1 - Executive Summary

This 17th Annual Pension Scheme Administration Survey, commissioned by Capita Hartshead and undertaken by Underline Marketing and Research, is based on the responses of 414 public and private sector defined benefit and defined contribution workplace schemes to a questionnaire issued in paper form and online in February 2010.

The schemes that responded manage pension fund assets exceeding £297 billion, with a total membership of 5.4 million lives. The sample represents schemes holding around one quarter of total pension fund assets, together with a number of public sector arrangements, representing a significant proportion of the members presently covered by UK occupational schemes.

As well as exploring pension scheme administration trends, this year's Survey also examines views on the Government's NEST (National Employment Savings Trust) reforms and auto-enrolment (both presently due in stages from 2012), as well as trusteeship and governance issues.

This year's Survey found further evidence of defined benefit scheme closures to new entrants (and in some cases future accrual), with more expected in the year ahead – 76 per cent of private sector schemes are closed to new entrants and 13 per cent to future accrual.

The Survey found that 71 per cent of organisations in this sample have established defined contribution arrangements – a third of which have been opened in the last 5 years.

31 per cent of employees are not members of any of the workplace pension arrangements that are offered (up 3 points from last year).

Over the last five years, 74 per cent of defined benefit schemes (as opposed to 34 per cent of defined contribution schemes) say that the total cost of managing their pension scheme(s) has grown at a faster rate than other business overheads.

For most schemes, administration costs have increased by between 5 to 7 per cent over the past year.

For schemes with more than 2,000 members, third-party administration continues to provide cost savings (£3 to £6 per member per annum) in comparison with in-house arrangements.

Overall, 'reliability of service' remains the most important reason given for continuing the current form of scheme administration (ranked first by both in-house and third-party administered schemes), with 'specialist staff' as their second most important reason.

Overall, 'experience of the organisation' is again ranked first by both third-party and in-house administered schemes as the most important factor when choosing a third-party administrator.

Beyond this, there is a coming together in the factors viewed as the most important in the selection process. Both in-house and third-party administered schemes see 'specialist technical support' as the next most important factor, with the 'reputation of the company' and 'financial strength' both figuring in the top four of both lists.

Since the series began, many more schemes (now well over 90 per cent) have moved to spell out turnaround times for key administrative tasks.

Over nine out of ten schemes also now operate to set service standards that are incorporated into agreements with administrators and/or trustees.

Two-thirds of schemes say their administration service includes the measurement of end-to-end processing times, with this (as with service agreements generally) more prevalent amongst third-party administered and defined benefit schemes.

In the majority of service areas, there has been a considerable increase in service targets being exceeded by both in-house and third-party administered schemes, with service failures most apparent across all schemes in the area of 'reduced management time' devoted to pensions, as was the case last year.

Across most service areas, defined benefit scheme administration performs better against targets than administration in respect of defined contribution schemes. As a result of TPRs guidance issued in January 2009, close to 7 out of 10 schemes say they have undertaken a formal exercise to improve the quality of data, with the aim to improve defined contribution scheme administration.

This year, 97 per cent of schemes achieved or exceeded their target for service in terms of overall member experience, with, encouragingly, more service measures moving into the 'exceeded' box compared to last year.

Spending on scheme communications is generally down from a year ago, with six out of ten schemes spending under £20,000 per annum.

The majority of schemes continue to use paperbased documents to communicate pension information to members, supplemented by webbased communications, where shortened annual reports, newsletters, summary funding statements and scheme booklets were the most popular documents in this medium.

Reflecting the growing trend in web communication, 73 per cent of schemes (up 12 points from a year ago) now have a website, with over half offering interactive features and a third offering comment or feedback options.

Over half the schemes with web access say this has improved the overall member experience, but on average just 22 per cent of members actively use the facility.

Just over one in four schemes provide web-enabled access to members' individual records.

Reversing the situation of a year ago, two-thirds of schemes say their current level of communication with members is 'good' or 'excellent' (as opposed to just one-third a year ago).

A third of in-house administered schemes responding to the Survey have never considered using third-party administration. However, of these, two-thirds (up 35 points from a year ago) say they are likely to consider a change to third-party administration in the future.

A third of in-house schemes say they are considering a review of their system provider in the near future, considerably up compared to last year.

The principal third-party providers continue to be specialist administrators or consultants/ actuaries offering administration as part of a wider spread of services. This situation is less accentuated for defined contribution schemes where just over half of these schemes are administered either in-house or by third-party providers.

51 per cent of third-party administered schemes (up from 39 per cent two years ago) say they outsource because it is the wider business strategy of the sponsoring company to outsource non-core activities.

Only one in ten schemes presently use off-shoring for any part of their pension administration. A minority are prepared to consider more off-shoring in the future, primarily in back-office/payroll areas rather than where direct member contact is required.

Over half of defined contribution schemes have reviewed their existing third-party arrangements in the last three years alone, with a quarter changing administrator following a review, indicating there is a high level of competition in the market.

Almost all third-party administered schemes now have a formal contract for administration, with the most common contract periods being rolling contracts or for periods of between three and five years.

The Survey continued to find a very wide variation in the methods of charging for outsourced administration. 'Per capita and annual management charge only' and 'fixed price only' are the leading charging methods, presently used in over half of all contracts, but with 'per capita and annual management plus transaction charges' becoming more common.

A half of third-party administration contracts have penalties for poor performance, but with fewer schemes using them compared to a year ago. Only a few contracts include incentives for exceptional service, but numbers have doubled compared to a year ago.

The continuing trend over the last 12 months amongst defined benefit schemes has been the decision by sponsoring companies to make special one-off employer contributions to reduce funding deficits (27 per cent of schemes, but down 7 points from a year ago) and to implement salary sacrifice (11 per cent).

The year ahead shows these trends continuing, with many defined benefit schemes anticipating further one-off contributions and increases in regular employer contributions, as well as further scheme closures to new entrants and future accrual and more opting for salary sacrifice arrangements.

Amongst defined contribution schemes, the main change reported over the last year was, again, the introduction of new investment funds and options for scheme members. In the year ahead, half the schemes intend to introduce new investment funds and options and over a third intend to introduce salary sacrifice arrangements.

Ahead of 2012 (the current date for the initial rolling out of NEST and auto-enrolment) some 16 per cent of schemes say they are likely to decide to auto-enrol all employees into their existing company schemes (a sharp reduction of 27 points from a year ago).

Given the move to auto-enrolment from 2012, some 51 per cent (up 17 points from a year ago) of schemes now say they are likely to revise current scheme benefits to hold down costs.

22 per cent of defined contribution schemes say they may opt some employees into NEST rather than auto-enrol these employees into their company scheme, and 10 per cent may close their existing arrangements entirely in favour of NEST.

Schemes expect 25 per cent of employees to opt out from NEST or qualifying schemes, rising to 40 per cent where the qualifying scheme offered is a defined contribution arrangement.

Eight out of ten schemes hold between three and six trustee meetings each year, with seven out of ten reviewing administration performance at each meeting. Stewardship reports from administrators are increasingly required for each trustee meeting and a quarter of trustee boards now have a specific administration sub-committee.

Nine out of ten schemes regularly review their advisers, with investment managers subject to the highest incidence of review over the last five years.

'Investment strategy', the 'employer's ability to fund the scheme' and 'non-compliance with legislation' are seen as the top three risks impacting on scheme management. However, the ranking of those risks to be addressed by trustees is quite different between defined benefit and defined contribution schemes.

The ranking of mitigating factors to address the risks faced by schemes is also different between defined benefit and defined contribution schemes, highlighting the difficult and different challenges for trustees who are often responsible for managing both types of schemes at one and the same time.

Close to seven out of ten schemes say they have undertaken a formal exercise to improve the quality of their data, as recommended by the Pensions Regulator. Over two-thirds of schemes say they will review data quality annually or more often.

Scheme funding issues have prompted the greatest number of communications with the Pensions Regulator over the last year, with an increase in notifiable events and a reduction in clearance references.