Poor record-keeping could add 5% to buyout cost
UK - The Pension Regulator (TPR) is targeting poor record keeping with a consultation on new proposals for "good practice" guidelines for trustees and administrators, as evidence suggests poor practice significantly adds to the scheme's costs.
TPR revealed in the consultation paper it aims to work with pension schemes to tackle problem areas such as poor quality legacy data, a lack of common standards on what is good or poor data and a lack of appreciation of the importance of administration by both employers and trustees.
TPR suggested the problems of poor record-keeping are mainly highlighted at particular events such as wind-up of schemes, assessment for entry into the Pension Protection Fund (PPF), or a scheme buyout.
In particular, TPR has warned poor administration could add up to 5% to the cost of a scheme buyout, as key membership data such as postcode information is used to determine longevity risk, while in some cases, the regulator suggested, providers could decline to quote for the business at all or refuse to take any data risk relating to member records.
The consultation also revealed inadequate or missing records increases the length of time spent by a scheme in the assessment period of the PPF, as this produces problems in verifying member existence and entitlements.
Problems have already been experienced as out of 27 schemes currently in the PPF assessment period, 17 have missing or incorrect payroll records, 20 are missing postcodes and 23 are missing whole addresses.
As a result, TPR is consulting on three specific steps to be implemented by trustees and providers as recommended "good practice", which are:
In addition, TPR proposed trustees should make an annual statement of the key risks the scheme faces and the actions it intends to take to mitigate them, although it pointed out it expects the proposals to apply to all workplace pension schemes.
This includes contract-based schemes and those such as group personal pensions (GPPs) which are regulated by the Financial Services Authority (FSA), as it confirmed it has already consulted with the FSA on the proposals before publication.
The consultation follows the recent results of TPR's Governance Survey 2008 in which it revealed 79% of trust-based schemes rely on third-party administrators for their main administration services, an increase from 66% in 2006. (See earlier IPE.com article: Trustees concerned over transfer incentives - TPR)
TPR stressed it is deliberately targeting a "modest" approach focusing on the provision of "core" data, which includes fundamental information essential to paying benefits, such as National Insurance (NI) numbers, date of birth and date of joining the scheme.
Justin Wray, head of pensions administration and governance at TPR, said: "We will review this. But it's better to start with something modest that will be implemented than something overly complicated and over ambitious."
TPR said the proposals should be taken in the context of a rapidly changing pensions industry, as Wray claimed "the move to a DC world and with the introduction personal accounts in 2012, record keeping is becoming more important".
However, the organisation confirmed there would be no time limit for the implementation of the "good practice" and suggested for defined benefit (DB) schemes the most appropriate time might be at the time of its next triennial valuation.
Tony Hobman, chief executive of TPR, said: "The quality of record-keeping has a huge impact on all aspects of administration of a pension scheme. We wish to raise awareness of this essential aspect of pension scheme governance and welcome views on the approach set out in the consultation."
The consultation closes to submissions on October 15 2008.
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