Reluctance to outsource pension scheme administration has continued for the eighth year running, according to the Capita Hartshead Annual Pension Scheme Administration Survey. This is despite an overall trend in industry in favour of outsourcing non-core functions, and despite clear cost advantages.
The survey results were based on a questionnaire completed by 209 occupational pension schemes, with combined assets of more than £176bn. It is a significant sample of the UK’s largest schemes: it represents schemes that hold around one-quarter of UK total pension fund assets, from both the public and the private sector, and more than one-third of the members covered by UK occupational schemes. The majority of the schemes surveyed were defined benefit - 69 % - but this represents a decrease against the previous year, when nearly 80 % were on a defined benefit basis.
Consistent with the results of the survey over the past eight years, the great majority of the schemes are administered in-house - 66% are administered in-house and 34% are outsourced (against 68% and 32% the previous year). Some 9% of the schemes in the sample opted for third-party administration in the last year.
Over the years that the survey has been running, there has been a gradual trend among pension schemes to consider outsourcing. In 2001, many of the schemes run in-house state that they have considered using a third-party administrator: 74% said that they have considered the possibility, up substantially from 62% the year before, and, more dramatically, up from 54% in 1994.
Those that have considered the possibility of outsourcing say that increased pensions legislation and regulations have played an important role in swaying the balance. There was an 8 point rise in schemes asserting this over the previous year - and a 17 point increase over the past three years.
However, they are not that likely to consider outsourcing in the future – in 2001 only 23% said they would definitely consider it, while almost one-third replied with an unconvinced “maybe”. Although nearly twice as many replied in the affirmative when compared to the results from 1994, this remains a low degree of interest. Capita Hartshead sees in these results a “hard-core of in-house administered schemes … that take the view that outsourcing is not likely to be an option they will ever take up, even though some of this grouping may from time to time undertake a market testing exercise unless, of course, they are using the opportunity to get quotations as a means of benchmarking the in-house costs.”
The costs of in-house administered schemes have continued to increase over the last four years - they have risen by between 6% and 11% over the last four years. However, the rate of increase slowed during 2001: while last year saw average cost increases ranging between 2.6% to 4.4% for mid-sized schemes with fewer than 2,000 members, this year cost changes range from a 3% reduction for mid-sized schemes through to a 1% increase for large schemes. In addition to benefiting from low levels of inflation, the slowdown in cost increases may be due to improved back office efficiency derived from new computer software - more than one-quarter of the schemes administered in-house reviewed their computer software in 2000.
The costs of third-party administered schemes also increased last year, and at a higher rate than that experienced by in-house schemes. The variation ranged between reductions of 1.1% through to increases of 3.3%. However, third-party administration costs are on average 14% lower than in-house administered schemes. This represents a cost savings ranging from £3.66 (E5.8) per head for smaller schemes of up to 2,000 members, to £8.40 per head for the largest schemes covering more than 10,000 members.
Although the potential savings are clear, lower costs have not been a leading driver in encouraging schemes to contract their administration to third parties. Interestingly, 46% of those that outsource their administration state that they do so because it is part of a general policy in the company to outsource non-core activities.
When asked to list the advantages of outsourcing in order of importance, “reduced administration” came up number one in 2001, rising from second place the previous year. The top answer in 2000, “access to specialist staff”, fell to number three. Lower costs remained eighth in this year’s survey.
Costs are not that important to in-house run schemes either. In fact, 34% of companies that retain their administration in-house do not cost their pension administration and management, and only 39% say confidently that they know what their pension scheme costs per member for administration and membership.
When asked to list the reasons that they retain their pension scheme administration in-house, the companies surveyed put “better administrative control” in the number one spot. They also believe that they benefit from “greater speed/response” and “greater efficiency” over third-party administration.
The majority of respondents are happy with their third-party administrator, but the level of satisfaction is down on the previous year: 70% of respondents said that the third-party service provider met targets for quality in 2001, against 83% the previous year. Third-party administrators let the side down particularly in terms of cost savings - only 58% of companies said that targets were met. There was also a decrease in satisfaction with overall service, down to 76% in 2001 from 83% the previous year.
This decline in customer satisfaction should represent a wake-up call for third party providers, who cannot afford to become complacent. Almost two-thirds of the schemes surveyed have reviewed their arrangements in the last three years, meaning that poor performance can cost firms business.
In addition, an increasing number of firms are including penalties or reductions in charges as a result of poor
performance in their contractual arrangements with their third-party providers - almost 40% do so, up from only 7% in 1995.

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