The complexity of administering pensions has increased significantly, driven by factors such as changing legislation, freedom and choice, liability management and member behaviours and expectations.
Administrators, wanting to deliver services as efficiently, securely and cost-effectively as possible, have been another driver of change. In many cases, delivery models have increased in complexity too.
However, when we talk about pension administration, especially in the context of reviewing a current provider, we often still think of it as a single/homogenous product that should be (or can only be) bought from a single provider of ‘administration’.
For many schemes this is a view that needs to be reviewed.
Pension administration key components
Anyone currently involved in pension administration must recognise that there are multiple components of the delivery model and that different providers have greater ability and expertise in each.
When deciding the best approach for your scheme, there are some key components you should bear in mind.
A typical administration operation will have some or all of the following components:
Begin by considering the extent to which each of the pension administration components are executed, regardless of whether they are currently performed by an in-house team or an external Third Party Administrator (TPA) – or an in-house/outsourced-hybrid approach.
For the purposes of this CPD article, we refer to the provider of administration support as the TPA, as the majority of schemes use an outsourced approach. However, all considerations that follow apply to in-house and hybrid administration, not just outsourced TPAs.
Once you have considered how the administration is managed, look at issues such as where services are sited and whether they are distributed across different teams in different locations both at home and abroad.
Administration system integration between member teams, payroll and treasury is important – removing the risk of human error when re-keying information that already exists in one part of the system into another.
There is a similar issue as systems integration between on- and off-shore teams is vital, but not always fully operational. There may also be unintended consequences of actions taken in one location impacting on another.
Also, check if any of the outsourced providers subcontract the task to third parties - something that can vary widely across TPAs.
Often smaller or more specialist TPAs will tend to do ‘cradle to grave’ administration using a single team, while larger TPAs may have evolved more ‘distributed’ models. Additionally, TPA operating models can vary depending upon the size and type of scheme being serviced.
When assessing a potential new provider, or indeed when working with your existing provider to assess the service being provided, it is essential to understand your administration components plus how they may change in the future.
Additionally, try to understand what good looks like for each component as what makes one component ‘good’ may not be the same for other aspects of an administration service.