Changing third-party administrators can cause all sorts of issues, including loss of data. Michael Klimes looks at examples of poor transitions and asks if it is a widespread problem
An area where pension administration can go wrong is when a scheme changes third party administrator (TPA). During the transition, issues can arise that include the loss of scheme data, patchy member records sent to a new TPA and high exit fees.
Professional Pensions has been made aware of six unnamed funds that have experienced these problems to various degrees. Apart from the examples described below, there is a debate about how widespread these problems are and why they are occurring.
Five of the examples are defined benefit (DB) plans, of which one is a hybrid, and all happened in the last three years. The first two examples come from JLT Employee Benefits, which took on a large multi-section DB plan with 50,000 members and a medium-sized hybrid scheme with 3,000 members. In both cases, the ceding provider delayed the release of member data and the quality of data received was poor.
The other four examples are at the small end of the market and have between 500 and 2000 members with assets ranging from £50m to £100m.
Spence and Partners actuary Hugh Nolan explains problems that three of his firm's clients have experienced.
"In a case last year, a client had an exit fee which charged for the time spent by the previous provider pitching to the trustees to retain services which were up for tender. This year we had two cases, one of which a TPA charged a fee that the trustees felt was excessive where the provider would not negotiate at all and simply said, 'take it or leave it'. In the second case the plan suffered massive delays with getting electronic data transferred, let alone files," he says.
"It has taken three to four months for the data to come through to us when it should be a simple extraction from a system and done within a week. I am not saying that we should get people to send over data within a week but to say to the new TPA of the trustees that you cannot have the data for three or four months is ridiculous."
In the fourth case, Barnett Waddingham was the receiving administrator and took on a DB scheme with fewer than 2000 members. There was a handover charge which included a hefty amount to cover collating and transferring member files. However, no checks were made on whether the files handed over belonged to the transferring scheme.
A threat of legal action against the ceding administrator did result in several hundred member files being retrieved. Nonetheless, there were still hundreds of members left with no files, which meant benefits could not be verified.
Scottish Pension Trustees client director Julia Miller, who is a professional trustee for the scheme in question, explains what happened: "There was a lack of engagement because there was no direct relationship between the trustees and the administrator, but not for want of trying. We asked to see people directly from the administration team but our main contact at the consultant blocked that. Administrators never came to meetings. That one consultant then retired, there were staff changes on the administration side, and then no one had any knowledge of the scheme."
Clearly, the quality of some TPAs is an issue. Why are these problems happening and how widespread are they?
Miller thinks a combination of factors explains what happened to her client.
"Part of the problem may well be resources. If staff levels at the TPA are stretched when a scheme hands in its notice, the interest of the TPA tends to shift to its current clients. In our scheme there had been a poor relationship with the incumbent TPA for some time."
However, she also believes her bad experience is not confined to this particular scheme.
"There are systemic problems within third-party administration, there are a lot of offenders out there and it is something the industry needs to tackle. There is also a trend now that when you terminate an agreement with your current TPA, they hold you to ransom over the termination process.
"Rather than have clear provisions in the service agreement covering termination, the trend is to produce a new agreement at the end of the relationship, often including pretty steep fees, where they have you over a barrel.
"I have seen a couple of TPAs do this - I suspect where you have had a long relationship, people have not thought of the divorce. In older agreements, that stage of the relationship has not been thought through."
Pensions Administration Standards Association chairwoman Margaret Snowdon observes the issue of mismanaged transfers has been around for many years.
"Transferring of schemes from one administrator to another has long been fraught and I have spoken about it many times. There is very good practice and I see it a lot when advising schemes, but the poor ones always spoil things for everyone."
Snowdon believes administrators cannot be held solely responsible for poor transfers and argues trustees can be guilty of not planning ahead.
"The biggest issue is that schemes do not prepare for exit when they appoint an administrator, as they should do, so there are often no guidelines when it comes to changing providers. It's a bit like getting married - we rarely assume that things will change or go wrong."
Given that relationships between a scheme and administrator can sour, how can trustees prepare?
One option is to look through PASA's Code of Conduct on Administration Provider Transfers - a nine-page document that spells out in considerable detail what should be done to ensure a successful scheme handover between TPAs.
Snowdon says the trade body expected its members to adhere to the code when undertaking transfers, and that it "covers all good, decent practice."
For its part PASA is considering what more it can do to ensure its code is followed by providers at all times. "We want trustees to be able to check that a provider is a PASA member (or better still, a PASA-accredited member) and know that on exit they will be treated well and in line with terms agreed at the outset," Snowdon continues.
KGC Associates director Kim Gubler says forward planning combined with PASA's code of conduct on transfers can reduce the risk of mishaps.
"My view is that if [a scheme transfer between TPAs] is managed properly, you are less likely to have problems. If the exit terms between the ceding administrator and scheme are not embedded in the project plan and exit, that could make a scheme transfer between TPAs difficult. Sometimes the ceding TPA is not being difficult on purpose, it is just that it has a legitimate problem.
"All firms or TPAs that are members of PASA should have signed up to the transfer code. If a scheme has a problem with an administrator, the trustees should tell the TPA, ‘you have signed up to the code and are not following the principles.'"
Gubler is also adamant that trustees should insist that any exit agreement with ceding TPAs has fixed charges and there is no time cost structure. "When trustees agree to something in terms of administration, always put a price on it," she adds.
The big picture?
Given all of the above, is it easier, harder or the same for a scheme to change third party administrator compared to 10 years ago, for example?
JLT Employee Benefits director Mark Adamson says the picture is mixed.
"It is easier to move to some providers - those who have improved technology in place to assess the quality and completeness of member data being received, as well as enhanced capabilities to configure calculations and documentation output.
"All of this helps to ensure a smoother transition and strong service to members from the point at which administration goes live at the new provider."
Regardless of the state of administration generally, Adamson argues the art to successful interaction with ceding providers is to meet with them very early in the transition process to agree clear deliverables and sensible timelines.
"This approach, led by the new provider, doesn't guarantee success but it does maximise the chances of success and also means that if issues are encountered the trustees and sponsor of the scheme in question can be alerted to them quickly and corrective action agreed and executed," he says.
While it is nearly impossible to make all scheme transfers between TPAs perfect, trustees that look at PASA's code of conduct and plan ahead have a higher chance of success than those who do not.
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