The complex mass of regulations which now surrounds pension administration has pushed it to the top of the company agenda.
A decade ago, how to improve the management of the company pension scheme was a subject which was invariably relegated to the back of the corporate agenda, where it would, occasionally, be mulled over by human resources and finance directors. The pensions environment was stable then. Many sizeable organisations provided their employees with a final salary pension scheme and all employees were obliged to join the scheme. But information about pension provision was generally poor.
This situation has changed dramatically in recent years, so much so that pensions are now a major issue for many companies. This is particularly true of the British Coal Corporation, which has two major pension schemes with assets totalling £14 billion.
There are three main reasons for the change. The first is to do with choice. The straightforward model of a contracted-out final salary scheme is becoming less common. Companies can now contract out by establishing a money purchase scheme or they may sponsor a group personal pension plan. As the rebates for contracting out become smaller, the decision about whether or not to do so needs to be thought out more carefully. The decision is made more complex by the fact that additional rebates are now granted to those over 30 who have contracted out via a personal pension. This new method of pension provision has prompted many companies to review the role of pensions provision in the total benefits package. As a result, they now have a much clearer understanding of why and how they provide pension cover for their employees.
The choice now available to individual employees has caused the most radical change in the way the schemes operate. This has been due to the abolition of compulsory scheme membership in April 1988 and the introduction of personal pensions in July of that year. Sophisticated material promoting the benefits of various schemes are now being churned out in abundance.
The second reason is complexity. A mass of regulations now surrounds pension schemes. Concepts introduced in the 1980s, such as revaluation, disclosure regulations and guaranteed minimum pension increases, all add to the burden. Nor is there any sign that the schemes will get any simpler, what with limited price indexation, the treatment of pensions with regard to divorce and a possible change in state pension age.
All this poses problems for trustees and HR directors in assessing how best to arrange for the administration of the pension scheme. It is important to ensure that the perceived benefits of the scheme are not lost through poor administration. The need for control in this sensitive area has been one of the reasons why many companies have previously handled their own pension administration. But as the complexity of the schemes increase, the role of the pensions administrator has become more important. He or she needs to be well trained both in technical terms and in service quality concepts.
A trend towards outsourcing pension administration seems likely. Indeed, professional administration companies, offering expertise and economies of scale, are now emerging. These are replacing the in-house pension arrangements of the major occupational pension schemes - British Coal's own Pensions and Insurance Centre being one example.
The third reason for the change in attitude towards pensions is due to the controversy surrounding them. In the late 1980s many pension schemes were in a very healthy financial position. This led to the often false notion that huge sums of money were available for distribution. True, the larger schemes had surpluses, often exceeding £1 billion, which meant that members' benefits could be improved and that many companies could take a temporary holiday from contributing. Public awareness of pensions issues increased greatly following the scandal at Mirror Group Newspapers, where pension fund monies had been used to support Robert Maxwell's private companies.
The effect has been to reinforce the need for trustees to review their arrangements for investment management and security of assets, and to consider what checks and balances need to be in place between company, trustees and pension funds. The issue has become highly politicised and a government sponsored review of the whole basis of pensions law will report in September this year. This will undoubtedly lead to further publicity on pensions.
The changes seen in recent years have transformed pensions into a major political and corporate issue. As a result, companies have a better understanding of the role of pensions provision in their benefit structure and scheme members have a better appreciation of the value of pensions. Increased complexity will lead to greater specialism in the provision of pensions services. Few would dispute that good quality occupational pensions are an ideal way of providing retirement income. My worry is that as the demands on employers increase and pension scheme requirements become more complex, fewer firms will offer such arrangements. The legislators need to be very careful not to kill the goose that lays the golden egg.