Dividing core tasks
The increasingly complexity of the pensions environment is driving trustees to look at outsourcing more of their fund services. Rachel Fixsen reports
As they continue to evolve, pension funds in Europe are increasingly looking to external agencies to share their workload. While outsourcing of administration and investment is already widespread, many are going even further by buying in fiduciary management.
Outsourcing has grown as pension funds have found their environment harder to get to grips with, according to Tobias Bastian, consultant at Hewitt Associates in the Netherlands, and a member of the Dutch management team of the firm's outsourcing business.
"Legislation, policies, government and regulator's guidelines are becoming more and more complex. The same goes for financial products and financial markets. This is no different in the Netherlands than in the rest of Europe.
"This leaves a pension fund board with greater worries about compliance," he says.
"Furthermore, a pension fund with its own resources is becoming more and more dependent on a small group of people who do very specialised work. This leaves a board with worries about the continuity of these specialist activities."
This is especially true for small- and mid-sized pension funds, he finds.
"A possible solution for this is the outsourcing of asset management as well as administration, IT services and actuarial work - sometimes communication as well," he says. "There has been an increase in outsourcing activities, but we also see a trend of closing funds or completely re-insuring liabilities and leaving all core functions with an insurance company."
Outsourcing is a hot issue in the Netherlands right now, says Frits Bosch (pictured left), director of Dutch consultancy Bureau Bosch.
"It has been shifting over the last 10 years," he says. "Trustees used to think that it was their task to do the administration of the scheme, and the investment management as well as the payment of benefits - also the communication to the participants.
"But that has changed all over the industry. First of all, the asset management was outsourced to various specialist organisations, and that can be done bundled or unbundled - as core-satellite or as fiduciary management as an integrated asset management solution.
"But the benefit payments are mostly done by the pension trustees, although that is starting to be outsourced as well. It can be included in fiduciary management.
"The consultant has become much more important than he previously was, because pension funds are outsourcing more; unless they've chosen a fiduciary solution, with all those functions going to the one provider," Bosch notes.
Outsourcing can save smaller funds from being swallowed up, according to Erik van Dijk, CIO and partner at consultancy Compendeon.
"It is a business model that enables smaller plans to maintain their independence," he says. "The expected integration of smaller plans into bigger ones - for example, industry giants - has gained much less momentum than expected."
"The driving factor [behind the outsourcing trend] is the growing complexity in a financial world that has switched from a two-bloc - US and Europe - to a three-bloc - US, Europe and emerging markets - structure," he says. "Added to that, there is the growing number of product possibilities. Especially smaller plans cannot keep track of this anymore and do have to acquire outside knowledge to stay abreast of market movements.
"There is now more information available about best-of-breed managers and fiduciary and manager selection specialists offer that to plans
now. Initially they were very wary about double costs in that kind of solution, but growing numbers of plans are now convinced that the average level of quality difference between best-of-breed and the rest is more than big enough to warrant that."
Outsourcing is spreading beyond those functions that have traditionally been handed over to external agencies - administration, investment management and the production of communications materials, according to Andrew Cox, senior consultant in the employee benefits consulting practice at Lane Clark & Peacock in the UK.
"There is now a growing trend to outsource more functions including scheme secretarial, the role of pensions manager, independent trusteeship, investment manager selection and, where legislation permits, delegating trustee authority," he says. "This growing trend is resulting in the appointment of ‘one-stop-shop' outsourcing providers, where a large number of services are provided by a single organisation. This may include a range of benefits, where the pension scheme is just one element."
In the UK, says Cox, companies and trustees are finding the burden of running a closed defined benefit (DB) scheme disproportionate to the relevance of those benefits to attracting and retraining talent.
"The move to defined contribution (DC) is resulting in a move away from the occupational trust-based vehicle for pension provision, towards contract-based products. Stakeholder and group personal pensions are increasingly the chosen option for pension provision [in the UK].
"These products typically bundle a whole range of services in one outsourced vehicle: administration, communication, education, investment management and annuity selection," Cox says. And these services
can all be provided for specified
annual management charges, which can be picked up either by the employer or the members.
But with more functions subject to outsourcing, how should pension boards define what their core tasks are, pinpointing precisely what they can outsource?
"One size does not fit all," stresses State Street's Wade McDonald, head of customer management, investor services, UK, Africa and Middle East. "The development of specific operating models for pension boards revolves around a number of factors in relation to the operation of the scheme, the size of the scheme and the prevalent corporate environment."
Bastian has two golden rules for deciding on outsourcing. "Only outsource a function that is currently working well. In other words: don't expect miracles if you outsource a function that is currently not working well. And only outsource a function that you can understand and monitor properly."
On the actual work of identifying the core tasks of a pension fund, Paul Trickett, European head of investment consulting at Watson Wyatt warns: "This is something the fiduciary body needs to do - it is not a job to be outsourced. It has to ask what its beliefs are. Spending time doing this can seem to be quite a nebulous task, but all this can be worked through by the trustees.
"The critical thing is to get around the table and have a willingness to sit down and talk - how do we see our visions and our beliefs? Traditionally, that is not something trustees have been doing. They find it worthwhile, and it helps their strategy going forward. From that they can easily work out what are the jobs we are going to do and what are the jobs we want other people to do - to what extent shall we outsource these tasks?"