Professional Pension Admin Panel June 2010
The rate at which final salary schemes are closing to future accrual for existing members is accelerating. Pension industry experts are in general agreement that the majority of FTSE 100 companies will cease DB pension provision to all employees within the next few years. If schemes are not closing, other changes are being considered include retaining a final salary scheme but capping growth in pensionable pay or moving to a career average (CARE) scheme.
In terms of the complexity or simplicity of administration, how does capping pensionable salary compare with changing the scheme design to CARE? What needs to be done to ensure systems are flexible enough to cope with these changes; and in what way should material administration considerations be taken into account in reaching a decision on future benefit design?
Changing the design of the Scheme to CARE will effectively necessitate the setting up of a new arrangement to run alongside the closed existing DB Scheme.
Capping salary allows the existing Scheme structure to generally remain in place, just with lesser increases to pay and potential administration implications as a result of changes to calculations, depending on the how the cap is to be applied. The last few years has seen employers moving towards increasing non-pensionable elements of pay, such as bonus, with the aim of containing pension costs by limiting increases to the pensionable elements of remuneration, such as salary and consequently administrators have had to make the relevant changes to their administration platform to ensure they are able to handle any changes satisfactory.
In general the impact on administration should not be too onerous as flexible administration processes should be in place, if not however the implications to process time and cost will be significant.
What are the main points of the business case which could show that potential cost savings and benefits in ongoing administration as a result of scheme closure can offset the cost and disruption associated with implementing the change?
Any costs savings from closing a Scheme could well be negated by the cost of implementing the change, which should not be underestimated. Consultation and communication with the Scheme’s membership along with the necessary changes to systems, processes, calculations and interfaces all add up.
Although there will no longer be a pool of active members to maintain, potential cost savings may be achieved by a reduction in the number of interfaces, and no longer having to carry out underwriting of members. These saving will in some way be countered by the work incurred in tracking deferred members, GMP reconciliations and further work carried out following closure.
What should administrators be doing in advance to facilitate any change and to prepare the scheme for alterations in benefit design or scheme closure?
Where a strong relationship exists between the administrator and Scheme Trustee the administrator is likely to be included in discussions and as such will be able to identify the likely implications of any changes and respond appropriately.
Key to ensuring the success of any exercise will be the Administrators willingness to be adaptable and able to respond rapidly. The appropriate level of resource must be available and in place to implement the changes within the required timescales and ensure that there is no disruption to the ongoing service.
When a scheme is closing or has been closed to future accrual and all remaining members are deferreds or pensioners, what opportunities are there for administrators to improve the efficient running of the scheme?
The next logical step following closure is to prepare for the scheme to be wound up, as this is an inevitability, be it in the short, medium or longer-term.
With this in mind the Scheme may take the opportunity to cleanse its data and seek to track its deferred members. In addition, as the Scheme is closed and no further benefits will accrue, the Scheme should consider working with HMRC to carry out a GMP reconciliation exercise, which can be a lengthy and involved process, to ensure complete and accurate records are in place.
Any change to benefit structure or closure to future accrual would require clear member communications throughout the process. If changes to benefit design are in the pipeline, why should sponsors be delaying implementation and communication until 2012 to include any changes relating to Personal Accounts, or should they accelerate their plans in advance of Personal Accounts?
The current economic climate has had the result that employers do not appear to be considering the changes of 2012 as part of the decision making process. As has become apparent, the main aim of making changes is to not only cut current costs, but also to cap future liabilities.
With that in mind, many employers are taking immediate decisions, in some cases at very short notice and are unwilling to delay these by a further two years, when the financial cost of doing so may be that much higher. Consequently the issues of the changes in 2012 will be considered separately, regardless of the potential disruption this may cause.
by Daniel Jacobson
Client Manager