A matter of confidence

As someone who doesn’t work in the financial sector, Joe Public invariably has little in the way of financial knowledge and relies on his daily newspaper for information about factors affecting his pension scheme. This is not a reassuring thought for pension schemes keen to improve their members’ perceptions of their efficiency and level of service.

The UK press certainly pays attention to the closure of defined benefit schemes and other events that lend a negative slant to the general public. This habit undoubtedly has a cumulative effect on pension schemes at large, regardless of how well run they are or whether they continue to be maintained at great cost to the employer.

The unfortunate truth for the pensions industry is that what makes news is an out-of-the-ordinary factor. Papers will give a lot of attention to a scheme that has failed, not only because of the sheer number of people and amount of money involved in its collapse, but also because it doesn’t happen everyday. Admittedly, newspapers would be fairly boring if they listed every plane that took off and landed safely – but they will cover a slippery runway at Bristol or Heathrow blanketed in fog.

Capita Hartshead’s director of sales, marketing and communications Stuart Heatley says there is a wide range of feeling about pensions among the British public, depending on personal experience, education and level of involvement.

He says: “If you take somebody who’s never been in the public sector or who has been in a well funded corporate DB scheme, generally their perception is that pensions are a positive thing because they’ve had a positive experience. Going down to somebody who potentially isn’t in a pension they often have a very negative perception. So there is a mix of views.

“If I wasn’t aware of pensions at all the only message that I would get for the last few years would have been a negative one in terms of the mainstream media. You don’t get a report about somebody retiring before their 60th, going around the world and having a great time. You only get the report about a company that has folded and left the pensioners with a reduced pension.”

JLT’s senior administration consultant Simon Butler agrees there is definitely a glumness surrounding the pensions industry that can partly be blamed on press coverage.

He says: “All we ever read about is schemes getting themselves into trouble. Being in a pension scheme is a good thing. It’s not incredibly exciting, so I guess we’re going to hear more about court cases than we do about members who get their pension on time.”

MNPA‘s business development manager Mike McMillen agrees that the press, in pursuit of newsworthy stories, can often influence perceptions negatively with “scare factor” headlines potentially undermining the value of perfectly good pension schemes.

However he admits doubt in the industry is sometimes warranted.

He explains: “Admittedly, there are issues around the funding of DB schemes and some of the closures of DB schemes have been high profile as they have affected high street names – the latest being WH Smith’s plan to close its DB scheme, for example. Greater awareness that DB schemes deliver a promise and not a guarantee of benefit is needed.”

So if the reputation of the pensions industry really is in tatters, what can be done about it? As with most problems in the industry the answer would appear to be education – of trustees, members, and the general public.

HS Admin’s managing director Mark Adamson says: “It is for trustees, employers, consultants and administrators to work together, supported by the government, to carry out a number of initiatives to improve the lot of the pension scheme member.

“There needs to be education of members (and non-members) about their scheme, its benefits, its limitations and the responsibilities of the individual to understand their prospective benefits and to take a level of responsibility of their retirement planning. This should begin with financial education at school and continue throughout employment.”

Butler agrees: “I think that getting communication right to explain why any particular change is being made, how it’s going to be made and what the impacts are for members is crucial. Once you have people understanding what’s happening and why, you have transparency; you’re improving your own governance because it means that trustee boards are thinking about why they’re doing things.”

Heatley agrees with Adamson that education should reach beyond the bounds of building employee pension awareness, to building sound financial knowledge whilst people are still at school.

He explains: “What you can do is teach 16-18 year olds, who are starting to become financially aware, not just about pensions, but about property, working with bank mortgages, etc. Unless we get messages across about financial planning, generally throughout the lifetime of an individual, I think we’re still going to be challenged.”

Higham Dunnett Shaw chief executive Jocelyn Blackwell also places an emphasis on general financial education.
She says: “One problem that we have in the UK is poor financial capability. People in the US and Australia take responsibility for their own financial affairs, but we seem to be somehow fearful of this. We could do with far better financial education in schools and universities – an organisation called PFEG [Personal Finance Education Group] is doing some good work here, encouraged by the FSA.

“If people have a better understanding about their financial affairs, then they may do more to help themselves. We can’t rely on the state to provide a comfortable living in our old age.”

Alongside education, clear communication is also very important. McMillen says communicating what is happening to members builds confidence and thus helps the scheme’s reputation, as members feel fully involved and important to the process.

He explains: “Rather than ‘reputation’ we believe the main issue is ‘confidence’ – that is members need to have confidence in their pension scheme. This is where good administration helps to build confidence in the scheme. We’ve found spending a bit more time talking with members on the telephone and focusing on delivering good customer care has a very positive effect on improving members’ confidence.

“For example, keeping members informed of the progress of their enquiry helps provide confidence rather than creating the impression of a ‘black hole’ where they may wonder whether the enquiry was ever received.”

Performance measurement
Improving the reputation of a scheme could be seen as a PR exercise, but simply improving administration and member satisfaction levels will improve the relationship between the scheme and its members, and, therefore, the scheme and the public.

All too often, administrators focus on the length of time it takes to respond to a query as a performance measure, but that approach fails to take into account the total amount of time a member is waiting for an adequate response, and their level of understanding when they get it.

Adamson explains: “Turnaround time is important because cultural development has meant that scheme members progressively expect a rapid response as well as an accurate response. With pensions seen more and more as simply another financial asset, members understandably expect that they can get answers from their pensions provider as quickly as they can get answers from their bank.

“Therefore, we cannot ignore turnaround, but equally we should ensure that the turnaround times we are measuring reflect the members’ full experience, not just the time during which the task is in the hand of the administrator.”

Blackwell agrees: “Even if you only measure turnaround times, make sure that you also measure the total time that it takes to process a member’s enquiry. Administrators can ‘stop the clock’ on processing enquiries when they are waiting for data from third parties or the member – which is entirely legitimate. However, it does not give any idea on the end-to-end process time, which can be months if things are not chased.

“If all you’re measuring is how quickly you process a calculation that doesn't tell you how well that was received by a member. Because the member needs to know that his whole question is answered within the period of time that he would expect, so it’s not just the calculation which was done as a little tiny piece of the process, but that he got the answer that he needed within the time scale and that he understood it.”

Clearly, administrators need to use additional criteria to establish if they are providing their members with the level of service they expect.

McMillen says those aspects of service that are measured and reported on tend to drive the priorities and behaviours of the administrator, leading to other areas of service being completely ignored.

He explains: “The problem is that focusing on just one aspect of the service gives an incomplete picture of performance. For example, a turnaround time may well be hit but if a member does not understand a letter or it does not answer the question they will not be happy. Worse still, if they then telephone the administrator to try to get the right answer and have difficulty getting through to someone who can help or they speak to someone who clearly can’t be bothered then a complaint is likely.”

Blackwell agrees administrators need to look beyond turnaround times for performance measures.

She says: “Measures that can give early warning of things not going right are really useful. For example, high turnover in an admin team could imply low morale which could impact on the service to members. It could also mean that valuable tacit knowledge is lost if procedures are not fully documented (as is often the case).”

Reducing operational risk
Providing pensions is a risky business, although there has been a noticeably greater focus on risk management recently. Steps can be taken to reduce operational risks within schemes, namely in the administration area, where it is so important to get it right first time every time.

Aon Consulting operations manager Paul Noone says risk management should be at the centre of everything the administrator does and be reflected in its core business plans.

He says: “Ensuring that the organisation’s goals are clearly articulated to its staff and reflected in each of their goals and objectives will help drive a culture of risk management and continual improvement.

“It is important that the administrator has robust quality procedures and the correct level of IT adoption within its business to ensure the correct level of controls and, as far as possible, automated work routines to reduce the scope for human error.”

However, McMillen warns cutting down on the need for human intervention through automation and end-to-end processing helps to reduce the risk of human error but can increase other risks.

He explains: “Administration providers should recognise the importance of employing administrators that think rather than having a “pressing buttons” mentality, where common sense checks, which can be very helpful in picking up errors, are not made. Automation will save administrators’ time and this should be used to focus more on customers and the overall level of customer care they give to members.

“Automation that is not properly tested is worse than no automation at all. Just imagine the impact of an automated calculation that is wrong, affecting thousands of members and is not detected for years through poor testing.”

The Pensions Trust head of customer services Martin Hoskins agrees care needs to be taken so administrators are not overly reliant on technology.

He says: “Once you are relying on technology you must be sure that the process is right and that you haven't in fact introduced systemic errors. This puts greater onus on the system design stage and ensuring that this is well-designed and tested before introduction.

“The technology should allow administrators to be freed up to deal with cases that the systems find difficult to handle and to respond to customers who are making enquiries. Well-trained and knowledgeable administrators who understand what should be happening are also more likely to quickly spot any errors that do occur.”

Butler stresses the importance of identifying risks before they become too big to handle.

He says: “Identify the risks, identify what you’re going to do with them and then revisit that process regularly to monitor progress. It is not enough to say I know what risks I’m facing and this is what I said I was going to do about them in January 2005 if I haven't yet done anything about them.

“I think that operational risks have been a big focus coming out of The Pensions Regulator’s work, which we very strongly support, and the code of practise going in place on internal controls last November has offered practical guidance to administrators.”

DC schemes require a more careful approach to administration than DB schemes. Administrators must be able to prove that everything happens on time, as delaying an investment could mean the member has missed out on future retirement income.

McMillen explains some of the finer points of DC administration: “The administration is often described as being more akin to accounting and it is essential to reconcile contributions and investments – otherwise problems can be stored up for the future. Unpicking DC problems are horrendous and costly.

“Timeliness is an issue: if money isn’t invested on time members can lose out if say there is a change in stock markets. DB admin is more forgiving as the eventual benefit is not linked to investments but salary. Due to this transparency, it is even more important to make sure data is correct when providing members with access to their records via the web.

“The investment risks lie with members for DC schemes and therefore they need greater pension literacy and financial astuteness to ensure they make informed decisions. However, this is not easy with prescriptive disclosure requirements often making pensions more confusing.”

Adamson agrees DC administration brings different challenges than those presented by DB administration.

He says: “It is essential that DC contribution data is recorded 100pc accurately and within rapid time scales to ensure that the onward transition of monies to the investment manager is swift, ensuring the earliest possible investment.

“DC members have every right to expect that as soon as their contributions leave their pay they are working hard for their retirement, which is why same-day investment should be the target for all administrators.”

Blackwell points out the scope for error is much greater when dealing with DC schemes than it is when dealing with DB schemes.

“With DB schemes you have to get things right at the time that you do a calculation for retirement or death or transfer. With DC you have to get it right every single time there’s a contribution or a switch. The attention to detail and the opportunity to screw things up is there all the time.”

TPR has recently focused attention on DC administration and governance, following a report last April that showed members are at risk of losing out on future payments because of poor record keeping.

Trustees are now faced with regulations which require them to establish and operate internal controls that ensure the scheme is administered and managed in accordance with scheme rules and the law.

McMillen explains: “Up until recently, administrators that have issued internal control reports would usually have prepared the report based on the FRAG 21/04 framework. However, this framework has been criticised because there are no requirements for the reports to have opinions over the design of the internal controls and no requirements for different administrators to cover the same control objectives.

“To address this, there was new guidance issued by the audit and assurance faculty of the ICAEW in 2006 setting out conditions that scheme administrators should meet when providing reports on internal controls and control procedures including a framework of control objectives. The new guidance also requires the internal controls report to address the design and operating effectiveness of the control procedures.”

Adamson says: “TPR’s approach will certainly give some further focus to administration and governance issues, but may not in itself have significant impact. Administration and governance are both already hot topics and have been for some time, whether as a result of legislation, trustee awareness or member expectation.”

Heatley says regulations are good, but it would be better if the industry carried out self-regulation.

He explains: “All administrators need to put a code or practise in place. It would be very useful to give promises that we will do this, and we will adhere to this, so schemes won’t select providers that don’t adhere to that.”

Adamson believes that regardless of the approach taken by the regulators he anticipates that many third party administrators will seek to convince trustees and employers to make greater use of technology, to develop and improve member service and diversify the range of services they provide.

He says: “However the industry develops, I would like to think that providers could work more cohesively with each other to seek to improve the overall experience of the scheme member.”