When things go wrong in DC pension administration they go badly wrong. The old axiom is “right first time”. The cost of unravelling a mistake can be ruinous.
Take the case of the Dutch insurer Aegon, whose UK subsidiary formerly Scottish Equitable- has had to identify, unwind, recalculate and compensate a large number of customers for an administrative error that persisted over time. This from the FT.
Aegon’s underlying earnings before tax declined 11 per cent to £8m in the third quarter of this year compared with £9m in the previous quarter, due in part to the cost of customer redress.
Significant exceptional charges affecting results during the quarter included £5m for a customer redress programme and £7m in expenses related to the programme’s delivery.
Aegon expected the process of determining the full scope of customer redress to continue until the end of the year and could affect financial results for the final quarter as a result of further charges.
The costs come from a process of identifying and correcting issues in the company’s policy records, and compensating for any financial detriment suffered by customers.
Reading this ,I’m aware of the vulnerability any pension provider has to human error – even manual keying errors – this frightens me.
I’m also aware that the costs incurred by Aegon would sink most pension administrators and it concerns me that the controls in place at multi-national insurers may not be as rigorous across the board.
The security of the assets you hold in a DC pension scheme varies. If your pension is managed by an insurance company, you will almost certainly be covered by the Financial Services Compensation Scheme but if it is set up with separate administrators and asset managers (known in the trade as “unbundled”), you are really dependent on the level of Professional Indemnity cover owned by the administrators and the financial strength of the administrator themselves.
The Pensions Regulator is right to include the “security of assets” as one of the 6 key differentiators in determining the likelihood of good DC outcomes.
My concern, and the point of this blog is that while we have not yet heard of a cock-up of Aegon proportions in the non-insured (unbundled) part of the DC pensions market, there is no reason to suppose that the time bomb is not ticking.
If the bomb goes off and we discover one of our third party administrators has had systemic problems over years that have led to gross errors in the calculation of pensions or worse still, the loss of assets backing up the calculations, will there be money of the kind Aegon had to throw at the problem?
I suspect the answer will be no and it will be the taxpayer who will be the insurer of last resort.
If you are the member of an unbundled DC scheme, you are probably unaware of these issues. Hopefully you will never need to worry because you have trustees who keep on top of the administrative issues and make sure that the security of the assets that are set aside to buy your pension are in the hands of sound custodians.
However, if you are a trustee reading this and you are getting that queasy feeling in your tummy that comes from not feeling quite sure, then I suggest that you think long and hard about staying uninsured. Insurance companies may not seem the friendliest of bedfellows but in the complex world of UK DC pensions , they may be your best bet.
Whether member or trustee, the risks of not insuring your DC pensions by which I mean placing the assets and administration within an insurance policy, seem unrewarded. There is no great financial advantage to staying unbundled and for all but the specialist market of fully utilised SIPPs and SSASs, the insured route seems obvious.
Unless of course you are contracting with NEST or one of the new breed of non-insured mastertrusts….or have I just opened a new can of worms?