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Pension Schemes Must Face ‘Game Changing’ Legislation Head-On; Address Data and Technology Management Issues Now

In light of upcoming regulatory requirements (Auto-Enrolment, the Retail Distribution Review and Solvency II), the pivotal role of data and technology strategy should be a central concern to all pension professionals and trustees seeking to operate efficient, compliant and effective schemes.

Published today, the Clear Path Analysis report ‘Data and Technology Management for Pension Schemes’, explores the minefield schemes face and why this issue is so critical to overall success.
In 2012, the fundamental challenge for the pensions industry will be: the impact of an estimated five million new employees entering UK pension schemes with longer term implications.

Auto-enrolment legislation, in particular, has formed over many years and the effects of this ‘game changing’ legislation will be felt for a long time in the UK pensions market. The start-up and ongoing costs of this huge change are understandably making employers nervous, but providers are equally as nervous, as schemes, data and processes are reviewed to cope with the doubling and tripling of some schemes’ membership.

“Many commentators have queried the readiness of UK companies to comply with auto-enrolment. The majority will hit their staging dates in 2013, leaving scant time for a full evaluation. With many companies not even beginning to evaluate the effects of the 2012 legislation on their schemes, administration issues should now be high on the agenda”, explains Richard Tuff, Principal at Mercer (UK). “Those organisations with sophisticated pension systems and DC schemes set up after the closure of their legacy DB scheme, may believe that they will not be burdened by auto-enrolment. However, the complexity of the legislation should not be discounted.”

To demonstrate this, Norway introduced mandatory occupational pensions (Obligatorisk TjenestePensjon) in 2006/7. Much like other countries’ auto-enrolment legislation (including the UK’s), the purpose of OTP was to halt reliance on the state and make saving for retirement compulsory. The Norway experience is a ‘window’ on how UK auto-enrolment will affect employers, employees and pension providers in the future.

Hallvard Müller, Principal at Mercer (Norway), states: “In Norway, the legislation was very vague in certain areas; employers had great difficulty in getting clarity on workers with flexible shifts, without any set pattern. It told you what to do, not how to do it, and that’s where the complexity lies. Companies that prepared far in advance of OTP, who had worked through the issues of subsidiaries, employee working practices, looked at data and communicated the changes to employees, saved effort and money in the long run.”

Recent surveys on the readiness of companies for auto-enrolment (including CIPD and ACA) indicate that the UK has not learned the lessons of Norway.

“Many employers believed that the enrolment process, once set up, would run on auto pilot, with multiple data files being automatically processed into opt-in and opt-out straight through files. The experience was anything but that. The OTP process is continuous. Without exception management of the employees that ‘break the rules’ and focus on data quality, many organisations found that their enrolment process stalled month on month, and relying on a ‘free’ service from a provider often cost the employer in cleaning data internally and externally.”

“Data management is an increasingly important topic in Life and Pensions boardrooms”, notes Grant Denholm, Strategic Client Director at Experian. “While there are external pressures to comply with improving customer data through industry wide and European legislation, the smartest companies are grasping this opportunity to develop world class data management processes. They are seeing benefits in improved customer retention, increased cross sales and more satisfied customers.”

“Previously it was sufficient to just capture enough customer information to write a policy. If a customer changed address, it was up to them to inform the company. This resulted in a huge number of goneaway records. If the customer died, the company relied on the dependents advising them. This lack of data validation also made many companies vulnerable to money laundering activity. In some cases unnotified deaths resulted in annuity payments continuing for many years.”

While some of these practices may still occur in some providers, legislation has meant that there has been a focus put on good customer data management. Three huge pieces of legislation are looming on the horizon and each of them has implications for data management: Auto-Enrolment, the Retail Distribution Review and Solvency II.

Regarding the first, Denholm reflects: “While the initial focus is likely to be on the administrative burden of the enrolment process, companies and trustees must also be aware of the quality of the data, its integrity and its completeness. Otherwise, a lot of time and resource may be spent bringing in incorrect or incomplete data. A relatively small amount of effort up front can alleviate issues further down the line.”

In terms of the RDR, it “has focussed many providers on the need to develop a direct channel to service the customers that are not willing or able to pay for financial advice. Providers should be seriously considering investing in improving data quality now so that they can hit the ground running once the RDR becomes live.”

Lastly, on Solvency II:  “One of the biggest issues the banks faced in complying with Basel II was data management. Banks that concentrated solely on the modelling side often found that much of the data required was either not available or not of sufficient quality to populate the models.”

The pressure for good data management is not just coming from the legislators. Customers are becoming much more data savvy and there is a rise in regulatory and customer expectation for companies to hold up to date and accurate information. Companies not complying with the legislation can face very large fines.
Denholm concludes: “Beyond compliance there are considerable benefits for companies practising good customer data management. Knowing more about your customers will increase the opportunities for upselling and cross selling products.”

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