The Future of Pensions Administration conference
Wednesday 7 November 2018
Thank you very much to the PMI for having me here.
Events like this, which are focussed on pension administration, are a great opportunity for all of us. They help to concentrate our minds, to look at the good things which are happening in administration, and to talk about what we think needs to improve. Because administration is a crucial part of ensuring good outcomes for members, and all of us here today are responsible for ensuring a high quality of administration.
To be clear - I will be focussing specifically on scheme administration here today, as opposed to governance - that’s crucial too of course, but it’s a different subject for a different day. I will be addressing both in-house administrators, who come directly under our regulation - as well as third party administrators.
Third party administrators do not fall under our direct regulatory remit, nevertheless they are a key part of the infrastructure that supports occupational pensions. A small number of companies are administrating the pensions of millions of members of trustee based schemes. This presents both risks and opportunities.
There is undoubtedly a concentration risk, with so many schemes reliant on a small number of third party administrators. This concerns us particularly in terms of the impact of a ‘sudden stop’ at one of these administrators, for example, due to a major systems outage or a cyber attack. But equally well, this concentration of administration also means that if one such service provider improves its standards, then this can have a positive impact on the administration of a large number of pensions schemes.
You will therefore understand why we as the regulator of workplace schemes, with a statutory objective to promote good administration are keen to engage with and influence these third party administrators. We want to ensure the resilience of a key part of the industry plumbing and use these companies as a channel through which to drive up standards.
TPR focus on administration
We believe that high quality administration is the bedrock of a well-run scheme and so poor administration is a serious risk to member outcomes. A scheme may have a great investment strategy, a great communications strategy and great advisers, but all this is undermined if not enough attention is paid to making sure the day-to-day administration of the scheme is the best it can be.
In the end, a pension scheme’s function is to pay the right member the right benefit at the right time. And if as administrators or trustees you can’t be sure that you have received the right contributions, invested the correct number of units, and tracked members’ entitlements, you can’t be sure that you’re paying out the correct benefits.
If a member receives incorrect information about their pension or, even worse, they are paid the wrong benefits, then that is unacceptable for that individual. Furthermore, it damages confidence in pensions as a whole.
So administration is very high on our agenda.
We have a statutory objective ‘To promote, and to improve understanding of, the good administration of work-based pension schemes’.
One of our Corporate Priorities, set out in our current Corporate Plan, is to improve standards of governance, record-keeping and data in schemes.
And our new regulatory model, developed as part of our TPR Future work identifies poor administration leading to poor member outcomes as a core regulatory risk. You can therefore expect us to focus on aspects of administration in our regulation, and yesterday at our Board awayday, we discussed possible areas of focus for the coming year. We haven’t firmed this up yet, but I’ll highlight two which we all agreed as significant. First, that core financial transactions are processed accurately and promptly. And secondly, no surprises here - record keeping and data quality, which I’m now going to say a few words on.
You will know that TPR has increased its focus on data recently, requiring trustees to report on data reviews in the scheme return. I am preaching to the converted when I say that good data is critical. We welcome this focus and renewed efforts by industry to get on top of their data, and it’s an area we will continue to be closely involved in.
And we know from our own research that our expectations in respect of record keeping and data quality are still not being met. Almost 30% of DC schemes, mostly small and medium, still don’t measure their common data every year, which we set out as an expectation in 2010. And even though there are clear legal requirements around the accuracy of core financial transactions, over half of trustees don’t have service standards with their administrators around this. And two thirds don’t track their administrator’s performance. So you can see there is work still to be done.
But good administration goes beyond good data. It’s about ensuring that systems and processes are fit for purpose and keep data secure. It’s about providing the best possible service to members and about providing the reports and information that the law requires schemes to provide to us and to their members.
For most members, their only engagement with their pension scheme will not be with the trustees, or the advisors, but with the administrator. So you all play a big role in members’ experience of pensions, and how much they engage with them.
Members should be able to expect the same standard of administration regardless of whether they are in a large or a small scheme, DB or DC, and whether their pension is administered by one of the large third party administrators, or in house by a dedicated team of pension specialists.
Both have different strengths - in-house teams may have a closer relationship to their membership and be able to leverage other activities of the sponsoring employer. While third party administrators can spread best practice from their work with different clients. And clearly that is one of the reasons we are all here today, to learn about successful approaches and technical innovations that can make your administration and member experiences more effective and more efficient.
So we have been paying more attention to administrators. We continue to promote the great work done by PASA and the standards they set for administrators. But we have also being speaking to some of the larger third party administrators recently to aid our understanding of the potential impact of events such as an administrator going out of business or a major cyber attack. As a result of this, we have also gained a broader understanding of what is happening in the administration market and the challenges, and also the opportunities, you face.
In fact some of you here today will have spoken with us already and I want to thank those of you who have taken the time to do that.
Many administrators have given positive feedback about these meetings and are welcoming further ongoing engagement with us. This kind of insight helps us understand an overall risk as well as increasing our knowledge of administrators’ individual business models and challenges.
So far we’ve only reached out to a few of the largest administrators out there. And while we appreciate that their experience will not be the same as all of yours in the room, we think there are good lessons to be learned from these conversations to date:
- One of the issues you have raised is that the level of engagement from trustees is highly variable. For example, some schemes clearly saw the value of investing in good data, either to increase member engagement on-line, or as part of a strategy to buy-out liabilities.
However other schemes appeared to be less engaged on these issues. You told us that there was a resistance in some schemes to commissioning data improvement plans, even though data quality issues had been raised with trustees. In part, this stems from a failure to recognise the greater demands required of scheme data for regulatory purposes.
Looking ahead, the focus on data quality will not decrease. So there is a role for us there in continuing to raise the awareness of trustees and sponsoring employers of the importance of investing to support good administration.
- You have also told us that resource is an issue - that recruiting high quality administration staff can be challenging. But we’ve also heard some innovative solutions being sought, such as the use of apprenticeships.
But we’ve not just heard about challenges - we have also heard first-hand about the benefits of investing in good systems and processes and the opportunities offered by new technology - enabling automation and better services to members. For some this has helped alleviate some of the resourcing issues, and support them in delivering a high standard of administration while keeping costs down. And there are some really sleek tools being delivered out there to members online.
We believe that administrators need to be prepared to invest in their systems and processes to ensure they can provide the best service to members, and be in the best position to respond to the current challenges, including, but not limited to, the forthcoming pensions dashboard.
- I mentioned that we started this engagement because we wanted to understand the risks members face should an administrator suddenly cease to trade, or fall foul of a major cyber incident. We gained some confidence regarding the robustness of Business Continuity and Cyber security plans - at least among the larger administrators that we’ve talked to so far - and it has allowed us to set parameters for ‘what good looks like’ in this area.
We are going to be expanding our engagement with administrators further, and I hope that you are as willing to engage with us as we are with you. All of us: trustees, administrators and TPR, need to work together to ensure members receive the administration they deserve.
Three key messages
I’d like you to leave today with a clear understanding of three key messages from us:
1. We want Administrators to drive good practice across the industry. You play a crucial part in delivering member outcomes. You are important in the industry and you are influential. So we want you to continue raising awareness of our requirements to trustees and sponsoring employers.
In that vein, we’d like to see more administrators as members of PASA and attaining the PASA accreditation. This will give assurance that the outcomes for members of the schemes you administer are being focussed on.
And this applies equally to in-house administrators. It sometimes feels like in-house administrators get a bad rep, but there are some excellent in-house administrators out there who meet what we expect, and what members should expect.
2. Consolidation. We are likely to see more consolidation in the occupational pensions market. We will be overtly encouraging schemes to explore consolidation into an alternative arrangement that provides good value for their members if schemes are unable to meet the standards of governance we expect. As administrators, you play a key role in smoothing transitions, both in making sure that records are of a good standard, and in ensuring a professionally managed transition, for example by making sure PASA’s Code of Conduct on Administrator Provider Transfers is adopted.
3. Enforcement action. Understand that we can and will take enforcement action when our expectations are not being met. Trustees and managers are accountable for the administration of their scheme and are likely to be the first focus of any enforcement action but we can, and indeed we have, taken enforcement action against third parties, so you are not entirely off the hook. We are able to issue third party improvement notices, which, if not complied with, can result in a fine of up to £50,000 per breach against the service provider.
The information we are collecting in the scheme return, for example on data, is a starting point, and we can use it to help us understand the landscape, and target our interventions. It helps us track progress across the industry and for each scheme individually. We also look at the volume of complaints or alerts we are receiving about a scheme.
We won’t take enforcement action on the basis of such information alone, but it will trigger our interest. And if we have concerns that our standards are not being met (especially if there is no evidence of progress over time) we might engage with individual schemes, either on a one-to-one basis or as part of our new high volume regulatory activity, by reminding trustees of what we expect, asking them to explain to us what they are doing to meet our standards and following up on those who can’t demonstrate this.
And where their trustees or managers fail to demonstrate they are taking appropriate steps to improve their records, particularly where there is evidence of such failures leading to delays or errors in financial transactions, like the payment or transfer of member benefits, we may take enforcement action.
Administration remains a key focus for TPR. The quality of administration has a direct impact on members’ outcomes, and that’s why we focus on standards in this area. We want the highest quality administration across all schemes and all administrators, whether in house or third party. We want members to feel certain that their savings are secure, whatever scheme they are in. We know there is plenty of great work going on. And we also know there is more to be done.
Millions more people are saving through automatic enrolment; the importance of good information for members has increased with pension freedoms; technology is becoming available to support automation and member engagement: this presents us all with a real, positive challenge. All of us here today can rise to that challenge, and play our part in creating a secure and robust place for people to save for their future.