Pensions: Get a grip

In a few seconds of high drama in Athens last summer, the US – favourites to win the sprint relay at the Olympics – fumbled the baton and handed glorious gold to our men.

The US team included the individual gold and bronze medallists, but relays are lost during the handovers, not won solely by individual excellence. In both HR and pension administration, the same holds true: no matter how well individual departments perform, significant risks lie on departmental boundaries.

There are, for example, clear risks when raising a benefit payment. In one memorable case, the administration department raised cheque requests for members leaving the pension scheme and sent them to accounts. If accounts did not confirm that a payment had been made, administration sent a second request.

Unfortunately, accounts assumed this was a new request and, in 20 cases over 12 months, made duplicate payments, eventually paying out a six-figure sum in error. Merely marking the second request ‘duplicate’ was all that was needed to prevent a repetition.

Similarly, an important risk to consider is that a pension scheme receives the correct contributions from the employer, and that those contributions are not late. Problems can arise through failure to track salary increases or miscalculation by an employer’s payroll department. An employer may also be deliberately slow in passing contributions because of cashflow difficulties.

And the risk is not purely theoretical. In one case I tackled, salary rises were ignored for three years in the calculation of contributions for a defined contribution (DC) scheme. The cost of calculating the amount of compensation due to members was almost as large as the compensation itself. Indeed, the typical cost of the administrative effort to resolve mistakes like this in DC schemes is about 300 to 500 per member.

In another case, a company asked its pension trustees to stop offering enhanced early retirement terms. The trustees duly took the decision and recorded it in the meeting minutes.

A couple of months later, when a director retired, the company was surprised to discover that the augmentation had still been applied. When challenged, the administrator said he was using the calculation specification the trustees had provided two years ago and no revised specification had been received from the trustees.

The cost of this mistake was more than 100,000, but could have been prevented by the trustees assigning specific responsibility to ensure that their decision was implemented.

Generally, preventing a risk from arising involves simple, straightforward solutions, which can often be implemented at minimal cost. The consequences and cost of dealing with a risk after it has happened can be considerable.

Risk review workshops are a good way of considering what may go wrong and what impact that could have, but it is important that the review does not overlook key risks. Luckily, many third parties will have helped other organisations conduct risk reviews and can supply extensive templates of potential risks to mitigate, but not eliminate the risks. Perhaps more beneficially, by acting as the workshop facilitator they can also help you learn from the mistakes of others.

However, as we have seen, many of the risks lie on the boundaries between depart-ments and functions. A facilitator with deep experience in one aspect is likely to be less valuable than one with broad experience across the full range of risks.

For a pension risk review, you may wish to ensure that the individuals who facilitate your workshops have professional grounding in actuarial funding, business continuity, investment strategy, IT, payroll, process design and supplier management techniques. Similarly, a risk review workshop should include senior representatives from the relevant internal and outsourced departments.

Although risk reviews should be an annual part of pension scheme governance, they can only mitigate risks and do not prevent risks from being embedded in the first place.

Effective planning and design is needed to reduce risk from the outset. For example, employers will soon be forced to consider requests by employees seeking to work past 65. These situations could be managed by encouraging phased retirement alongside part-time working.

  • The 2004 Finance Act allows part of a pension to be taken while someone is still employed, such as in a part-time role, and while still earning more pension on their continuing earnings. Administratively, this is complex, and pension administration specialists should be a central part of the design team if you want to ensure the baton can be passed between HR, payroll and pensions with the minimum of risk.

    Three simple steps for effective pensions management

    Review risks on a regular basis and before implementing changes
  • Ensure that all specialisms are represented in your pensions review team
  • Learn from other peoples’ mistakes rather than your own

Nick Phizackerley is a senior consultant at Lane Clark & Peacock LLP

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