PANEL
Chair: Margaret Snowdon - Chairman, PASA
Mark Adamson - Regional Director, JLT Benefit Solutions
Robert Branagh - Managing Director, Administration, RPMI
David Carstairs - head of Business Development, Trafalgar House Pensions Administration
Michael Mann - head of operations, MNPA

Chair: One of the major issues occurring in the industry at the moment is auto-enrolment. It is a challenge for everyone and it’s one of the biggest issues to hit pensions in quite a long time. It covers the payroll HR side and also the pensions aspect itself. However, I think we needn’t forget that business as usual carries on and there are a lot of other topics in pensions that don’t actually involve auto-enrolment that need to be addressed as well. Starting first with auto-enrolment though, the biggest of companies have already commenced their process for this, so what would you say has been the feedback from these businesses and how well are they coping with the move to auto-enrolment?

Adamson: The larger companies that I’ve interacted with have made a decent start. I think they’ve benefited from having put in place early not just their decision-making, as to how they were going to structure auto-enrolment and what the qualifying scheme was going to be, but they also engaged very early with appropriate consultancies around how the whole process would work. The administration process seems at this stage, early though it is, to be working for them. This is where they have considered fully, with appropriate professional help, just what the end-to-end piece is going to look like.

Carstairs: I agree. The companies that I deal with are doing reasonably well so far. The feedback though, is that they wished they had started earlier. I think most of them allowed about 12 months to actually get through it all. The key message coming back is that it has taken a bit of time to get their communications together. And the other feedback is that it proved to be a little bit more complex than they thought, particularly when you’re talking to HR people who may be predominantly not involved in pensions. It has taken a bit of time to get their heads around the technical requirements and who has chosen to opt in and who has opted out, but it’s going reasonably well. The other interesting aspect is the involvement of IT and that tended to get left off the agenda at the beginning because people were looking at it purely from a benefits and pensions and HR perspective, without recognising that there may be some significant work to be done in their own IT departments.

Branagh: A lot of the larger schemes actually have planned to spend about 12 or 15 months in dealing with auto-enrolment and they do appear to be coping very well. Some have also realised they should have started a bit earlier to get their heads around their population of employees affected by auto-enrolment. They need to look after their employees rather than just going to a consultant and asking them to provide a pension solution. I think that’s been a big difference for lots of employers I’m speaking to.

Carstairs: There’s also a strategic aspect as well, which is all about taking a step back and saying ‘right, what do we want to do now in terms of auto-compliance? Go down the standard master trust route or set up a new scheme or to take this as an opportunity to revolutionise our approach to benefit provision?’

Adamson: I think it’s quite interesting that one or two of the early starters have actually improved the benefits that they’re seeking to provide for these new schemes, compared to what they were providing before. Whether we’ll see that continue as something of a trend is questionable however.

Mann: I agree with what Mark is saying. What we’re seeing with some of the early starters is that the standard DC offering as laid out in the legislation is not good enough. It’s not attractive enough to engage their employees and as such quite a few employers out there are looking to provide enhanced scheme benefits to entice membership.

Chair: That’s interesting because in the industry there was certainly a fear that it would all go to the lowest common denominator. Generally what you’re finding then when you’re talking to clients is that they’re not getting stuck into thinking how little can we get away with, they’re actually thinking about the whole design package. I think the challenge coming up is around the medium-sized schemes and then the small ones. Do you think that these companies are already well prepared or are they waiting to see what’s actually happening with the larger firms first?

Branagh: It’s a mixed bag for the medium-sized ones. I think there are some who still haven’t really started unfortunately. And there are some who have been planning for a fair bit of time and have put a lot of energy into thinking about how they will transmit this big change to their employees.

Adamson: I broadly agree with that. There are one or two that I’ve spoken to who are in a position where their staging dates are as early as May next year, but they haven’t yet worked out what their solution is. They’ve just about worked out what their qualifying scheme is but haven’t worked out how they’re going to enable that. They haven’t worked out how that’s going to link into HR, into payroll, which may well be outsourced anyway, and how that’s then going to filter through into administration. I think for any pension scheme 18 months has been proven to be the timescale that people need. If you are now in a position where you are six months away from a staging date and you’ve only really just decided what your qualifying scheme is, or at least haven’t done any more than that, then you are in trouble and there are some of those definitely around.

Chair: So what do you say to a company that’s in that position and they’ve got six months to go and they are ill-prepared?

Adamson: I think the only thing that’s going to get these people into a situation where they can succeed if they can’t postpone, is to engage and look for ‘off the shelf’ solutions which may help them to achieve what they need to. Six months is a very short time to enable all of this and they won’t achieve it if they do not engage properly and seek professional advice on it.

Branagh: Some of these professionals have got less resource available to them internally. Some of the medium type companies I’m talking about just consist of a pensions manager and there may be just one administrator helping them. And they’re obviously trying to educate HR and the wider business as to what the changes are and how they are going to be applied. At the same time they are juggling things like ongoing scheme pressures and data cleansing.

Chair: It sounds as if there’s still going to be quite a gap to fill particularly for the smaller companies. Are there actually resources within the industry to try and pick up all those gaps and make sure that the smaller companies, in particular, actually have a solution available to them or are they going to be left behind? I think you’re sort of suggesting that so far so good for the big guys because they’ve had the resources with lots of people helping them and telling them what to do. The small end in particular will probably find it a real challenge because there isn’t anybody at this point necessarily holding their hand.

Carstairs: And equally their requirements are the same as the big organisations. For the smaller companies, however, the costs are even higher proportionally than they would be for the large organisations.

Mann: The real challenge for the smaller employers is around communication and them fully understanding the obligations placed on them to comply – many are currently oblivious to the requirements. The IT in terms of middleware etc is available with established fit for purpose processes, so that’s not really going to be a problem for them. It’s the communication that is difficult. For example, one recent survey showed that 47 per cent of employees working for a large employer who has already gone through their staging date knew nothing about the changes that occurred. So, for small employers with less resource available to them to understand the legislation and engage with their employees, I think they could indeed be left behind.

Adamson: An important part of the solution, particularly for the larger and medium-sized schemes, is the use of the web. The web can target the communications angle very effectively. If you’ve got employees’ email addresses, or can collect them, you can communicate with them very quickly, very easily and very cheaply. I think certainly in terms of keeping costs down and in terms of keeping efficiency and communication up, the web’s got a great role to play. We still under use the web in this industry. I am hoping that auto-enrolment might drive greater use of the web not just for auto-enrolment purposes but for wider administration purposes.

Chair: What about the web generally and the advantages for admin? We’ve certainly been talking about the web for years and web solutions are coming in but they’ve never quite made it.

Mann: I don’t think the web is necessarily going to be the answer to controlling auto-enrolment admin-istration costs. I think the main issue with auto-enrolment is opt-outs where a member opts out after the first contribution has been paid across to the administrator and thus they need to be refunded which adds new costs to schemes. In addition, I believe many short-service members will lose touch with their small pots and will require tracking down when their benefits become payable which again adds costs to a scheme. From an administration point of view these two issues need tackling to control costs with web services being only part of that solution. Indeed, the schemes that I have seen go early are looking at 50/60 per cent opt-out rates and I think that will continue and potentially increase as we move towards the medium and smaller size employers.

More generally with the web, I agree it’s not actively used in our industry as well as it could be. However, schemes are starting to engage, they are starting to put pay-slips online, benefit statements online and certain transactions can now be completed fully online, which is good. The traditional difficulty, in particular for DB schemes, has always been data. Is the scheme data quality good enough to allow people to self serve and process their retirement online? Data quality is now improving to a level where we can look for at least 80/90 per cent of DB scheme membership to potentially self serve online over the next 18 months or so.

Branagh: That 50/60 per cent figure is huge.

Chair: That sounds like a failure to me if you have a 50 per cent opt-out rate.

Carstairs: I’ve spoken to a couple of large organisations that are not too disappointed by the opt-out numbers due to the significant financial implications to the organisation of a high take-up rate.

Mann: And there is a quandary there as well – from a financial services point of view should you be encouraging people to pay off their credit card debt, student loan or indeed any other debts they have before they start investing in pensions?

Chair: As administrators though, how do you react to 50/60 per cent opt-out? What does that do for administrators if there is such a rejection of pension scheme membership?

Adamson: If you’re using the web to enable that it’s not an issue. If not then you’ve got to make sure that the systems and processes that are being used by an employer suit the style, the size and the nature of the employer.

Chair: It’s almost saying that no matter what the take-up is, you need to have the technology there to make it work. If you have huge levels of opt-outs then you’ve got a spike of work to deal with that. Once you’ve had all those opt-outs, you’ve actually got lower membership than you possibly had predicted.

Carstairs: The other point I would like to make about the web is that for me it’s just one medium, which is going to become more prevalent. I believe in time it will become the recognised communications medium but we shouldn’t forget that members will still want to speak or write to administrators. The infrastructure still needs to be able to support that and I think one of the challenges for the industry is that you can’t necessarily control which medium members actually communicate by.

Adamson: One can kind of force the web approach. You can’t do it 100 per cent but you can enable and encourage a member to use the web. Maybe you can’t provide them with a laptop or a PC at home, but many have them anyway, or tablets or sophisticated mobile phones, so the use of the web can be encouraged. The people who aren’t so technologically tuned-in may still not use it but those who have some element of technological awareness probably will. But I agree all communication styles must be catered for.

Branagh: I’m seeing more and more employers saying they can’t afford it. We would like more people on the web because it will reduce our cost and arguably it can keep that communication piece going, but in reality I don’t see it happening. Youngsters are going to come through with debt, they’re going to come through with periods when they can’t afford to get on the housing market. So the pensions issue for them is going to get less and less of a priority going forward. Unless the web pays back in terms of bottom line cost, I don’t see it suddenly exploding in the sector.

Carstairs: I think it will be a slow burn rather than an explosion. But I think there will be more web demand for those that do engage in the pensions environment.

Adamson: The longer-term benefits are that hopefully it’s going to drive down the cost of our administration.

Branagh: Some of this is really aspirational on our part as pensions professionals.

Adamson: Well, I don’t agree with that. It’s aspirational, yes, in the sense that we want to achieve it, but aspirational implies that it isn’t happening and in some cases it certainly is. Also I would say that if through auto-enrolment we can encourage employees who haven’t been in pensions before to use the web to handle their auto-enrolment situation that will help. The web can provide a series of screens that will help the individual to understand the risks of opting out. It can show the employee that if they do opt-out they will be giving up money from their employer and that this will cost them in the long term. It may not change everybody’s mind but it might change 5 or 10 per cent. But at least the benefit of all of that is that you’re pointing out to people in a very simple cost effective way what it is they’re giving up.

Chair: It sounds as if there’s a great dilemma there. People just don’t want to pay the extra premium to get web-based solutions even though it might mean significant cost saving in the long term.

Carstairs: I think there’s a greater appreciation now as to what the web can produce. If I go back over the last five years I’ve had conversations with people who were saying they want the web without identifying why. We interact over the web for retail every day. However, the functionality has to be easy to use and the information provided easy to understand. There also needs to be a support mechanism available when someone wants to ask a specific question. Does that person get the answer via a Q&A on the web or is there someone they need to contact to get an answer? From a commercial perspective, the more enquiries that can be answered by utilising technology, then the more beneficial it is to everybody.

Branagh: But if you look at the next six to eight years, you will have people who are not in work, people who don’t have disposable income. You will have people whose employment is really fractured. Why would employers, enlightened or otherwise, continue to spend money on something like the web which doesn’t have a short-term payback and may only payback in 2016, 2018 or 2020, when trustees are struggling with the financial security of their actual scheme going forward? There are too many small schemes in the UK not getting the support they need, there are too many medium schemes without adequate resources. The big schemes will always look after themselves unless something happens to them, but there’s just too much on the go to allow anybody other than enlightened employers or trustees to do something like this. So I think the web is fantastic but in the real world I don’t see it delivering much more than it currently does.

Carstairs: But people coming out of education both now and in future are engaged in technology and as they will be tomorrow’s HR and finance decision-makers they are more likely to be seeking a technological-based solution.

Chair: We touched on data and it is a big issue particularly with auto-enrolment entering the space. So are we actually doing enough to improve data in the industry? Are we going about it the right way?

Adamson: There have been cases where schemes have begun to realise that poor data is costing them money and administrators obviously are finding that poor data is costing them money and maybe they can save some of those extra costs by actually spending a bit more now. The clear argument that we have put down is that if you spend £10,000 you will save yourself £100,000. I think people have begun listening to that, encouraged by the regulator’s greater degree of interest.

Mann: Not enough is being done to improve data in particular for DB schemes. Data is key to meeting the trustee desire for both efficient administration and cost effective project work such as de-risking exercises, as and when they are commissioned. The industry, for me, is far too focused on TPR’s common data requirements, which I feel is a weak measure of a scheme’s data quality – it is far too basic. Our industry moving forward with data still looks to the regulator to come along and say ‘this is what you should be doing on conditional data’ rather than just getting on with it and taking action. We, along with pension managers and trustees should consider proactively what the scheme is planning to do over the next three to five years and ensure a programme is in place to get the data in the right shape to support those plans and initiatives effectively.

Branagh: I think in the outsourced market it’s more led by consultants and administrators saying ‘you need to do this because it’s a good thing and there are some financial arguments which will help your business’. In the insured market and the small market there’s still not a big appetite for data cleansing, or just improving data and record keeping generally, because of the cost. So you can almost segment it in that sort of way. And again, the key questions should be what’s your scheme’s strategic journey and where does the data cleanse come in? And at what point in time is it right for you and everybody else to do that particular exercise?

Mann: There is certainly scope for better working relationships with scheme actuaries on data issues. For example agreeing tranches of member data that if cleansed would mean the calculation of liabilities becomes more accurate, potentially leading to wider scheme savings such as reduced PPF levies.

Carstairs: I’m not sure trustee boards collectively have got that. I think there’s a whole mixed understanding there.

Chair: But I think you’re saying that what they ought to do is to tailor data cleansing to suit and work to a plan.

Carstairs: We’ve engaged more on this subject as administrators than probably anything that I’ve experienced in the last five to ten years.

Chair: Moving on to the issue of fees versus quality. We’ve mentioned a few times that companies are concerned about cost at a terrible economic time. The economy is not exactly healthy but what can we do about pressure on admin fees?

Branagh: You want to speak to the investment consultants first.

Mann: Will administration fees be driven down? I think the answer is yes. Firstly, increased self-servicing through administrator web offerings will reduce fees in the coming years. However, the level of reduction will be subject to member take up and in particular the value of what they do online to the administrator. Secondly, all administrators continuously improve and re-engineering processes to make everything slicker and better, which again over time will reduce fees. That said, you do get what you pay for and when fees are driven down the quality of service can suffer, unless carefully managed. An area that can see reduced quality levels is how administrators handle those ‘moments of truth’ when a scheme member dies and the bereaved relatives are trying to do all the right things and contact the pension scheme for help regarding benefits. Cost efficiency could, if not carefully managed, mean that bereaved relatives get put through to a call centre with ‘press 1 if you’re an active member, 2 if you’re a deferred member etc’ – then be potentially put on hold for 20 minutes before getting through to someone that can’t really help with their request, as it requires a specialist backroom member of staff to call them back! As I said, you get what you pay for and that experience could be the unintended consequence of pressure being applied purely to administration fees. The focus should always be on achieving good value for money which is a broader and much better measure.

Chair: Do you think people care about quality?

Carstairs: I think it comes back to Michael’s point. It’s about value for money – you get what you pay for. For me there are three schools of thought. There are the ones that want it cheap and cheerful, there are those that want it a bit of both, and there are also the ones that are prepared to pay that little bit extra for a quality service. I think that’s the market as it is, the difficulty is recognising when you talk to potential customers or clients or organisations understanding exactly what service they are wanting and not trying to give them something that they don’t want.

Chair: Do you think they actually know what they want?

Carstairs: As a general rule of thumb, members want the right information at the right time for as cheap as possible.

Branagh: I agree with what people are saying here but you have to be grounded in reality. As David said earlier, some people are ready to accept that occasionally the quality will degrade, but you know if you look at off-shoring, and I’m quite passionate about off-shoring, there have been enough initiatives recently where people have tried to address the cost base but do they always pass that on for the benefit of their clients? There’s been some innovation, there’s been some change of practices in process engineering, there have been different approaches that certainly the third party market has been trying to address over the last three to five years so we can pass on some cost reductions to our clients. The downside is if you don’t always get a return on that, either as an individual TPA or a business, and the industry doesn’t get any recognition for the professional service and the professional standards we apply to our clients. A lot of the reasons why for example lots of TPAs have gone out of the market is because they can’t afford to invest in systems or training their staff.

Carstairs: Customers are happy to accept the cheap solution up until the point it goes wrong and then they want quality. That’s where the relationship needs to be strong and there needs to be a recognition that at the cheaper end there may be the occasional blip in service.

Adamson: I think we all look for partnership with our clients, don’t we, and sometimes we succeed and sometimes we don’t. I think one of the challenges particularly, with smaller and medium-sized schemes, is that it’s difficult to find the person you’re actually going to build that partnership with. If there’s a pensions manager then at least you’ve got somebody to latch onto to truly try and build that partnership piece where everybody’s contributing to the end result. One of the big things that I’m sure we’re all very conscious of is that over the last three to five years fees have been driven down. We should be robust about fees.

Chair: It’s interesting that you’re saying that fees have been driven down and you’re almost getting to the point where you think it’s not fair and it shouldn’t be driven down beyond a particular point. However, some people aren’t trying to drive fees down, they are prepared to pay. I think what the administrator can bring to the table is an explanation of what they actually offer and let the market sort itself and segment itself in that way. It sounds as if fees aren’t just being driven down relentlessly – there’s at least a bit of room for discussion of what clients actually want. Do you actually think that smaller companies get what they want and expect from administrators?

Carstairs: It’s an interesting challenge, certainly in the market that I’m operating in because historically they’ve gone with bundled services.

Chair: But in a sense you’re saying that small schemes are limiting their own choices because they go for a bundled option or because they can get it really cheap and they might not see the possibilities of doing something else.

Carstairs: And predominantly there’s nobody within those small organisations who is driving any focus from a pensions perspective, because they’ve outsourced and now it is HR or finance that look after the relationship. HR are focused on corporate issues and often pensions is secondary on the list of priorities.

Chair: So does that mean you think the small organisations are actually getting what they want?

Carstairs: As they are not experts in the market there is a tendancy to just accept the service they are offered from the provider.

Chair: They get what they’re given, but not necessarily what they want.

Mann: I don’t think the smaller companies are adequately served at this point by administration providers. Looking at garages and the hairdressers for example that will have to put their employees into a pension scheme as part of the auto-enrolment requirements, they’re not adequately served at the moment. It is probably too early to say whether the super trusts, like Nest, will provide the right level of service to small and medium-sized employers that have predominately low-paid and transient workforces. I think the jury is still out in terms of whether those particular employers will get an adequate level of service from our industry.

Adamson: I would echo that. If you look at the small schemes with a couple of hundred members the majority are full services type clients who engage with the actuary and maybe a consultant but don’t really engage with the administrator. They’re frankly not that interested in admin until it causes them a problem. The consultant in some cases probably doesn’t engage that well with the administration either, so even at that level, where we’re not talking about tiny schemes, they are getting what they’re given and they’re only conscious of it when it goes wrong.

Chair: The age-old debate has been in-house versus outsourced. The question is, have the arguments actually evolved for in-house versus outsourced?

Adamson: I strongly believe in in-house management, if schemes can afford the people, can afford the systems, afford the processes and keep them developed sufficiently. And there are a number of large schemes, medium schemes and even smaller schemes who continue to be managed in-house. There’s the classic BP case that outsourced and went back in.

Mann: I think the argument for DB schemes has swayed towards outsourcing for the following reasons. The first is that the paternal link between the employer and the scheme membership has reduced and in some cases disappeared. Most DB schemes are now closed to new entrants and future accrual, so only a very small percentage, if any, still work for the employer. So, having an administration team, on tap, in-house to service new entrants and active membership on various floors of head office or depots around the country has become redundant. As a consequence a stronger argument now exists to outsource legacy DB scheme administration to a professional third party. Secondly, linked to the above, in-house resources and energy should probably now be focused on active employees and employer auto-enrolment obligations. Thus, legacy DB scheme are a distraction that might now be best outsourced to a specialist company who can look after them at a fixed known fee. Thirdly, a trend has emerged that when in-house schemes look at upgrading their IT system they are shocked by the higher than anticipated costs that are quoted. This in turn has driven them to look more widely at their internal pension scheme costs and then towards the savings that could be generated through outsourcing. This has also contributed to an increasing trend for DB schemes to now seriously consider outsourcing.

Branagh: This is slightly worrying for us as an industry because not only do we know people who work in software houses but where is the innovation going to come from if everything goes down the outsourced route?

Chair: Do you think the administrator will actually ever be seen as a professional service provider much in the way actuaries are?

Carstairs: As an industry we are beginning to recognise that it’s important that you actually manage the client relationship. Typically there’s normally only five minutes at the end of a trustee board meeting where the administrator has an opportunity to talk. Administrators are not always invited to quarterly board meetings and administration has not historically been a priority for discussion. The focus from the regulator on data has been a massive step forward for trustee boards to begin to recognise the important role of the administrator.

As an example when trustees look at any de-risking strategy i.e. buy-ins, buy-outs there is now a recognition that the administrator who acts as custodian of the data has a significant part to play in any discussions, and quality of data ultimately determines the final premium offered. Over the last 18 months there has therefore been a steady increase in the profile of the administrator, which I see continuing.

Branagh: I think the progress that we are talking about on the back of data, on helping things like de-risking, highlights that there has been progress in the image of administrators. We still give all the information to an actuary but there’s been more engagement, I think there’s been more benefit realisation from administrators of most trustees on the medium and large schemes now they see some real benefits that I think the standard or the perception of professionalism is going to rise. It might get closer aligned in the next three or five years. Administration will be seen more professionally than it has been in the past.

Adamson: I think administrators need to raise their game a bit, whether it’s in-house or TPAs. There should be greater emphasis placed on training and education of administrators and on taking some of these professional qualifications. I don’t think there’s an administrator in the land that can claim to have sufficiently well-qualified and well-trained people as they need. So I would like to see more emphasis from those who employ administrators to raise their professionalism.

I’m a director of PASA and I would like to think that’s going to have a positive impact, we have yet to see whether it will. The accreditation that PASA is planning to introduce in the early part of next year will I hope bring a greater focus on administration quality, but that won’t happen overnight. That’s going to take a while to bubble through. But hopefully as more and more third party administrators and hopefully more and more in-house administered schemes decide to go with the PASA accreditation that should lift the profile of administration and the requirement for high quality administration in the eyes of trustees and employers. So I think there are things that the administration providers, whether in-house or TPAs, can and should do to raise awareness of the importance of administration. We’ve sat on the back foot too much over the years and cowered in the corner. I think we haven’t fought our corner terribly well and we should raise our game from that point of view.

Mann: In terms of the administration industry, I think we’ve got a lot of very knowledgeable, very capable people.

Branagh: And that is being recognised I think. In terms of good quality administration and in terms of increasing the level of project work I think trustees and pension managers are recognising the knowledge that administrators have in terms of making those things run smoothly. It is very important that PASA becomes successful moving forward setting standards for the industry. Having the accreditation is important and I think PASA’s ambition should be applauded. It really is something that does need to grow wings and fly over the next two or three years. Around 15 to 20 years ago when we were all coming through you had to do your PMI exams, learning and development was compulsory. Now people can’t afford the time. There’s not enough education or ongoing qualifications and that might just be pressure of work.

Carstairs: I think it’s crucial because it’s becoming more complex.

Chair: So what you’re all really saying is administration deserves to be more professional than it is?

Carstairs: You look at the whole range of questions that an administrator has to answer from a member now, compared to what it was years gone by. That’s a massive challenge for administrators and they must, firstly be able to articulate it and secondly engage with the member and make sure they’ve got an understanding of the full picture.

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