Pensions Age admin roundtable 2004

Since the Pensions Age Administration panel last met, the industry has seen some dramatic changes, not least the enactment of the Pensions Bill, the publication of the Pension Commission’s Interim report, as well as what some are now calling the “Turner & Newall amendment” relating to the PPF. But what will the impact of all these events have on the day-to-day administration of pensions? More than one might think.

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Chairman: Robert Birmingham is president of the Society of Pension Consultants, the managing director of benefits consulting company Entegria and a member of the executive management team of parent organisation Hogg Robinson plc. Birmingham has extensive experience in providing strategic advice to employers and pension scheme trustees

Jon Saunders is head of third party client services and consulting at software provider and outsourcer, Marlborough Stirling, which has over 15 years experience in providing solutions for the servicing of life, pensions, protection and investment business

Finlay Ross is joint chief executive of Aquila Group Holdings, which provides pension software across the pensions market. Previously he had been responsible for Watson Wyatt's administration outsourcing business

Geraldine Brassett is a pensions delivery specialist at Hewitt Bacon & Woodrow. Brassett's role is varied but she is currently leading the programme to interpret the new legislative requirements from the Revenue and the DWP

Clive Hallworth is chief executive of P3 Corporate Pensions Software. His background is in employee benefit consultancy/administration, having worked for Clerical Medical, Godwins (now Aon), Mercer’s and Willis

Chairman: Starting with the Pensions Act, what might the specifics mean for administrators as well as for the industry as a whole?

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Pensions Act

Hallworth: I think the Finance Act pales into insignificance when compared to the Pensions Act in terms of what changes it brings to pensions administration.

The Finance Act mostly relates to maximum benefits which affect a very small portion of the pensions community, while the Pensions Act potentially affects all members of schemes. People, in my view, are either overlooking this fact, or simply don’t understand the urgency here, since these changes have potentially to be in place from April this year.

For example, DB schemes that choose to adopt the 2.5 per cent reduction in LPI as published in the Act will have an extra layer of service in all of their calculations – they will have to split service now to pre and post-1997, and pre and post-2005, or whatever dates they choose to implement the change.

This will have a knock-on effect on things like the way pensions are commuted at retirement. There will also be implications for transfer values, for benefit statements, and so on.

So, from a system administration point of view, there is a lot of work to do in a very short space of time. System providers have to make the changes whether schemes take up the LPI reduction or not.

Ross: I agree that the LPI reduction is an important issue, although from my perspective I don’t think it will be that complex a change since our existing systems already allow for multiple tranches of service, each with different rules applying. It will add one more complication on top of lots of others that already exist, but I don’t think it’s going to be a quantum leap – more like another straw on the back of a camel that is already under stress.

Brassett: I think the other problem is that there is a choice. If it was a blanket provision that had to be done then we could just roll up our sleeves and get on with it. But the fact that organisations need to make a choice either way adds to the complications as we, as administrators, have got to force a decision out of them, one way or the other.

Also, everybody is focussing on the DB part but it is actually relevant for DC too because of things like automated annuity purchase and online annuities – you have got to think about the implications of all your communications.

Chairman: So, on administration grounds, is there an argument for saying that schemes shouldn’t adopt the 2.5 per cent reduction?

Hallworth: I just question whether the cost of making the change can be justified, because most actuaries are using an RPI basis of just above 2.5 per cent at the moment anyway.

Ross: I have discussed this point with other actuaries and you’re right, it may not actually have an effect on the current liability in terms of the next valuation.

However, I think if you take a longer-term view, in particular in the case of open DB schemes – for example in ten years time when the financial landscape may have changed – I think you might find the trustees looking at the actuaries (or whoever made the decision not to cost the effect of the reduction) and saying “well, it’s a shame you didn’t identify the potential saving ten years ago”.

Hallworth: So, are you saying if you are totally closed DB scheme, then there is no point making that change?

Chairman: There is a point and it’s a good one – I think most organisations who sponsor DB plans will want to take the advantage of moving the ceiling from 5 per cent to 2.5 per cent, not so much because is it going to save them a huge amount of money, but because it is going to give them more protection.

Ross: I agree – I think one of the primary reasons for the DB problems today is that the liabilities are ratcheting up all the time, so if you get the opportunity to give yourself some protection against future inflation then you should take it, as not to do so may just accelerate the day when you have to close your DB scheme.

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Three-month vesting

Chairman: What is the three-month vesting provision going to mean for administrators?

Brassett: It is going to create more work as the huge tranche of people that you currently just pay out a refund to, you are now going to have to go through the process of doing some sort of transfer value calculation, and then give them the option of that or the refund, and then chase them for a reply, and only then are you allowed to default to the refund position.

Hallworth: Saying that, wouldn’t those members who had done more than three months but less than two years not just transfer out to an insurance policy in order to also secure the employer contributions?

Saunders: It’s all about trying to get inside the head of the type of individuals we are talking about, and I am not so sure many people currently understand the options that are available to them in sufficient detail in order to make an informed decision i.e. where they are going next or what type of scheme is available.

Brassett: Also, if we think about the here and now, people tend to have one pension arrangement, however, once simplification has kicked in and we get concurrency, we may see more people with numerous pensions and if these people take more interest in their pensions, then transfers are likely to increase.

Levy for the PPF

Chairman: There is provision in the Pensions Act for some or all of the PPF levy to be paid by members and the more I get involved in discussions about it, the more I think it will happen.

I was particularly struck by someone’s description of the PPF as an insurance contract, the argument being that as it is the member who is going to benefit from it, the member should be the one paying for it. I am not sure, though, how it would work. There might have to be some value reduction in benefits in respect of deferred members, perhaps?

Ross: If a DB scheme chooses to implement it that way then effectively you get a negative hybrid scheme i.e. you get a DB scheme, but instead of a DC underpin you get a DC deduction where you just put the fees in and roll them up with interest – it would certainly be quite interesting to see what the effect of that would be.

Brassett: The problem with deferred members though is that you need to find them in order to tell them what you are actually doing, and that isn’t always easy.

Saunders: This shouldn’t be as much of an issue as it has been previously as there are now tools available to help with that, and while it may mean extra costs on the face of it, there are people who will only charge for successful hits so it may actually be more cost effective in the longer-term.

It’s then just a question of what happens with those members that you don’t find although the numbers should be far less so the problem won’t be as bad .

Hallworth: Surely there is a simple way to do it. We have got some very clever actuaries in our business and I would have thought they could adjust the benefit levels to absorb the costs that are being taken out of the fund.

Ross: Either way, it is going to cost money to implement and you have to advise the member that their entitlements are being reduced because of a tax levy by the government, and that is how you need to present it.

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Provider durability

Chairman: In light of recent events, the issue of provider durability has come to the fore. How important is provider stability?

Ross: It is very important and I think if you are looking at new systems, or even existing systems, there will be a whole raft of work for a number of years going forward, so anyone making a purchasing decision at the moment will need to consider the stability issue, particularly as larger TPAs and insurance companies are risk averse for obvious reasons. It was an important issue beforehand but recent events have reminded everyone of how relatively small the system provider market is and how few players capable of taking on large projects there actually are.

Brassett: I think people are starting to look more closely at their contracts and see how future proof they are.

Hallworth: A point worth making is that size is no measure of security. Everyone used to think that in order to achieve security you needed to go to the bigger suppliers. As we have recently seen,that is absolute rubbish.

What you have to look at is the management philosophy of the business: how is it being run, how products are being developed, as well as its financial structure. For example, if have to rely on future sales to keep your business afloat then you are potentially going to be in trouble down the road, if not now.

On the DB side, there is currently a very limited number of suppliers in the market and I cannot imagine anyone now developing a new DB solution.
It is also apparent from recent events that, whilst everyone might now be rushing to sign an Escrow agreement with their suppliers, these may not provide the security needed if the wording prohibits on-going development of that software for legislation changes.

Ross: I think the point about durability is that you need to look at it in a sophisticated way. It’s not just a question of who is the largest player. You need to really understand the finances and you need to understand the systems, particularly when there are transitions to new systems as that is always a point of danger for any established company.

Whether it is an in-house system or whether it has been bought from a third party supplier, what the administrator wants is the ability to do things quickly and if you have a long chain behind it, that is bad news.

In addition, though, I do think that given that there are unlikely to be new DB system suppliers coming into the market and given that there is so much work to be done, I can’t see how the market as a whole will be able to get all the work done in time.

As a result, I think two things are going to happen: either clients aren’t going to be able to find anyone to do their work; or suppliers will over commit and then be unable
to deliver.

So, the issue will not just be durability of supplier but, over the next one or two years, how the supplier actually plans to deliver will also be crucial – can they actually deliver on everything they have taken on?

Brassett: I agree with this point about administrators wanting to be self sufficient – that is very important as no-one can afford to be dependent on their supplier to deliver to their clients, they need to be able deliver themselves.

Also, I think the point about there not being enough suppliers over the next 12 months is valid, but I think that is not just a software issue but a TPA issue too.

Saunders: This is all very topical for Marlborough Stirling as a provider of both software and outsourced services – the needs of our existing and potential customers are changing and we are realigning ourselves to match.

The question of durability in the current climate has to be expected and for us it is important that the market understands where we are focusing and recognises the strong credentials that we have as experienced outsourcers who also have the ability to provide high quality software solutions rather than viewing us purely as a software house. This is a very challenging time for us as we undergo this transition but we are confident that this can be done.

In order to overcome the issue of size, to achieve this we are considering the greater use of partnering – the key thing is to establish who the correct partners are in order to ensure the appropriate combination and with a number of potential partners looking to get into the outsourcing market on either a small or a large scale we consider this to be a very exciting period for us.

In recognising the concerns that have already been raised about provider durability whilst we believe that our own software offers significant cost reduction advantages, as outsourcers we are not necessarily tied to our own products and if there are tools available that do the job will look to apply our administrative and change management capabilities to lever the cost savings and as a result create the levels of durability that are required.

Chairman: Has the Profund issue made a big difference to the market?

Hallworth: Yes, we have seen a huge step up in people looking for new systems – it has gone up five or six-fold. Whether that has been driven totally by what has happened at Profund, or driven by the Pensions and Finance Acts, I don’t know, but I expect it’s a combination.

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Straight-through-processing (STP)

Chairman: Looking ahead, do we think straight-through-processing is any closer?

Brassett: I think in terms of people going in and switching their benefits
it is, but with things like online retirement, where it all goes straight through to the annuity purchase, I think there is still a long way to go.

I also think there is a shift in member client expectations of TPAs. If you look back, administration used to be quite reactive i.e. if somebody asked you to do something, you did it; and then we moved to a position where we were reactive but within certain timescales.

Now I think the market is moving to the point where clients and members expect a proactive service from their TPAs – they almost want their administrator to think for them – and I think with or without STP, there has got to be a shift in the type of service TPAs can provide as the demand is there for that proactivity.

Saunders: I agree that the requirements are changing and the demands to be pro-active are getting stronger, but the challenge for the administrators and outsourcers will be in regard to who bears the costs involved.

The introduction of what I prefer to refer as ‘self-service’ (STP is something completely different and has much greater application in Marlborough Stirling terms) is again on the agenda and it will be interesting to see how the debate develops from here especially with the need to drive down costs getting ever more demanding.

Hallworth: We have been quite pleasantly surprised on this side of things.
We were recently involved in a pensions technology conference and set up an example HR database (as an Excel spreadsheet). When some dates of leaving for members were added, this demonstrated the fully automated process of a leaver quotation. We had prefaced the presentation by saying that this was 2010 stuff, but I was amazed that 17 different companies came up to me and asked whether the software was available now and are following it up.

So, whilst we thought there was a great reluctance in the industry for this (because of the potential replacement of staff with software), we were proved very wrong.
I think a lot of people are starting to get concerned about 2006 – about making the changes, and creating an effective administration environment with a good quality of service. We have definitely noticed a change in the last three or four months in the reaction to our automation tool – I love it, I think it is the way forward and it takes away the boring work of the regular application/quotation processing. It allows admin staff to get on with making sure that data is right, getting in touch with members and making sure that they are serviced as properly as they should be.

Brassett: I agree that people are seeing the 2006 changes as an opportunity to do other things, to standardise more, as they feel that if they have got to change they might as well change in a way that benefits them in the long-term.

Hallworth: Saying that, there is a big fear in the industry about the quality of data and STP is fine as long as the quality is there, and this brings us back to the point of migrating systems – a lot of people are using this as an opportunity to check and clean up the data that they are moving, and that can only be good for the future of the industry, although it is still a long way off.