How to get scheme data up to scratch for a buy-in/buyout

This is primarily focused, at least judging by the levels of public discussion, on asset and liability management – due to the huge financial implications of getting these strategies wrong this is perhaps as it should be.  

Insurers have to understand future cash flows to ensure we are paying the right benefits 

But schemes and administrators have also been focused on the quality of their member data. We have seen guidance published by the Pensions Regulator on both common and conditional data.

The Pensions Administration Standards Association was also formed to set clear and common standards for schemes to follow – and through certification, recognise schemes and administrators that have attained those standards.

However, for many schemes there is still a long way to go to achieve data that are fit for purpose for a derisking exercise or an accurate assessment of their own liabilities. Some trustees view incomplete data as a quite specific issue only affecting schemes that are being wound up.

If a member is receiving a pension and there are no complaints, then the trustees or administrators might not even realise that they don’t know whether the spouse is entitled to a pension, or what that pension will be, or even if the amount they are paying is actually correct.

Typically, outside of scheme wind-up when the whole scheme has to be reconciled, individual reconciliation exercises – for example when a pensioner dies – can be relatively straightforward.

Bulk derisking

It can become an issue, however, when the scheme considers going through a buyout. This is when the insurance company will need to know the exact value of liabilities that may not crystallise until 30 or 40 years hence.

For example, it is fairly usual, following a pension insurance transaction, for the insurer to deal with a string of issues thrown up by the Barber judgment and guaranteed minimum pension equalisation, or lost files or incomplete records. Insurers have to understand future cash flows to ensure we are paying the right benefits and to maintain security of those benefits.

Once the member becomes a policyholder, insurers still maintain excellent data. So for example, we at PIC use three separate people-tracing agencies to make sure our data are as up to date as they can be and that we understand all our future payments to our policyholders.

However, data accuracy, specifically around GMPs, is now a pressing issue for trustees, and they have an increasingly narrow window to get this data in the best possible shape.

After April 2016, trustees who have failed to lodge a request with HM Revenue & Customs to reconcile their GMPs will effectively be stuck with an unknown level of risk, when HMRC’s Scheme Reconciliation Service is wound up, coming to complete close in April 2018.

Trustees should act now so they can really get to grips with the GMP benefits due to their full membership. In our experience it is typical for there to be GMP errors affecting perhaps 30 per cent of members, so this is not something that can be swept under the carpet.

The SRS is open to all schemes, not only those in wind-up, and it will be reviewing the GMPs of active and deferred members, so trustees can get a full and accurate picture of their liabilities.

Yet only 30 per cent of schemes are registered for this service, perhaps because it is not mandatory and trustees have to request it online. But I would urge them to do so, because once they have gone through the process they will have an assurance from HMRC that all scheme records are up to date.

In our view, it is simply best practice to put your data into the best possible shape, not just with a derisking transaction in mind but with the goal of it helping trustee boards to pay the right pensions, understand future cash flows and increase the security of their members’ benefits.

Matt Gore is chief administration officer at Pension Insurance Corporation