JLT Employee Benefits' David Hepplewhite explains why record-keeping is just as important, if not as glamorous, as flexible pensions.
However, business as usual has not been forgotten by the Pensions Regulator.
It is certainly not letting up in its ongoing campaign to improve the quality of the records held by trust-based pension schemes, having recently published a follow-up to its thematic review on record-keeping, originally undertaken in March 2014.
Action points
Reconcile GMP as quickly as possible
Review how the different tranches of benefit are being recorded
Make record-keeping a key agenda item for each trustee meeting
The requirement to meet the regulator’s standards on common and conditional data is well known, but meeting these standards only takes you halfway to excellence. These standards only test the presence – or lack – of data, but not necessarily their accuracy.
Most importantly, having a high score on the quality of common and conditional data does not resolve the two data issues that trustees of defined benefit schemes have to deal with:
• Reconciling guaranteed minimum pension records with HM Revenue & Customs;
• Correctly identifying the relevant tranches of benefit.
GMP reconciliation
The fact contracting-out first started in 1978 and the manual processing of data and correspondence was, until at least the late 1980s, the way records were handled, means errors will have crept in.
For example:
• HMRC could still have short-service members show up in its records while the trustees think they had been reinstated to the state scheme;
• HMRC could have records of members whom the scheme thinks had transferred to another scheme;
• The amount of GMP that HMRC believes the scheme should provide is different to that which the scheme has on its records.
In 2018 HMRC will write to all individuals with a GMP entitlement to tell them how much they should receive from each scheme based on its records.
After that point it will not be possible to rectify any data discrepancies and schemes will have no choice but to accept HMRC’s records as final, even if they are incorrect.
Therefore, delaying any move to reconcile GMP records could lead to schemes having bigger liabilities than they should, which will increase costs to the sponsoring employer.
While 2018 is three years away, resourcing issues at HMRC mean that schemes should not delay. With contracting-out ceasing from April 2016, there will be a rush of schemes looking to reconcile their records.
Benefit tranches
Many DB schemes have accumulated a number of different benefit ‘tranches’, reflecting not only GMP (pre and post-1988), but also:
• post-GMP benefits (post 1997 requisite benefits and excess);
• different rates of increase to pensions in payment (fixed, limited price indexation capped at RPI, LPI capped at CPI);
• changes to benefit bases (ie move from 1/60th to 1/80th).
Any review of record-keeping should also ensure the tranches have been identified and the correct benefits assigned.
Data is as important as investments
While poring over the scheme’s performance is a key part of each trustee meeting, equal importance should be given to reviewing the quality of the member records.
Therefore, the agenda for each meeting should ensure record-keeping is given equal weight to other, more sexy items.
While we should all be cognisant of the regulator’s drive to increase standards in the running of schemes, ultimately the members will expect trustees and managers to do whatever is necessary to ensure correct benefits are paid.
Issues, such as cost, time, and difficulty in locating archive records will not be seen as legitimate excuses for not achieving this.
David Hepplewhite is a principal at JLT Employee Benefits
