I was interested to read the results of the latest Capita Annual Pensions Administration survey. The survey shows that 57% of schemes are on some form of fixed cost administration contract (either purely fixed fee (30%) or core fee plus per capita charge (27%)) yet this would be the preferred approach for 92% of schemes. However, cost was only ranked 5th in order of importance in choosing third party administrators (TPA), with the top 4:
- Technical support
But do the results of the survey really gel with experience? It is refreshing to see that, from this survey at least, when looking for a 3rd party administrator (TPA), cost isn’t the be all and end all yet most trustees still appear to want fixed cost contracts. ‘It’s because we want budgetary control’ I hear them cry. But is the upshot of this objective a reduction in quality and a lack of investment which has resulted in a poor standard of service throughout the industry and an increase in ancillary costs?
Trustees rightly recognise the need for good governance and systems alongside experienced, technically competent staff and are critical of TPAs that provide a poor service but there still seems to be a reluctance to recognise the true value of quality pension administration.
Notwithstanding the results of the Capita survey, in our experience, pension scheme administration is still very much cost sensitive. Consequently, TPAs will usually look to keep costs to a minimum particularly, if there is traditionally more lucrative consultancy and actuarial work alongside.
This long entrenched attitude has resulted in some serious underlying problems. Rarely do we take on new clients where there is not a long list of administrative issues which need to be resolved. In part this highlights historical problems within the industry as a result of the relatively slow take up of computerised recorded keeping (especially for smaller schemes) together with frequent changes in advisers but it is also symptomatic of a general lack of resourcing, lack of investment and lack of attention to detail that administration requires.
How this has manifested itself (and is possibly the most striking omission from the list above) is in the staggeringly poor quality of pension scheme data.
We have addressed the issue of scheme data previously (blog post Pension scheme data – pass me a shovel!) but it is worth saying again that the purpose of a pension scheme is to provide the right benefits to the right people at the right time. Wrong data leads to incorrect information being provided and/or slow response times to members which is the biggest cause of complaint to TPAS and the Ombudsman. Inaccurate data provided to the Scheme Actuary can lead to misleading results and inappropriate funding decisions as a result. The need for additional manual intervention in the process as a result of poor data also increases fees.
There must be a balance to be struck here – the holy grail of a quality service at a reasonable price but this shouldn’t automatically mean fixed price contracts and will require some upfront expenditure. As the saying goes, there is no gain without pain.
We would urge trustees to carry out an independent review of their scheme data. The Pensions Regulator is equally emphatic and has gone as far as to publish specific guidance on Record Keeping and, to quote from an article published in March of this year:
“… it is important not to forget that in the end the responsibility for running the scheme and protecting members’ benefits rests on the shoulders of trustees, and the trustees are accountable for the actions taken and the outcomes of those actions.
… One area which is often outsourced is the collection and management of scheme records. This is also an area where reviewing performance and effectiveness is often shelved to the ‘to do later’ pile … This is a major mistake. Strong, clean, high-quality data is central to the overall effectiveness of all schemes. It is the basis for the absolute core activities of accurate valuation of liabilities and correct benefit payments …”
Could the message be any clearer?
Only once the data is right can you benefit from the efficiencies that that latest administration systems can offer. Without accurate data you may as well employ the back of envelope and a calculator (and if your administrator was being honest, you might discover this is more common than you think!). Get your data right and everything else falls into place. Administration systems can then be properly employed which means greater accuracy and efficiency. Better accuracy means fewer queries from actuaries, auditors and members which results in smaller bills for these services.
Thereafter, trustees should have no concern about entering a more flexible administration contract as they can be confident that any administration was being done in the most efficient manner possible and any bill properly reflects the time spent. For closed schemes particularly, as membership shrinks and activity reduces accordingly, trustees might reasonably expect administration costs to reduce over time.
As you may have seen in other posts, Spence & Partners have developed a unique data auditing tool that trustees can commission to highlight deficiencies in their data.
In the Tools section of the Spence & Partners website there is also a Administration Cost Calculator which can give trustees an indication of the cost to administer a defined benefit pension scheme in any one year. Of course, this makes certain assumptions so can’t be anything other than a guide.
If trustees see that they are not paying for TPA inefficiencies, witness benefits in administrative quality and witness overall savings there may well be a move away from the drive for fix cost administration contracts and allow TPAs to properly invest in quality.
So, if I was to re-order the factors trustees should consider when reviewing their TPA, it might be:
- Technical support
… cost and reputation will ultimately look after themselves!