It is time to take scheme administration more seriously

The outsourcers have been found out. Interserve shares dropped 17 per cent on the news of rival Capita’s latest profit warning. The announcement saw Capita’s own share price collapse by an astonishing 47 per cent.

Questions surround these outsourcers, who are involved in a range of industries of which pensions administration is one small component. These are very different beasts from pure pensions consultancies, or even specialist pensions administrators. 

Meanwhile, some third-party pensions administrators are beating a retreat from the market. Last year, Aon Hewitt withdrew its standalone pensions administration service.

It’s never been the sexy part of pensions and doesn’t often get the investment it needs

Suzanne Dosell, Hymans Robertson

Should schemes with outsourced administration be concerned by these headlines? Has third-party administration seen its day? How can schemes insulate themselves from the scandal and speculation engulfing outsourcer boardrooms?

Don’t be led by low costs

Part of the outsourcer’s business proposition is often the prospect of cost reduction. This is understandably attractive to trustees, who should be encouraged to stay on top of their costs.

At its October 2017 annual meeting, British Coal Staff Superannuation Scheme chair Dame Kate Barker told members the proposal received by Capita during its tendering exercise “included significantly lower costs than Aon’s”, its old provider, whose proposed charges were “significantly higher than [those of] other firms”.

But conducting scheme administration on the cheap can risk poor outcomes for members. Schemes must do more to ensure the selection process for a third-party administrator is conducted with sufficient due diligence, and administrators must be appointed for the right reasons.

Chris Roberts, trustee representative at Dalriada Trustees, said that generally speaking, schemes should look for more than low costs when choosing a third-party administrator. 

“A professionally run process should consider not only the cost of providing the service, the quality of the service that will be provided, but also the financial strength and the support behind the business that you’ll be entering into a partnership with,” he said.

“That’s probably a crucial step that may not be considered in all procurement, and why I guess looking for the lowest possible price is not always the most appropriate way to procure professional services, because the downside of a nuclear-style event occurring is obviously quite significant,” he added.

Pensioners are worried about administrator failure

Fortunately, the pensions industry yet to witness a 'nuclear-style event', where an outsourcer carrying out administration for schemes is forced to cease operations.

The plausibility of this scenario has not escaped pensioners. Alan Pickering, chairman of Bestrustees, said: “A number of pensioners are ringing their schemes at the moment and saying… ‘If the administrator goes bust, what happens to my pension?’”

Prudent trustees will factor this undesirable outcome into their business plans, according to Pickering. “All trustees now have a business plan, and part of that plan will be a business recovery plan,” he said.

“Hopefully that plan will identify the steps that will be taken if there is an interruption to service, whether that interruption to service is temporary, or potentially longer term than that,” he added.

Companies underestimate administration

Trustees can prepare in advance for the implosion of their third-party administrator, and would be wise to assess the health of the outsourcer as a whole before entering into an agreement. What they cannot do is control the size of the market.

Not only does a shrinking market leave schemes with less choice, said Suzanne Dosell, head of administration consultancy at Hymans Robertson, it also places greater strain on current market participants to deliver adequate service. Dosell said there is no current safety net in place for schemes in the event of their administrator failing.

Some market participants have underestimated the complexity of scheme administration, she added.

“I can see why companies would want to wander into that market, but I don’t think it’s often appreciated the level of depth and experience and skill that is required to administer a pension scheme,” she said.

The industry needs to fully recognise the importance of good scheme administration, and invest accordingly, in order for standards to go up.

“Trustees are not going to be able to look for someone who can run it on the cheap anymore. It doesn’t work. It never did work, but it doesn’t work now,” said Dosell.

“It’s never been the sexy part of pensions, and doesn’t often get the investment it needs, so now perhaps it’s time to rethink this,” she added.