1 - Third-party administered schemes

The principal third-party providers continue to be specialist administrators or consultants/actuaries offering administration as part of a wider spread of services (see Table 28). 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.

Many of the schemes use other services provided by their administrator, most notably communication and pension consulting services. Additionally, annuity procurement is a service used heavily by defined contribution schemes, whereas the use of administrators' actuarial services is sought by many defined benefit schemes.

Schemes that currently take advantage of a 'bundled service', i.e. take their actuarial, consultancy and administration services from the same provider, accounted for 16% of respondents, and a further 12% of schemes would consider doing so. Whilst some larger schemes may see some benefit in using specialists for each function, e.g. investment consultancy, and may prefer a spread of providers, for small to medium-sized schemes, the potential economies in terms of both cost and efficiency of utilising more than one service from a given provider may well be an attraction.

This year, 51 per cent of third-party administered schemes (up from 39 per cent two years ago) say they outsource as this is now the wider business strategy of their sponsoring company (see Table 29). This trend-line is likely to be reflective of the financial pressures brought on by present economic conditions, with businesses focusing on core activities and overall efficiencies. In part, this will be a cost issue – our Survey continues to report lower administration costs for most sizes of schemes run on a third-party basis. However, elsewhere, it is noteworthy that, and elsewhere amongst in-house administered schemes (see Tables 12 and 13). 'specialist staff/specialist technical support' have moved up in the ranking of factors as most important in continuing current administration and choosing a third-party administrator.

In an increasingly complex pensions scene, where these specialist skills are a scarce commodity, it may be that more companies are appreciating that these skills are difficult to retain in-house compared to the resources available to third-party providers, where also the skill set available has greater breadth and depth. This trend is understandably being reflected in the higher number of schemes saying they are now more likely to consider third-party pension scheme administration, also reported elsewhere in this Survey.

Whilst outsourcing may be growing in popularity at the moment, only one in ten schemes presently use off shoring for any part of their pension administration. For the future, a minority (around 10 per cent of schemes) are prepared to consider more off shoring, primarily in back-office/payroll areas, rather than for where direct member contact is required.

Over 20 per cent of schemes first moved to third-party administration in the last five years – the most recent wave being amongst defined contribution schemes (see Table 30).

Over half of defined contribution schemes have reviewed their existing third-party arrangements in the last three years alone, with a quarter changing administrator on review. Set alongside this, fewer defined benefit schemes have been subject to review of the administrator in the last three years, but a higher percentage – 30 per cent – have moved provider on review.

All of this confirms last year's findings that there is fierce competition between third-party providers.

Across all schemes, close to half have used a consultant in their provider review.

Almost all third-party administered schemes now have a formal contract for administration, with the most common contract periods being rolling contracts or for set periods of between three and five years (see Table 31).

The Survey continued to find very wide variation in the methods of charging for outsourced administration (see Table 32).

It can be seen that half of third-party administration contracts have penalties for poor performance, but with fewer schemes seemingly using them compared to a year ago, perhaps reflecting the generally higher level of service standards reported elsewhere in the survey.

Only a few contracts include incentives for exceptional service, although the number has doubled to 10 per cent in the last year (see Tables 33 and 34), with three-quarters of providers benefiting from such incentives, where they apply, in the last year. Table 33 also suggests that less scheme administrators are incurring service credits or penalties, pointing to an improvement in service.

Some 56 per cent of the schemes administered by third-party providers have access to member records on their providers' computers. Of these, well over half are offering access via the internet (see Table 35). Generally, defined contribution schemes are ahead in the race to provide access by this means.