Pensions scheme admin is an onerous business especially when members don’t keep trustees informed of their change of address, giving way to possible fraud and identity theft, says Ceri Jones
According to Experian over 18,000 people in Britain move house every day, while a further 1,600 people die. Given these statistics, it’s no wonder the task of managing a pension scheme’s membership database is one of running quickly only to find yourself standing still. It can be worryingly easy for employers to lose track of their scheme’s members. Almost 36% of employees in a private sector scheme have failed to notify providers of their change of address since 1996, according to Aon Consulting’s Pensions research 2007.
This should be a concern for pension scheme trustees who are ultimately responsible for scheme administration and therefore have a legal obligation to make reasonable endeavours to find a scheme’s members, including deferred members. This means they must actively monitor the effectiveness of admin procedures.
The Pensions Regulator has also stressed the importance of verifying the details of each member to prevent fraud. In particular, it has emphasised the need to check for suspicious activity in relation to pension transfers, following a series of illegal transfers to a firm wrongly passing itself off as AMP or AMP Pearl.
As well as ensuring benefits are paid to members when they are due, trustees are also charged with a responsibility to try to ensure that a scheme does not continue to pay out once a member has died. There have been many cases of benefits being paid out to Uncle Bob long after the poor chap has turned to dust, because the family has somehow omitted to inform the scheme sponsor of the death. Such frauds are not uncommon because they are so easy to pull off. Once an employee has retired and perhaps moved away, any link with their previous employer is, more often than not, severed.
Trustees have particularly onerous liabilities on the wind-up of a scheme, because it is their role to ensure benefits are paid to the right people. Richard Oliver, a pensions administration consultant at Hewitt Associates, says: “Before a scheme can be wound up, trustees have to extinguish their responsibilities by distributing all the assets of the scheme to members. Contacting individuals and ensuring they are paid correctly [is] quite a task.” Run-off insurance must be bought to cover potential benefits for all members not located, which, unsurprisingly, is expensive.
A decade ago, employers looking to trace members had few alternatives other than the service offered by the former Department of Social Security (DSS), which traced people through their national insurance record at a cost of £15 per name. They could also send a forwarding letter to the member’s bank. But technology has now increased the options available. Modern tracing services can harness the computing power of extensive databases and a data fragment can now often locate a member or verify a death within 24 hours.
The cost of these tracing services has fallen as more players enter the market. But as the competition for business has stepped up, some providers have adopted the practice of advertising ‘guaranteed’ high levels of success, which, according to industry insiders, are often over optimistic.
There are some difficulties with mortality screening, due to the separation of death databases between home nations. England and Wales have a shared file, while Scotland and Northern Ireland both have their own. Overseas deaths are also a challenge, particularly if the body is not repatriated, because the name would have to be checked against different nations’ records.
Pension trustee boards will usually select the tracing firm, but first will usually want to exhaust all internal low-cost options such as existing admin records. Some employers are in such disarray that their active members’ addresses are not on file, says Oliver.
Regular cleansing, perhaps quarterly, of the membership file is one solution. Employers can now purchase systems that run a sweep of a scheme’s entire membership to look for any inaccuracies or inconsistencies in the details held on file compared with a national databank. Some, for example, validate members’ addresses against postcode databases, electoral roles, telephone numbers, dates of birth and mortality matches.
Employers can also do more when staff leave their service to ensure they appreciate the importance of any future change of address. HR should stress that not providing correct details leaves members at greater risk of identity theft.
If you read nothing else read this…
- Pension scheme databases suffer from rapid data decay, but trustees have a legal responsibility to maintain administrative standards.
- This is particularly critical in a wind-up situation, where run-off insurance must be purchased to cover benefits for missing scheme members.
- Leavers should be reminded about the importance of updating their previous employers with any future changes of address.
- Regular sweeps of membership data by a cleansing system can help guard against fraud, for example, where benefits are being paid to dead members.