Workplace pensions and business protection: what your clients need to know

Hi everyone. Thanks very much for your time. My name's Craig Muir and I'm joined by my colleague Gregor Sked and we're both Senior Technical Managers with Royal London. Now today we're going to look at workplace pensions and business protection, but before we do just a few housekeeping rules. If you're watching this as a live webinar, then you'll be able to raise questions using the chat facility down the right-hand side of your screen and we'll get back to you with answer as soon as we possibly can. Alternatively, you can raise your question with your usual Royal London contact if you prefer. Now, if you're watch a recording of this, then the chat facility won't be available, and you'll only have the option of raising your question with your usual Royal London contact question. A question we always get asked about with regards to your CPD certificate. What you need to do there is you'll need to answer some questions after the webinar and then that will automatically generate your certificate.

Okay, that's the housekeeping over, so on with the webinar. Now in the first part of this session, we're going to look at workplace pensions and specifically at your employer clients who have been through the automatic enrolment process with one provider and they're now considering moving their scheme to another provider, it's sometimes referred to as the automatic enrolment secondary market. As you are no doubt aware, the staging process for automatic enrolment actually finished in February 2018, but of course employer duties with workplace pensions didn't end at that point. They've still got reviews to do cyclical re-enrolment and member needs, which all need to be considered on an ongoing basis. And of course there are new employers as well who will also have to set up an automatic enrolment scheme for their employees. But not every employer's happy with their choice of auto enrolment scheme and sometimes they're unhappy enough to want the change provider or perhaps they need a nudge by explaining the benefits of changing their scheme.

And that's really what our session today is all about, how you can get involved in the workplace pension market, how you can help these employers, and their employees, and the benefit this can add to your business. Now it might be a really good time for you to get involved too for a few reasons. Perhaps the most obvious is the introduction of the new consumer duty, which places a notice on an adviser to act to achieve good outcomes for their employer clients and by extension scheme members. But in addition to this, every three years employers have to undertake the cyclical re-enrolment process where those who have opted out or automatically re-enroled into their pension scheme. Now, many firms will review their pension scheme in advance of this re-enrolment date. So if you could identify those approaching their re-enrolment date, this might already be on their mind, but perhaps the overarching driver is that the world has changed dramatically since some of these schemes will have been put in place. Scheme charges may have changed, technology's improved, and of course employee wellbeing and financial wellbeing tools are now more prevalent within quality schemes than they were during the author enrolment staging period.

So, I think it's fair to say this is an evolving market and if employers aren't regularly searching for the best pension offering to attract and retain talent, then they're in danger of losing quality staff to those who are. And before you begin thinking all those employers must be all over automatic by now, can I just point out that in the pension’s regulators compliance and enforcement bulletin, and this was covering July to December2023, which is the most recent one, there were some 19,500 fixed penalty notices. Now that's the ones that's a £400 fine for falling foul off the rules, but there were also 8,400 escalating penalty notices issued. Now they're the big ones and they range from £50 to £10,000 per day until the employer puts that issue, right. So, employers clearly still need your assistance. And the second part of the presentation we'll explore the rest of SME clients not having a financial safety net in place for key persons within the business.

Now this could arise in the event of a serious illness or untimely death to help you and your clients address these risks will provide you with practical ideas and guidance, helping you to understand the role of business protection and how to identify and position suitable solutions. But for this to be CPD bill, we need to have some learning objectives. So by the end of the session, you should be able to identify ways to add value to workplace pension schemes, understand what employers and employees need from the workplace pension and explain why SME clients should consider a financial safety net to protect against the effects of a critical illness or premature death. Right? Before we go on to look at some aspects of workplace pensions in more detail, let's just look at some of the key points you might want to raise with employers when discussing the suitability of their existing workplace pension arrangement.

So first up is the default investment option suitable for the employer's workforce? Now this is huge as around 95% of workplace pension members sit in the default option. It needs to be robust and transparent, and it needs to cater for the whole workforce. And if you overlay that with ESG considerations and you can see this issue will grow and grow and grow as time passes. Next, our member communications clear, simple and jargon free. Furthermore, who's sending them? Is it the adviser's responsibility or the provider? Is it paper or is it electronic? Is the employer just given genetic documents to alter and send to employees or does the provider deal with all this and how much cost is all this add? Is the employer spending too much time dealing with problems in this scheme?

Next, we have what retirement options are available. Now, pension freedoms were a game changer for defined contribution pensions. And you know what? I don't think it's unreasonable as a member of a workplace pension arrangement to expect all this functionality will be available within their scheme. Yet we know the largest master trust out their Nest is currently unable to facilitate pension freedom functionality. Therefore, any member wishing to take benefits via flex access drawdown will need to switch to another provider, which of course could incur setup costs. Although some providers like ourselves at Royal London don't have any setup costs. Is the scheme as cost effective as possible? And I do mean cost effective, not just cheap because workplace pensions are unusual in this respect as you have more than one party to consider. Firstly, there's the employer, are they paying a fee? Is the middleware software they use something they have to pay for monthly and are the admin issues in point one, impacting on productivity. And this is a hidden but very real cost and then you have the members, are they getting the best value for money?

Now, nobody wants to pay more for something than they have to, but due to the 0.75% charge capital, workplace pensions, pricing differentials can be quite small. If you think about a scheme with an annual management charge of say 0.5%, that does everything the employer and workforce needed to do at no extra cost versus a scheme which does very little, let's say an annual management charge of 0.45% is only pushing the annual cost of a client with 50,000 in the fund up by £25 per annum. So, let's just make sure you're considering value, not just price. And then the last two points, who are the key people within the business and are their aspirations being insured? And Gregor will cover that off later on.

So, we have planning points throughout the session and our first one here is could you add volume in this market with the right support? Just talking about right support. I just want to point out that our business development managers are very experienced in this market. Many of them were allowed to help advisers with employers at the very start of automatic enrolment. So when employers first staged, and you'll probably find they've written dozens of schemes, so they're real experts who can provide you with a wealth of best practice ideas and of course they're ready and willing to help you.

Okay, now we'll have a look at some employee, employer and adviser research in the workplace pension market. And I think this probably makes a bit sense to start at the beginning, get an idea of how often employers review the workplace pension scheme. And as you can see from this graph here, it's a bit of a mixed bag, isn't it? The Royal London research here, it covered just shy of 500 schemes and it suggests that 17% review them annually and then that jumps around 26% for advice scheme. So, we don't have that figure on the screen. So, if you're looking for it, apologies, a further 27% review every two to five years and a significant proportion, 38% have no set timeframe for doing so. Now I dunno, I might be making too great a leap here, but from your perspective that 38% with no set timeframe I think presents an opportunity.

These employers didn't say never, which as you can see was an option. So presumably they are open to the idea of reviewing the scheme to achieve a better outcome for themselves and their employees. Now that 38% can be split into two groups. We've got advised and non-advised. If they're non-advised, then there's an opportunity to create a relationship with that form and extol the benefits. You can bring through regular reviews and we'll talk more about those as we move through the presentation. Alternatively, they have an adviser, but for whatever reason that adviser isn't reviewing the scheme on a regular basis and here it'd be worth discussing with the employer whether the advice was just initial help with establishing the scheme but no significant ongoing assistance. And if that's the case, once again, that's an opportunity for you to approach these employers to outline the benefits a regular review provided by your firm could bring. If you think about the more embedded automatic enrolment becomes and the more it's recognized as a tool to attract and retain the best talent, the more open to regular reviews to enhance scheme benefits the employers are likely to become.

And as you can see here, this really is important stuff. This research here is from workbuzz’s October, 2023 report. It was entitled The State of Employee Engagement and it shows the responses from approximately 300 people leaders, surveyed. Now it shows the top priorities for HR departments and while I don't have the full list here, you can see the top six. Now this year's report actually shows the movers and shakers comparing this and last year's top priorities. And as you can see, retention's up two spots, employee wellbeing’s up five places and recruitment's dropped one place. And as you can also see many of the top priorities are precisely what we're trying to achieve with a robust pension offering. We want employee engagement because engaged employees are less likely to leave. And two, the top three are attracting and retaining talent, which I've mentioned a few times already. So also interested to note that the second one we have is employee wellbeing and many pension schemes offer significant financial wellbeing tools for scheme members to use and we'll come back to employee wellbeing later in the presentation.

So, we've seen what employers have to say and what advisers say a scheme absolutely needs to have. But what about the key group? What about the employees themselves? Well, this research from the 2024 Royal London Workplace Pension Survey outlines the challenges employees face with regard pension saving and this is a considerable survey of 4,000 workplace employees. As you can see, 34% say they've never checked their forecasted pension and another 21% have not checked in the last two years. That's pretty concerning as it's very hard to know if you're on track to achieve your goals if you don't know what the goal actually is, 57% say they've never found out what their money is invested in their workplace pension. Imagine it's pretty hard to engage with your pension if you don't know where it's invested. So, a definite education piece needed there. Incidentally, and again, these figures aren't on the screen here, but when we looked at just the 50 to 69 age group, 65% have never looked into where their money's invested.

Now granted, some of these will be in defined benefits and they may not feel the need to understand where their pot's invested, but I tell you what, most will be in defined contributions and are approach and taking their benefits or what they may even have taken sum and that thinking is very unlikely to make you more engaged with your pension. 60% say they're not saving enough for retirement or don't know if they are and only 27% of those said they knew they were saving what they needed for the retirement. Okay, so it's not supposed to be a doom and gloom story rather what all that tells me is that employees are crying out for help to understand some of the basic elements of their workplace pensions. And you know what? That represents opportunities for you as advisers. And rather than you having to guess exactly what part these employees need help with, this Drewberry workplace pension report kingly tells us, and as you can see at the top by far and away, the number one thing people want to know is, am I saving enough for retirement?

Now the Royal London Research corroborates this as we just saw, 42% say they don't know if they're saving enough and a further 18% feel they're not saving enough. Now, something that can really help with this is the Pension in Lifetime Savings Association or as PLSA, as you more often hear at called and what they have their retirement living standards. Now we actually have a follow-on presentation that covers the PLSA retirement living standards and quite a bit of detail and it also outlines actions you could suggest the clients to help them achieve these. So, if you are interested in that, have a word with your usual Royal London contact about getting access to it. Anyway, I won't go through the rest of these Now as you could get access to a PDF of the slide deck after this to refer back to if you want, but it's helpful to have this insight into the areas people want help with. I will just draw your attention though to the third point, which is salary exchange or salary sacrifice, and we're going to have a look at that in a bit more detail in a few minutes time.

But given the automatic enrolment, it's been going for about 10 years or over 10 years now, you're probably more likely to encounter employers looking to switch their existing workplace suspension to a new provider than to need their first scheme set up. So next lets the reasons why employers might want to switch workplace pension schemes. Now these points are actually from discussions with advisers, and these are the things that you could be tugging at with employers. So first up, if we look at the drivers to switch, so we have here lack of support, poor service from existing schemes and poor member outcomes. Now we've grouped these two together as they both have a negative impact on the employer. Lack of support or service from the scheme means a drain on the employer's resource and profitability when they have to deal with issues and find solutions to issues that providers should be sorting out for them. Poor member communications results in the workforce approaching the employer for answers and this indirectly results in the same issues for the employer that a lack of support does.

I've grouped the next two points together because they're different. These are about making things better for the employee. Charge is too high and by this what they really mean is annual management of the plan and that's something that impacts the workforce, not the employer. And I've grouped this with another point. I often here mentioned what I refer to as a paternal employer looking to provide better benefits for employees. I'm not saying this is always altruistic, they're possibly doing it as a means of attracting and retaining talent, but I do hear from our consultants that they're seeing more and more employers taking this approach.

It's also important to know why some employers, even when the benefits of switching are clearly outlined to them by advisers, why they declined to switch. Now the reasons we here for this are much narrower, so they don't want to pay another fee, they just want to tick the box and the existing schemes doing that and then there's inertia and the apathy, it's more hassle than it's worth. So, we've effectively got three groups here. First, we have the blocker side, they don't see a lot of value in the workplace pension to themselves and possibly they feel they're paying a contribution for their employees and that's enough. They see the workplace pension as something that needs to be complied with a box tick, but not much else. There are enough open doors in this market. I wouldn't waste a lot of energy pushing at these closed ones.

The second group are employers who will switch because the scheme's causing them problems. It might be that they've just converted a pre automatic enrolment scheme to use for auto enrolment. It turns out it's not fit for purpose, but the challenge here will be identifying if the employer's interested in the additional services you have to offer or if they just want the scheme. And it's hugely important to set your stall out early as to the additional value add services you offer and whether you still want to act for the employer if they're not interested in these. It may be that you're still interested as you look after the owner, for example, as an individual client and you don't want another adviser in there. So, you take on that scheme. Finally, we have the paternal employers. Those looking to get the best offering possible for their employees perhaps as an aid to recruitment and retention. And this is an ideal client, but it's still important to outline from the start what service you offer and what you don't and how much all this will cost.

Now speaking of cost, we need to remember the cost to the adviser. Now, workplace pensions are somewhat different to say at the time of advice due to the different timeframes for providing the advice. Now a common timeframe from initial contact to that first premium being paid in the new scheme is around six months. Now obviously it can be longer or short than this, but six months is a decent benchmark, but that raises another point. When are you remunerated? Now the point of this graph is simply to illustrate that with a workplace pension switch. The adviser does a lot of work early in the process, but the client doesn't get to see much of it, so they don't value it as highly. But once the scheme's up and running, so stage five and beyond, the client sees an enormous amount of value. They've got a shiny new toy with lots of new bells and whistles, but at this stage, much of the adviser's work to establish the new scheme has already been done.

So, the point I'm trying to make here is to ensure the employer understands this and ideally agrees to provide a portion of the remuneration at different stages in the process rather than one lump sum payment at the end. Because what you don't want is to get to stage four, the recommendation by which time you've already done a significant proportion of the work only to find employers cooled on the idea and no longer wants to go ahead. Well, if they've already paid the portion of the remuneration or at least have a contractual commitment, they're less likely to walk away at this point.

Now, one way to overcome this could be an itemized menu of services. Now this is ours at Royal London. No doubt there are many other available in the market and I'm sorry, the font's pretty small, so I'll just talk you through what it does. So, you decide who's involved from the adviser side, so whether it's the adviser, whether it's a paraplanner, administrator, et cetera. And then you attribute an hourly rate to each. Now there are actually three sheets covering the redesign of the scheme, implementing the scheme, and then running the scheme. And all I'm just showing you here is the run page here. Now I think this helps because it enables you to offer an itemized menu of services to the employer costed either an early rate or at scheme level. Now remember, these employers you're dealing with have probably been through scheme setup before, so they're going to want to know what they're getting and how much it'll cost.

So, if you're a bit new to this market, it also helps as an aid memoir of a breakdown of all the services you might want to offer. Also, I think this fits nicely with the Consumer Duty. So, if you haven't already, you can use this to itemize your services, cost them out, and then use this for the price and value outcome. Remember, a key component of Consumer Duty is to document and be able to demonstrate how your proposition is value for money. So, something like this is hugely advantageous as it has a list of the services, the time they take and the cost to provide them, but also the ability for the employer to see at a granular level all the services you offer and then they can make an informed decision about which ones they value. Now it may also give you the opportunity to explain how valuable some of your services are, which they may not have considered. I should also point out that this tool is editable so you can edit the services you offer. For example, on this one right at the bottom, you can see here I've included a review of the business protection arrangements previously established and that provides a cost inclusive of VAT for these to be reviewed on a regular basis. And all this goes a long way to help with PROD and Consumer Duty requirements to be able to demonstrate ongoing value of which cost will form apart.

So, our next planning point here is outlining your proposition clearly at the outset and what if I'd had a bit more space in the box? I would also have said where possible to get remuneration and stages throughout the process. Of course, I'm going to gloss over the fact that I drew the box and could have made it any size I wanted. So, I've clearly just forgotten to add that button. Apologies for that. When I speak to our business development managers about workplace pensions and the advisers, they have who've been successful in this market, there's one common theme that sticks out at salary exchange. Now, most schemes don't currently utilize salary exchange despite it not being as complicated as many people imagine. My experience is not many people understand it, but what most advisers understand it and if you can successfully convey the benefits to employees and employers, it's possibly the easiest way to demonstrate a tangible benefit you can add. Now I've been given numerous examples, this scheme has been one off the back of explaining and highlighting the benefits of salary exchange. So, let's run through a brief case study to bring this to life.

So here we have Sam who works for Royal London Sockets Limited, we'll just call it RL Sockets from now on and has a pensionable salary of £35,000, which is it's roughly the average salary in the UK. His automatic enrolment scheme season contribute 5% of pensionable salary and his employer 3%. So, what we're doing here, we're assuming there are no band of earnings, so the 8% is actually paid from pound one. Now RL Sockets Ltd Sam's employer have approached you to review the workplace pension scheme for their 100 employees and they don't currently use salary exchange. Okay, so what we're going to do is we're going to look at Sam's position pre and post salary exchange. Then we'll look at the employer's position pre and post and then we'll look at overall. Now before we start, I just want to say don't get too hung up on the mass and numbers at this stage.  Rather let's just focus on what we're trying to achieve.

So, if we look at Sam first before salary exchange, as we've said, headline salary, £35,000, he makes his own pension contribution that's £1,400 net that gets crossed up to 1,750 and he has a take home salary of £27,320 after salary exchange, his headlight salary is lower £33,056. He makes no pension contributions as you can see there as his employer now makes it all on his behalf. But his take home salary is still £27,320. So, while it's lovely, Sam's take home salary hasn't changed, we haven't actually seen any real benefit to him thus far. Now to see this, we need to look at the employer's position. By the employer paying Sam less salary. Sam makes a national insurance saving and so does the employer. Now in our example, what we're going to suggest is Sam is redirecting all his national insurance savings to his pension and his employer is redirecting half of their national insurance savings to Sam's pension and keeping the other half for themselves, which they're quite entitled to do.

The employer could actually keep all their national insurance savings and you know what, there are a few other options too. So again, if you want more information on this, have a word with your normal Royal London Business Development Manager or Account Manager. But as I said in our example, Sam's redirecting all his national insurance savings to his pension. The employer is redirecting half their saving to Sam's pension, keeping the other half for themselves. So we know Sam's handling salary has gone down, but look at the employer pension contribution role. The employer's pension contribution has gone from £1,050 per annum before salary exchange to £3,129 after salary exchange, but that's because they still pay that £1,050 contribution plus all of Sam's contribution, plus all of Sam's national insurance savings plus half of the employer's national insurance savings all into Sam's pension. Now even with all this additional pension contribution, the employer's making the cost of employing Sam reduced by £134 per annum.

So, Sam now has £3,129 per annum going into his pension, which is £329 per annum extra. And that's for the same take home pay received when making a pension contribution without salary exchange. And this is a key point. Look, it doesn't make your pension contribution free, you just get more buying for your buck. Now, RL Sockets Ltd total cost of employing Sam for the year reduces by £134. Now if we had a hundred Sams in the scheme, that would mean a saving every year for the employer it's £13,400. Now you know what I'd argue you've gone a good way towards creating your own fee plus enough to pay for any business protection and also solicitor costs to set up the salary exchange contract. And I'd really hammer this home with employer maybe something like in the first year, this is my fee for doing the transfer of scheme, et cetera, and then on an ongoing basis I'll charge X proportion of this saving as my ongoing retainer. Now just make sure the employer is aware that when it comes to time to pay your fee next year and the year after and the year after that, that this isn't a cost to them. This is money that we're never going to have if you haven't created this saving by implementing salary exchange. Now they clearly also have ongoing business protection costs, but the solicitor fee for the change of contract, that would be a one-off payment. So, no ongoing cost for them.

Now salary exchange won't be suitable for absolutely everyone though. And just a few pitfalls you should be aware of and make employees aware of include it'll reduce your headline salary so it can impact death and service lump sums and it might impact your borrowing ability. It might not though because sometimes employers provide a certificate showing it assuming the salary hadn't been exchanged. You also have to be careful not to reduce anyone's salary below the minimum wage or below the level to be an eligible job holder for that automatic enrolment. It is a change of contract, so you will need to include a lawyer, but you know what? Provided you can address these points using salary exchange can be highly advantageous for both the employer and the workforce. So, our planning point here is simply have you discuss salary exchange with your employer clients.

Now, we're going to look at some wider opportunities and why advisers value this market and we actually asked advisers who've been successful in this market, what value they gain from being involved and it can loosely be broken down into three areas which will expand on over the next few slides. They were advice to businesses themselves, so corporate protections and investments, et cetera. Advice to the business owners and the senior staff. Now that was actually a big driver for a lot of them. And then advice to the wider workforce. Now a lot of the comments focused on the at retirement advice for this group, but not all. Now one point, repeated many times, was the importance of the scheme governance report and identifying those approaching 55 so the adviser could speak to them, they could identify them and speak to them. And access to the MI on the scheme membership is vital here. So, I would check what output the provider can give you here before deciding on which provider you're going to use. I just want to point out though that you don't want to have to deal with every part of the business to get involved in this market.

Maybe you don't want to get involved with dealing with the wider workforce and perhaps you're quite happy just to deal with the business owners and the senior employees and the protections for the business itself. And you know what? That's absolutely fine, there's no model you have to follow. The comment that I've heard several times from advisers in this market is corporate work opens doors and we're actually going to call the presentation that. Now interestingly, when we ask advisers if they use professional connections to get access to these employers, we get the usual yes - solicitors and accountants. A couple that may be slightly less common though include payroll providers and a slight nuance I thought was worth mentioning is other financial advisers because if you're thinking of getting into this market, it might be worth perhaps through your network or your service provider or some other means making it known to other advisers in your area that you are active in this market as not of adviser is.

So, let's just look at some opportunities for paternalistic employers and first up clinics and seminars. Now, probably most relevant if you do intend to target the wider workforce targeted clinics and seminars for high-net-worth individuals can work too, but if you do want to connect with the wider workforce, simply setting up the scheme and then being invisible to everyone, but the directors thereafter probably won't work. But clinics and seminars can be a great way to get your message across financial planner X. Now, some firms I've spoken to have used the opportunity of advising the general workforce to bring on a financial planner, often promoting from within the actual firm. Remember, this could have the benefit with the longevity or even sale ability of your firm. If your mid-fifties as many advisers are and your client bank are predominantly at or in retirement, the likelihood is your assets under management will reduce over time as these clients will often have finished accumulating and are busy decumulating.

This in turn could impact the sale price of your business as this is often linked to the value of assets under management. A steady stream of new potential clients could alleviate this to some extent. I appreciate these clients might not have a high level of investable assets at this stage, so it might be a longer-term strategy, but some of them will become the high-net-worth clients of tomorrow. Also, they can improve the age demographic balance of your client bank, which might also have a positive impact on the sale ability of your business. And the financial wellbeing app, although it is probably a bit advanced for what we're talking about today, if you do choose to get heavily involved in this market, you may want to speak with providers of employee wellbeing systems and also employee benefit portals to service the breadth of the workforce.

Again, Royal London Business Development Manager will be able to give you further insight into what we provide with regard these features. Will and power of attorney, now I probably should have entitled this last point is guest speakers as that's largely what I'm driving at there. Remember, you don't have to do all of every clinic or seminar yourself. You could cultivate relationship with and invite specialists and will writing or power of attorney or perhaps protection specialists or mortgage specialists if that suits the demographic of the organization. It's really a matter of getting your brand in front of them and talking to them about issues which are relevant to them, so they know who you are. And I guess speaker could be just the ticket. What you might just want to top tail the seminar with who you are and why you've invited the speaker along.

And then the last point you protection advice. Now I'm going to hand over to Gregor to expand on this in just a minute. After all the workplace pension discussions you'll be having are with businesses and have they considered the need for a financial safety net? Should a key person become seriously ill find themselves off work, sick long term or die. Now we face a massive protection gap as a country and whilst the pandemic brought a renewed focus on the need to families and individuals to consider the protection needs, we're still a long way from where we should be. So, I'm now going to pass you over to Gregor who will take you through to the end of the session.

Thank you Craig, and good morning everyone. I'm Gregor Sked one of Royal London’s Senior Protection Technical Managers, and as Craig said there, I'm going to be taking us through the latter part of our session today and really pulling on that point around opportunities to bring business protection to life with those workplace pension clients that you will be discussing and having frequent discussions with at the moment and in the future. And again, as Craig says, we do face a massive protection gap as a country and what we're going to be looking at today is some of the steps that we can be taken to help bring down that massive protection gap. Now I think first and foremost, I want to set the scene and just remind ourselves of the role, the really important role of protection advice, putting aside for a moment, business or personal protection. Now in financial planning, protection advice is there to help customers withstand life events.

And those life events are ones that ultimately could impact their income. In other words, it's there to make sure that they're financially resilient. Now, what life events might put a customer's financial resilience at risk? Well, an injury or an illness might mean a customer becomes too unwell to work, it might result in a loss of some or all of their income. A serious illness could mean the customer has to consider maybe reducing their working hours, taking ill health early retirement. They might just need to make adjustments to the home to cater for a change in lifestyle. And of course, all of this could have significant financial implications. So, are these being factored into any potential discussions you're having with clients? Premature death could also mean a sudden loss of income for a family, putting added pressure on day-to-day running costs, estate planning as we work through the boxes on the left-hand side, estate planning isn't necessarily a risk, but certainly a stage of life where protection advice can be crucial because estate planning without protection advice could risk clients' loved ones becoming financially burdened with inheritance tax liabilities.

And if customers intend to leave a legacy behind for the next generation, or even if they just want to have some control over how their wealth passed on, protection advice can help enable them with achieving that objective through assigning things particularly cover into suitable trusts for businesses. Protection advice can be invaluable during their continuity planning and succession plan, much of which I appreciate many of your businessman clients will be undergoing at various points. I'm going to come back to these two areas in a bit of detail as we go through our session today. Now, right at the start, Craig asks the question in key considerations from today's session, and there was a couple in there around are your business owner clients ensuring their future aspirations? I think this is a really key point to pull on here, particularly when we're looking at things like business succession planning, because again, business succession plan and business continuity, not inherently a risk, but certainly an area that business owners should be considering.

If you do have business owner clients, have they considered who could be potentially the next generation of taking on their shares of the business? Business owners really need to be considering things within their succession plan and like the need for partnership, shareholder protection plans, actually taking the time to consider that type of cover can prevent the shares of a business being inherited by unwanted beneficiaries, maybe avoid the disruption and upset that may be caused by the uncertainty for both the surviving business owner family and also the deceased families as well. And particularly when it comes to exit planning, making sure that these business owners' aspirations are being insurers a really key consideration and conversation to be having. Right at the bottom, we've got emotional support. Again, Craig alluded to this earlier on, one of the top priorities for HR departments is with regards to employee wellbeing.

And actually, the fact that that's moved up by about five spaces in terms of priority really brings another aspect of protection advice to life. Because protection policies like those offered through Royal London in many cases will give clients access to much more than just the financial support of protection policies. And actually, they can give clients access to a wealth of support services, much of which can also help with their ongoing wellbeing. So why do businesses need protection? Well, I'm going to introduce you to a really simple route to bring business protection into your advice process. Now, on screen just now are four boxes. These are, in my opinion, the four reasons why business owners need to consider having business protection discussions. So, death and service schemes are ultimately a very popular way for businesses to provide the families of employees who do sadly die in service with a sum of money.

Now, the number of group life or actually accepted group life schemes grew last year in 2023 by about 5.5% compared to the previous year. However, group risk providers don't always cater for schemes where there's usually going to be fewer than often five members, meaning smaller businesses are at risk of not having any death and service cover or actually having to pay for life cover through a personal arrangement from their income after tax or even from the company account. So today I'm going to share with you how protection advice can provide small businesses that don't have enough eligible employees to qualify for a group scheme or even whether it is a group scheme in place, but maybe they need a bit more of a flexible arrangement with a tax efficient solution.

Now, the start of 2024 saw growth in small to medium sized enterprises lending from high street banks, figures from the UK finance showed more than £4 billion worth of lending to SMEs took place. Now for businesses that are taking out these loans and debts, what impact could a sudden death or serious illness mean for the financial stability of the business? Do they have the capital readily available to be able to clear that debt quickly? So today we're going to talk about a solution to help provide businesses with the means to repay debts if the unthinkable happens. Now, SMEs account for about 99.9% of UK businesses and the point around about 61% of the country's workforce. Do your SME clients have contingency plans if a key employee died suddenly or became seriously ill? Have they got a sub bench? If not, how might that loss impact the business's revenue or ability to operate with their day-to-day activity, particularly where that individual may have had a key influence on the profit?

And finally, where there's partners or shareholders within the business, has there been any succession plan and discussions taking place to identify how to avoid the shares of a deceased or critically ill partner or shareholder? As I said before, fallen into the hands of someone that maybe has no desire to be involved within the business? Does the business have the funds to buy the shares back from the impacted partner or shareholder? So, four things I want you to remember. Debt and service, debt, profit and control. So, let's now take a look at how these each translate into an actual solution to bring to life with your SME clients. So, I'm going to start with death and service because actually it can be a great route into talking about other areas of business protection. And of course, the solution we're looking at here is relevant life. Now I just need to point something out here.

Relevant life shouldn't actually be considered as business protection, but the reason I'm talking about it today, and the reason I'm bringing it up first is it is a great door opener to some of the other business protection solutions we're going to look at very shortly. But just a very quick refresher on relevant life. So, it's an employer funded life policy taken out on the life of the employee. If an employee dies, then the money will be paid to the family of the employee that they're ideal for your SME clients who maybe don't have enough eligible employees for a group scheme, but they can also run alongside a group scheme so they can provide directors and employees with that coverage that can allow voluntary increases in their amount of cover or maybe where someone doesn't want their cover to be linked to salary at death and perhaps need to fix some relevant life cover can help.

Now they are, as I've mentioned a few times now, they're a tax efficient way of providing life cover to directors and employees. Now, as it's an employer funded policy, the premiums are paid for by the employer and they're not treated as a benefit in kind by HMRC. So, the employee won't pay any income tax nor are they accessible for employer or employee national insurance. Also, if HMRC are satisfied that the premiums meet the wholly and exclusively rules, then they might be able to be treated as an allowable expense for corporation tax. When it comes to the benefit paid out, if there's a claim, this will be paid as a tax-free lump sum to the employee's chosen beneficiaries and it's typically paid out through a discretionary trust. But that means in some exceptional circumstances, periodic and exit charges might apply. Now in order for a relevant life policy to qualify for those tax benefits mentioned a second ago, there are some key conditions that need to be met.

Firstly, it can only pay out to an individual or a charity. The cover can only pay out a lump sum when the employee dies in service before the age of 75. It can only provide life cover and no other benefits. It can't have a surrender value and it can't be used to avoid tax. As I said before, the trust is typically used to really maximize the tax efficiency with these types of policies. So next up, we've got loan protection. Now I would say most forms of business loans and debts can and really should be protected. Some examples include, as we've gotten screened, as well as that commercial bank loans, venture capital loans. If the business is a small startup and maybe used that form of financing, some businesses may have personal guarantees whereby the individual's home or car might be used to repaid debts if something happened to the business.

Ultimately, the objective of loan protection is to ensure that a business has access to capital to allow it to repay. Business loans cover those debts in the event of someone within the business that's responsible, that's liable for the repayment, dying or becoming seriously ill. Key person protection provides businesses with ultimately a financial safety net. In the event of someone that's critical to the continuity of the business becoming seriously ill, being unable to work because of a long-term illness or if they die, it's there to make sure that a business can continue to trade as normal. But a question you might be asking yourself is, who is a key person? Well, consider if a business has any key sales contacts who can maybe contribute significantly to the income of the business. Also, who are the founders? Do they still play an active role in the business?

Are there controlling directors who have maybe heavily invested into the business? Are there employees with specialists skills that might make replacing them expensive and timely? So a simple yet effective way to help business owners just understand who might be considered key within their business, if they're not too sure, is to ask them to bring along a structure chart or draw one during your meeting, get them to run through who does what, how much are they remunerated, what skills do they bring, and crucially, what would happen if they were unable to do the job. And lastly, we've got shareholder and partnership protection. This is purely just a snapshot that some of these solutions that we're looking at today, the objective of shareholder and partnership protection is to provide a business with funds to buy back to shares from a deceased or seriously ill shareholder or director. Overlooking this type of cover does bring the risk that it could impact the business's ability to trade or actually finance a replacement. It creates a risk that the remaining business owners are unable to raise the finances to buy the deceased or seriously ill owner's share from their family. And what if they had no desire to actually be involved within the business? Who might the family then sell the shares to?

So, the regular discussions that you're going to be having with business owners about their workplace pension certainly puts you into a really advantageous position that you're actually already engaging with businesses and business owners. But how else might we be able to find the opportunity? Well, whether you want to start discussing business protection with those workplace clients, or actually if you're wanting to explore the topic with other clients, maybe business owners that could be overlooking their business protection needs. Just doing a quick scan of your client demographic might throw up some initial opportunities worth bringing business protection to life with and actually could help show where those conversations maybe are more urgent than others. Now on screen, I've got a table with five clients. I've just pulled these together assuming that I've already got some initial information about them, maybe their names, employment status, business name, and from what we can introduce the type of business that they work within.

One really important thing to remember when it comes to business protection is to know the type of business that you're dealing with. So firstly, are they a limited company? If so, you'll know that they must have at least one shareholder and one director. So immediately there's a business protection lead. If they're a partnership, what type of partnership are they? How many partners are involved? And what's the personal liability like. If they're an LLP, remember that the individual members have a reduced personal liability for any business debts. Or if they're a sole trader, do they operate a loan? Do they employ other people? Remember, if a sole trader has a business loan, the liability of that loan would fall onto the family rather than the business if they died. So, knowing that the business is key, actually using the table on screen can be a little bit of a checklist as well to help with those conversations.

And in such a way of knowing can I get access to particular documentations? Has the business got those particular documentations? If not, can we help them get access to those documentations by using some of our professional contacts? And also, what information is contained within these documents that maybe I have access to that can help really beef out our business protection advice? So, let's take a quick look through some of the items on our checklist here. So, shareholder agreement, not a statutory requirement, but it's more of a private contract. A private agreement between shareholders of a company sets out their rights, their duties of the shareholders. It can be filled with a vast amount of very important information, but also vast amounts of information that can help with your business protection advice. So, it can help you see who has what percentage share in the business, what their exit plans might look like, what might happen on the death of a shareholder.

We've got partnership agreements. So again, not essential to have, but also not a good idea not to have because on the death of a partner, the business would be dissolved, and the assets passed to their estate and the remaining partners. Loan agreements, what loans and debts has a business got liability for? And actually, who's responsible for the repayments? If you can get a hold of the loan agreements, you can get some very important details to help position loan protection with clients. Wills, firstly, do the owners have any personal wills? It might be worth getting a hold of these to make sure that there's no contradictions with what might be going into any potential cross option agreements. And we've got DLA or Director Loan Accounts. So, these are common with shareholder and directors. It's money that they've put into the business themselves. So, can you get a copy of any DLAs and see what if any protection has been put in place?

Because if a shareholder director dies with a DLAs, the loan becomes immediately payable by the business and it can be a bit of a pest where there's no protection and no capital to pay that liability. It's also worth noting too, that if a business owner is not taking dividends or remuneration that they're entitled to, that will increase any director's loan agreements in place. And lastly, our directors paying for life cover out of their net pay. Remember what we've looked at before with relevant life cover, you're now in a better position hopefully to be able to pre-empt a relevant life discussion.

So earlier Craig introduced RL Sockets Ltd. I'm going to bring them back, but this time I want to take a look at a couple of key people and that's their directors. We've got Ruth and Lee, their joint control and directors of the small but very successful manufacturing firm. And as we saw earlier, they've got a salary exchange scheme in place. So perhaps you've advised RL Sockets and you've got a close relationship with the directors within your role as their adviser. And thinking about what we've covered today and the role of business protection for a business who overlooks their protection needs, what could the outcome be? So, let's assume that if Lee died suddenly, how might some of these following stakeholders be feeling right now? So, the bank, they might be looking at the financials of our Sockets Limited. They might be a bit concerned about potential future revenue or lack of future revenue.

Customers might have had a great relationship with Lee, but now might feel a bit uncertain as to who could step in and what it means for them. Might they start looking at competitors? Actually, competitors themselves might be thinking this is now a good time to start picking away at any of the remains of the business. Trade creditors they might have previously had offered RL Sockets a line of credit for goods. Now might be looking for immediate payment on delivery. If there's a reduction in cashflow, does the business have the funds to pay suppliers immediately? And we can't forget about the employees who might themselves be worried about job security and potential future changes to any pension or employee benefits that they have access to. Now, a liability audit is a really simple idea that's been used in the business protection space across the industry for quite a while.

So, you might have seen it spoken about in recent years. It's a really great way to help your SME clients just visualize the scale of the risk and helps demonstrate the value that you're providing by actually having a business protection conversation. And it can also help evidence the fact that you've presented these risks to those clients. Now also, I would say furthermore, it can be a really useful way to help understand the amount of cover needed. So, we've got a few boxes on screen just now. We've got looking at costs that business owners might have whereby their classes, liabilities to third parties or business debts, maybe liabilities to owners or money that many directors might have lent or even debited from the business. Next, if we consider the loss of profit multiplied by the time that it might take for the business to recover, that can certainly help project us with a cost for the type of cover that we're looking at.

And also, if we consider any one-off expenses. Things like recruitment costs. And we're going to present this in a slightly different format in a few slides time. Now let's bring back RL Sockets Ltd, if we are reviewing their workplace pension, maybe we could be also considering their business protection requirements too. They've got two controlling directors, as we said, Ruth and Lee, Ruth, we can see a bit more information about their roles here. She's responsible for the day-to-day operations of the business. Lee looks after sales and marketing. We do have another name here. We've got one technical specialist, Andy, who played a key role in the manufacturing process. Now last year, the business had a really strong year, but a gross profit total thing around about 1.25 million. Now we can see a few more details of RL Sockets Ltd on screen. So, in terms of their liabilities to third parties, they've got two bank loans, one for £250,000, the other for £150,000.

They have an overdraft facility, which they max out each month, and both Ruth and Lee have invested heavily into the business to get it off the ground. So, they've actually got two directors loan accounts, crucially in credit to the value of £220,000. Now we know that the gross profit from last year was about 1.25 million. We're going to attribute about £240,000 each to the business owners to that gross profit. The technical specialist is estimated to have had a contribution to the profit of around about £120,000. Now the business expects the financial impact of either Ruth or Lee suddenly being absent from the business to take about 18 months to recover from and potentially about 12 months. For Andy. Recruitment costs for Lee and Ruth were estimating to be about £50,000 and about £25,000 for Andy. Now, if we build these figures into little audit template, we've looked at a second ago, it can give us a bit of an indication as to the level of business protection required.

And Craig earlier spoke about how showing your clients the value of your work can help go a long way into showing the overall value that you're providing, whether that's triggered through a workplace pension, which are not, and actually a liability audit like this can be included within that cost of services calculated that Craig also showed, I remember stage six of the illustration that Craig looked at earlier. It was ongoing reviews and where business protection devices being provided, that really should be a trigger to continually review that, cover that the client's taken out, making sure that the level of cover remains suitable if there's increases reductions needed. Maybe there's new key people within the business, maybe there's new loans that have been taken out. Again, it really opens up that opportunity for a review. Now, to do a bit of a wrap up, I've got a couple of planning points that wanted to talk through.

The first plan is just a bit of an awareness that with business protection, you're naturally going to be dealing with larger, some assures than you otherwise might be doing with personal protection. And just a little plug to make sure that if you are coming across these types of cases, we, for example, business protection cases that you do have access to, a breadth of specialist support for larger cases and business protection cases at Royal London. We can help you with these cases in great detail. A second in point is regarding something called premium equalization. Now, it is fairly common for businesses to have shareholders of varying ages, varying different health status, maybe different shareholders, and actually that can lead to different insurance needs. Now, as a result, some may be paying more for their policies, but actually getting less benefit. Now to prevent HMRC from deeming this as a non-commercial gift between shareholders, premiums can be equalized and what that means is that each shareholder pays a commercial amount relative to their expected benefits.

Now, if they aren't equalized, the different amounts paid because of any difference in age, health, size, or stake of the company, that could potentially be deemed as a gift introducing potential inheritance tax implications. So certainly, worth speaking to your Business Development Manager at Royal London about how premium equalization can be ad within your conversations with clients. And the last plan in point on screen, something Craig spoke about earlier where we looked at that employer saving of about £13,400. In that particular case study where the example used the salary exchange process. So could some of that saving be put towards providing the business with a financial safety net.

Now, as it's titled  on screen, it's not for everyone, but just bear in mind, for many SME owners, the business could be their only source of income and it could also be their retirement plans. Now in this post-consumer duty world, which you certainly need to be looking at the risks all clients face, both personal and business or corporate, we need to be looking at how to mitigate the risks that they face on impact on their financial resilience. And again, that's not achieved by not providing clients with protection advice. So, whether you're a workplace pension specialist, whether you're a mortgage adviser, a wealth adviser, a protection specialist, or a bit of an all-rounder, failing to include protection advice as part of your financial planning can leave clients at risk that either they or their families may well face financial difficulties in the future. So, if you can't or decide not to offer protection advice yourself, clients really should be referred to a protection specialist. It cannot be ignored.

Now, just as a further conclusion, some points from both of our sessions today. So, the secondary market is significant. It's going to continue to grow. Many employers review their scheme regularly and have significant numbers considering switching schemes to a new provider. We know employees are crying out for someone to tell them what they need to do for a comfortable retirement, but they don't really know where to go for that help. Workplace pensions are likely to be the future of the mass affluent advice base. Many banks have moved out of this market and actually since auto enrolment began, most employed people now have a relationship with another financial body, be that the provider or the visible face, the advice firm who sets up. Again, we've got various different case studies of where advisers who are active in this space have been very successful by using this corporate business protection opportunity as a door opener to further opportunities within the firm.

And something that we've had the discussion with Craig about previously that I thought that we wanted to leave you with is why do you think that master trusts have flooded into this market? It's a pretty price competitive area. It's capped at 75 basis points, in any case, do you really think they're doing it purely for the profit that they'll actually make from running the scheme? Or do you think that they'll see it as a route to market and an opportunity to do other business with these companies and to the people that they employ?

So, to recap what we've looked at today, you'll be able to see that through our learning outcomes. Hopefully we've been able to show some areas where you can add value to your workplace pension schemes, understand the different needs from both employers and employees with regards to the workplace pension scheme, and hopefully be able to explain some of the reasons that SME clients should be considering having a financial safety net in place.

Now that's sadly all about time. We've got time for today. Thank you so much on behalf of myself and Craig for joining us today. And thank you to everyone that has submitted questions along the way. We will follow up with all the questions asked afterwards. Don't forget to get in contact with your Royal London Business Development Manager for either pensions or protection following today's session. And once again, thank you so much for your time.