Consultants as outsourcers
The pensions situation was not an immediate priority in the wake of the 2002 IT super-giants’ merger when Hewlett-Packard acquired Compaq. “But when we began to examine it we saw that we had a lot of integration ahead of us,” says Ron Wisselo, regional pension specialist at Hewlett-Packard’s western European HR organisation. “We had four pension plans – one for Dutch HP and three plans from Compaq,
the result of its 1998 acquisition of Digital Equipment. In total there were three times more active members than before.”
In addition, there was a time constraint. “At the same time as we were assessing the situation a mandatory fund deadline was looming for the Dutch ICT sector, with all IT companies that were part of an industry-wide agreement having to change their plans before 1 January 2004,” adds Wisselo.
HP had opted not to join the industry-wide scheme because it wanted to retain influence over investment policy and the appointment of the fund’s investment managers. But it had decided that the HP plan should provide benefits that were at least the equivalent of those in the industry-wide scheme. “So we more or less copied the plan of the industry-wide sector fund,” says Wisselo, who selects organisations for inclusion on HP’s list of preferred asset managers for their pension capital.
At E700m, the integrated fund ranks about 100th in the Netherlands in terms of size. “The new pension plan is a hybrid scheme with a career average defined distribtion (DB) plan up to a salary ceiling of about E53,000 and defined contribution (DC) over that,” says Wisselo. “The DB plan, which covers 2,400 active members and is some 85% of payroll, is executed by the pension fund, the DC plan, consisting of the other 15% of payroll, is insured. Deferred pensioners and pensioners make up around 50% of the assets of the fund. Quarterly reporting to the PVK on asset-mix and returns is required.”
With the introduction of a new industry-wide programme being an important driver to get the plans integrated, the HP pension fund board appointed a working group to examine whether to recruit more people to oversee the integration or to outsource the process. The working group included Wisselo as an expert from the company, representatives from the pension fund board, including its office manager, the employees’ representative and one of its two administrators, and Hans van den Hatert, an actuary on the committee and a Hewitt employee. “At that point we saw that such an investigation meant looking for external service providers,” says Wisselo. “So we requested six outside companies to do a request for proposals.” The RFP was for the transfer of the schemes’ administration and the performance of various secretarial duties for the funds.
“We knew what we wanted to do and we asked for external help to do the letter writing, make sure the reports were received in time and summaries were made from the reports,” says Wisselo. “The assistance came from someone at Hewitt’s Eindhoven office who was not otherwise involved in the process. The idea was that he would keep the process up to speed and well structured. Moreover, it relieved the office management of the pension fund from doing that work.”
In addition to the external RFPs, HP gave the two employees handling the administration of the Digital pension fund an opportunity to make a pitch.
But speed was also important. “Because the formal part of the plan had to be in place by the start of the new branch industry plan at the beginning of 2004, the pension issue had to be resolved quite quickly,” says Van den Hatert, manager of Hewitt’s Eindhoven office and leading consultant for Hewlett-Packard in the Netherlands. “The outsourcing working group was established in August last year, a beauty parade was held in November and the decision was made in early December.”
The beauty parade followed the first selection and involved four respondents. “We had worked on a beauty parade scorecard having taken advice on how to draw it up to include both the factors we were looking for in a provider – including flexibility, stability and cost – and on how to rate these different elements,” recalls Wisselo. “After the beauty parade we went back to our scorecard and made some corrections to the initial numbers behind key factors because we found that we had rated some parties too high and some too low.”
At the end of the process the scorecard showed that two candidates could clearly do the job, with the other two trailing some way behind. “We could have just picked number one but we realised that other factors such as a cultural match should also be taken into consideration,” says Wisselo. “Consequently, we balloted the panel members and asked them also to state why they were voting the way they were. The decision for Hewitt came in three to one. Although a member of the working group that reviewed the results of the beauty parade, Van den Hatert, as a Hewitt employee, did not vote.
The working group also negotiated on price with the final two candidates during the selection process. But price alone was not the deal-maker. “All pension statements from the other major candidate had more or less the same structure and of course that was reflected in its cost structure, which was lower,” notes Wisselo. “But I would rather pay a bit more and have more flexibility.”
The price is partly fixed and partly related to the number and kind of mutations to be recorded in a year, he adds. “Hewitt and some of the others got extra points on the scorecard because they were also working with HP in other countries,” says Wisselo. “We know that Hewitt is experienced in using multi-country systems, HP has a relationship with Hewitt in Switzerland and Hewitt also does a lot of outsourcing for HP in the US. But it was not the final decision maker – the large company also got some extra points because they administer the ICT sector fund.
“There is a lot of choice when it comes to companies offering pensions administration on the Dutch market and some of them, like number two, are really big. But the final question for us was whether we would feel happier being client number 60 or 70 for what I think is the biggest player in the Dutch market or being an A-rated client with a flexible lean organisation like Hewitt.
“And flexibility is very important. By that I mean whether, should one discover after the plan is drawn up that something that it does not cover is needed, the possibility of making the pension statement more sophisticated can be discussed.”
And how did Hewitt make its pitch? “Like any consultant in a situation like this, the first thing you want to do is to meet with the client and find out what are their needs so you are best able to craft a solution that meets them,” says Paul Howes, managing director of Hewitt in the Netherlands. “We heard that HP required assistance in a variety of areas, not least the professionalism of our solution, a flexibility to meet their changing needs and on our approach to communication to employees – and this was one of the key factors that most influenced HP’s decision. Value is moving to the consumer and the ultimate consumers in everything that we pension specialists do are the employees themselves. Pension schemes in the Netherlands are quite complicated and I think Hewitt has a solution that will make it relatively easy for employees to assess what they are entitled to.
“With a decision being made in December it was not possible for Hewitt as a provider to start from 1 January because we needed to make adjustments to our system,” says Van den Hatert. “However, we offered HP an intermediate solution. On the one hand we set a deadline of going live on 1 July, which in itself was quite a challenge. In addition, before 1 July Dutch pension funds have to submit to the PVK their statutory requirements over the preceding year, and that was completed by the two employees who had run
the pension fund up to then. But
on the other hand, although Hewitt has taken over the job as of 1 July, we in fact started with the population in the plan as per 1 January 2004. We have six months of administration to catch up and have it all done by December.
“We outsourced nearly everything to Hewitt – benefit payments, record keeping, financial administration and annual report,” says Wisselo. “The fund still has an office manager who takes care of preparing the board meetings, taking minutes of the meeting and preparing supporting documents for board decisions.
“Since we got the contract we have been setting up our systems to implement Hewlett-Packard’s plan, working to take over not only the participant administration but also the financial administration for the fund itself,” says Howes. “We have been working on that to ensure a smooth transition, in particular from July when we started paying pensions for HP’s own pensioners. Currently, we are insourcing the secretarial duties of managing the pension fund, organising the accounts and the yearly report that has to be sent to the authorities and, on the more detailed side, all the record keeping for the participants in the plan.
“And we have emphasised the importance of good communication with HP participants. Apart from written statements we will be able to present benefits statements on demand through our Your Benefits Resources web-based tool, which also allows participants to make online calculations of their expected pension situation. We currently provide these services to about 35 Dutch pension funds and HP is one of our largest clients for outsourcing.”
But how has the arrangement worked since the deal was signed in December and have there been any surprises on either side?
“In the RFPs we had also considered whether to transfer the administration of all the existing schemes,” says Wisselo. “We were warned that it would be wise to think twice when considering changing the plan as well as transferring the administration because there will always be something you have not thought of and it takes more time than anticipated. And when you transform four plans into one you always have unexpected situations that require extra thinking. We were not finished in May of this year but I should say that this was a surprise for HP but not for Hewitt. But there have been no major upsets.”
Howes agrees: “The outsourcing of the pension administration in combination with changes in the pension plan was a big challenge for Hewitt,” he says. “It is important that the HP participants receive a correct overview of their new pension entitlements or pension promises. We have been working hard to provide the participants with a new overview. Part-time working can be a major complicating factor.
“Under Dutch labour law everybody in the Netherlands has the right to work part time and to choose the percentage that they work part time. And quite often people change the ratio during their working career. That has a huge impact on pension plans. For example, it adds horrendous complications to things like pensions accrual under a defined benefit plan.
“The law also requires that people who work part time accrue benefits pro rata to full-time benefits,” adds Van den Hatert. “The basics are relatively simple, particularly in final-pay plans, but when you are the administrator you end up with a lot more changes that you would in plans in other countries.”
Wisselo has advice for pension funds considering outsourcing. “Appoint a dedicated working group, set-up a scorecard in advance, structure your questionnaire and process well, if necessary get help and/or advice from a third-party, and cover communication issues to participants, because these will become increasingly important.”