Innovation “is our competitive advantage,” boasts Denmark’s PKA Pension Funds collective. It cites four areas it believes backs up this claim: its outsourcing strategy, socially responsible investments, its real estate portfolio and its hybrid structure.
“The innovation in outsourcing was to achieve an effective administration policy,” the fund says. A new company, Forca, was formed in 2005 to handle all the daily pensions operations of the newly formed partnership between the eight PKA funds, the Paedagogernes Pensionskasse/PBU and Laerernes Pension. Forca is now responsible for member service, finances, IT operations and development and actuarial services.
“PKA’s administrative systems formed the basis on which Forca was modelled and more than 200 PKA employees were transferred to the new company. This meant that it was ready to begin operating with a fully functioning and very modern IT system, not to mention a fully skilled staff used to handling a multiplicity of funds,” PKA says.
Forca’s first customers were the eight PKA Pensions Funds, which between them comprise more than 210,000 members. They will be joined in July 2007 by the administration of Paedagogernes Pensionskasse/PBU with approximately 100,000 members. Finally, the Laerernes Pension, with approximately 105,000 members, will transfer its daily operations to Forca from January 2008.
“Altogether, Forca will handle more than 420,000 members, some 12% of the Danish labour market’s pension scheme members, and it will be able to deliver high quality at a very low cost,” PKA claims. It anticipates that Forca will grow beyond its current client base pretty rapidly. “Other pension funds will be invited to join Forca on a commercial basis at a later stage,” it says.
PKA is keen to stress that only daily operations regarding finances, member service, IT and actuarial services are outsourced to Forca. Other strategic operations such as supporting the board, annual general meetings, annual reports, investments, risk management and strategic communications remain in the hands of each individual fund in the partnership. “Segregating our operations in this way means PKA itself now only has some 45 employees since 210 or so have transferred to Forca to continue their work there,” PKA explains.
To preserve the individual personality of each of the funds that Forca services and to ensure a personal touch for each member, all Forca’s operations will be done on what PKA calls a “white labelling” basis. An example of this would be that each time a member of any of the schemes it administers makes contact, whether by phone or letter, everything will be done in the name of that scheme.
There are several reasons why pension schemes outsource parts of their operations. PKA says the increasingly complicated nature of running a scheme made outsourcing parts of its administration to Forca a logical step. “The administration of pension funds is rapidly growing more and more complex,” it says. “It requires specialised staff and very fast and efficient IT development. For smaller pension funds, these areas of administration will become extremely expensive to run. Joining forces simply means efficiency, increased capacity and maintaining low costs.”
For PKA, cost was key, for although it is quite large in Denmark, the systems established in Forca are able to handle much bigger operations at practically the same cost as when they were handled in-house. Outsourcing brought other advantages for Paedagogernes Pensionskasse/PBU and Laerernes Pension, as both were especially interested in the IT systems PKA had developed and which are now accessible through Forca.
“PKA expects to reduce costs considerably, while Paedagogernes Pensionskasse/PBU and Laerernes Pension will be able to add to their developing capacity and service levels at no extra cost,” says PKA. Once it is fully up and running, Forca expects to offer services to the pension funds for approximately €60 per member per annum.
PKA’s property portfolio has been outsourced for some time. In 1989 it established a company now called Dan-Ejendomme to manage its holdings, and these constituted Dan-Ejendomme’s only portfolio until the late 1990s. A strategic change in its operations has seen it since expand to manage the property portfolios of most of Denmark’s institutional investors.
“Dan-Ejendomme now has 200 employees and more than 600 building superintendents - skilled staff within almost all aspects of real estate administration. These skills would be very costly for a pension fund to develop on its own. By outsourcing to Dan-Ejendomme, PKA has managed to reduce costs, increase efficiency and optimise professional standards,” PKA points out.
Highlights and achievements
Outsourcing is a great means of unloading expensive operations and allows a pension scheme to streamline its operations so it can go about its core business: growing its members’ assets. But the relationship with the insourcing company has to be smooth and a scheme takes a risk when it decides to outsource.
PKA’s idea to join forces with other schemes and establish a new company to take over key areas of its administration is innovative. It is not just the administration that is outsourced. The staff that transferred to Forca are not only skilled in the work they do but are already familiar with PKA and how it functions. In addition, Forca’s IT infrastructure was effectively PKA’s, so PKA will inherently understand how Forca operates. It is not just cost-effective and efficient but a confidence-building move.