A major headache in today's life and pension industry is the constraint imposed by legacy processes and IT systems. This restricts companies when they ought to be dealing with problems such as competition from new market entrants, launching innovative new products and embracing new forms of distribution.
Poor processing reduces the quality of service an IFA can supply. Straightforward policy amendments can sometimes be embarrassing for the providers and IFAs concerned – not to mention frustrating for the policyholder. To handle this there is often an alarming interchange of paper-based amendment forms between member, IFA and provider.
Stakeholder pension providers cannot afford such inefficiencies. Many use inadequate, expensive legacy IT systems to support call centres, back-office operations and large distribution networks and can ill afford the extra overheads on low-margin, highvolume business.
So how can providers decide on the best solution? First, assess any concerns over the retention of control of customer contact, speed to market, flexibility, cost and their existing skilled resources. Then consider three outsourcing options – managed services, third-party administration (TPA) and application service provision (ASP).
A managed service is the provision of a service to clients on-site or remotely – using the client's infrastructure. It can encompass an extensive range of services, but generally it is contracting an external operation to run and maintain processes and IT operations more efficiently. It is a typical solution for those companies which feel their relatively modern systems do not require wholesale change in the short-term.
Other such contracts can serve a more temporary aim, such as migrating operations to a new system. A managed service provider would run a new system in parallel to the old, ready to migrate once the new system is fully tested.
Alternatively, a number of more strategic options are open to those lenders that seek a fundamental change to their business. Where existing operations prevent lenders from launching new low-margin products quickly – responding to competitor movements or entering new markets – ASPs and TPAs can make a significant impact.
Such services have been available for over 20 years but modern technology makes them more flexible and better priced than ever.
ASP is the delivery of applications over a wide area network (including, notably, the internet) to multiple organisations from a data centre. An ASP, for instance, might be compared to the old computer bureaux of the 1970s and 80s. But ASP is a far more advanced and flexible version of the application rental proposition.
There are a number of IT infrastructures which support this model. Some clients want the ASP to retain complete control of the system on the ASP's own premises. These providers effectively outsource complete responsibility for the IT system to the experts. Data is then sent via a fixed telecommunications line (virtual private network) or via the internet to the user's PC. Others prefer to have the IT systems resident on their own client premises in a traditional networked environment.
The ASP model is increasingly popular. After a small set-up fee, companies are simply charged per transaction. For instance, every time a user processes a pension on the system the ASP would make a single charge to cover the use of the system and the processing of the transaction. The cost would be determined by a number of individual factors, including expected business volumes and the scale of the IT infrastructure employed.
The pricing structure means set-up costs are minimised, making it hugely attractive to new market entrants. This includes those entering from outside the industry as well as established players looking for a new channel for a new product. Other organisations are even looking to set up new discrete operations based on an ASP model.
Those providers who prefer to remain in control of client liaison often prefer the ASP route, as they can continue to use their skilled customer service staff, who in turn benefit from the latest technology.
The ASP model is mostly chosen for short-term contracts – less than three years. In general, while there are huge savings in infrastructure and support costs on balance, the costs for each transaction are relatively high. In terms of business volumes, there is a finite economical point beyond which the ASP route cannot be financially viable.
An alternative option would be a fully outsourced solution. Companies can derive significant benefit by using the existing expertise of TPAs, who can provide multiple options to cover the whole pensions supply chain if required.
The TPA – a third party which processes and administers portfolios of pension funds using its own infrastructure – can provide operation which includes all sales support functions, application processing, correspondence generation and ongoing pension servicing. TPAs can provide support for as many or as few of these services as required.
TPAs offer not only modern, regularly updated IT systems and trained personnel, but also years of shared experience – often handling competitors' pension portfolios with Chinese walls. Few in-house operations can compete in terms of this flexibility, experience and economies of scale.
The TPA option will be used increasingly by those companies who need to make a major strategy shift. Whether existing operations are restrictive to change or the company wants to move into new markets, the tried and tested TPA will be enormously beneficial.
Other providers may opt for a TPA operation as a temporary measure while IT development work takes place. It is in such circumstances that life and pensions providers will realise the benefits of a third party provider offering not only TPA services but also software solutions. If a seamless switch needs to be made from services to systems or vice versa, the end customer is not affected.
The key to a successful managed services/ASP/TPA relationship is flexibility – especially as some companies have opted for a hybrid approach.