Financial strength
In the current financial turmoil, this is the most important criteria in assessing a preferred pension provider and should be used as an initial filter in any selection process. Future pension reforms, primarily in the shape of the proposed introduction of personal accounts, are likely to add further competitive pressures and possibly lead to further consolidation among providers.
When selecting a suitable pension provider the first stage is to eliminate those who do not meet the requirements for financial strength. For example, employers may decide to consider only providers that have a S&P rating of at least A.
Traditionally, investment was seen as one of the most important factors in assessing a provider’s offering. However, products have generally become ‘unbundled’, with providers increasingly separating administration from the asset management business. This open architecture enables the provider to link to external fund managers. The ability to link
to an investment manager of choice makes the assessment of the provider’s own asset management offering less relevant than other criteria.
A secondary point supporting this view is the increased use of tracker or passive funds, which mirror the return of an index, rather than attempt to outperform through active fund management. It is reasonable to expect the return from comparable tracker funds will be very similar.
Assessing a provider on the basis of charges has become less important in today’s market. Stakeholder legislation has significantly reduced the charges on all new contract-based pensions. In many cases, the charges quoted by the providers are not affected by the choice between a group personal pension and stakeholder.
An area where a provider can add value is through specific product features. A strong position in the annuity market is key, as are good internet facilities to educate members, allowing them to model different expected benefits based on their available choices.
When setting a charging structure for a new scheme, most providers now look at each proposed scheme individually and will offer terms based on a number of criteria. These will include the industry in which the employer operates, proposed contribution structure, potential membership and anticipated staff turnover rates.
Choosing a pension provider with good administration is key. Administrators are the people who will be in direct contact with scheme members, and therefore have the greatest influence on the quality of the service received by both the members and the employer.
When shortlisting providers, employers need to understand the relationship between the pension provider, adviser and their own management team. Providers should have in place a system whereby a client relationship manager will work with all the parties to provide the smooth implementation of the scheme within an agreed timetable. The relationship manager will also remain the high-level contact at the provider on all matters relating to the scheme, providing regular key data, attending client meetings as and when required, and coordinating the provision of additional services as appropriate.
When assessing the capability of a provider and their administration, employers need to consider the following areas: automation; on-line access; service-level agreements; and stewardship reporting.
IT systems
Efficiency through automation is a prerequisite to operating successfully in the current pensions market. The introduction of open architecture systems and the linking of external fund managers to standard products means that, in most cases, employers can now assess a provider’s administration proposition separately from their asset management arm.
Of increasing importance is access to online member services. Individuals are increasingly accessing many services online – eg banking – and as a result, there will be a high expectation as to the quality and functionality available from any provider.
There is a general belief in the pensions industry that the market will not support the wide range of group pension providers that currently exist. Many providers have already pulled out of this area. When selecting a new provider, employers need to be confident that the selected providers have sufficient market share and drive for continued innovation to remain and prosper in the group pensions market.
KEY points
■ In the current financial turmoil, financial strength is the most important criteria in assessing a preferred pension provider
■ Assessing a provider on the basis of charges has become less important in today’s market
■ When selecting a new provider, employers need to be confident the selected providers have sufficient market share to remain and prosper in the group pensions market
Tony Barnard is a technical consultant at Gissings
