Pension Funds Online

What Will They Outsource Next?

Outsourcing has passed from a craze to an established form of service provision in the pensions industry. The more recent craze has been ‘off-shoring’ though in the pensions industry it has been slower to take off than in other business arenas. Everybody is looking at off-shoring even if they are not doing it because companies are always looking to get reliable services less expensively and, in some cases to gain other benefits such as access to a multi-lingual workforce. However, a newer form of outsourcing is emerging based around governance services, such as pensions management and scheme secretarial work, where there is a growing need and an emerging hunger.

This article considers the options for employers and trustees in providing scheme secretarial and management support.

The driver for change

The traditional in-house pensions manager has been a godsend to trustees and companies alike. The role has usually included scheme secretary to the trustees, or at least responsibility for another such individual in this role, and pensions adviser to the company plus a host of other roles and responsibilities. The pensions manager has promoted harmony and partnership between the trustees and the company and has provided essential support services for DB schemes for years and years, but the role is now changing. Since DB schemes are now definitely in decline, an increasing number of companies are losing their appetite for supporting the role. As a result, the role may be regarded as less important, the career path diminishes and companies will find it harder to attract good quality people.

DB Schemes do not represent the future of pension provision within most organisations and the membership of these schemes is becoming increasingly weighted towards deferred and pensioner members. In most cases, the only thing keeping DB schemes on the corporate radar is the continuing high cost of maintaining them. Companies are focusing their attention on DB schemes on getting deficits off balance sheets while seeking ways of reducing costs overall. In a recent survey commissioned by Hewitt Associates, 36% of company scheme sponsors were in favour of outsourcing governance support services as well as administration. The equivalent number among trustees was 28% and among pensions managers the figure was 7% (though more than 40% of pensions managers favoured outsourcing administration services alone).

As a result, pensions managers are finding that the role is gradually diminishing, as evidenced by employers downgrading the role when their pensions manager moves out of post. There is further evidence of this down-grading in both advertised salaries, where there is evidence that these are reducing, and in the fact that some pensions managers are not being replaced at all. Some organisations are going back to the days of pushing pension responsibility into other departments, often the HR company secretary or treasury departments. However, those people who pick up this somewhat onerous responsibility already have a day job and often have to fit pensions into an already busy schedule.

Therefore, more and more companies are looking for ways of getting access to good quality pensions management services without having to incur the full employment costs of a quality individual.

The impact of change

Companies may not see the need to continue to employ an in-house resource but trustees have seen their need for quality support increase with regulation and industry change. DB schemes still have huge funds and liabilities to be managed against a backdrop of increasing regulation and responsibility. Far from needing less support, trustees need more, particularly in the area of risk management. Trustees are not full-time employees in their role therefore a constant and reliable resource is still essential for coordinating all scheme activities, keeping them informed and monitoring all their responsibilities delegated or not.

Trustees are concerned that the costs they incur are necessary and fair, but are rarely prepared to compromise quality and risk management in the quest for reducing cost. Trustees now need access to good quality pensions management and secretarial services as much as ever. In the Hewitt survey mentioned above, managing risk was the second highest priority for trustees after managing the impact of the new legislation. Those risks which featured as the highest priority were compliance with regulations and managing conflicts. The Pensions Regulator’s codes of practice also steer the trustees very clearly towards robust risk management. Thus trustees really need the stability afforded to them by quality governance support services.

The options

In broad terms there are three main options.

Option 1 – Fold the pensions governance services into other corporate departments as described above.

Clearly, this would help reduce headcount, employment and operating costs in the short term. However, there are some pitfalls to be aware of such as:

• Overloading people with work increases the risk of error and omission particularly where that work is non-core;
• The quality management structure may be weakened. Individuals who are not pensions professionals may overlook something or not spot an error and the realised risks could be very costly;
• The successful coordination of all activities may be hindered if individuals are not aware of: the need to obtain external professional advice; and the lead-in times required;
• External costs may rise as individuals turn more and more to their advisers for support; and
• The adequacy of monitoring external suppliers and the accountability of services may suffer.

In order to manage these risks, companies will need to ensure that there is a mechanism in place to obtain assurance from external advisers as appropriate.

Option 2 – Trustees could take over responsibility for all management services. A corporate trustee company could employ the staff directly.

The trustees would be able to keep the service effectively in-their house but not in the company’s house. Trustees would gain direct responsibility for the services and have a dedicated team. However, there are some pitfalls to look out for:

• Corporate trustee companies are not trading companies but the responsibilities of the company would increase dramatically in relation to compliance with employment and accounting law and regulation. In order to operate successfully it is likely that additional resource would need to be bought in or hired in some form to discharge these additional responsibilities securely;
• Trustees may not be appropriate directors for a company that employs staff and additional advisory costs would necessarily have to be incurred;
• Trustees may find that they are picking up many additional costs that were previously covered as a matter of course by the sponsoring and participating employers; and
• The staff are likely to be moving from a large company employment to a small company employment which may be less attractive in terms of security, reward and career progression. Therefore, the ability to recruit and retain staff may be much more difficult.

Option 3 – The company and trustees could agree to find a suitable third party provider of these services and buy them in.

Where a large scheme is considering this option there will be the potential to transfer staff across to the outsourced provider under TUPE regulations. This may help in providing continuity of service and will also help manage some of the risks associated with outsourcing services, in the short term. In addition, the trustees would gain access to a wide range of service facilities and tools and access to a larger pool of staff and the staff who TUPE across to the TPP gain access to an improved career path.

The main pitfalls of this option are:

• It may be difficult to find a supplier with an established service offering underpinned by a robust risk management framework to help trustees manage their risks. Many suppliers have been providing governance services at the small end of the market as part of a package and in the form of an add-on service. For larger schemes such services are unlikely to prove unsatisfactory in terms of skills, experience, service delivery facilities and risk management;
• Managing the transition from an in-house environment to a commercial TPP environment. One of the advantages of outsourcing governance services is to gain access to established and proven risk management structures but this could mean significant change in the way the service is delivered. Such changes may not be welcomed by the TUPE’d staff who may refuse to transfer or leave shortly after transfer.

Choosing the right option is a job for the company and trustees combined though it should be remembered that it is the trustees, not the company, who have the ultimate responsibility for the successful management of UK pension schemes – the buck stops with them. The right solution will differ between schemes and careful consideration needs to be given in each case. The options are not as black and white as suggested above; there are many potential shades of grey in between and any decision about governance services should be taken as part of a wider consideration of the governance framework for any pension scheme as part of a decision on how best to manage risk.