Get value for money

This year’s survey of pension admini-stration costs covers more than 172 schemes with a membership of over 3.5 million. Of these, 39pc are administered in-house and 61pc are administered by an external third party. The schemes vary in size from under 100 members to over 300,000.

Watson Wyatt’s objective was to derive data to help trustees and sponsoring employers benchmark the running cost of their scheme.

The survey also asked respondents to identify the cost of any large, special exercises and valuations carried out in 2006 to analyse the “normal” ongoing running costs of the scheme.

Satisfaction levels of respondents with their scheme administrators and providers where also analysed in terms of both quality of service and value for money.

A number of factors can have an impact on the running costs of pension schemes. Not only is scheme structure, size, maturity or turnover a key determination of the administrative cost per member but so is the attitude of the scheme’s sponsor to risk.

The complexity of the scheme’s benefit structure is relevant, as is the quality of the company’s payroll or HR departments. The range of services offered to members is also important.

It is impossible to draw conclusions on how effectively schemes are being run or to benchmark the costs of specific schemes of similar sizes, without ensuring that the schemes and how they are operated are identical in most other respects.

There are however several clear conclusions that can be drawn from the Pension Scheme Cost Survey 2006.

The size of the scheme is crucial. The larger the scheme the more costly it is to administer in absolute terms, but the per capita costs decrease with size. The average administration cost per member of schemes with over 40,000 members was £26 per year; this increases considerably to £40 per year between 10,000 and 40,000 members and £159 for schemes with less than 500 members.

The survey also considers other running costs, including actuarial, benefit and investment consultancy advice. Again, these are proportionally lower for large schemes. From the data, it costs on average £159 per member to provide advice to a scheme with less than 500 members, reducing to £61 for between 500 and 2500 and down to £6 for those with over 40,000 members.

A similar pattern follows for auditor and solicitor costs.

The survey shows there could be a significant cost savings through combining schemes. In fact, the costs savings could be up to one-third of the running costs by combining two schemes with 2500 members using two sets of administrators and advisers into one scheme and 5000 members with one set of administrators and advisers.

Most pension managers would agree that overall, pensions and deferred pensions typically generate less work each year than active members so the average cost per member of administering mature schemes is lower than that of administering immature schemes of the same size.

The survey highlighted this very fact. For schemes with between 10,000 and 40,000 members in total but fewer than 25pc active members, the median administration cost per member was £39.

For the same size schemes with between 25pc and 75pc active members the median cost rose to £43.

A second conclusion is that administration costs are rising, though the survey data could indicate that the cost of in-house administered schemes have risen less than those administered by a third party.

To eliminate as many variables as possible, we considered only the 98 schemes that participated in both the 2005 and 2006 survey and where the total number of members and the maturity did not change significantly.
The median increase in costs was 9pc.

We are frequently asked by our clients whether purely from a cost perspective it is cheaper to administer schemes in-house or to outsource. The results show that irrespective of size, on average the costs for those that are administered internally are less than those administered by third-party administration companies, although there is very little difference in costs for large schemes of between 12,000 and 21,000 members.

This is not unexpected – from our work reviewing individual schemes on behalf of their trustees, we have encountered many pensions departments that are run very efficiently.

However, both the survey and individual scheme-specific reviews indicate that some schemes are not administered cost efficiently in-house, so trustees and companies can not be complacent.

In this context, the only way to ascertain the effect on costs of outsourcing is to seek actual tenders from a number of third party administration companies.

The survey asked respondents to score how highly they rated their scheme administrators and other service providers, both in terms of quality of service and value for money. The rating was on a 1-5 basis, where 1 was very good and 5 very poor.

The results were positive. The vast majority of respondents indicated that they are satisfied with the service they receive: the average of all the responses was a score of 2 for quality of service and 2.3 for value for money.

While there was little or no variation according to the size of the scheme of note, far fewer in-house administered schemes responded to this question than outsourced ones.

Schemes participants in the survey will receive the full report very shortly, if they have not already done so, with an analysis sheet of their own data to enable them to make the relevant comparisons. Unfortunately the survey is not available to a wider audience.

However we would encourage interested parties to contact Paul Mead on 01737 274551 or via e-mail to paul.mead@
watsonwyatt.com to discuss participation in next year’s survey.

Paul Mead is head of administration consulting at Watson Wyatt