Archive for January 2019

Dennis Mincher

Data quality

The Pensions Regulator (‘TPR’) has been highlighting the issue of data quality for years and continues to do so. Maintaining data quality requires scrutinising (testing for accuracy, completeness, reliability and consistency) the data set periodically and rectifying where needed. Various rectification tasks may include updating, standardising or de-duplication. Since TPR started pushing their data quality agenda there has been a reasonably positive response from pension scheme trustees, however, over the same period of time, the legislative environment across the UK pensions sector has experienced a rapid succession of changes. Whilst many pension scheme trustees have reviewed their schemes’ data quality and perhaps even taken steps to rectify the issues that exist, legislative developments are potentially creating a host of additional problems for pension scheme data and pension scheme administration operations. The only way to effectively manage this is through the use of dedicated systems.

A good example is the processes involved with pension flexibilities available to members with Defined Contribution (‘DC’) benefits introduced back in 2015. Various actions such as partial Defined Benefit (‘DB’) to DC transfers and flexible drawdowns may not be properly recorded on systems. The issue here is that the fields and calculations required for any potential new inputs may not currently exist and the necessary system development could be difficult or out-of-scope, the implications of this could be disastrous. If all this data is not properly recorded at the time of processing, it could be lost completely or issued with unchecked errors that could create problems for trustees and members alike. Inaccurate records will impact on the information provided to the member and consequently their understanding and application of the guidance and information available. In turn this may lead to the member choosing a retirement option that is not right for their circumstances and which could affect them and their dependents for the rest of their life.

The alternative to updating existing systems is to develop new systems; however the development cycle for a new pension scheme administration system is typically measured in years, with complex projects and high associated costs. Many insurers have been slow to offer new products and services to their customer following the advent of the pension’s freedom flexibilities. One of the reasons cited by insurers to justify the lack of greater flexibilities is that they have not received adequate support in order to develop systems that can deliver the proper information and protection that consumers should expect in making choices about their retirement options.

Beyond the software development world, users of third party systems are often faced with large scale implementation and data migration projects should they wish to upgrade or change their systems. As a result of this, there is a desire among system providers and system users alike to ensure that their pension scheme administration systems remain relevant and fit for purpose for as long as possible. The choice between switching to a newly developed system, or sticking with an existing system and pushing for functionality updates is fraught with risks on both sides. Making the wrong choice in the short term could have costly repercussions for both the long term operations of the scheme and the delivery of a quality service to scheme members, especially if more legislative changes occur in the future.

As always, the key is vigilance to ensure that the correct systems and processes are in place to guarantee good record-keeping now and in the future.

Brendan McLean

Market Volatility

Recent market volatility has created a lot of news headlines, as well as causing multiple asset classes to record some of the worst annual performance since 2008. The last quarter of 2018 was particularly painful with global equities returning -10.6%, UK equities -10.2%, oil -40% and 10 year treasury yields -19%. This was mainly driven by fears of slowing global growth and investor de-risking and moving into safer assets.  It is worthwhile noting that strictly speaking the definition of market volatility is markets moving a lot both down and up however, in periods in higher volatility markets tend to decline as investors panic and sell.

The cause of the volatility has not yet dissipated, and 2019 could be an even more volatile year due to a range of factors including tightening global liquidity because of the withdrawal of quantitative easing, rising interest rates, rising geopolitical concerns including Brexit, Italian politics, US political gridlock, and the ongoing trade conflict between the US and China.

But what does all this mean for pension schemes and their investments? 

I think pension schemes should not be panicking.  They are long term investors so should not be too duly influenced by short-term volatility.  That said such volatility does provide challenges (as well as opportunities) and it does alter market dynamics.  I mention below a few areas that I think pension schemes should be thinking about as follows:

  • Asset switching – with such volatility schemes need to be careful when switching.  The impact of market volatility can be reduced by trading over a number of days or trading on days when news announcements are not expected.
  • Active management – In recent years there has been a lot of capital flowing into passive funds, due to the low cost and better performance net of fees, versus active managers. However, active management may be able to reduce volatility and provide better returns by using their skill to protect against such volatility. Also they can hold more cash in falling markets than passive managers so protecting values. This could mean active managers could outperform the aforementioned passive index funds.
  • Diversified Growth Funds – If you look over the last 5 to 10 years these funds have often provided returns significantly less than equities during the bull equity market run, despite being sold as equity replacements.  Perhaps they can now in a more volatile environment prove their worth and provide equity like returns with lower volatility.
  • I believe that pension schemes should have trigger structures in place to benefit from any potential upside if it does occur. Given the current volatility with market movements occurring rapidly, having a robust process for implementation will benefit pension schemes and help them take advantage of these opportunities.

I am sure that there a lot more areas that pension schemes need to be thinking about and it is worthwhile that Trustees speak to their consultant about what is going on at the moment to seek their views as well as their managers’ views.

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