There has been an increase in media coverage recently highlighting the growing issue of pension schemes holding wrong or missing information.
This can happen where schemes have moved from being paper-based to computerised, or simply from one system to another, and human errors have occurred when inputting data.
Incorrect information can have a huge impact on those retiring both now or in the near future. In the main, it is a problem relating to defined benefit schemes that have been running for many years.
Clients are likely to be completely unaware of what to look for in their calculations and paperwork. Such calculations are highly complex and establishing whether there is a problem at the point of retirement is not usually something they will be able to do themselves. They will need help from an adviser.
Of course, clients must keep as many records as possible regarding their pension scheme and entitlements but even with all of this, trying to establish what they should be getting at retirement can be very tricky, particularly as scheme rules have a tendency to change over the years.
My frustration is that we should not even be discussing this. Pension scheme members have worked hard over many years; they and their employers have ploughed thousands of pounds into plans to achieve a good retirement income. When it comes to receiving benefits, they deserve to be sure they are getting what they paid for.
One case I recently heard of involved a pension being incorrectly calculated, meaning the client had received less than they should have done over the last few years. They are now having their pension and multiple years of increases recalculated.
The real issue here is that any correction could tip them over into the next tax rate banding for a single year. Should those that have had to pay extra tax due to an error seek compensation?
There are other complications that could occur because of such an error.
Due to the benefit crystallisation event having to be recalculated, additional contributions may have been made, but it is more likely funds will have been crystallised elsewhere. In a worst-case scenario, the client may have unintentionally breached their lifetime allowance.
Who is responsible for sorting out the mess created? The original scheme will not be aware of what other pensions the member had and the second scheme that crystallised benefits will have been working on the information provided to them in good faith by their member. Given the member had no reason to doubt the information provided in the first place, can they really be held accountable?
Another issue that may occur due to incorrect calculations will be the member’s entitlement to the pension commencement lump sum. It is highly likely that, because the original calculation was too low, the amount of PCLS offered would not be the full entitlement. This is something the member might have needed or wanted at the time but may now not be entitled to.
Check and check again
The key message for advisers is: check, check and check again. Unfortunately, these errors occur all too often, so you cannot assume the calculations coming from the pension scheme are correct.
For the simpler final salary schemes, it is always wise to try and estimate what the pension should be and, if the client is still there, to check the pension statement annually. Ongoing issues could cause an annual allowance problem if the pension is suddenly increased one year.
It can be more difficult to check the figures for more complex multiple tranche schemes and career averaged schemes. However, making sure they have the correct service and salary details should help prevent any significant errors that will need to be sorted out in the future.
If errors are found, the biggest challenge is being able to get them rectified in a reasonable time scale.
Claire Trott is head of pensions strategy at Technical Connection