The Hidden Cost of Bad Data: A Case Study

An organization with an employee defined benefit pension plan realized its annual PBGC premium costs were increasing at an exponential rate and sought a solution to stem the tide.

Background

The pension plan had been designed and implemented at a time when tenure at the employer was measured in decades rather than years. However, as the employee landscape changed to more portable benefits and a mobile workforce less devoted to their company, the plan found itself carrying many terminated participants with low service and, accordingly, relatively low benefits. With ever-increasing PBGC premium rates, participation by these former employees contributed to PBGC costs becoming more burdensome to the company’s bottom line.

The Issues

The organization asked Sibson to calculate lump-sum distributions for vested former employees with the intent of offering a one-time lump-sum cash-out option, which, if elected, would remove them from the plan. When Sibson examined their data to estimate the cost of completing the work, a major issue became apparent: the plan’s census data was incomplete and contradictory.

During an initial assessment, the Sibson team found data accuracy was hindered by:

  • Inadequate documentation by the prior actuary
  • Differences between older paper records and current electronic records
  • Data input errors in the electronic system that had compounded over time

Moving forward using only the data found in the electronic system would have undervalued the lump-sum distributions, put the plan in possible non-compliance with the IRS, and potentially led to expensive court challenges by the former employees.

Sibson's Solution

The Sibson team retrieved copies of all older records from participating divisions within the plan and then worked onsite to correct the current electronic system by matching data from paper records. The team then calculated the lump sums and assisted in drafting personalized letters to the former employees explaining the lump-sum option and the benefit.

Sibson found the vested former employees, as a group, were undervalued on average by almost 10% of their accrued benefit, and by almost 25% in some cases. Fortunately for the organization, the plan was well funded and therefore correcting the records did not involve a financial burden.

The Results

Approximately 55% of the former employees took the lump-sum option, leading to a decrease in annual PBGC premiums of approximately $300,000 per year. The organization saw further gains in reducing the expected number of future hours that administrative staff would spend on benefit calculations going forward with a renewed confidence in the accuracy of the data records and corresponding calculations.

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