You need to think ‘buy-in/ buyout data’, which may be more detailed than that used for the day-to-day administration of your scheme. For example, buy-in and buyout data will include up-to-date postcodes, marital status and spouse's date of birth.
There’s a common misconception that data needs to be 100% clean before you go to market. That’s not true, but it does need to be of a sufficient quality for insurers to price properly. If your data is not of a good enough quality, there is a possibility for the price originally quoted to increase.
A data audit will enable trustees to agree a workable plan to address any identified issues and missing data items.
- The simple presence of common and conditional data items as specified by the Pension Regulator (tPR) will not be sufficient for insurers.
- In our experience, the most common missing data items are postcodes, up-to-date marital status, spouses’ dates of birth and spouses’ pension amounts (for pensioners).
- For any missing data items, insurers make prudent assumptions, potentially leading to an increase in their price.
This involves using specialist services to identify missing data including:
- Address tracing - Insurers need postcodes for the majority of members for pricing purposes; these are typically available for current pensioners but are often missing or out-of-date for deferred pensioners.
- Existence checking/mortality screening - Mortality screening is primarily required for current pensioners and enables you to avoid insuring benefits that are no longer payable.
- Marital status tracing - Marital status tracing enables you to identify members' current marital status and find their spouses’ names and dates of birth.
- It is good practice to undertake address tracing and existence checking/ mortality screening at regular intervals.
- Marital status tracing can help you to validate or set scheme funding assumptions.
- It is worth identifying marital status early in the process as it can materially move pricing if it is sourced after the transaction.
- Marital status can be updated immediately before the transaction as this information will go out of date over time.
This involves writing to your members to confirm the details of their benefits and the personal data held on them. This allows your members to challenge data or benefit records held on them, with any queries from members then investigated and resolved.
- Data verification gives insurers and you the confidence that the data is correct and reduces the risk of future challenges by your members.
- You can use this exercise to request additional data (for example, marital status and spouses’ details before a trace is performed).
- This is normally undertaken in the months leading up to a planned transaction but can also be undertaken after the transaction if preferred.
Calculation of missing data:
This step involves calculating any required data items that are absent, such as spouses’ pension amounts or pension splits.
- The spouse’s pension amount for a current pensioner is often calculated after the member’s death, so, it may not be held on the scheme records or be up-to-date (for example, pension increases may not have been applied since the member’s retirement).
- Although appropriate assumptions can be made for first round pricing, at some stage insurers will need accurate spouses’ pension amounts for current pensioners as the percentage typically varies depending on the amount of cash members commuted at retirement.
- For deferred members, insurers will require relevant pension splits (for example, relating to the ‘Barber window’ and where different revaluation or pension increase rates apply).
- You must allow time for calculation in case archived records need to be recalled or legal advice is required (for example, on scheme equalisation basis).
Guaranteed Minimum Pension (GMP) reconciliation (only applies to schemes which were contracted out of the State Earnings Related Pension Scheme (SERPS):
This involves reconciling scheme GMP records with HMRC and making any adjustments necessary to residual benefits.
- If this is not already underway, it must be started urgently since the theoretical HMRC 2018 deadline for completion applies to all schemes.
- Issues identified in GMP reconciliation include discrepancies relating to GMP amounts and/or scheme membership (for example, HMRC may believe that there are members in the scheme that you have no record of).
- Where changes are identified, GMP amounts will need to be adjusted and scheme records updated. A decision will also need to be made on whether to alter the amount of pensions in payment.
GMP equalisation (only applies to schemes which were contracted out of SERPS):
This involves agreeing and applying a methodology to address GMP inequality between male and female members.
- Male and female members of contracted-out schemes have different GMP payment ages and their GMP is accrued at different rates.
- There’s no definitive methodology for GMP equalisation but the Department for Work and Pensions is now supporting an actuarial value approach, compensating by value rather than on a month by month basis. An actuarial value approach is the only solution that many insurers will support.
- A rapid data audit will generate a ‘shopping list’ of items to fix
- A tracing agency can identify missing personal information for most members in a few hours, with a slower, manual tracing then being required for a smaller number of members
- Telling members about their benefits earlier rather than later will make the entire process safer
- Data creation should usually be handled by a dedicated projects team (and should be given hard completion deadlines)
- The administrator’s core system should be updated with the newly created data and procedures should be changed to ensure it stays up to date
- GMP reconciliation must be managed robustly and cannot be left until later
- GMP equalisation is usually implemented at the time of the transaction, rather than carried out for an on-going scheme
We have seen cases where it has taken schemes as long as three years to get their data ready. So, even if you are some time away from going to market, it is good practice to start the process as early as possible.