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Enough demand, so what about the supply?

Richard Newell asks whether true cross border administration is still a pipedream

If the rumours are true that a very large Dutch company wants to expand into the area of cross border pensions administration, this is welcome news. The question of how to administer pan-European pensions is a conundrum that many service pro-viders appear to be shying away from, using the familiar excuse of Euro-compliance pressures and Y2K. This is quite understandable when one considers the difficulties administrators will face, especially in a defined contribution (DC) environment.

Outside of Luxembourg, whose banking industry has put its weight be-hind the European pension fund initiative (see Page 31), service providers and consultants do not see much im-mediate need to concentrate on the is-sue. But pension funds, especially within multinational firms, are grappling with the issue of how to integrate their various schemes, and whether to outsource the administration.

The potential market for outsourc-ed funds administration in a DC environment is huge. An increasing proportion of people will work in several countries where will be a demand for professional dedicated service pro-viders. In mature markets such as the UK, the amount of business outsourced continues to grow steadily. But the leading UK consultants and administrators still find it hard to conceive of a European-wide service.

The administration of membership records from one place for the whole of Europe is some way off," insists Paul Belcher of Watson Wyatt in the UK. "Perhaps another three to five years before it will be a practical pro-position. I do not know of any credible administrators who are likely to have a quality product available in the near future."

He adds: "A one-stop pan-European pensions administrator might offer modest savings in administration costs but is more likely to appeal on grounds of avoiding the risks of error and ach-ieving consistency. This is an area with many barriers apart from lack of company interest due to the comparatively small level of savings."

The current market for internationally-portable pensions is largely the domain of US institutions with significant operations in Europe. Digital have a large pension operation in Eur-ope and have been looking at ways of pooling their entire defined benefit (DB) administration functions. But since the group was acquired recently by Compaq, these plans have been put to one side. Compaq runs DC pensions and integrating the two companies' systems is now likely. Dow Chemical has been looking into the pan-European idea and Unilever, Shell and other funds have had to go through enormous hoops to establish transportable pensions for their staff.

One major bone of contention, for third party administrators, however, has been the way multinationals have been picking their local market administrators. Some multinationals run expatriate pension plans and keep some funds offshore which are obviously easier to administer, being in one base currency. But Jim Kelly managing director of the UK Government's paying agent Paymaster, recently ac-quired by Hogg Robinson, suggests that this is the only time they think internationally, when it is all geared towards expatriates. Often in these cases, "Schemes will be referred to the local organisation that is deemed the 'best fit'," he says.

"We see many examples of very poor management of arrangements through a lack of management capability when it comes to dealing with pensions," adds Belcher. "Often mistakes are made in one or more countries and the parent company then feels the pain through its consolidated accounts."

But facilities are currently limited for international pension funds that actually want an efficient system to en-compass their different schemes. The specialist mutual fund administration firms are watching developments; some are even devising systems. But as one leading administrator notes: "If you talk to clients in Dublin or Luxembourg, it is clear the level of shareholder servicing is not what it should be. No one has got it 100% right. The one thing you want when you are dealing with DC pensions is timely and accurate information."

Belcher says: "Different languages and different currencies are difficulties which can be overcome with effort. One that causes very great difficulty is the view in some countries that administering a plan in a country requires it to comply with that country's regulatory framework - in addition to the home country's regulations."

Kelly adds, "Companies want systems in their language but also in a variety of others. That is going to be a challenge for any administrator. DC at least offers some scope. DB is virtually impossible to integrate."

So if the basic quality of administration isn't very good, at least compared with the US, adding the complexities of cross-border administration to the equation, it is easy to why many of the third party administrators are sitting on their hands.

Henderson's Anthony Wolfe says, "If anyone is going to do it, it will be the likes of Vanguard with their systems approach. For others it will be a case of assessing whether this is a business they are cut out for. At the mo-ment I don't think the industry has the delivery systems that will allow it to provide clients with something that will make sense to them."

But Bill Rayner, of consultants Wil-liam M Mercer in the UK thinks that a good administration service is not necessarily out of European providers' reach: "In terms of delivering a service that is correct, efficient, prompt and gives value for money, I don't think that is impossible. I know some UK providers who can deliver it."

Thomas Seale of Luxembourg - based European Funds Administration (EFA) agrees, suggesting that re-gardless of the scale of a client's de-mands for shareholder accounting, different fee structures and trailers, "As long as you have a true retail transfer agency function, the problems are manageable."

And according to Kelly, European countries with similar conventions such as Ireland and Holland, should not pose any real problems either for cross-border administrators, though he adds: "The trouble with Ireland is that there are relatively few large companies. As a service provider, you im-mediately come up against the big players like Sedgwick Noble Lowndes."

He continues: "When you get outside that, the market becomes much more fragmented. Italy and Spain are making moves in the direction of DC schemes. Austria attempted to reform its own system, but couldn't get sufficient support to break the dependence on the book reserve system."

Paymaster will be looking at Sweden and elsewhere to see if there are op-portunities for its type of operations, but Kelly warns: "We will only look to countries where there is a DC market in place." In the UK meanwhile, ac-cording to Rayner, "demand for good outsourced admin exceeds supply by a margin at the moment". Demand is also starting to "bubble" in Belgium and Germany, he says with interest growing in Hungary and Switzerland.

"And given the range and spectrum of benefit design in different countries, economies of scale can only be achieved up to point . If everyone had the same pension scheme the econ-omies of scale would be considerable. But looking for economies of scale from any type of multi-cultural, multilingual funds seems to be a long way in the future," he says.

So to achieve the holy grail of pan-European pensions, a common regulatory framework is ultimately need-ed. It all comes down to taxation and systems in the end, and while everyone gets their head around the Euro, it remains to be seen whether the challenge will be taken up. EFA has al-ready been approached by a number of multinationals enquiring as to the possibilities of integrating their various schemes, which naturally Seale sees as a major opportunity to build a whole new area of expertise. But as Henderson's Wolfe says, a system which fully meets the needs of the multinationals is still a long way off. "American systems are not built for the complexities of the European en-vironment, and I don't think the European providers are ready yet.""

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  • QN-2546

    Asset class: Real Estate Equity Fund (non listed).
    Asset region: Europe.
    Size: Total CHF 600m, approx. CHF 100-300m per fund investment.
    Closing date: 2019-06-28.

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