The results of the Pensions Regulator's third annual governance survey, which assessed the standards of scheme governance in the UK, have recently been published. The Regulator's findings were generally positive but it noted there remains room for improvement in a number of areas. Shortly after publication of the governance survey findings, the Regulator launched a consultation on the importance of good record keeping. The Regulator's decision to highlight the importance of good record keeping as an essential aspect of good scheme governance also coincides with the publication of a determination of the Deputy Pensions Ombudsman demonstrating the importance of maintaining accurate records. In this August edition of Pensions Bulletin we look at the Ombudsman's decision and also consider the scope of the Regulator's consultation.
A recent Ombudsman ruling illustrates the type of scenario that may arise if membership data is not accurately maintained, particularly when data is being transferred. In this case the member understood he was a deferred member of a pension scheme but did not query his benefits for many years. He discovered the scheme had wound up but that there was no record of his membership at the time of winding up and no provision had been made for his benefits. The member submitted that during a transfer of administration of the scheme from one provider to another, details of his benefits had not been passed over. Investigation of this case was hampered because the last recorded evidence of the member's benefits in the scheme dated back to the late 1980s and the individual involved in administering the scheme had retired. During his investigation, the Ombudsman looked at evidence from the retired person and even considered the relevance of a handwritten note about the member's benefits annotated to an undated computer print out found amongst archived papers. The Ombudsman ruled that the evidence suggested the first administrator was responsible for the disappearance of the member's details and it was ordered to put the member in the position he would have been in had he been included in the bulk buyout when it occurred prior to winding up.
Background to Regulator's Consultation
The Regulator's aim for good record keeping is "to ensure that the records of every work-based scheme are such that the benefits due to each member at any point in time and in any circumstances can be calculated accurately". In the first instance the Regulator intends to "educate and enable" those responsible for good record keeping but it is clear that if necessary it may seek to enforce the regulation of good record keeping at a later stage. The consultation is targeted at those persons responsible for record-keeping (i.e. usually trustees) and those who administer schemes (usually insurers, third party administrators or in-house administrators) and is aimed at both small and large schemes. The key areas where the Regulator has identified that improvements need to be made include:- poor quality legacy data, particularly for deferred members; a lack of appreciation of the importance of good record keeping, and poor quality data transfer.
Why is good record keeping so important?
The Regulator points out that, amongst other things, the consequences of poor record keeping include higher costs during buy-outs or wind-up, inaccurate actuarial valuations and claims from members. Data included in the consultation document suggests that poor data can increase buy-out costs by an additional 5%. It is clear, therefore, that there are compelling reasons for all parties involved in the running of occupational pension schemes to take this new focus on good scheme administration seriously.
Trustees have both a fiduciary and statutory obligation to ensure their scheme is properly administered and should be able to provide members with an accurate value of their pension rights. With 79% of trust based schemes using third party administrators as the main provider of administration services, care should be taken in selecting the provider in the first place but also in the ongoing monitoring of the service being provided. Some schemes build checks into the system by requiring their administrators to provide quarterly reports. For those schemes that decide to enter into a service level agreement, professional advice should be taken when negotiating the agreement to ensure all the necessary services and targets are clearly set out.
Good quality record keeping is, of course, also vital for sponsoring employers who bear responsibility for funding schemes to the required level and to the members of the scheme as without accurate data, they may receive incorrect valuations and ultimately even incorrect benefits. Without accurate records, sponsoring employers may find they have an inaccurate representation of pension scheme liabilities on the balance sheet.
Measuring "core data"
The Regulator's proposals, on which it is currently consulting, include the suggestion that in addition to additional scheme specific data needed to calculate benefits, there is certain "core data" about every scheme member, which is required for the proper administration of all types of scheme. The consultation document proposes that every item of core data should be present in all schemes and that providers and trustees will need to measure the presence of both the core and additional data required for effective administration.
We will keep you updated on any changes introduced following the Regulator's consultation (which runs until 15 October), but irrespective of the outcome, focussing on good record keeping is something that all schemes should prioritise.