It is true that great progress has been made. Administrators, asset managers and software providers have collaborated to bring us to a point where information can (but not necessarily does) flow freely and securely, in a standardised format. The key benefits of this are:
■ systems exchange data automatically;
■ there is no human intervention;
■ it controls the risks of incorrect or late transactions and increases data security;
In just 30 seconds it is possible to process 100 transactions – transmitted, validated, authorised, acknowledged – quickly cheaply and correctly.
Where are the gaps? Currently, the only true STP is between the administrators and some asset managers. While many DC schemes allow their members to change their investment and contribution instructions online, these instructions do not necessarily go straight through to the asset manager. What is more likely to happen is that the information triggers an instruction to the administrator and that this is then passed on to the asset manager(s) as a separate instruction. While members will receive an acknowledgement of the transaction, this doesn’t necessarily mean it has happened – much as when a payment is made via online banking.
Where members do not have online access things are far clunkier. Trustees and administrators will have different procedures for investment instructions. In some cases the member will notify the administrator direct – by post, email or fax. None of these is necessarily secure, either in terms of data protection or in making sure the instruction reaches its destination. The approach also costs more. A transaction in the Eurozone costs some 700 times more than its US equivalent.
In some cases this is because technology has moved faster than governance procedures and trustees have different viewpoints. Some are happy to let DC members switch at will, while others prefer to review and approve every switch application. Some asset managers limit the number of ‘free’ switches a member can make in any year and this restriction is often built into the scheme guidelines.
What next?
To achieve true STP, data transfers between clients and administrators would need to be agreed and automated. This would require internal STP – between HR and payroll for example. There has been less to be gained from commonality at this end of the process than there is between administrators and asset managers, so it has followed a slower course.
In today’s volatile investment markets, the speed at which an investment instruction is implemented can also have a significant impact on the outcome for the member. While members should not be encouraged to attempt to time the markets, there is always the risk that they might take action against trustees where transactions are late. An even greater risk is that a large deal should be conducted incorrectly due to human error – a situation that is impossible with STP.
The introduction of personal accounts and auto-enrolment is likely to force the issue. Personal accounts won’t function unless there is a high degree of automation. Fund managers realise that they need to get on board, but are reluctant to commit capital in the current economic climate. Employers faced with a choice between highly automated personal accounts and an occupational scheme that requires manual intervention (and is more costly to run), might choose to switch to the former, although the opportunity to recover employer contributions from early leavers who take a refund has its own attractions. In order to survive, DC occupational schemes (and personal/stakeholder pensions) need to be just as slick in their administration.
Providers of administration services (both in-house and third-party) will need to catch up to survive the introduction of auto-enrolment. For example, in its consultation, the Department for Work and Pensions has suggested that individuals are provided with scheme details within seven days of starting employment, that they are enrolled within another seven days and they have 30 days in which to opt out. This will not work if instructions are transmitted via paper and faxes.
While we are still a way off from achieving true STP, we are heading in the right direction and picking up speed. The benefits are well understood and keenly anticipated by many. It will take much of the drudgery out of scheme administration and allow skilled administrators to do what they do best – look after the members.
KEY points
■ STP is highly desirable as it removes human intervention in data transfer, controls the risks of incorrect or late transactions and increases data security
■ While great progress has been made on STP for pension schemes, there is still a long way to go
■ The advent of personal accounts and auto-enrolment is likely to force the STP issue as providers are unlikely to be able to compete otherwise
Paul Sturgess is product development director at Capita Hartshead
