Deloitte Insurance Market Update (Part 2 of 3) - Pensions, Regulation and Strategy, Tax Risk Management

Simple pensions, simple administration

The implementation of a new legislative framework for pensions in†April 2006 heralds a new era for the industry. Merging eight regimes†into one will fundamentally change the UK pension market but it's†not just the sales side that will benefit. Simplification is also a chance†for providers to radically overhaul their administrative platforms and†tackle systems and operational issues. Andrew Power reviews the†opportunities and highlights some of the key considerations.

All change

It has been a busy time in the pension market with recent legislative†moves to merge eight pension regimes into one by A Day -†April 6th 2006. The new regime offers a lot of appeal in reducing†the complexity of pensions. They should be easier to sell and†to administer.

We believe the changes will have a significant impact on the UK†pension market:

Products will be fewer and simpler (more transparent).

In short term charges increase above 1.5% but not far.

Investment performance will become increasingly important.

Focus will increase on individual based plans and individual support.

Consolidation of individual "pots" will become more popular.

Nature of advice will shift (more information, more aggregation,†more investment reporting).†

Role of employer will lessen as defined contribution becomes†predominant.

Role of employee benefit consultant will change to broader†HR role.

As the government has hoped the changes could have a radical†impact on the pensions market, changing the industry structure and†competitive positioning.

A lot of attention has been focused on the sales benefits of†pensions' simplification. With greater simplicity, less advice will be†required enabling products to be developed that have lower†charges. As a result it is hoped this will encourage individuals,†especially those with moderate income, to save and contribute to†bridging the so called £27 billion savings gap in the UK. Much†uncertainty exists over the impact on sales given the public's recent†disaffection with pensions and the public's continuing lack of†understanding of financial products.

Current pension administrative challenges

Less attention has been paid to the advantages in pension†providers being able to simplify their pensions' administration.†Today large pension providers might have 5-10 legacy platforms†administering pensions. The same product may be administered†on multiple platforms and many policyholders will have pensions†with one provider split across multiple platforms. As a result of†this, many customers receive poor service on their pensions.†There may be no integrated view of a customer's holdings;†operational processes will be designed around the quirks of the†platform not the needs of the customers or operational efficiency,†and much manual intervention is required to undertake even†routine pension transactions.

Changes will impact systems functionality and processing across a†broad range of processes, many of which will be embedded within†existing business systems. The legislation is retrospective, additional†work will be required to migrate existing pensions data to new†record structures necessary to process the changes. Complexity is†increased if a number of different systems support pensions†processing and the interfaces between them. As illustrated below,†the new legislation has impacts on at least thirteen dimensions†e.g. new limits, and effects employers, individuals, providers†and distributors.

Such large scale change in the structure and feature of pensions'†products will have an impact on the day to day operations in†respect of:

new and revised business and compliance processes;

changes in the volume and nature of enquiries;

organisation and training of staff in the new legislation;

additional data collection and transmission across†the organisation.

For any organisation, these changes will cut across:

all group companies engaged in processing pensions;

sales channels - direct sales forces; intermediary channel†management; broker networks and bancassurance;

3rd party and off-shore service providers;

operations - sales & marketing; customer servicing;†pensions administration;

support - IT; compliance; tax; finance, actuarial; legal;

communication channels - call centres; internet services;†employer/employee intranets.

As is clear the changes are broad ranging and significant. Indeed,†we believe the nature of these changes have been underemphasised†by most providers, who naturally have tended to focus on the†product and market impact.

The opportunity for administrative simplification

Just as the response to Year 2000 allowed companies to deal†with many long standing operational and systems issues, pensions†simplification offers the same potential. It really will be viable to†consider migrating all pension administration to a single platform,†thereby improving consistency and avoiding the cost of changing†multiple systems in response to future pensions' legislation.†This will drive obvious benefits in operational efficiency and lower†IT development and maintenance.

More importantly, operational changes will be necessary to ensure a†pension provider remains competitive, or better yet steals a march on†its competitors. The new pension regime will change the basis of†competition in pensions.

In any less complex markets commodity pricing becomes prevalent,†and the winners are scale providers. Scale can only be achieved†through greater standardisation in both operations and systems.†While the pensions market is a long way from being a pure†commodity market, it is moving in that direction. The bespoke†pension platforms and operational processes will no longer cut the†mustard and returns from the pension market will plummet unless†operations are cleaned up and streamlined.

At the same time, with the advent of annual and lifetime limits,†individual record keeping will emerge as a potential key success†factor in pensions' administration. The most attractive providers will†be those that aggregate pension holdings to show an integrated†pension statement. Even better will be those who can then link†these administrative capabilities to multi-manager platforms, thus†allowing an individual to change asset allocation under one pension†wrapper. As a result those with retail brand names and†administrative efficiency will begin to win market share.

In addition, technology can be applied to provide better support†to distributors and customers. For example, planning tools can be†developed that allow individuals to select the optimum asset†allocation for their level of risk tolerance and specific retirement†needs. Straight through processing can be designed directly with†employers and with distributors.

The way forward

Work between the business, operations and IT must occur to get a†clear understanding of scope, volume of work and risks:

the legislation will require interpretation, and will continue to be†clarified right up to A Day;

business thinking will evolve and expectations and change must†be well managed. There will be a tendency to keep all options†open, but this tends to lead to design of excessive operational†and technology complexity;

strong facilitation to achieve an early baseline of good quality†requirements; and

linkage between the provider's strategy and its operational and†IT initiatives. If pensions simplification is considered just a response†to a mandatory regulatory requirement then the company will miss†a great chance to reposition itself strategically to capitalise on†growing individualism in pensions and growing scale economies.

When the scope is understood, IT will need to:

find solutions that work across the group to minimise cost and†reduce risk - implement once not several times;

coordinate IT changes and releases into the business - some business†area may want/need to move quicker than others. It will be critical to†understand and recognise this in release planning to prevent some†business units being put at a competitive disadvantage;

ensure impact assessment and identification of areas of change†is rigorous particularly around legacy systems;

provide sufficient IT resources (internal and external). While, over the†long term, a simplified pension administrative platform holds out the†prospects of more efficiency, unravelling the secrets of existing legacy†systems will be a major effort. Many providers will lose patience and†seek only to put new pensions business on a uniform platform;

manage these changes alongside existing IT development†portfolio and BAU activity. Pensions simplification is but one of†the major regulatory, mandatory initiatives effecting life &†pensions providers in the UK. It demands must be coordinated†with the response to depolarisation, Prudential Source Book,†IFRS etc;†

work with the business to prioritise the delivery of IT changes, in†order to do this, some planned projects may need to make way.†In making these changes the organisation will need to consider:†

setting clear benchmarks for operational performance and IT†return on investment;

documentation of the design and changes to new processes†to replace the patchwork of inefficient, unique processes of†today;

fit with existing technology strategy to ensure correct†prioritisation of application spend in line with value created and†the leveraging of a common infrastructure; and

training requirements to respond to a growing volume of†customer questions about the new legislation and related†products.

In summary, the pensions'...