PPF plots future £4.4m saving from taking member services in-house

Bringing services in-house can be used as a way of controlling cost and increasing responsiveness, but can cause short-term disruption.

If new priorities come in... a third-party administrator might not be able to do it as quickly

Malcolm Johnson, Profund

The PPF has unveiled its plan, which estimated its expenditure on member payroll services would fall to £3m by 2015-16 from £7.4m in 2013-14, through the creation of its in-house member administration services team.

However, the organisation predicted “short-term impacts” on the assesment process as the new arrangement is implemented.

Sara Protheroe, director of customer experience at the pensions lifeboat, said: “We will be providing customer services to members directly instead of using an external supplier, and as a result will have greater control and flexibility over the service we provide. Over time, this will also reduce costs.”

The fund again raised the prospect of insourcing its asset management.

There may be good reasons for some schemes bringing services in-house. “The reasons would include greater control and flexibility,” said Malcolm Johnson, managing director of pensions technology at consultancy Profund.

In-house services may be perceived as more responsive than outsourced solutions, Johnson said, adding: “If new priorities come in... a third-party administrator might not be able to do it as quickly. Proximity to the board might be quite an important point.” he said.

Rising investment costs

Despite savings made on member services, the overall costs of the scheme are expected to rise as the increasing size of the fund leads to higher fund management fees. This is expected to have a knock-on effect on fees paid to external providers including fund manager and custodian fees.

“Outsourced delivery services are expected to increase by 29 per cent from £99m to £128m,” the plan stated. “The key driver is the 41 per cent increase in fund manager fees in line with anticipated 40 per cent growth in assets under management.”

The total expenditure for the fund is expected to be around £137.4m for 2013-14, rising to £166.6m in 2014-15, and again to £170.1m in 2015-16.

The PPF first announced in March 2012 that it would begin to bring member services in-house as it grew in scale and maturity.

Richard Butcher, managing director of independent trustee company PTL, said that schemes often switch between outsourcing and insourcing.

“Every five or so years, schemes start doing it for better control of risks,” he said. “Every other five years schemes start outsourcing.”

The PPF also plans to review its investment strategy, including bringing on additional illiquid assets. “We believe that adding illiquid assets to the portfolio will further enhance our ability to meet our 2030 funding target,” said Barry Kenneth, chief investment officer at the PPF.

“As a long-term investor, and with compensation payments spread across many years in the future, we have an appetite for an allocation to illiquid assets, assuming the premium received to give up this liquidity meets our target, as this will help us to achieve our target investment returns.”

Butcher said that as the number of defined benefit schemes contributing to the PPF levy shrank, the fund could look to derisk.

“Ultimately it’s constrained by the fact its only income is the schemes it absorbs, levies and return on investments,” he said. “Over time, the PPF’s strategy will become more conservative. They want to be self-sufficient and the only way you do that is by derisking.”