In the out tray

The idea of pension schemes handing over all the administrative tedium
involved in keeping accurate records of scheme leavers and joiners, membership
benefits and so on, to third-party ‘expert’ service providers began to gather
momentum in the late 1980s and early 1990s.

As Ian Bell, head of pensions at Baker Tilly, explains, it has been led
largely by small to medium-sized schemes. The multi-billion pound schemes with
thousands of members have tended to invest in substantial in-house
administration resources and handled the whole thing themselves.

“For all small schemes, and certainly for many of the larger schemes as well,
the cost of running an in-house department will tend to be greater than the fee
charged by a third-party provider,” Bell says. So companies can always make a
reasonable business case for outsourcing.

It is important to realise that even at the SME level, schemes can develop
fairly complex structures over time. There may be acquisitions, with various
members joining on different terms. The whole thing can get very complex and
messy.

Robert Plumb, a principal at Mercer Human Resource Consulting, one of the big
players in pension fund administration, points out that there are two ways of
outsourcing administration. “You can separate the administration from the
investment side, a practice known as unbundling, or you can “bundle” them, and
have the pensions investment management organisation also take care of the
administration,” he says.

Mercer offers what Plumb calls “a semi-bundled service”. This means that
Mercer has added an investment platform to its administration service.
“Providers who used to offer only pensions administration are now developing
their service. They will select some preferred investment managers and through
the investment platform that the provider makes available, their clients can
invest directly in a range of funds,” he says.

Sliding scale

Plumb points out that even on the pure administration side, clients have a
wide choice as to how much or how little they want to outsource. “You can
decide, for example, if you want to keep the responsibility for paying
pensioners internally, running it off your own payroll. You can decide how much
of the communicating with members you want to retain. You can keep the scheme
accounting function in-house. This service comes in many versions,” he says.

Plumb has been involved in advising a number of clients who have put their
pensions administration service out to tender to a range of suppliers, so he has
seen his competition at first hand on a number of occasions.

In his experience, price is not the first consideration. “The potential for
reputational damage, if something goes wrong and your pensioners are left
unpaid, for example, is huge. So supplier competence is the really critical
thing here for most companies,” he says.

Julian Webb, executive director of Fidelity International, believes that
there is now a real trend towards bundled services. “We are seeing even very
large corporations with a history of doing pensions administration in-house
moving to bundled services. Also, companies which have outsourced their
administration to a specialist outsource provider are also starting to move to
providers that can offer a complete investment management and pensions
administration service,” he says.

Fidelity specialises in DC schemes and doesn’t do final salary pensions
administration at all. On the DC front, though, Webb says Fidelity can compete
well against specialist pensions administrations outsourcers. “We offer many of
the services that a third-party administrator or an in-house team would seek to
provide and, in fact, we have a superior offering to these,” he claims.

What makes for “a superior offer” is features such as web access for plan
sponsors, as well as access to a rich range of investment funds via Fidelity’s
“platform”. The platform is a suite of 50 to 60 funds and fund managers chosen
by Fidelity and the client can pick from these to construct the investment
portfolio.

Tailored options

Where required, Fidelity will also put options together specifically for a
particular client. “Say, for example, a client wants to have their own UK
equities fund, we can put together a UK equities fund, for example that is
one-third managed by Fidelity, one-third by UBS and one-third by Baillie
Gifford. The sponsor can rename this as their own offering,” he says.

The bundled deal that Fidelity offers gives every scheme member the ability
to switch funds daily, it provides investment and reconciliation of the monies,
full administration and member accounting, with statements, web access and full
member communication.

According to Webb, the fee for the deal would usually work out to less than
1%. “People talk about Stakeholder as low cost, but we conduct our service at a
very similar fee level,” he says.