Article | 24/01/2019

Does service consolidation really make things more efficient?

Much debate has been had on the subject of consolidation recently. For smaller schemes especially, the benefits of streamlined processes, reduced operational fees and simplified governance structures are very seductive. This opportunity hasn’t been lost on schemes that aren’t considering superfund solutions either. In recent months we’ve seen a surge in multi-scheme sponsors looking to bring scheme operations together under a single trust. In all the cases we’ve seen, the motivating factor is efficiency and the cost reductions that result. But when it comes to administration, efficiencies from consolidation are extremely difficult to achieve, so trustees and sponsors expecting to realise significant benefits from warehousing administration services need to tread carefully.

Despite what you might read in the headlines, it is by no means a slam dunk that your scheme will become more efficient simply because you have the same provider in place covering all sections. In fact, the exact opposite could be true with efficiency and automation both reducing because of a change. Plan carefully before significant strategic decisions are made and perform a rigorous cost-benefit analysis of bringing together the service provision.

This might sound counter-intuitive to what is now accepted market theory, but the benefits consolidation brings to other providers, such as actuaries and trustee secretaries, are a lot less transferable to administrators. Unifying meetings, papers, valuation dates, registers and reporting dates are all hugely beneficial, but do little to remove the major burden that drives administration efficiency.

How easy it is to achieve effective and efficient administration depends on one thing: complexity. Scale is important, but only because it usually manifests in more members having the same benefit basis for calculations. It is complexity that determines how well things work, how many errors are made and how expensive your service will be. Unless your consolidation plan removes complexity, you’re unlikely to realise any sustainable long-term benefits.

For administrators, complexity drives efficiency so bringing together more sections, variables or rules under one provider may have little direct gain. The expense of levelling up means that most schemes can’t or won’t harmonise pension increase or revaluation rates. In some cases, scheme rules may even prevent dates or practices being unified.  What you’re left with, therefore, is the same level of complexity and nuance simply under a different banner. So where exactly does the major efficiency gain for administrators come from?

Non-member administration services, such as scheme accounts production and trustee stewardship reporting, can be areas where harmonisation simplifies reporting. But, so often in these cases, trustee boards and sponsors need to maintain sectionalised reporting to allow sponsor-based funding and participation negotiations to continue. Again, a net zero efficiency gain.

Critics of this view will cite cost reduction as evidence that consolidation works and has a tangible benefit. This is impossible to disagree with. If you put three separate schemes out for tender and appoint a single administrator, costs will reduce. But, this position conflates a competitive market with efficiency gains made from warehousing operations.

Improved efficiency can be achieved through consolidating administrators, but only if it is done with the right intent, investment and backing. If you want to get an efficiency gain through consolidation, then it will need to be achieved in the same way that all administration efficiency gains are. Invest in a robust, comprehensive conversion plan that provides calculation and communication automation. This cannot be achieved by simply porting one section into another. To consolidate properly, significant system and data changes will be necessary, and benefit basis calculations will need to be worked up from ground zero. Indeed, pre-existing procedural documents and communications will also need to be re-worked.

If you’re consolidating into an existing administrator, then you should expect to pay for a full installation programme for those sections moving in. If you’re transitioning to a brand-new administrator, then be prepared to pay for multiple transitions because, aside from having to treat them all separately on the way in, the work required to improve data and build automation routines won’t reduce because you have one supplier instead of three. Unless you’re simplifying and unifying your scheme rules, then you haven’t removed any complexity for your administrator; you’ve layered further.

Quite rightly, we’re all enthusiastic about the benefits that consolidation can bring to the market. But, it’s important to be realistic about where and how efficiency gains can be made. If you’re looking at administration, then it’s important to understand how your administrator can leverage or apply what they’re currently doing to other sections or schemes you might bring under their remit. An attractive lower overall cost, with little or no upfront investment, may mean that existing levels of automation are lost, or the targeted efficiency gains are never achieved. You run the risk of simply trading lower short-term operating costs for a poorer overall service in the long run.

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