Errors ‘could cost DC members thousands’ in lost contributions
Data errors affecting defined contribution (DC) scheme members are becoming “increasingly commonplace” and could cost them thousands in lost payments, according to Hymans Robertson research.
Incorrect contribution percentages and errors in applying tax relief could be costing DC members up to £12,000 in retirement, the consultancy reported.
To avoid this, Hymans Robertson said employers needed to “proactively review” compliance with rules on contributions and ensure these align with payments made to staff.
“By taking the time to do so, all organisations, regardless of size, can help avoid costly mistakes,” the company said.
Providers have been uncovering more errors in pension payments following new requirements from the Pensions Regulator (TPR), which instructed companies to seek more detailed information from employers.
Hannah English, head of DC corporate consulting at Hymans Robertson, said schemes and employers faced costly remediation bills to fix these errors once uncovered.
Scheme members could face significant negative impacts from these errors, she added.
“For a member on an average salary of £30,000, errors over a 10-year period [resulting in them] missing out on 1% contribution could lead to a gap of up to £12,000 in contributions, if this isn’t rectified,” English said.
“This is a significant loss in contribution to an individual’s outcome if not corrected, and one that will be multiplied across many employers and DC schemes.”
Complexity leading to more errors
Hymans Robertson said several factors had contributed to the rising rate of errors. Corporate restructurings and acquisitions were a factor in some cases, the consultancy group found, while there was also a potential impact from “recruitment churn” in the wake of the Covid-19 pandemic.
In addition, auto-enrolment rules have added a layer of complexity on top of employers’ existing employee benefits programmes.
“From our own independent reviews, we have seen similar themes emerge which have led to contribution inaccuracies,” English said. “Errors in pensionable pay, wrong contribution percentages and the incorrect application of tax relief, and salary sacrifice are a few of the common reasons for mistakes.
“These errors could result in both under- or over-payments, which employers would need to correct. In some cases, this will also need to be reported to the regulator. Identifying these early and having a clear plan should reduce the likelihood of the need for further investigation.”
With pension dashboards in development, TPR has been increasing its scrutiny of scheme data standards to ensure that they are on top of what is needed and are ready to connect and feed into dashboards when they launch.