What to do if your in-house pension team is ‘at risk’? (which it probably is)

The risk of staff churn in a pension team used to be quite manageable. But what if your DB scheme is targeting buy-out, or your DC scheme is moving to a Master Trust. Your team will be worried about their own situation and pondering the reasons to stay or leave. Across the market we see this manifesting in informal approaches and CV’s in circulation. In this market replacement will be challenging where the career is curtailed by design. Emergency arrangements may be expensive with knowledge lost. Some teams are quite small and churn will matter – a lot.

If realised, this risk means that key actions drift and this ultimately manifests as financial risk. Examples are hedges that aren’t refreshed, investments gone unsold, admin records that aren’t cleaned or a deadline to buy-in/out missed. Hard to quantify but may be something like 1-2% of your funding level in potential loss.

It all sounds pretty challenging but this risk can be hedged or mitigated. One way to prioritise among your trustee group or within the sponsor is to get people risk (ie the risk of churn in your in house team) up your Risk Register, a catalyst for proactive action.

A Scenario to consider?

Consider the following people profiles:

25-30 years old, saving for a house, met their dream partner, planning to get married soon
35-40 years old, big mortgage, student debts, two young children at school, in clubs and so on
45-50 years old, big mortgage, car loan, two children at University who need supporting
55-60 years old, mortgage mostly paid off, car loans, parents with health issues, need support
Over 60 years old, mortgage paid off, looking forward to retirement

They (or similar) probably also work in your pension team. You don’t need to tell the team what’s happening – they’re smart and have worked it out. The Company is keen to wind up the DB Scheme and move the DC Scheme to a Master Trust. The overall financial position supports this. Discussions have taken place and plans drawn up. Indeed some of the team were involved.

The team is now unsettled, already two members have raised concerns with you. You suspect most of the team have CVs out in the market.

[This Scenario is not ‘typical’ per se. Every scheme is different - but there may be features which ring true. The point is to recognise them and put a plan in place]

Based on our Scenario, consider the following mitigation strategies, with commentary.

Options for Mitigation of in-House Team Risk

Option	Example, Pros/cons
1: Allow the team to dwindle through time, and reallocate the work	Admin Head leaves, deputy takes over, but no replacement. Likely the riskiest strategy as there may be mismatches between skill and experience levels; makes the control environment less robust
2: Retain the team through retention bonuses	Staff held onto for a defined period through retention payments. Usually phased. Some evidence this works, but pension projects (like this) are notoriously hard to predict. We’ve heard of further payments being paid to staff. Doesn’t address the real personal worry that an individual’s career options are narrowing
3: Use contract labour	Possible to match contractor with skills/experience need but takes time to recruit and get up to speed; generally expensive, and limited time (so overruns cause further retention issues); independent of advisers/providers
4: Use consultants	Probably more resilient solution than a contractor (they’ll likely know the scheme) but consultant may have capacity issues, will tend to be expensive and isn’t independent of advisers/providers
5: Contingency agreement with 3^rd Party	Cover kicks in when key person (or people) leaves. Agreement should provide for embedded familiarity, else looks a lot like the contractor option. Likely has to have a retainer fee which could look like ‘money for nothing’. Independent of advisers/providers
6: Outsourced executive – modular	Would take on part of the executive in-team function (eg Secretariat, Admin oversight, Investment…). Better if planned but likely to be more resilient/durable than, and hence preferred to, options above
7: Fully outsourced executive	Further extension of the modular approach across most of not all executive services.
8: Fully outsourced with managed people transfer (probably partial)	Like the other outsourced service options but retains the ‘scheme knowledge’ because staff are retained albeit through the 3^rd party provider. Gives the staff career longevity as expected to work on other clients

Whilst all options offer some mitigation, we like the sound of Options 2, and 5-8 (especially 8).

A possible way forward is to combine different options, as part of a phased plan. For example, to pay retention bonuses to (say) certain key staff, but then enable an outsourced executive to firstly take on BAU work (ie ‘modular’). For example, the Secretarial (eg agendas, minutes), or Admin cleansing, or Investment. It just depends on the area of greatest risk. For example, someone may already have left, or be keen to (for example) retire.

This period can be used as a springboard to build scheme knowledge in case of further staff churn, and position for some of the necessary project work/governance which delivers the buy-in/out or the DC move to Master Trust. We think Option 8 is of particular interest. That is, to outsource the pension team, but for the outsourced firm to take on team members. This preserves the link with the scheme (people and knowledge) with potential for a career whilst working on multiple clients.

Summing Up

We see staff churn in existing pension teams as more likely than not and very likely in schemes nearing buy-out. The risk of staff churn is hard to quantify but if realised, may be about 1-2pc of the funding level. Pegasus offers an outsourced executive pension team across Secretarial, Admin, Project management, Investment and DC. Our own best case is for a scheme to opt for an outsourced pension executive, whilst taking on members of the existing team, because it preserves the link and has potential to extend peoples careers, something they’ll likely be worried about.

Pegasus is working with clients who face these challenges and offer a range of options to support – across admin, secretarial investment and DC. In the first instance please speak to Nicole Weiner to find out more.