Henry Tapper
When you choose a workplace pension for your employees, carrying out ‘due diligence’ could save you from making a mistake that could come back to haunt you, says Henry Tapper, founder of Pension PlayPen.
In America, the business of providing staff with a retirement benefits plan (known as 401k) is taken very seriously. Employers have ‘fiduciary’ responsibility to the employees enrolled in the plan. That means that if employers do not take due care in the choice and governance of the plan they set up for their staff, they are liable to civil prosecution.
Here you can read about the “excessive” law suits taken out against US employers and their advisers resulting from alleged poor behavior
The employer’s duty in choosing a pension plan under The Pension Regulator’s rules is a lot less clear. Employers have a duty to choose a workplace pension for their staff, but (unlike in America) there is no obligation on employers to choose carefully.
This is causing providers, business advisers and, most importantly, employers some concern. The past twenty years has seen us lurch from one mis-selling scandal to another. Pension transfers, endowments, PPI and interest rate swaps have all been subject to class actions and massive retrospective penalties on those found wanting in due diligence. The ambulance chasers have followed closely behind.
I have been in financial services for over 35 years and seen a large amount of bad practice. Even where good advice was given, I have seen action taken against the adviser for not properly documenting what was advised and why. We all remember from our maths exams, it’s not just the answer that matters, but your working that gets you full marks.
When an adviser provides a pension recommendation they match product features with client requirements and combine this with actuarial data. The data and information is crunched and produce product recommendations for their clients.
This is known by lawyers as carrying out “due diligence”. Due diligence also covers business matters such as compliance and payroll compatibility and cost to the company. It should also consider the things that make a difference to pension scheme members such as fund charges, investments and retirement options. Due diligence needs to be recorded so there is an audit trail of how a decision was taken.
So, when my firm, First Actuarial, was thinking about how we could help small businesses through auto-enrolment, providing help on how to choose a pension and an audit trail that showed the due diligence taken, was our number one priority.
The way we do this for our large employers involves many thousands of £££ worth of our time and considerable investment from our clients. We knew we couldn’t demand this from small employers. So we decided to build everything we knew about choosing a pension into a computer program, powered by an algorithm and supported by actuarial certification which we could give to employers who followed the steps to choosing a pension properly.
We called this service Pension PlayPen because we liked the child-like simplicity of the name.
Update 23/02/2024: –
Pension Playpen due diligence service has now closed while Pension Playground focuses on other areas of the pension industry.
The service helped many thousands of employers choose a pension to demonstrate that they’ve carried out due diligence in the early years of auto-enrolment.
We feel that demonstrating that you’ve carried out your due diligence could prevent the kind of litigation happening in the UK that’s happening in the USA.
The Pension Regulator provides advice on choosing a pension scheme, this can be found here.