Archive for June 2010

Neil Copeland

The Pensions Regulator has published clear guidance on record keeping and the steps that it expects trustees to take to ensure that their data is fit for purpose by the 31st December 2012. In a welcome reprieve for trustees, the end of the world is set for 21st December 2012.

Everybody knows that pension scheme data stored electronically, particularly historic data, is poor across the industry, but trustees have been reluctant to address the issue, possibly because they lack the tools to do so. Despite the recent regulatory guidance many still seem disengaged from the problem – but you never solve a problem by ignoring it.

The attitude of many trustees and administrators to this issue has led me to conclude that the only logical explanation for their inaction is that they are hoping that prophecies associated with the Mayan Long Count Calendar (“the Mayan calendar”) will render the issue redundant.

For those of you who are unaware, there are those amongst us (admittedly there is a question as to whether they should remain amongst us rather than be held in a secure facility where they can receive appropriate help) who believe that the Mayan calendar predicts that the Earth will end on 21st December 2012. The Mayans are no fools and accomplished remarkable feats in the written language, mathematics, astronomy, astrology, art, architecture, agriculture, and much more, so it’s likely they’ve got the end of the world right as well, runs the argument. Handily for trustees and administrators the end of the world will come 10 days before the Pension Regulator’s deadline for sorting out their data.

Unfortunately for trustees and administrators there are a number of problems with relying on the astrological predictions of an ancient civilisation that the world is about to end as a solution to their pension data issues.

  • It probably doesn’t really satisfy their fiduciary responsibilities to members
  • In an exclusive interview with the Daily Telegraph (seriously) a Mayan elder has made it clear that no such prophecies exist
  • NASA has a special web page refuting the claims (seriously, again)
  • The Pensions Regulator has made it clear that it will review progress in 2011 on the take-up of its guidance and its effectiveness in addressing problems identified in its earlier consultation. So on the off chance that the world does end in December 2012, it may not save trustees from regulatory scrutiny.

Whatever way you look at it, trustees are going to have to deal with their data issues, and the sooner, the better – but it doesn’t have to be the end of the world.

For our take on how to beat the 2012 deadline click here

For an alternate view of how John Cusack might handle things click here – 2012 The Movie

Tom Nimmo

In recent months much publicity has been given to the new guidance from The Pensions Regulator regarding scheme data standards. Both trustees and administrators have a burden of duty to ensure that their core data is up to scratch. Failure to maintain accurate and ostensibly complete member records no longer only result in potentially inaccurate settlements or valuations, pension schemes now risk incurring fines and enforcement notices.

Given this new climate for greater data responsibility an article in caught my eye. The article suggests that trustees should switch their third-party administrators (TPA) if they have any misgivings about their ability to maintain or report with transparency on the quality of a scheme’s data. This immediately grabbed my attention as it struck me that changing TPAs doesn’t necessarily solve the problem of poor data quality. In fact one of the biggest risks that pension data can be exposed to is a change of administrator and the associated complications of migrating it to a new system. It therefore seems completely counterproductive to me for trustees to move their scheme data before knowing where the gaps and potential issues lie. If you didn’t know the contents of your loft, you wouldn’t just move house to find out.

To my mind, the best way for trustees to assuage their doubts over the quality of their scheme data is to seek an independent data audit. A thorough data audit will not only reveal gaps and inconsistencies in a scheme’s data but it will also provide practical advice to rectify any issues discovered. Above all else, a data audit will immediately provide trustees with certainty over their data whether it is good or bad news. From there the best road may turn out to be a move to a new TPA but to return to my previous analogy – at least on moving day you’d know what was in all your boxes.

Spence & Partners provide a range of independent pensions data auditing services and have recently launched a new data audit tool that provides in depth analysis of all the core data fields contained in The Pension Regulator’s record-keeping guidance.

For more information on our Pension Data Service contact David Davison on 0141 331 1004.

Brian Spence

I have a dilemma.  In late 2009 we bought a new house in the Mourne Mountains with a wood pellet boiler with the promise of low heating bills and endless hot water.

Prior to this I had lived almost a half century without knowing what an auger is and with fuel either on tap or at worst at the end of a phone.

With 14 days lead in time turning to 21 in snow and efficiency only achieved with much cleaning and maintenance, it is clear that the unhedged downside risks of wood pellets are too painful to contemplate on an ongoing basis (such as returning home to a cold house after a weekend away).

It just struck me how similar the options are to those facing pension scheme trustees.

Replacing the wood pellet boiler means “fire and forget” like buy-out or full matching.  Seems like an expensive option on the face of it but little or no maintenance.


Trust in wood pellets to deliver returns without too bumpy a ride (equities): high maintenance but with the promise of low costs in the long run.  You can even have an automated GSM text sent to tell you when the boiler has failed (any chance of including this in a fiduciary management mandate)?


Hedge my bets.  Go for the benefits of wood pellets but buy an oil boiler as back-up – bit like LDI.  Still got the maintenance and the potential upside but the maintenance cost is steep.

My logical head says oil but one can become strangely attached to a wood pellet boiler.  Nice piece of technology that you can understand.  Wood pellets go in one end and a hot bath at the other.  A bit like many companies are attached to the idea of running a pension scheme and investing in risky investments even when the maths is against them and the risks just aren’t worth taking.

There is of course also the ethical aspect, the long term impact on climate change and the smug “carbon neutral” boast but that is another subject in itself.

Brian Spence is a founder of actuaries Spence & Partners Limited and a director of independent trustee Dalriada Trustees Limited.  You can follow him at @briandspence or @PensionsEndgame on Twitter or link to him on LinkedIn.

Follow @SpencePartners and @DalriadaTrustee on Twitter.

Michael Selby

It was Albert Camus, the existentialist Algerian goalkeeper and sometime philosopher, who said “It’s no use reminding yourself daily that you are mortal: it will be brought home to you soon enough.”

The huge amount of press comment on mortality recently has brought home its importance to life insurance companies and trustees and sponsors of final salary pension schemes.

The position is additionally complicated for smaller final salary pension schemes as for them it is not only the risk that the assumptions being used are wrong but that the experience of their scheme differs very significantly from the average. Clearly the larger the scheme, the more diverse and regionally based the membership the more likely the mortality experience of the scheme is to match the socio-economic groupings of the population as a whole. Conversely, of course, the smaller the scheme the more likely it is to have experience which differs significantly from the whole.

Primary research we’ve carried out in to what I have called ‘the small scheme effect is shown below.

In simple terms this research shows that even where the underlying mortality rates have been predicted correctly the smaller the scheme the more it could suffer from funding fluctuations as a result of the randomness of mortality. This reflects the two extremes that the scheme membership could all die considerably earlier than expected or live considerably longer.

This raises a very difficult issue for scheme trustees and sponsors. In the latter case the scheme could be providing benefits for members for much longer than would be anticipated. This would mean that the ultimate cost of providing these benefits would be higher than anticipated, requiring larger contributions to reflect this.

On the other hand should mortality experience be better than expected (by which I mean from the sponsoring company’s perspective) then there is a risk that the scheme would be over contributing for the benefits being provided. There would clearly be a concern on the part of the employer that should this happen there would be a risk of a ‘trapped surplus’, namely money held within the scheme over and above that needed to provide benefits which could not be returned to the employer.

Our view therefore would be that, particularly for small schemes, this makes the use of contingent assets more attractive as it provides security for the scheme trustees and therefore the members as well as minimising the risk that the employer will over contribute.

In addition as mortality assumptions in schemes are forced to strengthen the margin between the funding position of the scheme and the buy-out cost may narrow making the security of a buy-out solution more attractive.

Improvements in mortality are generally unwelcome to sponsoring employers as they imply higher pension scheme costs however they need to be addressed or there is the potential to waste resources if the right future funding decision is not selected.

Schemes could greatly benefit from carrying out a specific mortality assessment on their scheme to provide some additional insight. This is a relatively simple and inexpensive process which greatly assists in providing a basis for mortality assumptions used in funding negotiations and for accounting disclosures.

As Bill Shankly, the Scottish philosopher and sometime football manager, nearly said, mortality is not a matter of life or death, its more important than that!

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