Vicki Taylor asks if it’s more cost effective for an organisation to outsource its pensions administration to an external provider than to run a scheme in-house
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Opinions are split as to whether it is more cost effective for employers to outsource pensions administration or keep it in-house.
Experts believe cost savings are probably achievable whether pensions administration is in-house or external.
Cost savings are rarely the main driver for outsourcing pension scheme administration.
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The cost-effectiveness of outsourcing pension scheme administration has been the focus of some debate. Opinions are split over whether it is cheaper to outsource or run a scheme in-house. Capita Hartshead’s 13th Pension scheme administration survey 2006, for example, found that occupational pension schemes that outsource their administration cost an average 8% less than if it is kept in-house. However, Ian McQuade, head of consulting at Dunnett Shaw, the consultancy which helped BP bring its pension administration back in-house in June 2004, says: “Depending on who you talk to you will get a very different answer. If you talk to in-house pension managers they will say they don’t understand how companies can afford to outsource. If you talk to outsourcing companies they will say the economies of scale that they can bring to the table [make it] cheaper to outsource.”
Pensions administration involves maintaining membership records, and handling any requests from scheme members and changes of member status within a scheme. It also involves collecting contributions, paying benefits and communicating pension information to members. The majority of the work is conducted with the help of software, which also needs maintenance. McQuade estimates that an outsourcing arrangement for plans with more than 25,000 members, including current and deferred members, and those already drawing a pension, costs between £15 and £20 per head per year. “If you have a much more inclusive service with a lot more communication, then it may be as high as £25 or £30 a member.”
For smaller schemes with around 1,000 members, a company can expect to pay £30 to £40 per member for a basic service and up to £60 or £70 for a more inclusive service. Robert Plumb, a principal at Mercer Human Resource Consulting, believes cost savings can be made whether a company keeps its pension administration in-house or outsources it. “If it is an in-house operation, you just need to look at the level of resourcing and how efficient it is, and improvements can [probably] be made. If [pension administration] is too expensive and is already outsourced, then you could probably improve the efficiency of how you work with the existing administrator, [or] you might want to look at changing administrators.” However, cost is rarely the main driver for an organisation to outsource or bring its pension administration back in-house.
“In many cases, when employers outsource it isn’t because they think they are going to save money. [It could be because] they are facing major investment in systems to keep it going in-house or because a key person is leaving,” says Plumb. When an organisation does decide to outsource its pensions administration, the main issue is getting it right. “There are in excess of 60 to 70 third-party providers out there so it is a really congested marketplace. It might only be a three- or five-year contract, but you want to hope it will end up being a long-term relationship,” says McQuade.
Keeping some expertise in-house is also advisable. “In some instances, [companies] get rid of their pensions manager because they don’t think it is their problem anymore, but there still needs to be someone internally managing how the third-party provider is performing,” McQuade adds.