The issue of whether or not a pension scheme should be administered in-house or outsourced could be boiled down to two words – effectiveness and efficiency! Can my scheme be more effectively and efficiently managed in-house than having the work outsourced. Before attempting to answer that question, we have to ask ourselves what we mean by ‘managed’ or ‘administered’ and that entails looking at the full picture.
The textbooks talk in terms of six or seven processes being involved in the operation of a pension scheme:
o Benefit design and planning
o Record keeping
o Benefit calculation
o Financial management and accounting
o Legislative and regulatory compliance
o member service and communication
Almost always, where outsourcing does exist, some elements of these would be retained in-house. One wonders in such cases, when companies and trustees are assessing the effectiveness and efficiency of their pension arrangements, whether they have due regard (or indeed any regard) to those elements that are not outsourced.
In the case of the Roadstone Group Pension Scheme, we manage all of the above processes ourselves. This does not mean that we do everything ourselves, for example we do have an external fund manager and we do obviously use actuarial and legal advisers, but we manage the processes ourselves. In making the case for in-house administration, we will look at what we do and how the constituents of the scheme – members, pensioners, trustees and companies – benefit as a consequence.
Firstly, some background. The scheme was established in 1967 and it is now reasonably mature with an active membership of almost 1,000 and the same number receiving pensions. It is a typically, traditional type of defined benefit (DB) scheme, which is contributory and integrated with social security benefits. Because of the nature of the sponsoring companies – suppliers of materials to the construction industry – membership is overwhelmingly male and largely blue collared. The scheme’s assets are now approximately IR£200m (E254m). The trustee is the company Roadstone Pension Trust Ltd, of which there are 10 directors, four elected by the members and the rest nominated by the companies. These include the chairman (himself a pensioner), a solicitor and four others.
Taking the constituents in alphabetical order, firstly, the companies: In addition to the usual day-to-day running of the scheme, we advise on all pension matters – on legislative requirements and possible changes, on comparisons with other schemes, on actuarial valuation results, on benefit and rule changes, on individual and/or group entitlements and augmentation costs, and on the effects of rationalisations and acquisitions and similar matters.
The second constituent is the members, for whom the whole area of communication is paramount, and indeed we cover all this area ourselves. The process starts with the initial enrolment and members’ handbooks and then deals with queries, the issuing of benefit quotations and statements, correspondence – both general and individual, talks to groups of members and the preparation and issue of the annual reports. Most importantly, the process consists of counselling: counselling members about to leave or retire, on their choices relating to social welfare, insurance, tax and so on. For active members we counsel on matters like additional voluntary contribution facilities, on whether to transfer from previous schemes, etc. Our duties to members would also, obviously, include contribution deductions and collection and record maintenance.
For pensioners, the third constituent, where of course our first responsibility is to pay them, we manage our own payroll. We deal with enquiries, which comprise a large area that stretches beyond payroll queries. Again, counselling is to the fore. We try to set the tone when members retire and again on death in retirement. We make it known that we are always available should they need to contact us for any reason. When death in service occurs we would visit the next of kin, (almost always in our case, a widow), go through the entitlements from scheme and state and help complete whatever forms are necessary. We organise a periodic survey, attend pensioner functions and of course, maintain records.
Lastly, but by no means least, we have the trustees, for whom our overriding role is to ensure the scheme’s compliance with the provisions of the Pensions Act, Family Law Acts, trust law and Revenue Commissioners’ requirements and, being a corporate trustee, company law. We carry out the elections for member directors and run training courses for those elected. We monitor our investment activity by not only maintaining investment ledgers, which are updated daily, but by making weekly contact with our investment managers and we manage our direct property and cash holdings ourselves. With our solicitors, we negotiate our management and custody agreements. We prepare annual accounts for audit and of course we service the board by setting the agendas for our quarterly meetings and writing the minutes thereof. Finally, we represent the scheme in the Irish Association of Pension Funds.
This is what in-house administration should mean and entail. In our scheme, two people carry all of this out in the pensions department!
Hopefully, some of the advantages which it is believed that the constituent groups enjoy are now clear, but it is useful to focus more closely on the benefits, as seen in terms of the two stated criteria: effectiveness and efficiency. These are:
1. Accessibility: all four groups have ongoing instant access to relevant information and advice. This is literally at the end of a telephone line with no middle layers applying.
2. Insider knowledge: Being of the organisation ourselves, we are aware of and understand all aspects of the culture and operations of the organisation. We also know, if not all the members personally, their background (or in the case of spouses of deceased members, their spouses’ backgrounds) in the organisation. This facilitates easier and more effective communication and allows for sensitivities – both personal and between constituents – to be better managed.
3. Sole Focus: There is no competition from other (especially larger) clients for our time and no question of divided interests. Our time is devoted totally to our scheme. This has obvious results in terms of service such as response and lead times. It also enables us to secure maximum advantage from our dealings with outside advisers such as investment managers.
4. Control: All four groups can take comfort from the fact that our fingers are firmly on the pulse. By keeping ourselves fully informed, we are able to plan, act or react more effectively to developments on their behalf or in conjunction with them and in a more timely fashion than would otherwise be the case.
5. Linkage: Our department provides a focal point of linkage between all four constituents. We are the conduit for exchanges between them. This link has special relevance for pensioners who regard it as their way of remaining part of the organisation.
6. Public relations: Kudos.
7. Cost: A few years ago, the group received a quotation from a firm of pension consultants for the administration of the group’s Irish and UK schemes. The quote, given on the basis of the consultants carrying out only two processes, (record administration and benefit quotations) proved to be more expensive in the case of the Roadstone Scheme, than the total actual cost involved in managing all processes.
Although the case for in-house administration has been made here on the basis of what happens in our scheme, much, at least, of the above could apply to any scheme, regardless of size. Provided the person or persons involved, as the case may be, are sufficiently informed, able and committed and have a strong feel for sensitivity, there is no reason why other schemes could not enjoy the same levels of effectiveness and efficiency from having their scheme administered in-house as we believe to be true of ours. Nonetheless, there can be no room for complacency. We are and must be ever conscious of the changing nature of business today and of how this will impinge on what is going to be an increasingly complex area.
Brendan Hackett is secretary and director of the Roadstone Pension Trust, based in Dublin. This article is based on a talk given to the Irish
Association of Pension Funds