Kent sees 75% reduction in overpayment write-offs

Pension overpayments typically occur when schemes are not made aware of the death of a member or when member data is inconsistent or incomplete. Data can be compromised when schemes move administrators or older records are not brought up to new standards.

A lack of accuracy across scheme data can significantly impact the quality of information provided to actuaries, and as a result remove schemes’ certainty about their funding position.

Between 2012 and 2013 Kent reported 60 cases in which they were forced to write off pension overpayments, amounting to an £18,979 loss for the scheme. During the reporting period 2013 to 2014 there were just 15 cases of write-offs totalling £3,154.

Avgi Gregory, director at Muse Advisory, said the issue was widespread across UK schemes. “This has been a significant challenge for some boards in recent years… Some of the larger schemes have had to deal with very large numbers, where the overpayments are very complex,” she said.

“To say nothing of the wider financial and reputational damage, trustees and sponsors must avoid the temptation to hide from the issue,” she added.

A note on the report directly attributed the reduced number of cases to the introduction of a monthly screening service, which was first announced in the 2013 annual report. Kent declined to comment further on the issue.

Industry experts said such screening processes were clearly effective in rapidly alerting the scheme of members’ deaths – enabling significant savings in cost and administrative work – but suggested the issue was much bigger and more complex than just tracing mortality.

Gregory said: “Schemes need to have trustee protocols and overpayment policies for managing overpayments. There may well be a conflict between administration and the actuary – if they’re from the same firm – to work out the value of the overpayment.”

Julie Walker, associate at Barnett Waddingham, said: “There has been a much-increased take-up of our recommendation for annual mortality screening since the Pensions Regulator issued guidelines.”

To say nothing of the wider financial and reputational damage, trustees and sponsors must avoid the temptation to hide from the issue

Avgi Gregory, Muse Advisory

In 2010, guidance from the regulator introduced new minimum standards for the quality of schemes’ common and conditional data, saying: “Poor record-keeping may lead to significant additional costs in a number of areas such as administration, error correction, claims from members, buyouts, wind-ups and, potentially, may necessitate the making of more conservative actuarial assumptions.”

The accuracy of data is set to come under increased scrutiny with the abolition of contracting out for defined benefit schemes in April 2016, which will require all schemes to reconcile their guaranteed minimum pension liabilities with HM Revenue & Customs.

Gregory said she anticipated the number of overpayments identified will increase as trustees undertake more conditional data audits¹ and GMP reconciliations.

Failure to improve the accuracy of scheme data could have a knock-on effect on schemes wanting to undertake a pension increase exchange exercise or secure a buyout with an insurance company.

Laura Moore, business analyst at consultancy Veratta, said: “For buyouts, insurance companies are quite particular [and] need to have reconciliation exercises done. It will be less costly and time consuming, and could reduce the actual cost of the buyout.”

¹The original version of this article referred incorrectly to "conditional debt audits" rather than "conditional data audits". This has been updated.