Perfect storm
In being involved in a large proportion of market buy-in and buy-out transactions it is clear to us that there is currently a lack of administration resource across the industry. Anecdotally and through our own experience, we have seen administration firms struggling. This is evident to us due to:
- Administration firms quoting long time scales for pieces of data work that are needed to be completed before we can advise that the scheme is ready to approach the bulk annuity market. We are seeing this in schemes where we have been appointed the risk transfer advisor.
- Trustees of DB schemes approaching us to ask for our advice and help in progressing schemes from buy-in to buyout. A common issue here is timescales for GMP equalisation. We are frequently hearing from trustees that their scheme administrator has quoted a timescale of 2 years+ for completing GMP equalisation.
These delays impact the timescales of schemes being able to approach insurers for buyout quotes, and this therefore delays reaching a position of being ready to sign a buy-in contract, and hence these issues delay DB schemes de-risking and member security.
But crucially, the issues affecting the industry are going to get significantly worse as workloads for administrators increase. Why is this?
- There is an increasing amount of project work. As above, work on data for buy-ins and schemes moving to buyout is a big part of the workload problem. In 2023, around £50bn worth of premium was paid to insurers, across around 240 transactions. However, the bulk annuity industry is projected to be even busier over the next few years. Several new insurers to the market have recently entered or have plans to do so in the near term, and so this issue will get worse not better.
- Other project work such as work for data dashboards and data audit work are predicted to increase.
- On top of this, BAU admin work will also increase. As schemes are closing steadily, the population of members in DB schemes is therefore ageing rapidly, this will generate an increased volume of BAU work for administrators. According to the PPF Purple book 2023, over half of members in PPF eligible schemes are either active or deferred, around £4.9m members. As these members age, they will require retirement calculations. Similarly, as the pensioner population ages, the number of deaths will increase. Each of these leads to admin involvement in some way.
This is a ticking time bomb; administrators are struggling already, and workloads will increase at an alarming rate over the coming years.
What is causing the issues?
The primary obstacle is skilled resource.
- DB pension schemes have been closing at a rapid rate in the UK for many years. The PPF Purple Book data says that in 2006, 43% of DB schemes in the PPF universe were open to new members, whilst the most recent publication in 2023 has that same percentage reduced to just 9%. It is clearly going to be more challenging to convince people of the longevity of a career in DB admin.
- Additionally, there will be existing administrators are retiring or leaving the industry to train in other vocations which they believe will provide them with better career longevity.
To make matters worse, an increased workload will likely be causing more administrators to choose other jobs, thus exacerbating that issue.
What can we do to solve the problem?
In our view, scheme administrators’ valuable skill sets should be used to process the typical, day to day, administration work which is the core of a DB scheme administrator’s role – retirement, deaths, transfer values and the like.
We’ve seen some administrators set up specialist project teams, focusing on buy-in and buyout projects. We think this is a positive step that will lead to focus and efficiencies in this area, and would encourage others to do the same, ideally without the resource having been taken from the existing administration resource pool or hired from others administration resource pools, as this may not improve the situation. We believe there is strong merit in wider skillsets forming these project teams. For example, could we use actuaries, where there will likely be less scheme actuarial and investment advisory work over the next decade, stepping up to help fill a developing void of resource on these projects.
We are all conscious of putting the members of pension schemes at the heart of the work we do. To continue to do this, we need to make changes in the way we think about how pensions administration works, and quickly, so we continue to provide great quality service to members throughout their member journey.
Andrea Mendham, Partner at K3 Advisory
