The second line of defence: Quick fix or long-term solution?
Just as defined contribution (DC) trustees were familiarising themselves with the guidance available for members retiring after April, the government has added to their responsibilities. After launching Pension wise - the guidance guarantee delivery service – it last month unveiled the ‘second line of defence'.
This puts the onus back onto providers of contract-based schemes and trustees to make sure members don't act too rashly.
A poll carried out by PP at the end of January found scepticism about how effective the second line will be but what exactly is it and how might it work?
Equiniti Pension Solutions defined benefit (DB) technical analyst Nigel Howarth says: "The second line of defence is about asking the customer or member some basic questions and checking whether they have received Pensions wise guidance to protect the member from making a naïve choice."
There are a number of ways the second line of defence could work, ranging from a basic box tick exercise to a more comprehensive service involving trustees and third-party administrators.
Xerox principal and head of pension administration Girish Menezes says the easiest and cheapest mechanism is to send a simple form. "Checking it is fine but I am not sure ticking boxes will change members' decisions. Potentially how it could work, which is not that much of a nightmare for administrators, is the member ticks boxes, signs it and sends it back to the scheme. That is an auditable record."
However, there could be a more rigorous process according to Menezes. "The right way to do it would be to have onus on the administrator to provide guidance at the exit. You might even have to recruit new administrators and guidance councillors."
Menezes is concerned the softer option would not be particularly effective. "If it is just a bureaucratic exercise, what's the point?" he asks.
JLT director Margaret Snowdon says costs are still unknown. "It depends on the detail, but clearly it is expected that providers and trustees will pay. If it is just extra information on a retirement quote, it will be low cost. If providers and trustees have to store the information, it has data storage and processing costs, as well as potential Data Protection Act issues and risks."
Pitmans Trustees managing director Richard Butcher thinks the second line of defence will irritate members - who will see it as an obstacle to accessing their money - more than it will protect them. He says it will add costs and put more pressure on providers and could guide members in the wrong direction.
He says people who decline to take up the offer of guidance from Pension wise are unlikely to be helped by the new requirements on trustees.
He says: "They are either an astute buyer who recognises the guidance guarantee is so limited they have gone and bought proper financial, or they are someone who is determined to take their cash regardless of what anyone tells them. In both cases I don't see the second line of defence serving any purpose at all."
Menezes has a more positive view but believes the process has been rushed. "I think it should have been thought about a long time ago because there's going to be a huge increase in activities," he says. "We still don't know what we are supposed to do. There is not enough time to get everything in place."
Administrators could play a more assertive role alongside trustees to help members understand their choices but this requires a different skillset from what administrators traditionally use. Menezes says: "Our administrators are not advisers; they are not trained in guidance. You could be adding a huge onus of responsibility on them which is yet to be defined and who is going to pay for that? I actually thought that was the whole purpose of Pensions wise."
He points out: "Independent financial advisors have a responsibility. They have a far more vigorous fact finding process. Pension administrators and trust-based administrators don't have much skin in the game when members are probably exiting into someone else's product."
In an ideal world, Menezes sketches out this scenario: “The logical start is a soft launch. Potentially then you could have a proper industry consultation to have proper guidance at exit and then put that into place: recruit, train and I think that could work."
Capita Employee Benefits marketing head Robin Hames believes the proposals are a step forward. He says the second line is a necessary extension of the seismic changes introduced in the Budget, and supports its roll out to trust-based schemes to ensure there is no confusion between regulators.
He says "It can only be supportive of members. Clearly members will still be able to make their own decisions but at least there has been a further opportunity to make them aware of the consequences of their decision."
However, Hames argues that for it to work technology must be utilised to the full. "The hope would be the regulators offer a broad range of delivery options in terms of traditional paper but so much is transacted online. Will there be some sort of phone-based service to make sure it is as flexible as the guidance guarantee? All these things are in their infancy. As I am sure Pensions wise will evolve, this will evolve."
Published in Professional Pensions, February 2015