Both locally and internationally the question of whether to outsource the sometimes cumbersome, time consuming and costly task of pension fund administration has been considered by most schemes at some point or another.
But what exactly are the underlying considerations that dictate whether a fund keeps the paper in-house or ships it out to an administration contractor?
For Kevin Conlon, superannuation manager for the combined funds of approximately Ir£2.6bn (e3.3bn) within one of Ireland’s largest pension schemes, the Dublin based Eirecom pension fund – formerly Post&Telecom (P&T) then Telecom Eireann, the issue was as much a question of inherited culture as anything else.
Conlon explains that many services were brought in to the Eirecom pension scheme fold such as fund management and actuarial expertise, which had previously been outsourced – in a bid to consolidate the fund’s diverse historical elements.
“What the in-house administration does as part of this is to pull all these elements together to get the bigger picture. “It also means we pay the pensions directly to the pensioners.”
He notes, however, that the reality is that Dublin has no outsourcing outfit that could cope with the Eirecom set-up.
“On the question of outsourcing or remaining in-house there is no operation – certainly not here in Dublin – big enough to take on what we do. It is a very substantial operation. “The staff numbers are now around the 10,000 mark but we have a substantial number of people that have come to us as pensioners – so the balance is much the same between membership and pensioner benefits and payments.
“There are also legal requirements around advising all of those bodies of what’s going on – so it is a fairly large undertaking.”
Paul Goddard, pensions manager at the £300m (e500m) Stagecoach pension fund in the UK, says the fund had a lengthy debate in the past over whether administration should or shouldn’t be done in-house. “Stagecoach took the decision in 1993 that they preferred it in-house and it has been that way ever since.
“At the time it was very much a cost driven issue, but subsequently it has been a question of quality of contact with the members because you have more control over what you do.”
He notes, however, that the pensions administration market has become very competitive and says the price may have come down since Stagecoach took its original decision.
Certainly across Europe there seems to be a consensus that above a certain size then it is more cost-effective to do the administration in-house.
Anita Eggemberger, head of the SFr200m (e132m) pension fund of Adliswil based gastronomy group Moevenpick, which also keeps administration under its own roof, offers a simple explanation for keeping hold of the work: “We believe that we can work more easily and cheaper than any insurance company for the administration.”
The fund, has between three and four thousand members, which can fluctuate according to seasonal employment levels, so Eggemberger says the issue is revisited on a regular basis.
“We compare what we are doing on administration against the industry every three to five years and we have found that we are much more efficient. “Doing the administration here is more hands-on and it’s more direct.
“ If you outsource you pay a basic administration fee and we are cheaper than that also – so it’s simple.
“You do need a certain size to keep the administration in house though, because there is a competitive market of insurers and specialist administration providers out there doing the business.”
On the flip side, the Slough based £1.3bn UK pension fund for gas company Centrica, found itself faced with a large administrative burden at the time of its demerger from British Gas - but nowhere to house it.
Jean Chitty, pensions finance controller at Centrica, explains: “When we came out of the demerger of British Gas, their pensions administration team looked after us for the first year to ensure a smooth transition, but they were always like an outsourced administrator to us.”
The fund has 15,000 active members, around 2,000 deferred pensioners and less than 1,000 retirees and at the end of its first year of operations moved the admin to Aon Consulting following a tender process.
“Aon now do most of the administration such as payment to pensioners and any benefit issues.
“We asked a number of suppliers whether they wanted to pitch for the business, although there was an additional constraint that we did want to use the existing computer systems that British Gas had because the software suppliers weren’t prepared to install the system with any competitors – so this reduced the number of potential suppliers to a beauty parade of four.”
Chitty says cost is the overall benefit, but adds: “At the end of the day it wasn’t much of a decision for us because we didn’t have the facilities to do this in-house. It would have taken a lot of work to set it up.
“We considered at the time of demerger whether to do this in-house, but we decided that it didn’t fit into the business of the company – and more specifically we didn’t have the room!”
Aon started the administration work last year and are set for review every three years.
Centrica also underwent another administration review following its purchase of the Automobile Association (AA) along with its £1.2bn fund for 10,000 active members, 8,000 deferred and 4,500 pensioners.
“The AA previously had an internal admin team and we reviewed this following the takeover. We didn’t have a beauty parade though, because we already had the information. After further advice from
Watson Wyatt, who said Aon were one of the market leaders we switched the AA over to them, because it didn’t make sense having different administrators.”
If funds think the issue can sometimes get complex on the local stage – they should look to the administration impasse that has greeted their multinational colleagues over the last ten years.
Languages, currency, culture, centralisation of resources – all the major stumbling blocks to European integration play a major part here.
Angela Docherty, senior corporate investment consultant at Anglo-Dutch multinational Unilever, says the group is currently in the middle of carrying out work with consultant William M. Mercer on administration outsourcing through a project looking at the feasibility of multi-country pooled funds for investment.
“We have to look at how you do the custody then and we are talking to one of the lead custodians in the market at the moment about the availability of their systems – their deliverable is mid-October for us.”
She notes that the number of multinationals tackling the question head-on is scant.
“The only other people that I think would be ahead of us on this is IBM.”
However, as one investment manager points out, cross border administration and custody have been happening for years in the investment world. “For us, with the administration of cross border pensions – unless there is something funky about the structure of the vehicle, then there is no problem.
“The problem lies in the fact that multinationals are trying to get multiple pension fund branches of their own groups together for pensions, custody and asset management reasons – and for some it is a question of, say, getting the Dutch and the Swiss to pool their assets for this.
“The Dutch may say though “why should I do it – what’s the benefit for me?”
Another point raised is the practicality of pooling or outsourcing all the administration right down to the grassroots – the pensioners.
“The currency problem exists in some places yes, but ultimately the issue is different languages when you get down to the individual level.
“Nobody has found a solution to this – it’s both complicated and economically not viable. “You would have to do this in a centralised place, where you can talk to all the pensioners,” he says.
“How though are you going to find a call centre where they speak all these languages. “There are not many people around or prepared to do those kind of jobs.”
A practical point is offered to underscore another point – the issue of local fiduciary responsibility within a larger group. “Say a multinational has a plant and a pension fund in Denmark – which relatively speaking is likely to be small compared to the company’s equivalent UK or German pension fund. “The Danish fund may benefit through economies of scale, fewer management fees and enhanced returns by going into a larger pot for investment and admin – there are lots of benefits for them.
“The trick is why would the guys they are going to pool with like the Dutch, the Brits and the Germans go for it, when it makes it more complicated for them? “The multinationals are struggling with this – nobody has really done it in this fashion.
“How could each pension fund with its fiduciary responsibility to its own members go to their trustees – unless they had a proven case – and argue for this. “Intellectually it is quite easy, but emotionally it is very difficult.”

Topics