In the UK we have an old-fashioned saying ‘Don’t spoil the ship for a h’a’p’orth of tar’. Or in other words, by seeking to save too much money on essentials you could end up ruining the whole project.
In the pensions world, this is frequently seen as occupational arrangements where there is no specialist pensions manager in place within a company. This can often save money on staff costs, but this cost saving comes at the potential price of increasing overall scheme costs. So what initially appears to be a saving actually ends up costing a lot more money at a later date.
Why is this the case, and what do pensions professionals bring to pensions management?
It is important to clarify that the focus of this article is not specifically on investment management and that it focuses on those who are responsible for ensuring the whole plan achieves its objective - the payment of the right benefit to the right person at the right time. Investment is clearly a key part of that objective, but only one part.
Other just as important elements (but perhaps less ‘glamorous’) are the legal, technical and administrative tasks. Someone needs to co-ordinate all of these to ensure that the plan (whether it is defined contribution (DC)) or defined benefit (DB) achieves its objectives. This is the case whether the governance of the plan is through a board of trustees (as is common in the UK) or through a committee of management or other similar governance structure. Throughout the rest of this article the word ‘board’ is referred to as being the governance committee, whether a trustee board or otherwise.
Many of the functions of the board are outsourced to advisers and third-party providers. In the UK context, even in the largest schemes, it is rare to find an in-house scheme actuary or legal counsel. These functions are generally out-sourced. Benefits administration can be provided by a team within the company but again is frequently outsourced to a third partly. Even where it is not, the Board still needs to liaise with someone within the company who is responsible for the provision of the services. And of course there are the investment managers, auditors, accountants, performance measurers, medical advisers and the other many advisers and service providers that pension plan boards need to ensure proper stewardship of the assets and delivery of the benefits.
The common route, at least in the UK, is to have a single individual, frequently the secretary to the trustee but often chief executive of the trustee company (where there is a corporate trustee rather than a board of individuals) who is responsible for managing the co-ordination of these advisers and third-party providers. The question is whether it is appropriate for that person to be a pensions professional or whether the function can simply be allocated to an individual without specific pensions knowledge.
Clearly, the size of employer (and scheme) can be relevant. Few small employers can afford to employ someone solely dedicated to the pension scheme - and if the scheme is small and fully insured it is probably not required, although some pensions knowledge would be helpful. But in the larger schemes - those with over 1,000 members and/or assets of €350m and above, the benefits of a pensions professional being the link between the employer, the board and the advisers should be clear.
Why should this be? Simply, a pensions professional in the role will have the ability to be an intelligent purchaser of services. Furthermore, such a person will also be able to add value to the deliberations of the board by relating regulation and proposed changes to the plan, thereby providing scheme specific advice.
The UK context provides an excellent example of these advantages. The recent regulations on age discrimination resulted in many UK pension plans having to change their rules. Where there is no pensions professional in place to help the board through this process it is the board’s legal adviser, in the main, who will be assisting the board to ensure that the rules comply with the regulations. At the end of this the board will be compliant and there will be no legal issues.
On the face of it, there is no problem. However, that is merely one part of the process. The legal adviser is not a benefits administrator. Having changed the rules the board will advise the administrator. What happens if the administrator finds that the new rules are unworkable when it comes to applying them to members in real situations? The board will have to have further discussions with the legal adviser and the administrator, and further changes will have to be made. All of which costs money.
Of course, the board could have ensured that the legal adviser and administrator liaised as part of the process of determining what rule changes were required. But what, or who, will have prompted the board to think of doing that when the issue is not one of administration but compliance with regulation and therefore clearly an issue for the legal adviser?
In this scenario, if there were a pensions professional involved in the process then the administration issues would have been highlighted at an early enough stage to prevent administration issues arising. This is because it would be the pensions professional who would have been able to have seen the practical difficulties of the rule changes. Such a person would have been of value in the process and would have saved significant fees. This is one example of a pensions professional being an intelligent purchaser of services.
Take another example. Again in the UK there is now a legal requirement for boards to have knowledge and understanding of the pension plan, and there are detailed regulatory requirements for boards to meet. Again, this can be provided by the scheme actuary, legal adviser or other service provider. But that will all come at a cost because much of the requirement is scheme specific.
While many advisers provide training, that training is generic and not scheme specific. Scheme specific training comes at the cost of the adviser’s normal hourly rate. Yet a pensions professional, employed by the board or the employer, will be able to deliver scheme specific information much more cost effectively, and at a time convenient to the board.
In the UK there is a professional body - the Pensions Management Institute (PMI) - that provides a qualification for pensions professionals. It is clear from these two examples (which translate into the European, and indeed, a global experience) that a pensions professional can add real value to the board and can save significant money and problems at the same time.
All boards should be considering the quality and knowledge of those who support them to ensure that they have, in post, those who can be intelligent purchasers of services that the board really requires, and who is in a position to effectively manage the service providers to ensure that the board receives the services it is expecting at the time it expects. The only people that can really achieve this in the pensions context is a pensions professional.
Pensions professionals are multi-disciplinary having technical, legal and administrative skills. Those boards who are supported by such professionals will be better able to meet the increasingly onerous requirements of pension plan management.
To put it another way, company boards would not have at the head of their finance department someone who was not a qualified accountant or financial person. Why should they take a different approach for the pension function which is possibly much more complex and holds just as much risk for the future health of the employer if things go wrong? The only logical answer is to save money - is this not a prime example of the ship being spoiled?
Penny Green is president of the Pensions Management Institute
No comments yet