Professional Pensions November 2009
In the current economic climate, employers and trustees are engaging in ways of de-risking to reduce their exposure to pension scheme liabilities. Examples we have seen in recent times include buyout/buy-in, capping of Final Pensionable Salary, and offering enhanced transfer values.
What can administrators do in advance to support possible future de-risking initiatives?
Be prepared! Administrators need to engage with Trustee Boards to work with them in determining not only their intentions, but also their timescales for doing so. The trustees’ expectations need to be managed so that they are aware of the amount of work required, thereby allowing the administrator to accommodate the conflicting demands from differing clients all looking to de-risk at the same time. This will hopefully enable adequate resource to be put in place.
In preparation for this, the trustees and administrators can scrutinise records on a quarterly basis through the regular stewardship reporting mechanism or a particular area such as part-time records can be concentrated on, either on an ad-hoc basis or in conjunction with events such as the scheme valuation or annual renewal.
Whatever de-risking strategy is employed, it is likely to create lots of queries from members that need to be dealt with by pension experts. How equipped are administrators to deal with this? What alternative resourcing solutions or specific training would be required for administrators to help members?
It is important that the work and resultant queries generated by these exercises does not impact upon the day to day running of the Scheme. It may therefore be beneficial to put in place a project team to manage and run the exercise which remains separate from the team dealing with business as usual, thereby enabling both activities to run in parallel.
Whilst there will inevitably be a requirement for team members with both experience and detailed knowledge of the scheme to work on the de-risking exercise, it may be possible to mix this with additional temporary resource who after some initial training would be able to work on the exercise with appropriate escalation routes for any non-routine queries arising from the exercise.
In the event of de-risking strategies involving the transfer of member administration to another provider, what due diligence should trustees be carrying out to satisfy themselves that members will continue to receive a good level of administration service in the new arrangement?
The end result of the exercise is for the trustees to feel that the right decision was made. It is therefore important for them to select a provider whose values are a fit with those of the trustees, so that the members do not notice a detrimental impact upon the level of service they experience
References from other clients of the selected provider and reports on internal controls, such as the AAF0106 can go some way to providing reassurance to trustees. In addition, in considering a change of provider, the trustees may want to consider whether they wish to seek professional advice and guidance on the change of provider and whether they feel they have a requirement to benchmark this advice.
To what extent do you believe that a data management exercise in advance of de-risking can pay for itself in terms of the reduced cost of conducting such de-risking exercises? What empirical evidence is there to support such beliefs?
The cleaner the data, the more accurate the resultant costings are. Where data is ambiguous, incorrect or missing, margins of accuracy need to be factored in, resulting in increased costs.
That said, it needs to be borne in mind that membership data is constantly evolving and any exercise undertaken merely serves as a fix at a particular point in time, as such only minimal benefit is gained if the exercise is carried out well in advance of de-risking, as it will only to have to revisit it when it is decided to proceed. A cost benefit analysis of the work to be carried out also needs to be undertaken. If the overall impact of the work is minimal when compared to the overall costs of de-risking, the merits of spending what can often be significant amounts of money on an exercise of this nature may require reconsideration.