Andrew Cox asks what pension schemes should be doing to improve their data

One of the essential tasks of a pension scheme is to pay the right amount of pension at the right time to the right person. Getting this basic procedure right is a fundamental part of keeping members happy – and will help the trustees sleep soundly at night.

Poor data management that hinders this basic process will have unhappy consequences for scheme trustees. The Pensions Regulator (tPR) has clearly signalled its intention to get tough on data management by updating its guidance on good practice for record-keeping in June 2010. Schemes should be aiming for 100 per cent compliance on new Common data (i.e. data that is necessary and applicable to all members of all schemes) created after June 2010 and 95 per cent on legacy Common data as the benchmark for data completeness by December 2012.

TPR will review progress in 2011 and if it finds evidence of poor record keeping this is likely to result in sanctions against schemes and trustees. This could include the public naming and shaming of the worst
non-compliant schemes. Pension schemes must think carefully about what they can do now to improve their data management.

To clean or not to clean?
The Pensions Regulator has listed events that it considers give rise to an urgent need to review record-keeping, irrespective of any longer-term plans – these include a change of administrator, entry into the PPF, a buy-out or a full or partial wind up. When one of these events occurs, tPR will expect providers and trustees to give high priority to reviewing and cleansing the scheme's data.

Schemes should also practice good data management as part of their liability management duties. Even the cleanest data degrades over time if it is not maintained, as members get married, have children, divorce, go part-time, leave the scheme, move house, retire and ultimately die. As a result, regular data analysis is needed to ensure that a scheme's liabilities continue to be accurately stated. The Regulator expects schemes to test data at least annually, or more frequently if the improvement plans require it.

Indeed, poorly maintained data means that schemes will have less certainty on the cost of de-risking solutions such as a pension buyout or a longevity swap. Our experience is that the additional cost loading for poorly maintained scheme records could add as much as five per cent to buyout premiums to account for the risk of understated liabilities. Such additional costs might prevent an employer from taking de-risking measures. Further, bulk enhanced transfer value exercises cannot be undertaken if members' benefits have not been correctly electronically stored.

On a day to day basis, inadequate records prevent schemes automating their systems. Because membership data may be incomplete and therefore unsuitable to code the calculations, trustees might not be able to automate administration processes to reduce costs. A scheme will also struggle to reap the benefits when changing administrators if data is poorly maintained.

In its consultation paper in January 2010 tPR provided several real life examples of how maintaining good records made good business sense and saved money.

There may be other issues for members arising from poor data management. Member education is extremely important, especially in a Defined Contribution (DC) environment. However, a scheme cannot communicate with its members if it doesn't have their current contact details. Alternatively, the benefits and cost savings of member self-service might preclude online member access if data deficiencies were to be exposed.

Planning for the future
With the increased emphasis on DC pensions, Trustees should therefore think carefully about the importance of taking action to improve their scheme data management. This will necessitate a change in mindset. In a defined benefit (DB) scheme, by recording an individual member's leaving date, joining date and salary history, one can normally calculate benefits at retirement. However, you cannot leave this solely to chance. However, in a DC environment, every single contribution and fund movement needs to be recorded accurately. Rebuilding a DC scheme’s records to correct past errors can cost hundreds of thousands of pounds, not to mention the additional out of market investment risk and the cost of addressing those members who have been disadvantaged.

Other common historic causes of poor data include the scheme administrator inheriting poor data, recurring data interface problems, or systematic issues arising from faulty procedures or incorrect calculations. Poor administration – for example, the use of notes fields on administration systems or 'gone away' entered in the address field when correspondence is returned – degrades data accuracy.

Given these problems, the scrutiny of the Regulator and the experience that clean data saves money, schemes must take action to understand and address any data problems. This will help them stay on the path towards the compliance benchmarks set by tPR. Clean data cannot be achieved overnight, but schemes need to be able to show how they intend to attain it.

Practical steps to improve data
There are a number of steps that can be taken to improve scheme data. Firstly, create a plan to analyse scheme data, then address the specific issues raised. For example, member tracing exercises conducted by specialist tracing agencies are invaluable ways of verifying and updating member records. This could cost between £2.50 and £10 per record and a 'no find, no fee' charging basis is possible. Mortality screening can also be conducted to ensure pensions are not being paid to deceased members. These screenings should be conducted on a regular basis (insurance companies test their books every quarter to ensure their records are up to date) and can often pay for themselves, especially if de-risking exercises are being considered.

Take specialist advice
Some trustees prefer to use inde-pendent consultants to conduct data analysis, project planning and cleaning of their members' records. This removes the problem of incumbent administrators facing potential conflicts of interest if the data they have been maintaining is in a poor condition. Once the consultants have reported on the state of the data, the costs and benefits of cleaning it can be assessed and a prioritised recovery plan devised. This should set a timetable, allocate responsibilities and deliver regular progress reports for trustees. Once data is cleaned, it needs less subsequent work to maintain it. Administration costs may be reduced and service levels improved.

For trustees, it is vital that they can show that they are taking the issue
of data management seriously. Rather than relying on subjective assurances from their administrators, trustees need to obtain regular objective reports and monitor actual results against targets, with remedial action taken where necessary or face the prospect of sanctions by the Pensions Regulator.

Data management is a key ongoing priority for pension schemes. We can expect to see further announcements from the Pensions Regulator, particularly if it feels that its good practice guidance has fallen on stony ground. Ultimately, it is in the best interests of pension schemes to practise good data management, but tPR will want evidence that this is happening.

Andrew Cox is a senior consultant in the Employee Benefits Practice at Lane Clark & Peacock LLP

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