PensionsSep 20 2018

How to help prevent future pension problems

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How to help prevent future pension problems

This means there may be many more clients and unadvised pensioners who are yet to receive a letter from HM Revenue & Customs and/or their scheme provider with a request for repayment.

Because contracting out ended in 2016, the process of GMP reconciliation is still ongoing, with schemes and the tax office having to agree on the right GMP figure. 

Sir Steve Webb, director of policy for Royal London, says although the process is supposed to finish this year, "I very much doubt that it will".

Therefore, he urges schemes to be understanding when it comes to requesting clawback.

We could be building up to the same problems again in 20 or 30 years' time, when people find the amount paid in for them was not correct. Ros Altmann

But all schemes need to make sure their houses are in order, not just for DB but also for all pension entitlements, as Kay Ingram, director of public policy for LEBC, points out. 

What the GMP debacle has taught the industry is that poor administration and erroneous calculations can affect all types of pension pots - and nobody wants to see a repeat of this 20 or 30 years down the line.

She says: "From a policy perspective, there is a need for schemes to keep better records of pay and service, and to keep the member informed of their entitlement before retirement age. 

"The Pensions Regulator (TPR) is putting pressure on schemes to improve, as far too many still rely on paper records."

Being proactive

Instead of waiting for clients to be hit with a letter towards the end of the year - when heating bills and Christmas expenses start to rack up - Mr Webb also advocates that advisers be proactive with clients who might have been contracted out.

He adds: "Advisers may also wish to check with occupational schemes whether the GMP reconciliation process is complete yet for their scheme, as this should mean that there are no nasty surprises coming down the track."

John Lawson, head of policy, retirement solutions, for Aviva, warns there could be future issues over transfer values, so he advises people to check whether the scheme has completed its GMP reconciliation process as required by HM Revenue & Customs. 

"Similarly", he adds, "for any client whose benefits come into payment before December 2018, it would be worth checking with the scheme whether the expected benefits are correct, having been reconciled against HMRC records." 

Beware of similar problems

But while the GMP process of reconciliation is drawing to a close, other experts have warned there could be more poison in the pensions pot as similar errors involving poor administration are being uncovered over transfers and defined benefit contributions.

Earlier this month, FTAdviser reported errors were found in half of the data employers sent to providers on the auto-enrolment contributions of their staff, leading some to call on the pensions regulator to step in.

Integration platform Pensionsync, which recently appointed former pensions minister Baroness Ros Altmann as chairwoman, had analysed data on contributions to more than 10,000 schemes between August 2017 and July 2018 and found 50 per cent had to be sent back for correction.

Ms Altmann cited common errors, including contribution amounts that are too high or too low, payments made for workers who do not belong to the scheme or have opted out, or incorrect pay period dates.

Implementation of the dashboard would incentivise schemes to improve record keeping and would enable members to be better informed well before retirement. Kay Ingram

She says: "The really scary thing for me is that, since working with Pensionsync, it has become obvious to me the administration of pensions is still not working properly. 

"There are hardly any safeguards in place to be sure that auto-enrolment pension contributions are actually correct. And the error rate for the contributions, often uploaded manually onto spreadsheets and sent to pension providers with errors, is high."

Ms Altmann warns if these records are wrong right at the start, then "we could be building up to the same problems again in 20 or 30 years' time, when people find the amount paid in for them was not correct, and then have to try to sort out the mess, rather than having strong safeguards in place now to ensure problems do not arise in the first place". 

Technological advances

For Ms Altmann, making the most of technological advances to ensure proper audit trails and "robust checks" is essential. 

She explains: "With automated integrated connections between the administrator and the pension provider, with robust checks to ensure contributions are actually correct, there is much less chance of manual errors, and there can be robust checking to ensure accuracy." 

Ms Ingram agrees, and highlights the incoming pensions dashboard - which after much controversy this year is expected to be put in place, in some form, during 2019 - as a good example of how technology can be used to prevent future 'surprise' clawback attacks.

She says: "The pensions dashboard is designed to require all schemes to provide a digitalised record of an individual's pension from all sources, and for this to be updated regularly. 

"Implementation of the dashboard would incentivise schemes to improve record keeping and would enable members to be better informed well before retirement."

Advice well ahead of retirement

Again, having a quality financial adviser helping people in the run-up to retirement will prove invaluable, whether the person has a defined benefit or defined contribution or personal pension pot. 

She has drawn up a list of 10 commandments that individuals and their advisers can use to help protect them against not only poor scheme administration but also errors on behalf of HMRC. 

Her Ten Commandments for improving retirement income are: 

  • Understand what income needs will be in the future. This should be the goal set for retirement, rather than simply accepting the pension offered from each source. 
  • Consider all options in terms of flexi access, guaranteed lifetime income annuities, and ensure that all lifestyle and health issues are fully explored, as this could gain more guaranteed income. 
  • Don’t underestimate life expectancy - always plan for 100+. Don’t forget to provide for inflation and for dependents, who may not qualify for continuing pensions after your death.
  • Get a retirement specialist IFA to check that the offer of pension from the scheme is correct based on the scheme rules, and individual salary and service history.
  • Seek advice on whether the scheme rules and pattern of income payment meet your needs. For the majority of scheme members, they are likely to be the best option, but if personal circumstances make you an exception, there could be benefit in getting advice on alternative strategies. 
  • For contract-based schemes, shop around the whole market, do not accept the first pension offered.
  • Get a state pension forecast. If there is a shortfall, ensure that all credits have been claimed and, if necessary, make top-up payments to secure a higher pension.
  • Make full use of tax relief and carry forward of relief from earlier years to top up pensions before drawing benefits.
  • Be aware that drawing £1 more than the tax-free cash via flexi-access drawdown will end carry forward and limit future tax relieved contributions to £4,000 (the Money Purchase Annual Allowance).
  • Expect the first pension payments to be incorrectly taxed, as HMRC uses an emergency code, so be ready to reclaim the overpaid tax.

Ms Ingram adds: "Starting to plan at least five years before income is likely to be needed will enable gaps to be filled and alternative strategies to be considered fully. 

"Focusing on future income needs, and aiming for that goal, may achieve a better retirement than simply accepting the pensions offered from various sources."

simoney.kyriakou@ft.com