Archive for February 2010

Neil Copeland

I misread the headline on FT.com and initially thought that Basil Fawlty was causing problems for UK banks and their pension schemes. Something to do with Europe, apparently. Was the manager from Barcelona, perhaps, or had Basil upset the Germans again by mentioning the war?

But no, it was the Basel Commission on Banking Supervision. The BCBS. Typical of the Swiss to come up with an acronym that doesn’t sound the slightest bit rude.

Anyway, the BCBS has published proposals for the treatment of defined benefit pension schemes which, UK bankers say, would unfairly penalise their capital positions. One proposal put forward means that banks would have to deduct their entire pension deficit from their core tier one capital, rather than the next five years’ contributions as is the case now. This, the bankers contend, could constrain dividend payments and lending.

One banker is quoted as describing the proposal thus “It is turbo-charged pro-cyclicality”. I have no idea what that means, and I’m not sure the banker does either, but, as we’ve seen with credit default swaps, lack of knowledge and understanding is not seen as a barrier in the banking world.

Whilst it’s difficult, in the current climate, to feel empathy with those responsible for bringing the world financial system to the brink of collapse, the pain will not be spread evenly and the measure will have a disproportionate impact on UK based banks. According to the article, most US banks do not provide defined benefit pension schemes and most continental European banks have not historically run pension deficits.

This proposal therefore means that the UK banks final salary pension schemes have the potential to impact on the wider UK economy and individual borrowers and savers. A further competitive disadvantage for UK plc as it struggles to emerge from recession.

This again highlights the many, and occasionally unexpected, risks faced by businesses operating this type of scheme. It also highlights the risk posed by the mooted EU wide regulatory body  and the difficulties it will face in squaring divergent national interests and economic characteristics.

So, that’s two egg mayonnaise, a prawn Goebbels, a Hermann Goering, and four Colditz salads.

Claire McGruer

Those in the pensions industry will have noticed, over the past few years, the phrase “poor record keeping” creeping into conversations and press coverage. However up until now many schemes, and their sponsors have failed to engage with this subject which was highlighted yesterday by the Pensions Regulator’s survey which has shown that only 19% of schemes measured up to the fundamental core data standards (and just over half of these had more than one data item missing) under their record keeping guidance standards that they published in Dec 2008.

Data quality is not a subject often seen on the Trustees agendas but it needs to be on there now. It should already be on the Trustee’s risk register as data quality alone constitutes ones of the greatest financial risks to the pension scheme. Poor record keeping leads to inadequate data which creates extra costs not only in administration errors and claims from members but also when the scheme winds up or buys out some or all of its benefits, significant extra time and resources are required to ensure that the data is correct. The earlier that the trustees address their data quality with their scheme administrators, the better.

The Regulator has issued a 12 week consultation on this subject and proposes that in 2012 pensions reforms will oblige trustees to maintain core data to an adequate standard and if trustees do not have adequate plans in place to resolve data issues the Regulator will force them to improve their standards. For those trustees who wish to understand more about the need for good quality data, the Pensions Regulator will be adding a module to its e-learning programme on this subject and will be running governance workshops starting very soon around the country.

Now is the time to dust down those pensions records and ensure trustees organise for a “data audit” to be carried out as a preliminary step. This audit will clearly identify where the problems lie with scheme data and an action plan can then be drawn up to resolve those data queries. Spence and Partners regularly carry out “data audits” for pension schemes and will be delighted to discuss further with you. Please contact Mike Selby, head of administration services for further information.

Neil Copeland

Let me ask you a question. You’re the chairman of a leading airline. The maintenance staff have told you that to be fit for purpose your aircraft needs to be completely taken apart and reassembled. If you don’t do this the maintenance staff advise you that they can’t be certain that everything will carry on working as advertised and there is a good chance that one of the wings might fall off.

Do you:

a) Authorise the maintenance staff to take the aircraft apart and reassemble it
b) Wait for the wing to fall off, then fix it

Option b) is likely to be a much costlier job if the wing falls off while the plane is airborne.

Clearly airlines would only ever opt for option a), but it would appear that many trustees have been content to adopt option b) in relation to pension scheme data.

Everybody in the industry is aware that the standard of pension scheme data is generally poor, but until recently there has been an ostrich like mentality about addressing the issue, with many heads buried in a virtual Sahara of sand. Just remember which part of your body is most exposed in this scenario.

We have commented on this point in our earlier blog Pension Scheme Data Pass me a Shovel

The Pensions Regulator’s latest consultation on record keeping makes it clear that it considers poor scheme data as useful as a plane with no wings. And no engines. And a gaping hole in the side. It’s also clear that trustees are going to be required to address their data issues more effectively.

The Regulator has actually suggested that trustees might want to fix their data previously. It appears seriously miffed at the underwhelming response from trustees to this suggestion.

So now, the Regulator proposes to set targets for the accuracy of the common data which schemes must hold. The Regulator also proposes to review performance of schemes. Where schemes fail to have adequate plans in place to resolve data issues, the Regulator will require them to improve. My background is in Pensions Administration (so I empathise with the aircraft maintenance guys) and I couldn’t agree more with the Regulator’s view of the central importance of data to pension schemes. The Regulator notes that cost remains a significant barrier to trustees voluntarily taking the action they know is necessary to identify and rectify their data issues. The Regulator clearly sees this as a false economy, and an unconvincing reason for inaction.

Accurate data is a prerequisite to paying the right benefit to the right person at the right time – this is a bit of a cliché, but has become so only because it simply and succinctly expresses the raison d’etre of a pension scheme. As data also underpins actuarial valuations, its accuracy is important in ensuring the correct liabilities are being valued. Accurate data held in a well maintained data base hasn’t been valued much by trustees and employers previously, hopefully that will change, not just because the Regulator has decided to get its stick out, but because it actually is what all trustees should want for their schemes as of right.

Some people may have been attracted to this article by the suggestion that it might explain why planes fly. That’s what is popularly known as a tease. I’m not an engineer and don’t understand how a big chunk of metal can stay up in the sky. Slightly alarmingly, if this article from the Straight Dope  is to be believed, the engineers aren’t entirely sure either.

Ian Campbell

The draft Financial Assistance Scheme (Miscellaneous Amendments ) Regulations 2010 were laid before Parliament on 20 January and this was followed up on 28 January with consultative documents on draft guidance which amongst other areas sets out a proposed actuarial valuation process for pension schemes eligible for the Financial Assistance Scheme (FAS) and which will transfer assets to the government – these are referred to as FAS2 schemes. This guidance takes into account earlier consultation in the period 2 April to 15 May last year and a webinair for actuaries with speakers from the Pension Protection Fund.

Broadly the draft guidance sets out a mechanism for determining if members of FAS2 schemes should receive higher benefits than standard FAS compensation.

As mentioned in our earlier blog, “How pension schemes will be valued for admission into the Financial Assistance Scheme“, the PPF is proposing that the FAS2 actuarial valuation calculations will include equalisation of Guaranteed Minimum Pensions.

The current draft guidance does not differ materially from that issued last year and from the processes presented in the webinair; we believe that it is therefore unlikely that there will be many changes in the final guidance which we anticipate coming on stream by the middle of this year.

The PPF have built onto some the S143 actuarial valuation principles for schemes going through assessment but there are a substantial number of material differences. One area of similarity is that data has to be cleansed before the actuary is instructed to proceed and the actuary has to be satisfied with the quality of the data.

Spence and Partners have extensive experience of carrying out S143 valuations including data cleansing, and we are gearing up to adapt our professional skills for FAS2 schemes.

Alan Collins

At Spence and Partners and Dalriada Trustees Limited, we have long been espousing the value of good recording keeping in relation to pension scheme administration, particularly in our call for action in relation to pension scheme data.

We therefore strongly welcome today’s consultation from the Pensions Regulator (TPR) entitled “Record-keeping: measuring member data“.  We endorse the view that “Trustees and those responsible for administering workplace pensions will need to improve standards of record keeping”.

I was certainly less surprised than TPR by the fact that only 19% of schemes surveyed had checked that they had all the fundamental common data and that over half of the surveyed schemes were missing more than one item of fundamental data.  My experience would indicate lower “success” rates than this.

We further support the proposal for TPR to set, monitor and enforce target levels of accuracy for the common data that schemes must hold and will be interested to see how this area develops.

We note further that TPR intends to work closely with the Financial Service Authority to monitor record keeping in contract based schemes.

Finally, we look forward to further developments in this area and would encourage all trustees to look out for and undertake the soon to be published e-learning module on this subject.

Page 2 of 212