May made for interesting times in the pension world, with The Pensions Regulator (TPR) taking a hard line on compliance and HMRC bending a little to help the industry get things done. Bhavna Baines of Barnett Waddingham takes a brief look at some of the key pension topics for the month.

HMRC: Countdown Bulletin 45 – the clock briefly turns back

In an incredibly welcome turnaround, mid-May’s Countdown Bulletin 45 confirmed an extension to the previously expired deadline for payment of contracted-out equivalent premiums (CEPs). These tiny jewels in the GMP reconciliation crown allow GMP liability to be extinguished and State Pension reinstated for members with service under 2 years (or under 5 years in more historic cases).

Most of these members will have received a refund of contributions decades ago but, somehow, something fell out of the paper trail, maybe at the scheme side, maybe at HMRC’s, and the GMP wasn’t properly extinguished at the time. Much to their own surprise, when the GMP reconciliation data from HMRC first turned up, most schemes found themselves carrying tiny amounts of GMP liability for people they had literally no record of.

With Bulletin 45 extending the deadline to 4 June, we saw 2 weeks of fairly feverish activity across the industry as schemes rushed to submit their final requests. Inevitably there will still be cases where boats have been missed and schemes are still left saddled with rogue GMP benefits, however, with GMP equalisation adding even more urgency to the need to get these records absolutely right, even this short extension to the deadline was hugely helpful.

HMRC pension schemes newsletter 110

As life isn’t complicated or busy enough for pension schemes, HMRC also published pension schemes newsletter 110 which covers a range of topics including:

A consultation on the steps – the Government proposes to meet the UK’s expected obligation to transpose the fifth money laundering directive into national law. This includes a proposal that all UK resident express trusts, which will potentially cover most registered pension schemes, will be required to register with the Trust Registration Service. With the consultation due to close on 10 June, further updates will be announced on the ever increasing spiderweb that is pension scheme compliance.

TPR news – compliance and enforcement bulletin – no more Mr Nice Guy

In other news, May also saw TPR publish the latest edition of its quarterly compliance and enforcement bulletin, in which the Regulator provides an overview of how it used its powers between January and March 2019. This unassuming collection of pension crimes and misdemeanours across 4 cases studies should be required reading for anyone involved in pensions.

Several major outcomes during this quarter include:

• the first fraud conviction
• the first conviction for making prohibited employer related investments
• the first custodial sentence resulting from TPR prosecution
• the first time TPR have appointed a trustee to a scheme primarily because of a lack of competence amongst existing board members.

Bhavna Baines
Senior Technical Analyst – Barnett Waddingham

Setting the standard

Raising pension scheme governance standards is as hot a topic as ever. With recent developments in the area including the Pension Regulator’s (TPR) 21st Century Trustee programme, IORP II and new standards for professional trustees, there is a lot for trustees to get to grips with. TPR states that good governance is “the bedrock of a well run pension scheme”, and vital for achieving good member outcomes. Whilst we can all agree that effective trusteeship and governance are fundamental, the real challenge for trustees is working out what good governance looks like for them. TPR acknowledges that there is no single solution to delivering robust governance, so what is appropriate will depend upon the circumstances of the scheme and the trustees. With all that in mind, we suggest some practical steps for trustees to take on the path to good governance.

A good place to start

A trustee self-evaluation exercise is a good place to start. Take time to devise a questionnaire which draws out the key issues facing the scheme, and ask each trustee to complete it, giving their views on:

• their own level of trustee knowledge and understanding;
• the conduct of trustee meetings and business;
• existing governance processes and policies;
• advisers; and
• the relationship and interaction with the employer.

Collate the responses and identify any consistent themes or specific comments that should be addressed in more detail.

Business plan

TPR expects trustees to have a clear purpose and strategy in order to manage their schemes effectively. Having a business plan will help boards to look ahead, make best use of trustee time and ensure that all legal and regulatory requirements are met.

Business plans should include:

• clear, long-term goals for the scheme;
• interim objectives around key areas of focus (such as investments, funding and administration);
• how the trustees propose to meet these objectives and goals; and
• how the trustees will measure and monitor progress towards them.

Trustees should then use the results of the self-evaluation to prepare and review their business plan, forming the basis of their priorities for the coming year.


The law requires trustees to have knowledge and understanding of
the law relating to pensions and trusts, and the principles relating
to scheme funding and investment. Put simply, trustees need to
have sufficient knowledge and understanding to enable them
to properly discharge their duties. One step towards achieving
this is to implement a trustee training programme, with a clear
commitment from all trustees to meet the agreed agenda for
this. New trustees should be asked to commit to completing TPR’s
‘Trustee toolkit’ as soon as possible after appointment. The best
training is specific to the scheme and its circumstances. Generic
legal and regulatory updates are helpful, but trustees should ask
their advisers to speak, in particular, to the most relevant issues for
their scheme at each trustee meeting. As part of the business plan,
topical training could be scheduled to coincide with related trustee
decisions. A skills matrix can be a helpful tool for keeping track of
trustees’ relevant qualifications and experience, and a helpful point
of reference when allocating roles for sub-committees or delegating
authority to working groups to take forward specific issues.

Getting to know the scheme documents

Trustees are required to be ’conversant’ with their scheme’s governing, investment and funding documents, having a working knowledge of relevant documents so that they can use them effectively. If the scheme rules are old and unwieldy, this may seem an impossible task. Schemes could consider a formal rewrite of their rules into plain English, although for many schemes this is likely to be disproportionately expensive. Alternative documents trustees can use to help ensure that they are familiar with the key provisions of their scheme rules include a balance of powers table, noting each of the key powers in the scheme rules, who holds that power and in what circumstances it can be exercised.

Another helpful tool is a trustee handbook, pulling together the main governance documents for the scheme. Typically, a handbook provides a short summary of the key provisions in the scheme rules along with the relevant legislation and guidance. It can be expanded to note important trustee decisions, advice and administrative practice, and could also include governance policies, such as those on whistleblowing or notifiable events and the risk register. The handbook will then be given to new trustees on appointment as part of the induction process.

Clear roles and responsibilities

Pension schemes are increasingly complex. Trustees usually delegate responsibility for certain day-to-day functions to in-house teams or third party providers such as scheme administrators. However, as trustees remain accountable for all scheme activities, it’s important for them to be on top of their delegations.

A table recording to whom the trustees have delegated their powers, and on what terms, is useful here. This should be a living document, which the trustees review periodically to determine whether the delegation and its agreed parameters remain appropriate. For delegations to sub-committees of the board, clear terms of reference should be in place, setting out the committee’s remit, the extent of their authority and the circumstances in which matters should be referred to the board.

Ongoing obligation

With TPR’s recent announcement in its 2019-2022 Corporate Plan that it will now launch phase two of its 21st Century Trustee programme (focussing on the make up of trustee boards, competency standards and accreditation for professional trustees), governance needs to stay high on trustees’ agendas.

TPR is clear that it will intensify its focus on and take action against schemes with governance failings. There is no denying that good governance will cost time and money – but as TPR points out, ‘investing in good governance is likely to save you in the long run’.

Kirsty Pake
Associate – Sackers

“Creating good culture With the right people, culture and values, you can accomplish great things.”

The above quote comes from the US businesswoman Tricia Griffiths. How often, however, do we in the pensions industry focus on good culture? The Pension Regulator’s 21st Century Governance campaign talked little about the importance of culture, instead focusing in the main on traditional areas of governance such as policies, meeting processes and risk management.

A simple definition of culture would be ‘the way we do things around here’ and the culture of a pension board, ‘the way we do things on this board’. To find out what ‘the way we do things’ looks like requires a step back from the day-to-day running of a pension scheme. This may be difficult to find given the increasingly complex demands of pension scheme governance but could be vitally important to the success of the scheme and ultimately to member outcomes. A board with a good culture is an attractive board for others to join and thereby assists with succession planning. A board with a good culture is strong yet flexible and makes good quality decisions. A board with a good culture is an asset to any pension scheme.

What words would describe your board? Is it a board where members feel empowered to have open and honest discussions, where new ideas are welcomed, where discussions consider alternative viewpoints and decisions are made after careful deliberation? Is it a place where counterproductive behaviour is dealt with swiftly and appropriately? Or does it have a stale and old-fashioned feel, with new ideas passing it by, or overdominated by one or two loud and confident individuals?! Culture is a difficult thing to define, but it is not something that should just be left to develop by chance. A good culture develops because of the right people being in place, the right tone being set, and clear and robust values which are lived and enforced.

People, leadership and values

Getting the right people on a board is critical to its success. It is also important to have the right number of people. Too large a board can be unwieldly and inefficient whereas a very small board can run the risk of lacking diversity of thought. Within the agreed optimal structure, the people who make up that board must be engaged, committed, and together have a diversity of background, experience and skills which enables the board to collectively function well.

In governance circles it is common to talk of the ‘tone from the top’ meaning that the leaders in an organisation need to live the values of that organisation for them to hold any weight, for them to be believed in and followed by others. The leadership of a pension board often rests in the Chair role, and it’s critical that the Chair does indeed set the parameters of how meetings will run in a cultural sense as well as a practical one, inviting opinions from all, being firm in curtailing excessive contributions that don’t add value, and challenging advisers where appropriate.

However, it is not just up to the Chair to set the cultural tone; the best way to do this is likely to be through agreeing the values and style of how the board will operate through a consensus from the whole board, perhaps to be evaluated and retested at an annual away-day or governance review meeting.

Creating good culture through soft-skills development

Despite a slow start, the pensions industry is finally waking up to the importance of soft-skills. These are skills like communication, awareness, adaptability, preparation, sense of collaboration, and strategic thinking. Testing such skills is due to form part of the professional trustee accreditation regime and increasingly pension governance bodies are recognising that such skills, which are all part of a good culture, contribute significantly to their ability to make effective decisions. This is particularly the case in defending against the unconscious bias that can run through decision making. I outline some of these below:

Anchoring occurs when an initial idea is presented (‘the anchor’). This anchor sets the baseline for the following discussion, often affecting the interpretation of future information. For example, when a dominant member of the board takes a very strong view on investment strategy at the start of a discussion, it is very likely that this will heavily sway the ultimate decision.

Good board culture, that does not allow overdominance and whose members are self aware, helps to mitigate this risk.

Groupthink occurs when a desire for harmony in a group and the minimisation of conflict to reach a consensus decision quickly leads to a poor decision. Good culture, which is not about harmony at all costs, but about open and appropriate challenge, and considering all reasonable courses of action, will mitigate against this tendency.

Overconfidence occurs because individuals tend to overestimate their own abilities, knowledge and skills. A culture of reflectiveness, peer challenge, and good use of advisers, will help with this common human tendency.

Sunk cost fallacy occurs when a bad decision or loss has been made in the past, yet individuals continue to stand by it because of the investment they have already made. A board that has a culture of being able to recognise when it is time to make a change and take swift action to correct issues will assist in this case.

Status quo bias occurs because it is often human nature to stick with the current situation: better the devil you know’! A culture open to new and fresh ideas and input is a living culture, one that does not stagnate and become stale. In its 2016 report on board culture, the Financial Reporting Council argued that the value of culture should be recognised as a source of competitive advantage, ‘vital to the creation and protection of long-term value.’ Whilst pension scheme boards are not looking for competitive advantage, they are certainly concerned with long-term value for the pension scheme members. Greater attention to board culture can only assist with this focus on long-term value. Let’s challenge our own status quo bias which may lead us to focus heavily on process, policy and technical matters.

Good culture is the heart of good governance.

Laura Andrikopoulos

Head of DC Governance –Hymans Robertson

The terms ‘risk reduction’ and ‘de-risking’ are used frequently in relation to pensions, but usually focus on investment strategy. What other ways can pension schemes reduce risk in the administration, provision and communication of pensions to individuals?

As anyone involved in the planning of, or attendance at, trustee board meetings will know, investment management is frequently the main focus of trustees’ attention; achieving the best investment returns from assets, whilst simultaneously reducing exposure to risk, with the aim of securing a well funded future for its members. However, it could be argued that the priority is oftentimes too heavily focused on risk reduction from a purely investmentfocused and liability reduction perspective. This essay will examine the argument that, given the modern day landscape of pensions and the associated risks to pension schemes that go with this, it would be wise for trustees to also consider ‘risk reduction’ or ‘de-risking’ strategies from a more comprehensive administration perspective.

Historically, employers established ‘final salary’ or defined benefit (DB) pension schemes and adopted a paternalistic approach by ensuring their staff and their spouses were taken care of through provision of certainty of income in retirement, with little engagement required on the part of the employee.

However, as society has changed, so has the way many of us live our lives; people now demand more flexibility and choice in their financial affairs.

Since the Pension Schemes Act 2015, members are able to access their benefits flexibly, and deferred DB members have a statutory right to request a transfer quotation up to twelve months prior to their normal retirement date. As a result, over one million members have accessed their benefits flexibly since April 2015, with the risk that a proportion of these members may have withdrawn their pension savings as large lump sums which could be heavily taxed and spent without thought for the future, leaving them with little income in their later years. Additionally, with increasing longevity, it would seem that 55 is a relatively young age to access funds that may have to provide for an individual over the next 40 years. The State Pension age is continually being pushed back, and may even be withdrawn altogether in the future, with the danger that many will not have this to rely upon for additional income in retirement.

Under pension freedoms legislation, members are required to seek advice from a regulated financial adviser qualified in giving advice on transfers from DB to Defined Contribution (DC) schemes in order to transfer benefits worth over £30,000 in this manner, which should, in theory, ensure only members who are better off accessing their benefits flexibly will do so. However, high street financial advice has never been so freely available, and so members could be at risk of being taken advantage of by unscrupulous advisers. One way in which trustees could mitigate this risk is by providing members with access to a pre-vetted independent financial adviser with the appropriate advice skills in order to ensure members are only receiving advice that is impartial and appropriate, and reduce the risk that they will make a decision they will later come to regret.

This is particularly important when an employer is undertaking any wider exercise, such as bulk or enhanced transfer-out exercises, where the primary objective is to reduce DB scheme liabilities as a result of members transferring their benefits elsewhere.

Financial risk to members, however, is not limited to this.Members are also at risk of falling victim to scams, and losing some or all of their savings to fraudsters.

With the advent of modern technology, fraudster tactics are becoming ever more sophisticated and convincing, with the result that The Pensions Regulator (TPR) estimates that in 2017 alone, scam victims lost an average of £91,000 each. Trustees can play their part in minimising this risk, however, by continually reinforcing the message to members that scams do exist, and the need to be vigilant. Clear signposting is vital in all communications with members, as well as driving home simple messages, such as to ignore cold callers who attempt to discuss your pension (which is now illegal). Trustees should also seek assurances that their administrator is undertaking the required due diligence at the point of transfer. This risk could be further mitigated if administrators were permitted to share information with each other, perhaps through the use of a ‘blacklist’ which could be used to keep track of known scam suspects. Schemes may also find tools such as The Pensions Administration Standards Association (PASA) guidance is useful in this regard.

However, threats to the security and integrity of members’ benefits are not always external. Trustees are heavily reliant on good quality advice in order to effectively run the schemes for which they are responsible. There is an ever-present, albeit lower, risk to trustees of receiving misguided advice or of maladministration. A poorly run scheme is more likely to have a direct adverse financial effect on members. For example, the miscalculation of, and resulting over/ underpayment of benefits. This can result in member recourse claims down the line and the added unwelcome reputational risk to the sponsor associated with the scheme.

These risks can be managed effectively through good quality administration and governance. Good quality administration is one of the most important risk controls trustees can put in place, and therefore trustees should be mindful of the importance of this when tendering for administration services, and not only to focus on sourcing the lowest cost provider. Similarly, trustees should not underestimate the importance of good scheme governance, which helps to ensure that schemes operate according to both their own rules and within legal guidelines. Many recurring scheme events, such as the distributing of annual benefit statements, submission of scheme returns, or completion of the Trustee’s Report & Accounts, are subject to timescales by law, with consequences for non-adherence. These risks can be mitigated however, through the use of an annual planner or calendar that effectively charts the progress of the various scheme events that are required at different times of the year. From a wider advisory perspective, trustees should also ensure that advisers have implemented risk management procedures of their own; for example, regular Audit and Assurance Faculty (AAF) audits to evidence sufficient internal controls for security of member data, and having a Business Continuity Plan in place to limit the consequences from disasters. Trustees are also required to maintain a Risk Register to monitor and manage risks, and should include the risks that external advisers present with regards to investment advice, legal advice, data control or day-to-day administration. For this reason, trustees may find a helpful addition to their risk management procedures is to employ a dedicated Pension Management service to assist in the management of scheme governance on their behalf, and ensure that it is not approached merely as a ‘tick box’ exercise.

On a related note, TPR has issued guidance to trustees on cybersecurity, which represents a severe risk to pension schemes. Insufficient controls for the storage and transfer of data not only jeopardises the integrity of the scheme, but also puts members at risk of falling victim to identity theft and fraud. Trustees can reduce this risk by ensuring there are robust cybersecurity controls in place and a policy governing the use and storage of data.

Finally, there are the risks associated with poor member education and engagement. With the gradual reduction in the availability of DB schemes, and the growing prevalence of DC schemes, it is becoming more important that members become engaged with their retirement provision. However, with increasing pressures on the generation of ‘millennials’ such as rising house prices and insecure employment contracts, there is a risk that pensions are at the bottom of a long list of higher priorities.

Additionally, a recent survey by Moneywise found that the majority of young people find their workplace pension schemes too confusing to understand. A related risk to this is that members underestimate how much they need to save to provide for a comfortable retirement. This is a risk that is unlikely to be tackled by only issuing the minimum communications required by law, such as annual benefit statements or Summary Funding Statements, and requires more thought and consideration of the tone and medium used.

Trustees should therefore assess the needs of their particular membership demographic when considering how best to engage. For example, is it better for a scheme with a young membership to utilise online tools and apps, as opposed to paper communications?

However, trustees do need to bear in mind the fine line in all communications between encouraging /engaging members, and actively advising them, which is a regulated activity.

In conclusion, there are many ways trustees can reduce risk in the provision, communication and administration of a scheme. The majority of risks highlighted here can be minimised through a combination of selecting high quality scheme advisers and by performing effective scheme governance, as well as suitably engaging their members. As a result, trustees should be able to reduce the risk that a pension scheme causes its members to suffer from a loss of financial security; a clear contradiction in terms, and ultimately the most serious risk to a pension scheme of all.

Chris Burtenshaw
Assistant Pensions Management Consultant – Barnett Waddingham

The terms ‘risk reduction’ and ‘de-risking’ are used frequently in relation to pensions, but usually focus on investment strategy. What other ways can pension schemes reduce risk in the administration, provision and communication of pensions to individuals?

In the context of pensions, the terms ‘risk reduction’ and ‘de-risking’ are abundant. The performance of funded pension arrangements is most obviously measured by the performance of the scheme assets and the suitability of the investment strategy which underpins it. It is important to recognise, however, that ‘risk reduction’ and ‘de-risking’ extends beyond the balance sheet and can (and should) contribute to approaching areas other than investment, as part of a holistic approach to providing sound retirement benefits.

The handling of transfers are a considerable source of concern for Trustees. As a case in point, the closure of the British Steel Pension Scheme (BSPS) offered unscrupulous financial advisers pretext to target uninformed members, causing considerable damage to their retirement savings. The Financial Conduct Authority stepped into action – because of which, for example, contingent charging (which might bias advisers to put profits before professional obligations) was banned. This is a clear example of where positive regulatory action was taken to curb member risk. The recent case of Mr N v Northumbria Police Authority (PO-12763) highlighted that the detection and prevention of pension scams still leaves much to be desired. The Pension Scams Industry Group’s Code of Good Practice on Combating Pension Scams is a welcome example of industry intervention, but compliance is ultimately voluntary. While the Pension Regulator’s Codes of Practice are also not statements of law, they are taken into account by Courts and Tribunals. Given that pension scams can lead to HMRC’s unauthorised payment charges (levied on the Scheme and of course the member), it is in the interest of Trustees and Managers to ensure that the risk of payments being made to pension scams is mitigated as far as possible. I firmly believe that the industry should seek that the Regulator fully adopts the Code thus giving it equal weighting to other Codes of Practice, in doing so addressing a very real and emergent issue. Schemes will thusly be motivated to move away from a box-ticking approach and innovate as far as is practicable. 38% of non-retirees have no private pension provision (Page 46, FCA ‘Financial Lives’ survey, June 2018) and those that do must be safeguarded.

Electronic systems are a staple of the modern pension administrator, enabling rapid data transmission and automation which can simplify and reduce risk in an administrator’s role. From a client and member-experience perspective automation is a good thing (where system routines and controls are comprehensive) as it can allow services to be offered accurately and in reduced timeframes. At the same time, however, increased automation might be seen to reduce need for sophisticated training in certain areas, at extremes running the risk of creating pension administrators who simply do not know how to administrate beyond a flow of system prompts. No system is infallible, and without enough available technical knowledge about the provisions of a Scheme, teams may struggle to cope during system downtime. In addition, individuals who develop limited practical knowledge in their role might find themselves ill-suited to progress into more practical positions (which, indeed, might involve the development of automated systems considering new legislation). I feel that a considerable proportion of those at the industry’s apex will certainly be those that have been there the longest, but in no small part due to learning and progressing without system advancements which newer professionals may take for granted. These individuals will seek their own retirement in time and we must be able to fill their shoes when they do. Automation is a noble pursuit, but it must be complementary to robust technical training rather than instead of it, lest we create a bottleneck of professionals who can wax lyrical about ‘what’ they do, but not ‘why’ or ‘how’ their system processes it.

While staff training is by no means a radical concept (and I have enjoyed thorough training in my employment), there is an emerging industry risk that as systems become more sophisticated we put microchips ahead of micromanagement- which left unchecked will ultimately hinder the development of skillsets and harm the companies involved in retirement provision.

When people think of pensions, they think of lifetime annuities and ‘gold plated’ scheme pensions- such as those which their parents or grandparents might enjoy. The prevalence of these options can be traced back to the Radley Commission of 1888, which rejected the payment of benefits as lump sums on the basis that “in the event of providence or misfortune in the use of it, [the retired member] may be reduced to circumstances which might lead to him being an applicant for public or private charity.” The Taxation of Pensions Act 2014 is in my view the most important piece of pension legislation to be introduced since the Appointed Day. Although the concepts of Capped and Flexible Drawdown already existed, even in facilitating ad-hoc encashment of an individual’s pension pot, reference was made to the annuity an individual might be able to get or the amount of secured income an individual had at the time. To this end, the introduction of Uncrystallised Funds Pension Lump Sums and Flexible Access Drawdown (and the readability with which these options are available) have cut away the pensions red tape- or as the cynical might say, the safety nets. Pension Wise (soon to be part of the new Money and Pensions Service, formerly the Single Financial Guidance Body) was established in response and additional disclosure retirements were introduced, including the requirement to provide retirement risk warnings and signpost to Pension Wise. While these are welcome steps, as part of its remit the Money and Pensions Service can and should strive to do more once it launches in 2020/21 (Page 14, Money and Pensions Service Business Plan 2019/20). If a member wishes to access the pensions flexibilities, I believe that individuals should be required to positively declare that they have discussed their options with the Service or an appropriate financial adviser. While this could be considered ‘nannying’, Section 48 of the Pension Schemes Act 2015 requires the provision of Appropriate Independent Advice where a safeguarded benefit valued over £30,000 is to be transferred to access new flexibilities. We therefore already acknowledge that the ramifications of certain retirement options require great care and, considering the context in which pensions were devised (the term ‘pension’ itself derives from Middle English meaning “payment, tax, regular sum paid to retain allegiance”) it seems to follow that deviating in a manner which might leave the member unprovided for in later years should be afforded a similar degree of concern.

As the pension freedoms are exclusive to Defined Contribution arrangements which by design put the member in the path of any scheme-associated risk, you may find yourself wondering how the actual utilisation of the Money and Pensions Service or other guidance and advisory services will be of concern to those de-risking pension schemes.

Pensions are more than a legislative requirement and an employee retention tool (where the minimums required under automatic enrolment legislation are regarded as the starting block, not the finish line). Pension schemes are there to fund our retirement and where there is a risk to a member’s financial security, there is an implicit risk that the Scheme may not have achieved to what it was set up to do. This risk won’t be reflected in the audited accounts – it is a matter of integrity. We may be attuned to the world of pensions, but most will not be. Whether you are a Trustee, a Pension Manager, a Human Resources contact or an Administrator like me, I feel it is incumbent on each of us to ensure to the extent of our professional remit that members engage with those that can help them. This is not to say that subsequent member actions must reflect the advice or guidance given – consumer autonomy is fundamental – but we would challenge the notion that the need for financial advice is a minority sport and only for those with ‘considerable’ assets. Once established, we must work with the Money and Pensions Service to achieve this.

I would like to round off my piece by reiterating the principles above, which will serve us well reducing risks in the administration, provision and communication of pensions to individuals. On the administration of transfers, we must move away from a legislative limbo-dance, taking decisive action at a regulatory level to ensure we all hinder the efforts of would-be scammers. More generally, we must not allow improved systems to deprive individuals in the industry of the background knowledge fundamental to their role. Employees and employers will invest great sums into their pensions and it is only right the people who run them are intellectually invested in and can get it right. Finally, on communication, we must move away from a Monty Python-esque “nudge nudge say no more” approach and ensure that members engage with the resources provided. The industry can push for the reform of the advisory services but, if members are reluctant to use them, we find ourselves flogging a dead parrot.

Jed Newton
Pension Administrator – Willis Towers Watson

The terms ‘risk reduction’ and ‘de-risking’ are used frequently in relation to pensions, but usually focus on investment strategy. What other ways can pension schemes reduce risk in the administration, provision and communication of pensions to individuals?

The word risk conjures up images of parachutes failing, avalanches rumbling, bungee cords snapping; hardly synonymous with the world of pensions. So what sort of risks are we talking about?

The terms ‘risk reduction’ and ‘de-risking’, when associated with investments, describe pension schemes making decisions to ensure that their assets will safely meet their liabilities. The wider subject of risk in the context of pensions is best tackled by first defining what we are trying to do, the familiar maxim being ‘paying the right amount to the right person at the right time’. Risk then, in pension terms, is anything that could contribute to us failing to achieve this outcome.

What are the right benefits? A scheme’s trust deed and rules set these out, so administrators should familiarise themselves with these governing documents from the outset. Are they clear or do they contain ambiguities? Many legacy schemes are still administered using trust deeds and rules written in the 1970s or 1980s, often in virtually-impenetrable legalese and amended by various subsequent deeds. Frequently, administrators taking on a new scheme will follow previous practice and any misinterpretations or mistakes are repeated and compounded. If the benefits and beneficiaries are not clearly defined, the administrator must raise any issues with the trustees, who must then decide whether legal advice is required. Trustees of schemes with governing documents pre-dating the overhaul of the pensions taxation framework in 2006 would be well-advised to review and consolidate them.

Having nailed down the benefit structure as set out in the scheme rules, we must ensure that it isn’t lost in translation. Administrators do not have time to trawl the rules before preparing each benefit calculation; instead, summaries and quick-reference documents are produced. It is important that any such derived guides do not over-simplify the benefits.

The dangers of over-simplification are illustrated by the case of a terminally-ill pensioner who been reassured verbally and in writing that on his death, a spouse would receive two-thirds of his sizeable pension.  He married his long-term partner and passed away shortly afterwards. It was then identified that as the marriage had been within six months of his death, the scheme’s rules allowed her only the widow’s GMP, a significantly lower pension than they had been led to expect. To resolve the complaint, the employer and third-party administrator shared the substantial cost of securing an annuity to make up the shortfall in the widow’s pension.

So how do we manage the message and make sure the member is given accurate information? The automated production of member communications – retirement illustrations, transfer packs, annual benefit statements – has much to recommend it in the increasingly-complex world of pensions administration.

Acquisitions and mergers result in schemes with numerous categories of membership, a fertile ground for benefit variations. Add to this the constantly-changing background of pensions legislation and Regulator requirements and opportunities for mistakes are rife. Accurate standard documents, requiring minimal human interference, are essential to reducing the risk of incorrect information being provided.

Automated, standardised communications also allow the overall message and the details of the wording to be agreed by all parties. A pension scheme is a significant drain on employers’ funds and they will understandably wish their employees to appreciate and value this expenditure. It is to everyone’s advantage that members understand their pension and the options available to them. The pensions industry as a whole is ditching the jargon and pensions communications are getting their messages across in snappy, bite-size chunks of information. Long, rambling, confusing letters have no place in today’s pensions world and there should be standardised text and automated document production in place wherever possible. There is no reason in 2019 for administrators to be manually typing members’ addresses into letters, yet it is still happening – we have a way still to go.

Benefit calculations are the area of highest risk in pensions administration. As schemes merge and structures become more complex, or benefit changes are brought in to reduce future accrual and liability, benefit calculations grow increasingly complicated and multi-layered. Calculations should be programmed wherever possible and should draw the inputs directly from the database, removing the risk of manual error.

I am not proposing the replacement of experienced, knowledgeable staff with button-pushing robots. Far from it. The increasing complexity of pensions, in particular the administration of DB schemes, requires expert individuals whose time is not wasted checking manually-created change of address letters.

Automation as a whole is crucial to the future of pensions administration. An investment of time and expense in the short term reaps huge dividends; shorter processing times and lower costs, increased accuracy and consistency, the reduction of human input and its inevitable errors, the list goes on.  But an automated system will only ever be as good as the data it uses. Data is key.

If we are to pay the right amounts to the right people, we must hold records that correctly identify them and contain the information needed to determine their correct entitlement. The flow of data from the employer’s payroll system to the administration database, whether individual or in bulk, must be checked and verified before being loaded to the members’ records. Do the scheme calculations need just the basic salary, or should overtime and bonuses be included? If the member’s contributions are being paid via salary sacrifice, and the scheme rules have been amended to include these in a death lump sum, is the contribution data clearly split between (notional) employee and employer elements? The administrator should make sure that the payroll team understand the pension data requirements. In DC schemes, care taken at the verification stage prior to loading contribution data can prevent a time-consuming reconciliation job later on.

Once recorded, how do we ensure that the data remains up to date and accurate? This is, after all, a GDPR requirement. The Pensions Regulator has been asking schemes to measure their common data for some time, the bare essentials you would expect to see on any member’s record, such as their name, date of birth, NI number and address. Schemes are now being asked to report on the quality of their conditional data, those vital scheme-specific items – pensionable service dates, salary information, working hours, membership category, contribution rate and so on. The spotlight is on data.

Databases must be secured and accessible only by those with a defined and legitimate purpose. The data should be accessed on a read-only basis , any amendments should be controlled and require the authorisation of another user of the appropriate level.

Correctly recorded data should not normally need to be amended, with some exceptions. One data set that we expect to change over time is a member’s address. Referring back to our overall goal, if we are to pay benefits at the right time, we must maintain up to date address records for preserved members so that we can make contact. Tracing companies offer services to trustees that will run through their data and identify any members who may have moved house. If a change of address is suspected, the member can be contacted and asked to confirm their personal details before the new address is entered onto their record.

The risk of retirement benefits being paid to the wrong person is minimal provided that administrators follow established processes requiring sight of a member’s original identification documents, or certified copies. The member’s name and date of birth as shown on the database record need to match those on their documents. Increasingly, this process is moving to service providers who will search online registries to confirm a positive match between a member’s name, date of birth and address. Where a strong link cannot be made, the member is contacted and asked to provide the necessary documents.

The risks discussed above are generally those of error and oversights, rather than intention. Fraud, by which an individual claims money that is meant for someone else, is not common in pensions and is most likely to occur when a pensioner dies and the family fail to report the death, continuing to receive the payments. This risk can be minimised by the use of a tracing service to regularly screen pensioners against mortality records, identifying any potential deaths. The pension can then be suspended pending confirmation of the status of the pensioner. It remains the case that if an individual is set on committing fraud it can be extremely difficult to prevent. Always, if something does go wrong we must learn from it and reduce the risk of reoccurrence.

Despite the dull, grey image of pensions administration, it can be a risky business and the stakes can be significant. We may not be the ultimate white-knuckled thrill-seekers, but we deal with our own kind of risks on a daily basis. A force of knowledgeable experts, armed with standard documents and procedures, automated processes and controls, are our best defence as we continue to combat these risks and provide the best possible outcomes for our members.

Joanne Carr
Senior Pension Administrator – First Actuarial

March saw the publication of the Pension Regulator’s (TPR’s) Annual DB Funding Statement (the AFS), which set out its expectations of schemes carrying out valuations, and what schemes, in turn, could expect from TPR. Whilst the AFS does not have legal force, TPR is clearly setting out its stall, and schemes should make sure they have an eye to this update in their negotiations.

Long-term funding targets (LTFT)

Paying the promised benefits is of course the key objective for schemes. TPR now states that it expects all DB scheme trustees and employers to agree a clear strategy for achieving a long-term funding goal, which recognises how the balance between investment risk, contributions and covenant support may alter over time. Schemes should adopt ‘journey plans’ working towards meeting this new target, which should now look beyond being fully funded on a technical provisions basis.

Balancing risks

Consistent with existing guidance, TPR emphasises the need for an integrated risk management approach, with trustees evaluating covenant, investment risk and funding in the round. As in previous years, the AFS categorises schemes based on their risk profile. But this year a scheme’s maturity is given as a significant factor. TPR explains that since most schemes are now closed to new members, scheme maturity issues should assume greater prominence when setting funding and investment strategies.

The statement contains a series of tables, setting out the key risks and actions which TPR believes trustees and employers should focus on, depending upon the category into which their scheme falls. It is essential that trustees and employers take advice to understand the specific implications for their scheme.

Investment strategy expectations

Also, for the first time, TPR spells out its investment strategy expectations in the tables, including:

+ setting asset allocation consistent with LTFTs, and journey planning to get there
+ quantifying the impact of adverse investment performance on funding, and
+ testing and evidencing the ability of the covenant to support this without extending the recovery plan.

Dividends and deficits

TPR expects schemes to be treated ‘equitably’ with other stakeholders. The AFS states that it remains concerned about the disparity between dividend growth and stable deficit reduction contributions (DRCs), and makes clear that TPR expects:

+ where dividends and other shareholder distributions exceed DRCs, that funding targets should be strong and recovery plans short
+ if the employer covenant is tending towards weak or weak, that DRCs should be larger than distributions, unless the recovery plan is short and the funding target strong, and
+ if the employer is weak, that shareholder distributions should have ceased.

Late valuations

TPR expects trustees to plan ahead so that their valuation process leaves sufficient time for advice, analysis and negotiation. A missed deadline should be reported ‘in good time’. But, while parties should work to finalise an appropriate valuation and recovery plan as soon as possible, trustees should not agree merely because of time pressure, and should contact TPR if pushed to do so.

What now?

TPR confirms that it intends to review and update its DB funding code, consulting in summer 2019 ‘on various options for a revised funding framework’, and ‘shortly after’ on the code itself. Until the updated code comes into force, trustees and employers should continue to refer to the current DB code and guidance.

Sonya Fraser
Senior Associate – Sackers

The European Pensions Directive IORP II (“the Directive”) requires occupational pension schemes to have an internal audit function. The Directive came into effect in UK law in January 2019 with regulations requiring schemes to have an effective documented system of governance including a requirement to have internal controls proportionate to the size and complexity of the scheme, and to the nature of the risks to which it is exposed. This applies to schemes set up under trust and regulated by the Pensions Regulator (TPR).

The Directive identifies details for consideration under the heading of internal controls as including the custody and control of assets, internal audit and reporting lines.

Internal controls are not a new concept for trustees of UK occupational pension schemes; tPR’s expectations are already enshrined in Code of Practice 9, which came into force in November 2006. TPR will review its Code of Practice and set out how trustees can meet the requirements of the new Directive; guidance is expected later in 2019. One of the key new aspects of governance on its way is internal audit.

So what does the Directive mean by ‘internal audit’? Firstly, internal audit should not be confused with the statutory external audit, where a scheme’s auditor provides an independent opinion on the statutory financial statements of the pension scheme. It is important for trustees to understand the extent and scope of the statutory audit, which does not automatically extend to include confirmation that benefits paid are correct. Auditors may offer to extend the scope of the statutory audit to provide some assurances on calculations.

An internal audit of the type envisaged by the Directive has a far wider scope and includes non-financial processes and controls such as member communication and trustee governance. Trustees will need to decide on the scope of their internal audit and identify a suitable audit provider taking into account conflicts of interest, independence, knowledge of pensions and professional and technical experience in undertaking audits. It is likely that areas of review will be tackled over more than one scheme year, the trustees having prioritised the risks to the scheme. The internal audit review could be provided by an ‘in-house’ function provided by the scheme sponsor or independently by an external third party giving assurance e.g. an audit firm.

The Institute of Chartered Accountants in England a Wales (ICAEW) suggests that trustees establish an internal audit charter with its internal audit function in order to describe what activities will be carried out and the value this adds to the scheme.

Whilst we all await guidance from TPR, trustees can begin to consider the steps they will take to comply:

+ Annually review their providers’ independent audit reports? For example, many third party administrators and investment managers produce AAF 01/06 reports, which include an independent assurance report from an audit firm; and
+ Ensure their risk register covers key risks and mitigations. These should be reviewed frequently and given sufficient management time as risks can change. Actions flowing out of risk register reviews must be recorded, responsibility allocated, followed up and completed; and
+ Identify the priority areas to be reviewed, consider budgets and investigate sources of independent audit assurance.

Sara Cook
Associate and Senior Pension Management Consultant
Barnett Waddingham LLP

Freedom and choice in pensions revolutionised the world of retirement income and gave individuals greater control over their retirement plans, but with this comes increased risk and responsibility for all. With this in mind, WEALTH at work conducted a survey with PMI to investigate what trustees are doing to support pension scheme members as they make decisions to access their retirement savings.

Key findings include:

Nearly nine out of ten trustees (88%) fear their members nearing retirement will face predatory attention from scammers.

Eight out of ten trustees (81%) believe members are not equipped to deal with the taxation implications of accessing their pension.

Almost nine out of ten trustees (85%) have concerns on risks their members face if they transfer out of their DB schemes.

Nearly two thirds (60%) of trustees are concerned that their members’ money will not last the duration of their retirement.

Almost two thirds of trustees (63%) worry about a lack of engagement from their members.

Pension scheme members nearing retirement face some unique challenges. The retirement income options open to each member can confuse and bewilder even the savviest person and leave them open to an array of risks.

As the findings show, the vast majority of trustees fear their members nearing retirement will face predatory attention from scammers.

After all, a lifetime’s savings can be lost in a moment with highly plausible fraudsters persuading members to move their retirement savings into unregulated, high-risk or bogus investments that could result in them losing their entire pension. The amounts lost to pension scams can be significant with the FCA revealing that victims of pension fraud had lost, on average, £91,000 each, with some even losing more than £1 million to fraudsters.

Trustees also have taxation fears for their member’s at-retirement. They are right to be concerned about this as there are a number of ‘tax traps’ that pension scheme members need to be aware of when accessing their retirement savings; all of which can have a material impact on income levels. These can include moving into a higher marginal income tax rate when cashing in DC pension pots, triggering the Money Purchase Annual Allowance, or failing to understand the inheritance tax benefits of pensions verses other savings and assets.

These risks also equally affect defined benefit members who are considering transferring their pension. Indeed, the majority of trustees in our survey have concerns over this. Assessing whether it is right to transfer is highly complex with multiple risks to consider around how to manage the money once transferred, including market volatility, inflation, taxation issues and running out of money too soon.

When we consider the risks that trustees are worried about, it’s unsurprising that so many are concerned that their members’ money will not last the duration of their retirement. But this may also be due to a number of other reasons including members not saving enough during their working life, or underestimating how long they will live in retirement.

Lack of support despite fears for scheme members

The survey found that despite the fears that trustees have for members, just over one third (35%) provide financial education for their members. Nearly two thirds (61%) of trustees indicated that their schemes do not provide or facilitate one-to-one financial guidance for members at-retirement.

Just one in five trustees (21%) are providing or facilitating regulated advice for their members at-retirement. These findings indicate that pension scheme members coming up to retirement are likely to be ill-prepared and blissfully unaware of the potential problems ahead when accessing their pension, and perhaps suggest why the majority of trustees worry about a lack of engagement from their members. Unless more support is provided, it’s likely that many members will make poor decisions at-retirement.

Financial education and guidance is an excellent first line of defence to help members understand their options atretirement and avoid many of the risks that trustees are concerned with such as scams and tax mistakes.

As well as providing individuals with a plan tailored to their needs, regulated advice can also provide members with added consumer protection for the advice given and can prevent them from making costly mistakes.

Our report suggests that all these concerns and risks could be mitigated by providing more support for members at-retirement which includes offering financial education, guidance and access to regulated advice, as well as helping members to implement their chosen retirement income option(s). An increasing number of trustees are now turning to specialist retirement service providers to help their members navigate the maze of options at-retirement. This provides an efficient way for schemes to offer their members access to reputable providers who have undergone due diligence, rather than leaving them to go it alone. After all, providing support for members is vital if they are to optimise their income and achieve good outcomes at-retirement and beyond.

About the survey

The survey received 65 responses from a range of trustees which were completed online and via paper over 4 months from December 2018 until March 2019. Figures have been rounded to the nearest whole number or to one decimal place where appropriate.

Jonathan Watts-Lay
Director – WEALTH at work

Pensions are among the biggest financial commitments we’ll ever make, so naturally we want to feel assured our investment will be well looked after. We’re essentially handing someone else the reins to our retirement, which is a bit like giving a stranger the keys to your house. This feels even more significant when we’re all living longer, healthier lives.

Fraudsters take advantage of this leap of faith, by cynically and ruthlessly deceiving people into believing that there are untapped riches on offer, before cruelly and callously dashing their dreams for later life.

These scams are extremely damaging, desperately so for their victims, but also for the rest of the pensions industry, eroding confidence in saving. So, we need to tackle this criminality, and we’re clear both trustees and government must play a part.

For their part, trustees are in a powerful position to warn people against making the wrong decision. They have an in-depth understanding of each saver’s financial position, and their experience and nous enable them to spot the ‘red flags’ that give away when a would-be scammer is up to no good.

So, we’re planning to legislate to help trustees ensure that transfers of pension savings are made to safe schemes, such as authorised master trusts, and not fraudulent schemes.

Trustees have a moral responsibility to act in the best interests of their members, and these laws will assist them in performing a vital screening role to stop scams at source.

As we help trustees to combat these criminals with new powers, we are giving savers the tools to better understand their finances in one place. The newly announced Money and Pension Service (MAPS) is a joined up service for everything from help with debt to money and pensions guidance.

It will make it easy for people to get all the help they need to make better financial decisions throughout their lives. This is a big step towards providing high quality, free and impartial information and guidance on the big money questions. As more of today’s younger generations are saving through automatic enrolment, we want to build a nation of savvy savers.

The new Money and Pensions Service (MAPS) will play a vital role in this process, informing people of their pension options with face-to-face and over the phone guidance and, in what will be a huge step in bringing pensions into the digital age, it will drive industry’s development of pensions dashboards while delivering the first non-commercial dashboard.

The more information people have about their money, the better they will be at spotting these sophisticated frauds, and MAPS will make accessing this information quicker and easier.

Automatic enrolment has transformed pensions saving, bringing more than 10 million people across the UK into workplace schemes. That translates to billions of pounds put aside for later life.

The bigger the pot, the bigger the draw for the rip-off merchants. That’s why I’m determined to arm trustees and savers with the tools to keep the scammers at bay, and retirement savings safe.

Guy Opperman

Minister for Pensions and Financial Inclusion