Employee benefits: pension fund administration

The profile of good governance in the pensions industry has grown over the
past three to four years following a series of less than positive news stories.

In 2005, the pensions regulator was created to give teeth to the Pensions Act
2004 in its objective to protect members of work-based pension schemes. For the
trustees the legislation ensures that they now have a framework that supports
them in their responsibility to act in the best interests of members.

Trustees are required to have knowledge and understanding of the law relating
to pensions and trusts, of the funding of pension schemes and of the investment
of assets. Not only that, they need to be familiar with scheme specific
documentation including trust deeds and rules, and statements of investment and
funding principles. A good governance framework will underpin these
requirements.

Good governance is crucial to effective scheme management by trustees. It is
demonstrated through rigorous processes and effective decision making to ensure
members get their promised benefits on time.

While the regulator has set out regulatory requirements, trustees should be
thinking beyond just ‘ticking boxes’. A robust governance framework will help
trustees ensure they have the right processes in place in order to meet their
overall objective of delivering benefits to members. Identifying and managing
key risks within the arrangement is essential in this process.

While the vast majority of schemes are well regulated, with the right
knowledge, risk assessments, administration and processes in place, trustees
should be able to act more as they should in an ideal world ­ as non-executive
directors overseeing those who manage and operate schemes on their behalf.

Trustees have to understand what it is they are tasked with and work out how
best to execute it. There are a few trustee boards with excellent support and
processes but if the trustees aren’t engaged or confident, governance is often
poor.

Most trustees do feel confident in their governance practices but, according
to the pensions regulator’s 2007 survey, there are some areas where it found
shortcomings:

• Fewer than one-third of defined benefit (DB) schemes had a written policy to
  manage conflicts of interest;

• Around one-third of DB are yet to review employee’s covenant;

• 20% of all schemes with a pensions provider do not have any service level
  agreement in place.

However, the regulator’s 2007 governance survey showed a continuing and clear
link between training and effective governance.

The regulatory stick exists to promote a certain level of good governance,
and the 2007 survey shows that it is beginning to have effect. However, trustees
should be encouraged to look beyond the regulations to discover the true
benefits of an effective governance framework in the discharge of their
considerable duties.

Rachel Brougham is a principal in the governance team at
Mercer

The word pension raises different reactions. To some, it’s a natural part of
retirement planning, but to many it provokes confusion, even fear, because the
subject can be complicated and impenetrable. Many scheme members don’t even want
to think about it; they just keep their fingers crossed and hope someone will
sort retirement planning out for them.

Communicating information about your pension provision is vital but it’s not
just a case of giving members a brochure and hoping they will instantly get the
picture.

There needs to be some thought put into what you need to communicate, why and
how. In short, you need an effective communication strategy.

First, it’s important to think about why the company has a scheme in the
first place. What is the strategy of the scheme and why it is being offered to
employees? Is it to encourage productivity or to retain employees? How do the
answers fit with the overall company strategy, HR strategy and business
direction?

If the company has a problem with retention of employees, then the goal for
the pension scheme would be to promote the benefit as a valuable part of the
employees’ overall package which should not be given up too lightly. People may
leave a company for a higher salary, but they often don’t realise that their new
employer may not offer them such a good pension.

You also need to work out short-term goals. Are you worried about not having
enough people in the pension scheme? Are contributions at an effective level? Do
members really understand their investment choices? Focusing on these types of
issues can help to build up a communication strategy to address your particular
goals.

Consideration then needs to be given to the structure and timing of the
programme. There are several options, and how, and how often, you deliver the
information has to fit with the way you communicate generally. If your employees
all have PCs, then it would be natural to provide regular information
electronically. But if employees don’t work at a desk, PC-based information
won’t work. In this case, written material may be the best option or you may
want to hold presentations, in groups or individually.

We find from our surveys that face-to-face presentations are the most
popular, because people can ask their own questions. During a group
presentation, we will often have a break and ask people to fill in a simple
questionnaire. This interactivity gets their brains working and we find they
start asking the right questions.

It’s good to back up presentations with printed material for members to have
something to refer to. But the material must be jargon free and in bite-sized
chunks.
Also, avoid information overload. Give them one fact to digest; explain one term
and they are far more likely to come back to ask more questions because at least
they’ve understood that one thing.

Helplines are another good source of information; they provide contact with
real people and can be useful for those who may be embarrassed to ask questions
at an open meeting.

Websites can provide further details out of office hours when employees may
have left a printed booklet at work.

Communication is not an optional extra. Some see it purely in terms of cost
but it’s something that will benefit a company and its pension scheme members.
It’s essential.

David Millar is education manager for the Member
Experience, Mercer’s packaged pensions communication programme

The governance survey can be found at
www.thepensionsregulator.gov.uk

Mercer’s latest quarterly FTSE350 pension deficit survey can be found at
www.mercer.com