfort that it was on track to meet its
objectives.
8
Quarter 2 - 2010
Bandwagon The BWCI Group Newsletter
BWCI Mini Soccer Festival
This year’s BWCI Mini Soccer Festival will take
place on the weekend of 24 and 25 July. We
have been sponsoring this hugely popular
football festival since 2007 and each year it has
gone from strength to strength. We are
delighted to be able to announce that we have
agreed to sponsor the festival for the next three
years.
BWCI Partner Diana Simon and
GFA Chairman Mark Le Tissier
BWCI’s sponsorship enables the GFA to bring
over professional academy teams. This year’s
festival should see the return of last year’s
champions, Fulham, as well as the runners-up
Everton.
Guernsey Football Association Chairman Mark
Le Tissier, who signed the agreement on behalf
of the GFA said:
“These are exciting times for local football with
many positive initiatives underway. With this
continued and generous sponsorship from BWCI,
together with the support we are fortunate to
receive from other local businesses, the mini
soccer festival will continue to play a key role in
adding to the development of our local
footballers, which we appreciate very much.”
Guernsey Camerata
Little red riding hood
aND other tales
Sunday 31 January - 2:30pm at St James Concert Hall
Including music by Grieg, Shostakovich, Patterson, Copland and Dvorak
Guest Conductor - Peter Ash
Tickets available from St James - Box office tel no: 711361
The latest Guernsey Camerata concert,
sponsored by BWCI, was a wonderful afternoon
of entertainment for the whole family.
The orchestra welcomed guest conductor Tom
Hammond. He was joined by the multi-talented
soloist and narrator Matthew Sharp. Matthew
immediately engaged with his audience and
very soon they were all assisting him,
pantomime style, with his rendition of “I Bought
Me a Cat”
Both the orchestra and the audience were on
the edges of their seats waiting to see where he
would appear next. This was a truly memorable
performance and we hope to see him back in
Guernsey very soon.
The highlight of the concert was Matthew’s
performance as the narrator of Little Red Riding
Hood from Roald Dahl’s collection of Revolting
Rhymes. His hilarious narration of the wolf,
Little Red Riding Hood and her grandmother
took Matthew to all parts of the hall.
Matthew Sharp
Maths Team Challenge
Guernsey Grammar School’s year 8 and 9
students have returned the BWCI Trophy to
Guernsey following a 12 month absence, after
coming out on top in the Channel Islands
regional final of the UK Mathematics Trust’s
Team Maths Challenge held in Jersey.
The event, which alternates between Guernsey
and Jersey, took place at the St Helier Town Hall
and saw 12 teams of four from the islands battle
it out over four rounds.
The picture show, from left to right:
David Holmes, Lily Woodall, Lauren Tuffield,
George Headington, Malcolm O’Donnell and
Harry Plumley.
Readers are reminded that nothing stated in the newsletter
should be treated as an authoritative statement of the law on
any aspect, or in any specific case and action should not be
taken as a result of the newsletter. We will be pleased to
answer questions on its contents.
Front cover and page 4 images courtesy of VisitGuernsey
© 2010 BWCI Group Limited
Guernsey office
Tel
Fax
Web
Former winners Victoria College and Elizabeth
College kept the competition tight until the final
round. The winning team secured first place
after the final “Maths Relay” round which saw
the teams split into pairs and required a
combination of mental and physical speed to
score maximum points.
BWCI’s actuary in Jersey, David Holmes, was on
hand to present prizes to the winning teams.
The winning team will now represent the
Channel Islands in the national final at the Royal
Horticultural Halls in London on 21st June,
where they will pit themselves against the top
70 teams from across the British Isles.
PO Box 68, Albert House
South Esplanade, St Peter Port
Guernsey, GY1 3BY
+44 (0)1481 728432
+44 (0)1481 724082
www.bwcigroup.com
Jersey office
Tel
Fax
Web
Kingsgate House,
55 Esplanade, St Helier
Jersey, JE2 3QB
+44 (0)1534 880112
+44 (0)1534 880113
www.bwcigroup.com
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