The lid is lifted once a year on the administration of UK pension schemes by a comprehensive annual survey now in its seventh year. Undertaken on behalf of Capita Hartshead a UK firm offering third party administration services, it provides a fascinating picture of how funds approach this critical area of activity and the decision whether to outsource or not.
This year’s survey covered 211 pension schemes, which with assets all told of £158bn(E262bn), covering a total of 3.5m members, in both public and private sector schemes. Altogether in asset terms this represented about a fifth of the industry and about a third in membership terms. Nearly 80% of the schemes surveyed are on a defined benefit basis.
Over two thirds of schemes were in-house adminstered and the balance outsourced. The reasons funds give for retaining their in-house stance is firstly that it gives them ‘better administrative control’, followed by ‘greater speed /response’ and thirdly, ‘greater efficiency’. The other reasons cited are those of ‘employee relations’, ‘better communications’ and ‘better cost control’. But as the sponsors of the survey point around a third of the funds have consistently over the six years of the survey said that they have not considered using a third-party provider for administration. But there are signs this may be changing, as 22% of respondents, the highest number ever, are now saying they are likely to consider outsourcing. Clearly the drivers for this are the changes in pensions legislation and regulation. These have made 17% of funds more likely to make a move, compared with the 14% in 1999 and the 8% in 1998, who replied this way to the same question. But there is no doubt that there is a cost pressure as well, as the survey says that average costs in the past 12 months are up in a range of 2.6 to 4.4%, compared with 2.3 to 2.8% the previous year, for a scheme with less than 2,000 members. Over the last four years average in-house costs have jumped by 17 to 22%.
The survey has monitored the change in approach to quality of service issues and over the last five years over a quarter more schemes (just over 60%) are operating to set in-house quality standards, though only a third actually have an agreement between the trustees and administrators on these. But this year the survey shows a fall back in response times for a range of tasks.
The survey also looks at how the third party administered schemes perform in turnaround terms. Certainly, the outside providers run schemes where they set out the times they work to on key administrative tasks. But there is little to choose between the average turnaround times between in-house and outsourced. That the range is often narrower in the case of outsourced arrangements for turnarounds may reflect the contractual conditions, but only in seven of the tasks are median turnaround times just marginally quicker.
The advantages seen in going to a third party provider in descending order of importance are their ‘specialist staff’, ‘reduced administration in-house’ and their ‘understanding of legislation’. The more bread and butter advantages come next in the pecking order: ‘efficient record keeping’, ‘reduced management time’, reliability of service’, faster response times’ and ‘lower costs’.
That lower costs ranks well down the list is surprising as our graphs show the considerable cost advantages the survey claims for third party costs. On average, outsourced costs are around 16% lower than in-house, the survey finds. In actual costs, for schemes up to 1,999 members the average in-house cost per member last year was £71.84(compared with £66.97 third-party); for 2,000 to 4,999 members this fell in the case of in-house to £55.58 (£44.85); for 5,000 to 9,000 members £42.789 (£35.33) and 10,000 members £35.24 (£26.37).
The costs of running smaller schemes had fallen steadily for three years from 1994 to 1997, partly attributable to increased computerisation, but has risen in the three years since then, as they have less members to spread the additional regulation costs over.
What do funds see as being the factors in choosing an outside provider. In the most recent survey, the ‘experience of the provider’ moved to the number one slot, pushing ‘quality standards’ into second place. The other rankings were ‘technical skills’, flexibility’ and then ‘cost’ in the fifth place.
One of the dilemmas for the third party providers is that cost is something where the survey shows they have an advantage, but for the pension funds, their perspective is not on primarily on cost, but on the other factors. That the survey finds that satisfaction has dropped regarding the service levels, which had peaked at around the 90% level in 1997, to 76% in 1999 and 83% currently is something that should be worry to providers in the market. The cost saving targets are clearly not being achieved at anything like the levels three years ago as a third of funds say costs are not meeting their targets. The expectation of reduced management time on administrative issues is another area where satisfaction levels have fallen from a very high level of satisfaction at what was being delivered at one point. That said, the ‘quality targets’ achievement has improved.
The survey warns third party administrators that schemes could well review their arrangements and bring services back in-house, if the standards expected are not achieved or maintained. The trend to imposing penalties or reductions in charges for poor performance is one that will be examined by more schemes. Scheme requiring these in contracts have increased by 31% over the past five years.
As to where, funds want to take their administration, this is very much to greater use of the internet and intranet to provide members with more timely information. Now 47% of outsourced schemes have access to member records on their administrator’s computer, compared with just 22% in 1996. The challenge facing third party providers is to develop more IT-led interactive services for scheme members to review their individual arrangements at work or at home.

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