Pensions schemes and poor data – why is it and how to sort it

ImageIn July 2013, the Pensions Regulator released a report which made for disappointing reading. Despite all the efforts to date, many schemes are still falling short of the standards The Pensions Regulator has set for measuring data quality and maintaining accurate records, despite steady improvements in some areas.

In 2009, The Pensions Regulator issued good practice guidance about scheme data and subsequently set targets for schemes to meet its ‘common data’ standards by the end of 2012. These standards relate to the members name, date of birth and National Insurance number, which is a key tool in the identification of individual scheme members.

Clearly, the Pensions Regulator is underwhelmed with the findings and has threatened that if schemes have failed to meet targets for keeping accurate records then it will begin to issue improvement notices and if that does not work, financial penalties on pension schemes.  

For those smaller pension schemes, without access to sufficient resources are the ones causing the Pensions Regulator the biggest headache. They are more likely to be part of the two million or so members where common data has not been measured or significant improvements are required to meet the standard set of 95% having data stored. There is also the issue that the scheme conditional data, that is data specific to the individual scheme, is still not what it needs to be. This is particularly important if the there is a scheme valuation, or even more importantly, a buy-in or scheme wind up in the offing.  


Not surprisingly then, the Pensions Regulator has timetabled the end of 2013 to publish the results of its detailed record keeping review and the accompanying guidance.


What do Trustees need to do?

First and foremost trustees need to accept that administration needs more air time both in meetings and outside of them.


The data used by the administrators is a living thing, it changes (members die, re-marry, leave, move address etc) and corrections to earlier administration errors are made almost daily. As many decisions relating to the scheme are based on the member data, valuation assumptions, investment strategy for example, having the best data available is much more than a ‘nice to have’ it is essential.


From this, trustees need to engage with their administrators to develop a plan for both monitoring and improving scheme member data. In turn, administrators need to be open and   

honest with their clients so that they are seen as part of the solution, not the problem. In the past, it has been too often the case of trustees and their advisers, shooting the messenger when the administrator reports data problems.


There are tools in the box to use. For example monitoring pensioner deaths is going to bring benefits not only in having more accurate pensioner data but also as a weapon against scheme fraud. Contacting deferred members may also flush out deaths where there is an immediate benefit payable but then no further scheme liability. Asking active members to ensure that details of spouses are accurately recorded could influence the potential scheme dependents pension liability. A simple review of whether a data item is stored in a database is not sufficient – there needs to a check made to ensure that the item makes sense. The use of dummy data  was prevalent in the not so far off past, such as NI numbers based on a universal date of birth NI01010000F denoted a female and ending in M a male. Such data needs to be identified and cleaned.


All of this requires a budget and in these times, there are competing needs both for the scheme sponsor and the trustees. But not having a budget, both financial and in time, is a false economy and could well end up costing more money with data having to be put right when the clock is ticking.


Trustees – de-risk now?


After months of poorly performing gilts numbers, there are eventually signs that government bond yields might finally be increasing. For trustees, this means it is time to prepare for scheme de-risking and be prepared to act quickly to take advantage of this window of opportunity.


UK 10 year government bond yields have now broken through 3 per cent for the first time since 2011, Paul Carney’s much trumpeted Bank of England’s introduction of forward guidance on interest rates and a “sharp increase” in the manufacturing and construction Purchasing Managers’ Indices and other indexes such as the service sector business survey all support the growing expectation that longer-dated gilt yields will continue to rise.  


Trustees should consider de-risking and buying bonds but only if they believe that the gilt yields increase in the last few months (which has meant that bonds became cheaper and schemes’ funding gaps became narrower) and that interest rates are going to be lower for longer, make it sensible to move into more gilt-type investments. One of the issues will be that as Trustees start to increase demand and in so doing will constrain yields from climbing particularly high.


The decision whether Trustees should increase their investment in gilts depends upon their   risk journey plan and how they want to balance investment risk against sponsor contributions. Or in other words, what is the balance for the Trustees in the degree of risk they are prepared to live with and what the plan is for managing the scheme assets and the contributions.


Trustees do have some sophisticated tools at their disposal to monitor the scheme assets and liabilities, which allows them to prepare for de-risking. Trustees who have been proactive, gone through some scenario planning and therefore understand the decisions they would like to make and can wait for the right market conditions to execute those decisions are in the best position to act quickly because they are effectively further down the road.


Trustees have to consider whether they believe that interest rates will recover more quickly or slowly than the market expects. Although the Bank of England bank is committed to a base rate of 0.5% until unemployment falls to 7% – at the current rate of progress not expected before 2016, all it would take is a couple of political shocks in the Eurozone or Chinese debt spooking markets to seriously derail the global economic recovery. And this will inevitably mean that scheme funding levels will suffer.


On 22 September, Germany will hold a general election which could shake up the Eurozone’s most stable economy, while here at home the coalition looks set to see out their five year term to May 2015. The problem is that political decisions are much more likely to have a bigger impact than economic factors – neither seem exactly stable at the moment.   


Now, as ever, trustees should be thinking about their strategies, how much risk they need to carry and if they can afford to hedge risk even if market conditions are not as helpful as they currently are. There are a number of actions which need to be in place before the ‘buy bonds now’ decision can be made, not least whether the scheme data underpinning the decision is both reliable and accurate.


As always, it’s all about the planning.


September 2013