Tax free lump sum overpayment

Pat38493

Silvertabby said:

Pat38493 said:

AlanP_2 said:

I think there is a point here that not all DB scheme are administered the same. 

Some, not all, DB schemes have in-house admin teams e.g. Local Gov. Any mistakes the employees of the LA who run the admin side make would either have to be paid by the scheme members and / or taxpayers if the member is not going to repay for whatever reason.

Which of those are you in favour of?

Can you imagine the comments you would see in the media if council tax went up somewhere because a pension admin team had made big mistakes over a period of time and decided it was too much hassle get money back from pensioners.

Understood - my questions are mainly focussed on private DB schemes where the administration has been outsourced to a provider (and often then further outsourced to another offshore provider according to my impression).

My suspicion is that public sector schemes are less likely to make such errors, and also, at least in my personal experience (spouse), they are more likely to get the payments in place on the requested date.

Retired LGPS administrator here.  Most errors are - or were -  picked up at the checking stage.  Towards the end of my time there, I was picking up more errors simply because the junior staff were placing too much faith in the computer system, and just couldn't 'see' that the final figures churned out were obviously wrong.  

One record I checked was a deferred into payment, having been deferred for some 20 years.  The final (maximum commutation) lump sum and pension were huge in relation to the service and leaving salary, so I asked the young chap who had produced the quote if he had checked all the original figures.  "No need", said he with all the confidence of youth and a computer "it would have been checked 20 years ago, and now the computer says....."

The annual GMP figures had been input as the weekly figures, so the computer not only multiplied the GMP elements by 52 but it had also added 20 years of GMP increases.  That took some explanation, and the pensioner (having based his retirement plans on his annual benefit statements) went to the Ombudsman.  He was awarded a few £s of compo, but his pension and lump sum were reduced to the correct amount.

On the plus side, any underpayment errors are corrected and arrears paid.

Interesting thanks - do you have any feel for what % of cases you found errors in, that impacted on the member (as they had already been given the wrong information)?  I am wondering if we are just talking one in a hundred or a significant proportion of them.

katejo

Cobbler_tone said:

I requested a 'retirement quote' on my DB scheme and will do each year, purely to reconcile it against our online portal. It is exactly what the portal says at any given time. I don't want any nasty surprises when I'm getting ready to 'press the button'.!

I have just requested one and I got one last year too. I was told by SAUL that the online quote would be inaccurate anyway because it doesn't include the AVC's which I paid for nearly 20 years.

MarkCarnage

Seems to me that there must still be billions in those schemes

Almost £1.2trn according to ONS in private sector DB and hybrid schemes.

but if a bank or a company payroll department was making these type of mistakes regularly they would end up out of business and/or in trouble with the FCA pretty quick. 

Different model and regulatory regimes. These are generally fairly simple transactional payment systems or calculations which are made frequently. DB pensions rely on the accuracy of multi decades of data, and the administrator is reliant on third party inputs very often, not least from the beneficiaries themselves. 

Also if a bank said - yes we know you have requested a transfer of your funds from your account to an account at another bank, but we''ll get around to it maybe in a few months, and by the way we won't communicate with you at all in the meantime, again I think this would be seen as completely unacceptable.

See my comment above. Apples and oranges here. A request to transfer funds from one bank account to another is a factual transactional matter. Putting a pension into payment or transferring the value attaching to a DB pension is a rather more complex matter. 

I know this is an extreme example, but what is a DB scheme became insolvent due to consistent errors/overpayments by admins that were never detected over years?  Is anyone legally accountable there - admins / trustees / sponsoring company?

These would have to be pretty significant and systematic! A decent audit should pick up anything systematic. The new Own Risk Assessment regime (ORA) will put quite onerous requirements on Trustees - many are already compliant with most or nearly all of it. 

Ultimately one, two or all three would be. The sponsor is on the hook for deficit recovery contributions long before it became insolvent. Bigger concern is probably the employer covenant which is why it's monitored pretty closely now.

Then - I am almost scared to ask this, but who is responsible for making the calculations every few years that determine the solvency of the scheme?  Is it by any chance the same people that are making these errors?

The appointed actuary makes the calculations for funding level of a scheme triennially or more often if specifically needed. Solvency is the most rigorous one and assumes that the scheme is ceasing immediately as a going concern and estimates what the cost of an insurer providing full benefits would be.In practice, technical provisions as it's called is the most common on going measure for a scheme and increasingly assumes low dependency on the sponsor going forward. The actuary is independent of the administrator. Indeed, often the actuarial team will be auditing work done by the administrator to check that they are calculating benefits accurately.

I'm not sure that I agree that in house public sector schemes are inherently better (or worse) than private sector. Much depends on the data quality and the quality of  the staff/processes used. 

Pat38493

MarkCarnage said:

Seems to me that there must still be billions in those schemes

Almost £1.2trn according to ONS in private sector DB and hybrid schemes.

but if a bank or a company payroll department was making these type of mistakes regularly they would end up out of business and/or in trouble with the FCA pretty quick. 

Different model and regulatory regimes. These are generally fairly simple transactional payment systems or calculations which are made frequently. DB pensions rely on the accuracy of multi decades of data, and the administrator is reliant on third party inputs very often, not least from the beneficiaries themselves. 

Also if a bank said - yes we know you have requested a transfer of your funds from your account to an account at another bank, but we''ll get around to it maybe in a few months, and by the way we won't communicate with you at all in the meantime, again I think this would be seen as completely unacceptable.

See my comment above. Apples and oranges here. A request to transfer funds from one bank account to another is a factual transactional matter. Putting a pension into payment or transferring the value attaching to a DB pension is a rather more complex matter. 

I know this is an extreme example, but what is a DB scheme became insolvent due to consistent errors/overpayments by admins that were never detected over years?  Is anyone legally accountable there - admins / trustees / sponsoring company?

These would have to be pretty significant and systematic! A decent audit should pick up anything systematic. The new Own Risk Assessment regime (ORA) will put quite onerous requirements on Trustees - many are already compliant with most or nearly all of it. 

Ultimately one, two or all three would be. The sponsor is on the hook for deficit recovery contributions long before it became insolvent. Bigger concern is probably the employer covenant which is why it's monitored pretty closely now.

Then - I am almost scared to ask this, but who is responsible for making the calculations every few years that determine the solvency of the scheme?  Is it by any chance the same people that are making these errors?

The appointed actuary makes the calculations for funding level of a scheme triennially or more often if specifically needed. Solvency is the most rigorous one and assumes that the scheme is ceasing immediately as a going concern and estimates what the cost of an insurer providing full benefits would be.In practice, technical provisions as it's called is the most common on going measure for a scheme and increasingly assumes low dependency on the sponsor going forward. The actuary is independent of the administrator. Indeed, often the actuarial team will be auditing work done by the administrator to check that they are calculating benefits accurately.

I'm not sure that I agree that in house public sector schemes are inherently better (or worse) than private sector. Much depends on the data quality and the quality of  the staff/processes used. 

Glad to hear it at least - many thanks for your comprehensive input from your personal experience.  I still feel that with £1.2trn in play, there should be more regulatory rules put in place to try to ensure that calculations are always (at least almost always) correct before they go to the member, but I take your points.

Silvertabby

Pat38493 said:

Silvertabby said:

Pat38493 said:

AlanP_2 said:

I think there is a point here that not all DB scheme are administered the same. 

Some, not all, DB schemes have in-house admin teams e.g. Local Gov. Any mistakes the employees of the LA who run the admin side make would either have to be paid by the scheme members and / or taxpayers if the member is not going to repay for whatever reason.

Which of those are you in favour of?

Can you imagine the comments you would see in the media if council tax went up somewhere because a pension admin team had made big mistakes over a period of time and decided it was too much hassle get money back from pensioners.

Understood - my questions are mainly focussed on private DB schemes where the administration has been outsourced to a provider (and often then further outsourced to another offshore provider according to my impression).

My suspicion is that public sector schemes are less likely to make such errors, and also, at least in my personal experience (spouse), they are more likely to get the payments in place on the requested date.

Retired LGPS administrator here.  Most errors are - or were -  picked up at the checking stage.  Towards the end of my time there, I was picking up more errors simply because the junior staff were placing too much faith in the computer system, and just couldn't 'see' that the final figures churned out were obviously wrong.  

One record I checked was a deferred into payment, having been deferred for some 20 years.  The final (maximum commutation) lump sum and pension were huge in relation to the service and leaving salary, so I asked the young chap who had produced the quote if he had checked all the original figures.  "No need", said he with all the confidence of youth and a computer "it would have been checked 20 years ago, and now the computer says....."

The annual GMP figures had been input as the weekly figures, so the computer not only multiplied the GMP elements by 52 but it had also added 20 years of GMP increases.  That took some explanation, and the pensioner (having based his retirement plans on his annual benefit statements) went to the Ombudsman.  He was awarded a few £s of compo, but his pension and lump sum were reduced to the correct amount.

On the plus side, any underpayment errors are corrected and arrears paid.

Interesting thanks - do you have any feel for what % of cases you found errors in, that impacted on the member (as they had already been given the wrong information)?  I am wondering if we are just talking one in a hundred or a significant proportion of them.

To be fair, it was unusual to find records that had been deferred with the wrong information.  I quoted this case because it was so huge.

When the Annual Benefit statements were run (live records) any that exceeded a certain parameter (usually wrong pensionable pay input by the employer) were red flagged and appeared on our 'to be checked' list.

Major errors that only came to light after commencement of payment were thankfully rare, although a few pre-retirement quotes got through with the wrong pensionable pay figure.  However, these carried the rider that they were only estimates, based on their employers estimated final pay figures, and so weren't guaranteed.

I would like to think that the checking systems are still as robust - but with Covid and then working from home ..........

MarkCarnage

I still feel that with £1.2trn in play, there should be more regulatory rules put in place to try to ensure that calculations are always (at least almost always) correct before they go to the member, but I take your points.

There's plenty of regulation....believe me.....
Most calculations are pretty accurate, despite the horror stories above. Many of the errors are very minor and may arise from slightly incorrect interpretation of Scheme rules. Our scheme does audit samples of cases of various kinds, and we try to focus on the higher value/higher risk situations or where there may be scope for systemic error. 

In a large multi sectional scheme, with a number of 'legacy' employers, the scheme rules can be horrendously and needlessly over complex. You really wonder at times why and how they were put in place, and the problem is that it's very difficult to change them or rationalise them to one set  in many cases. A small number are so bad that they are an obstacle to a scheme moving to buy in/buy out as an insurer won't take on the risk involved or be able to hedge that risk effectively. There's usually a way round that involving money......