Article | 10/10/2018

Where there’s blame, there’s often no claim

The following piece is a reprint of an article published by Pension Funds Online on 10 October 2018.

When a pension scheme changes administrator, one universal truth applies: data issues and historical errors will be uncovered.

First-hand experience of countless administration transitions has taught me that if schemes change administrator, then at least one of a handful of common issues will be uncovered.

A comprehensive transition should examine and interrogate every part of a scheme’s DNA. Data, rules, communications, processes and policies are all up for grabs with past-practice being used to benchmark and compare against current day results. With sophisticated data analysis and the experience of thorough benefit reviews being well-rehearsed, no stone should be left unturned.

Often, issues that have been uncovered date back many years and can incur significant costs to remedy. Naturally therefore, the most common refrain trustees have is “can we go back to the previous administrator for compensation?”. This is an entirely understandable and natural conclusion given that the source of many issues could be, at least in part, attributed to the administrator. However, rarely is this course of action successful, and even more rarely is it ever profitable.

But why is this the case? Why should trustees who have appointed a professional firm to provide competent services, or to use the much-cited legal phrase “reasonable skill, care and diligence”, have no recourse when things go wrong? How can administrators who have failed in their fundamental obligation to maintain accurate records suffer no penalty?

The answer to this question lies in the most common form of defence administrators cite: incorrect source data.

Imagine a scenario where over the course of many decades, your bank records successive incorrect transactions that result in you being credited with too much money. At the same time, they also make incorrect payments to all your payees. The problem only gets identified when you change banks, and your new provider tells you that your balance is wrong, but it will take many hundreds of hours to figure out exactly what it is. Quite rightly, you expect the problem to be fixed and for your bank account to reflect every payment accurately.

However, what happens when the bank draws into question the validity of information passed to it?

Who becomes accountable for analysing and unwinding years’ worth of records when your employer messed up your salary and credited your account with the wrong amounts? Who is accountable when cashed cheques are written in indecipherable handwriting? Suddenly, the surety of the negligent party becomes clouded and compiling a watertight case relies on tracing the source of thousands of data exchanges.

To today’s average reader an example that cites the use of a ‘cheque’ probably seems anachronistic. However, it’s a metaphor fitting to pensions administration. It’s inconceivable today that important financial data would be recorded and transmitted using small pieces of handwritten paper, but let's not forget that this is how most pension data moved between employers, administrators, members and government departments for many decades.

The defence of questionable source data and the sheer complexity, volume and multitude of sources required to perform administration tasks makes it almost impossible to build a case based on general poor standards of record keeping. Unless you can, with absolute certainty, point to a specific event, change or transaction that your administrator independently performed, with entirely accurate source data, it becomes almost impossible to claim they are solely negligent in delivering poor standards of record keeping. We are most often just the last one holding the baby.

Where it is easier to point the finger and prove a case of maladministration is where internal events or changes have led to an administrator being independently culpable. The most common example is where a change of system, data exchange or calculation error arises. The most serious of these I’ve witnessed is where an administrator moved systems with little due diligence or internal controls being applied, resulting in significant duplication of pension liabilities.

It may be unpalatable and lack the justice trustees deserve, but taking a pragmatic approach to resolve problems is sometimes the better option. Weighing the choice of pursuing a sometimes-costly legal route, against the necessary cost of rectification should be the first decision. Trustees should then think about the amount of time needed to reach a resolution and whether all parties are able and willing to invest that time in pursuit of compensation.

The hard reality of poor administration is that it is commonly a case of death by a thousand cuts, rather than a single knock-out blow. Whilst disagreeable, aggravating and upsetting it’s sometimes better to draw a line under the past and make a stronger plan for the future.

Garry Wake, Managing Director, Trafalgar House

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