Regulation is a funny thing. It’s there to help, but so often seems to baffle or hinder us humans to the extent common sense can disappear. Here are a couple of tales to illustrate why we should never forget to think sensibly and apply sound, practical judgement.
The tale of poor regulation
A deferred member was looking to transfer out their benefits to another pension scheme. He completed all the necessary paperwork and attended a telephone appointment with the scheme administrator’s anti-scams team. This call raised a flag and the administrator recommended the pension trustees advise the member to contact MoneyHelper to seek further guidance.
The only issue here, and the reason a flag was raised, was the scheme he wanted to transfer to (the Aviva self-invested personal pension (SIPP)) offered overseas investment funds - as do probably 100% of similar products! It seemed even more daft given the company’s own defined contribution (DC) plan is with Aviva – how can you turn round to an employee and say this might be a scam?
Guidance from the Department for Work and Pensions (DWP) and The Pensions Regulator (TPR) makes it clear the regulation didn’t mean to pick up standard funds with overseas equity assets. However, the regulation is still in place. That means the pension trustees could, theoretically, be legally challenged by a member for ‘letting’ them transfer without an amber flag process if the member subsequently regretted their decision.
Pension administrators are addressing this differently - some take the guidance on board, some stick strictly to the letter of the law. It’s a case of poor regulation adding to the time, complexity and cost of actioning a member request.
In this case, the pension trustees decided to over-rule the proposed action by the scheme administrator following the anti-scam call and allow the transfer to go ahead. They took the guidance on board and assessed the risk to be minimal. It’s a good example of why we should look at each case individually and should not be so risk averse that common sense goes out the window!
The tale of challenging advice
I was taking on a new client – a well-funded £100m defined benefit (DB) pension scheme. As part of the transition, we did a more in depth governance review and noticed late retirement revaluation had been carried out incorrectly.
After investigation it came to light, on top of the incorrect revaluation calculation, the latest draft of the scheme Rules had failed to copy over the late retirement factor rule, which the current pension trustees believed to be an error. After getting legal advice, we needed to review all trustee meeting minutes and write to previous scheme trustees to confirm it was, indeed, an error.
We needed to rectify the calculation error, which was fine. However, for the change in Rules, as the trustees couldn’t prove it was an error, legal advice was to proceed on the current basis. The scheme actuary and lawyer advised, due to the pension scheme having a Barber equalisation period, the trustees needed to undertake a complex administration process to calculate the late retirement benefits and write to members aged 60 or 65 to ask if they wanted to retire late.
The process they suggested seemed very over the top to me, incurring lots of additional administration costs. I’d seen similar benefit rules whilst on secondment to an in-house pensions team where they didn’t do this complicated process. I remembered there was relevant HM Revenue & Customs (HMRC) guidance. After sending this to the scheme actuary and pension lawyer, they accepted their recommended process wasn’t required after all!
The result was no change to administration processes, therefore no increase to pension administration fees and no need to for complex communications to members about a process that would have been hard to understand and would have meant reduced tax-free cash lump sums!
Using knowledge from one client to benefit another and applying it sensibly saved complication and costs. It was a great example why challenging advisers in the right way is vital – and when common sense tells you something doesn’t feel right, it may not be the right thing to do (even if the advice says it is)!
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