Transcript West Thames HR Exchange Club 11th April 2002

West Thames HR Exchange Club
11th April 2002
Agenda
•Membership Update
•Minutes of Last meeting
•“A curious time to talk Strategy”
•Training Update
•Benefits Survey
Round Robin
•The Pensions Dilemma
•Any other business and items for next meeting
Slough
28 February 2002
Evolution of 'Consensus' forecasts for 2002
GDP growth
Percentage change on 2001 4
United States
Asia Pacific
3
Euro area
2
1
0
Japan
-1
-2
Jan-01
Apr-01
Jul-01
Oct-01
Jan-02
GDP growth
Percentage changes
4.0
Latest quarter on
a year ago
3.5
3.0
2.5
2.0
Latest quarter on
previous quarter
1.9
1.5
1.0
0.5
0.0
1998
1999
2000
2001
0.2
Contributions to Manufacturing
pp contribution to 3 on 3 growth
Output Growth
2
Transport Equipment 1
0
Other
-1
Electrical & Optical
-2
-3
Jan-00
Jul-00
Jan-01
Jul-01
-1.9
UK and US ICT output
% change, 3 month
on 3 month earlier
20
US
15
10
5
0
UK
-5
-10
-15
-20
Jan-99
Jul-99
Jan-00
Jul-00
Jan-01
Jul-01
Retail sales
latest quarter on
same quarter a year
ago
percentage change
7
6
6.2
5
4
3
2
1
0
latest quarter on previous quarter
1995
1996
1997
1998
1999
2000
-1
2001
1.3
Household expenditure on vehicles
% change oya
30
25
20
SMMT private car
registrations
15
10
5
0
ONS household
expenditure on vehicles
-5
-10
-15
-20
1999
2000
2001
House prices
3 month on 3 month growth rate
Balance
75
RICS expectations
(lagged 3 months, LHS)
Nationwide
(RHS)
5.0
60
4.0
45
3.0
30
2.0
Halifax
(RHS)
15
1.0
0
-15
2000
0.0
-1.0
2001
2002
LFS employment rate
Working age population
Per cent
75.0
74.6
74.5
74.0
73.5
73.0
1998
1999
2000
2001
Unemployment rate
Per cent
7
6
LFS
5
5.1
3.2
Claimant count
4
3
2
1998
1999
2000
2001
Chart 4.7
RPIX goods and services price inflation
Percentage changes on a year earlier
RPIX services
12
10
8
RPIX
6
4
RPIX goods
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02
2
+
0
_
2
Chart 1: Current GDP projection based on constant
nominal interest rates at 4%
Chart 2: Current RPIX inflation projection based on
constant nominal interest rates at 4%
“A curious time to talk Strategy”
• The heroes of the economy are the
purchasers of DVD’s and Per Una!
• But we all need to save more for retirement
• If we all did, then the economy could
plummet!
Reading the economic runes…
• Is difficult:
– Redundancies have been heavy, but
unemployment is low
– Retail prices are low, but inflation is holding
– House prices are soaring, consumers are
unlocking house value, but debt is also soaring
– We could be in recession, but we could not!
So what does it mean for HR?
• Discussion points:
– Impact on long term strategy
– Managing performance
– Aligning with the business
– Investing in the future
– Core versus Outsourcing
– Designing and Defining Reward Strategy
(e.g.High pay for high quality (internal and
external))
Training Update
• Debbie Alexander has contacted people and
essentially funds are tight, so this is a back
burner issue.
Non Financial Benefits Survey
• Delayed because of
– another survey clashed
– What will the Chancellor do
• Will run this quarter
Round Robin
The Pensions Dilemma
• Types of Pensions
– Final Salary or Defined Benefit Schemes (FS or
DB)
– Defined Contribution schemes (DC)
– Personal Pensions
– Stakeholder Pensions
– Basic State Pensions
– Serps
The Pensions Dilemma – the
Problems
1. The Maxwell affair – tighter rules on fund
operations
2. Pension Fund Mis-selling
3. Abolition of tax relief on dividends cut
income by 18%
4. Stock market has declined by 25% in
2000/01
The Pensions Dilemma – the
Problems
5. FRS17 introduction requires pension assets
and liabilities for FS Schemes to be in
Balance sheet, preventing actuarial
“smoothing”
1. Iceland found in their triannual valuation
that the shortfall went up from £4M to
£14M – 25% of group profits.
The Pensions Dilemma – the
Problems
6. Level of charges made by Providers –
sometimes over 10%, as well as stamp duty
on trades
7. Low Annuity rates – only 50% of value in
1980
8. Compulsory Annuities
The Pensions Dilemma – the
Problems
9. Increased Life Expectancy
10. Reduced chances of Lifetime of service
1. (A check I did at Honeywell showed that of all
employees who had ever joined the DB Plan
only 3% actually became Honeywell
Pensioners!)
11. Need for Greater Flexibility
The Pensions Dilemma
• Result:
– Companies are closing DB schemes and opening DC
schemes – transferring risk from Company to
employee.
– Eg IBM, ICI, M&S, Abbey National, J Sainsbury,
HSBC, Mencap, Birmingham University
– Iceland and Ernst and Young have closed schemes to
existing members as well!
– DC schemes get lower contribution rates
The Pensions Dilemma
• What does that mean?
– Take employee earning £15,000 on starting
work and earning £90,000, 40 years later
– DB scheme – 2/3rds pension =£60,000
– DC Scheme – would typically yield £22,848 at
current annuity rates at 65
– (Assumes 5% contribution from both and 5%
fund growth pa)
The Pensions Dilemma
• What does that mean?
–
–
–
–
–
–
Take your current salary
Multiply by 2/3rds to get IR Max Pension
Take the result
Divide by 5
Multiply by 100
Answer is approximately how much you would
need now to fund it!
What about the State Pension?
• Basic Pension - £3770 pa
• SERPS – Income related (eg earned average
earnings SERPS is worth Approx £3700pa)
• SSP (State Second Pension ) from April 2002
(Same as SERPS but better for low earners under
£24600pa)
• Opting out gave a better deal, but no more, for
same reasons – low returns, stealth tax etc)
What About Stakeholder?
• Low charges – non earners could contribute
up to £3600pa
• Take up is pathetic - same problems
• Rich have been using to create tax effective
pensions for spouses and children)
Which is best? – it depends…..
Value of £100 invested after
5 years
10 years
15 years
20 years
25 years
Pension
£207
£365
£519
£1277
£2634
Unit
Trust
£125
£253
£357
£1347
£3365
Property
£143
£135
£230
£344
£708
Higher rate tax added to pension,
tax free returns for unit trust
Standard and Poors / Halifax
What should employees do?
• Continue to join company schemes to get
company contribution
• Make additional contributions to AVC’s or
stakeholder (check who pays charges)
What should they save?
Age
To get 2/3rds To get £30,000
25
12.5%
£98pm
35
18.4%
£214pm
45
30.6%
£523pm
55
67.3%
£1710pm
Percentage of salary now to get pension at 65
What else should they do?
• Opt back in to SERPS / SSP
• Look at other options (ISA’s)
• Use free market option at retirement – this
can increase pension by up to 20%
Annuity Rates
Annuity type
Male, single 65
Female, single 60
Level annuity
£8237
£6930
3% escalation
£6345
£4922
Inflation link
£6309
£4835
With Profits
£8466
£7067
Impaired life
£10030
£8040
Based on Pension Fund of £100000
William Borrows Annuities
Conclusions
• Many people will not have the pensions
they expect when they retire
• Taking action as young as possible limits
the damage
Any Other Business
• Items
• Things for next meeting
• Potential Speakers
–
–
–
–
Work Life Balance
Data Protection / Employee Monitoring
Personal and Group Motivation
Selecting and Managing Benefit Providers