In the pension market, it has been normal in the past to either carry out administration in house or to use a third-party administrator either on a stand-alone basis or packaged with an investment facility. But the onset of stakeholder has led to a significant change in the market.
Stakeholder has meant providers have made massive investments in systems to collect small premiums efficiently. Collection and employee systems have leapt forward and many pension experts believe this could spell the end for third-party admin.
At present, there are three options for companies running pension scheme. They can carry out the admin in house, which may interfere with the day-to-day business of the company. They can hire a third-party administrator or they can use a packaged service from insurance companies, which includes an investment service for the contributions.
The main role of third-party administrators is to establish communication channels to ensure all parties involved in a company pension scheme are kept up to date with events within the scheme.
The investments are also kept separate, which means if there is a change of fund manager, it can be made without disturbing the admin. This is particularly applicable in the final-salary market, where companies may have to change fund managers on a regular basis. But Jack McVitie, chief executive of Edinburgh-based IFA LEBC Group, considers that pension providers are set to take over this role.
He says: “Packaged products from providers such as insurance companies have investment and administration wrapped up together. These companies have invested in systems to improve efficiency and volumehandling because of stakeholder.”
Standard Life general manager (customer services division) Alan Forbes believes the number of third-party administrators is likely to diminish.
He says: “Generally, the market will gravitate to a small number of big suppliers. There is a big ongoing cost to keep computer systems up to date. But there is no reason why third-party administrators should not be able to keep their systems in line with others.”
McVitie believes the ability to administer pension schemes has been enhanced with the development of more sophisticated computer systems. By computerising everything, pension providers have been able to reprice products downwards to match third-party administrators or to better them.
However, not all experts believe that the role of third-party administrators is likely to diminish dramatically in the future. Scottish Life offers both packaged and third-party admin services and head of communications Alasdair Buchanan feels there will still be a need for third-party administrators, particularly in companies that look after the running of their own scheme.
He says: “The group under the greatest pressure will be companies that do their own admin. A lot of companies will say that the pension scheme is not a core part of their business. They will say they are here to make widgets, not to administer their pension schemes. They will want to sub-contract this business and third-party administrators will do well.”
Buchanan says companies offering admin services, whether they are thirdparty or insurance companies, need to decide if it is sensible to carry on. “If admin is a core part of their business, they will have to invest in systems. They will look to repay the outlay with economies of scale,” he says.
Another benefit of enhanced computer systems is the ability for pension providers to offer investment links in addition to their own in-house funds.
McVitie says: “Members of pension schemes may find there is now often a wider fund choice than is often available from third-party administrators.”
But Buchanan does not entirely agree. He feels that third-party administrators have the greater investment choice over insurance companies which have external investment links as well as their own funds. He says: “In reality, by going through a third-party administrator, the pension scheme has the maximum possible flexibility. The administrator is not linked to any provider and can go anywhere for the investment services.”
The cheaper costs of arranging for the admin of a pension scheme to be carried out by the pension provider is best illustrated through a practical case. McVitie says: “I have a scheme where the employer is currently paying £500,000 a year for the admin costs and fund management charges of 0.5 per cent a year. I can arrange for the company to take out an insurance company product with admin and fund management charges below 0.5 per cent a year, together with a wide range of investment links.”
Buchanan does not necessarily believe it will always be cheaper to combine admin and investments in one package. He says: “There should be some economies but if the admin is inherently more expensive, it could be more economical if it is split away from the investment.”
One of the biggest problems facing a company wanting to use specialist administrators is uncertainty.
The company is happy for funds to be invested by a fund manager as it does not insist on investing its own money. But when it comes to admin, the company is concerned about letting information go outside as records, data and admin can be more important than the funds invested.
Whether a company uses the services of a third-party administrator or an insurance company, it must be sure that technology is available for it – and the pension scheme members – to keep track of the scheme and to update individual details.
Buchanan says: “Third-party administrators and pension providers must have a combination of back-office and web-enabled front-end systems. It is necessary for both parts to work well. There is no point if people cannot get at the details, nor is there any point in giving access if the system is not robust.”
McVitie believes members of small and medium-sized schemes will get better service. He says: “With insurance companies coming in to run the schemes, everybody will get a better deal. Administrators who cannot afford to invest in systems will be squeezed out.”