Access to automation could explain why there is still a large gap in fees for large and small schemes, according to KGC Associates' ninth administration survey. Victoria Ticha looks at the findings
This year's KGC Associates administration survey considers whether the slow take-up of automation in managing data is affecting schemes' fees, and looks at how often administrators are interacting with scheme trustees.
It also compares the percentage of ‘core offerings' provided by administrators for a standard fixed fee, and considers the industry's perspective on a number of issues such as the future of master trusts.
The firm's ninth annual survey involved asking 18 administrators to cost for services broken down into five sections: administration; pensioner costs; treasury and accounts; implementation; and year one costs for a range of scheme sizes covering 200, 500, 1,000, 2,000, 5,000, 10,000, 15,000 and 20,000 members.
It also looked at ongoing costs for maintaining the pension scheme and created a unit cost per member, derived by dividing the total cost by the number of members.
There is still a significant gap between what larger schemes pay in unit cost per member compared to their smaller peers, with 200- and 500-member schemes paying on average £124.26 and £67.67 compared to 15,000- to 20,000-member schemes which pay £24.05 and £22.41 respectively.
Why is the unit cost per member higher for smaller schemes compared to their larger counterparts?
Impact of automation
The "significant gap" between what larger schemes pay compared to smaller schemes is hard to justify, given that we are in an age where the relentless pace of technology has made automation products increasingly accessible and cost effective, according to KGC Associates research analyst Hayley Mudge.
Internal pressures to drive down operational costs but still deliver high quality and speedy services means pensions administration is a complex market to be in. "Unfortunately, there will always be a variance in fees between large and small schemes, [but] trustees need to make sure they're justified," says Mudge.
However, while "economies of scale" might account for some of the difference, Mudge believes there must be another reason which means the large gap is not always justified.
Similarly, KGC Associates director Kim Gubler says: "There will always be some degree of economies of scale. But are the economies of scale the whole reason? Or is it that larger schemes are generally in a stronger negotiating position?"
Either way, all schemes should be offered access to automation, which could more than halve their costs, she says. If their data is not fit for automation, then trustees should be asking why.
"If you don't have good data, you can't automate," says Gubler. "But if your data is good, then you can drive down administration costs."
While data is important to calculate scheme benefits, she worries that the data is not always good. "Even if administrators are using automated systems, those systems have to be maintained and checked by a scheme actuary. That's one of the reasons why The Pensions Regulator (TPR) is [again] focusing on scheme specific data."
The findings shows 200- to 1,000-member schemes are only offered on average two trustee meetings a year, while larger schemes with between 2,000 and 20,000 members receive four.
When it comes to pure administration meetings, only one was offered to smaller schemes, while a third of 1,000-member schemes were offered either one or four meetings, and 2,000- to 20,000-member schemes were offered four.
For a trustee board to be effective, Mudge says it should meet on a regular basis, because, in her experience, smaller schemes have the same issues to discuss but have less assistance.
"We are seeing a step change with administration no longer sitting at the bottom of trustees' agendas, and data following closely behind," she says. "[But] we would like to see smaller schemes formally engaging with their administrators more. This will give administration the place at the table it deserves," she continues.
"After all, just because schemes are small doesn't mean they have fewer or less important issues to discuss."
As part of their role, trustees have to show that their scheme is receiving value for money, but a lack of meetings focusing on administrative issues could mean trustees falling short in fulfilling their duties.
However, it is encouraging that administration services are becoming more inclusive. Eight administrators offered 100% of ‘core services' in their standard fixed fee, nine offered 90%-99%, and only one offered 80%-89%.
Across all the administrators, the average was 97% of core services offered for a fixed fee, compared to 80%-90% in last year's survey.
Still, only the firms that charged the highest fees provided access to 100% of core tasks in their fixed cost. However, Gubler says it is important to consider what tasks are not included and whether they are necessary.
It is not all about driving down costs; rather, it should be about finding value for money.
"If somebody offers 100%, they're more expensive than someone who's offering 97%. So you look at what they are offering and ask do I need that and how often? It's not just about cost, it's about what is most valued," says Gubler.
For example the report cites ‘bespoke administration stewardship reports' as the most commonly excluded task within core fees, and so schemes should really weigh up the costs versus the benefits of such services.
In the survey, KGC also asked eight master trust providers for their thoughts on authorisation, and where the master trust market would be in a year's time.
Half of those surveyed said only around 50 master trusts (out of around 90 currently) would be around in operation by the summer of 2019, while the other half thought there would be even fewer. One provider said there would only be 15-20 left, while another suggested it would be closer to six.
All master trusts said they expected to have collected the evidence for authorisation by 30 November 2018, with a third saying they would have done so earlier.
Another question, which sought to find whether pensions managers and trustees' concerns were the same as administrators, asked what would be the most prominent issue over the next 12-18 months.
Pension managers and trustees said defined contribution (DC) freedoms and potential standardisation of defined benefit (DB) to DC transfers would be the most prominent (31%), followed by data quality and cyber security (23%), Brexit and its effect on the economy (15%), TPR's increased powers (15%), and ‘other' (15%).
For administrators, data quality and cyber security topped the list (56%), followed by DC freedoms and DB transfers (17%), Brexit (11%), TPR powers (11%) and ‘other' (5%).
Managers and trustees were also asked how confident they were that they, and their administrator, had the processes and procedures necessary to prevent pension scams. The majority (62%) said they were ‘confident', compared to 38% who said ‘fairly confident', and none said they were not confident.
While it is great that the majority of managers and trustees are confident they have processes and procedures in place to prevent scammers, the team at KGC Associates recommends those who are only 'fairly confident' to look to improve standards to protect members.
Likewise, for trustees and employers looking for value, it's a balancing act between costs versus the services needed for their individual schemes. "We firmly believe trustees should start with scoping out the services they need before negotiating price," says Mudge.
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