Employers turn to outsourcing their pensions administration

Regulatory change and a raft of new legislation is driving employers towards outsourcing their pensions administration, but they should also consider what needs to remain in-house, says Ceri Jones

Growing regulation around pensions provision is encouraging many employers to re-examine their plan’s administration. Most defined contribution (DC) schemes have had their administration outsourced in recent years, and a logical step is to outsource the final salary (DB) schemes as well, particularly as a large part of the appeal of third-party administrators is the use of dedicated, specialist staff who have the time to keep abreast of the constant slew of new regulations.

Employers are increasingly considering outsourcing their pensions administration. Almost a quarter (24%) are considering such a move as a result of legal changes, according to Capita Hartshead’s Pension scheme administration survey 2007. This is an increase of nine percentage points on 2006.

Third-party administrators offer core pensions administration, support services, payroll, and accounting and treasury, but these functions will continue to require in-house support. Somebody within an organisation must assume responsibility as the point of contact for the administrator, handling queries as they arise, communicating issues to the sponsor and trustees, and providing secretarial services to the trustees. The administrator’s service levels and performance must also be monitored.

Service levels have generally improved, pushed along by the Raising Standards in Pensions Administration initiative. The commonest complaints, says Jane Hollingworth, senior consultant at Punter Southall, are now slow turnaround on quotes, and poor communications.

On a day-to-day basis, someone must also be responsible for maintaining the integrity of the information supplied to the outsourcer, and the quality of the HR and payroll interfaces, on which the accuracy of pension payments ultimately depends.

A scheme’s relationships with the investment and actuarial consultants must also be managed. With tougher governance around schemes, trustees will want to ensure administration and investment are executed well, and regularly reviewed.

Most organisations will assimilate these responsibilities within a role reporting into the finance director or HR department. In many cases, managers who are suitable may already have a heavy workload. Knowledge about the scheme may also rest with a single employee. “We try to find out at tender stage bits of information such as any special cases that might be known only by the pensions manager and could be lost along the way,” says HollingworthTraditionally, outsourcing was seen as the more expensive option, but this is changing says Steve Kortens, senior consultant at Watson Wyatt. “With all the legislative changes and [new] IT, a huge development effort is required, and this is the major driver of outsourcing at the moment. Staff are difficult to recruit and, as DB schemes close, their career paths are diminishing. Employers don’t have the resources to invest in these developments. A number of outsourcing agreements are coming up for renewal and employers are keen to look at what is available,” he adds.

Once a scheme has been outsourced, it is hard to bring it back in-house. However, companies that have been on the acquisition trail, such as HBOS, have done just that to take advantage of the economies of scale provided by one streamlined operation.

If you read nothing else read this…

  • A slew of pensions legislation is persuading employers to consider outsourcing defined contribution schemes to third party administrator.†
  • A multitude of functions must still be retained in-house notably managing the relationship with the outsourcing firm, member communications, and managing the actuarial and investment consultants
  • Several employers have moved their pensions administration back in-house in order to streamline their scheme under one operation