Over one million UK pensioners live abroad – a trend that’s likely to accelerate as factors such as the relatively lower cost of living, improved communications and cheaper travel, become ever more entrenched. Indeed, some estimates state that up to four million UK pensioners will be living overseas by 2010.
And demographic changes- as well as economic issues- have made retirement more problematic for many workers over recent years: investments failing to meet expectations, concerns over service quality and the closure of final salary schemes are adding up to difficulties for current and future recipients in all types of schemes. Indeed, all these problems- especially service quality- are exacerbated when retirees decide to settle abroad.
Pity, then, that many will be so poorly served by their pension providers with respect to pension payments. The typical situation relies on the paying agency making the payment- normally by cheque or wire transfer- in pounds sterling while the pensioner takes the responsibility of securing the funds in the local currency. This process can be shrouded in a lack of transparency that can be expensive for the pensioner, not to mention the inconvenience of not knowing exactly when their funds will be available. And a lack of transparency is the complaint most often heard from pensioners who have retired abroad.
Many find themselves subject to seemingly arbitrary bank charges applied by correspondents as the remittance travels from provider to beneficiary- that often, in fact, depend upon the payment instrument being used- and unpredictable changes in exchange rates. Indeed, the situation can arise where two pensioners, entitled to identical benefits, receive differing amounts depending on the practices of their local beneficiary bank.
The availability of funds can also be an issue, especially where cheques are used. Banks’ policies in this respect will vary, which can lead to delays in recipients receiving their pensions when the cheques are drawn on banks in the UK. Indeed, even electronic transfers can result in unpredictable availability of funds depending on how the transactions are processed.
The Problem? Poor Service
The result of the current situation is that pensioners living overseas are often receiving a level of service much poorer than that available domestically. And this is not limited to the UK- a similar situation exists globally for millions of pensioners who decide to retire to foreign shores. Such problems stem from a lack of transparency in the payments process for overseas beneficiaries, with the result that the pension providers and paying agents may not even be aware of the problem, although the beneficiaries themselves will be acutely aware.
The financial pressures associated with ceasing employment mean that this demographic pays particular attention to the minutiae of their personal finances- and will quite reasonably expect a level of service commensurate with the sizeable sums they are likely to have invested to provide for retirement. For pensions providers, therefore, there are reputational implications that go well beyond the duties of fiduciary care that they owe their pension plan beneficiaries.
Addressing the Problems
Two things are required to solve the issue. First, there needs to be a standardisation of the disbursement process regardless of destination country and bank, as well as foreign exchange rates based on the market standards.
Second, the payments process needs to be transparent- allowing retirees to see the charges being levied, to see the FX rates being applied and to know when their funds will be paid. Aside from the obvious benefits for the retirees, such a system also allows for paying agents to respond to queries proactively, confident that all pensioners are receiving the same level of service regardless of location. Under their current arrangements, many agencies struggle to provide an adequate response to queries and often end up spending disproportionate amounts of time trying to make superficial changes to a process that is fundamentally inefficient- unsurprisingly these efforts are often met with little or no success. And enquiries that are not resolved to the satisfaction of the beneficiary can often escalate to trustee level and even lead to adverse media coverage for the paying agency.
While low value overseas payments of this type are considered a nuisance for many banks- and are often unofficially termed ‘nuisance payments’ by banks- they are a core activity for specialist providers. Such providers have made the necessary investments in scale and automation, developing low-cost processing systems that provide timely and secure payment delivery.
Payment instructions are sent electronically from the pension provider or paying agent to the bank, where the instructions are reformatted to conform to the payment system of the destination country or, if required, cheques are issued in the local currency and drawn on a local bank that is forwarded to the beneficiaries’ postal addresses. The cash accounts of the paying institution are then debited and confirmations provided. For an electronic payment, the credit will be deposited into the beneficiary’s cash account, while cheque payments are cleared locally in the recipient’s country of residence.
Indeed, a single provider of payment services can not only improve the level of service and transparency for the pensioner, they can also offer efficiencies for the pension provider. Thanks to a high level of straight-through processing and payments being made in batches, costs can be kept low, and information delivered from a standardised source ensures transparency and a first point-of-reference for any queries. The single payment provider approach also significantly reduces the cost of resolving issues such as non-receipt of funds and reclamations. Snags can be easily identified and buck-passing eliminated.
Conclusion
The fact that few consumer groups are as vocal and proactive as pensioners, means that problems- not necessarily directly connected to the pensions provider- can quickly escalate into reputational issues attracting the wrong sort of publicity. Investing in a payments process that mitigates that threat- especially one likely to result in cost and operational efficiencies- may well turn out to be a silver lining for both the pension provider- and the ‘silver’ generation.