Pensions insight
Henry Tapper, founder of Pension PlayPen, contends that proposals spell trouble ‘Pension reshaping’
I n pensions ‘freedom’ is the buzzword: people should have what they want, how they want it. We all know this means that down the line there is potential for administrative chaos. Payroll depends on uniform rules, but the natural bent of pension consultants is towards infinite complexity. Prepare for problems. Readers will be familiar with the compliance issues of automatic enrolment, the vagaries between net-pay and relief- at-source schemes and the complexities surrounding salary sacrifice. They will be aware that a pension scheme may have several contribution rates, with members moving from one contributions section to another. They will be aware that pensioners can have pay rises based on various indices with benefits sometimes revalued at different rates. Moves are now afoot, however, to flex the payments of pensions using techniques that owe much to flexible benefit programmes. Typically, these programmes are described as ‘pension reshaping’: they allow members at retirement to receive a higher or a lower initial pension depending on how much indexation they want in subsequent years. Having attended several seminars and workshops on these proposals, I can see them as attractive to members as they are an extension of the pension freedoms brought in by George Osborne in the Finance Act 2015. But because individuals could have their own rate of pension increase, the proposals spell trouble down the line for people charged with running pensioner payrolls. One of the benefits of collective solutions (such as pension schemes) is that they provide uniformity of process which leads to economies of scale. By offering freedoms, the risk of things going wrong increases with the cost of risk mitigation being charged
back to the pension scheme (or borne by the pension payroll administrator). My worry is that the conversation between those who design these snazzy solutions and those who are called to administer is not a long one. I worry it is more an instruction than a conversation. It’s critical that those who run the pensioner payroll for the corporate defined benefit (DB) schemes that still look after some 11,000,000 of us in retirement are kept appraised of the proposals under consideration by pension schemes and have a say in the cost/benefit analysis before the trigger is pulled. ...trouble down the line for people charged with running pensioner payrolls This leads me to a wider point about the assertiveness of those managing the pensioner payroll in pension governance. In days of yore, pensioner payroll was an in-house function, but now it is a function incorporated into third party administration that uses the pensions software either of their in-house administration system or a third-party system that is typically a module of a wider payroll system. As the outsourcing chain gets longer, there are more rather than less decision- makers in the process. While a pension administrator may feel comfortable with the principle of ‘pension reshaping’, the software suppliers may not. I worry that as we seek to provide more freedom to pensioners to choose the way their pension gets paid, we stretch the supply chain to breaking point. So – to my governance point – I think it sensible that all those involved in the payment of pensions, including those who are
considering pensioner payroll to the defined contribution pension (DC) providers, get organised and get involved prior to decisions being taken. I mention DC pension schemes and my heart sinks at the lack of engagement between those advising individuals on the art of the possible and those charged with administering some of the options available in law. There are options now not just to flex payments (under drawdown) but to flex the taking of tax-free cash. While most people will take their cash at the point that they crystallise their ‘pension pot’ and take 25% of the total fund in one go, many people are choosing (or being advised to choose) the taking of pension as 75% taxed and 25% untaxed, effectively drip-feeding their tax-free cash in exchange for a lower tax bill on the regular payments. The complexity of such arrangements is limitless; for under a draw-down, the individual has the right to vary the monthly contribution at will. It is the ultimate example of the pension freedoms as an administrative liability. I worry that despite the valiant efforts of the CIPP, the voice of payroll is seldom heard in the trustee boardroom. More worryingly, I don’t hear much consultation with payroll among pension consultants, many of whom take pension administration for granted (it is referred to as a ‘hygiene factor’ among some of my peers). Finally, I am worried that government has insufficient grasp of the complexities of paying people a pension and of the risks that are created when payroll processes creak. For all these reasons, I suggest that we need a committee or working group to look at pensions from the payroll perspective. Whether it be the compliance to automatic enrolment, the payment of DB pensions or the operation of DC pensions under drawdown, payroll needs a strong voice. n
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| Professional in Payroll, Pensions and Reward |
Issue 35 | November 2017
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