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.
Pension Administrator – Willis Towers Watson