Insuring the right pension solution

David Davison

or Subscribe to Feed

Private Eye has a regular feature where readers compete to send in the latest unimaginative and probably inappropriate inclusion of the word “solutions” in a company name or marketing slogan. You know the kind of thing – “for all your total reward solutions” “for all your waste management solutions” “for all your rubberwear solutions”, or whatever.

It’s undoubtedly a difficult time for pension scheme trustees and scheme sponsors – always looking for solutions. Ever more onerous legislation to keep abreast of, more onerous training and competency requirements, a more complex funding regime, confusion and concern among members, more complex administration, and the constant concerns regarding conflicts of interest.

For small final salary schemes the plausibly promoted “insured solution” at first glance appears attractive. All your needs catered for under a single umbrella and at a surprisingly low cost. They have administration solutions; actuarial solutions; documentation solutions; consulting solutions; investment solutions. You name it they have a solution for it.

Recent dealings with insured pension suppliers (and there are honourable exceptions) has left a distinctly bad taste in the mouth. Service levels have deteriorated dramatically as margins have been squeezed. With many of the more experienced staff having fled the scene, getting answers on interpretation of scheme rules or particular issues related to an insurance policy has become nigh on impossible. Decisions about with-profit surrender terms or guaranteed annuity rates can take many months to resolve and even then seldom satisfactorily.

Administration records are frequently poor with scheme records having often been held in paper format and never fully converted to electronic media which leads to complexity and errors as a result of manual input. In fairness this point is a universal issue on final salary schemes but many insured providers, in our experience, have particular problems. Delayed retirements, incorrect benefit statements, poor communication, inconsistent or inaccurate member records are all commonplace. With trustees now seeking to comply with the requirements of the internal controls guidance it’s almost impossible to get a satisfactory handle on the processes being employed.

Some of the insured providers have sought to plug the skills shortage by outsourcing services to third party providers. This at least usually adds some quality to the administration processes although only to a limited extent as pricing margins again squeeze service.

This is partly because insurers have allowed administration to become a commodity, and a low value one at that. If providers could deliver a low cost but effective and compliant service that would be a good thing, but that has not been our experience. It would appear that as providers have competed to offer the cheapest service, the quality of service has ceased to be important, as long as they can hang onto the investment funds.

Competent administration is key to any pension scheme and is the interface between the scheme and the members.

Advisory input is now required by legislation and this is a requirement insurers find difficult to meet.

Actuaries can no longer produce AVR’s in a dark room isolated from the realities of the world outside but must engage proactively with the trustees to reach conclusions which are scheme specific. Insurers have not seen themselves as providing a consultancy service, but trustees can no longer operate without one.

Additionally many insurers still offer trustees a very limited investment choice, tied to the provision of the other services. Frequently there is only access to the insurers own expensively priced and relatively poorly performing funds. Seeking an escape route to a more competitively priced and liability specific fund is frequently met with demands to find significant sums in surrender or transfer penalties which leave trustees with little hope of escape.

Against this background many of the insurers have until recently promoted, and in some cases still do promote, their services to financial advisers with the carrot of substantial commission payments which will further restrict future flexibility. It is also necessary to ask should advisers with little final salary experience be encouraged to play in this complex area by such a financial inducement. If they are, they should be made aware of the significant risks involved and the likely level of, and lifespan over which, services will need to be provided and therefore the timescale such a payment is likely to need to last. The trustees of such schemes are the client of the IFA’s and need to be properly advised in relation to the Scheme. My experience suggests that when trustees ask who is providing the specialist advice they require the IFA’s and Insurers are helpfully pointing at each other!!

I would emphasise that these problems are not universal as some insurers are better than others. The position is at least improved where an Independent Professional Trustee becomes involved as they can at least exert some pressure and monitor the situation although clearly that can also have an impact on costs. But there are still a lot of lay trustees out there without a clear advisory relationship and huge amounts of personal liability.

If insurers are to continue to promote these services they must make a commitment to those they are assuming responsibility for to commit the necessary resources over the required time period to offer a reasonable level of service and must seek to provide flexible and commercial approach to those for whom they already provide services or leave the market to those who will.

The flip side of this is that trustees also need to recognise that the necessary quality of service cannot be bought cheaply. The reality is that the complexity of properly managing a final salary scheme comes at a cost. Our view is that it is better to pay a reasonable cost and obtain a reasonable service.

Re-reading my article when I’d finished it, I was a bit concerned that I was doing providers an injustice so I thought I would check the meaning of “solution” in my dictionary, and it gave me a number of options:-

(a) A homogeneous mixture of two or more substances, which may be solids, liquids, gases, or a combination of these.

(b) The process of forming such a mixture.

(c) The method or process of solving a problem.

(d) The answer to or disposition of a problem.

On the assumption that trustees are looking for something along the lines of (c) or (d), I can only conclude that the providers, when pondering “solutions”, checked the same dictionary HMRC used when looking up the meaning of “simplification”.

David Davison

Post by David Davison

Specialist consultant on pensions strategy for corporate, public sector and not for profit employers