Administration standards for DB to DC transfers need to become more consistent, say Margaret Snowdon and Kim Gubler of PASA
At the Pensions Administration Standards Association (PASA), we have been concerned for some time about the huge variation in time between members requesting transfers from occupational pension schemes and the payment being made to their provider, or scheme of choice.
Members have a right to a transfer to a valid arrangement, so many argue monies should be paid across without delay, and there are a number of initiatives seeking to speed up information flow and drive consistency between arrangements. However, talk of transfer times usually refers to insurer-to-insurer transfers within a pre-vetted club and are generally straightforward, but the complex nature of defined benefit (DB) trust schemes makes a standard processing time challenging.
PASA is already part of two groups seeking to find a sensible way to integrate trust schemes into the faster transfers process. However increased DB-specific governance legitimately holds up the process and that must be recognised. For example, DB trust schemes deal with transfers to myriad different receiving arrangements, most of which are not part of any club and some turn out to be scams. Transferring to overseas arrangements can add even more time and complexity.
Pension freedoms, larger transfer values and greater adviser activity have more than doubled the volume of transfer quotation requests, putting great strain on administrators. Some trustee boards have responded by either agreeing increased administration fees to cover the extra work or limiting the number of transfer requests from a member to the statutory obligation of one a year. Ironically, only about 20% of transfer requests actually proceed, so all those extra quotes are getting in the way of satisfying the expectations of those who do transfer.
We cannot sacrifice benefits safety in the interest of fast transfers, so scam activity also needs to be taken into account.. Administrators have the added pressure that if HMRC decides an unauthorised payment has been made, punitive tax of up to 45% will be demanded from the trustees and member.
That said, it is vital that members receive the necessary information to plan for their retirement and this is simply taking far too long. We all need to change, but in the right way.
PASA believes there is too much variance between administrators in processing timescales, and too much acceptance of ‘stopping the SLA clock’ - the practice of suspending monitoring of elapsed time while waiting for third party information. PASA is setting up a working group looking at the transfer supply chain for occupational schemes and helping improve the experience for all parties. Within the trust world, we should know where the barriers to faster transfers lie and must work out how to remove the ones that can be eliminated safely. In PASA’s view, the five major barriers to faster transfers are:
1. Lack of automation. Despite living in a technological age, many transfers are still calculated ‘off the platform’ using proformae provided by the Scheme Actuary, creating a far more onerous manual authorisation process.
2. Actuarial interventions. Transfer values are currently large, meaning many calculations – automated or manual – need Scheme Actuary approval before they can be issued to the member. This usually stops the SLA clock, but PASA believes both administration and actuarial input should be subject to service agreements that are integrated to reflect the overall impact on the member.
3. Adviser involvement. Members’ advisers are an essential part of many transfers, however exchanging information with advisers is often long-winded and there is considerable friction in the processing. Issues tend to be non-standard information requests and transfer forms, as well as misunderstanding the type of scheme the members is transferring from, so larger administration firms are already creating standard information requirements with the major IFA networks. PASA would like to see this more universally applied and consider the good work done in the insurer space to avoid inventing new forms when a single, universal one will do.
4. Ready availability of cash in closed DB schemes. When a transfer is agreed, which often amounts to hundreds of thousands of pounds for a DB member, it is likely assets will need to be disinvested to fund it. Some trustees prefer to just hold a minimum amount of a scheme’s assets in cash, which can lead to a delay in paying transfers until the next realisation of assets occurs. Cash flow planning must be optimised so float levels are realistic for schemes’ needs. Members’ waiting times will be reduced, whilst ensuring schemes’ assets are invested appropriately.
5. Data Quality. Put simply, poor data slows up calculations and can lead to errors in quotations.
As a first step, PASA’s Transfers Working Group will invite key individuals at the main administration provider firms to discuss the issues and potential solutions, sharing some of the initiatives already under way. The output of this will ensure we focus on areas that will most positively impact on the process with the least disruption for schemes.
The Group will look at the transfer information and payment processes, to develop realistic standards which members and the industry can depend on, ensuring they are as aligned as possible with the IFA and insurer community. There are some quick wins to help members in the short term and some other areas that will take a little longer, but the important message is that the journey has begun.
The work commences with an Autumn workshop and PASA will publish our initial findings before the end of the year.