Pension Provision: Where there is blame, there is a claim
John Reeve, Director at Cosan Consulting, recently wrote for Pensions World on how to avoid claims from disappointed members looking for someone to blame for their inadequate pension.
In a nutshell:
- trustees and employers have a responsibility to help employees make the right decisions during their career, as well as at retirement
- both should work together to help employees avoid poverty in employment
- a full audit trail of the help given will help mitigate the risk of retrospective action by employees.
The article in full:
In recent years, there has been an increased focus from corporate and pension trustee boards on the management of risk. Companies have been required to improve their governance and to manage risks of all types, whether these be financial risks, operational risks or reputational risks. In the pensions world, risk is also a big subject. Trustees are encouraged to de-risk liabilities and to manage and recognise the risks within their investments.
While some risk is necessary, especially in investments, the new phrase of “eliminating unrewarded risk” is becoming a mantra of many boards. Risk logs and risk assessments are now becoming a way of life.
I want to consider one risk that is very real and potentially very damaging, but which is getting very little consideration at either company or trustee boards. This is the risk associated with employees’ inability to make appropriate financial decisions.
We all now have a lot more flexibility and choice in the UK regarding our retirement. Not only do we have choice as to how we take our retirement savings, but we also have more choice than ever with regards to when we retire. Importantly, with the move from defined benefit (DB) to defined contribution (DC), we also now have a choice as to what we spend and what we save for our retirement.
While many commentators will applaud the new freedom as good for the consumer, Mahatma Gandhi said: “Freedom is not worth having if it does not include the freedom to make mistakes.” Countless law firms have suggested that: “Where there is blame, there is a claim.”
In the increasingly litigious world in which we live, there is often a direct line of sight drawn between the freedom to make mistakes, poor outcomes, finding someone to blame for the mistake, and litigation. So how does this become a risk for employers and trustees?
First, let us consider the employer.
We do not have a default retirement age in the UK. So, when an employee gets to age 60 or 65, the employer cannot force him or her to retire. If that member does not have sufficient savings to live on, then he or she may well decide to continue working. Without older employees retiring, it may become difficult, if not impossible, to bring new people into the business. This is a risk that employers should recognise.
Furthermore, employers now have a responsibility to auto-enrol employees into a pension arrangement. If you have little knowledge of finance and you are told that you are in a “pension scheme”, then I think you are entitled to expect that it will give you a “pension” – a payment to replace your regular wages when you retire. You cannot be expected to understand that the plan into which you have been auto-enrolled will not do this. We all know that the contributions are not sufficient to meet most people’s expectations. And if the default fund fails to perform, then there are further obvious exposures.
What about trustees?
For many years, the role of the pension trustee was to administer the trust as laid down by the employer. In recent years, the responsibility has been implicitly extended, such that the Regulator now sets out the trustees’ responsibilities in the following words: “Make sure you understand your pension scheme members’ views and needs, and you communicate with them at the right time and in the right way to help them make good decisions.” – www.thepensionsregulator.gov.uk/dc-pensions.aspx
For all those trustees who doubt this, let me refer you to the DC Code and associated guides. Here are just a few quotes from these:
At all times, it is important that the communications members receive contain all the relevant information to help them make good decisions about their retirement saving throughout their membership period, including as a deferred member.
Similarly, we expect trustee boards to ensure that members are regularly informed that their level of contributions is a key factor in determining the overall size of their pension fund.
We expect trustee boards to ensure that members have access to enough information about the investment options available to make informed decisions about their investment choices and to understand the potential impact of those decisions on their pension savings.
(Code of Practice 13 and the associated guides)
All of these quotes refer to DC guidance, but before those responsible for DB arrangements smugly turn the page, let me suggest that these apply equally to DB trustees.
The direction of travel is clear and it would be a strange view of our world to suggest that the responsibilities of DB and DC trustees differ in this respect. Indeed, I wrote in these pages in April about how this might come back to haunt DB trustees.
Where an employee gets to age 60 or 65 without the savings needed for a comfortable retirement, they are going to look at why this has happened. It might have occurred because they:
- may not have saved enough through their working lifetime
- may not have received sufficient investment return
- may have taken advantage of the new freedoms and cashed in their savings at 55 and spent it all.
Common thinking would suggest that all of these would be the employee’s fault, but history would suggest that there will be many people looking for someone else to blame.
The story of pensions mis-selling and payment protection insurance should be a warning to us all that very different views can be formed, when viewed through the telescope of history. Could these risks become the next class actions, with lawyers collecting aggrieved former employees to take action against employers and trustees?
We have already established that trustees have a responsibility to make sure that members have the information they need to make the right decisions during their careers and at retirement. If trustees have this responsibility, then where a member retires without enough to live on, there will be a question of whether the trustees met their responsibilities.
Employers share this responsibility and have the added risk of having to deal with the inadequacy of auto-enrolment and with the issues associated with continuing to employ those who find that they cannot afford to retire.
If employers and trustees face this risk, what can they do about it? There are two things that need to be done.
First, trustees and employers should both be looking to help employees make the right decisions throughout their working life to ensure their financial wellbeing. That is not to say that we should be looking to maximise savings into pensions. This will not be the right decision for everyone. This is about helping employees do what is right for them, whether this is paying off debt, saving for a house or saving for retirement. We need education across all aspects of financial wellbeing. It is time for the pension industry to realise that we are part of the wider financial world and not a “special case”. Trustees and employers share a responsibility to help employees with their financial wellbeing.
Second, trustees and employers need to be able to show what they have done to help employees make the appropriate decisions. In ten years’ time, how will you be able to prove to a judge that you did all that you could to help that impoverished ex-employee? Can you evidence the information supplied, the training provided and the help offered? Can you show that IFA advice was offered and, if taken up, can you trace the adviser?
With this in mind, we believe that employers and trustees should work together to create a programme of education and information to help employees be more financially aware. This should not just cover pensions, but should cover all aspects of financial wellbeing; and it should not just be for those who are approaching retirement, it should be for all employees. The programme could be a combination of online and face to face training and should be engaging and easy to access, meeting the varying needs of the workforce. Most importantly, it should be well structured and it should include a full audit trail of the information provided: what, when, where and to whom.
Only in this way can trustees and employers be happy that they have all done everything that they can to avoid employees suffering from poverty in retirement. In addition, they can minimise the risk of a successful claim against the company or trustees in the future.