Look long term

Over recent years the demands placed upon pension administration systems have increased. Firstly, pension simplification meant many calculations had to be re-programmed and with age discrimination hitting, many further changes are taking place.

Secondly, there is an increasing demand for online access and transactional capability, especially with DC schemes, but more so with DB schemes as well. Obviously this is being driven by members, but there is an increasing demand for online tools from trustee boards and pension managers.

With technical advances being made at an increasing pace, ensuring the system used keeps up is important for most administration departments. There is therefore a continuous process of review and change for both internal pension departments and third-party providers of administration.

The benefits of a high-quality administration system are:
• Database – all the relevant data can be stored and retrieved quickly and easily. Effective interrogation of the database is important for report writing.
• Calculations suite – ideally all scheme calculations would be automated. In practice this is rarely the case as there are often small pockets of members where the time and cost of automation outweighs the benefit.
• Workflow – workflows should be set up to guide the user through the process. This reduces the scope for errors when running calculations.
• Electronic document management system (EDMS) – integrated EDMS allows incoming post to be scanned and stored electronically.

The time and cost of implementing a new pension administration system is significant. Choosing a new system should be seen as a long-term commitment as it is both expensive and time consuming to change. Therefore, it is important to adopt a thorough process which will ensure the best possible outcome is achieved.

The more time spent identifying the requirements and evaluating the different system options at the outset, the more likely it is that the right system will be chosen. There are clear stages in a selection process.

Evaluation Team
It is important to involve the right people in the evaluation team. This is likely to include resource from the administration and payroll teams.

It will also include IT resources to evaluate the technology requirements. There should also be appropriate representation from the trustees to ensure buy-in.

This team will be involved in identifying the requirements including details of all the functionality needed from the new system. They will produce the relevant tender documents for the providers and evaluate the responses.

The use of external consultants can be of great assistance in this area and others. They can challenge and review preconceived ideas and make the team aware of all the options and opportunities.

Defining Requirements
The initial stage is to identify key requirements for the new system.

Some of the questions at this stage are fairly obvious, such as does it need to cater for defined benefit and defined contribution schemes, does it need to be web-enabled for member access and what level of manage-ment information is required from the system. While these are fairly high-level questions, it is important to get these things right at the start so you head down the right route.

This is not just about looking at the functionality of the existing system and trying to replicate it, it is about identifying what is required now and in the future. For instance, members may not currently have web access but if this is something that may be required in a few years’ time then it needs to be considered as part of the selection process as you don’t want to change again in three years’ time.

Identifying a Shortlist
Next, an expression of interest (EOI) can be produced. This contains basic information about the scheme and a fair amount of detail on your requirements.

It will ask for high-level information from the system providers as to the functionality of their systems. The main purpose of this stage is to reduce the long list of system providers down to a short list of four providers at most and to find out which system certain providers (those with multiple offerings) would wish to put forward.

The evaluation team will use both a qualitative and quantitative approach to evaluate the provider responses. Costs can be a differentiator at this stage, but rarely are as it is unusual at this stage to be able to fully understand and compare the fees quoted. From this review a shortlist of four providers can then be selected to go through to the invitation to tender (ITT) stage.

Invitation to Tender
A comprehensive ITT document should be prepared which covers the detailed statement of operational requirements for the department, as well as clarification of future needs.

The tender document will also reflect desired improvements to current procedures. It is likely, although not necessarily the case with the largest schemes, that the system provider will be responsible for setting up the calculations.

Therefore, the more detail they have at the tender stage the more accurate the cost estimate will be. It is not necessary to actually include calculation specifications in the ITT but an overview of the main calculations along with details of any quirks will be useful for providers and allow a more realistic response on the question of estimated costs.

The ITT responses are evaluated using an objective evaluation in the same way as the EOI responses, but at a much deeper level of detail. The new framework for good gover-nance by trustee boards makes it necessary for them to be able to demonstrate an audit trail for all the decisions that they take.

Selection of a new pension administration system is a major decision that should be taken with clear objective evaluation of responses so it always recommended that the evaluation criteria and any weightings to be applied are agreed ahead of the receipt of any responses to the ITT.

Costs
The temptation when receiving the responses to the ITT is often to go straight to the costs section of the response and reject any providers who seem to be out of line with the others. Although costs are one of the key factors, they can be negotiated and so providers should not be ruled out on this alone.

Another problem with this method is that often costs cannot be directly compared. Some analysis is required in order to judge them on a like-for-like basis. This is because certain items, such as integrated electronic document management, may be included as standard with some providers whereas others will charge extra for this where this is provided as an add-on option.

The costs of the implementation and ongoing support need to be assessed based on at least a five year time frame because a high implementation cost with one provider may be made up for by lower ongoing costs. Therefore once the initial cost analysis has been carried out the costs should be compared at the end of the evaluation process to see which option gives the best value for money.

Presentations and site vsits
Presentations and site visits are an important part of the evaluation process. The suppliers should be asked to give a demonstration at the client’s office. This will allow members of the administration team to see the system and provide input.

Although ultimately it will be the evaluation team making the final decision, this is valuable feedback and helps get buy-in from them so that they feel part of the selection process.

Site visits to clients already using the providers’ systems give you the opportunity to see the systems working in a live environment. The providers will have given you information on what the systems can do in theory – this is a chance to see it working in practice.

Site visits are carried out without the system provider being present and therefore you have the opportunity to ask questions about the provider. This can include questions on the implementation, for example, was the project delivered on time and budget. It is also helpful to ask what the high and low points were.

Although these reference clients have been put forward by the provider, they do still tend to be very honest.
This is always useful as you can learn from issues experienced by others, whichever system you choose.

Final evaluation
Once all the information from the site visits and demonstrations has been collated a final evaluation can take place to decide on the preferred provider. This will take into account the merits of each system and provider along with the costs of each option.

Once a preferred provider is in place and contracts have been agreed, a robust implementation process needs to be agreed. You can then install your new system so it meets all your needs and sets you free to pro-vide the high-quality and cost-efficient pen-sion administration we are all aiming for.

Cyrus Manecksha is a senior consultant at Higham Dunnett Shaw