In January 2017 the European Union approved a major revision to the legislation on workplace pension schemes – the Directive on Institutions for Occupational Retirement Provision (IORP II). Whilst many of the most contentious parts of this directive were negotiated away, one very significant element for administrators remained, the introduction of the Pension Benefit Statement.

The Pension Benefit Statement has a relatively simple list of required content, but demands a complex journey to implement:

· Personal details of the member

· Scheme information and contact details

· A projection of benefits to the scheme’s normal retirement age

· Details of accrued benefits, contributions and costs

· A picture of the scheme’s funding position

· Signposting for further information

Full details of the requirements are set out in Articles 39 and 40.

With implementation needed by the 12 January 2019, the countdown is on for schemes to get ready for this change. Central to the complexity of this development is the span of membership it encompasses - the Pension Benefit Statement must be sent to every member (active and deferred). For defined contribution schemes this will not be problematic as the requirement to provide all members with an annual statement has been in operation since 2003 when Statutory Money Purchase Illustrations (SMPI) were introduced.

Defined benefit schemes, however, find themselves in a different situation, having never been compelled to send deferred members a personalised annual statement.

Research conducted by Trafalgar House shows that deferred members of defined benefit pension schemes are on average, the most discontent – with the reason most commonly cited is that they do not receive enough tailored, individual updates on their pension. Current legislation does not oblige trustees to provide annual retirement projections to this class of member, so for reasons of cost and complexity, most do not. A limited number of schemes provide members with online access to their benefits, but the application of this technology has a particularly low saturation rate amongst DB populations – for deferred members we estimate at below 20%

An additional vague complexity in the methodology of revaluation to deferred pensions (Section 52a orders) has always acted as the excuse for schemes not providing deferred members with an annual update on their pension. The applied method calculates the uplift between leaving pensionable service and retirement age on an aggregated basis, rather than year-on-year. This means that any single year that exceeds the maximum capped increase is smoothed over the entire period and not annually. Whilst only likely to have an impact where price inflation rises above the annual cap, it still means that actual revaluation can only be known close to the point of retirement. This is the most commonly quoted reason for why schemes and administrators do not send deferred members annual statements.

Whilst the introduction of the Pension Benefit Statement will undoubtedly

resolve the long-standing accusation of neglect from deferred members, it does first demand that three very significant challenges be resolved:

1. Deferred data

Deferred data is the biggest, stickiest most nasty problem in pensions administration. Of all membership classes, it is defined benefit deferred records that contain most problems. Borne of historic practice, often in a pre-automated world, data is often unstructured, missing or inconsistent. Three of the most common types of problem found with data include unequalised benefits, missing contingent spouses’ liability data and incorrectly tranched pension splits.

Two out of three of these three problems impact the validity of deferred retirement projections. The problem for administration is that this is often accommodated for through existing process on an entirely transactional basis i.e. when individual members ask for something or when they are due to retire. Unless a scheme has undertaken a comprehensive benefit assurance and data rectification programme then these problems might still be lurking in your underlying data today. Left unchecked then you run the risk of misquoting projected benefits for your deferred population.

2. Complexity

Deferred pension revaluation is extremely complicated and, for some schemes, can require separate individual treatment be applied to as many as 8 different benefit sources. Includes the application of countless factors and often relies upon very old source data that is not stored on a consistent basis. Despite common misconception, crystallised deferred benefits, especially those that have been built up with GMP and Barber splits, are infinitely more difficult to project to retirement than benefits still accruing.

3. Automation

Automating calculations is expensive. It requires a great deal of time in analysing rules, specifying programming, building routines and testing outputs. When deciding what to automate deferred calculations often fall down the pecking order, as focus goes into building solutions for active populations who need to receive annual projections on mass. Highly sectionalised schemes or those with small deferred population groups will probably have been excluded from your administrator’s automation plans, meaning that they may not currently have the capability to automatically generate deferred projections for all your members. Calculation automation is a lengthy process and can take months to complete.

The work required for schemes to fulfil their obligations to deferred members from 12 January 2019 should not be underestimated. Whilst it represents a significant opportunity to re-engage a disenfranchised population, with it comes very significant risk if not handled thoroughly.

Methodically working through the requirements, starting at data and moving through to automation, is essential if trustees and administrators are to be well prepared for this significant change.