The post-stakeholder world is tough for life companies, forcing them to question the traditional operating models and determine their core competencies. The focus on reducing costs means that outsourcing non-core activities is becoming a commercial necessity.
When a company is considering its strategic options there can be value in ringfencing the annuity operation and adopting a different strategy. This is almost certainly the case for those not marketing annuity products but can be equally true for the active players in the market. It tends to be treated as a low-priority, back-office function, characterised by inefficient processes and reliance on inadequate legacy systems.
Annuity administration is also different to the administration of other products in several ways. The processes involve paying out money on a regular basis rather than receiving it. Service requirements are different – customer enquiries relate to different issues, for example, tax deductions. Annuitants also need a particular approach to customer care that trained specialists can provide. Finally, servicing rarely involves the adviser once annuity payments have commenced.
Third-party administrators can provide a fully managed service including application, payments and claim processing, correspondence generation and customer servicing.
Outsourcing annuity administration generates many benefits. Top of the list is usually cost savings, although the non-financial benefits are equally, if not more, important.
Despite the fact that a TPA's charges will include an element of profit, outsourcing costs will usually be significantly less than those of the in-house operation when all indirect costs are included. Specialist TPAs with big operations are able to benefit from economies of scale, which they can pass on to their clients. Their greater use of technology enables them to achieve superior levels of efficiency and lower unit costs.
Care needs to be taken when comparing internal costs with the outsourcing option because many current costs are hidden. Direct costs for the administration staff in the annuity operation are obvious but other areas will be involved.
For example, the finance department normally has a big part to play and IT services will be incurring costs that can be substantial where expensive legacy systems require development and maintenance.
Technology is the key driver for many companies to consider outsourcing. IT strategies are focused on rationalising legacy systems, especially after a merger or acquisition has taken place, and on moving away from mainframe systems.
Many annuity operations have difficulty meeting legislative requirements and the expectations of their auditors. Pension increases, where different rates apply to different elements of annuity, Inland Revenue maximum checks and customers with multiple annuities are regular problem areas.
Companies tend to rely on the skill of experienced staff and manual work-rounds but this makes them vulnerable. Outsourcing to a specialist with fully automated processes and strong internal controls mitigates these risks and provides easy access to management information and audit trails. It also protects the provider from costly future developments.
Some of the risks inherent in annuity portfolios are caused by incorrect data. Given actuaries' increasing concern about mortality losses, this is now a big issue. A good outsourcing arrangement will include a data audit and cleanse.
Financial services companies are trying hard to provide superior standards of customer service. Outsourcing can assist here also. Automated processes and integrated workflows enable TPAs to achieve desired service levels consistently.
The contractual nature of the relationship also ensures a constant focus on meeting targets. Time to market can also be improved, particularly where in-house resources are already stretched.
Of course, outsourcing is not without its own dangers. The main concern is usually that the provider is placing its expensively created brand identity in the hands of another company. Good TPAs recognise that the customer's experience has a major effect on the way their client's brand is viewed and work to minimise the risks.
Service delivery will be designed to mirror the approach of the provider, systems will be integrated and all communications will be badged so the TPA operates as an extension of the client's business.
Outsourcing annuity administration involves a big dataconversion exercise. The implications of potential mistakes, and paying the wrong pensions to thousands of people, are significant. The TPA must have a structured methodology and the specialist skills required to deliver projects on time and in line with the expectations of all interested parties.
The key to success, from day one through to the end of the contract, is the relationship between the annuity provider and the TPA. The most successful outsourcing arrangements result from the two working in partnership towards common objectives.
For the outsourcer, this means proactive client management, regular communication and flexibility. By building a close working relationship, they keep in touch with the changing needs of the provider and are able to adapt their service accordingly.
For the provider, outsourcing does not mean they can forget about annuity administration. It is in their interests to manage the arrangement and to treat the TPA's service team as part of their own business.