Achieving accuracy in DB files for outsourcing and valuation

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By Jean Smith | 31 January 2013

A long-time Milliman client had emerged from a decade of business losses and bankruptcy. A new decade provided renewed business promise through downsizing and refocused business goals. Although the company was on an upswing, it was faced with auditor concerns over the frozen pension plan and related funding challenges. Internal and external auditors were anxious to scrutinize all numbers, headcounts, and liabilities related to the pension plan, in order to sign off on the company’s consolidated balance sheet for the year.

Incomplete data could affect profitability

When auditing the valuation results for the prior year, the auditors reviewed various personnel files within the vested terminated section of the client's file room. They noted that about 4% of the paper files surveyed yielded inconsistencies or missing information compared to the electronic data source of record that served as a basis for valuation costs and benefit administration. With 4,600 vested terminated participants in all, a 4% variation had the potential to impact the company's net profitability. Further, the company wanted to update the administrative service model by turning to Milliman's outsourced DB administration services. Concerned about the auditors' inquiries and the quality of the data for the new system, the client asked Milliman to help by performing a review of the files.

Cleaning up—meticulously

The personnel data files needed to be fully audited to ensure consistency to the electronic data source. Milliman arranged for file transport from the client site to the local Milliman office, tracking all files in a customized database. Data from the current pension administration system was imported into the database and used as a basis for the comparison. The Milliman team then analyzed each file for employment dates, benefit amounts, and other relevant data used in valuing the plan's liabilities. The team denoted the personnel files that were not represented in the electronic data as well as data in the system for which files could not be located.

After six weeks, the team had reviewed 4,100 files, found more than 750 data discrepancies, identified 60 participants who had not been included in the administration system data, and determined that more than 600 files were missing from the client’s file room. Additionally, more than 200 files were misclassified as vested terminated that should have been coded instead as nonvested terminated or retiree and stored within other sections of the client's file room.

Preventing future problems, meeting targets

As Milliman worked to verify and correct the company's electronic data, consultants also worked with company managers to develop new internal controls for recordkeeping and payroll transmission so that the data problems wouldn't reoccur in the future. When the data was corrected and verified, the Milliman team summarized its findings for easy review by auditors.

The client was pleased when the outsourced administration to Milliman met its targeted launch date. The company was able to move forward, confident that the vested termination data could be administered easily and provide a valid basis for the annual plan valuation. In addition to the company being back on track financially, it is now on stronger footing because of the outsourced administration and solid underlying data controls.