THE UK  & THE M&S EXPERIENCEwith Julie Parker‐Welch

AGENDA

About the UKState Pension provision and some statisticsState Pension provision and some statisticsHistory of Private PensionsAbout Automatic EnrolmentWho is Marks & Spencer?Marks & Spencer pensionsWhat about the future?

State Benefits in the UK – some statistics

UK population 62mCurrent life expectancy : Male - 78 years Female - 82 yearsCurrent life expectancy : Male 78 years Female 82 yearsNumber of people over State Pension Age: 1993 – 9.9m, 2011 – 11.7mWorking past State Pension Age: 1993 – 7.6%, 2011 – 12%Welfare Budget now 30% of Government spending60% of households receive more in benefits than they pay in taxBasic State Pension £107.45 (169CAD) per week – increases in line with average earningsVery complex State Pension provision which has allowed some opting out and integration with private pensionsA new plan to simplify and increase to £140 (235 CAD) per week in 2017

State Pension Age (SPA) in the UK

Year of Birth SPA Men Year of Birth SPA Women

Prior to April 1950 60

A il 1950 t D 1953 60 65Prior to Dec 1953 65 April 1950 to Dec 1953 60 - 65

Dec 1953 to Oct 1968 65 - 66 Dec 1953 to April1968

65- 66

April 1968 – April 1977 66-67 April 1968 – April 1977 66 -67

April 1977 – April 1978 67 -68 April 1977 – April 1978 67 - 68

From April 1978 68 From April 1978 68

CANADIAN RETIREMENT AGE IS 65 WITH PLANS TO INCREASE TO 67

State Pension Age is gradually increasing in the UK and will be reviewed every 5 years in line with life expectancy

Private pension provision

During the 1960’s and 1970’s many large employers opened Final Salary pension schemesThe 1980’s were boom years with contribution holidaysThe 1990’s brought realisation that people were living longer than expected and market volatilityLate 1990’s through to the noughties DB schemes closing rapidly and bankrupting companiesStart of the Pension Protection Fund (PPF) - leviesMost larger employers now provide pension through individual DefinedMost larger employers now provide pension through individual Defined Contribution SchemesMost smaller employers do not provide pension provisionCompany pensions generally provided under Trust Law but increasingly also by use of group Insurance policies –thousands of pension plans

A major shift in UK pension provision –automatic enrolment

The Government’s response to the increasing cost of State Benefit provision by encouraging more private pension savingAll employers will be required to provide access to a company sponsored pension with minimum employer and employee contributionsEmployers must enrol all employees into pension who are:• Over 22 but under State Pension Age• Have earnings in excess of a threshold, currently £8,105 per year (13,616CAD)Very complex administrative requirementsBeing introduced gradually with largest employers firstBeing introduced gradually with largest employers firstEmployees can opt out but only after they have been enrolledNo enforcement yet!

A bit about Marks and Spencer

1884 Michael Marks opened his first Market Stall in Leeds – the penny bazaar1894 went into partnership with Tom SpencerNow has 70,000 permanent employees in UK and 8,000 outside the UK80% of our employees are part time80% of our employees are female700 stores in the UK from Simply Food to flag ship stores21 million people visit our stores every weekOur business split half between food and half general merchandiseWe are the number one provider of womenswear and lingerie in the UK

Our Stores

Plan A – we care

Food & innovation

Our clothing

More often ..............

M&S Pensions

DB scheme closed to new entrants in 2002• 50,000 pensioners, p• 50,000 deferred member• 13,200 employees still earning benefitsAssets c£7bnDefined Contribution scheme for other employees• Prior to October 2012 voluntary joining• Take up rate c20%• Therefore c45 000 employees in no pension• Therefore c45,000 employees in no pension• Lots of paper and manual administration• Needed to be updated to meet automatic enrolment legislation

The new scheme –Your M&S Pension Saving Plan

Employee contribution

M&S contributioncontribution contribution

Foundation level (Auto enrolment default)Available immediately to all employees

3% 6%

Premier LevelAvailable to employees who complete two years’ membership

6% 12%

complete two years membership

At the more generous end in comparison with most retailers and well in excess of minimum requirements

The new M&S pension plan

Everyone can join immediatelyAll employees treated the sameChallenges:• 25,000 temporary staff• Staff turnover• Administration• Cost• CommunicationA new way of managing company schemes – the Master Trust• Administered by Legal & General• Allows many employers to group togetherAllows many employers to group together• Economies of scale• Low fees• Flexible• No legacy scheme

Who are Legal & General?

Legal & General established in 1836 – known for passive managementLGIM one of Europe’s largest institutional asset managers and major global investorglobal investorQ3 2012 £391bn under managementLGIM one of the largest investors in the UK stock market - responsibility for c4% of all London-listed equities on behalf of its clientsThe largest pension fund manager in the UKSmall operation in the US offering Term Assurance through Banner LifeLGIMA - LGIMAmerica - launched in 2006 out of Chicago and already has g y£26bn under management. So far been an actively managed bond team with success has been in working with the US consultant community to take on American pension scheme mandates

How does a Master Trust work?

Any employer can join and there can be different terms:• Fees• InvestmentsA set of Independent Trustees are charged with:• Ensuring members interests are looked after• Reviewing administration• Reviewing investment choices are appropriate• Dealing with UK RegulatorLife assurance cover can be includedLife assurance cover can be includedThe Employer has a Governance CommitteeRetirement flexible after age 55Members have access to get help to buy an annuity

The M&S investment choices

1 default Lifestyle1 other Lifestyle fund – Moderate1 other Lifestyle fund Moderate10 choices

Long Term Growth > Mixed GrowthBalanced Growth > Global EquityMixed Bonds > CashProperty > Corporate BondsShariah > Socially ResponsibleEmerging Market Equity > Index Linked GiltsEmerging Market Equity > Index Linked Gilts

Look at our website www.yourmandspension.com

Why these investment choices?

Who are our membership? • Low paid• Most not financially awareMost not financially aware• Variance in age and service• Low member engagementWhite label funds – so we can more easily adjust Use of Passive wherever possible• We don’t believe that active management can consistently outperform the market• Passive is cheaper and that is important to our members

Charges are the c rrent political concentration• Charges are the current political concentrationA Lifestyle fund that could change as member nears retirementA need for a default fund - legislation requires that members need not make any choices

Let’s look at some detail......M&S Lifestyle default Fund

Default retirement age of 65• Member can pick an alternativep• Often don’t• Need to be aware of short term decisions around retirementOur view was that our membership would not like major investment shifts

- particularly coming up to retirementAll members over 10 years from retirement in the Long Term Growth FundGovernment allows 25% of fund to be taken as tax free cash sumM b l th 10 t ti t d ll i t Mi dMembers less than 10 years to retirement gradually move into Mixed Bonds and Cash

- less volatility

Long Term Growth Fund

White Label blend means that we can change the proportion and the funds included easilyUse of Legal & General where possible - consider cost versus performanceKey is growth but with consideration to risk Annual Management Charge (AMC) of 0.30%

Fund name Proportion

Legal & General UK Equity Index Fund 25%Legal & General UK Equity Index Fund 25%Legal & General World (ex UK) Developed Equity Index Fund 55%Legal & General World Emerging Markets Index Fund 10%Legal & General Managed Property Fund 10%

Mixed Bonds Fund

White Label blend means that we can change the proportion and the funds included easilyUse of Legal & General where possible - consider cost versus performanceKey is low volatilityAMC of 0.10%

Fund Name ProportionLegal & General AAA Corporate Bond all stocks Index 33 34%Legal & General AAA Corporate Bond all stocks Index 33.34%Legal & General over 15 years Gilts Index Fund 33.34%Legal & General over 5 Years Index Linked Gilts 33.33%

The charges

Legal & General supply all scheme management and communicationsMember pays the full cost of the management of the schemeMember pays the full cost of the management of the schemeOur AMC are at the low end of the market in the UKM&S pay for advice on investments and scheme changes

Movement of members from old Scheme to new

Transferred old funds to new ones c £160m - managed by Legal & GeneralList of member data and investments as at 30 June 2012Break down of White Label funds into the component investments –

9 companies and 15 different funds and mainly active management- 9 companies and 15 different funds and mainly active managementIn-specie transfer where feasible

- Pre-investment of 95% of the cash where not possibleSome reregistered – Property & ShariahMembers had statement from closing fund and opening statement

– difference was due to market improvementsNo member was worse off. Cost of the transfer underwrittenNo member was worse off. Cost of the transfer underwrittenWhole process took 8 weeksFull independent audit undertakenNO LEGACY SCHEME

Our biggest challenge - communication

LegalNeeded to meet the legal requirements

Understanding – pensions is a complex subject and full of jargonFocus on helping member but keeping employer safeFocus on helping member but keeping employer safe

EngagementWe wrote to c237,000 employees (3 times) to tell them that contributions start in February of 3%. Had only c1000 calls to helpline

Just getting in touchAll those employees in 700 different locations

Calls to action where needed Apathy really does take overApathy really does take over

Paper isn’t enoughUse of different media is needed

BrandingNeeds be engaging to encourage people to read

The future?

You know a bit about the UK and what is driving change in pension policyYou know a bit about the M&S business and our history of pension You know a bit about the M&S business and our history of pension provisionYou know a bit about what M&S are doing now to deal with new legislation and the challenges that brings and the investment options that we have put in placeWe will continue to evolve our pension provision

My prediction for the UK:My prediction for the UK:• More private provision• Movement of cost from State to private companies• Less and larger schemes – more than one employer• More regulation – e.g. Charges

QUESTIONS?