Pensions Age asks Steve Kortens, senior consultant at Towers Watson, for his tips on how to best manage the move to a TPA

Once a board of trustees has decided it's time to choose a TPA, what's the first thing they need to do?

Last year I decided to change my car, not because I was particularly unhappy with the current performance but because the industry and technology had moved on over the years and I was keen to see what options were now available.

I already had an idea of the manufacturers and cars I was going to consider, but how could I make sure that they met my requirements? My first task was to create a list of key criteria and rank them in order of importance. This quickly enabled me to exclude a couple of cars. I then visited the remaining manufacturers, completed test drives and compared the cars against the brochures and marketing material.

Finally, to rubber stamp my decision, I consulted some of the motoring magazines and the Internet to seek direct feedback from customers on my preferred manufacturer/model to see if the car lived up to expectations.

Whilst I would not suggest choosing a Third Party Administrator (TPA) is the same as choosing a car, a similar, structured approach can pay dividends.

Defining the key TPA selection criteria at the outset provides focus and it can also help the trustees to determine which providers to approach and allows providers to assess their proposed solution against the key criteria to determine if they are a ‘good fit’.

Example criteria might include:
• Size and financial strength
• Experience of delivering similar administration services
• Transition approach and experience
• Quality of service e.g. ISO and AAF 01/06 accreditation
• Structured approach to quality and process improvement
• Approach to client relationship management
• Training and ongoing staff development
• Systems strategy and capability
• Costs – including level, composition and transparency of the fee structure

Meeting with each of the potential providers at an early stage in the process is a good way to assess whether you think you can work with a particular organisation – sometimes the chemistry and cultural fit may not 'feel' right.

How can trustees best assess which solution they should go for? How important is web-based access?

In order to procure a 'solution' that meets the trustees' needs it is important to clearly define their requirements. Not only will this ensure that all elements of the service are included within a selection exercise, it also helps providers to price the services required, helping achieve a level playing field and enabling direct comparisons across the providers to be made.

One way of achieving this is to document the requirements in an Invitation to Tender (ITT). The ITT should set out the current services as well as defining future requirements.

The fast pace of technological change means trustees also need to consider the role of the web in their future service delivery model. Historically, the web has been seen as more value to members of defined contribution (DC) schemes but increasingly, defined benefit (DB) schemes are looking to promote member web 'self service' as a way of containing costs.

For example, if deferred members of DB schemes can be encouraged to utilise the web for transfer value or retirement quotations, this removes the need for the administrator to become involved, avoiding a potential transaction charge. 'Self service' facilities via the web, 24/7, also mean that members can obtain information at a time that suits them helping to improve the member experience and engagement.

What are the fee considerations trustees need to consider?

A changing scheme profile and the suppliers evolving service delivery model can have an impact on fees so it is important to understand how these changes will affect what you pay for your administration services both now and into the future.

A fee basis that links fees to the level of membership may cater for day-to-day changes in the membership profile, but what will happen to the fees if there is a liability management exercise and a large number of deferred or pensioner liabilities are transferred?

It is also important to understand how operational efficiencies e.g. generated by offshoring certain elements of the service delivery, or increased member 'self service' via the web, will impact on the level of fees. Whilst it may seem attractive to seek a fixed fee model, a changing membership profile, provider opera-tional efficiencies and increased use of the web may result in a more flexible fee model being more appropriate, with the potential to meet immediate and longer term needs.

What do trustees need to do to their data in order to maximise the service they will receive?

Data quality, accuracy and completeness can have a direct impact on the overall service delivery, level of risk and potential fees (due to any data cleaning that the provider has to complete post transfer). Analysing the data before the transition to a new provider can help identify the overall quality of data, and ensure both parties are aware of any issues enabling the providers to factor any data cleaning required into their overall transition plans and costs.

But how do you go about analysing the data to ensure you have an objective viewpoint?

The Pensions Regulator's guidance note provides a good framework and has been widely adopted by the industry. Dividing the assessment and validation into three areas – common data, conditional data and numerical data – the Regulator makes benchmark suggestions against which your data can be compared. Running these reports and sharing openly with providers during the selection process will highlight any potential issues with the data and enable trustees to discuss the impact, both operationally and from a cost perspective, whilst at the same time reducing risk.

How important is automation for a) DC schemes and b) DB schemes?

High levels of automation can help reduce the degree of manual intervention which in turn reduces risk. It can also help reduce turnaround times and ensure accuracy and consistency.

Effective DC administration is based on disciplined administration and robust processes combined with flexible, interactive and innovative technology. The structure of the DC administration operating model and level of automation is key. Tracking and reconciling all sales and purchases and effecting all deals in an automated way through the administration system is critical. The increasing use of Straight Through Processing between administration providers and the investment management community is another area where automation delivers increased efficiency and reduced risk.

For DB schemes, once the key calculations have been automated, the extent to which benefit projections and estimates are to be made available to members over the web will drive additional automation. If the trustees are keen for all categories of members to be able to carry these out via the web then this will lead towards the full automation end of the spectrum.

Whatever the desired level of automation it is important that this is agreed with the providers during the selection process as this may have a direct impact on the level of the implementation fee. At the same time, increased automation can lend itself to increased member 'self service' which, as outlined above, can lead to reduced transactions completed by the administration team. Ultimately, this can have a direct impact on the ongoing administration fees.

What questions should trustees ask at the site visit?

Site visits provide an opportunity for the trustees to get 'under the bonnet' and to ensure that the service solution outlined in the proposal is the same in reality. The trustees should request that key members of the ongoing administration team are present together with the transition and client manager. Asking them about their experience of working with other clients and how this will help them with their scheme can also provide re-assurance.

The transition process is critical to the ongoing success of the administration. The trustees should question the provider about other transitions that are taking place during their own transition period and which of their proposed team are involved.

Spending time on an office tour can give trustees an insight into the provider's working environment and it is also important for the trustees to ask to see how the administration works in practice e.g. systems demonstration. As part of this tour the trustees should talk to administrators about how the system helps them undertake their jobs and what benefits the system and the processes deliver.

Should trustees seek advice on their choice of TPA, and if so, where from?
Understandably, trustees may not have an in-depth understanding of the administration market but help is at hand. There are a number of excellent and experienced consultants that can assist trustees with the selection process, help identify their requirements and match their key selection criteria with the most suitable providers. Their level of involvement may range from helping to identify providers and constructing the ITT through to analysis of responses and help with preparation and attendance at the site visit and contract negotiation.

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