Michael Burkie, market development manager EMEA at The Bank of New York Mellon explains why those who retire abroad do not always get a fair deal, and what can be done to rectify the situation
Many dream of a retirement abroad - a prospect made even more appealing by the idea of warmer weather, lower living costs and a more sedate pace of life. To date, over 1 million UK pensioners are living this dream, and many more are planning on joining them - a further three million by 2020, if the estimates are correct. For these retirees, the pensions payments process is rarely a point of consideration. Yet it should be, if for no other reason than the fact that the income shift from salary to pension is a significant financial change in an individual's life. As a result, pensioners are more likely to pay close attention to the minutiae of their finances than any other demographic.
However, the reality is that many retirees abroad receive a poor service from their pensions providers - and they may not even be aware of it. This is because, in most instances, the opacity of the pensions payments process obscures both the mechanics and the costs of the payments system from the pensioner.
Problems with the system
Certainly, the lack of transparency in pension payments is the most common complaint from retirees abroad. Upon inspection of their payment receipts, many discover that seemingly arbitrary bank charges have been applied by intermediary banks as the remittance travels to them from the provider. These charges frequently vary, and the differences depend on factors such as the type of payment used and the strength of the foreign exchange (FX) rate secured by the bank on the retirees' behalf. This means that situations can occur where pensioners entitled to identical benefits receive differing amounts - depending on the practices of their local bank.
Payment delays are another problem, usually because funds may not be readily available. Delays in pension payments being received can arise in instances when cheques are drawn on UK banks, and are dependent on the cheque-clearing policies of these banks. Indeed, even electronic transfer payments can be unpredictable, as not all transactions are uniformly processed and/or charged.
Resolving the issues
The truth of the matter is that pension providers and their paying agents may not even be aware of these problems. Overseas pensions payments are considered low value payments by most banks - often referred to in the industry as 'nuisance payments', a telling term that may help explain the lack of investment among many providers in pension payments processing.
Yet in order to resolve these issues, two important changes will have to be made.
The first is the standardisation of the payments disbursement process across all destination countries and banks, with FX rates secured in accordance with market standards. The second is that transparency must be brought to the payments process to bring to light any levied charges, the FX rate and the due date of funds.
However, a key issue with the recommended changes is the fact that they both require the paying bank to invest in technology - something many are not prepared to do given the relative low value of the payments, and the weakened financial situation of many banks. Yet there are specialist payments providers for whom such 'nuisance payments' constitute a core business activity. As a result, these providers have invested significant sums to build scale and improve the automation of their payments processes. They have developed low-cost processing systems that provide timely and secure payment delivery that also allow payment instructions to be sent electronically from the pension provider or paying agent to the specialist provider, which increases speed and efficiency for all involved in the payments process.
The payment instructions are then either reconfigured to the payment system of the destination country in question, or they generate a local currency cheque to be drawn on a local bank and then posted to the beneficiary. The cash accounts of the paying institution are then debited and confirmations provided to help with reconciliation.
Advantages for all
Therefore, by investing in systems that improve payment processes, a single specialist provider of payment services can improve the level of service and transparency for the pensioner. However, they can also offer efficiencies for the pension provider. Low cost levels can be maintained as a result of straight-through-processing and payments being made in batches. Also, information delivered from a standardised source provides transparency and a first point-of-reference for any queries.
As an additional bonus, the costs of resolving issues such as non-receipt of funds and reclamations are significantly reduced. Payments processing systems can clearly identify where technical problems and personal responsibilities lie, which enables the paying agents to respond to queries in a more pro-active manner - and secure in the knowledge they are providing a uniform quality of service to all pensioners in their charge, regardless of where in the world they may be.
The current method of issuing payments makes the maintenance of adequate customer service levels a thorny task for many pension providers and paying agencies, as they often end up spending disproportionate amounts of time and energy trying to make superficial changes to a process that is fundamentally inefficient. Therefore, any such efforts offer little reward and make no significant difference.
Yet real improvements can be made by investment in technology and a change of attitude amongst pension providers and paying agencies towards the payments process. Certainly, investment in the payments process will improve cost and operational efficiencies, while at the same time address the root causes of the problems - allowing pensioners to enjoy their retirement abroad.
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