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27 Apr 2016
by Robin Hames

Report: The challenges facing pension schemes in 2016

This week Capita Employee Benefits launched its second annual Pension Scheme Insight report, examining the key dilemmas facing trustees and pension managers.

 

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Earl Miller may not be the most familiar name to those outside of the rarefied atmosphere of cognitive neuroscience. Based at the prestigious Department of Brain and Cognitive Sciences at Massachusetts Institute of Technology, the renowned professor’s summation of our ability to cope with multiple demands may also not make the easiest reading for the modern trustee and pension manager.

“We are not wired to multi-task well...When people think they’re multi-tasking, they’re actually just switching from one task to another very rapidly. And every time they do, there’s a cognitive cost in doing so.”

Running a pension scheme remains a challenging task

What’s abundantly clear from this year’s Pension Scheme Insight Report is that the task of running a pension scheme is not getting any easier. In last year’s report there were five challenges that pension managers and trustees felt stood out; this year respondents highlighted at least eight serious challenges with others such as pensions liberation and re-enrolment also being flagged by a significant percentage.

It is evident that the demands on those seeking to successfully run a pension scheme require individuals to be exceptions to the good professor’s view.

The need for a gifted multitasker

The modern pension manager and trustee really has to be a gifted multitasker: director, auditor, investor, educator, investigator and regulator all rolled into one. And all this is happening at a time when the resources to support good governance are likely to be under scrutiny.

It is clear that cost and resource, or more accurately managing cost and resource, remain very pertinent issues. While the very largest schemes may have the necessary resources at their disposal, the vast majority of schemes are, at best, stretched.

GMP reconciliation biggest challenge

A case in point is the primary challenge arising from this year’s survey: GMP reconciliation. For many the fundamental issue, initially at least, is one of resource: the initial analysis stage is really just a matter of grunt work rather than requiring any deep technical understanding. But such grunt work is laborious and time consuming.

Likewise the second biggest challenge, member education and engagement, requires both time and technology. Time is needed to truly segment the membership and consider the best means of communicating with each cohort while technology may be needed to deliver personalised messages to the appropriate groups within that membership. Others will still prefer paper-based information, group session and one-to-one time.

With the recent Budget introducing Lifetime ISAs for the under 40s, the choices facing scheme members are becoming more not less complex; the need for education ever more acute.

According to figures published by the Halifax in 2015, the average age of a first-time buyer in the UK was 31, so the allure of the LISA for younger members should not be underestimated and many may have to balance the benefit of the employer contribution against the immediate need to fund for a deposit.

But both the time and technology preferable to maximise the impact of education and engagement campaigns do, again, carry costs for a scheme to bear. It is also notable when looking at the key challenges, as described by our respondents, that the processing of requests following the introduction of the new pension freedoms was actually seen as a greater challenge than determining what changes should be made to the scheme to accommodate the potential for enhanced options at retirement. In this instance, the administrative strain is perceived to outweigh, albeit marginally, the complexities of the strategic conundrum.

The juggling of finite budget and resources

What these challenges – GMP, education and request processing – have in common is that they do not necessarily revolve around technical knowledge or capability. Trustees and pension managers tend to have these in spades. What many are struggling for is, to use the rather horrible corporate phrase currently in vogue, ‘bandwidth’; the puzzle of how to juggle all these competing demands within a finite budget and with finite resources.

Indeed if we look at the eight greatest challenges overall, we can see that while there are strategic issues being wrestled with, such as de-risking exercises and the abolition of contracting-out, there are as many, if not more, that are really matters of adequate resourcing.

Of course this really falls back on the thorny issue of cost. Whether it’s a question of increasing headcount or bringing in capability and capacity through external sources, it amounts to the same thing: the expenditure the sponsor is willing to bear to manage the scheme.

Perhaps this is why it is evident, particular for smaller schemes, that managing core actuarial, investment and administration cost is so important. Any savings made here may be allowed to be redeployed elsewhere.

As we observe later in our report, the old dynamics of in-house or outsourced are becoming increasingly anachronistic, even for larger schemes. The key decision may well therefore be to determine the best, and most cost-efficient, means of dealing with specific tasks; to meet the resourcing challenges while simultaneously allowing managers and trustees greater time to grapple with the strategic issues that, in the long term, are likely to have a far greater impact on the membership.

Data management provides yet another bugbear

What is also clear is that if cost and resources are a common bugbear so too is the issue of data management. Accurate data is the driver of good governance but for many schemes, for a variety of reasons, it is difficult for managers and trustees to have total confidence in the data available to them.

Schemes that have been in existence for decades are naturally vulnerable to data errors and omissions with historic paper trails, a variety of systems, corporate mergers and conflicts with accompanying records such as payroll.

However, key challenges, such as GMP reconciliation and de-risking exercises are dependent on good quality data to maximise their effectiveness and to minimise their cost. While great strides have been taken to improve scheme data in recent years, it is evident that there is still a gap between the present and getting the past perfect.

In essence these seem to be the key themes emerging. Trustees and pension managers are dealing with a variety of challenges; some require deep strategic thinking while others are really issues of capacity management. Resolving the resourcing issue while at the same time addressing the core concern of data quality seem to sit at the heart of the trustees’ and pension managers’ fundamental dilemma: how to deliver outstanding pension scheme governance.

To request a copy of the Pension Scheme Insight Report from Capita Employee Benefits, whose head of marketing and research Robin Hames, provided the above article, click here.

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