So here we are again – another pension provider under scrutiny, talks of shortfalls on funds, inspectors appointed, followed by negative reports in the media, the pension industry is caught again in the crosshairs.
Of course those of us who are a while in the pension industry will have seen negativity heaped on our industry before. We had Equitable Life leaving hundreds of thousands of pensionholders short as they were unable to pay what they had promised. And we had Scottish Provident again leaving pension holders short as they slowly wound down their business in Ireland.
So what can we do? How can we demonstrate to people that their funds are safe and that not all pensions are subject to the same risks?
When Independent Trustee Company was founded 18 years ago we looked at existing pensions and we identified two key risks that could potentially cause harm to a pension holder and we took steps to eliminate them. These two risks are:
· Balance Sheet Risk, and
· Pooling Risk
Balance Sheet Risk
Balance Sheet risk occurs when a pension provider keeps the pensionholders assets on its own balance sheet. Effectively the clients pension assets and the pension providers own assets are held together on the balance sheet of the provider and if that provider gets into difficulty as we have seen with Equitable Life and Scottish Provident then the clients assets can be called upon.
In these circumstances the client unwittingly takes on a risk that he is not being rewarded for, though perhaps more importantly he faces the potential loss of some or his entire pension.
In the UK they have woken up to this problem and where an advisor fails to adequately explain the difference between assets being held on the provider’s balance sheet versus being held at arms length, they risk a future claim.
The solution is simple but effective. At Independent Trustee Company we hold no client assets on our balance sheet, all the pension assets are held under trust. This includes not just the ITC SSAS which is by its nature a trust but also the ITC ARF and our newly acquired ITC PRSA. No mixing of assets can occur and as a consequence we truly believe that we have the safest pensions on the Irish Market.
Pooling Risk
The second risk is pooling risk. This occurs when client assets are mixed together for administrative reasons. A typical example is a client asset account where all funds received from various pension holders are lodged and perhaps also where all funds paid out by the pension provider are paid out from.
The potential risk here is that clients’ funds can get confused, one client gets credited with the assets of another, or perhaps on the payments side a client is charged with a payment that relates to another client. The result is at best administrative confusion, at worst complete organisational and system chaos.
So how do you minimise the possibility of that happening? Again the solution is simple, at Independent Trustee Company, each and every pension holder has a separate bank account even before funds are contributed/transferred. And if they engage in an investment that is specific to them they have further separate accounts there also.
Of course if they combine with a number of other pensionholders to invest in say a syndicated property that investment will be a combined account. However only the portion that relates to the investment is combined, the pensionholders other assets are kept separate.
We have found over the years that these two guiding principles allow our clients, (and indeed ourselves, those that regulate us, and those that insure us) to sleep well at night. Perhaps these principles are what our industry needs going forward.
