The falling value of the pound over the decade has had serious financial implications for many institutions and individuals, says Owain Walters, managing director of Ebury Mass Payments.
This year has been particularly volatile as the Federal Reserve leads the developed global economy in raising interest rates at a punishingly rapid rate, driving the dollar to outperform most major currencies.
Market jitters over the UK's fiscal and monetary plans temporarily saw the pound tumble to record lows following the ex-Chancellors catastrophic ‘Mini-Budget and while a sense of stability has returned the gloomy economic outlook is unlikely to bring much midterm uplift for sterling.
However, one group that has not been mentioned so much in the headlines as collateral damage of a falling pound is overseas pensioners. Many of these retirees will receive fixed incomes in the local currencies of their place of residence and therefore will be directly, and negatively, affected by a weak pound.
For example, if they retired to the US they would have seen their purchasing power reduced by over a quarter (27%) over the past seven years. Expat pensioners in Canada and Australia have also seen their pensions become 26% and 22% less valuable, respectively, while people in these countries are also impacted by frozen State Pension rates.
Rampant global inflation running hot to double digits in many major economies will further compound the impact for pensioners living overseas.
While this may seem like a small problem for pension schemes, the latest government estimates suggest that around 1.2 million of UK citizens have retired overseas, accounting for billions of pounds of payments every year.
But what can administrators do to mitigate the financial consequences of a devalued pound?
While currency fluctuations are obviously out of their control, we believe there are three key steps to ensure good value for money for overseas pensioners.
1. Upfront bank account validation
It is critical that bank account details are verified prior to any payments being made. From our discussions, we understand this can be a protracted and manual process taking anything up to 2 weeks with some banks.
If this process is not completed, there is an increased risk of payments being delayed or not even reaching the Scheme Member, causing both emotional and financial distress alongside creating significant case work for the Administrator to rectify.
2. Method of Payment / Payment Fees
Choosing the optimal payment method determines the value received by the pensioner.
The majority of pension payments are made via the SWIFT network (Society for Worldwide Interbank Financial Telecommunication), which is the financial messaging network connecting banks globally.
Payments sent via this method can incur fee deductions, particularly if the payment is routed via multiple banks to more exotic locations. These deductions are taken from the original amount sent, resulting in the Scheme Member receiving less.
Cumulative deductions from excessive payment fee charges and uncompetitive foreign exchange rates can amount to as much as 10% of the total payment, meaning pensioners face additional financial stress through not receiving best value for their pension payments on an ongoing basis.
To alleviate the likelihood of fees being deducted, Administrators may have to absorb or pass through higher payment fees to the Scheme Member in order to ensure the full amount is received.
An alternative method is the use of local payment schemes with funds sent directly to in-country bank accounts, similar to Bacs in the UK, SEPA in Europe or ACH in the USA.
This removes the risk of fee deductions and payments being ‘clipped' en-route by processing banks. It's important the local payments option is made available to Pension Administrators to ensure best value for pension scheme members.
3. Foreign Exchange
As mentioned earlier, currency exchange rates fluctuate constantly and with added uncertainty caused by global events such as Covid-19, greater disparity between currency values are a reality.
Currency exchange rates significantly impact the amount pensioners receive in their local currency and left unchecked provide the opportunity for uncompetitive rates to be applied.
Having transparency of exchange rates empowers Pension Administrators to ensure they remain competitive and maximum value is delivered to Scheme Members. Having this information to hand also enables Administrators to discuss payment options with their service providers to protect Scheme Members against the impact of currency volatility.
Conclusion
As a first step, it is essential that schemes and administrators review their payment processes on a regular and ongoing basis. Ebury has found that in many cases the same operational procedures to manage payments to international Scheme Members have been in place for in excess of 10 years which could be directly harming overseas pensioners.
Greater engagement and availability of transaction data from banks and payment service providers will also assist Administrators and Trustees in protecting Scheme Member value. This will help deliver better financial outcomes while upholding standards of integrity and governance across the sector.
While expat pensioners may be a very small minority of total pension scheme populations, getting these processes right is crucial to protecting all scheme members no matter where they decide to retire.
By Owain Walters, managing director of Ebury Mass Payments.
