The opening up of the market for providers of administration outsourcing to European pension schemes is one of those areas where much of the talk has yet to be followed by action.
While the rationale for the outsourcing of the ‘back office’ has been successfully argued and won in many industries, notably in insurance and asset management – the predicted pan-European solutions to scheme administration for pension funds have yet to materialise.
Undoubtedly, the trend towards defined contribution (DC) pension provision – beginning now to make noticeable in-roads in Europe – has pushed the admin debate to the fore.
With investment accounts for each individual, DC pension plans generate a much greater administrative burden to the sponsor than defined benefit (DB) schemes.
Furthermore, moves by multinationals to centralise their European benefits operations and hive off the back office have undoubtedly created a market for providers to target.
Fuse these factors with increasing regulatory and commercial pressure on pension funds to keep costs down in a market where returns are falling, and the shift to outsource cumbersome record keeping and accounting tasks would appear to be a done deal.
However, the reality of the market seems to be somewhat different.
Traditionally, pension funds have either done their administration in-house or have gone to the consultants and custodians that already provide them with services. These firms in turn have ‘bundled’ back-office services such as record keeping, compliance, performance analysis and execution monitoring along with their regular business - although most have tended to focus on the asset side of outsourcing rather than the administrative side.
The bundled approach, however, has been criticised for not being cost-effective for pension funds, with some arguing that that there is still room for specialist providers – particularly those in the area of IT systems – to offer an alternative to the current packaged solution.
Yet despite the predictions in recent years that changes in the pension industry in Europe could favour newcomers – particularly small, nimble companies who could build online capabilities from the ground up to meet the new demand, moves by providers into this area have been tentative, with little certainty as to how successful they will be.
One such endeavour is that of former Shell pension fund treasurer Robert Meijer, who earlier this year launched an integrated back office system for pension funds in Europe. Meijer, now an independent consultant, developed the system in conjunction with an IT company, an accountancy firm and a software house.
The firm called AMIC, or Asset Management Information and Control, will execute the normal settlement of equities, bonds futures and options for pension funds, while additionally offering accounting, securities lending, cash management and risk analysis. Performance measurement and attribution and counterparty exposure management will also be covered.
Launching the service, Meier commented: “Contracting out everything to a custodian is not always the best solution as it often costs more. This approach is a way for them (pension funds) to contract out some of their non-core business”.
Meijer noted that the project was still in its infancy and would be financially unfeasible if not backed at the outset by a Dutch pension fund larger than e10bn. “We are not going to do anything if we don’t have one or two major clients.”
If the project gets endorsed though, Meijer hopes to have something launched by the end of the year.
For Meijer, the project heralded pan-European rather than just Dutch ambitions. He noted that the system would suit multinationals whose pension funds tend to be organised per country and as such have separate back offices. “There is no real difference in terms of a pension fund’s back office, wherever it is based.”
In terms of the larger players in the admin market though, many people looked to the UK to see which way the land might lie. Administration companies have become a feature on the UK pensions landscape following the 1995 Pensions Act – in itself a response to accounting fiascos such as the Maxwell affair. The legislation made administrating pension funds much more complicated and a move to outsourcing among pension funds followed.
David Andrews, joint chief executive of Redhill-based Aquila, a pensions administration software provider, explains that the firms Administrator product allows insurance companies, third party administrators themselves and medium to large corporates who still run their staff pension schemes in-house, to meet their back-office needs electronically.
“This could be all the scheme and member administration, calculation of benefits and policy administration.”
However, Andrews notes that moves to the Continent have been the exception rather than the rule. “Historically, we have taken products outside the UK, but it is not something we have done for some time. We are considering it though. The issue is how do you approach such a wide market?
“Do you do it directly or with partners? You also have to ask what the cross-border issues are and if you think about our target clients – insurance companies – then they already have their own issues with selling pension products cross border from a legislative point of view and then also administering this, because most of them are not geared up to administer them on a cross-border basis.”
Andrews believes though that it is not a question of inadequate systems. He points out that Aquila’s Administrator product is designed architecturally to adapt to a pan-European need.
“The mechanism doesn’t vary that much in terms of the printed and web info needed. The key issue is to do with compliance. We could do it now, but the issue is finding the right client to do this with.
“I guess we are anticipating that need and we believe that in the medium term there will be one or two companies going to market with that proposition and we will be a key provider to them.”
David Edwards, director of European business at UK software/outsourcing firm, Marlborough Sterling, says the firm started looking at mainland Europe around two to three years ago pitching its back-office systems to life insurance companies – particularly in Italy and Spain.
He notes that while direct pension fund administration services have not historically been their market, the company is aware of the potential: “I think if we find the right partner it would be a very interesting market for us.
“We do already work on a pan-European basis in that we are working with some of the major life providers who are looking at pensions in more than one territory. However, the life insurers are still designing products to match the fiscal requirements of each country.”
Geoff Conway at State Street in London explains that the custodians are also very much part of this market and seeking to consolidate their presence.
“I haven’t seen a whole slew of new providers come out onto the market, although I do see a growing interest in outsourcing amongst pension funds, due to the now common trends – DB to DC and multi-tiering of products and structures for multinational type pension solutions – it’s complex stuff.”
Conway believes one restriction to the market is the ‘capability’ required by providers: “For someone who may have a software solution, and I think there are only a few that might, you need to be able to balance that with a service solution to be able effectively to get at the outsourcing market.
“For this reason I still believe that for pension funds to be able to get the long-term solution with the right levels of servicing and partnership the traditional providers are the way to go.”
Conway also rejects the ‘bundling’ criticism levelled at custodians: “I don’t see it. I think if you look at the investment spend that we have to put in for those common functions and processes, then we should be able to do it as cheaply as anyone, if not cheaper.
“As the demands of the industry become greater in terms of the infrastructure needed, then any players in the market will have to spend more on their systems and we should be able to leverage and create even more cost-effective solutions for clients.”
In terms of European markets where State Street is seeing increased outsourcing business, Conway points to Holland, the Nordic market, Germany and the UK.
However, he is quick to point out that the talk about administration outsourcing is a lot more lively than the activity: “The whole outsourcing trend is a wonderfully exciting discussion topic, but it takes time and there are many product issues still to be resolved.
“Do providers that say they can outsource have the product capability and can they then do it at a price that’s cheaper than it is being done today? Also, can the clients emotionally give up the activity that they are doing to day – it is a control issue?”
Dean Handley of ABN-Amro Mellon, says that he has noticed a shift recently in pension funds looking for custodians to do the banking of their benefit payments as well as the more traditional asset accounting services.
“Some pension funds are paying away 50,000 items per month to the beneficiaries/pensioners and they want to have a more all encompassing arrangement t than just employing a third party bank to do that.
“They are looking for a provider to keep the register of who the payees are and take the money out of the fund every month and pay it away – and that can be quite a big job.”
He notes that any provider looking to do this kind of record keeping for a pension fund would have to have a close relationship with a bank to carry out the practical side of paying the money: “I suppose that does limit the number of possible players in the market to a degree, but I do think that this is an area that is not likely to get smaller in terms of increasing business.
“Generally speaking pension funds are no different from anyone else today, and they are looking to outsource as much as they can and focus on their core competencies.
“I’ve not seen a huge amount of business go into this market yet, but that may be because we are on the asset admin side of the business and we don’t have so much to do with the beneficiary side of things.”
Tony Solway, managing director at third-party admin specialists Cogent, now owned by BNP Paribas, believes that the DC shift in pension funds is pushing greater outsourcing, but that the market is split between asset and beneficiary administration, with the latter taking longer to mature as a market.
“Funds that are crossing the line between DB and DC are also crossing the line between in-house provision and outsourcing for administration.
“The market is split though for services between the asset side of the fund (investment and accounting) and member record keeping and companies tend to do one or the other.”
Solway’s long-term view, however, is that these two sets of services will combine into single providers.
“I think that there are about half a dozen providers in the market for member administration, but the market is still quite small and very specialist.
“The new players that may well start looking at this area are those that already do unit registry and transfer agency work – people like ourselves and Mellon, for example.
“I think in the long-term these providers will be able to adapt their systems towards DC schemes. The custodians will be looking at it as well, particularly if they believe that there could also be reasonable returns to be made from added value areas such as ancillary services for cash and foreign exchange business on pension fund money transfers.”
For the time being though the market appears to be experiencing something of a hiatus.
Solway notes that pension funds that have outsourced their member administration have made comments to the effect that there is a gap in the market.
However, the providers appear to be courting the scale end of the market at present – the insurance companies.
“Pensions business and therefore administration has traditionally been the preserve of the life companies. The situation at the moment is that these life firms are looking very hard at their cost bases and will become more willing outsourcers than they traditionally have been.
“In an outsourcing business you need scale – you can pick up a scheme with a thousand members here and there, but really you want to be picking up schemes of 20,000 members or more, so the admin providers are looking here.”
Another reason why providers are wary of tackling the European market, Solway believes, is that the business is still too ‘national’.
“If you look at unit registration, then you can adapt this for use in different domiciles. “But the idea that you can leverage a pensions platform for scheme administration across multiple countries is unproven, if not impossible at the moment. There is very little that links the legislation for Riester Rente funds in Germany with UK pension plans.
“The lack of market providers in this area may also come from this perceived lack of leverage from one market to another.”
Solway predicts that change will take a long time, despite the onset of DC and the endeavours of the European Commission on pensions harmonisation in Europe, although he recognises that both are important precursors to the development of admininstration outsourcing.
The talk then in the administration outsourcing market is that this is a complex area, but one that may be underprovided, albeit with the potential for someone to come in with a high quality offer that pension funds may go for. This competition element in itself could be a spur for the action that will finally see the market develop.