Our panel of experts analyses the latest regulatory challenges and how the pensions industry can adapt its strategies to meet ongoing requirements
Chair: Chris Parrott, Pensions and Reward Manager, British Airports Authority
Robert Branagh, Managing Director, RPMI
David Carstairs, Head of Business Development, Trafalgar House Pensions Administration
Melanie Cusack, Client Director, Pitmans Trustees Limited
Michael Mann, Head of Operations, MNPA
Mark Pemberthy, Director, JLT Employee Benefit Solutions
Chair (Chris Parrott): On the topic of regulatory updates and in response to the GMP equalisation consultation, there have been enormous concerns raised around how this is all going to be addressed. So, what issues do you see GMP equalisation causing you?
Mann: From my point of view the main issue with this is the costs involved. Administrators will need to run two sets of calculations and keep two sets of records for each member with only minor resultant changes to members’ benefits, in particular as it only touches on their GMP benefits from 1990 through to 1997. In summary only small benefits result for a large administration cost.
Carstairs: As I understand it there has been an opportunity for some time to convert GMPs into normal benefits in schemes but this has not been taken up due to the need to consult with members and determine a satisfactory method of providing benefits of actuarial equivalence to GMPs. So one would question why there is a need to do this now.
Pemberthy: If we are going to crystallise how GMP equalisation is to work, then we suggest it is done as a one-off exercise, converted to normal scheme benefits then you are done with it once and for all.
Cusack: With regards to a cost/benefit analysis, there is an argument for saying that rather than fiddling around trying to equalise and potentially doubling up on administration costs and whatever else we have to do for all the people that we have not yet equalised, we should just put the cost to levelling them up so we know we are going to be equalised rather than spending the money on all these calculations on an individual level.
Carstairs: Has there been any research done on the actual impact of doing it financially?
Pemberthy: I don’t think there has been enough time. There have been estimates that the overall implications will run into the billions.
Carstairs: What is the cost of doing it?
Pemberthy: In terms of the cost of extra benefits for members. The cost of administering it is going to be significant as well. There is going to be variable ability to automate the process depending on system capability and the quality of data available.
Chair: Do you not think that this is yet another case of tinkering with something which could have been sorted out years ago if the legal system had come to a conclusion rather than just asking the regulator?
Mann: I agree it is tinkering. The DWP are making a suggestion here rather than giving a clear instruction, so from an administration point of view we could well have five, six or seven GMP equalisation calculation models each with different record keeping requirements. So, it is potentially a nightmare.
Chair: One of the main issues that always arises is whether your data is good enough to be able work all this out. Do you believe that there are enough resources available, enough partnerships being offered by central government, DWP, or HMRC, which will allow you to get your records in a timely manner and for you to come up with your own cost analysis for how much all this will cost?
Branagh: Well, the classic example would be that there are not enough resources or energy to deal with current issues, let alone all the ones that are set to come along. It is an uphill battle.
Cusack: Central government bodies are quicker than they were and they seem to respond better than perhaps in the past.
Branagh: They seem to perform at a faster rate if a scheme enters insolvency for example.
Chair: Keeping on the regulatory theme, let’s focus on the abolition of short service refunds. Again, is it a case of tinkering? Who receives a short service refund these days?
Pemberthy: There are a lot of trust based DC schemes open to new members, so abolition of refunds from DC early leavers will impact a number of schemes. From an administration perspective the quid pro quo of potentially having more mobile pension pots will be increased volumes of transfers and this almost certainly outweighs any efficiencies for not having to pay early leaver refunds.
Carstairs: Was that not what personal pensions were about?
Pemberthy: We are increasingly seeing a level playing field on scheme designs so whether it is occupational, bundled, unbundled, insured or not, then the same rules apply across the piece. The policy principles of making sure that people retain a pension benefit with any contributions that are paid is a noble one. However we don’t see huge volumes of short service refunds. If you look at total volumes of pension contributions paid, the actual volume of refunds is not massive so in the round we do not see it as a significant issue, but as a policy principle it is a starting point.
Mann: The consolidation of small pots is a good thing. The devil is in the detail though, for example, there is talk of an aggregator scheme to help facilitate the abolition of short service refunds, which could be Nest. This detail is important and needs to be sorted out as the cost of effecting a small transfer to another scheme could easily outweigh the transfer value amount itself, particularly if it’s under £2,000.
Pemberthy: The discrepancy in charges and governance around pension schemes is vast so there are some real regulatory risks around mandatory transfers without any degree of guidance.
Chair: Talking about aggregated schemes, where all pension pots are in one place, what do you see as the advantages of seeking this aggregation?
Pemberthy: It’s much easier for members to get a feel for their pension benefits if they are all in one place, I think they do this in Australia and it does make a difference in terms of member engagement. There is some real merit behind members knowing exactly what’s in their DC pension pots so they can monitor their overall position and have a degree of insight as to what the outcome is likely to be. But doing it on a practical basis is a massive step from where we are at the moment. From a DB point of view it is not practical to make any kind of simplified DB transfer, so there are some real challenges to making this work in practice.
Carstairs: The only way to do it would be to resurrect the section 32 scenario.
Pemberthy: Even then you are turning DB benefits into DC benefits and that is a regulatory and compliance nightmare.
Branagh: You could say that the government has put a lot of eggs in one basket with Nest and if Nest is one way of reaching out to the country’s five or six million people who don’t currently participate in pension saving and if people who have got small pension pots have lost contact with an employer or trustee or whoever used to look after them, then an aggregator scheme could take all of those elements into it.
Carstairs: And to support that, an aggregator scheme is one place for the member to go to, to find out what the benefits are as opposed to a whole raft of places at the moment.
Cusack: In Australia, there were industry wide schemes as well, so in a sense if you had mobile employees, they tended to stay largely in the same industry so it didn’t matter that they were changing employer, they still had the master trust available to them.
Mann: Even within the Australian model, over 20 per cent of people have already lost touch with their pension pots, so that is going to be potentially a big concern for us in the UK. Keeping in touch with those members with small pots will be difficult.
Pemberthy: A key question of any proposed automated transfer process will be who has the responsibility for tracking that scheme? Is it the ceding scheme, or is it the new scheme which will have to go back and try and find out where the member was a member before? In addition how do you automate the process? We have got such a diverse industry of administrators, providers, scheme structures, charging structures and investment structures. Therefore actually finding a common way to get money to move around effectively which is efficient for the administrators and good value for the members, is a huge logistical challenge. The principal is good, how it works in practice and whether it can work in a way that is commercially viable for organisations is another matter.
Chair: OK, we have touched on data quality within a couple of topics already. Are you seeing further steps beginning to be taken to get the accurate data that we all aspire to?
Carstairs: It is a mixed picture. There are organisations or schemes that are right at the forefront of this area and doing everything they possibly can to capture data. Equally there are other schemes that are just putting things in boxes and only just meeting the requirements. There are equally others who have not woken up to what we have got to do regarding data in a very short space of time.
Branagh: Very large well run schemes are doing everything they can to comply and/or exceed minimum compliance, the mid-tier are doing enough to get by and are asking for some help in progressing some areas, and then there are the whole raft of smaller schemes that aren’t looking at it at all.
Cusack: My concern is that when there is a lack of data, people do not know how to obtain that extra data information. It is always a question for the trustees as to whose fault it actually is that data is missing. You need to be satisfied that some check has been made however, so that you can be certain that there is or is not data missing.
Pemberthy: We are starting to see increased levels of trustee governance and data validation, with trustees going to greater lengths than they have ever done before.
Carstairs: Is that mainly on the bigger schemes though?
Pemberthy: Yes, typically, because there are costs for undertaking projects of that nature and larger schemes typically have larger budgets. But we see schemes becoming smarter about how they do it. So instead of just seeing data validation as a large one-off project, they are becoming much more focused about what they want to achieve. For example a corporate sponsored project may include a firm budget for data validation for the relevant membership segment. Over time that will help to commoditise it and make it more accessible in the mid market.
Branagh: If you were being cynical though, you would say that that is just getting ready for de-risking further down the line.
Cusack: It is managing risk generally for example I have a scheme that has had the same administrator for years and years, and they have recently discovered that some overpayments were being made. Buyout is not the issue in this case.
Mann: There is a lot of focus at the moment on The Pensions Regulator and its guidance on common and conditional data which is fine. However, schemes should really be focused on its scheme strategy and the resultant data requirements to enable them to do what they would like to do over the next few years. Cleansing of data must be targeted and deliver benefits rather than just being done for the sake of doing it.
Branagh: But are you finding that you are getting more of a voice these days as an administrator compared to say a year ago?
Carstairs: Yes, I would have said so.
Cusack: The message has come through now that if you are going to do anything, then get your house in order first and it will make the process of data cleansing and validation a whole lot easier when you come to do it, and a lot more efficient both in terms of time and money.
Carstairs: It is also part of the trustee board agenda now which it never was in the past.
Pemberthy: Employers, particularly if they have got de-risking objectives, are going to be more open to supporting some of these initiatives. We talked about GMP, we also have RTI, auto-enrolment, a whole host of practical reasons why data needs to be in good shape. With de-risking, buy-in and buyout, the better the quality of data then the better the value the scheme is going to get from those sorts of exercises. If you look at a road map for what a scheme might do, from both a trustee and employer point of view, data runs right through all of that in terms of making sure that it is as effective and efficient as possible.
Cusack: For a long time, the scenario has been that the trustees have chosen the administrator and then trustees delegate the administration function. Just expecting a report detailing the number of leavers, the number of new entrants and that’s it. There has been no real analysis of whether spot
checks have been carried out, whether there are gaps in the data. This has changed considerably in many schemes. There is a more engaged dialogue with the administrators over administration reports.
Mann: I think that’s right, that’s what I was going to say to a large extent. As administrators we’ve got a lot of experience of doing projects such as ETV exercises, PIE exercises, buy-ins and buyouts. More experience of doing these than many trustees or pension scheme managers so we now have the knowledge and confidence to influence such projects. For example we are prompting the thinking and planning of these exercises six to 12 months earlier than historically has been the case. Administrators can make the process smoother and help the trustees save money for example by ensuring the data is cleansed and in the right shape for an exercise to commence.
Branagh: The issue is around the cost, as to who pays for it, especially as part of the ongoing process.
Carstairs: To manage the budgetary aspect, for me the administrator needs to be involved right up front, find out what the long term strategy is for the scheme, if it is buy-in and buyout then when does the scheme propose to do that and therefore you can find out at what point the data cleanse and validation kick in, because the trustees will not want to be paying for it one year and again at a later point when the exercise actually takes place.
Cusack: It is not just ETVs and so on, I think even with a triennial valuation, the more accurate the data, the easier it is for the actuary to value the data accurately. So it’s the whole risk aspect of the scheme.
Pemberthy: There is a strong direction of travel isn’t there involved with this. There is a big focus on getting data in a better shape but it is dependent on the scheme and the budget, so it is quite patchy but generally the direction of travel is a good one.
Mann: Going back to triennial valuations, there is feedback that the administrator should get from the actuary that says they have made some assumptions around a particular data element and that if this data was cleansed it could make a significant difference in terms of the outcome of the valuation, positively or negatively. This feedback would enable administrators to work closer with the actuary to ensure they are given what they need.
Cusack:There should be a two-way dialogue between the administrator and the actuary.
Branagh: There is definitely a bit of a disconnect between the actuarial profession and the administration profession about sharing information or helping one another on things as basic as data.
Chair: We have talked about things being done on a three yearly cycle, it’s more regular than that. We undertake actuarial valuations, interim funding updates, annual benefit statements and we have monthly schedules of information to deal with. It is not just the administrators who have to deal with this, nor just the actuaries, it is the employer as well. We surely are all in this together. Don’t you think that as an industry we could be accused of perhaps some laziness, in that some of the issues that we have been talking about regarding data and administration should have been dealt with years ago?
Pemberthy: There has been a general change in the expectation around quality of data. If you look back five or 10 years ago when everything was more manual or even paper based, a lot of the interaction that we are talking about was not even feasible, so now with information being more instant it
is only natural that expectations are more challenging and you can start to look at the sharing of responsibility around data.
Branagh: It isn’t necessarily that we have been lazy but we have been distracted by other activity. From GMPs to small pots - every year we have had something new to cope with, which means that some of this dialogue that should happen on data has not taken place because there has been something else that’s come over the hill to deal with. There’s RTI this year and tax relief projects, it’s constant. It’s a great industry to work in, and I should say that before we get really critical, but every year we get some new challenges coming along which eat into our core service resources. We have to find more resources to be able to manage all this.
Cusack: By default it becomes a reactive industry. Now, data is the catalyst, the whole spectrum is being turned around and admininstration is now being recognised as a crucial part of the whole data process.
Chair: Concerning incorrect benefit calculations, who is responsible for this?
Branagh: Looking back to June 2010, the regulator said that after that date you have to have clean data. You can almost say it’s the employer and the trustee who own the data and therefore, because of the information flow, it’s not the administrator who has responsibility because you can only act on the information being given.
Carstairs: I think all parties have the obligation and that includes the actuarial profession as well. The employer actually triggers the data, for example for a new member joining a scheme, the calculation of their benefits has been provided by the actuaries or by a lawyer and then the administrator converts all that into the actual reality of the situation. They are therefore all culpable by association.
Chair: And others? Do you think the auditor has some responsibility as well?
Cusack: Definitely. I think the trustee is ultimately responsible because they administer all aspects of the scheme and I think the problem is that when a data issue comes up, whatever it is, the trustee has to find out how to fix it and they look to work out who to fund that cost. What about when the administrator has been doing the same job for 15 years and somebody finds out there is an error that has been carried right through this period and gone unnoticed. What does the trustee do then?
Carstairs: I think it depends on the nature of what the issue is. I think that if there is an established relationship between the administrator and the trustees of the scheme for a long period of time, then you work together to address the issues.
Chair: Turning our attention towards auto-enrolment, we are now at a place where everyone should know their staging date and we are in the process of preparing and planning for it. What specific challenges must be addressed?
Pemberthy: It depends on what role the scheme has in terms of auto-enrolment. Is it going to be a qualifying scheme or not? If it is going to be a qualifying scheme, then there are some major challenges that the administrators need to prepare for and a lot of it depends on how involved in the auto-enrolment process the scheme is going to be. If you look across AE, there are assessment processes, enrolment processes,and communication requirements. It is really important that the scheme, employer and other relevantparties fully understand where their responsibilities lie. For example, some schemes may take on responsibility for managing opt-outs, opt-ins, refunds and they will need to be really clear how they execute that compliantly.
Carstairs: The challenges are getting everyone focused as to what auto-enrolment actually means, particularly the employers. The financial implications are also important and whether auto-enrolment embraces part of a wider benefits and reward strategy review.
Cusack: It is fairly crucial as well from a covenant perspective for the trustees of any current DB scheme to be aware of what the sponsoring employer is intending to do. If the sponsor is going to have a large additional pension cost, the existing DB scheme, which may not be used in any shape or form to comply with auto-enrolment, may be impacted. There is not a lot of dialogue going on between employers and existing DB trustees, because they believe that DB is not part of this.
Carstairs: Do you think that is because we as an industry have looked at things from a process perspective as opposed to an implications perspective?
Cusack: Possibly. I think most employers are aware that auto-enrolment is going to impose a cost. It appears that most employers know their staging dates and they have an idea that auto-enrolment is going to do something, but when they actually get down to how they are going to conduct the process and what it actually means, not everyone has sat down and worked it all out. Even just the mechanics of how people are incorporated into the payroll system, and who does the admininstration are questions still being asked. The right level of detail is not there yet.
Branagh: A lot of companies are struggling with aspects such as opt-ins, opt-outs and refunds. People are struggling with the sheer volumes entering the process.
Pemberthy: We break auto-enrolment down into a number of key phases. First is the financial assessment, that then feeds into the strategy piece. There is a scheme selection issue, clarifying what schemes are going to be used for qualifying purposes, and then you have the operational aspects. When you look at volumes; for example in the retail sector pension participation is commonly in the single digits, 5 or 10 per cent across the workforce, whereas a lot of employers are now going to be seeing 60, 70, and 80 per cent of employees being eligible. So just from a pure processing point of view, there will be a wave of pension membership which will dwarf the existing arrangements. Tens of thousands of new members will have to be dealt with at the staging date.
Cusack: Some will leave after a month as well.
Pemberthy: Absolutely. With opt-outs and refunds as well, some organisations might be looking at six figure numbers of transactions on a scheme where currently it might be in the hundreds at most on a monthly basis. From a processing point of view there are such prescriptive timescales around auto-enrolment that everything does need to be slick. So in terms of when somebody joins or becomes eligible, making sure that the assessment, enrolment and communications piece works in a smooth manner is going to be critical.
Chair: So employers will no doubt have to keep up with technology?
Pemberthy: Technology is a crucial factor. It is vital for large companies because of the sheer volumes of workers and it is vital for small companies because they do not have the resources to do it manually.
Carstairs: For me there needs to be clarification as to what is meant by technology? Is that only the payroll interfaces?
Pemberthy: It sits across a number of areas. So you either have the payroll companies driving a lot of that behaviour, we are seeing a growth in middleware solutions where there will be specific auto-enrolment solutions that will take data feeds from HR payroll systems, and give the enrolment files to the pension schemes. The right solution will depend on the company, on its existing arrangements and existing configuration of payroll systems.
Mann: Communication is the biggest challenge for me, particularly with staging dates being pushed back and people thinking is auto-enrolment really going to happen? Auto-enrolment will bring a whole raft of new people into the pensions industry, who do not know the language. If we don’t get the communication right then we will be sitting here in two or three years’ time thinking it’s all been a damp squib.
Cusack: The argument is that people are less likely to opt out of the auto-enrolment process because they are indifferent. There are more people who know less.
Pemberthy: There are so many variances as to how employers want to engage with employees around this. Some are taking the view that there is a massive spend coming on, and they really want to get some value from it and make sure that people engage. Others are taking the view that if they don’t engage then people are more likely to opt out and from a financial point of view they will be happy with that.
Cusack: I think there will be test cases on that because the employer must not be seen to encourage opt-out.
Pemberthy: From a compliance point of view the regulator has stated that they may look at sector averages for opt-outs and if there are any obvious deviations they are more likely to be audited.
Mann: For the smaller schemes it will indeed be very interesting to see how many people opt out.
Cusack: And they are the ones that are meant to be getting the benefits of auto-enrolment.
Branagh: If people get the chance I would recommend that they look at Nest’s communication. They have taken out a lot of jargon associated with auto-enrolment and it is a fantastic vehicle.
Pemberthy: Nest will have a critical part to play, once we get to the micro-employers in 2015, 2016 and 2017. Fundamentally it is not going to be the third party administrators providing schemes for that market, it is not even going to be the insurance companies. It really is Nest and the alternatives in that master trust space.
Chair: Do you think the setting of the earning thresholds has been helpful in all this, in that it will inevitably take a large number of people out of this issue, if we talk about small businesses such as the local garage and so on?
Pemberthy: From an operational point of view, it is really helpful that the thresholds are in line with existing tax and NI thresholds. Payroll have an important part to play in auto-enrolment so aligning assessment with thresholds that are already in the payroll system makes perfect sense. However if tax thresholds go up to £10,000, many more millions of people would be taken out of auto-enrolment. That could go against the policy intentions in the first place.
Cusack: But if they are not paying tax then you could argue that they don’t have the funds immediately available to be paying into a pension, although ultimately these may be the people requiring the pension the most.
Mann: There is also the situation where if someone has a credit card debt for example, of several thousand pounds and we are compulsorily putting them into a pension scheme, unless they consciously opt out, is that right? They could be better advised to pay off that credit card debt before investing in a pension.
Pemberthy: Communication is key here as well. The Money Advice Service may have an important role to play in this.
Carstairs: The vacuum lies in the fact that we are putting a very complex subject before an uneducated population.
Pemberthy: Morrisons has announced that they will conduct a financial education campaign across their workforce and it will cover exactly these sorts of issues. However, we probably won’t be seeing many smaller businesses being able to afford such campaigns and therefore there will continue to be variable support from schemes and employers.
Chair: OK. Well we’ve spent a bit of time talking about communication, so let’s just expand on that a bit. With all the regulatory changes we’ve had in the past, whatever’s going to come at us in the future, how can scheme administrators help to engage with members? Is it just a case of clear language, or is it a balance between clear language and inevitably some complexity that’s in there?
Pemberthy: I think one of the big benefits that administrators in particular can add to this is helping around segmentation. One of the things that we will see is increased targeted communication to different age groups at different points in time. Having the ability to break down the membership into groups will highlight the important role that administrators will play.
Cusack: Why is that different though from now?
Pemberthy: At the moment we still don’t see lots of segmented communication. We still see very little communication targeted at different needs for example communication with sub-thirties is not currently that different with those that are over 50.
Branagh: I would argue that most people could stop spending significant money on communication as the costs of pension scheme management rise. Trustees and employers may only spend small sums on limited target information, pushing everyone to a website.
Carstairs: The bottom line for me is that everyone needs the education piece and everyone needs the communication piece. It is how you go about it, through what medium you use, whether it is face-to-face, whether it’s online or on paper. This is an ongoing debate. This is a education issue and it needs to start being addressed in schools. You will then be faced with a receptive group who will have some awareness of financial matters and be better educated to plan for their financial future.
Branagh: If you have a weak employer covenant however, or your scheme is less than say 90 per cent funded, you are not going to throw money around in order to try and improve these areas.
Carstairs: Absolutely and that is the barrier to it. I see the challenge from a moral obligation within the industry perspective rather than specific schemes.
Mann: The thing that I don’t agree with is the segmentation part. Personally, I want to be dealt with in a way that suits me as an individual.
Cusack: Segmentation comes in because if you get the disengaged member of a DC plan who has all their money in equities at retirement that
is a serious impact on their pension. This is different to DB and you cannot re-educate everyone who is used to a DB scheme. DC is a completely different approach to DB. I think that less quantity but higher quality communication is better.
Chair: Is there anything else that you are finding as a burning issue that you would like to cover?
Pemberthy: As we move from a DB to a DC world, particularly for future accrual, the at-retirement experience has been in the spotlight a lot recently. It is absolutely critical that DC members have the ability to make the right decision for themselves at retirement. There is still a lot of work that needs to be done, as to how we help DC members convert their accumulated funds into the most effective retirement income for them. Again, administration is such a key part in that chain. Only a third of people are accessing open market rates, and therefore are ending up with as much as 40 per cent less than they might have otherwise had, had they made a different decision. They can only make a decision based on the information that is available to them.
Carstairs: It is about giving members the right information to enable them to make an educated choice.
Pemberthy: Administration has a key role to play in all this because it sends out communication to members and will be involved in the transaction with annuity providers.
Mann: I agree with Mark. As many more people enter into DC we now need to be, as an industry, much better at giving people an informed view of their options at retirement. The most important thing for me is encouraging people to take advice. That’s going to be key moving forward.
Cusack: I do think we have to have engagement, but we have to have it earlier. People are leaving it too late to seek advice, by which time an individual could be experiencing financial problems. There has to be a trigger saying that for those people who are getting close to retirement and have invested everything in a default fund or equity fund, then information must be sent to them asking whether they have considered their options.
Pemberthy: Absolutely. And the trustees are responsible for the nature of the schemes’ investments, having taken appropriate advice from investment consultants. In terms of where administration in particular can help with this, it is predominantly in terms of functionality, for example investing in the ability to start pulling through open market quotes into standard retirement literature.
Chair: Wrapping everything up then, we’ve talked about regulatory update, whether it is a case of yet more tinkering or is there really some benefit that’s going to come out from all the excessive costs that we’ve got to go through. Data inevitably always comes back to whatever we talk about in administration. We’re doing an awful lot as an industry to improve data, but we’ve still got a long way to go and I think we just need to recognise that this is just not an administration issue. It’s everybody involved in the operation of a pension scheme from the individual themselves, all the way through the support structure to the trustees, up to the employer itself. Auto-enrolment is here now. We’ve got to do something about it, and it is worrying that perhaps we do have a whole tranche of schemes or employers that are potentially not doing anything about this yet. I do worry that this is the next disaster waiting to happen. But in amongst all of this one important issue is the need for individuals to take more responsibility for their own outcomes but we can all help these people by clearly communicating with them and giving them solutions so that they can make the right decisions at the appropriate time.
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