An increasingly common question we are asked by HR experts is: should they retain or even return pension administration in-house? That is, having a team to deliver the administration of their pension plan within their own business rather than outsourcing it to a third-party provider.
The reason for this is the level of dissatisfaction that some companies are experiencing with outsourced provision. One of the most common complaints is that outsourced providers often lack an understanding of, or care about, member servicing and communication. Given that the pension scheme is often an employer’s largest expenditure on their staff after salaries, this is plainly unacceptable.
Managers of pension schemes with in-house administration typically claim that the advantages more than outweigh any potential benefits from outsourcing. They believe that a focus purely on the cost of the administration loses sight of the wider importance of the pension scheme. In-house operations are also often closer to the business and share the culture and strategy. Many in-house schemes cite the fear of the reputational damage should something go wrong with an outsourced provider, as disgruntled scheme members can be very vocal.
There are, of course, challenges with in-house administration, such as key person risk and attracting talent. Investment in technology and a lack of innovation and change/project capability can also be a problem. Outsourced service providers on the whole offer better options with regards to managing key person risk, dealing with projects and justifying the necessary investment in technology. However, in-house and outsourced teams often have the same shareholder pressure to contain costs, and outsourced providers can also be wary of making significant investments because of the often short-term nature of contracts. And plainly these challenges certainly do not apply equally and to all situations.
Regardless of which strategy you have adopted in the past, the key to finding the best long-term solution is understanding your specific pension administration requirements, now and in the future. A detailed review should be undertaken, looking at your own specific pension administration issues, as well as the broader cultural and strategic issues for your organisation. You should also commission a detailed understanding of the true costs of the different models.
Specific issues for organisations considering an in-house solution include existing staff resources and their technical abilities and pension knowledge, the existing technology, and the cost of new systems and training. Workforce planning and the ability to manage spikes in workloads and projects alongside business as usual are key. You should also consider member engagement and where pensions sit in the broader benefits agenda. Finally, think about macro issues such as potential regulatory or funding/de-risking policies that might impact on future delivery.
At the risk of generalising, there are things that in-house teams can learn from the outsourced world, such as good management information reporting and governance, a strong project management methodology and approach to change control, work allocation and management. Likewise, third parties can learn a lot from in-house teams about member care, the importance of specific scheme knowledge and taking a more flexible approach.
It often makes sense for HR departments to consider a hybrid model. For example, schemes can consider outsourcing transactional areas, such as pension payment where technology and economies of scale can make outsourcing more efficient, while having activities such as finance and member contact in-house where existing solutions can be leveraged and more control retained.
Whatever the solution, the key is always understanding what all the stakeholders are trying to achieve both now and in the future. But what is clear is that a ‘one size fits all’ approach is unlikely to be the preferred option for employers.
Philip Dickinson is a director at Cosan Consulting