Changing for the best, preparing for the worst
The advent of a new year is often the catalyst for people to start tackling those jobs they have put off for too long.
Be it the financial hangover from Christmas and the need to get better value for money, or wanting to make a change that will make 2017 better than 2016, we always see a flurry of new business at the start of a new year.
Changing administrators is often perceived to be a complicated and risky venture, and it seems that most people are only prepared to begin exploring these options at the start of a new year.
Whatever the motivation, I offer a cautionary note to anyone diving into the search for a new administration service provider. Before you do anything, make sure you have agreed a discontinuance fee and enshrined the agreement in your contract.
Discontinuance fees are charges your current administrator makes for handing over services to a new administrator.
These costs are often missed in the planning and budgeting process, with the focus being on installation charges made by your new administrator to set the scheme up on their systems.
Discontinuance fees vary significantly, with some providers charging as much as 50 per cent of the annual fee to deliver the project.
Unless you have contractually fixed these fees and the deliverables, you will be in a weak negotiating position and run the risk of being stung with a massive exit charge.
To protect yourself against excessive exit charges, consider implementing an agreed schedule of charges for exit services, even if you're happy with the service you're currently getting.
Most good quality administration transitions follow the same path, with many having identical handover requirements. Why not therefore agree to a list of exit services with your current administrator, at a fixed cost, just in case you ever decide to move away at a later date.
Think of it like a prenuptial agreement for your administration service.
Most new administration agreements now include a service schedule for discontinuance services and the associated fixed costs, establishing exit charges at the start of a relationship.
It's unlikely that any administration agreement older than five years will have this feature, so ask for your terms to be updated whilst you are in a strong negotiating position, even if there is currently no appetite to change.
If things go badly wrong and it's time to move, you don't want to find yourself without the security of fixed exit fees. This could see you stung with charges reaching into the hundreds of thousands, simply for moving away from an underperforming provider.
Since most administration transitions have the same list of deliverables, you can broadly establish the requirements now, covering 90 per cent of the process and get your administrator to commit to a fixed fee (which is what they would do for new clients, so you should have an equal right to demand this now).
Whilst the overall cost of these exercises depends on the size of the pension scheme being transitioned, much of the work, such as producing data extracts, is the same for all schemes and should take no more effort if your scheme has 50,000 records than if it has 15.
Struggling to find out where to start? We have put together a typical schedule of discontinuance services which you can download by following the link below.
Ask your administrator to price and commit to providing it.www.trafalgarhouse.com/exit-services
The key is to act now whilst you are in a strong negotiating position, rather than waiting until you've decided to change providers. If you leave it too late and don't lock in a commitment from your administrator, you leave yourself open to getting hit with excessive, unnecessary exit fees.
Written by Toby Clark, Client Relationship Manager, Trafalgar House.