 By Adrian Kennett, Director, Dalriada Trustees
The vast majority of defined benefit schemes are now closed to new entrants if not future accrual. Over recent decades we have seen a marked shift to defined contribution schemes throughout most sectors in the UK. With 9 million new members to be captured by auto-enrolment requirements by February 2018, most would agree that defined contribution schemes are the immediate future of benefit provision in the UK.
It is not a surprise therefore that many providers have concentrated on the defined contribution universe when considering how best to add value from technology. This can only continue to spiral when the charges cap (as and when it is finally introduced) drives an ever increasing need for cost efficiency.
What is perhaps more surprising is the relative lack of innovation with regards to the technologies supporting the running of defined benefit schemes. The Pensions Regulator’s Purple Book 2013 states that defined benefit liabilities amount to over £1.3 trillion. Yet many schemes are run on databases that were developed in the early 1990s and aren’t web-enabled.
Defined benefit pension administrators often rely on incomplete and inadequate data, to which they apply manual calculation routines, and report to Trustees that everything is fine because they met their service level agreement of 95% of cases being turned around in five days. They don’t comment on the percentage of those cases which were actually correct.
The process of obtaining an actuarial valuation often extends to the end of the 15 month statutory window. These schemes are often stated as being on a “flightpath to buy-out”. If it takes up to 15 months to obtain a valuation, opportunities to de-risk are going to be lost. In the majority of cases, the prime driver in a lengthy valuation process is data completeness and quality. Often the Actuary has had little contact with the data since the previous valuation, at that valuation much time was spent between the administrator and actuarial team agreeing the valuation data. Commonly the actuary fills some gaps with assumptions that are never rectified or fed back to the administrators. Three years later, the dance is repeated with minimal improvements in the data. It is massively inefficient.
As a business, we are working hard to change this situation. Last year we adopted a newly designed IT system called ‘Mantle’. We believe we are using a tool where trustees now have the opportunity to have services provided differently, and much more efficiently, really maximising the potential of technology in the management and governance of their defined benefit scheme.
In line with some other innovative competitor systems, ours has been programmed to produce calculations (for example, retirement benefit and transfer value calculations, etc.) automatically and we also have a calculation routine which enables the quality of data to be established – both against core and conditional tests.
The key new differentiator we’ve brought to the marketplace with Mantle is the ability to run actuarial valuations on a user-specified basis, on current administration data. The administrators and actuary work from the same database; all amendments are shared in real time; all assumptions are recorded and highlighted to all parties. The data is constantly reviewed, refined and rectified. This enables the actuary to focus the actuarial valuation budget on the value-added aspects – the advice – rather than on the calculation of the funding level and contribution requirements. The system captures financial statistics on a daily basis, utilises cloud-based storage to maximise calculation speeds, and supports stochastic modelling.
Regardless of which option they pursue, it’s important that the defined benefit trustees embrace new technology or they will run the risk of being left behind, caught up in the many inefficiencies that currently make these schemes overly complex to manage.
One of the significant barriers holding back the implementation of more technology within many defined benefit schemes is whether it is in the financial interests of the large traditional technology providers to drive change. If you were to design the services now required for closed defined benefit schemes using today’s available technology – including open source code, cloud based databases, and internet access - you would not end up with the systems which trustees have and, in many cases, continue to use. However, creating modern technology solutions for clients does not necessarily require major investment, compared to many of the legacy systems, and perhaps the obstacle that needs to be overcome is that trustees need to be better advised, or be more aware, of the options now available to them.
While the competitive nature of the defined contribution market will ensure that most effective technological solutions continue to be adopted, there is an opportunity for the defined benefit market to follow suit. With increasing regulatory scrutiny, trustee boards need to challenge themselves and their service providers on how they can best use technology to give them a clearer, easy to access picture of their scheme.
Through the introduction of new systems like Mantle there are a few innovators which are seeking to offer a solution to the marketplace and I believe other technology providers will follow this approach, driven by customer demand and the need for service organisations to drive internal cost efficiencies in a shrinking defined benefit market.
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