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Professional Pensions Administration Panel - October 2006
Simplification
a. Were trustee boards, companies and pension managers ready for the changes?
In our experience most parties were prepared for the changes arising from A Day. Whilst it was frustrating that some of the finer details were clarified by HMRC fairly late in the day, pension managers and trustees were aware of the substance of the new requirements and the impact on their schemes. Many trustee boards also recognised the importance of member communication and issued information to their members to advise them on the impact of the changes as part of the preparation process. In a few cases transitional arrangements have meant that, whilst aware of the changes, trustees have elected to defer some decisions.
b. Post event, are administration providers satisfied with how their implementation plans worked and what have they learnt from the process?
Here at Barnett Waddingham we were pleased with the success of our implementation of the A Day changes. Thorough planning ensured we identified the necessary changes in plenty of time to coordinate the decision making processes required from trustees, thus securing efficient implementation for clients. Some of the changes depended on a scheme's particular circumstances and this necessitated both a tailored approach and flexibility. As pension legislation continues to evolve, pension providers and trustees increasingly value an administration system with the flexibility to cope with future changes in legislation and benefit design.
c. How has simplification affected the services being provided?
The A Day changes have had an impact on almost every administration process. However, in our experience, simplification has had little effect on the overall services provided to members, since administration providers and pension managers have sought to provide a seamless transition to members. Many trustees and companies took this opportunity to review the options offered to members, and whilst in most cases this has led to members being offered some benefits of the new A Day legislation, for example flexible retirement or higher cash lump sums, existing administration services have not been affected.
d. Have there been any savings and if not, when will they come?
Some administration tasks have certainly been made more straightforward such as dealing with an overseas transfer or aligning the date at which Protected Rights can be taken. However, some tasks are now more complex, for example, the options for an early leaver with less than two years have increased, leading to higher administration costs for these events. Overall, I believe the increased flexibility that simplification brings to occupational schemes with a greater range of options leaves less potential for cost savings in terms of administration fees. In the longer term, the greatest administration savings will arise from changes in scheme benefit design together with increased systems capability from administration providers.
Outsourcing
a. Is the industry ready to outsource beyond the UK?
As funding costs are driven upwards, employers are looking to reduce operational costs, such as professional fees, and outsourcing some of their administration overseas is one solution. However, pensions administration is a complex area requiring expert communication skills as well as the ability to interpret and implement complicated legislation. As a result, given the UK's experience to date where other industries have outsourced client services overseas with mixed results, we have reservations that this is the right direction at this time.
b. What are the drivers for any such move?
The main drivers are undoubtedly lower overheads and reduced labour costs. Yet outsourcing requires a substantial initial investment in systems and management to ensure an adequate framework is in place to facilitate even the simplest of data processing tasks. With continuing improvements to systems and the introduction of self service options, outsourcing only the back office function overseas will be more viable, with expertise retained in the UK.
c. Are clients happy to see this change and are there any issues and concerns
We strive with our clients to constantly reduce the costs of pension administration but there is always agreement that there should be no detrimental effect to the quality of service provided. Outsourcing overseas presents risks which are not only outside the control of the client but also of the provider.
Many schemes are very complicated to administer and finding sufficient expertise at a reduced cost is therefore unlikely. It is more likely to be standard 'off the shelf' contracts that can be outsourced. This broadens the range of administration service costs for different arrangements, and only serves to accelerate the demise of those more complex schemes.
There is also a perception with Helplines that scripted responses are often adopted which removes the personal touch, a vital element for a very personal and often complicated matter.
Finally, the geographic areas offering the lower salaries are often those with the greatest risk of political instability; a business continuity nightmare.
d. What is the experience in day to day administration for those who have already moved down this route?
NA
e. What are we likely to see in the next five years - more, less, the same, something completely different?
Companies trying the outsourcing model are likely to continue in this cost driven world, especially as more defined benefit schemes are replaced with more straightforward defined contribution contracts. Given the historical legacies of UK schemes they may struggle more with outsourcing, however, new standardised products may find a better fit.
DC Admin
a. Is the administration market changing in regard to providers and system suppliers?
A growing number of organisations are finding the cost of providing the required administration expertise themselves too onerous. In-house pensions departments, for all but the largest employers, are under pressure to outsource to specialist providers. Insurance companies and investment managers are also outsourcing administration for both old and new products. This is all good news for specialist administration suppliers but attracts more competition for market share. The effect on systems is more demand for efficient, flexible and additional features that attract customers. Over the past few years, restructuring within the software provider market has encouraged several firms to offer modern, innovative systems.
Deciding 'which is best?' will depend on the requirements of each scheme. The need for an integrated administration system that met our clients' needs led us to develop 'BWebstream', our own administration software available to clients over the internet.
b. Are the right systems available to deal with defined contribution administration?
Definitely. The high pace of change over the past 10 years, both within pensions and information technology, has resulted in the emergence of some 'high tech' administration systems. Substantial investment has been made to ensure the longevity of this new generation of systems. Key features include easy customisation, proactive processing, extendable record keeping and integration with other office systems. Internet facilities are increasingly being used to deliver services beyond standard member access by adding; self service and shared ownership in many areas such as the contribution cycle, benefit calculations and scheme reporting functions. We believe that taking advantage of the internet not only serves to break down traditional access barriers, it also makes the service much more transparent and in turn more accurate with faster response times.
c. Do we have the right training, experience and services in place in the industry to deal with defined contribution administration?
Defined Contribution administration is no longer the novelty it once was. The demise of Defined Benefit provision has resulted in the majority of employers providing at least some DC benefits for their employees. This has increased the need for DC administration and it is now almost impossible for administrators to be isolated from it. Personal pensions and, more latterly, stakeholder pensions, made a large impact mainly in the world of insurance companies and investment managers. This culminates in a wealth of DC expertise throughout the industry and the upward trend is set to continue. Companies, such as Barnett Waddingham, have therefore made a concerted effort to prepare with the right training, business processes, systems, communications and customer services for all aspects of DC administration.
d. How do you feel NPSS will affect DC provision over the next five years?
NPSS will increase awareness of DC provision among the general public and put pressure on existing DC schemes to compare costs and contribution levels. Whereas stakeholder pensions had minimal impact on most employers who already had pension schemes in place, NPSS will have a much wider impact and increase pressure on existing schemes to drive down running costs and transfer management responsibility onto the individual. Therefore, there is a strong likelihood that these schemes will be simplified or replaced by cheaper 'off the shelf' alternatives. The trend for more standardisation and less sophistication will continue.
However, executives are an exception and Self Invested Personal Pensions are the obvious solution for them. For everyone else, there will be a need for education and affordable financial planning services.
Barnett Waddingham LLP, October 2006.