Are you really sure…? Learning lessons from PPF cases

Topic:

Wind up/buy out

Date published:

Thursday, 3 May 2018

Author:

Chris Hayes

…you’re paying the right benefits to the right people? It may be a straightforward question, but it is a very important one.

It is essential for pension trustees to be clear about scheme liabilities. Especially true if you want to be ready for a buyout but, generally, if you aren’t clear your benefit basis is correct, how do you know you are funding the right liabilities? We have learned a lot from the specialist work we do with schemes in Pension Protection Fund (PPF) assessment that it would be wise for trustees of ongoing pension schemes to take heed of.

Digging up the drains

I’ve always said that working on PPF cases is just like digging up drains. It is an intensive period. Keep calm, stay focused, count to 10, breathe deeply, practice mindfulness…

On every single PPF case, a benefit specification is drafted and legally reviewed. Only by looking afresh can we be clear what the pension scheme benefits actually are compared to what’s being paid or in the records.

Any pension trustee considering a pension buyout also needs a robust benefit specification. The buyout market has limited capacity and you need to make your pension scheme as attractive as possible to an insurer if you want to transact and at a good price.

Next is a full data audit. Again, the data needed to transfer a scheme to PPF is almost the same as is needed for a pension buyout. Take note - insurers do much more robust data checks during a buy in/out than they did 5 years ago. They don’t rely on ‘we just buy out what you tell us’ anymore.

Other things you need to check include whether pension benefits were equalised properly and the pension scheme closed to accrual properly. There are still a surprisingly large number of schemes that have issues with these and many end up on court for directions (the Wedgwood Group Pension Plan being a recent example).

Then there’s benefit sampling. You need to do it - and deal with the consequences. Handling under and overpayments is never easy but you have to comply with the law and treat members fairly and with respect.

Dodgy addresses

On all PPF cases, an external tracing agency does a complete check on addresses and existence of members. This is really quite robust and our experience has shown you might think you have a full address list, but have you really? Are you risking sending personal data to an address that is wrong?

And while I am thinking about data, partly due to accurate records and partly GDPR, there is much talk at moment about paper records. While in theory electronic records should mean you don’t need to look at old paper records day to day - and this is true for some pension schemes - we have seen plenty of historic and large cases where the electronic records need supplementing with the paper records.

Pension trustees need to ask can your administrator properly run the scheme? Is a scanning project needed? Let your current scheme administrator give an honest answer on what’s needed - they are the experts after all.

So, PPF work brings a very interesting look into the realities of pension scheme data and benefits. While the 6,000 ish ongoing schemes left out they are not looking to go into the PPF, many would like to buyout and they need to deal with the same issues. The last thing you want is to think you can afford to buyout and then find an equalisation or closure issue means you can’t. Pension trustees and scheme sponsors need to know their true liabilities. If you don’t, you are just pushing issues down the lane and that benefits no one.

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