South Yorkshire staves off risk of mass opt-outs

The South Yorkshire Pensions Authority (SYPA) has built a calculator and communication strategy to mitigate the risk of thousands of members leaving the scheme.

Public sector schemes face the prospect of swathes of members opting out if government proposals for a raise in the employee contribution level go ahead.

This could lead to schemes seeing a massive reduction in their income, as members leave and no longer contribute to the fund.

“The more active members who leave, the more the ongoing costs fall on the employer,” said Ian Baker, pensions manager for member services at SYPA.

“We felt we needed a long-term plan in place.”

SYPA developed a calculator to show members the level of benefit they would be giving up if they opted out of the scheme.

Baker's team sent messages to members using the calculator results and also discussed the results with members who requested an opt-out form.

The strategy was launched in late January and it is still too soon to judge its success, Baker added.

Schemes have also been urged to undertake a cashflow analysis of the next three to five years to help plan for any drop in income.

SYPA’s strategy

SYPA began by surveying its members to get an indication of the risk of mass opt-outs.

The threat of mass opt-outs is a real issue now

The scheme polled 2,000 members and found between 20% and 30% would leave if their level of contribution rose. This was significantly higher than the 1% of members suggested by the government.

SYPA then embarked on a communication campaign, targeted at those most likely to opt out.

“It was the people who had not been in the scheme a long time and were finding modern life financially difficult,” Baker added.

The strategy was both proactive and reactive, and was focused on giving members as much information as possible about the benefits they would be giving up if they left the scheme.

On the proactive side, Baker’s communication team sent out messages to members with endorsements for the scheme from independent sources such as union officials.

These messages would contain figures from a calculator SYPA developed in-house to show the effect opting out would have on members’ net pay and retirement benefits.

“In most cases, the results are quite frightening,” said Baker.

In one example, a 30-year-old, full-time Rotherham Council employee earning £22,000 a year would make a net saving of £75.63 a month if they opted out of the scheme.

But they would be missing out on an annual retirement income of £12,833 if they worked to age 65.

They would also automatically lose life cover of £66,000.

On the reactive side, when a member of Baker’s team received a request for an opt-out form from a member, they would go through the calculator results with that member.

They would also go through the other benefits members would be missing out on, such as ill-health retirement cover, partner’s pensions and death-in-service benefits.

If the member decided to opt out, SYPA would contact them six months later to review whether circumstances had changed and re-emphasise the benefits of the scheme.

“South Yorkshire sounds like it is ahead of the game,” said Barry McKay, partner at Hymans Robertson and actuary to a number of public sector schemes.

“The message we are giving out to clients is very similar. The threat of mass opt-outs is a real issue now.”

Reducing risk of opt-outs

Schemes that do not prepare to keep hold of members run the risk of a large proportion of their membership leaving.

A cashflow analysis is an important risk management tool to help schemes work out the impact of opt-outs

This would dramatically reduce the scheme’s income – from both employer and employee contributions.

“If lots of people opt out, the fund becomes mature more quickly and that leads to issues such as liquidity and a change to the investment strategy,” said McKay.

In such circumstances, schemes may have to take more risk with their investments because they will have less money coming into the fund from contributions than money going out in pension payments.

This situation is known as being cashflow negative.

Schemes may also have to sell their assets at unfavourable times in the market so they can use the cash to pay pensions.

McKay said schemes could evaluate and manage this risk by undergoing a cashflow analysis.

“We get quite a number of requests to do these over three to five-year periods,” he said. “It’s an important risk management tool to help schemes work out the impact of opt-outs.”

Glyn Jenkins, head of pensions at Unison, said public sector schemes should investigate the HR practices at all their employers to make sure some organisations were not encouraging members to leave.

“If there is anything sniffy going on, members should be made aware of their rights,” he said.