Pension fund members could be losing out on up to £800m of benefits because final salary pension sch...
Pension fund members could be losing out on up to £800m of benefits because final salary pension schemes have been wound up inefficiently.
"Wind-ups pose many problems for trustees and members alike," says Antony Miller, a partner at actuarial consultants HighamNobbs Consulting.
"Trustees are in the difficult position of having to look after members' interests whilst ensuring compliance with complex legislation and facing the potential risk of litigation should things go wrong. This all means that members will usually face a reduction in their entitlements and uncertainty over their future."
Research conducted by HighamNobbs finds two principal reasons for the loss.
"The wind up process is taking far too long," the consultants note. "Over 40 per cent of final salary pension schemes which go into wind up take over four years to complete." Conversely, with effective project management, the vast majority of pension scheme wind-ups should take no longer than two years.
The other reason for losses is blamed on potential cost savings which are missed by trustees who do not review the experience, resources and proposed charges of the schemes' advisors at the start of the wind up process.
HighamNobbs says around 80% of pension scheme members would benefit from a greater focus on minimising costs when a pension scheme goes winds up.
The consultants note that only 10% of incumbent advisors and administrators fees are subject to market testing. "This is a surprisingly small figure given the current rapid increase in final salary scheme wind-ups as the effects of the Governments' Minimum Funding Requirement and FRS17 continue to takes hold," the consultants note.
Many trustees believe prompt action is required in a wind up situation to protect members' entitlements. The scheme's investments, for instance, may need to be moved to a more appropriate environment. However, the research showed action is often delayed whilst trustees seek advice and their advisors get to grips with the complex legislation, risking further loss.
Whilst company insolvency remains the foremost reason for pension schemes to wind up, the threat of FRS17, rising compliance costs and the demands on cashflow caused by the Government's 'minimum funding requirement' are quickly becoming the more important factors.
‘Important to have an anchor’
Report to be written by TPR
Lack of innovation for solutions
Some 2,000 consumers affected