Administration in the Regulatory Environment
The pensions administration industry has long argued that good administration is at the heart of a well-run pension scheme, but for many years these assertions have gone unheeded, with most schemes tending to focus their energies more on investment and actuarial matters. However, times have changed and now, in the light of The Pensions Regulator’s recent pronouncements on both administration and record keeping, administration is starting to be looked at as never before.
The Regulator has stated that inaccurate and missing data can have serious cost implications for Schemes and has claimed that research has shown that validated records could lead to potential savings of £20,000 per pensioner. As cost is key for virtually all pension schemes, administrators can expect a greater focus on their activities, both in terms of what they do for the schemes they look after, but also for what they charge for doing so.
It is clear that now is the time for trustee boards to engage with their administrators if they have not already done so. However, the good administrator should already be working with their clients, as the deadline for action resulting from the Regulator’s guidance on common data items looms ever closer, with audits being expected to begin shortly thereafter. It is also clear that this is just the tip of the iceberg and guidance on conditional data is expected to follow once the Regulator has had time to review the initial audits.
With this in mind, the Regulator is expecting schemes to review data quality on a regular basis and that trustees will have access to an annual report on the quality of their data. This ties in with good stewardship and trustees should look to have their administrator attend, as an absolute minimum, one trustee meeting per year. In addition to that it would seem prudent that service review meetings take place between the relevant members of the trustee board and the administrator to review the service provided and to discuss any upcoming projects or initiatives.
This is also probably the right time for both schemes and their administrators to review the content and relevance of the stewardship reporting produced. The one page summary of membership figures which has been classed as a stewardship report in the past is not sufficient, and indeed has not been so for some time. More comprehensive information is required about membership throughput, adherence to contractual and regulatory requirements, member satisfaction, any complaint or Internal Dispute Resolution Procedure cases and contributions received during the reporting period.
Such reporting will become even more crucial with the advent of auto enrolment. Many employers are still unprepared for this and the prospect of members having to be enrolled, un-enrolled (should the member choose to subsequently opt-out )and re-enrolled into pension arrangements on a periodic basis, with all the attendant paperwork and record keeping that this entails, understandably fills them with a degree of trepidation.
This is typical of how the focus on administration is shifting. In the past administration has concentrated solely on the routine day to day business of calculating and paying members’ benefits, producing benefit statements and providing information to the necessary regulatory parties and other scheme advisors. Whilst this will remain the backbone of the industry, there is an increasing shift to incorporate project-based work.
Auto enrolment is a good example of this and, as the economy continues to remain somewhat uncertain, pension scheme sponsors are now taking a keen interest on pension arrangements and the impact these have on their balance sheets, along with the future benefits which they are liable for. As employer covenants have never been as important as they currently are, so the employer may well seek to crystallise their liabilities.
Many schemes are looking to change their benefit structures, transitioning from an open defined benefit arrangement, to one which is closed to new entrants and from that point moving through the various stages of closing to future accrual, establishing a career average revalued earnings or defined contribution arrangement, seeking to de-risk through enhanced transfer value, pension increase exchange and buy-in exercises and from there, looking to wind up the defined benefit arrangement through buying out the remaining liabilities.
All of these stages require the experience and capability of the seasoned administrator, with the trustee relying upon them as never before. However, this increased reliance also leads to increased scrutiny and accountability and, as these projects inevitably work to challenging timescales, the administrator needs to ensure that they work smarter to ensure that not only are these timescales met whilst continuing to deliver a good level of day to day administrative service, but also that all these services deliver value for money at an acceptable cost to the trustee board.
by Daniel Jacobson, Senior Client Manager