Christopher Shortt of Spence & Partners details the process of automating DB pension schemes. 

In today's world of technology, it is very rare for you to go through your daily routine without coming across an automated system - often without even realising it (that's the beauty of automation).

But have you ever stopped to consider what it would be like if everything had to be done manually?

For example, imagine calling to book a hotel room and being told that a letter would be sent out within 10 working days to confirm your booking (of course this wouldn't be acceptable!).

So why should a retirement request from your Defined Benefit ("DB") pension scheme be any different?

Process of automation

Before we get to the stage of instant retirement quotations or transfer values, the system will need be set up to automate the calculations. There are four key stages for the process of automating a DB pension scheme.

1) Data – the first step is to load the data onto the system and fill in any missing key components. It would be pointless having an automated system if there is incomplete data or even incorrect data to calculate the benefits.

2) Benefit Specification – step two would be to review all scheme documentation and input it into a user friendly document. It is worthwhile at this stage to review matters such as scheme equalisation and benefit basis. Again, there is no point in having an automated system that is calculating the benefits on the incorrect basis due to misinterpretation of the scheme documentation.

3) Code the system – at this stage most of the hard work is completed. The system just needs to be coded to calculate the benefits; however it can be quite complex depending on the scheme basis and if there are different categories of members. Once again, if the system is not coded correctly it could result in benefits being settled incorrectly.

4) Testing – the final stage to be completed before signing the scheme off is to test the benefit calculations. The benefits would be checked against an independent calculation to ensure there are no errors and avoid any re-work in the future.

The power of automation

DB pension schemes have been around for many years and will be around for many more, therefore automation needs to be approached from a long term point of view. So what does the power of automation bring to your DB pension scheme?

-Costs
Trustees are always looking to keep costs down especially as schemes are closing to future accrual. With an automated system the costs of administering the scheme on an on-going basis will be reduced, as less time will be spent on each task. With an uptake on requests following the pension reforms, an automated system will help keep these costs to a minimum.

-Service Level Agreements (SLAs)
Automation leads to better efficiency which will allow administrators to meet SLAs. An automated system should help avoid any back-log from increased requests from the pension reforms and still allow administrators to keep meeting agreed SLAs. This will reassure trustees that their members are receiving an excellent level of service from the administrators.

-Crystallising with confidence
Having an automated system and following the processes described above allows trustees to be confident that members' benefits are being settled on the correct basis. It also reassures members that they are receiving the correct level of benefits.
Can you afford not to automate?
On the flip side – what is the cost of not automating?

-Costs
On the plus side there are no upfront costs required if your scheme does not plan to automate, which can be very appealing. However as mentioned earlier the on-going costs of manually administering a scheme are going to be more expensive in the long-run.

-Exposure to Trustees
From incorrect data and benefit calculations to a misinterpretation of the scheme rules, the risk of human error is significantly higher when there is no automation, leaving trustees exposed.

-Service Level Agreements (SLAs)
The administrators could get a back log of requests following the pension reforms which can sometimes lead to corners being cut in order to meet the SLAs and consequently settling benefits incorrectly.

-Employer risks
Higher on-going costs means that more funding will be required by the employer in the long term to keep the scheme going. If for example, it turned out out that the scheme legal documents were drafted incorrectly, this could lead to an instant increase in scheme liabilities which will be reflected on the employer's balance sheet.

Costs are always going to be the main driving force of automating a DB pension scheme. Schemes will need to take the bear the higher costs at the beginning of the process in order to get the benefits of automation.

In light of this trustees should look to review their administration systems now, so they can start benefiting from automation as soon as possible.

Written by Christoher Shortt BSc AMPI, Consultant, Spence & Partners