Twenty defined contribution pension schemes administered by Aon Hewitt have seen delays to their members’ derisking strategies, leaving them exposed to risk assets for up to four years longer than intended.
DC lifestyling strategies typically begin to derisk members around 10-15 years before retirement, moving investments from equities into safer assets such as bonds and cash (see graphic).
Aon's steps to resolve the issue
• Confirming which lifestyle cycles were missed;
• Working out who would have been lifestyling during these periods;
• Confirming the investment holdings of those affected, at the beginning of the lifestyling phase;
• Reworking and applying lifestyling rebalancing, together with all other transactions (such as new contributions) that were made;
• Comparing the reworked end position with the actual position to work out difference;
• Discussing with trustees an approach for any member who has made a ‘windfall’ gain;
• Discussing and agreeing with trustees what action may be needed if members have left or retired from the scheme;
• Adjusting current members’ positions so they are financially correct.
One of the big three consultancies, Aon Hewitt has confirmed some members of schemes it administered had been left exposed for up to four years – with the earliest case so far discovered starting in 2011 – risking market hits to savers' pension pots.
The issue was originally brought to Aon’s attention late last summer. An average of roughly 100 members in each scheme have been affected, and the company is currently working to rectify the problem.
An Aon spokesperson said it had been working with clients on remediating issues where necessary. “We are aware of the issue with certain DC schemes administered from the Glasgow office and are working actively to correct it," the spokesperson said.
“Our prime objective is to make certain that scheme members are not affected financially, and as a result we are undertaking a thorough review in order to make certain that this is the case.”
The cost of putting DC administration errors right can be a lot more than any compensation that may be due, according to a source close to one of the affected schemes.
The source said trustees and schemes should be aware that administrators need to have both good systems and good people in place to pick up on such errors. Administrators which experience such incidents should confirm which members have lost out and that they will be recompensed, the source added.
Ian McQuade, client director at governance specialists Muse Advisory, said rectifying the issue will have to be done on a case-by-case basis, as the process will be determined by what is written into each scheme’s contract with the administrator. But he agreed the cost of resolving the initial problem is likely to be more than any compensation.
McQuade said lifestyling is such a fundamental part of running DC administration and such errors "really shouldn’t happen”.
“Whether [members are] worse off or better off is irrelevant. They’ve signed up to something and they won’t be where they’ve expected to be.”
He added: “It’s the sort of thing that happened 20 years ago when some of the lifestyling was really first being put in place, when the controls making sure that the right things happened at the right time weren’t as good as they are today.”
McQuade said most members are not likely to be aware of the problem, but added: “Will it have been picked up by some? Absolutely. I’m surprised that it’s gone this far without having been resolved.”
This story was updated with a boxout on Friday February 27, 2015.
