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- Poor data preventing some schemes from de-risking
Mercer is encouraging schemes to maintain the improvement in data quality, highlighted by the Pensions Regulator (the regulator) but believes that smaller schemes are likely to find it harder to identify what steps need to be taken and consequently are lagging the field in improving the quality of the data that they hold. The consultancy believes that the improvements identified by the regulator are being driven by larger schemes with specialist pensions administrators.
The comment follows publication by the regulator of results from its regular survey on the quality of record keeping in pension schemes. The survey reflects that, particularly following the record keeping guidance published by the regulator in 2010, most schemes have generally improved the quality of the data they hold and the processes they have for maintaining data and keeping it up to date. According to Mercer, over 50% of the schemes included in the survey are administered in-house, but this will cover a multitude of different models.
According to Robert Plumb, Principal at Mercer and specialist in pension administration, “The majority of occupational schemes seem likely to meet the regulator’s target of December 2012 and have the vast majority of their core data in place. However, many schemes still have data that may not have been reviewed for many years and in some cases, still isn’t held electronically. Such ‘legacy’ issues can make large data cleansing exercises seem expensive, particularly at a time when cost pressures on employers are significant. Nevertheless, schemes of all sizes need to address this.”
Delaying data cleansing might prove a false economy, believes Mercer. At a tactical and a strategic level, schemes will be more risky and expensive to run if data is not held electronically or is inaccurate or incomplete. In terms of scheme administration, inadequate data means that scheme records have to be reviewed and perhaps rectified as each member event occurs, which is inefficient. Then, if proper systems are not in place, calculations cannot be automated, which increases the risk that wrong benefits could be paid.
However, more strategically, good data is a pre-requisite for understanding a scheme’s liabilities in terms of longevity and exposure to inflation and interest rates.
“Analysis of such factors opens the door to better-managed risk reduction strategies,” said Matthew Demwell, Partner in Mercer's Financial Strategy Group, “including liability-driven investment, liability management, longevity swaps and bulk annuities. A lack of robust data makes it impossible to properly assess risk management options and obtain the best price in the market for transferring risk.”
The benefits of reducing or transferring risk cost-effectively will far outweigh the initial costs of a data cleansing exercise. For example, bulk annuity insurers will often charge a premium of between 1% and 5% of a scheme’s liabilities to provide cover against inaccurate data and this cost can be significantly reduced through data cleansing.
“If they have not already done so,” says Mr Demwell, “Trustees should urgently review their record-keeping, and they should also satisfy themselves that proper systems are in place to ensure operational control and efficiency.”
Mercer is a global leader in human resource consulting and related services. The firm works with clients to solve their most complex human capital issues by designing and helping manage health, retirement and other benefits. Mercer’s 20,000 employees are based in more than 40 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy and human capital. With 53,000 employees worldwide and annual revenue exceeding $10 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a global leader in management consulting. Follow Mercer on Twitter @MercerInsights