If the pensions industry could be likened to a football team, then administration would probably be the goalkeeper: the one who only gets noticed if he does something spectacularly wrong.
While the product providers, consultants and advisers show off their silky skills and attract all the media attention, the administrator is often left to pick up the pieces and actually ensure that the scheme members get the service they require.
And speaking of paying, the recent explosion in footballers’ wage packets exceeding £100,000 per week and transfers in excess of £50m per player seems to have coincided with downward pressure on administration costs as the recession takes a stranglehold on company finances.
The survey
The recession does not appear to have had much of an impact on the number of providers, which is unsurprising given that this is an essential service to all schemes. There has been some consolidation in the market of late, with Capita Hartshead leading the way à la Manchester City, having acquired Gissings, Higham Dunnett Shaw, FPS Group and Aspen in the past three years.
This has helped Capita Hartshead have a successful year, adding 13 contracts. Although this is lower than the 24 gained in 2007, it is worth remembering that the Gissings takeover in June this year expanded Capita substantially, adding in excess of 60 schemes to its books.
The most successful firms in terms of new business are undoubtedly RPMI and JLT Benefit Solutions, having won 25 and 30 new contracts respectively. Smaller firms have coped well in the tough economic climate as well, with Goddard Perry (formerly Michael Kirk & Partners) winning five contracts in 2008. Premier Pensions Management, the youngest company in the survey, also had a good year with eight new contracts. The breakdown of new business (table one, page 33) shows that three times as many defined benefit (DB) contracts were won in 2008 as defined contribution (DC), reflecting the funding crisis sweeping the DB sector, increasing the need to reduce costs at every opportunity.
As research by Hewitt Associates indicates, this trend could continue to provide more business for third-party administrators (TPAs) in the coming years. Hewitt reports that a typical large scheme (20,000 members) could save between £100,000 and £150,000 a year by outsourcing administration.
Oval Group is a fairly new addition to the sector, having launched its TPA service to the wider market after catering for a select few clients since 2001. See page 16 to read employee benefits director Simon Chrystal’s plans for the future of Oval.
True costs
Back in June, PM highlighted conflicting research into administration costs, with Watson Wyatt reporting a 20% rise in some costs and the news that smaller schemes were paying more per member than the largest schemes. However, Kim Gubler Consulting’s research, based on more recent data that was not made public, seemed to indicate that costs were actually falling, although this may be due in part to the wider economic climate.
Ian Terry, business development manager for pensions administration at Hewitt Associates, suggests that the truth in cost trends lies somewhere in between the conflicting reports.
“If you look at a range of data from providers or industry surveys over a number of years, I think it’s pretty much inarguable that for in-house and third-party solutions costs of administration have risen above inflation and more quickly than other business overheads.
“In very recent times there may have been significant cost pressure brought to bear at the larger end of the market, which has meant that the rate of increase has slowed, or is being controlled. Certainly we are seeing from feedback from prospective clients that costs are increasing, according to survey data.”
Many of our respondents certainly agree that clients are either asking for more for their money or are looking for a cheaper deal than they currently have. Often clients can get the balance between a cheap deal and a genuine value-for-money service wrong. Colin Ross, head of client relationships at Aegon HS Admin, warns that higher costs do not necessarily guarantee a higher quality of service.
He says: “We believe that schemes and advisers are prepared to pay more when they know that they will receive higher standards, greater flexibility and customised service from a trusted provider.”
Driving this long-term upward trend is a need to deal with the growing complexities of running a UK pension scheme. Trustees of DB schemes are increasingly concerned with funding levels and growing deficits, and often these issues can force administration down the list of priorities. Often they have upper management following their every move to ensure company finances are not being wasted. On top of all this, the vast majority also have full-time jobs within the company. Unfortunately for the members, this can mean that the goalkeeper is only dropped when he’s already scored a hideous own goal.
