Workplace pensions & business protection​ - corporate work opens doors​

Hi everyone, thank you very much for your time. My name is Craig Muir and I'm a Senior Pensions Technical Manager at Royal London, and I'm joined by my colleague Nathan Douse, who's a Corporate and Estate Planning Specialist also at Royal London. Now today's session is ‘Workplace pensions and business protection: Corporate work opens doors’, and I've actually stolen that last part from an adviser who's very successful in the workplace pension market. He told me the reason he went into the market was that corporate work opens doors to new opportunities.

But before we get started with the main presentation, I just have some housekeeping rules. So, 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 be able to get back to you with the 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 watching a recording of this then the chat facility won't be available of course, you'll only have the option of raising your questions with your usual Royal London contact. With regards your CPD certificate because we always get asked this one. You'll need to answer some questions after the webinar and then that will automatically generate your certificate, and it'll get sent to you.

Okay on with the webinar, and in the first part, what I want to do is I want to look at workplace pensions, and particularly at your employer clients who've been through automatic enrolment process with one provider and they're now considering moving the scheme to another provider. Now, as we all know, the staging processes for automatic enrolment they finished in February 2018. But you know what, employers’ duties with workplace pensions that didn't end there. There's things like reviews, there's cyclical re-enrolment, there's member needs which all need to be considered on an ongoing basis. And of course, there'll be new employers as well who 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 to change provider. Perhaps they need a bit of a nudge by explaining the benefits of changing their scheme.

That's what my session's all about; how you can get involved in the workplace pension market, how you can help these employers and of course their employees, and ultimately the benefit this can also add to your business. Now might be a good time for you to get involved too, for a few reasons perhaps. The most obvious is the Consumer Duty because that places an onus on advisers to act, achieve good outcomes for their employer clients, and by extension scheme members as well. But in addition to this, every three years employers have to undertake the cyclical re-enrolment process where those who opted out are automatically re-enrolled back into the pension scheme. And many firms will review their pension scheme in advance of this re-enrolment date. So, if you can identify those approaching the re-enrolment date, this might already be on their mind. I think probably the overarching driver is that you know what, the world's changed dramatically since some of these schemes will have been put in place, scheme charges may have changed, might be a bit keener now. Technology certainly improved and things like employee wellbeing and financial wellbeing tools are now more prevalent within quality schemes than they were during the automatic enrolment staging period which I said finished back in 2018. So, I think it's fair to say that it's an evolving market and if employers aren't regularly searching for the best pension offering to attract and retain talent, then they could be in danger of losing quality staff to those who are.

Now in the second part of the presentation, Nathan will explore the risks of SME clients not having a financial safety net in place for key persons within the business. That could arise in the event of a serious illness or untimely death, but to help you and your clients address these risks, he'll help provide you with practical ideas and guidance, helping you to understand the role of business protection and how to identify and position suitable solutions.

Now for this session to be CPD-able, we need to have some learning objectives and they are; by the end of the session, you should be able to identify the features of different workplace pension arrangements, demonstrate the benefit of salary sacrifice, and workplace pensions. Now, this is particularly important as you'll probably get asked questions from employers as a result of the limits that have been put in National Insurance rebate announced in the Budget in November 2025. So, I'll go over these changes, but I'll also explore the impact and how important salary sacrifice will continue to be even after 2029. And then the third objective there is explain why SME clients should consider a financial safety net to protect against the effects of a critical illness or premature death.

Right to begin with, I think we should look at the main types of defined contribution workplace pensions being used for automatic enrolment. Now, we're not going to consider the public sector and the few private sector DB schemes used for automatic enrolment today because they're few and far between. I don't think you'll come across them very often.

So, the defined contribution workplace pension market is dominated by two types of arrangements. You can see them here, master trusts on the left and contract-based schemes on the right, what you would probably have previously called a GPP. So, the master trust is run by trustees. Now they might outsource the admin to a third party, or they might deal with it in-house and if they're outsourcing to a third party, it can sometimes make it difficult as an adviser to get the MI you need on the scheme if you're going to provide an ongoing service to the employer and the workforce. So, I guess that's my first action point for you. If you're going to use a master trust and you want to do the ongoing servicing for the employer and their employees as well, check what MI is available. Master trusts, they're governed by The Pensions Regulator, not the FCA, because they're occupational pensions and they usually operate a net pay system, although NEST, the National Employment Savings Trust, which is the largest master trust in the UK, offers both net pay and relief at source. Now just a quick reminder: net pay means the pension contributions are taken from gross pay, so will include full marginal rate tax relief. However, National Insurance is still paid on these contributions.

Then my last point there, government backed. There seems to be a bit of a misconception in the market, certainly from employers that particularly NEST is government backed. Now the reality is that none of the master trusts are government backed, NEST was in fact established by a government loan. They do have to accept any employer who wishes to establish a scheme with them, but that loan still has to be repaid. And also, just as a quick reminder, the charges for NEST is 0.3% per annum, which is really competitive, but also every pension contribution attracts a 1.8% charge, and I think that's to help pay off that government loan. Now many employers are unaware of this extra charge and also many of them left it a bit too late to get private provision before their automatic enrolment staging date, and then they ended up in NEST. So, it's worth talking to employers who are in NEST, explain to them about the charges. Now it might be the case that another private pension provider wasn't interested in that employer's workplace pension scheme when they first set it up as the contributions and assets might have been too small for them. But you may find that the assets have built up since they first set up the workplace pension, and it may make them more attractive to another pension provider now.

Moving on to the right-hand side, contract-based schemes, they are overseen by an Independent Governance Committee which every provider to contract-based schemes have to establish. They're governed by the Financial Conduct Authority, and they provide tax relief via the relief at source system rather than net pay. So, what happens there is each contribution receives 20% tax relief regardless of their tax status, and yes, that includes those who don't pay any tax as well. Therefore, if you're a higher or an additional rate taxpayer, you would need to reclaim your extra tax relief from HMRC. That's unless salary sacrifice is used, in which case, full marginal rate tax release is given and National Insurance isn't applied to the pension contribution, which can mean there's a saving for the employer and the employee too. And I'll go into that in a bit more detail later on. On the whole, they tend to be a bit more flexible or have a greater breadth of at-retirement options than some master trusts. Now that's a bit of a broad-brush statement because some master trusts will actually offer all retirement options.

Back in November 2024, the Government produced a consultation, and it was considering consolidation in the workplace pension market. And their intention was to deliver economies of scale to help employees and ultimately to release funds to invest in UK infrastructure. Now, this wasn't aimed specifically at master trust. I know this says consolidation of master trust, but it was really to do with the workplace pension market in general and in fact, it covered the myriad of local government pension schemes, which could be consolidated. Now, the Government in their consultation, they suggested that the benefits of scale start to arise once the fund hits about £25 billion to £50 billion, and they propose minimum asset requirements for default arrangements by 2030 of £25 billion in a bid to encourage scale and consolidation in the defined contribution market. Now, that proposal was passed into law in 2025.

So, what you're looking at here, this came from Lane Clark & Peacock, and they produced a document called Master Trusts Unpacked. It was back in February 2025, and they were looking at which master trusts would meet this minimum asset amount, and by extension, which ones would need to consolidate to get to £25 billion. So, you can see at that point there was only three that met the minimum it was Legal & General, NEST, and the People's Pension. Now I need to point out that the assets are the total assets in each master trust. So not just how much is in the default fund, which is what we need to look at, and therefore the funds will be slightly lower than that. Also, I want to point out as well that the traditional pension providers on the list will also have contract-based schemes with a default fund. So, they may indeed reach that minimum of £25 billion. I also want to point out that Royal London's default funds already achieved the £25 billion mark on so and so, you know, we don't have any concerns about having to consolidate. But you can see some of these master trusts that are on the screen here will be at threat, and we know some are actually in the process of consolidating at the moment. So, you know what, you could be targeting employers who are in one of these smaller master trusts and highlight that they may need to consolidate shortly. So, you know, why not get ahead of the game and look at another provider now, one which will have over £25 billion by 2030, or preferably ones which already have £25 billion. So, you'll be saying to them, you know, you don't want to leave it too late, and maybe your choice will be restricted. Also, if you're advising employers where to set up their workplace pension, I suggest you're best not to recommend one of these smaller master trusts. Otherwise, in a few years’ time when they may need to consolidate with another provider, they could be faced with the pain of new admin systems and new comms and I'm not sure they'd be too impressed with your original advice. Did you avoid foreseeable harm springs to mind?

Before we go into look at some aspects of workplace pensions in more detail, let's just look at some of the key points you may want to raise with employers when discussing the suitability of their existing workplace pension arrangement. So first off, ‘Is the employer spending too much time dealing with problems in the scheme?’. I'm not going to elaborate too much on this because I think it's pretty straightforward. You know, if the tool you've got isn't working properly, you buy a new tool or you suffer the consequences of a job poorly done. Next one is ‘Is the default investment option suitable for the employer's workforce?’. Now that's huge because around 90 to 95% of workplace pension members sit in that default fund option. So, it needs to be robust, it needs to be transparent, and it needs to cater for the whole workforce. And this is a key point I'd be raising with employers. Is your default fund still suitable for your workforce? Does it have enough flexibility to change as the demographic of your workforce changes? Now, the default fund may have been suitable when you first set up the workplace pension, but is it still suitable now? You know, perhaps your workforce is older or maybe younger than when the default fund was first agreed. But is it still suitable to your workforce now and for the future? ‘Are member communications clear, simple & jargon free?’, furthermore, who's having to send them out? Is it the adviser's responsibility? Is it the provider's responsibility? Is it the employer's responsibility? Is it paper or is it electronic? Now we know some pension providers just give templates, which the employer then needs infill their employee's details, and they're also responsible for issuing the documents and how much cost does all this add, because that is going to distract the employer from their business.

‘What retirement options are available?’. Pension freedoms were a game changer for defined contribution pensions, and 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 there, NEST, is currently unable to facilitate pension freedom functionality. Therefore, any member wishing to take benefits via flexi access drawdown will need to switch to another provider which could incur setup costs. There's also the consideration of avoiding foreseeable harm because if you know the workforce is older, then they're likely to want to have the full range of retirement options. And remember, the employer may well be part of the workplace pension too, and if they're older, they'll question you about why their scheme doesn't allow something like flexi access drawdown.

And then we have ‘Is this 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 that I mentioned in point one impacting on productivity? Because that's a hidden but very real cost. And then you have the members, are they getting the best value for money? Because nobody wants to pay more for something than they have to, but due to the 0.75% charge cap on the default fund in workplace pensions, pricing differentials can be quite small. Just remember a scheme with an annual management charge of 0.5% that does everything that the employer and workforce need it to do at no extra cost versus a scheme which does very little, let's say an annual management charge of 0.45%. So just five basis point less is only going to push the annual cost of a client with £50,000 in the fund up by £25 per annum. So, make sure that you're considering value and not just the price.

So, I've got planning points throughout the session as well. So, could you add value in this market with the right support? Now, I just want to point out that our business development managers and our account managers are very experienced in this market and, you know, many of them are around to help advisers with employers at the very start of automatic enrolment. So, when employers first staged you'll probably find that they've written dozens if not hundreds of schemes. So, they're real experts who can provide you with a wealth of best practice ideas and they're ready and willing to help. And we're also in the unique position of having implementation managers who can hold the employer's hand during the whole switch process, you know, from preparation, implementation, then helping running their new workplace pension with Royal London. But, you know, speak to your normal Royal London sales rep about how they and the implementation managers can help support.

Right, given that automatic enrolment’s been going for over 10 years now, you're probably more likely to encounter employers looking to switch their existing workplace pension to a new provider than to need their first scheme set up. So next, let's consider the reasons why employers might want to switch workplace pension schemes. Now, these points were actually from discussion with advisers who've been successful in this market. So, if we first look at the drivers to switch and we've got; lack of support, poor service from existing schemes and poor member comms on the left-hand side there. Now I'm grouping these two together because they both have a negative impact on the employer. Lack of support or service on 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 the provider should be sorting out for them. Poor member comms, that results in the workforce approaching the employer for answers, and that indirectly results in the same issues for the employer that lack of support does.

Now the next two are about making things better for the employee. Charges too high, and by this they mean the annual management charge of the plan. And that's something that impacts the workforce, not necessarily the employer. And I've grouped that with another point I often hear mentioned they’re what I refer to as paternal employers looking to provide better benefits for employees. Now, I'm not saying this is always altruistic, you know, 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. Of course, it's also important to know why some employers, even when the benefits of switching are clearly outlined to them by advisers, they still decline to switch, and the reasons we hear for this are much narrower. So, they don't want to pay another fee, just want to tick the box in the existing schemes doing that and then you've got this inertia or apathy, you know, ‘oh, it's going to be more hassle than it's worth’.

So, we've effectively got three groups here I think, first we've got the blocker side. They don't see a lot of value in the workplace pension to themselves and possibly 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. Do you know what, there are enough open doors in this market I probably wouldn't waste too much time pushing at these closed doors there. Second group are employers who will switch because the scheme's causing them problems. Maybe they converted a pre automatic enrolment scheme to use for auto enrolment. It turns out it's no longer fit for purpose. Now 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 and whether you still want to act for the employer, if they're not interested in these. Now, it might be that you're still interested because you look after the owner, for example, as an individual client, and you don't want another adviser in there so, you take on this scheme. And then finally we've got the paternal employers, those looking to get the best possible offering for the employees. Perhaps as an aid for recruitment and retention, and that's an ideal client, but still important to outline from the start what services you offer and what you don't, and how much all this will cost.

Right, when I speak to our business development managers and our account managers about workplace pensions and the advisers they have, who've been successful in this market. There's one common theme that sticks out and that's salary sacrifice. Because most schemes don't currently utilise salary sacrifice, despite it not being as complicated as many people imagine. In my experience, not many people understand it, but you guys do, 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. I've been given numerous examples of schemes, being won off the back of explaining and highlighting the benefits of salary sacrifice.

Now I'm going to run through a case study to show how salary sacrifice can work. But before I do, I just want to remind you of the November 2025 Budget and the proposed change to salary sacrifice. Now we actually covered this in our January webinar. It's called ‘Navigating the numbers, Budget update and tax year end planning’. So, I'm only just going to talk briefly about this, and if you want further information on the implications of the change, please refer to the January webinar, it's on the CPD area of our Technical Central hub. Well, firstly we know that with the increase in employer National Insurance rate from April 2025, so last year, many employers were looking at salary sacrifice to try and offset some of the additional costs. So, there'll no doubt be some confusion about what the impact, the changes that were announced in November are going to have. So, let's try to allay some of those fears and explain how important salary sacrifice is still going to be.

So, from April 2029, National Insurance savings will be restricted to the first £2,000 of salary sacrificed. Now, the £2,000 cap is likely to result in a reduction to pension contributions in some instances, but there will still be some significant advantages to continue with salary sacrifice even in excess of £2,000 after this date. Now, I just want to clarify that salary sacrifice isn't being limited to £2,000. It's just the National Insurance saving for employees and employers that are limited to the first £2,000 sacrifice. That's quite significant because salary sacrifice enjoys benefits in excess of just a National Insurance saving, and that's something that we all need to bear in mind and get across to employers. So, although only the first £2,000 sacrifice will benefit from these National Insurance savings, sacrificing beyond this figure will reduce the taxable income. Potentially keep an individual below a tax threshold or perhaps keep them out of a tax trap. Now, these tax traps are bands of income where the effective rate of tax exceeds the headline rate. For example, if child benefit has been lost because the highest earner in the household is earning £70,000, sacrificing salary of £10,000, even though only £2,000 benefits from National Insurance saving after 2029, that will recoup the otherwise lost child benefit. Another major benefit of salary sacrifice beyond the National Insurance saving is the ability to secure tax relief beyond that 20% at source and for that tax relief to go into the pension fund.

Now when the relief at source system's being used, as I mentioned earlier, 20% tax relief is given its source and anything above this needs to be claimed from HMRC by the scheme member. Now, as well as some people neglecting to claim this relief, those that do usually get this relief in the form of an altered tax code. So, while the tax relief is received, it doesn't necessarily go to the pension plan unless the scheme member makes a manual contribution. Using salary sacrifice enables a scheme member to get their full marginal rate of tax relief into their pension fund without needing to claim anything from HMRC.

So just to summarise it, because it's really essential employers are made aware of this. Salary sacrifice benefits will remain. There's still tax relief with higher and additional rate taxpayers still enjoying full marginal rate tax relief at source. And with the tax threshold remaining frozen, we'll see ever more higher and additional rate taxpayers and if they don't use salary sacrifice and they don't claim back their additional tax relief and pay it into their pension. We'll likely see a greater number of higher earners with a pension shortfall. The tax relief at marginal rate from salary sacrifice is a huge benefit and shouldn't be overlooked. £2,000 will cover many and the Government actually produced some stats. They showed that 74% of basic rate taxpayers will be unaffected by this. I've already mentioned this, but there's no need to claim the tax relief. It saves the hassle of claiming higher rate tax relief or worse still, the folly of neglecting to, and of course it's still three years away, so there, you know, there's plenty of time to make use of the current more generous rules if you aren't already.

Okay, as I mentioned earlier, I'm now going to run through a brief case study to bring salary sacrifice to life. So here we have Sam who works for RL Sockets Limited, and he has a pensionable salary of £35,000, which is roughly the average salary in the UK. His automatic enrolment scheme sees him contribute 5% of pensionable salary and his employer 3%. So, we're assuming there are no bans of earnings here, so the 8% is paid from £1. Royal London Sockets Limited, Sam's employer, is reviewing the workplace pension scheme for their employees, a hundred employees, and they don't currently use salary sacrifice.

Okay, so what we're going to do is we're going to look at Sam's position pre and post salary sacrifice, then at the employer's position, pre and post, and then at overall as well. Now, before we start, I just want to say don't get too hung up on the maths and the numbers at this stage. Rather, just focus on what we're trying to achieve. So, if we look at Sam first before salary sacrifice, you can see the top left-hand column there. Headline salary is £35,000 and if we go down you can see his net pension contribution is £1,400, so it's £1,750 gross, and he has a take home salary of £27,320 after salary sacrifice. His headline salary is lower £33,056. He makes no pension contribution because his employer makes it all on his behalf. And his take home salary is still the same, it's £27,320. So, you know, while it's lovely, Sam's take home salary hasn't changed, we haven't seen any real benefit to him thus far. And to see that 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, I'm going to say that Sam's redirecting all his National Insurance savings to his pension, and RL Sockets, his employer’s redirecting half their National Insurance savings to Sam's pension. They're keeping the other half for themselves, which you know, they're quite entitled to do. In fact, the employer could keep all their National Insurance savings and there are a few other options too so, again, if you want more information on this, have a word with your usual Royal London sales rep. So, we know Sam's headline salary has gone down, but if we look at the employer pension contribution row here, the employer's pension contribution has gone from £1,050 per annum before salary sacrifice to £3,140 after. And this is because they still pay the £1,050 contribution, plus all of Sam's contribution, plus all of Sam's National Insurance saving plus half of the employer's National Insurance saving all into Sam's pension. And even with all this additional pension contribution the employer's making, the cost of employing Sam is reduced by £146 per annum.

So, Sam now has £3,140 per annum going into his pension. That's £340 extra each year for the same take home pay received when making a pension contribution without salary sacrifice. And that's a key point; it doesn't make your pension contribution free you just get more bang for your buck. Royal London Sockets Limited, total cost of employing Sam for the year reduces by £146. Now, if we imagine there were a hundred Sams in the scheme, that would mean a saving every year for the employer of £14,600, and I'd argue you've gotten a good way towards creating your own fee there. Plus, enough to pay for any business protection, which we’ll come onto in a few minutes, and also any solicitor's cost to set up the salary sacrifice contract as well. Now, although this isn't on the slide, the additional cost of employing Sam as a result of the increase in the employer National Insurance contribution from April last year, April 2025, which I mentioned earlier, that's actually £926 right. If you were to apply that to the 100 employees, that's an additional cost of £92,600 to the employer, and that's each and every year. It doesn't take a genius to work out that 50% of the employer's NI is redirected and saves £14,600 if they don't redirect any savings, and I'm certainly not advocating this, but it is an option. You know what? It might help to keep the employer afloat. At the end of the day, the saving’s going to be double, so £29,200. I'm sure employers have worked out already what the additional cost the National Insurance increase made to their business. And although salary sacrifice won't be right for all employers and can't mitigate all the additional costs, you can help by demonstrating how salary sacrifice could ease the burden.

Now we've always advocated salary sacrifice to employers, but for me, this demonstrates how it's become even more important to employers from April of last year and will continue to be even after April 2029. I just want to form a point here actually, I'd also suggest speaking to employers about the employment allowance. Because that's now available to all eligible employers and it reduces their total bill by £10,500. So just make sure that they're claiming that.

Okay, salary sacrifice. It won't be suitable for absolutely everyone though and a few pitfalls you should be aware of and make employees aware of include that it will reduce their headline salary. So, you know, it can impact things like death in service lump sums. It might impact their borrowing ability. Now, having said that, many employers can produce what's called a statement of remuneration, which shows the employee salary, pre-salary sacrifice, and lenders are quite happy to accept this. Also, many employers base the death in service on pre salary sacrifice too. Now you need to be careful not to reduce anyone's salary below minimum wage or below the level to be an eligible job holder. And that is a change of contract so, you will need to include a lawyer, but provided you can address these points, using salary sacrifice can be highly advantageous for both employer and the workforce too. So, our planning point here is simply have you discussed salary exchange or salary sacrifice with your employer clients?

Now I want to just look at some of the wider opportunities and why advisers value this market. Now, much of this comes from speaking with advisers who have been successful in this market and asking what value they gain from being involved in the workplace pension market and it can loosely be broken down into three areas. They were advice to the business themselves, so things like corporate protections and investments, etc. Advice to the business owners and senior staff now that was seen as a big driver for a lot of them. And then advice to the wider workforce and a lot of the comments focused on the at-retirement advice for this group, but not all of them. One point often repeated is importance of the scheme governance report. So, the MI to be able to identify those approaching, say 55 so the adviser can speak to them and access to the MI and the scheme membership is vital here. So again, I know I mentioned at the start, it's worth checking what output the provider can give you here before deciding on one.

Just want to point out though, that you don't have to deal with every part of the business to get involved in this market. You know, maybe you don't want to get involved with dealing with the wider workforce. Perhaps you're quite happy just to deal with the business owners and the senior employees and protections for the business itself, and that's absolutely fine. There's no model that you have to follow. Interestingly, when we were asking advisers if they use professional connections, we get the usual, yes solicitors and accountants. A couple that are slightly less common though include payroll providers, which could probably be grouped with accountants, but it's a slight nuance and I thought it was worth mentioning. And the other was other financial advisers because if you're thinking of getting involved in this market, it might be worth perhaps through your network or service provider, via some other means, making it known to other advisers in your area that you are active in this market, because as you'll know, not every adviser is.

I'm now going to pass you over to Nathan who's going to take you through the rest of this presentation. So over to you, Nathan.

Hello everyone and thank you Craig. An informative session and some great points raised particularly around salary sacrifice and potentially using those savings generated to perhaps set up a business protection arrangement.

Now, before I get into my session, just by way of introduction I'm Nathan Douse. I'm part of the Specialist Protection Team at Royal London and I support our business development managers on the wealth side of the business and protection only, and work with advisers on all things obviously business protection, IHT planning, using regular premium protection policies and more complex high net worth protection business. So, initial training, ongoing support, technical guidance just to name a few areas where we can assist, but invariably here just to make doing business with Royal London as easy as possible.

Now, in terms of my session today, there's going to be some people who are experienced in the business protection market, and this will hopefully serve as a refresher whilst also highlighting the invaluable support Royal London can offer you. And undoubtedly there's going to be individuals here with little to no experience on this subject matter, looking just to gain an understanding of the opportunity, look at what that opportunity looks like whilst also developing your skills and increasing your knowledge. So, I guess for me the business protection market, it's still massively untapped. For me, there'll be reasons for that. It could be, due to time or lack of, it could be business protections perceived complexity or even just a perceived lack of knowledge and certainly, a lack of confidence in this area. The tax position are key person policies, the Anderson Rules premium equalisation, the legislation requirements of the Companies Act 2006, option agreements, trust forms, all these things put advisers off from having the conversation with the business owners.

But I'll let you into a little secret. Most business owners are unaware of the risks that they face in terms of business protection and certainly at that initial fact-finding meeting, they're not going to be asking you about any of those tax or complicated questions yet. You're going to need to be aware of them, particularly when recommending solutions, but that's where Royal London and my team can support you. But initially, at that first meeting, keep it simple, ask questions, understand their objectives, find out what's important to them, and help them understand some of the risks that they may face without a financial contingency plan in place. And then we can move on to the solutions, and as I said, that's where Royal London are here to help.

So, today's just going to be a brief overview of the business protection opportunity that exists. I'm going to signpost the main types of business protection, give you some reasons why a business owner should consider a protection contingency plan. And as I've said, also show you some of the risks a business face without a financial safety net.

‘Why do businesses need protection?’ Before we consider this, let's just consider some statistics. I guess there's around five to six million private businesses in the UK with a vast majority, 90% plus of those being micro businesses which, which means they've got less than 10 employees. It's those businesses that will be reliant on key individuals to drive the profit and cash flow. And importantly it will be those businesses that in general will require a conversation with an adviser about what happens if things go wrong. Furthermore, when we consider the opportunity, we only have to look at some statistics and if we use some information sourced from one of Swiss Re's Term and Health Watch reports, there's around 1.4 million term policies written in the UK. Of those, business protection policies accounted for around 1%, which is a staggering statistic and just highlights not only the significant opportunity in this market, but also how underprotected many UK businesses are. For me, it doesn't matter whether a business is a partnership, an LLP, a sole trader or an SME. All businesses need cash and businesses don't tend to go bust overnight because of lack of profits. They go bust overnight because they have no access to cash, and in recent memory, COVID highlighted that issue.

One of the questions that we get asked by advisers is, ‘how do we open up the conversation around business protection with the business owner?’ and this is really important. Talking to a business owner in a language they understand is critical. Leading with conversations around insurance likely won't be effective because it will be seen as another cost that they can ill afford and the shutters will come down. Leading with terms like key person insurance or shareholder protection, probably going to have limited success. Why is that? Because many business owners simply will not understand these terms and why they may be relevant to them. What we need to do is understand what is important to the business owner. What's the short-, medium-, and long-term objective? What does their business mean to them? And more importantly, what's it mean to their families? What's that business funding? Is it lifestyle, pension contributions, family holidays, kids’ education, luxuries, retirement planning? Make the conversation personal, get the business owner to articulate those points and you can build in the protection conversation. What if you don't get there? What's the plan B for that business?

If you're working with a business owner in a private client capacity, you're providing them with financial planning advice, it's likely that you're going to be meeting that business owner on an annual basis as a minimum. Perhaps you're helping them with their retirement planning, you're funding that pension perhaps maybe tax-efficiently up to £60,000 annual employer pension contribution. There'll be planning around that, a goal, an objective, what's it going to be funding? The continued success and profitability of that business. What if something goes wrong? There's a death of a key individual, a serious illness, accident, injury, resulting in short-term issues. Having a strategy in place to ensure that the business can remain financially resilient is going to be critical not only for the business but for the business owner, for their employees, for their family it’s going to be important for those pension contributions. Perhaps you're doing ISA contributions, but for all those future financial aspirations. Business owners are more likely going to want to protect something once they understand the value. So, the key areas and in no particular order on this slide, control - shareholder protection to you and me. What do businesses have in place should a shareholder die or become critically ill? What happens to those shares? I call it aspiration versus reality, and what shareholders often think will happen and what does actually happen are often poles apart. With nothing in place, what does actually happen to those shares? Well, let's have a think about it. Who actually ends up with them? And is that what they really wanted? Or is it the cash value that they wanted? What do the remaining shareholders want? The driver is going to be to keep control, they will want to buy those shares back from the deceased’s estate, and that's fine as long as they've got a suitable agreement in place, and more importantly, the available cash to facilitate that share purchase.

Debt protection, again, many businesses will have some form of lending in place. And you know, years ago the banks were active in this area, and it wasn't uncommon to see commercial bank lending being covered with protection as a condition of the loan. You fast forward to present times, many banks no longer providing financial advice, certainly not protection advice. And subsequently, this is an area that's often getting neglected much to the detriment of the business owner. Using statistics from the recent Business Protection Focus Week, 74% of businesses have some form of lending in place. Over and above that, often the lending is there to fund cash flow, so a sudden shock to that business, death or serious illness to someone who is key to the profitability of that business could be extremely problematic, and the business may find that it can no longer continue to meet those loan repayments. That issue could be compounded further. Why? Well banks will typically attach security to the debt to ensure that it can be repaid if the worst happens. Fixed or floating charges on business assets are not uncommon, and for smaller businesses in particular, the bank will often require a personal guarantee to be in place. This can have huge ramifications on the family if the bank are required to call in that security, and often it'll be the biggest asset at risk, which is the family home. And then let's not forget, the cost of servicing debt has also increased over the last few years. Interest rates have risen from their historic lows. Again, highlighting the importance of putting cover in place to ensure that debt can be repaid should the worst happen. Of course, it's not just bank lending or commercial mortgages that should be considered. Often shareholding directors will lend money to the business personally, perhaps at start up, if formal bank lending's not available, maybe dividends are declared and not paid, salary credited but not withdrawn. All these areas increase the value of the director's loan accounts. Importantly, and often something that's overlooked is that the director loan accounts are repayable to the estate. If the business has no cash, then this becomes a real issue, a business ending issue in many scenarios.

Profit protection as we've touched on, businesses rely on cash flow and profit and in many if not all businesses, they will have key individuals that are contributing significantly to that profit. Statistics tell us that many businesses have at least one key person, if not more. Have the businesses considered the financial impact then of losing that key person to death or serious illness? How long would it take to replace them? How would the business cope financially? Would the business even survive? And if so, what financial hardship? How financially resilient is their business should they lose a key person? What a brilliant question to ask a business owner. Has the business owner actually ever thought about it? And then finally one person death in service, tax-efficient life cover, relevant life to me and you. Great door opener to the wider business protection conversation. Tax efficient means we’re providing life cover to directors and employees. A solution that's now been around for a number of years, but one which many accountants are still not aware of and dare I say that many business owners certainly won't be aware of.

As I touched on earlier, many of those five million UK businesses will be micro businesses with less than 10 employees. It's unlikely that those businesses will be able to secure any life cover by way of a group death in service scheme, as these are usually aimed at larger businesses. The alternative, relevant life on a single life basis, and importantly, tailored to that individual's needs and objectives. Again, combine that with the beneficial tax treatment, it's a compelling solution for any business owner and in some scenarios, their employees too. Key message for me here before I move on, is that no matter what area we are discussing with a business owner, they are all providing one thing, which is cash, and cash equals control. The death or serious illness of a business owner or key individual can have a significant effect on the remaining business owners and their families. Having a business protection contingency plan in place can help avoid those issues, give the remaining individuals one less thing to worry about, and importantly, provide them with time to steady the ship without making any rash or ill-judged decisions.

Here we have a fictitious company RL Sockets Limited, small manufacturing company, and to hazard a guess you'll have companies similar to this within your client banks. Ruth, Lee, Mona, and Anita all equal shareholding directors, and all equally key to the business. All having specific skill sets, knowledge, experience, specialism in their fields, and critical to the business continuity of RL Sockets. A hundred employees, a workplace pension as we know with Royal London, and again, statistically speaking, around 94% of businesses recognise that they have key people and why wouldn't they? You know, if Lee was no longer around, it's unlikely that Anita for example, could step into his shoes and be as effective on day one.

Speaking of Anita, she's the sales director for RL Sockets, one of the founding shareholders, and an integral part of the day-to-day operations and continued success of the business. Married to Derek with two dependent children. She's paid by salary and dividends. Director loan account in credit to the tune of £50,000. And in the bank’s eyes she's going to be key to that business loan of £100,000, which is secured again via personal guarantees on all the shareholding directors. But what's the position if something happens to Anita and she's no longer around due to her premature death? From the client's perspective, perhaps Anita is the business. Anita is the founder, has the relationship with many of the key clients, but importantly the top clients. If Anita's no longer around, those clients would know and would they remain loyal? Would they be concerned? Would they lose confidence? Service levels may deteriorate. If those customers had issues in the past, it was probably Anita that they would turn to, and she would facilitate a resolution. Where do they go now? Perhaps they would look to a competitor.

If competitors become aware that all is not well at RL Sockets, what will they do? Maybe they're going to capitalise on the opportunity, offer preferential rates to clients to win business. Perhaps they'll poach staff as well and then what about the employees at RL Sockets? How do they feel? One of the owners is gone. Who's going to replace them? Are the jobs safe? Is the business even safe? What does the future look like in huge uncertainty? What about the bank's position? Is the lending being serviced? If RL sockets are losing clients, what's the financial position look like? Will the bank want the lending repaid? What were the terms on that loan agreement? And what about the personal guarantee? What would this mean to Anita's spouse and family? You know, if that bank came knocking on the door. And then importantly, what actually happens to Anita's share of the business, assuming she's got a will in place, and it's likely that her husband Derek's going to end up with a piece of paper saying he's now a 25% shareholder of RL Sockets. Is that what he wanted? Probably not. If someone had asked him the question before Anita's death, they would've said that they would've wanted the cash value of the shares. What does it mean for the remaining business owners now that Derek holds that 25% shareholding? Could he be appointed a director, have a say in the business? Be awarded dividends and so on? Again, if this eventuality had been discussed with RL Sockets before Anita's untimely death, they probably would've told you that they want to retain control. And that could have been achieved, with a protection solution, suitable agreements in place and therefore ensuring the sale and purchase of shares could have proceeded.

What about the director's loan account? £50,000 in credit, a debt to Anita's estate? Are RL Sockets in a position to repay this? Maybe, maybe not, but if a conversation again had taken place earlier, perhaps a financial safety net could have been discussed and put in place. Key person cover to provide a lump sum on death or earlier critical illness to ensure the profit can be maintained while RL Sockets get back to a stable trading position, or perhaps to employ a suitable replacement for Anita. Loan protection cover to obviously cover that bank loan and the director loan account. Relevant life could have been discussed as a tax-efficient way to provide additional family protection for the family, and as I touched on shareholder protection to ensure that the business can retain control and that the family receive the cash value for that shareholding. Again, I've said it once, and I'll say it again. Having a business protection contingency plan in place gives that business time. Time to implement the plan B, protect the profits while they get back on track, fund a replacement at short notice or simply keep control. Protection provides the cash that gives the business time and peace of mind.

Business protection, it's about helping business owners understand the risks they face, and to some degree they will already do a lot of that. It's also about asking questions and gaining an understanding of both the business objectives, but also the personal objectives of the main individuals involved. What risks are RL Sockets planning for? What are their main concerns? And this is a really important step, and certainly a step that needs to be taken before any business protection recommendations are considered. So, during your initial fact-finding meeting with RL Sockets, we might ask, or we might use a matrix similar to the one on screen. And this matrix considers the probability of risks happening and of course, the impact on the business. And this will look slightly different with each individual business. Using the example on the screen, okay. We can see the probability of an employee, not a key employee in this instance, resigning is just reasonably high. Now, that's natural turnover of staff. However, if they had a flood or a fire, while the probability is quite low, the impact would be extremely high, if not catastrophic. Now, most companies assess risks. They will have business continuity procedures in place for various risks that they've identified. Turnover of low-grade staff, as we've touched on, that's going to be assessed in a likely continuity plan in place to cover recruitment, onboarding, training, and so on. And for the risks they have identified as being particularly high from an impact perspective, they'll likely not think twice about insuring that risk. And they may even have a disaster recovery plan in place, enabling them to work at a different location should the worst happen. What business owners don't tend to do though is consider the even greater risk, and that's the risk that one of their key people may die or suffer a critical illness, let alone consider the risks that they themselves as business owners may die or become critically ill. Again, going back to RL Sockets, we saw the potential impact on the business if Anita died. The issue with the lending, the impact on the profits and the potential loss of control due to a lack of agreements and lack of cash available to facilitate that share purchase.

Going back to our case study, one of the statistics I've not used but was recently highlighted during the Business Protection Focus Week was that 60% of businesses would cease trading in under a year if they lost a key individual and the following slides illustrate why this happens. Earlier as stated that in terms of remuneration Ruth, Lee, Mona and Anita take salary in dividends. The director loan accounts are in credit to a sum of £50,000, and I also mentioned they had employees and a workplace pension.

Here we have an example profit and loss account for RL Sockets, and there's a couple of areas I want to draw your attention to. Firstly, as I mentioned, the shareholding directors are paying themselves dividends and dividends are paid from the bottom line, your profit after tax. Secondly, let's consider the fixed costs because fixed costs are really interesting. Things like rent, lease payments, utilities, salaries, business rates, insurance premiums, workplace pension costs and so on. These typically will remain constant, and by that what I mean is they don't change should a business lose a key individual, Anita, for example. And that means they need paying no matter what and that's really important when you look at what a reduction in turnover does.

So, let's put some figures into that profit and loss account as shown. What we'll now do is just play around with these figures just to see the effect of changes in turnover and gross profit and how these are amplified in that net profit figure.

Here we are reducing turnover and cost of sales by 20%, and that reduction is due to Anita's death. And to be honest, 20% reduction is probably on the more conservative side, noting her role and contribution to the business. Importantly though, even though Anita has died, the fixed costs have not reduced. They still need paying, and whilst RL Sockets have still made a profit, it's been reduced by nearly 90%. Now, how do those remaining shareholders pay themselves? Retain profit, perhaps that's if they've got any. Moving on RL Sockets, they may need to replace Anita. An extraordinary cost in year one could be up to £150,000. And what about that director loan account that needs repaying a further £50,000 RL Sockets needs to find at a time when they've lost that key individual, a colleague, a friend. Suddenly the situation for RL Sockets is much worse. That original £180,000 net profit has now become a deficit of £180,000. And for me, that's why that statistic, 60% of businesses would cease trading in under one year is so accurate. And yep 40% may continue to trade, but at what financial hardship, what struggles have they gone through to get back on an even keel?

Finally then, just before we summarise today's session, I wanted to share with you one of the best tools in the business protection market. And this is the business protection liability audit. Many advisers who are new to this market will tell us they struggle to get business protection conversation going with their business-owning client. The liability audit is an effective tool to use with a business owner to visually capture the business liabilities. But it also gives you, as advisers, a track to run on and as I said, can be incorporated into your fact finding. I'll briefly explain how it works. Firstly, you'll need to establish who's key in a business, and then once identified, you'll need four bits of key financial information. On the first line that's liabilities to third parties. This is where you capture the bank lending, commercial loans, commercial mortgages and that will lead you onto a conversation about how to structure the cover. You know, are all the key individuals equally key to repaying that loan? How would the bank want the loan repaying? How would the business want the loan repaying? and so on. On the second line down, we capture our liabilities to the owners. That's the director loan accounts, so we know how important those are. The third line down captures the true key person element. For me, I would look at the gross profit of the business, then work out how much of that gross profit is attributable to each of the key people identified. And then following that, assess how long it would take to replace them a year, perhaps maybe longer for those more specialist roles. And then finally, one-off expenses, with recruitment costs, advertising costs and so on. Add them all together, you've got the total liabilities of that business. If you've done this with the business owner, it's a powerful disturbance tool. And that can enable you then to build that protection conversation, the all-important, what if, the plan B.

So, just to conclude today the workplace pension market is significant and will continue to grow. Many employers review the scheme regularly and a significant number are 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 this help. Workplace pensions are likely to be the future of the mass affluent advice. Many banks have moved out of this market and since auto enrolment began, most employed people now have a relationship with another financial body, be that the provider or the visible face of the advice firm who set it up. I've heard comments from advisers who've been successful in this market, confirming corporate business opens doors to other opportunities within the firm. Those opportunities, as Craig touched on, might be surgeries with employees, financial planning opportunities with key employees of the management team, could be business protection conversations to ensure that business is financially resilient should the worst happen.

Okay, we're at the end of the presentation now, and I hope you found that useful. I'll let you have another look at these learning outcomes. Just by way of a reminder and with regards to your CPD certificate, you'll need to answer some questions after this webinar. And this will automatically generate that certificate for you. Any questions that have been raised in the chat facility, we will get back to you as soon as we possibly can. And then I would urge you please to look out for our next Royal London webinar in April, which will be about ‘When relationships end’. So, we're going to be touching on things like pension on divorce, family income benefit, income protection, and economic abuse. In the meantime, just wanted to say on behalf of Craig and myself, thank you very much for listening.