Trustees must take action to prevent admin operational issues

A scheme’s financial covenant is the trustees’ primary concern, but contingency plans should also be in place for managing ongoing administration should an employer fail. 

In the current market, neither should we ignore the fact that third-party administrators are also exposed to financial and operational challenges.

As the Pensions Regulator identified, financial stress normally presents tell-tale signs to which trustees should be astute. Trustees should monitor both the schemes’ sponsor and the TPA for profit warnings, credit downgrades or debt refinancing.

But it is not just the threat of catastrophic failure that needs risk management. As the pandemic rages on, we have seen higher levels of sickness, shielding, childcare and homeworking, all of which have caused additional stress on both in-house and external administration and need continuous monitoring.

Trustees should monitor both the schemes’ sponsor and the TPA for profit warnings, credit downgrades or debt refinancing

Administration risk assessments are needed

Whether a scheme is administered externally or in-house, there are common early warning signs of operational issues.

These include falling service-level agreement performance, increased member complaints, more errors and omissions, rising backlogs, increased internal dispute resolution procedure cases, projects being delayed/cancelled, less regular/inconsistent reporting, and apparent staff demotivation and a lack of responsiveness to requests.

In-house administration presents warning signs such as budget overspends including overtime, requests for additional recruitment, increased turnover in the team due to pressure of work and increased sickness levels that are not Covid related.

Signs that a TPA may have issues include requests for additional fees, ‘managing to contract’ and a lack of client manager contact as other fires have to be fought. In addition, there may be ‘noise’ from mutual clients and feedback from other professional advisers.

Before taking any corrective action, trustees should ensure they understand their legal obligations. For internal staff this includes employment rights. For TPAs it could cover service credits and penalty payments, termination rights, and exit agreements.

How to manage an administrator in distress

Typically, in-house teams have extensive expertise and passion. However, they can be reliant on key individuals, without whom they may need additional support to recover any position.

While you should never outsource a problem, a TPA may need to support, or if necessary to take over, the core administration from the in-house team. This would need careful management as it is essential that ongoing operations are not compromised, and it is a process that takes time to manage and implement properly. 

With a TPA, early engagement enhances the prospect of the service being recovered. If your administration team has shown signs of distress and key administration risks have materialised, you should shift the focus of the monitoring from the usual, regular reporting to shorter-term crisis management/remedial actions.

This could take the form of putting in place a formal recovery plan, whose basis will depend on the root cause of the issues.

Be open to remedial solutions including relaxing SLAs, withholding penalties and accepting prioritising work.

However, be aware of all legal obligations before agreeing to any measures. Also, ensure that any support does not just reduce the resources allocated to your scheme as resource is diverted elsewhere. 

As backlogs grow fast it is important that contingency plans are in place, with specific triggers when the service falls to an unacceptable level.

Create a crisis plan

A crisis plan should include forensic analysis of the scheme position, performance against SLAs, and alternate options including current market dynamics, possible alternatives, service recovery plans, and triggers and a process for changing administrator.

An irreconcilable position should be managed with care, especially if a detailed exit agreement is not in place. The scheme will be reliant on the existing TPA until a new provider is in place, and during this transitional period your current TPA must continue providing scheme information, data cuts and other related information.

Trustees should also know that replacing a TPA can be a lengthy and costly process, and that the handover will be much smoother if existing relationships are maintained/managed professionally.

You should also communicate with your members if service is failing badly, but this normally means relying on your current administrator. While others can do this for you, it is still reliant on being able to access your scheme’s membership data.

This article first appeared in Pensions Expert on 15th January 2021 (www.pensions-expert.com)