Things that could scare a DC pension scheme chair: number 3

Topic:

Hot topic

Date published:

Friday, 11 December 2015

Author:

Mark Homer

The increasing risk of complaints and litigation

A major concern for the DC Chair is the scheme’s failure to deliver the anticipated ‘good member outcome’ at the point of retirement. This concept is difficult to pin down as it is subjective and may mean different things to different members.

A study of over 2,000 DC members by Barclays (June 2014) suggested the ‘perfect annual income during retirement’ is £17,500 a year. Achieving this requires a pension fund of over £425,000 (based on a 24.5:1 annuity rate for a single life with 3% increases, as at November 2015).

A separate study by Prudential suggests average retirement income is in fact falling – from £18,663 a year in 2008 to £15,800 a year in 2014 (a decrease of 15%). So, are members being over optimistic about the performance of their fund or the amount of pension they expect to receive? Or are DC trustees failing to provide value for money or enable ‘good member outcomes’?

The task of the DC Chair is to communicate to members the pitfalls of not making sufficient contributions (especially at an early stage) and failing to regularly review their contributions, fund choice and retirement aspirations. In short, they need to manage member expectations with reality.

Figuring out how to effectively communicate DC pensions can feel like searching for the Holy Grail. Add to it the fact that how contributions are invested is a key determinate of outcome, and the double whammy of communication and investment decisions are enough to give a committed trustee Chair sleepless nights.

DC investment has become more complex with time, as the industry tries to find new, clever ways to overcome the problem that is member inertia. DC Chairs now need to answer questions such as:

• what will the design of the default fund be?
• what other choices are appropriate for the member dynamic?
• if annuitisation is no longer required, how should funds be invested if flexible access is needed?
• how are investment losses best avoided both before and after retirement in an often volatile investment world?

In addition, there are seemingly more mundane issue such as whether the scheme administrator invests contributions promptly to ensure members are not exposed to out of market risk? We have seen a scheme where this was an ongoing issue. Fortunately for the administrator, markets worked in their favour and members ended up better off, but it could easily have been the other way around and we would have been looking at a DC scheme with a deficit!

The DC Chair will understand the unenviable task they face as a combination of a lack of engagement, financial awareness and competing priorities for members’ money mean that even the clearest communication strategy may not be successful in helping members to help themselves.

Scary thought

There is a very real risk that complaints and/or litigation arises in the future from members who claim the outcomes they expected were not delivered and look to the trustees or the (former) employer to make good any shortfall.

In future, a DC Chair may be judged by the success or failure of keeping off the FCA’s or TPR’s radar and out of the courts. Already the Pensions Ombudsman is supporting complaints for DC maladministration and it can be costly to put a poorly treated member back into the position he or she should have been.

If you are a DC scheme chair or trustee, pensions manager, finance director or other employer representative responsible for pensions and would like to hear more about these issues, why not join us at our Scary DC Breakfast roundtable?

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