Pensions World

The outsourcing market is busy. Allison Plager, financial journalist, finds out why

Third party administration providers (TPAs) have never had it so good. According to Mike McMillen of
Towers Watson, “activity is at a record high for outsourcing generally, both for first timers and those reviewing”.  After some 18 months of planning blight, following the banking crisis, when there was no
investment for ventures that were not vital to the company, it seems that businesses are prepared to look at longer term projects that may not be core to the company’s main activity. People want value for money, says Mr McMillen, but “not inevitably the cheapest”. Quality is important.

Avgi Gregory of Muse Advisory agrees that there is a lot of outsourcing activity, with companies carrying out reviews and some looking to outsource for the first time. She says one reason for review is “rectification where large schemes outsourced some time ago”. This is happening, she says, because “the market has grown so much over the last five years – ten years ago, only a few
companies outsourced their pensions administration. Suppliers in the meantime have now raised the bar, for example, with substantial investment in software.” Large TPAs have learned what did not go so well when they first took on a scheme ten years ago. Often “proper due diligence was not done which has led to problems with data and calculations, and no one accepting responsibility”. So Ms Gregory says “rectification is a way of salvaging the relationship” without having to change administrator, although inevitably in some cases the scheme and the TPA will part. It is not a “bleak picture”, adds Ms Gregory. Advances in technology and closer attention to detail, for example,
mean that the situation is improving; a lot of investment is going on.

Solving a lot of problems

The reasons for outsourcing in the first place are myriad, as Box 2 on page 36 shows. The
legislation and regulations surrounding pension schemes are as complicated as ever and those running the scheme have to cope with seemingly constant change – the adjustments to the annual and lifetime allowances, the introduction of Nest and auto-enrolment, to name but a few.

Companies know that off ering their employees a company sponsored scheme is an important benefit, but operating it is not easy and not the main reason for being in business. Therefore, outsourcing the administration solves a lot of problems. As Mercer’s Richard Hilton says “the main advantages of outsourcing administration are risk transfer and crisis avoidance, access to best practice and added capacity for work peaks”. He mentions some additional benefits as being “the ability to handle business or pensions change, removal of the need to reinvest in enhancements to systems and processes, and reduced internal overheads”. He feels that most of the perceived disadvantages, such as loss of control, increased cost and reduced service, “can be successfully addressed through discussion and careful consideration of each client’s requirements”.

The choice of administrator is wide and varied. Ms Gregory says that there is some “segmentation in suppliers”, with bigger schemes going to certain ones and small schemes to others. Small clients can be particularly cost conscious in her experience, often questioning this aspect of the service more than larger schemes, although she says “companies tend not to move because of costs – it is usually for service reasons”. No one wants to replace their TPA unnecessarily.

Table 1 lists a selection of TPAs. They range in size from the largest consultancies: Mercer, Aon Hewitt and Capita Hartshead, down to the mid-market providers which include Punter Southall and Hymans Robertson, to the smaller consultancies such as Atkin & Co, Hanover and KKW Pensions Management.

There have been some changes since last year’s survey. AEGON has left the market, selling its admin business, HS Administrative Services, to Goddard Perry, and BDO Investment Management has been rebranded as Broadstone Pensions & Investment. Another new name is Global Benefits Administration: this is a trading style for the combined administration operations of ACS HR Solutions UK Ltd and Buck Consultants (Administration & Investment) Ltd.

Web technology

All TPAs know the value of electronic technology. As Tess Armstrong of Xafinity says: “web technology and electronic communication has become standard in the delivery of pension administration. As members are increasingly required to make choices about the future of their benefits, ensuring accurate information is available in multiple forms is essential.” She adds that such services can provide “members with fast access to information and the ability to model benefits themselves, increasing member knowledge and choice. This raises the profile of the pension benefits offered as well as supporting the legislative requirement to communicate change.”

Likewise, Hanover Pension’s Mr Hudson sees technology as “highly important as a means of communicating with the membership” and Kevin Watkiss of KKW Pensions Management believes it “provides tremendous scope for increasing efficiency and reducing costs when providing and
receiving information”.

Highlighting the way that technology can be harnessed to allow members more scope to update their own records, Mercer’s Richard Hilton says “a member web portal, such as Mercer One View, empowers members through the touch of a button – giving them the ability to change personal details relating to them, such as marital status, address and bank details”.

Graham Hickling of HS Admin agrees that the use of technology by a TPA is important, adding that “the combined use of email, intranets, internet, text messaging etc provides the opportunity for both
improvements to the quality of service and reduction in costs”.

Pension schemes are often keen to move admin services online where they can. Clive Wickenden of Capita Hartshead says “web services are being rolled out to more and more clients, although take-up varies depending largely on how it is ‘sold’ to members and what it is used for”. Some employers want everything to be web based, effectively forcing employees to use it. He points out that this is fine, but stresses that whichever approach is chosen, it is essential to make sure that the data is in a good state.

Not all members are enthusiastic users of computers and the internet, so written communications still have and will continue to have a role for many schemes. However, for many members, says Mr Hickling, “the introduction of web technology allows them to manage their pension scheme in the same way as they manage their bank account through online banking. They can have immediate access to their pension scheme records, scheme documentation, benefit statements, payslips as well as being able to run their own what-if calculations and retirement modelling.”

Biggest single problem

This year, Pensions World asked TPAs what is the biggest single problem they face when taking on a scheme administration.  Almost without exception, the reply was data. As Atkin & Co’s Caroline Vestel says “quality of data is a very big issue. Data transferred is often incomplete or inconsistent, or is not easy to reconcile. The lack of provision of individual member files can often add to the problem, especially as TPAs have a responsibility to hold original joiner forms, leaver forms and other backing papers to substantiate electronic data.”

Mr McMillen suggests that there are often historical reasons why a scheme’s data is not very good, citing mergers as a main cause. He recommends that before appointing a TPA it is critical to agree “a data cleaning action plan”.

Good preparation of data is key. As Mr Hilton says “schemes need to understand the status of their data and provide an accurate and open view of the data quality to their new TPA provider”. Similarly, Ms Vestel says a scheme “can prepare for the appointment of a TPA by ensuring that their data is complete and accurate and in a usable format for the appointed TPA”.

Again stressing the importance of eff ective data conversion and identifying issues with or gaps in the data provided, Mr Hickling says “the quality of the ongoing administration of the scheme is heavily dependent on the quality of the data conversion, audit and cleansing work identified during the implementation”.

Another reason that data is so important, says Mr McMillen “is that many clients are looking at liability management exercises or a buyin or buyout in the future”. It is “essential to get data in good shape to secure the best terms for any deal” and to “consider additional data that may not traditionally be held on a TPA’s system, such as spouse’s date of birth, which will be important for a buyout or buyin”.

Keeping up standards

Standard of service is paramount for all concerned. As Mr Wickenden says, “historically, most schemes were concerned with getting information from the TPA in time, but quality of the product is just as important – how easy is it for the member to understand the information?” He works with members to obtain feedback on their reception of information sent orally, in writing and on the web and feels that the “concerted swing from time based to qualitative standards” is appropriate.

The Pensions Administration Standards Association – created “for the next era of third party administration”, says its director Kim Googler – will engage with industry, the Department for Work
and Pensions, the Association of British Insurers and the Pensions Regulator.

The aim is to be more active: it is all very well to say you want to improve standards, but you have to say what those standards are.

An accreditation subcommittee will be formed to set what the standards are and create an accreditation. In essence, the idea is for “trustees to know that their administration meets certain criteria”.

Booming market

It is a busy time for pensions generally. This, coupled with the sponsoring employer’s drive to shed responsibility for the company pension scheme wherever possible, is contributing to the booming
market for TPAs.

The importance of having clean, up to date data has never been more important and is clearly an issue that trustees should be aware of and dealing with.

Table 2