I presented at the second ‘Future Influencer’ breakfast seminar hosted by Spence & Partners, on whether closed schemes should behave like schemes in the Pension Protection Fund (PPF) Assessment Period. Here is an overview of my presentation:
The PPF assessment period is triggered when a scheme’s sponsoring company goes insolvent. Throughout this period, the Trustees of the scheme have to carry out a number of tasks (including data audits, equalisation reviews, benefit audits and rectifications etc.) to ensure that the scheme is up to standard for when or even if the scheme enters into the PPF.
So, what can closed schemes take from this process?
The PPF have put hundreds of schemes through this process, which shows that they know how to get schemes up to standard. Why should Trustees take as much from this process as possible? The Project Plan provided by the PPF is an excellent example of how Trustees should decide which tasks to undertake, the order in which to do them, as well as budgets and timescales.
Why should schemes behave like this?
Reading the news, it is impossible to avoid the various stories regarding the decline of DB schemes. Research has shown that 40% of DB schemes are looking to buy-out in the next 10 years. The buy-out process is long and complex, with having to go through a consultancy process, aligning the investments to the buy-out and going on to choose an annuity provider. What would happen if 6 months before the scheme was due to be bought out, it transpired that the data was wrong or the pensioners were receiving incorrect pensions for many years? Would it not be more beneficial to carry out these tasks before even thinking about the buy-out process?
Pension calculation example…
If a data audit and benefit audit has not been carried out on a scheme, this can cause problems for pension administrators. If we are unable to reconcile benefits when calculating members’ benefits, this will cause delays in issuing the quote to the member as further investigations will be required. If a scheme has carried out these tasks, the quote could be issued to the member within a short timeframe, which will be to the satisfaction of the pension administrator and the member.
The benefit specification is an excellent document to have in place for a scheme. Most legal advisers have probably lost count of the number of schemes that did not close their equalisation widow correctly. When the scheme closes it would be an opportune time to review all the legal documents to help ensure that members are receiving the level of benefits that they are entitled to.
Benefits for Pension Administrators
How beneficial would it be for pension administrators if all schemes did indeed behave like schemes in the PPF assessment period? Working in the PPF admin team, I get to see how much of a mess schemes can be in when they enter the assessment period and then the dramatic transformation when they enter the PPF. If all schemes could be like this, it would make my working life a lot simpler as well as being more confident in the work that I produced.
Benefits for Trustees
Trustees could benefit the most from schemes behaving like this. The majority of this will be in relation to the scheme costs, which in theory should reduce once the tasks have been carried out.
The question the trustees need to ask is; do the benefits of doing this outweigh the costs? For example, could spending £100k result in a reduced premium of £1m?
The Pensions Regulator has been putting a lot of emphasis on common and conditional data in the last few years. In time will they begin to introduce a requirement to ensure that all benefits are correct? Would it not be worthwhile to continue with reviewing the data and now start looking at if benefits are correct?