Posts Tagged ‘Data’

Colin Wheeler

Data, in the context of pension schemes, has probably never been talked about as much as it is now. And there is one question that trustees keep getting asked – is your scheme’s data “in order”? But just what does this mean?

To those not immersed in the nuances of the subject, it may appear that data is data – how can it not be in order? When it comes to pension schemes there are a multitude of reasons as to why this is the case. For example, if we consider a typical member who joined a scheme in the 1980s, some or all of the following may have happened, which could cause their data to ‘decay’ over time:

  • employer is taken over
  • scheme administration is outsourced
  • scheme records went from paper to microfiche to computer based
  • scheme has passed through several third-party administrators
  • member left and became a deferred member
  • member retired
  • legislative changes caused benefits to need tranching-out
  • member transferred-in a previous company pension
  • scheme was merged into another run by the same or a different employer.

The list of reasons could go on and on.

During all the above, the member’s data will have been handled, giving rise to the possibility of it being changed, correctly or not.

Administrators, trustees and sponsoring employers all have a part to play in the data journey. Administrators should be reporting on data on a regular basis and, when we say data, it should be data which is meaningful in the context of buy out, so conditional or scheme specific data. Trustees and sponsors have a duty to be taking these reports seriously and taking the appropriate actions coming out of these reports. Over the last five years or so, many data reports have been produced with little or no thought given to their eventual use, and have merely ticked a box for trustees. This is not good enough.

High expectations

Data will need to be in order for a number of projects, including member derisking exercises, full calculation functionality and member online portals. In this blog, I want to discuss specifically data requirements for buy out.

When trustees go to market to insure member benefits via a buy-out, or a buy-in for that matter, there is an expectation placed upon them by insurers that they will have taken the necessary steps to get their data in order. In turn, trustees will expect their administrators to have data ready to share with insurers when quotations are sought. It is this engagement between trustees, scheme sponsor and administrators which is key to data readiness, and which needs to be in the project plan and discussed at an early stage.

When reviewing data in preparation for buy out, it is necessary to think about the insurer requirements, and the issues which will have the biggest bearing on their pricing, and indeed whether they will want to quote at all. The capacity in the market is limited and insurers can afford to be selective over which schemes they want to transact with. A scheme which can demonstrate that it has taken the time to prepare for going to market is more likely to appeal to insurers than one which hasn’t. Schemes which have invested in data preparation will see this reflected in the price compared to a scheme with incomplete data

For a relatively mature defined benefit scheme, the typical data issues which are likely to need addressing could include:

  • Pensions payable to spouses or dependants on the death of a member. This is particularly the case with pensioners who commuted pension for cash, but the pension on death is based on the pre-commuted pension.
  • Tranching of benefits, particularly for deferred members where different revaluation rates will apply to different tranches, and indeed some tranches will have different minimum retirement ages.
  • Treatment of transferred-in benefits for deferred members. This assumes that the transfer-in can be identified in the first place!
  • Data on marital status of members, and for those married, their spouse’s dates of birth.

It is not just a scheme’s core data that insurers will expect to receive. Other data not needed for day-to-day administration, such as mortality experience and marital status, can help insurers when valuing liabilities. The more data a scheme provides, the fewer assumptions an insurer will be required to make, which will allow it to price with a degree of accuracy.

It is also worth noting that many schemes will have members with “special benefits”, which have been documented in individual member letters or augmentations agreed with the sponsoring employer. In such cases the trustees must ensure that all instances of those benefits are identified and reflected in the data on which insurers are asked to price.


This is an area that insurers will look closely at, to understand exactly how the scheme equalised retirement ages, and how this has been reflected in data. They will seek the usual legal evidence, but when it comes to data, they will expect to see the respective “Barber” periods of service tranched out separately, with clear guidance to show what retirement age applies to each.

For schemes that tackled equalisation by awarding additional service, or some other form of compensation, this needs to be clearly labelled in the data. We may be 30 years on from the original Barber judgement but it is still proving to be a thorn in the side of scheme administrators. And Guaranteed Minimum Pensions (GMPs), specifically inequalities arising from GMPs, are rearing their ugly head, but that’s another matter…

It’s not only data that is needed

As well as data, a scheme going to market will need to provide a comprehensive, and legally endorsed benefit specification. The insurer will use this to interpret the data and to test that the scheme is being administered in line with the rules. It is not uncommon for schemes to have specific practices which have evolved over the years and which are applied ahead of the scheme rules. So, if the scheme’s legal advisers are preparing a specification, it is crucial that the administrators review this to ensure that it represents what happens in practice. It then becomes a matter for agreement between the insurer and trustees as to the basis on which policies are set up. If policies are not correctly set up then the trustees may find that they are not fully discharged in respect of the members bought-out. 

So, there you have it, getting data in order is not a task to be taken lightly, or left too late. When it comes to buy out of benefits, preparation is the order of the day.

Alan Collins

The clock ticking down to the end-of contracting out is getting louder and louder.  With just over a year to go, many trustees and administrators are getting their houses in order by completing the reconciliation of their records with those held by HMRC.  However, many more are not.  A recent estimate indicated that, on average, around 5,000 data queries a day would need to be resolved in order to complete reconciliations in the desired timescale.

For contracted-out schemes that are already closed to build up of future benefits, there are no excuses for brushing reconciliation exercises under the carpet.  Schemes which are open to accrual can also progress matters in advance of the end of contracting-out on 6 April 2016, using HMRC’s Scheme Reconciliation Service.

This is an exercise that must be done and trustees and administrators should take immediate action to complete any outstanding tasks.  The resource in an already stretched HMRC team will wither on the vine from 2016 until December 2018 when all individuals will be written to confirming their contracted-out pension entitlements.  Failure to act now may leave schemes carrying additional liabilities which they cannot prove belong elsewhere.  It is therefore also in employers’ interests that trustees complete the required tasks. Read more »

Neil Copeland

American author Chuck Palahniuk has written a lot of things. “Maybe humans are just the pet alligators that God flushed down the toilet”, for example. Or “All God does is watch us and kill us when we get boring ” The latter quote being of particular concern to my actuarial colleagues.

He also wrote “any behavior that is not the status quo is interpreted as insanity, when, in fact, it might actually be enlightenment.”

Everyone knows the pensions data status quo. Poor data, incomplete data, inaccurate data is rife… Yet when I make the, what seems to me entirely obvious, link between poor, incomplete data and a poor administration experience for trustees and members, the number of people who appear to fail to see that link leaves me uncertain as to whether I’m insane or enlightened. Well, it doesn’t really. I’m pretty clear that I’m enlightened, at least on this matter. Read more »

Mark Johnson

Spence & Partners latest blog for Pension Funds Online –

With pension liberation fraud, auto enrolment and the defined contribution (DC) code and guidance, data appears to have been put on the back burner – for the time being at least.

In a press release in December 2013, The Pensions Regulator (TPR) said it intends to review its record-keeping guidance during 2014, but it is still unclear what this will bring.

Without good quality data the industry cannot seek to improve accuracy and efficiency in any area of work carried out, be it a retirement settlement or a triennial actuarial valuation. Data is, and always has been, the foundation that the industry is built on; if this is suspect then how can we expect it to hold up to the test of time? Read more »

Will Davison

Spence & Partners, the UK pensions actuaries and administration specialists, today commented that the recent news surrounding the availability of real-time valuations is a welcome step towards the delivery of a more pro-active service to pension scheme trustees and sponsoring employers, but that progress will be hindered if the link with scheme data and an audited benefit specification isn’t strengthened.

Marian Elliott, Head of Trustee Advisory Services at Spence, commented: “The facility to undertake daily valuations and become more responsive around the scheme’s funding position will certainly benefit trustees and sponsors in the management of legacy defined benefit schemes. It is absolutely right that trustees should expect to receive real time liability information. This is something we have been doing with our clients for a few months now and they have responded very positively to the streamlining of the process. We are therefore pleased to see the development of other such services being announced in the industry. Read more »

Kevin Burge

This is our latest blog for Pension Funds Online –

If you have ever been to India or watched The Best Exotic Marigold Hotel film sequence where their bus drives straight at the oncoming traffic, you will know that ‘driving rules’ are few and far between.

The basic rule is not to hit anyone and certainly not to hit any of the many cows, which are sacred, that wander the roads and who always have right of way.

I recently returned from holiday in Rajasthan and had an interesting conversation with one of our guides. Motorbikes are only allowed two people on them – well most have three and many have the whole family; you can only overtake on the right-hand side of a vehicle – they overtake any which way they can irrespective of bends in the road, oncoming traffic etc.; you cannot use a mobile phone whilst driving – virtually every driver uses the phone including those on motorbikes.

This made me think about the data issues that face pension schemes. Read more »

Alan Collins

With recent market turmoil sending scheme funding levels tumbling, pensions present a potential Pandora’s Box for even the most enlightened Finance Director.

In this month’s issue of CA Magazine (pg. 56) Alan Collins, head of employer advisory services at pension actuaries Spence & Partners suggests 10 key questions that Finance Directors should be asking themselves about their defined benefit schemes and some guidance on each of these key issues.
Read more »

Greig McGuinness

GMP, Guaranteed Minimum Pension, the great invention to irritate pension administrators and make our lives more complicated than they have to be. Now you could be forgiven for expecting that following a couple of rounds of “simplification” and the cessation of GMP accrual from 1997 that GMP would be a problem of the past, with the number of non-retired members with a GMP element to their benefits gradually dwindling year by year.

Alas, just as we thought everyone had forgotten about Angela Eagle’s announcement last January, out come the DWP with proposed legislation and methodology for the equalisation of GMP. We could debate as to whether there is a legal requirement under European Law to equalise GMP at all, with some arguments against including GMP merely being a benefit underpin or that it is a quasi state benefit and therefore exempt.

My own opinion would be that there should be no Read more »

Tom Nimmo

Testing the boundaries

It is now over twelve months since the Pensions Regulator (tPR) published its Guidance on Record Keeping. The guidance emphasises the importance that tPR places on scheme data quality. For many in the industry, this publication merely confirmed what they already knew – that the member records for most schemes were in poor health, but very little was being done to tackle the problem.

With this guidance tPR did more than just mention the elephant in the room, they shouted about it for all to hear and addressed a warning to those who thought that they could continue to ignore that pesky pachyderm. The message was clear: scheme member data needs to be audited and brought up to a prescribed standard before December 2012. Read more »

Alan Collins

I came across an interesting panel discussion in the current issue of Engaged Investor Magazine, where a number of industry experts were asked for their views on developments in pension scheme de-risking. My views on the questions addressed are as follows:

Q1 – Many companies are not able to carry out full buyout in one go. What multi-layered approaches can they take to de-risk their schemes?

The most important first step is for the employer and trustees to agree a common goal for the scheme. In almost all cases (especially closed schemes), the ultimate goal should be to secure all benefits with an insurance company and wind-up the scheme.

An agreed, transparent objective will then set the path towards the ultimate goal. There are many alternative partial de-risking measures that can be taken, most of which can work in parallel. These include employer led exercises such as:

  • a transfer exercise, offering members the opportunity to transfer their scheme benefits to an alternative arrangement via an incentive in the form of an increased transfer value, or sometimes a cash payment; or
  • a pension increase swap exercise, where members give up future pension increases in return for a higher initial pension.

These exercises can generate significant savings to the employer relative to the ultimate cost of buyout. They are unlikely to generate significant immediate savings on ongoing funding costs or FRS 17, though they do contribute to reducing the risk profile of the scheme.

These exercises can be run in tandem with providing opportunities to members to retire early from the scheme, which can generate savings on cash commutation and also insurers prefer the “certainty” of pensioners rather than deferred members. In conjunction with the company, the trustees can also move towards a lower risk investment strategy, using bonds or LDI type investments, and also consider partial insurance such as pensioner buy-ins. I would caution that for schemes with young pensioners or where the pensioner group makes up a small proportion of the liabilities, it may not be efficient to use significant resources of the scheme to obtain insurance covering only a small portion of the liabilities. There are also opportunities developing in the market to enter into a staged buyout process with insurers, where the terms are agreed up front but the whole premium is not required at the outset.

Nor should the trustees overlook the potential for non-cash funding, such as parental guarantees, contingent assets or “asset-sharing” with the company, such as the whisky-bond deal completed by Diageo .

Q2 – In what ways did trustees’ de-risking choices change during 2010?

The choices remained broadly unchanged, though it was a year of massive change in defined benefit pensions, particularly on the legislative front. The single largest issue was Steve Webb’s RPI/CPI summer bombshell, which is expected to have a significant effect on pension scheme funding. Most schemes are expected to see a reduction in liabilities of between 5-15% depending on the nature of the scheme rules.

This meant that larger exercises tended to be shelved as trustees waited for the full impact of the change in inflation measure to come through. I would say the introduction of innovative non-cash funding solutions and the focus by trustees on obtaining enforceable security was the other main development in de-risking.

The emergence of longevity swaps was supposed to be the big-ticket item for 2010, but this remains the preserve on the very largest of schemes and I don’t see that changing any time soon.

Q3 – What early steps, such as data cleansing, communications and legal considerations, should be undertaken before entering into a de-risking activity?

The quality of pension scheme data can be highly variable. It can be held in multiple formats, for very long periods of time and is often subject to major change (e.g. after mergers, systems migrations, legislative changes). When entering a liability management exercise and moving ultimately towards winding-up a scheme, every effort must be made to ensure that members have the correct pension entitlement. The key message on data is that full and accurate data will reduce the cost of staff communication and liability management exercises as well as ultimately buying annuities as it helps to reduce underwriters’ pricing for uncertainty.

The communication process is also vital, both between the employer/trustees and the member. Possibly even more important is the communication between a financial advisor and the member during an employer’s de-risking exercise.

The need for proper legal input almost goes without saying, but the emergence of the RPI/CPI issue and continued problems with sex equalisation and other scheme amendments, mean that assistance from your friendly pensions lawyer is a necessity, not a luxury.

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