Look before you leap  

Tony Barnard (left) assesses how employers can select the right pension provider for a contract-based scheme

With a vast array of insurance companies offering pension products, what factors do employers need to consider before making a decision on who to appoint to run their contract-based scheme?  It’s not easy. There are many factors to take into consideration, and cost is not the only issue.

Employers can certainly make this decision without resorting to advice. But with a growing focus on governance, employers are increasingly looking to pension consultants to guide them. Broadly speaking, there are five main selection criteria employers need to consider before making a final decision.  

Financial strength
This is currently one of the most important criteria in assessing a preferred pension provider and should be used as an initial filter in any selection process. Future pension reforms, primarily in the shape of the proposed introduction of Personal Accounts are likely to add further competitive pressures and possibly lead to further consolidation among providers.

The first stage in selecting providers is to eliminate those who do not meet the requirements for financial strength. For example employers may decide to consider only providers that have a Standard and Poor’s rating of at least "A".

Investment
Traditionally, this was seen as one of the most important factors in assessing a provider's offering. However, products have generally become 'unbundled', with providers increasingly separating administration from the asset management business. This 'open architecture' enables the provider to link to external fund managers. This ability to link to an investment manager of choice makes the assessment of the provider's own asset management offering less relevant, than other criteria.

A secondary point to support this view is the increased use of tracker or passive funds, which mirror the return of an index, rather than attempt to out-perform though active fund management.  It is reasonable to expect the return from comparable tracker funds will be very similar.

Product features/charges
Assessing a provider on the basis of charges has become less important in today's market. Stakeholder legislation has significantly reduced the charges on all new contract based pensions. In many cases the charges quoted by the providers are not affected by the choice between a Group Personal Pension and Stakeholder.

An area where a provider can add value is through specific product features. A strong position in the annuity market is key, as are good internet facilities to educate members, allowing them to model different expected benefits based on their available choices.

Administration
Good administration is a key factor when selecting a pension provider. Administrators are the people who will be in direct contact with scheme members and therefore have the greatest influence on the quality of the service received by both the members and the company.

When short listing providers, employers need to understand the relationship between the pension provider, adviser and their own management team. Providers should have in place a system whereby a Client Relationship Manager will work with all the parties to provide the smooth implementation of the scheme.

IT Systems
Of increasing importance is access to online member services. Individuals are increasingly accessing many services online such as banking. As a result, there will be a high expectation as to the quality and functionality available from any provider.

There is a general belief in the pensions industry that the market will not support the wide range of group pension providers that currently exist.  Many providers have already pulled out of this area. When selecting a new provider, employers need to be confident that the selected providers have sufficient market share and drive for continued innovation to remain and prosper in the group pensions market.

 

Tony Barnard is a technical consultant at Gissings www.gissings.co.uk

 

 

 

 

 

 

 

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