What does this changing market mean for administrators?
Shona Davies, Rothesay
The current environment
Administration has often been considered something of a poor relation in the world of pension schemes. It’s always been easy for a trustee board to see the value in their investment consultant and asset managers; or understand the importance of having an experienced Scheme Actuary to guide them through valuation negotiations with the sponsoring employer; or legal advisors to ensure they understand their obligations as caretakers of the scheme. But the data? Well, the data would take care of itself.
Or would it?
After decades of tight budgets leading to dropped cleanse exercises, not enough investment in technology and automation, and a fight for talent, scheme administration finds itself in a difficult spot.
In administration, the people are as important as the data systems. However, the forced home-working of the COVID-19 pandemic showed that it was actually possible for administrators to work remotely, which opened up more opportunities and created a much more transient administration workforce – great for the individuals, but bad news for trustees that lose knowledge and experience on their schemes. Furthermore, insurers are guilty of shrinking the resource pool. By bringing administrators into their teams (likely seen as the growth area in the industry and where teams are more stable), they have attracted skilled administrators away from the ongoing scheme world.
For some schemes, the standards of dayto-day member administration are well below where they should be, never mind contemplating the extra work involved in implementing a risk transfer arrangement.
The big barrier to achieving buy-out is no longer scheme funding levels – where improvements have accelerated timelines to buy-out as much as 5-10 years. Whilst illiquid assets are a barrier, insurers are increasingly able to find solutions. Instead, it is now the ill-fated combination of poor data and a lack of administration resource which acts as the main blocker to buy-out.
With schemes now racing to the bulk annuity market to seize market opportunities, and sponsors keener than ever to break free of the pension burden, this elephant in the room has become
impossible to ignore.
How does this affect the transaction?
It goes without saying that the quality of the data and the level of advance preparation will have a big impact on a transaction. From the trustee and sponsor perspective, two areas are key:
- the upfront price, where assumptions are needed in calculating the premium (lower experience data and less reliable data leading to greater prudence, which can knock onto reinsurance pricing too);
- and, of course, the extent of data cleansing actions the insurer will require the trustee to complete (which will impact on any balancing premium owed further down the line, creating price uncertainty as well as extending the overall timeline).
But administration touches all stages of a risk transfer transaction, and there are some more subtle points to factor in that put additional pressure on the administration team:
- Accessing data needed in the exclusivity phase to complete due diligence can lead to delays in signing the contract and impact on price-locks, leaving trustees exposed to more market risk.
- Managing the impact on member experience, particularly where there is a deferred population included (which is increasingly the case). There will be additional processes expected of the administration team to incorporate member option factors; and the usual online portals may be unavailable during this time, increasing the activity directed to your administrator (plus news of the transaction itself may lead to increased volumes of enquiries).
- Additional regular reporting and tracing (particularly for the population past retirement age) will be required by the insurer.
- The data cleanse actions to be carried out by the administrator on behalf of the trustee can vary wildly, but often include work to calculate contingent spouse’s benefits, or re-visiting Barber equalisation – areas that will potentially involve digging around paper files and old systems.
- Whilst GMP equalisation needs to be completed by schemes regardless, there will be additional work in providing the data and any supplementary information to the insurer to ensure they can administer the benefits following buy-out.
- For some schemes, Winding Up Lump Sum (WULS) exercises can reduce the premium and are often a welcome opportunity to cash in benefits for members. However, the bulk of the work required to run the exercise will sit with the administration team, including population checks, bulk mail merges, handling queries, monitoring responses, running payment security checks and updating records.
- The administration team will be vital in managing member communication exercises, from general updates on the transaction, to write outs related to data cleansing actions and discharge notices ahead of buying out.
- Throughout the process, the scheme administrator will also of course be managing the transition to the insurer’s administrator – providing multiple data extracts, image files, AVC and payroll information, and addressing queries.
What can we do?
Administration capacity isn’t going to grow overnight to match the surge in activity in the bulk annuity market, and many schemes are coming to market with their legacy data issues unresolved. This leaves trustees (and insurers) needing to find alternative means to support the successful and timely transition of schemes to an insurer, and ease the pressure on the market that these transactions create.
This starts with bringing the administrator to the table – include your administration team in planning and discussions at the feasibility stage if possible, so they understand the requirements and get the right people available.
Ensure open conversations on costs and resource are had in the early stages, and be prepared to pay. Often the focus is on the premium and all the work involved in agreeing the contract, but during exclusivity (or earlier), you should get to grips with the cost implications from all of your advisors beyond inception date – don’t underestimate the extra work involved.
Consider the structure of the deal: single premium residual risk deals, for example, will increase the due diligence effort significantly and typically mean that the insurer will pay the benefit cashflows requested by the trustee, but this is predicated on the timely and accurate flow of information from the administrator from day 1, which is a significant ask.
As more and more transactions are completed, scheme administrators are building up expertise in the reporting and data that insurers require, often having specialist teams that can run the data cleanse exercise. Trustees can leverage this by sticking to standard terms as much as possible. Bespoke deals and drawn out
timelines will undoubtedly lead to more work operationally.
Whether at the client, or outsourced to a consultant or governance solution, have a dedicated project manager to partner with the transition manager at the insurer. This will be money well spent to maintain the momentum needed to meet each milestone and support the administrator in managing and prioritising their responsibilities.
Ask yourself, what is really important to you? For example, does the premium saving of a WULS exercise really offset the cost and effort of running the exercise at the risk of increasing the timeline?
Find opportunities to combine necessary processes, cleanse activities or communications into existing tasks. Technology and AI no doubt have a role to play here, too.
Consider the impact on resource that the method of equalising GMP will have. For example, dual record methods are almost certainly a heavier lift than conversion, both before and after buy-out.
It is in our collective interests for bulk annuity transactions to be completed as quickly as they can be, and for trustees and insurers to be mindful of the wider view when making their decisions. Otherwise, we are all continuing to contribute to the ongoing capacity challenges.
Your administrator really does hold the key to a successful risk transfer transaction.
So whatever stage you are at in your risk transfer journey, bring them in and start showing them some love – they really need it!
About the author
Shona Davies
Shona joined Rothesay’s transition team in 2021, having previously worked as a pensions consultant at Mercer, helping clients manage their pensions risk. Her role is focused on the post execution activities of new liability transactions. Shona is a Fellow of the Institute of Actuaries.