Phil Titchener and Laura Whistler explain the importance of ensuring data quality when conducting a de-risking exercise

2011 was a record-breaking year for buy-in, buyout and longevity hedging transactions and the trend looks set to continue in 2012. Those trustees and sponsors who want to take advantage of the windows of opportunity that 2012 is likely to present should ask themselves one key question before embarking on any kind of transaction - is the scheme’s data up to scratch?

Buy-ins, buyouts and longevity hedges involve a third party making an independent assessment of the size of the liabilities to be covered. Without complete and accurate data the transaction may fall at the first hurdle. If the data quality is poor, the true value of the liabilities will be unknown or hard to quantify accurately making it impossible to assess whether the deal is good value for money. If significant items of data (such as contingent spouses’ pensions) are missing, there may be hold-ups whilst they are calculated, which may allow markets to move and the pricing to become less attractive. Also any uncertainties surrounding data will mean that the third party applies an additional premium to cover possible future surprises which typically will be significantly more than the cost of the necessary data cleaning.

Think beyond the day-to-day administration
For many schemes, data is perfectly acceptable for business as usual. For example, many administrators do not hold contingent spouses’ pensions on their systems but instead calculate these on the death of the member, often using paper records. However, if the dependant members are to be insured, the third party will need to be provided with the contingent spouses’ pensions upfront.

Additional data may also be required to price the transaction, such as marital status, spouse’s date of birth, salary at date of leaving the scheme, occupation etc. Some of these may be essential whilst others are ‘nice to haves’. It is important that trustees and companies are clear which will affect the price most and how much additional data gathering or data construction will be required prior to transacting.

Signing on the dotted line
A key consideration at the outset of any risk transfer deal is accountability for the scheme’s data. Most contracts for these types of transactions will require a declaration that, to the best of the trustees’ or company’s knowledge, the data provided to the third party is reliable and accurate. Generally speaking administrators will only take responsibility for data quality whilst they have administered the scheme. For many schemes there may have been several administrators over the years and finding someone to be accountable for inherited data can be difficult. The more confidence all parties have in the data, the easier the warranty will be to obtain.

What can be done?
If a buy-in, buyout or longevity hedge is something which is likely to be considered over the next few years, now is the time to assess whether the data is fit for purpose.

The most effective way to do this is to engage experts to analyse the scheme’s records in terms of their suitability for one of these transactions. Towers Watson has a specialised data team that can provide a number of services which can help clients get their data ready quickly and efficiently. Based on our experience the key steps are:

• Move quickly to get a high level picture of how good the data is
• Once the big picture is known, consider how far the data cleansing should go and develop a structured cleanse plan
• Differentiate between the high priority and low priority issues and understand how these will be tackled, by who and how long they are likely to take
• Factor in time for tracing individuals and reconciling GMPs
• Involve the administration team in the planning to ensure sufficient skilled resource is available and the timescales are clear.

Remember the provider doesn’t expect to receive perfect data so concentrate on the key issues that could impact pricing.


Written by Towers Watson consultant Phil Titchener and actuarial consultant Laura Whistler

Share Story: