Pensions World

This is a good time to be looking for an outsourcing partner. Allison Plager surveys the market

If last year was a good year for third party administration providers (TPAs), 2012 is even better. Capita Hartshead’s Clive Wickenden describes the market as “incredibly buoyant”, with lots of opportunities to support schemes in reorganising their administration arrangements.

Agreeing that the TPA industry is going through a “boom time”, Towers Watson’s Mike McMillen said it used to be possible to take a break in August, but this year the holiday month is seeing presentations planned for potential clients. Summer holidays, it seems, are wishful thinking for many in the TPA industry.

Part of the interest in outsourcing comes from schemes which have been administered in house, but which now find the required investment in systems and processes excessive. As Mr Wickenden said: “Auto-enrolment is having an impact on the decision to outsource the pension scheme administration.” It is necessary to review all procedures and have slick automated processes to meet all the timescales that auto-enrolment entails. From the point of view of the employer, the new regime adds to the risk of running a pension scheme, so offloading some of that risk has got to be beneficial.

Systems are a key contributory reason for trustees and employers deciding to outsource the administration. Mr McMillen said the divergence between what a TPA and in-house team can do is considerable. It is expensive to keep a pension administration system up to date, so it makes sense to leave it to experts whose business it is to administer pension schemes, rather than what may be a small in-house team which has its collective hands full just keeping up with members’ movements. By outsourcing, Mr McMillen said the employer is reducing risk on several fronts. The TPA deals with all updates and resources, allowing the organisation to concentrate on its core business.

Looking back, Susan Phillips of Go Pensions said that in the early days some schemes “may have outsourced without properly understanding how the relationship between the pension scheme and the TPA would work in the long term”. Then A Day came along and the move to outsourcing declined. But now, she sees considerable movement as trustees are carrying out a five yearly review, with some perhaps changing provider for the third time since they first outsourced.

There are various reasons for a scheme deciding to change. Ms Phillips said the relationship is “key”. If this breaks down, then there is unlikely to be “any inclination to develop it” and the best action is to move to a different administrator. As to why rapport can fail, this can be for a variety of reasons. For example, she said it can simply be “because the administration is not being done properly: mistakes are being made, perhaps hidden by the administrator”. She added that the client has to help with the relationship: “not all schemes realise they have a responsibility in this, too”. Mr McMillen also sees disillusion caused, for example, by team changes or poor results with the current provider as a main reason for moving.

Other companies review the administration when they rationalise different pension schemes within the company, which arise as a result of acquisitions and mergers and which may be administered by various different TPAs.

Substantial choice

So for whatever reason the employer and trustees decide to find a TPA, the choice of provider is substantial. Table 1 contains a selection of TPAs. They range in size from the very large, such as Capita Hartshead, Mercer and Aon Hewitt, to the smaller firms such as Cartwright Group, Hanover and BBS Consultants and Actuaries. In terms of acquisitions, there have a been a few, with Capita Hartshead acquiring Northgate Arinso’s pensions business last July and Bluefin Corporate Consulting in April this year. In addition, Goddard Perry (which bought HS Administrative Services in October 2010) acquired KKW Pensions Management in August 2011.

Ms Phillips said the market has consolidated over the years, but there “are still some small to medium-sized firms that will provide a personalised service”. She suggested that the market “may shrink further as some of the smaller TPAs struggle to keep up with the technology required to offer a good service”.

Mr Wickenden agreed: “There is more room for consolidation, but that does not mean that we large administrators cannot offer a personalised service for small to medium schemes.” He added: “Once an administrator’s systems are not up to the job, the clients will start losing confidence and look for a new provider.”

Major catalyst

As already mentioned, the onset of auto-enrolment in October is a major catalyst for employers and trustees to consider outsourcing or review their existing provider. Mr Wickenden said that payroll seems to present problems in this respect: “A lot of organisations operate more than one payroll system, so they need to be able to take the information from these various systems and work out what to do with the data.” This problem can be solved by using “middleware which takes all the data and is programmed to know which schemes need to receive which data”. Timing is important and deadlines will have to be met. Looking at the logistics, he said that the large supermarkets, which are to be among the first to be in auto-enrolment, will have to opt in thousands of employees on day one, but then between day two and day 30, thousands will be opting out. Then, after three years, they will be opted in automatically again and the whole process begins again.

Mr Wickenden noted that the smaller employers still have time to make decisions, but he said planning and implementation is likely to be a 12 to 18 month project.

TPAs will be called on to help with auto-enrolment as they will be seen as having pertinent knowledge. Daniel Taylor of Premier said that “while auto-enrolment management requires new processing and technologies unfamiliar to TPAs, consultancies are turning to these departments for solutions as they have experience and technical expertise to deliver complex processes across multiple agents”. He said: “Auto-enrolment provides an exciting opportunity for TPAs to diversify into new service areas; by capitalising on existing experience and knowledge, built up over many years of providing similar services, they have a rare chance to bring truly new products and services to the market.”

Move online

Just as it is becoming the norm to bank online, book holidays via the internet and do your weekly shopping remotely, the use of web technology is becoming increasingly popular. Barnett Waddingham’s Carole Ward said “internet delivery is essential nowadays to satisfy expectations from employers, trustees and members alike”. She said it has the “advantage of increasing transparency, trust, quality and efficiency”.

Colin Hamilton of Aon Hewitt said: “The use of electronic technology has a strong place within the delivery of an efficient administration service, but it has to complement the behavioural and technical skills of the delivery teams. Electronic technology such as email, online member access and SMS messaging can greatly improve efficiency and response times.” He added that “online member access particularly can improve member self-service driving efficiencies automation, reduced costs and greater member engagement”.

In the past, the argument has been that not all workforces are ready for web technology: those in manufacturing or not sitting at a desk were not computer savvy and would not use the facility. This is less true now. As Ms Phillips said, “lots of people, regardless of their job, have smartphones and can use apps, so TPAs are and should be making things available in this way”. She described technology as “an enabler which needs to be driven by administration”.

According to Mr Wickenden, “more and more clients are thinking of making the web the main method of communication”. He said it is a quick way of getting members to carry out tasks as it is easier, for example, than filling in a paper form. Defined contribution schemes are leading the way in this respect because they lend themselves to web transactions. But equally, he said pensioners like to go online and look at payslips and P60s.

Despite the growing take up of electronic communication, not everyone is ready or willing to go online. Martin Ralph of Cartwright Group said web technology “has been talked about for a long time but has still not reached the levels hoped for by the industry”. Saying that it was of limited “day to day value for defined benefit members”, he agreed that it “is better suited to defined contribution arrangements, where members can obtain easily current fund valuations, perform illustrative retirement projections and switch investment funds. However, even for these arrangements, actual take up of online usage remains resolutely low.”

He has found “in the small and medium sized enterprise market, members and trustees alike prefer human interaction and the comfort of holding a piece of paper, provided that there is sufficient online storage and backup of the appropriate files and documentation”.

All about standards

Quality of service remains an issue for TPAs and the fledgling independent Pensions Administration Standards Association (PASA) aims to set standards for pensions administration and help companies to achieve them. Chaired by Margaret Snowdon OBE, the association is creating an accreditation process for providers. Importantly, to achieve accreditation, the TPA will need to do so at each of its delivery sites, the idea being to achieve consistency of performance and approach across all sites.

The respondents to the Pensions World survey all support PASA. As Mr Taylor said it “has the opportunity to set a universal standard for quality and delivery across the administration market”. For it to be “truly successful and give the greatest benefit to schemes, the standard will need to be logical, simple to implement and monitor, promote the right quality behaviours and most importantly of all be adopted by all of the major administrators”.

Given that TPAs are enjoying an unprecedented amount of business, and that schemes are increasingly being outsourced, it is important that members receive the best service possible. It is in everyone’s interest that standards are high and it is to be hoped that providers join the association and achieve accreditation.

Table 2