In pensions “freedom” is the buzzword. People can have what they want- how they want it and we all know what that means! It means that down the line there is potential for administrative chaos.
Payroll depends on uniform rules, the natural bent of pension consultants is towards infinite complexity. Prepare for problems!
Readers of this column will be familiar with the compliance issues of auto-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. As if pensions have not burdened payroll with enough, moves are now afoot to flex the payments of pensions using techniques that owe much to flexible benefit programs. Typically these programs are described as “pension re-shaping”; 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 a number of seminars and workshops on these proposals, I can see them as attractive to members, they are an extension of the pension freedoms brought in by George Osborne in the 2015 Finance Act. But they spell trouble down the line for people charged with running pensioner payrolls. For each individual could have his or her own rate of pension increase.
One of the benefits of collective solutions (such as pension schemes) is that they provide uniformity of process that leads to economies of scale. By offering freedoms, the risk of things going wrong increases and the cost of risk mitigation has to be charged back to the pension scheme (or born 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 if it is more an instruction than a conversation!
It’s critical that those who run the pensioner payroll for the corporate defined benefit schemes that still look after some 11m 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.
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, now it is a function incorporated into third party administration who use the pensions software either of their in-house administration system or a third party system- 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 re-shaping”, 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 providers , get organised and get involved prior to decisions being taken.
I mention defined contribution 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 its time that the CIPP set up a standing committee to look at pensions from the payroll perspective. Whether it be the compliance to auto-enrolment, the payment of DB pensions or the operation of DC pensions under drawdown, payroll needs a strong voice.