The problem of lost pensions is regularly mentioned on various media platforms. They mostly simply focus on the problem without looking at possible solutions and the benefits for the pensions industry as a whole that could be achieved by seriously addressing this issue. Many of the stories generally also feature large numbers which the general public cannot relate to and no genuine discussion tends to arise as a result.
There is little to be gained from apportioning blame for how the problem of lost pensions has got to this point. To use a large figure often bandied around in the press, the size of the current lost pension pot is estimated to be £3bn – £4bn. It’s an issue which is not going to be solved without the pensions industry as a whole taking the responsibility to try and find a resolution.
Pension schemes and administrators need to be more forward thinking when it comes to tracking down deferred members where contact has been lost. Nevertheless, it is true that members need to ensure their pension providers have correct and up-to-date details for them. Co-operation from pension administrators, coupled with an innovative movement to embrace independent technology, as seen in other European countries, could re-unite a large percentage of the estimated one million deferred members that DB schemes have lost track of within the UK. In addition, the universal marketing reach of The Pensions Advisory Service (TPAS), The Money Advice Service (MAS) and the Citizens Advice Bureau (CAB) would only further help people plan more effectively for retirement.
The Government’s position on the subject has recently changed
The introduction of ‘pot follows member’ by the Department of Work and Pensions (DWP) was recently pushed back to 2018. It was expected to begin its first phase in autumn 2016 and, moving forward, it’s believed that the initiative isn’t being delayed but is in fact being scrapped completely.
Shortly before announcing the delay in rolling out ‘pot follows member’ the Treasury called upon the private sector to take the lead in developing a ‘pensions dashboard’ for savers. Since then ecommerce firm Origo have announced it plans to embark on a project to produce a consumer ‘pensions dashboard’ over the next couple of years. It is yet to be announced that this project is backed by the Government but given the recent statements it would be hard to argue that it has not given the project the green light. If that were to be the case, it’s difficult to envision a future for the Pensions Tracing Service.
A ‘pensions dashboard’ should certainly stop the continued growth of lost pensions in the forthcoming years but whilst existing pots continue to go unclaimed the Government is losing out on tax revenue that could be earned from the payment of these pensions. On an individual basis a traced pension may not be of significant value to HM Revenue & Customs, £30 a week in recent years, but taken as a whole we are looking at a large sum of money and therefore lost tax revenue. In 2014 the Pension Tracing Service helped around 100,000 people find pensions worth in excess of £150 million which is less than 5% of the estimated unclaimed pension pot.
Where are we currently?
The majority of the public believe that pension schemes will get in touch with them when the time to claim their pension draws close. What is often not understood is this is not a straight forward process especially if they haven’t kept schemes updated of changes of address since leaving the scheme. Some members will be found using existing measures including DWP letter forwarding, tracing agencies, section 27 notices and internet-based search tools like 192.com. However, many others including beneficiaries, ex-pats and residents not on the electoral roll, may not be located in these ways.
At present the pensions industry follows best practise in terms of keeping in touch with their deferred members, which includes regular correspondence with deferred members via written communication and/or e-mail. Many schemes will employ various trigger points such as impending retirement or death of a member. The scheme’s records of lost or ‘gone-away’ members are likely to stem from returned Annual Benefit Statements and/or Funding Statements; these however don’t take into account statements which are simply ‘binned’ and not returned by a new resident at the member’s old address for example.
The process of updating a scheme’s records when administrative tasks such as Annual Benefit Statements are undertaken is very labour intensive for already strained pensions departments. There is no doubt they would benefit greatly by being able to keep track of these members throughout their working lives instead. A searchable online database simply containing a unique identifier such as National Insurance Number of the consumer, whilst also containing contact details of the pension provider, could bridge this ‘knowledge-gap’ for schemes where deferred members are not accounted for. Keeping tabs on these deferred members would significantly reduce costs for the scheme with regard to existing processes already mentioned and also further help to satisfy the Pensions Regulator’s common and conditional data requirements.
Accurate member data could help to reduce buyout costs through improved location (for mortality assumptions) and marital status information. This is often seen as the most time-consuming and difficult part of the process to get right. Other de-risking exercises, such as ETVs, PIEs, trivial commutation and refunds of contributions, could have a higher success rate for reducing the scheme’s liabilities if you can contact all members and allow them the option to leave the scheme in one of these ways. Lost member records affect the scheme’s funding position and resolving this missing data removes certain restrictive funding assumptions and potentially smaller pots. All of which help make the lives of pension scheme managers and trustees that little bit easier.
The value to members
For members themselves there needs to be a realisation that for them to make the most accurate and effective decisions about their retirement options they need to be sure they have all the correct information at hand. With pensions freedoms now upon us, more help than ever before is available to consumers. Despite this, there are still going to be cases where an individual seeks guidance without having a completely clear picture of their financial position. There is no benefit to these individuals or the pension scheme of pots going unclaimed.
Where this all leaves us
If the Government resolves the issue of lost pensions then the benefits are quite clear. For now the outcome of the potential Origo pension register service is unclear. We do not know how or if it will help streamline scheme record keeping or just further burden already stretched pension administration teams. At present the project has only just been announced and it is not clear who will fund it. It is also not known who exactly is involved or will be included in time and whether we will ever see this version of the ‘pensions dashboard’.
The costs of the Origo project are being spoken about in terms of millions of pounds which seem unnecessarily high to solve the issue of lost pensions alone. Deciphering the problem need not be an expensive project; a growing UK National database such as PensionsLink (incorporating FindMyLostPension.com) was developed for considerably less than the Dutch pension tracking system for example. The task of providing people with a crystal clear vision of their retirement opportunities does however remain challenging, requiring co-operation from all interested parties both public and private.
The end result though would potentially benefit millions of participants. From the employee able at any time to see their retirement funds and plan for the future, to a beneficiary who can easily track down an entitlement, or defined benefit schemes who could plausibly reduce their liabilities. Not to forget Third Party Administrators and Insurance companies. Finally, there is the Treasury and very welcome increased tax revenue.
So there would be a considerable upside to the pensions industry as a whole if it were to pull together resources and help reunite consumers with their rightful entitlements. At present it appears not a day goes by without another pension scams warning from ministers. It would be a welcome change to restore public confidence in retirement saving with news that people need no longer worry about lost pensions, as the industry had worked together to find a resolution.