The industry must understand the importance of robust and adequately resourced administration arrangements, the risks and controls involved and contingency planning including:
Assessment of scheme risks;
Hot on the heels of The Pensions Regulator’s views on the importance of accurate and robust record keeping, 2009 looks like being the year trustee take a long, hard look at their scheme administration. This just happens to be in addition to having to maintain a close eye on such matters as the employer’s covenant, scheme investments, trustee knowledge and understanding and conflicts of interests... 2009 will be a busy year for the industry!
Historically, the assessment of scheme risks has been likened to putting a cold towel on your head. It is true to say that some groups of trustees have looked at all the risks they find they are facing, and then run away! This approach unfortunately misses the fundamental point of a risk assessment – an exercise best undertaken with the involvement of pragmatic advisers and a proactive secretary to the trustees.
Risks are part of every day life. The challenge for trustees is to identify the risks that can do serious damage to their scheme (such as the employer being unable to fund ongoing benefits or failing to administer the scheme in accordance with the Trust Deed and Rules), and then ensure that controls are put in place, together with ongoing monitoring to minimise such risks re-occurring.
Spending a disproportionate amount of time on risks that are unlikely to occur is not what trustees need to be focusing on at this time. Having completed their risk assessment, trustees must then continue to monitor the position. An annual review of the complete risk register is unlikely to ensure that trustees proactively monitor their risks and take corrective actions in time to mitigate the risk.
At each trustee meeting, it is essential that a review of part of the risk register occurs so that over a 12-month cycle a complete review has been carried out with corresponding risks, actions and controls being mitigated. It would also be beneficial for specialist trustee committees – in other words, investment – to also review their own risk register each time they meet and provide an update to the full board.
Some risks are outside of trustee control and will exist no matter what action trustees take. In the current environment it is essential that trustees have a commercial awareness with specific focus on their sponsoring employer’s business. Keeping a close eye on business activity, company announcements and half-yearly accounts will go some way to determining whether the existing covenant has weakened between trustee meetings. Regular dialogue with the finance director covering the sponsoring employer’s trading position is also key to trustees understanding the impact on the covenant.
Reconciling data is a topic that trustees have, anecdotally at least, “parked for a rainy day” unless an audit has identified major problems such as funds not being invested. Regular data reconciliation has, historically, been focused more with DC scheme administration; however the increasing trend towards monthly interfaces for DB schemes will result in administrators running reconciliation reports every time data is received. All subsequent queries must be raised and resolved with the payroll/HR team in a timely fashion. Despite this potential process improvement, there may still be issues as this process is predominantly manual, time consuming and lacks secure audit functionality.
The development of Straight Through Processing (a single system to manage contributions straight through to the provider) has major advantages for both trustees and administrators by reducing the lead time to investment, minimising the risk of error, providing a secure audit trail and reducing the time spent querying data. For DC administration in particular an immediate reconciliation process is crucial. The failure of the administrator to reconcile contributions received/invested can create differences (total fund manager units against total member units held on an administration system). Any benefit information will therefore be provided on an incorrect basis and the trustees and scheme members, will start to lose confidence in their administrator’s record-keeping ability.
By not following best practice the administrator will spend a significant amount of time correcting records, liaising with investment managers, revisiting benefit calculations/ payments and reissuing member benefit statements. When that situation arises a great deal of time and energy is also needed to rebuild bridges and in some cases may result in a irretrievable breakdown in the relationship between the trustees and the administrator.
Adopting a best practice approach helps to ensure that benefit calculations are both timely and accurate, particularly against a background where calculating member benefits, in accordance with the scheme rules, has become increasingly complex. While it is easy to lay much of this complication on government legislation changes, scheme benefit structure changes, either improvements or reductions, inter-company transfer and guarantees (pension increases are a classic example), the impact of each aspect must be clearly understood and reflected within the administration processes. In addition, ensuring that the Trust Deed and Rules are up to date, with all Deeds of Amendment in place, is only part of the challenge.
The emergence of the buyout/buyin marketplace has lead to a greater realisation that the elements of data needed to cost the liability being transferred are much more extensive than those mentioned in the Trust Deed and Rules. It is therefore essential that comprehensive documentation is in place detailing the history and processes needed to calculate and record each element of pension benefit and each benefit calculation. This is particularly important where schemes have automated benefit calculations.
If trustees are considering this option, they would be well advised to consider spending time with their administrator to see how much information is currently available and to look at filling in the gaps sooner rather than later; a review on the quality of scheme data is also recommended to aid the liability management process.