Whatever will you do when your pensions guru leaves? asks James Lavender, Capita Hartshead
Many people associated with pension schemes will be familiar with the terms “governance” and “risk”. However, these terms are usually associated with investment and running the scheme. An area that can often be overlooked is key person risk. The loss of a key person – a pensions manager, an administrator or a key contact – can have a dramatic impact on a pension scheme.
During the life of a pension scheme there will be numerous changes, either as a result of overriding legislation or changes instigated by the sponsoring employer or trustee. Legal changes to a scheme will be reflected in deeds of amendment. However, the trust deed and rules are not always updated in a timely fashion.
As time passes, the myriad of changes can become a blur, but usually there will be a key member of staff who will remember the changes, what impact they had on the scheme, how processes evolved and, importantly, how member benefits are to be calculated. Many schemes have such a “sage” whom people rely on as the font of all knowledge. As a result, you may find that the scheme history and practices are not always fully documented and the knowledge is not disseminated to others. This type of position presents a huge risk to the scheme.
Alarm bells ring when the sage decides to leave, retires or worse. This is when panic sets in; when people realise just how much knowledge rests in that person’s head and, often, nowhere else.
To demonstrate the point, if you look back over the past 35 years, it is difficult to keep track of the number of new Pension Acts and other changes to legislation, without even considering their content.
Just think of the changes that have taken place to contracting out, equivalent pension benefits (EPBs), equalisation, guaranteed minimum pensions (GMPs) and protected rights! Someone new to a scheme or the industry may not be familiar with the intricacies of GMPs and what happened to EPBs, payments in lieu and suchlike.
Then there has been anti-franking, equalisation (a dizzying subject on its own), preservation, the Pensions Act 1995. These are just some of the changes driven by legislation, but what changes have taken place which emanated from the sponsoring employer? Have there been changes to the accrual rate? Has the definition of pensionable pay changed? What happens to benefits for members who divorce? Has the scheme moved to a career average basis? The list goes on.
This history and its impact needs to be captured, preferably while the sage is still around. In the pensions arena, history is vital and documentation is king.
The sage is also likely to be accomplished in dealing with scheme specific custom and practice, not just during times of the major changes in legislation but on a day to day basis; documenting this knowledge is essential for the upkeep of the scheme.
With the above in mind, what can be done to mitigate this key person risk?
The first step is always going to be documentation of practices to ensure that dates of changes are included and the finer points of the decision process are clearly set out. A full archive of member booklets and leaflets (with dates) should also be available in one place. The automation of processes, calculations and practices will also reduce the risk.
Finally, training and education of staff is always key. Well trained and educated staff are valuable to any operation, but especially in the pensions arena. Clear training plans which cover legislation, scheme history, practices and requirements will go a long way towards mitigating key person risk.
Whatever pension schemes and trustees do, it is important that they manage the risk, because no one knows when the sage may depart and leave them exposed.
James Lavender is a consultant at Capita Hartshead Actuarial and Consultancy Services; email@example.com
Author: James LavenderJames Lavender is a consultant at Capita Hartshead Actuarial and Consultancy Services; firstname.lastname@example.org