Complete and accurate pension scheme data is an essential ingredient for effective management by trustees and corporate sponsors. Otherwise there is a serious risk that incorrect benefits will be paid and the company and trustees will not be in full control of the funding position. This article focuses on occupational defined benefit schemes but many of the principles also apply to defined contribution arrangements.
Inadequate data issues often come to the fore when pension schemes are winding up or going through the Pension Protection Fund (PPF) assessment period. Before these processes can be completed it is necessary to carry out data cleansing and this usually highlights shortfalls in the completeness and accuracy of the data. This typically results in delays and increased cost before members’ benefits can be finalised and secured.
It is likely that a very high proportion of pension schemes are operating with substantially less than adequate membership data. In many cases the trustees and company may not be fully aware of the extent of the problem. One would hope that the scheme administrators, particularly if they are third-party, are aware of the failings and have plans in place to put things right.
One obstacle often put in the way of remedying pension scheme data inadequacies is the one-off cost of carrying out the review and subsequent implementation. However, there is a significant upside which can more than offset this e.g. the ongoing administration in future is likely to be much more straight-forward and therefore less expensive to run; also actuarial valuations will have a far lower cost at the data validation stage.
Trustees and corporate sponsors beware – the Pensions Regulator (tPR) is now on the case. In January 2009 tPR published “good practice” guidance in this area and has recently followed this up with a consultation document. This reviews the follow-up to the tPR’s January 2009 guidance.
The research shows that progress to clean up data has been limited. In fact tPR has stated that it has concerns that the importance of high standards is still not well enough understood. Consequently tPR is now gearing up to take a much tougher stance. In particular they will use their powers to:
- investigate the standard of recording keeping,
- take enforcement action where evidence exists of poor practices with no plans to address them and;
- select sample schemes for audit and will take action where breaches come to light.
The original tPR guidance was about “Education” and “Enablement”. To this has now been added “Enforcement”.
The consultation highlights that good member record-keeping is vital to almost everything that happens in the daily life of a pension scheme, and this is particularly important in times of change. Many corporate sponsors have been considering and/or implementing de-risking strategies and liaising with trustees on this; it is essential that membership data is fit for purpose to facilitate the efficient management of such programmes.
The tPR consultation throws up some worrying statistics:
- “….less than half the schemes surveyed were very confident that they had appropriate internal controls in place to mitigate the risks from errors in pension scheme administration”
- “The PPF encounter significant problems with poor member data. A variety of data problems lead to a situation where it takes an average of nine attempts to correctly transfer data from schemes to the PPF….”
None of this comes as much of a surprise to us or indeed to regular readers of this blog given our previous comments on the subject of pension scheme data. Indeed in a recent independent data audit we carried out on another administrators records using our bespoke audit software we found that only 7% of core administration data was present on the computerised record. Clearly this represents a serious indictment of the standards of administration being employed.
Another regulator has also been raising the bar on data. This is in the shape of the “Technical Actuarial Standard D: Data” from the Board for Actuarial Standards. This is one of the new suite of professional standards to which actuaries have to comply and it is effective from 1 July 2010. However earlier adoption is encouraged. Pension scheme actuaries in particular have a new focus in the review and manipulation of pension scheme data.
The purpose of this standard is to ensure that:
- data is subject to sufficient scrutiny and checking so that users can rely on the resulting information and
- any actions taken as a result of data being inaccurate or incomplete increase the reliability risk of the resulting actuarial information.
The objective is to ensure that users can place a high reliance on the information’s relevance, transparency of assumptions, completeness and comprehensibility including the communication of any inherent uncertainty.
The high-level principles set out in standard include a need for a description of any uncertainty over the accuracy of the data and an explanation of the approach taken to take account of this in the calculations and the results. The standard also states that a number of checks should be constructed and performed in order to determine the extent to which data is sufficiently accurate, relevant and complete for users to rely on the resulting actuarial information. Where data is materially complete or inadequate an assessment should be made to determine whether the reliability of data can be improved.
This Technical Actuarial Standard therefore requires pension scheme actuaries to consider the accuracy of membership data and take account of any shortfalls in their advice to trustees and corporate sponsors.
In future there is going to be a very clear focus on the completeness and accuracy of pension scheme data and rightly so. This is likely to lead to more demand from trustees and corporate sponsors to carry out an audit and cleansing exercise. The first step is to carry out a review of the existing data for completeness and accuracy.
Spence & Partners (S&P) have been carrying out such audits for clients over a number of years and have recently refreshed the processes and reporting to reflect tPR’s guidance. Experience has shown that almost all pension schemes reviewed have considerable data issues and some are very significant indeed. However, following consideration of the S&P report there has normally been a commitment to put things right even although there has been a one-off cost to do this. The end result however is a much more fit for purpose suite of data leading to more efficient management by trustees and corporate sponsors whether it be day to day routine administration, funding investigations, de-risking strategies, winding up or going through PPF assessment.
As the old cliché goes “rubbish in, rubbish out” and this certainly applies to pension scheme data.