By Ilonka Oudenampsen
The major changes to workplace pension provision due in the UK over the next two years are prompting schemes to re-consider how they manage their overall administration, according to Aon Hewitt’s third annual pension administration survey.
The Aon Hewitt Pension Administration Survey 2011, including responses from over 250 UK scheme managers and trustees from both DB and DC schemes, showed that 42% of respondents cited upcoming events would be likely to prompt a review, as 23% cited closure of a DB scheme to future accrual and 19% cited conversion of a DC scheme from trust to contract based or NEST. Other reasons cited included events such as M&A, the retirement of key individuals and changes to suppliers.
Taken together, Aon Hewitt believes these changes will prompt many schemes to seek new models of administration delivery. Pensions administrators will also need to meet simultaneously the challenges of appetite for increased quality and tight cost control – indicated as two important priorities for both in-house and outsourced schemes in responses to the survey.
Colin Hamilton, Benefits Administration sales director at Aon Hewitt, said: “One of the most notable changes will be increased demand for outsourcing services – primarily pension administration, but also related services such as communication. While 80% of schemes in the survey had already outsourced their pension administration, our research shows a willingness to outsource a broader range of services. Survey respondents cited improved quality, access to outside expertise, and cost savings as the key reasons for this.”
He added: “We expect online pension administration offering member self-service to become far more popular. While the capacity to offer this to members has been available for several years, scheme and member take-up rates have been mixed. Undoubtedly, with the introduction of NEST and more DB schemes freezing, this will change the attitude and behaviour of pension schemes and their members towards managing their pension arrangements through the internet. Schemes will increasingly seek to minimise ongoing administrative complexity and costs while still providing responsive, high quality services.”
One of the major changes to the landscape is the closure to future accrual of DB schemes in the UK. Aon Hewitt’s 2011 Global Risk Survey showed that 29% of DB schemes have already frozen and more than 20% are likely to freeze their schemes within the next 12-24 months. Having taken the decision to freeze their schemes, many are now looking at how to get the process – including the administration – right.
Hamilton said: “Many of our clients who have frozen their DB schemes are looking to introduce new operating models in order to increase operational effectiveness. As part of this, they are changing the way they work with their suppliers as schemes seek to simplify the management of the scheme. While quality remains an important concern, our survey also shows a willingness (more than 60%) to consider outsourcing all of their scheme management requirements to a single provider. This contrasts with the current model of schemes using several different suppliers based on a best-of-breed approach.”
Another reason for a change in strategy, is the conversion of DC schemes from trust to contract based or, alternatively, to NEST. Aon expects the introduction of NEST and the associated requirements for employers to introduce auto-enrolment from autumn 2012 in particular to have an impact. However, 7% of participants in the 2011 survey say they have not yet thought about auto-enrolment and are unsure about what will be required.
In total, nearly 40% of schemes say they have not started preparatory work and similar percentages are in the early stages of preparation.
Hamilton commented: “Schemes must be aware that there are cost implications to be budgeted and planned for. We know that reducing costs is a top three concern for 85% of the organisations who responded to our survey. However, the changes from 2012 onwards will give rise to additional costs from payroll, HR, and pension administration. These costs are additional to any increase in contributions that the employer may need to make, either as a result of higher take-up rates from auto-enrolment or any improvements in contribution structures required to become a qualifying workplace pension scheme. Based on this, we urge schemes to start preparation without delay.”