Pension Increase Audit

Scenario

A medium-sized employer operates a quasi-Public Sector style Pension Arrangement which was run by a national consultancy firm.  The firm has a good reputation, but the employer recognised the service as being over-priced and had significant concerns about the timeliness of the advice given, and the accuracy of the administrative calculations.  The employer also felt that the staff providing the separate services (Actuarial, Consultancy, Administration, and Investment Consultancy) were pulling in different directions and were unable to offer a co-ordinated service.

The trustees and employer were concerned about the upheaval of having to change advisors, but needed to address the value-for-money and accuracy issues.

The Decision

A decision was made to price-test the service to help ensure that the arrangement could be run on better terms.  Initially, the intention was simply to give the existing advisor a wake up call, because the concerns about moving adviser were felt to be overwhelming.

During the tender process, however, the trustees and employer quickly established that a smoothly managed transfer would not be as daunting as they had originally felt. 

As part of BBS's standard service, the installation data goes through a number of integrity checks and the trustees recognised that this would help allay their concerns about the accuracy of the work previously undertaken.

On balance, the trustees decided to appoint BBS as their new advisors, primarily because:

• The service offered a significant cost-saving over their exisitng advisors;
• BBS had significantly better service standards and could evidence that the service standards were met;
• The installation audit meant that switching advisors was likely to be a beneficial rather than detrimental event;
• BBS's team-focused approach would ensure that the actuarial, consultancy and administrative staff would all work together for the benefit of the scheme as a whole.

BBS was pleased to win this prestigious appointment.

The Outcome

During the installation audit, the BBS administration team recognised that there were inconsistencies in the way that pension increases had been awarded in the past, and brought in the actuarial team to investigate matters further.

Our actuaries assessed that 14 pensioners were being overpaid, equating to a total liability of about £150,000. 

BBS raised the issue with the trustees, employer, and the previous administrators, who condeded that mistakes had been made.  The trustees sought advice from their legal advisors who confirmed that they should rectify matters.  The trustees agreed that the pensions should be reduced to their correct level, and that the overpaid pensions should be clawed back over a four-year period.

BBS advised the members concerned and whilst they were understandably displeased with matters, we managed to ensure that the rectification could be implemented smoothly and without too much antagonism.

In this instance matters could be rectified, so there was no need to get the lawyers involved in pursuing the previous advisors.  Nonetheless, the advisors did make an ex-gratia payment to the scheme to cover the costs of rectifying matters.

The employer was able to recognise the reduction in the scheme's liabilities through a small saving in its future contribution requirement.

Notes

In our experience pension increases have been paid incorrectly in more than 50% of the schemes that we are asked to administer. In this instance the liability saving was modest, but in many instances the under and overpayments can be substantial, sometimes requiring the trustees to take action against their previous advisors.