Why? Duncan Watson, Managing Director of Data Solutions, tells us
The National Insurance Contributions Office (NICO) estimates that it holds 30% more membership records than the combined scheme membership records of all contracted-out schemes, effectively increasing contracted-out liability for trustees and sponsors by 30%.
Equiniti’s specialist contracted-out reconciliation team, which sits in its Data Solutions business, estimates that up to 20% of reconciliation mismatches are down to records that NICO hold but which schemes do not.
This estimate is based on approximately one million members who have been processed through their initial analysis phase.
As well as marking the end of defined benefit contracting-out in the UK, April was also the deadline for schemes to register with NICO to use its online bulk scheme reconciliation service – a deadline that, if it was missed, sees the relegation of unregistered schemes to the back of the NICO reconciliation support queue.
As a result, there has been much debate within the pension industry around the need for – and extent of – schemes’ contracted-out record reconciliation activity with NICO.
To recap, here are some of the key reasons:
- NICO’s excess records infer a 30% increase in liability values across all UK contracted-out schemes. Unchallenged membership records could lead to benefit and therefore liability claims in the future.
- From January 2019, schemes will no longer be able to easily query contracted-out data with NICO in bulk. Therefore, schemes considering a liability management exercise such as a buy-in or a buy-out need to act now to shore up their data sets. Failing to do so could lead to insurance data risk premiums of 5% or more.
- NICO will communicate with all contracted-out members under state pension age from 2019, setting out their contracted-out history. Unchallenged records may lead to member queries incurring time, cost and potential reputational damage.
- NICO’s contracted-out records will be used to calculate the deduction from an individual’s single rate state pension, meaning that unchallenged records could lead to individuals facing reduced state pensions through no fault of their own.
It's easy to feel overwhelmed by the potential scale and cost of a contracted-out reconciliation exercise, but help is at hand. By following a tightly controlled, step-by-step, risk-based approach, trustees and sponsors can carefully navigate the reconciliation minefield.
Equiniti’s analysis from the findings of its contracted-out reconciliation programme to date makes for interesting reading. The average initial mismatch rate found when comparing scheme records to NICO’s records is almost 50%. While this may seem like an alarming number, a fifth of these initial mismatches were easily dealt with using sophisticated bulk analysis investigation, saving the trustees and sponsors considerable time and cost during the member-by-member reconciliation phase.
Of the remaining 40% of mismatched records, approximately 18% were membership status queries where records either appeared on schemes’ data or NICO’s data, but not both. The final 22% were member records that appeared on both but with differences between the data sets.
Many schemes will be well underway with their reconciliation programmes. For those who are just starting the journey, Equiniti has the following advice:
- Take time to undertake a thorough initial analysis of your data set and NICO’s data set. Without this step it is impossible to size the issue in order to scope costs and resources.
- Once the initial analysis is done, bulk-eliminate as many mismatches as possible through intelligent use of technology and SME input.
- Plan for your end game by developing solutions with the rectification of at-source data sets clearly in mind.
- Create a risk-based governance approach to reconciliation and rectification decision-making. Not every mismatch will need to be dealt with right away, or indeed ever.
Recent guidance from Central Government has given public sector schemes the green light to progress their reconciliation programmes. To date there has been very little public sector activity in this space.
Once it begins NICO will have a significantly increased burden of queries to deal with, and so it stands to reason that the most important piece of advice trustees and sponsors should act upon is this: don’t wait. The best time to get ahead of the game is now.