The panellists discuss the administrative issues surrounding potential scheme closures
ANDREW COX: In terms of the complexity or simplicity of administration, how does capping pensionable salary compare with changing the scheme design from final salary to CARE? What needs to be done to ensure systems are flexible enough to cope with these changes; and in what way should material administration considerations be taken into account in reaching a decision on future benefit design?
MARK DALLAWAY: Launching a new CARE plan is a more administratively complex project than capping salary – as is its communication considerations.
That said, the primary drivers for scheme design must be scheme affordability and the overarching benefit provision objectives which should have been set to help attract and retain employees. Administration considerations should not therefore be high in the decision-making pecking order. It is worth checking administration systems’ capabilities and administrator experience of CARE, and involving the administrator in early discussions so that plans that support the objectives of any change can be made and executed in the required timescale.
DANIEL JACOBSON: Changing the design of the scheme to CARE will effectively necessitate the setting up of a new arrangement to run alongside the closed existing DB scheme.
Capping salary allows the existing scheme structure to generally remain in place, just with lesser increases to pay and potential administration implications as a result of changes to calculations, depending on how the cap is to be applied. The last few years has seen employers moving towards increasing non-pensionable elements of pay, such as bonus, with the aim of containing pension costs by limiting increases to the pensionable elements of remuneration, such as salary and consequently administrators have had to make the relevant changes to their administration platform to ensure they are able to handle any changes.
ANDREW COX: What are the main points of the business case which could show that potential cost savings and benefits in ongoing administration as a result of scheme closure can offset the cost and disruption associated with implementing the change?
MARK DALLAWAY: Generally, administration costs will be minor compared to overall scheme operating and funding costs and are unlikely to be an important factor in the business case but it should be recognised that closing a scheme still leaves records to be held and maturing benefits to be set up etc.
However, three important factors to be born in mind when considering the overall cost of change are first, that major scheme design change happens infrequently – costs of change should therefore be viewed over an extended period to be seen in context. Secondly, any new arrangements set up may have operating costs that need to be factored in, and third the scope of services for the original scheme should be reviewed so that any activity no longer required can be scaled back to reduce ongoing costs.
DANIEL JACOBSON: Any costs savings from closing a scheme could well be negated by the cost of implementing the change, which should not be underestimated. Consultation and communication with the scheme’s membership along with the necessary changes to systems, processes, calculations and interfaces all add up.
Although there will no longer be a pool of active members to maintain, potential cost savings may be achieved by a reduction in the number of interfaces, and no longer having to carry out underwriting of members. These savings will in some way be countered by the work incurred in tracking deferred members, GMP reconciliations and further work carried out following closure.
ANDREW COX: What should administrators be doing in advance to facilitate any change and to prepare the scheme for alterations in benefit design or scheme closure?
MARK DALLAWAY: Data is key so early assessment of whether any information needs to be validated or cleaned is essential. To do this properly it is important to know what decisions, if any, members are going to need to make and what data and process will be used to support any communications and statements necessary in the decision-making process. This will help ensure that data assessment and cleaning are correctly focused. It is also essential to include the administrator in the planning of any change so that their experience of similar changes can be utilised, but more importantly so that administration planning and preparation is not an afterthought. Failure in this area can undermine an otherwise well thought out design change.
DANIEL JACOBSON: Where a strong relationship exists between the administrator and scheme trustee the administrator is likely to be included in discussions and as such will be able to identify the likely implications of any changes and respond appropriately.
Key to ensuring the success of any exercise will be the administrator’s willingness to be adaptable and able to respond rapidly. The appropriate level of resource must be available and in place to implement the changes within the required timescales and ensure that there is no disruption to the ongoing service.
ANDREW COX: When a scheme is closing or has been closed to future accrual and all remaining members are deferreds or pensioners, what opportunities are there for administrators to improve the efficient running of the scheme?
MARK DALLAWAY: A complete review of requirements should be undertaken. It may be possible to make economies in many areas – for example reporting might be on a less frequent basis, data interfaces may no longer be necessary and there may be ways to make communication direct between the members and the administrator, saving the company time and resource.
There may also be economies in moving more processes onto the web to support a self service model including modelling tools that allow members to obtain information that might otherwise have attracted an administration charge.
DANIEL JACOBSON: The next logical step following closure is to prepare for the scheme to be wound up, as this is an inevitability, be it in the short, medium or longer-term.
With this in mind the scheme may take the opportunity to cleanse its data and seek to track its deferred members. In addition, as the scheme is closed and no further benefits will accrue, the scheme should consider working with HMRC to carry out a GMP reconciliation exercise, which can be a lengthy and involved process, to ensure complete and accurate records are in place.
Chairman: Andrew Cox, senior consultant, Lane Clark & Peacock
Andrew Cox joined Lane Clark & Peacock in 2007 as a senior consultant in its employee benefits consulting practice. He has more than 20 years’ experience of advising clients in their service delivery strategy, provider selections and administration technology and has worked with numerous FTSE100 companies.
Mark Dallaway, pension administration delivery model strategy lead, Hewitt Associates
Mark Dallaway has more than 30 years’ pensions experience spanning in-house pension management and consulting on administration technology, strategy and change. He has been with Hewitt for seven years acting as account manager to some of its largest outsourcing clients and has responsibility for the strategic direction of its UK pension administration service delivery model.
Daniel Jacobson, client manager, MNPA
Daniel Jacobson joined MNPA in September 2006. He has worked within the pensions and employee benefits industry for more than 17 years. His experience covers a number of different aspects of company and individual pensions for arrangements of differing sizes within both the corporate and voluntary sectors, including administration, consultancy, trustee secretarial, investment and member communication.
