Chair: Margaret Snowdon, Chair, PASA
Dan Taylor, Head of Administration Services, Premier
David Carstairs, Head of Business Development, Trafalgar House Pensions Administration
Fay Knight, Pensions Development Manager, Royal Mail Group
Michael Mann, Director of Administration, Ensign Pensions Administration
Mike Allen, Director of Pensions, LPFA
Richard Butcher, Managing Director, Pitmans Trustees Ltd
Chair:: What impact do you think the Budget 2014 changes will have on administration?
Knight: We act as an in-house administrator of the Royal Mail DB schemes and the impact for us is probably not as great as it will be for other administrators. However, we have already seen a number of calls to our helpline from members asking if they can have their benefits now- whilst the change was unexpected our helpline has responded well. Because of the transfer of the majority of the historic liabilities and assets of the Royal Mail Pension Plan – our largest DB plan - to the Royal Mail Statutory Pension Scheme, we are limited in terms of how we can apply the new rules. That transfer happened within a three year window and so for us it is causing an issue in terms of managing member expectations. As a result, our helplines have been very busy and we are looking at what processes we need to change within our administration centre. For example, standard letters and system changes will be needed, and we are starting to forecast the inevitable volumes that will crop up next year when we are out of the three year transfer window and some members can start to take advantage of the release in small pots.
Taylor: The impact for admin is highly polarised between the DB and DC side of things. The changes for DC are more significant in the long run, especially when you consider the impact this is going to have on the fundamental issue of annuitisation. There are a great number of questions that need to be answered on what happens with DC pots, the options on retirement and how that is communicated to members. In the short term, the biggest questions are actually around the DB side of things and this is where we are seeing the most work. From our perspective, most membership activity has been experienced in this area as well, with questions being raised around the new trivial commutation options and whether they are available and apply to them. Generally the outcome of the Budget for administrators falls in one of two ways. One is that it is a reinvigoration of the pensions market, which has the potential to help re-engage members, especially on the DC side of things. On the DB side the pace of the announcement and the range of changes has led to some confusion. This has meant that most trustees have not had time to fully consider the impact of the changes for their schemes and so haven’t been fully able to respond to all of the members enquiries on how the changes directly impact them. In an ideal world the central planning should have been more thought out, nobody tends to think of administrators in these circumstances. There is still an awful lot of work and analysis to be done. My main concern at the moment is what we are communicating to members, because we simply do not know the answers to some of the questions being asked.
Butcher: There is a phenomenal amount of rebuilding that needs to be done between now and April of next year. We are going to be asking for new types of MI from our administrators so that we can judge what is happening to the membership. In a DC world we gather in information at the moment on how many members take open market options and how many members annuitise. We are now going to be asking how many members are going to be taking cash and what they plan to do with their cash. We ask for that MI, so we can make informed decisions in other areas, so for example, the proportion of members who take cash against the proportion of members who take an income is going to have an impact on our asset allocation strategy. The other aspect of MI which I will be interested in the short term, is whether there will be an increase in DB to DC transfers. The government has told us that we can trust the consumer to do the right thing. We’ve seen very few transfers from DB to DC over the last few years so if we see an upswing in these transfers it is a fairly good indicator that we can’t trust people to do the right thing. We will be looking for that sort of MI as well.
Chair:: Trustees are therefore obviously preparing to ask administrators to do a little bit more as a result of the Budget changes.
Carstairs: That has highlighted exactly where administrators sit in the whole piece. There is a whole raft of things around communication, both to the members and equally to the stakeholders. It re-emphasises the need for the flexibility within the administration offering, in the sense of being able to respond with the right information at the right time in a clear and concise manner. Ultimately, the one person who is being impacted by all this is the member and from an administration perspective, the key is to give them sufficient information to make an informed judgement.
Chair:: Do you think it would be possible for administrators to collect some of the information around how members are choosing to spend their cash?
Carstairs: Information is held on how a member takes their benefits but short of asking them, which they could quite rightly perceive as an intrusion of privacy, it would be impossible to know.
Mann: I tend to disagree with that. Gathering information on how individuals might use their pension scheme benefits is going to be almost impossible to do. Trying to work out which members will take their money as cash, which are going to take an annuity and which are going to take drawdown will be hard for us as administrators to establish. The important thing, for me, in the Budget was around members receiving impartial free guidance and by whom and when they might receive it. Will this be at their normal retirement date, a year before or something else? Those people providing that guidance may be able to provide a clearer picture of the population of savers and who might plan to take what and when.
Butcher: That is a fair assessment. I don’t think we necessarily need to know what the members are doing with the cash, but we do need to know what members are taking cash. We have to design default investment strategies that are appropriate for the population of members in hand and we have to make assumptions when we do that both pre-Budget and post-Budget. If you can imagine a fork with three prongs, the way we see it is that you have the accumulation stage up to, let’s say age 55, and at that point in time the prong separates into three. One prong is those people who are projected to have very small funds, highly likely to take the cash, the middle prong is those people who will have the mid-sized funds who are more likely to annuitise and then the last prong are those people with the larger funds who are more likely to go for some sort of income drawdown mechanism. The first prong is going to require a different asset allocation strategy. We need MI from administrators to make informed decisions about how many people are likely to take their pot as cash and in due course we will validate those assumptions.
Allen: Traditionally we have had a very low number of transfers out from DB schemes into DC schemes. We will take a responsible line and make people aware of what they are giving up if they transfer out. It will be interesting to look at the age profile of those people transferring out as well.
Chair:: Do you think the Budget is an opportunity for savers?
Allen: There are some positives. If people know from age 55 onwards they can start accessing their cash in a responsible manner, then it will be interesting to see what happens to savings levels. The fact pensions were seen as something that ties up your cash could be seen as a danger but now it has been opened up.
Taylor: It all depends on your perspective of what opportunity means. From a trustee perspective there is a definite opportunity here. There are opportunities to engage in some exercises, should the rules allow, around commuting small pots and taking an opportunity to talk to members about transfer options. I don’t think there is an opportunity for administrators. There is an opportunity for more work, more complexity, more changes but ultimately we must embrace the change.
Mann: I take the opposite view on that point. I think it is a fantastic opportunity for administrators purely because I think it will now engage people with pensions. Lets be straight, the industry has historically shot itself in the foot by not promoting the open market option to those retiring, thus those retiring generally take what was offered to them by their existing provider. These changes will force us to be a bit more innovative. If you think about DC modelling tools, rather than just saying this is the annuity you might get if you continue to pay in, we will have to think about how we illustrate the drawdown and cash options as well.
Butcher: I am going to tread the middle way. It could be good or bad. We don’t know. This is a big policy risk and I am not sure we want uncertainty in pension policy. We are talking about providing for a whole generation of people and we don’t know what is going to happen. It may be ok if the Treasury had widely consulted on this and tried to get other peoples’ ideas but nobody knew about this. I knew nothing about this, the NAPF knew nothing about this and I don’t think even Steve Webb knew anything about this. That concerns me.
Chair:: Does anyone have a concern as an administrator about having the resources, the systems or the processes to be able to handle cash only or cash options at retirement aged 55?
Mann: I don’t think we have any immediate concerns. The changes will give us all a kick up the backside to have more flexible systems and processes. However, if we are complacent and crack on exactly as we are today then I don’t think that is going to be good enough for the new world in which we find ourselves. We need to up our game.
Allen: The lack of notice hasn’t helped either. People were calling the day after the Budget announcement, and people were just not sure of what answers to give at that point in time.
Mann: Concerning trivial commutation for members, I believe that it can only be a good thing. Members can take appropriate guidance regarding these options and at the end of the day it gives them more choice, which is positive.
Chair:: Is anybody thinking this is an opportunity for non-IFAs to offer guidance to members?
Carstairs: We have seen this situation arise in the past where spurious organisations crop up overnight looking to make a quick buck. As a member of the administration population we can provide a lot of information to assist the member in making the right choice but ultimately the decision is down to the individual member.
Mann: I think it is potentially a perfect storm to get other providers involved in the provision of guidance. However, it is no doubt the IFA community that are in the box seat to provide this guidance, but I’m sure others will now try and move into this space.
Taylor: I don’t think we have reached a point yet where we fully understand what exactly ‘guidance’, in the context of the Chancellor’s announcement, means. Some of the options that we have been considering is an online decision making system for members. It is not on a fully advised basis, or face to face, but it can allow more interactive guidance in a format and at a time that members prefer.
Butcher: The guidance piece is subject to consultation. We have got less than a year to build it, we don’t know what standard we have got to deliver, who will deliver it and most substantially who is going to pay for it. People will see this as an opportunity however. There will be scrupulous activity and unscrupulous activity. The key thing at the moment is that this guidance is delivered face-to-face. So online systems won’t work and if it has got to be face-to-face then this is going to be a huge industry.
Taylor: I disagree with that. Offering guidance demands a completely different set of skills from what administrators are being asked to do. With the continued development of automated system, and a far greater emphasis on compliance and control, what we are actually asking administrators to do spend most of their time doing is following processes and adhering to tightly controlled procedures. The skills and competencies required to offer effective guidance to members requires a whole different skill set. We need to recognise that administrators have spent all of their professional lives trying to avoid giving direct guidance and have attempted to provide the best standards of information whilst remaining neutral. We’re asking for all of that to be turned on its head in the aim of benefiting members.
Chair:: Looking at auto-enrolment, we have seen the large schemes staging and going through the process, but 2014 sees the start of the smaller enterprises coming through. What’s everyone’s thinking about dealing with those smaller schemes?
Carstairs: Ultimately we are now at the crux of the principle of what auto-enrolment is all about as we reach a point where the very small schemes reach their staging date. We are now generally dealing with individuals who historically have neither the knowledge nor the understanding of what this is all about and what it will bring to them. Clear communication to the members therefore becomes an essential part of the exercise.
Mann: I think it is a real opportunity for many now. We are at a stage where auto-enrolment has been a successful process with the larger schemes who have paved the way in terms of systems and processes. Indeed, there are some fantastic systems out there now that are available for SMEs to take advantage of, however, we might have a few more issues around the quality of the data supplied by smaller HR departments to deal with.
Allen: I see it as a real positive. In terms of data quality we do have a strategy in place where we can impose small fines on employers who don’t comply and we take advantage of that if data is below a certain standard. This has been quite a successful strategy.
b>Knight: In speaking to representatives from a number of small companies it’s clear there is still a mixed understanding around what their involvement has to be and what impact auto-enrolment will have on their company as a whole. Communication to workforces in general is still a bit hit and misses.
Taylor: Most providers now have pretty good middleware and most are in a position where they are tailoring those solutions, initially developed for larger enterprises, for smaller employers. From a technology perspective I now think all of the work is done, so the challenge is now to make those solutions scalable and affordable for the remainder of the market. One concern I do have, which I routinely hear around the market, is in regard to capacity - both from consultants and providers. There are still a huge number of small and medium sized employers who need to stage and many are sleepwalking into auto-enrolment thinking it will not be an issue for them. The main problem at the moment, as I see it, is that many are not planning effectively enough and believe that they will be able to appoint an adviser at the last minute to help them deliver it. There are still many employers without good quality advice. My other big concern is that many firms are rushing through the implementation, or not getting good quality advice, leading to them not being fully compliant. The problem we could face in the industry is that in a few years’ time a whole raft of employers will realise that their initial implementation wasn’t good enough and that the whole position for their members will need to be corrected. Administrators will have to recalculate contributions because its AE wasn’t implemented properly in the first instance.
Carstairs: Communication is vital as well. The member must get the right information to make an informed decision. The question is whether administrators should in any way be involved in that.
Butcher: Down the line beyond today, we have also got the impact of stage two opt outs, involving those people who don’t opt out immediately but choose to do so two, three or four months down the line and this will also have an impact on resources for administrators. Further down the line we will also have the impact of contributions being ramped up. We are concerned over whether the resources will be there, so the people who can opt out can do so when they want to.
Chair:: There does seem to be a degree of uncertainty within the auto-enrolment space. We do have charge capping, which will have an impact on how much can be charged for auto-enrolment. It will be interesting over the next few months to see what happens for administrators in this space.
Mann: Auto-enrolment is not enough for members in terms of making provision for their old age. The question has to be asked in the next two or three years as to whether the minimum contribution level for a qualifying scheme has to increase significantly to provide adequate income in retirement.
Chair:: What sort of things are causing a concern for administrators, away from the Budget and auto-enrolment?
Taylor: The end of contracting out. The management of contracted-out liabilities is on the horizon and will come at a time when we are already busy with a lot of other legislative and regulatory changes. We will have a capacity issue with schemes trying to deal with very large GMP reconciliations and wind-up processes.
Butcher: From a trustee’s perspective we should not lose sight of the regulation which is coming out of Europe. The current proposal is that all DC schemes across Europe will have a standardised euro-friendly benefit statement. Administratively how are we going to tie that in? Secondly, another element that could cause a few issues, is Scottish independence. This could happen quite quickly and the impact then of having employers amongst our clients who have got employees north of the border will also have an impact on administration levels. The government has also talked about capping charges on DB schemes. I’m not quite sure why they think they should do that, because it is surely down to the trustee and/or employer, but if it is imposed then that could be more work.
Mann: There is still quite a bit of uncertainty around the defined ambition model as well. In theory it could kick off in 2016 but in the context of the Budget I’m not sure exactly where that agenda is heading anymore.
Chair:: Are we at all concerned about the prospect of charge capping?
Taylor: I think as an administrator it comes down to what the definition of the charge cap includes and whether it is general operational costs, like a platform, or whether it is investment costs and other advisory costs. I would be very concerned about a DB charge cap – would it still offer most of our trustee boards the flexibility around what they choose to do and when they choose to do it?
Allen: Questions would also be asked around what impact a DB charge cap would have on benefits in a DB scheme.
Mann: A lot of the DB schemes have a long history and a long legacy of now redundant systems and processes, so you would have to have a charging structure that reflects the history of a scheme. Indeed, some schemes are much more complex than others to run so it would be difficult to have a one size fits all charging cap.
Chair:: There has been a degree of consolidation in the pension admin space in recent weeks, while other providers have exited the space in recent months. What is driving these changes?
Butcher: The pensions industry is changing rapidly and dramatically. The old models of pension companies are no longer applicable. Because the vehicle is changing the whole industry needs to change. Consolidation amongst the administrators is just recognition of the industry needing new skills to deal with change. In the trustee space, there is also a degree of consolidation.
b>Knight: At the end of the day it has to be about making sure that as this change happens focus is maintained on what the member needs.
Taylor: I think it is a result of an imperfect market in that trustees don’t act like your regular consumer. They don’t change providers quickly enough, they are not fluid enough in terms of their administrators to say this year has been a bad service so let’s move to another supplier. Trustees are naturally a cautious group and have fears regarding the complexities and perceived risks involved in moving administrators.
Allen: There has been a big debate in terms of standards of governance amongst local government pension schemes and the idea of merging to consolidate costs for example.
Taylor: In terms of general consolidation there is a danger that standards are going to be driven down as there will be less competition in the market and less innovative thinking. Trustees will continue to get a more homogenous service with universally low standards because competition is continually removed by further consolidation.
Allen: That’s why you need trustees to know what their role is.
Butcher: In relation to DC master trusts, if you are going to drive the agenda towards scale, then you will end up with few players in the market, which means there will be no competition. And there is no competition for quality of service, quality of administration.
Chair:: Do we think pension administration keeps pace with the technology demands of members?
Taylor: Generally speaking technology has moved on a lot, certainly in the last five to 10 years, and particularly in terms of member web technologies. Hidden to most however are the developments that have been made in the backend systems and processes that administrators use. All now have access to, and in my view should have implemented, high quality business process management tools, electronic document management solutions and multi-channel communication options - all of these solutions that help drive quality and efficiency have come on leaps and bounds. When it comes to member or consumer engagement however most technology in the pension space is not keeping pace with that of the general financial services industry. I think most administrators still have problems in this area.
b>Knight: We currently have a very static, front-end process. The trustees are launching a communication strategy, part of which they plan to ask members to what extent they would use an online service and what information they would like to see there. Some members will want to ring up a helpline to speak to a human being, whereas others are very financially astute and want be left to their own devices and see how much benefit they have accrued themselves. It is an area that we definitely need to develop but we will need to consider where the funding would come from.
Mann: For the DB and DC schemes we deal with, most members don’t want to deal with their pension issues through the web, instead they value a high quality telephone and written service. Our experience is that less than 30 per cent of members want to deal with their pensions online. In terms of moving forward, we do need to be a technology driven industry.
Allen: Ninety-eight per cent of our notifications to employers are now done online. Larger employers will use interfaces to send over information on monthly joiners for example. Employers are also letting us have email addresses for current employees so we can contact them directly.
Butcher: Back end technology I think we use quite well. The driver is efficiency in technology. At the front end, we are not good at communicating with members, and people who build admin systems need to work with communication experts so they can build better front end communication. One issue is that it can be easy to lose sight of data protection in all this. The more online we go the more risk I feel that data could be lost.
Allen: It is not all about cost cutting either. It is about getting members more engaged.
Chair:: Would trustees actually pay to get better quality of communication through technology?
Butcher: Our ambition is always to communicate more effectively, that may be electronically, that may be by post or face to face depending on the circumstances.
Chair:: It will be interesting to see how face-to-face guidance comes through. People seem to be a bit reluctant to engage and they might want to use emails. They might not be so keen to take that face to face guidance up. Do we actually ask members what they want and how they want to be communicated with?
Carstairs: We don’t ask. We make an assumption and it is almost at the point where we say this is the offering but it may be a million miles away from what the member or consumer wants.
Knight: Our experience of seeking member input has not always been met with great success. It will be very interesting to see how the trustees get on with obtaining member views on communication channels. Some of our overseas members would certainly like us to use more technology and this will be factored into consideration. In general, as a postal services operator, we find that communication by post is widely expected and preferred by our membership.
Chair:: The DWP is working towards launching a series of quality standards for DC schemes, setting minimum requirements for among other things administration. Does the panel feel that this is a necessary step to ensure a good level of protection for members?
Allen: Good quality data is key especially for a scheme like ours. If the data you are using to calculate your liabilities is off then everything is off. When taking on contracts with local authorities, one of the first things we look at is the quality of data through compliance checks.
Taylor: Specifically on DC I think there is a need for minimum standards. It requires timely and consistent transactions across all administrators and is a service that has many more constraints in terms of time and standardisation than say with the DB market. Self regulation within the DB market has been less important because of the nature of those transactions. For a DC scheme you need contributions invested on a timely basis for example. The danger with implementing any standardised marked code is that it can often not be regarded as the minimum standard but can be taken as the requirement for best practice.
Mann: I think there is a role for minimum standards being set out by the regulator but I think the industry should try and get itself above that minimum, so the industry does also need an accreditation process showing those differing levels of service. PASA has done a lot of great work in terms of driving up standards through its accreditation initiatives.
Butcher: From a consumer’s point of view, the work that PASA is doing is huge because it helps us to make an informed decision when purchasing. Regulatory intervention is also a good thing because it engages those administrators who are not going through PASA to drive up standards. The government is currently consulting on the forced accreditation of administrators. I think that is fundamentally wrong. It should be driven by the markets and not be statutory.
Chair:: Do you think the regulator should name and shame schemes when handing out improvement notices around data quality?
Allen: They should give more detail on the specifics without naming and shaming in the short term. But in the long run I think they should.
Chair:: PASA is there to try and keep developing standards. We don’t want accreditation of the mediocre in the market so everyone fits into the same mould, standards really do have to keep moving. Whether the consumer will continue to demand that remains to be seen however. Looking ahead is there anything on the horizon that will cause grief?
Mann: Budget and regulatory change will obviously be at the top as we have discussed. AE provider capacity may also be a major issue as we approach the rump of SMEs arriving at their staging dates.
Allen: Generally increasing complexity will be the main difficulty. We haven’t even mentioned HMRC and their plans for the sector yet.
b>Knight: The key thing is that we do not lose sight of the professionalism and qualifications of our admin team. We are embarking on launching the award in pensions excellence. We have a particular challenge in that a high number of our administrators are over the age of 55 and - whilst not all of them will be planning retirement, we need to plan ahead and ensure that when they do leave there are good quality people ready to step into their shoes. Forecasting is key for us, as there’s a significant increase in volumes on the horizon and we need to be ready to cope with this.
Mann: In terms of continuing to attract good quality administrators into the profession, it is a continuing challenge. We have done quite a lot of project work in the last year and I have been pleasantly surprised at the quality of people that are out there. The pensions industry is not necessarily the sexiest one to be in but there are still people looking for a long-term career in this sector, which is great.
Butcher: I believe that the pensions industry is a really exciting one to be in. We’ve just got to be able to communicate to young people that there is a real opportunity in the pension’s space at the moment, with a whole range of developments going on. Fundamental to the success of the social economy, there are very few places that could be more interesting at the moment.