The second line of defence legislation was great news to all of us who care about retirement savings being invested and spent wisely. However, for pension administrators, the timing cannot be worse.
With barely two months to go before the introduction of the new pension ‘Freedom and Choice’ flexibilities, the pension industry is still guessing at the processes, disclosure regulations and the standard correspondence required to be put in place by April. It can only be hoped that the final regulations don’t stray too far from the drafts.
When new legislation arrives, the immediate debate is consultancy led, focusing on the impact to trustees and sponsors, member engagement and how the changes fit within the overall scheme strategy. Very rarely is there consideration for the administration impact and lead time required from finalised legislation to successful development, thorough testing and deployment of solutions.
Administration functions on the principle of efficiency; this is defined by standardised process maps that both meet operational requirements and legislation. The ‘freedom and choice’ impacts are wide ranging and will require substantial changes to processes, controls, systems and portals. However, none of this will be sufficient unless it is backed by high-quality training for administrators to understand the core value of these changes and the critical gap between applying the second-line-of-defence principles, but staying far away from advice.
This is not helped by the fact that the additional layer of the second line of defence, although welcome, will also require some last-minute changes to correspondence, scripts, training and potentially audit systems.
The administration teams are also likely to need to field higher-than-normal volumes of calls, which will need to be modelled and catered for. The second-line-of-defence legislation is likely to amplify the call volumes and the time to respond to every member query. Administrators should be modelling their requirements to bring in extra staff for the transition period and put into place training plans. The final legislation will also determine whether the additional volume will become the new normal and need to be reflected in the ongoing administration fee.
There is also a question around the audit requirements for the second line of defence, whether a paper trail, a system-based checklist, telephone recordings or a web-based member self service are required. No final decision can be made by administrators until the detail of this new layer of requirement is known in its entirety.
The industry is also expecting a significant increase in transfer-out quotations from defined-benefit (DB) schemes. Some trustees are exploring the possibility of providing transfer-out quotes to every DB member as they approach retirement. Effort and costs involved for this can be phenomenal and this needs to be modelled based on scheme membership and profile.
Fortunately, Steve Webb has taken the wise decision to delay the universal launch of some of the more complex administrative requirements, such as the pot-follows-member initiative.
With the legislation geared toward improving retirement outcomes for members, more thought should be given to the administration pressures of delivering this to these members. Robust administration requires lead times to put appropriate processes, systems and training in place. As an industry, we should fully recognise the importance of administration, invest in it adequately and ensure that we give administrators the lead times to deliver the high-quality solution all of us want to achieve.
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