Exploring pensions outsourcing as a route to unlocking efficiencies

07 Jan 2025

First seen on Professional Adviser

In recent years, the pensions administration outsourcing market has witnessed consistent and steady growth, driven by a shift in how businesses approach operational efficiency and strategic focus. Organisations are increasingly entrusting third-party providers with administrative functions, enabling them to allocate more resources to their core competencies and long-term goals.

Outsourcing administrative tasks can serve to help companies reduce overheads and offer routes to improve operational agility. By leveraging specialised expertise, businesses can streamline processes, improve efficiency, and achieve greater scalability – all without bearing the burden of additional fixed costs.

As digital transformation continues to reshape the industry, the demand for outsourcing partners capable of managing end-to-end administrative workflows is accelerating. Companies now seek providers equipped to handle straight-through processing - ensuring seamless and efficient operations in a hyper-connected, technology-driven environment.

For organisations aiming to thrive in today's competitive landscape, outsourcing administrative tasks is no longer just about cost saving. It's also a strategic enabler of growth, agility and innovation.

Iterative improvement in pensions administration

Administrative pension tasks are often by their nature, narrow, standardised and repetitive. In this sense, the work shares characteristics with car assembly plants. One of the keys to continuous iterative improvements, or ‘kaizen' as the Japanese termed it, combined with Lean production techniques, was to devolve a level of ownership to small, dynamic teams, often led by problem solvers.

Toyota called this dynamic ‘humanware' as it combines management, participation, incentives, and technology strategy to optimise productivity, motivation and the development of people at work. Lean production techniques help engage participants in their work with an ideology that appeals to both their hearts and minds. In short, some of this business philosophy can be applied to improve productivity as well as morale. It gives more meaning to the work which ensures staff retention improves. It helps bridge the divide, in car assembly at least, between skilled manual and knowledge working.

Some of these ideas first honed on assembly lines from Fremont, California to Tokyo, Japan more than 60 years ago can be applied to pension administration teams today. For example, those willing to set their minds to addressing inefficiencies and collaborating with others to explore solutions, end up as technical or team leaders. Many of the efficiencies that we are realising in our pensions admin team today are because of tight, yet informal collaboration between our software developers, subject matter experts and pension administrators.

Conversations start with a discussion of a specific manual piece of work that is frustrating or prone to error. They naturally end with finding a short cut for automating that work. In this way, our administrators shape their future – both increasing their productivity but also creating the opportunity to make their work less error prone and of greater strategic value.

So, with the principles of kaizen and IT teams working alongside pensions administrators in mind, let's look at just four innovations to extract pension administration efficiencies and enable our Third Party Administration (TPA) clients to deliver greater value and higher quality services to their customers, whether they be advisers or end customers.

Innovation #1 - Automation

When we begin talking to new customers, we often find ourselves looking at pension processes which are currently being done in a manual or semi-manual manner. One such manual process is the production and delivery of Annual Pension Statements. Annual Statements are regulatorily required. They are normally sent out (at the anniversary of a policyholder's pension) alongside a covering letter explaining the statement's content.

Often in-house pension admin teams will use some ad hoc mechanisms for collating the data required for these statements, but will still rely on manual interventions to produce Annual Statements and merge them with personalised cover letters. To create and merge the data for these outputs can be resource intensive.

By applying automation software, it becomes possible, with a combination of automated data feeds pooling specific datasets in a variety of data formats; document templates and bulk document production; illustration calculations and collation tools, to generate thousands of Annual Statement packs very quickly . We have seen productivity rise significantly using these tools. Of course, this sort of automation can be applied to any bulk document production – for example, for the generation of Lump Sum Allowance (LSA) statements associated with new regulatory requirements, and particularly where the source of data is from multiple systems.

Innovation #2 - Robotic process automation

The application of robotic process automation (RPA) is ideal for finding efficiencies in high volume, low complexity tasks, which nevertheless MUST be highly accurate. For example, we built an RPA solution using Microsoft Power Automate to address a specific problem linked to direct debit processing. This solution has been set up to run checks on policy expectations ahead of bulk direct debit contribution processing.

Our pension administrators use this RPA tool to compare any unfulfilled contribution expectations on a given policy with a breakdown of expected contributions. This ensured that when the direct debits are received, the funds can be distributed and invested on the day of receipt.

The RPA tool is designed to only identify discrepancies between projected contributions to be received and expectations on the administration system - therefore limiting the requirement for manual checking and intervention.

Innovation #3 – More proactive, more frequent payroll

Typically, a monthly payroll run for payment of pension benefits. End to end cycles of payrolls tend to be quite lengthy making even fortnightly payroll runs challenging. By extending existing software capabilities, we can now enable more frequent payroll runs.

We did this by focusing on streamlining the payroll process by running payroll projection simulations from which we could identify tasks to be completed to ensure that on the day of payment all mandatory data is present. These simulations uncover missing data such as absent or temporary tax codes, and missing or incorrect bank account details. They also ensure significant cash is available to fund the income payment. Because all this checking and data backfilling is done pre-payroll, it ensures the actual payroll is processed much faster.

In the past, we found there was always a small percentage of people who would have to be excluded from a payroll run because their details were not correct in time. Now, we often complete entire payrolls in less than two hours including the tricky ones where discrepancies have had to be addressed before the payroll run. Because payroll runs are now much quicker, it is possible to support our clients in being able to offer an increased number of payroll dates.

Innovation #4 – Exploring generative AI

Artificial intelligence (AI) offers the opportunity to improve administrative efficiencies as well. TPA employees have worked alongside our software developers to create a chatbot for one customer. This was designed to handle policyholders' queries online and reduce contact centre and administration team workloads.

AI algorithms can also be used to help fix pensions data gaps and errors and to enable reporting. AI is particularly good at analysing large data sets and then using this analysis to predict future trends. We are currently exploring the idea of using this sort of analysis to ensure that we have the right number of administrators available in peak times like tax year end when typically, the quantity of pension contributions increase significantly.

Merit of running pensions admin from within a pension tech firm

One of the keys to good pensions administration is easy access to a team of pension and technology experts. At Dunstan Thomas this includes the teams responsible for our pension illustrations product, Imago Illustrations, as well as our pension administration product Imago Administration, and several productivity tools which have been developed in discussion with our pension administrators.

At Dunstan Thomas, our TPA staff naturally learn about the nuances of the software from its builders – our software developers - first hand, and apply their pension and system expertise to help shape the future roadmap of our products.

That proximity also makes our TPA team particularly well-placed to handle customers' pension administration queries. It also helps us to configure our technology to enable TPA staff to do what they need to do to serve their clients better.

It's this close collaboration between technology teams and highly active pension administrators which unlocks the potential for iterative improvement in the running of pension books of business for a growing number of customers.

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