By Mark Jones
The growing incidence of defined benefit schemes to de-risk is well documented. What is less well known is the extent to which the poor quality of information held by schemes is hampering the process.
New research by EDM Group shows that nearly one in four (24.7%) of UK pension professionals believes that over the next five years the level of de-risking of DB schemes will increase dramatically, and a further 41% expect a slight increase. But the same research also found that the respondents thought very little of the material they have to work with: only 5% of pension professionals believe that the quality of data collection by defined benefit schemes is ‘excellent’, and only 3.7% say the same about how it is managed.
De-risking presents an administrative challenge to DB pension schemes that some may not be prepared for. Any de-risking solution provider will demand that member information is accurate, complete, up to date, and that the full extent of the member contributions and scheme liabilities are visible.
However, common pitfalls include:
• Poorly stored or lost documentation, often going back several decades and stored in different places
• Records stored in multiple formats such as film, microfiche and paper, all of which degrade over time. They can also be bulky and difficult to access or transfer into useable formats
• Gaps in policy documentation and contact information, such as changing addresses, scheme departures or even deaths without the administrator being aware
In terms of the problems caused by information stored on paper or microfilm, our research shows 34% of pension professionals think this makes analysis more time consuming, and this was followed by 32% who said it can make it difficult, slow and costly to retrieve. Some 31% complain that it can be difficult to integrate the data with business applications.
The poor collection and management of scheme information poses a huge challenge in terms of meeting any de-risking goals. But fund administrators and trustees have begun to recognise that there is a way to address these challenges. Bulk digitisation of all pension records means that all data can be checked, stored and included in pension administration systems in an easy to access format.
Third-party providers of de-risking solutions will not want the administrative burden of paper or microfilm archives and will insist on electronic data that is more easily ingested and interpreted. Understanding the extent of DB scheme liabilities is key to the success of de-risking projects. Often, it is only when trustees and administrators begin to consider their options that they recognise the scale of the problem.
There are three broad areas where schemes can mitigate risk by understanding investment returns, longevity of members and scheme data:
• Investment allocation
• Deficit management exercises
• Buy-in/buy-out For all three approaches, pension fund sponsors need to remove as much risk as possible from the process.
This involves understanding the specific risks of a scheme, measuring them, setting goals and devising a plan. Having these in place in advance of an eventual decision to de-risk is invaluable. Increasingly, pension schemes are recognising the burden of pension administration, auditing and compliance can be eased through speedy and accurate digitisation of pension records. Once in digital format, pension records are proof against loss, damage or unauthorised access.
This delivers a number of significant benefits: most notably it enables the stakeholders (scheme administrators, trustees and the potential de-risking insurer) to be confident that all the scheme members’ records are complete, or at least be able to audit the records more quickly so they can establish if any records are incomplete. This enables them to assess their true liability and in turn that allows an insurer to decide if it will insure a scheme, and at what premium level.
Mark Jones is chief financial officer at EDM Group
Comments