Could co-sourcing be the answer to rising pensions admin woes?
Analysis: Uncertainty is an overused word in the pensions landscape, yet it is particularly appropriate when we speak of administration, which is teetering on the brink of crisis.
Long viewed as a necessary evil rather than a centre of excellence, administration has suffered from both providers and schemes driving down the price, which has impacted the range and quality of services available.
The hunt for quality
Hayley Mudge, research analyst at KGC Associates and author of KGC’s annual administration survey, said in the report: “Administration is starting to climb the ranks of importance and is taking its place among schemes’ key services partners.”
Co-sourcing for the right schemes and the right providers, where they work together to achieve the right outcomes, could well be the answer to bridge this widening gap
Many are trying to get administrators to focus less on service level agreements as key performance indicators in favour of value for money – a quality that schemes will, in future, be assessed on by the Pensions Regulator and members.
“With TPR’s focus on the need for good administration,” said Mudge, adding that “many trustees are turning their attention to their administration partners for demonstrable evidence of this”.
The latest KGC administration survey shows that pension freedoms have forced up fees as transfer requests have increased.
The ongoing guaranteed minimum pensions project and derisking exercises have placed greater demands on data, and both trustees and sponsors are asking for more from their administrators.
Systems and process failures
The squeeze on fees has not only limited the appetite for going above and beyond the black and white of the service level agreement, but has starved businesses of development capital for their systems and processes.
This is replicated across the financial services industry and it means that even the simplest requests can be difficult – or even impossible – to meet without human intervention, adding complexity, cost and the risk of error to each process.
This creates a vicious circle whereby the scheme asks for more from a provider already stretched in terms of capacity and capability. Something has to give.
Schemes that were dissatisfied with a provider would happily switch to an alternative in the past, but options are limited today. The market has seen considerable consolidation in the past few years and there is a lack of capacity.
Cherry picking
New entrants have made hay while coming into the market, and have had considerable success. Capacity constraints mean these companies can name their price and will not be forced into writing uneconomic business, a trait of admin contracts of the past.
“For some, price is no longer the make-or-break issue it was, and people are more able and willing to pay for something that is not Rolls Royce, but which offers quality,” said Paul Sturgess, managing director of RPMI’s pension division, a commercial arm created by the railway fund to service this demand.
These providers used to be asked to tender for schemes of up to 5,000 members, but they are now being asked to quote for tens of thousands. That creates a danger of concentration risk, but schemes are even prepared to wait for the right service.
“We are being approached by some who understands we cannot help them this year and perhaps not even next,” said Paul Latimer, head of pension administration at Barnett Waddingham. “But they want to know whether it might be possible to move in 2020 and what it might look like if they wait a year.”
New kids on the block, but not for long
The lack of capacity and dissatisfaction with service levels has forced some schemes to look at the potential for using master trusts.
However, unless these consolidation providers can create their own administration service – and admin expertise, particularly with regard to defined benefit, is in increasingly short supply – they will be sourcing it from one of those already identified as having capacity issues.
The pressures for critical mass are likely to see consolidation among this group, and the KGC survey anticipates at least 30 fewer master trusts will be in operation in 2019.
Loss of continuity
John Reeve, a director at Cosan Consulting, counselled against schemes thinking that moving provider is an easy fix. He describes much of his work as “marriage guidance”, in which he tries to fix the relationship so it does not end up in divorce.
Rentokil blames internal administration for £25k fine
Earlier this year, business services group Rentokil Initial blamed its internal pensions administration for failures involving the Initial Hospital Service Limited No.1 Pension Scheme, which led to a £25,000 fine from the Pensions Regulator.
“Moving from one provider to another rarely solves the problem, which is often about data or process,” said Reeve. “In moving, you lose access to all that history and knowledge about the scheme – the continuity is broken at what might be a crucial time.”
Working in partnership
Garry Wake, managing director at Trafalgar House Pensions Administration, said pensions administration services need to develop a “solid co-sourcing model” to “provide some form of mid-point between the challenges of being in-house or being fully outsourced where control and influence can often be lost.”
There is a place for each model, he argued, but doing it yourself in-house is increasingly risky and burdensome, while confidence in service providers is on the wane.
“Co-sourcing for the right schemes and the right providers, where they work together to achieve the right outcomes, could well be the answer to bridge this widening gap,” added Wake.