LONDON UK – Hewitt Associates, a global human resources consulting and outsourcing company, has published the results of its second annual pension administration survey. The survey highlights how scheme administrators remain under pressure to do more for less cost, and how changing scheme circumstances are increasingly driving strategy.

The Hewitt Pension Administration Survey 2010, reflects the responses of 97 UK scheme managers and trustees from both defined benefit (DB) and defined contribution (DC) schemes, with assets totalling almost £60 billion. The key findings revealed five important themes:

1. Pension scheme administrators are facing continued pressure to do more for less
2. Closure of schemes to future accrual and succession planning issues are driving change in pension administration strategy
3. A trend towards standardising administration and more outsourcing of broader pension functions 
4. Support and executive buy-in for outsourcing is becoming less of a barrier to change
5. There is increased desire for more stringent service measurement, introduction of web and data cleansing to increase service quality and accuracy

Ian Terry, Pension Administration business development manager, at Hewitt Associates, said:

"As the economic downturn has forced companies to tighten their belts, our research clearly shows that this has also been felt by pension schemes. Many remain faced with what may appear to be an impossible task: to reduce costs while improving quality. Simultaneously, trustees and pension scheme managers are operating in a fast-changing UK pension landscape – with many defined benefit schemes closing to future accrual.

"This kind of complexity is leaving many pension schemes struggling to prioritise their limited resource. If pension schemes are to meet these challenges head on, the approach to pension administration must fundamentally change from the traditional model to one which is more customer-centric."

More for less
Hewitt's survey underscores the mounting pressure on pension scheme administrators to improve quality and reduce cost.

While this was an issue identified by Hewitt in its 2009 survey, data from the 2010 survey reveals pressure on cost reduction has escalated over the past year. Reducing costs is now the prominent concern for 79% of pension managers and 58% of trustees. Pressure to improve quality is not far behind. It continues to be a top priority for 59% of pension managers and 43% of trustees.

At the same time as reducing costs and improving quality, 80% of trustees and 55% of managers want to improve service measurement standards. 70% of pension managers and 40% of trustees would like to implement a full data cleanse; and the focus on introducing web service for members is important to 50% of managers and 40% of trustees.

Ian Terry said:

"It's unsurprising that cost and quality remain a focus for pension schemes. Based on our experience and conversations with clients, the traditional approach to pension scheme administration will not enable schemes to meet these demands.

"Over the past six to 12 months, we have seen a much higher volume of schemes implementing market review of existing arrangements or considering outsourcing for the first time. Managers and trustees must therefore consider implementing new practices and approaches that will facilitate high quality control and efficient administration."
 
Adapting to an evolving environment 
The rapidly changing pensions landscape presents several challenges to pension schemes, particularly with the closure of many defined benefit schemes to future accrual over the past 12 months. As a result, many pension schemes are currently changing their pension administration strategy to reflect this.

Closure of the pension scheme to future accrual was cited by 30% of respondents as the main reason for changing outsourcing strategy. Hewitt's 2009 Global Risk Survey indicated that 70% of respondents were considering freezing their schemes to future accrual, suggesting that many more schemes are likely to have to change their pension administration strategy in the coming year.

In addition, the loss of critical pension administration knowledge and experience is an issue for UK pension schemes as key individuals are retiring or leaving.  With a limited inflow of entrants, the talent pool for in-house pension administrators is becoming increasingly limited. 
52% of pension scheme managers thought their internal team was too small to have sufficient breadth of experience and expertise to deal with ongoing administration.

This is having a direct impact on pension administration. In the Hewitt survey, succession planning was cited as the second most important influence over outsourcing strategy for pension schemes.

Ian Terry, said:

"The debate on closing or freezing DB schemes and the issues around succession planning are the two main factors driving strategic review of the approach to pension administration; and the survey results show that outsourcing is one of the solutions preferred by both pension managers and trustees. We anticipate this trend will continue over the next three years."

Leaning towards a standardised solution 
Currently, it is estimated 54% of UK schemes outsource their pension administration to a third party administrator (TPA). When considering potential suppliers their top two criteria are service quality (93%) and strong process expertise (80%). However, notable from this year's survey was a weakening in the desire for customised solutions down from 63% in 2009 to 50% this year. This may point to a greater acceptance of standardised service as more schemes close to future accrual, or a recognition that completely bespoke service solutions are more costly.

Ian Terry, said:

"Outsourcing is increasingly becoming the preferred option for pension administration, as long as the strategy is well defined and correctly implemented.  Choosing the right third party provider is therefore becoming increasingly important.  Nearly 60% of participants said they now saw an opportunity to cover all pension functions within a single outsourced solution, providing the four core services of actuarial, administration, investment and pension management."

Increased appetite for outsourcing 
Hewitt's survey shows that last year's significant barriers to outsourcing – gaining buy-in from senior management, and building a business case – have eased considerably. 77% of respondents highlighted lack of managerial support as a moderate or significant barrier to outsourcing in 2009, reducing to 27% in 2010. Difficulty for building the business case was rated a significant concern by 65% in 2009, reducing to 38% in 2010.

Having addressed the primary challenge of gaining buy-in among senior management, the spotlight has now shifted towards the external market and how, if the decision to outsource is taken, schemes can best control key processes (68%) as well as supplier management performance (42%).

Ian Terry said:

"This year's survey shows that senior management are now less opposed to an outsourcing solution, recognising the potential for it to be more cost and time efficient as well as more productive.  It enables pension managers to focus on the more strategic tasks while also meeting cost reduction objectives. The key concern for schemes now is to control what is being outsourced, what the performance levels are and how to manage the process."

Improving quality and accuracy
Given the need for a new approach to pensions administration, Hewitt asked pension scheme managers and trustees which alternative delivery options they would consider adopting in order to improve overall quality and accuracy.

The two favoured alternatives were improving service measurement standards (the top priority for 80% of trustees and 57% of pension managers) and implementing a full cleansing of data (the priority for 40% of trustees and 68% of pension managers).  Not far behind is a web service for members (the priority for 40% of trustees and 51% of pension managers).

Ian Terry said:

"A significant proportion of schemes have no web services for members at all, despite the large potential for better communication and service. The data suggests that pension scheme managers and trustees have recognised the potential in using the web, but relatively few have either taken the plunge or maximised its transactional capability. We expect uptake to increase over the course of the next 12 months.

Notes to Editors

About the survey 
The Hewitt Pension Administration Survey 2010 polled 97 UK schemes of which 63% already use a third party provider for their pension administration; and 37% currently administer their schemes in-house.

The main respondents are pension managers and trustees from private sector organisations, however the survey does include a small number of public sector organisations.  

About Hewitt Associates 
Hewitt Associates (NYSE: HEW) provides leading organisations around the world with expert human resources consulting and outsourcing solutions to help them anticipate and solve their most complex benefits, talent, and related financial challenges. Hewitt works with companies to design, implement, communicate, and administer a wide range of human resources, retirement, investment management, health care, compensation, and talent management strategies. With a history of exceptional client service since 1940, Hewitt has offices in more than 33 countries and employs approximately 23,000 associates who are helping make the world a better place to work. For more information, please visitwww.hewitt.com.