GMP top priority this year but trustees could be missing the bigger picture

With the deadline for cleaning up GMP data only two years away before HM Revenue & Customs closes its services and sends out statements to members, it is perhaps understandable that the issue ranks high for trustees and management teams.

Capita's report, based on responses by 110 UK pension schemes, found that 53.6 per cent of respondents said GMP reconciliation is their priority for this year, while 42.7 per cent want to focus on improving member education and engagement, and 39.1 per cent are focusing on DB derisking.

Knee-jerk reaction

However, Richard Butcher, managing director at professional trustee company PTL, said the top priorities listed in the report all sounded like “knee-jerk responses”. He said these problems are no more urgent now than they were in 2015, and most schemes will already have begun addressing them.

Butcher noted that both defined benefit and defined contribution trustees are missing other issues of greater importance, such as transaction costs. “Regulators have to give this more airtime,” he said.

He also warned that “there is a lot of risk to derisking” in DB schemes, as many schemes will invest in derivatives without really understanding them. “Trustees don’t understand the risks of establishing collateral” for derivatives, he explained, too often taking an asset manager’s word for what is fair.

About GMP reconciliation, Butcher said it would be “unfair” of HMRC to insist on a December 2018 deadline with evidence that schemes were working “in good faith” to achieve this end.

Albatross around employers’ necks

Alan Pickering, chairman at professional trustee company Bestrustees, said an advantage of GMP pressure is that it is making schemes revise outdated records. GMP is “only the tip of the iceberg” of a broader data quality problem, he said.

He noted that the growing prioritisation of member communications is targeted at members affected by new freedom and choice legislation.

However, he said big data was “a blunt instrument” in the context of freedom and choice, and in this widened field it was “misleading to extrapolate current behaviour into the future”. 

Pickering said the report misses a “major bugbear” – compliance with lifetime allowance – adding that the government was “strangling” employers with a restrictive legislative framework and tax compliance. 

DB schemes are derisking and closing, he observed, because “lower real investment returns” raised benefit costs “into even more of an albatross around the necks of employers”, obliging them to pay more than they had intended to offer.  

Administrative focus

Jon Hatchett, partner at consultancy Hymans Robertson, said the report’s findings are only issues from an “administrative perspective”. From a broader standpoint, schemes are more focused on financial security, and making sure their funding is “integrated and risk-based”. 

He named risk management as pension schemes’ greatest concern in 2016, spurred by deficit drivers such as a drop in interest rates and equity underperformance. 

Hatchett described member education as something of a red herring. He conceded that the average member does not understand how their pension scheme works, but said this was because of a lack of interest rather than opacity.

Most employees “trust their employer” to manage their pensions well, and prefer to delegate, Hatchett said. “This is more about behavioural economics than about education.” 

He noted that the imminent national living wage will be a broad HR cost for most DB schemes, meaning savings will have to be made elsewhere, catalysing derisking exercises.

The end of contracting-out will see maintenance costs rise by as much as £1,000 a year, he said, leaving DB schemes with a choice between drastic overhaul and closure; many might see closing as the easier solution.   

EU developments

James Walsh, European Union and international policy lead at industry body the Pensions and Lifetime Savings Association, said the issues raised by Capita’s report are important, but pointed out that “significant EU developments exist” which should be on schemes’ radars. 

One such development is the European Market Infrastructure Regulation directive. Walsh said its potential difficulties include a concentration limit, as for the largest pension schemes no more than 50 per cent of collateral can be domiciled in one country.

This can easily become problematic for UK pension schemes, whose government bond holdings are predominantly in sterling, he said.