Crisis in outsourcing? What happens if an administrator fails?

Helen Powell

In the wake of the collapse of Carillion, headlines about profit warnings from other outsourcing specialists are bound to set off warning bells. Capita has just announced a significant restructuring programme following a profit warning, including a refocusing on its core businesses. It may be that there are no implications for its pension scheme administration business, but it’s still worth trustees and employers of all schemes considering what would happen if a third party administrator (TPA) were to fail. How would pensions continue to be paid? What would happen to other scheme services?

It’s important to note that insolvency administrators will generally seek to keep things running in order to be able to sell off viable parts of the business and maximise the returns to creditors in the insolvency process. In the Carillion example, employees have been asked to continue to work normally, and are being paid; Carillion customers are being told that services should continue to be provided under current contracts. Clearly, however, there will be uncertainty within Carillion, as the insolvency administrators look to sell off parts of the business or transfer key contracts. That often leads to employees leaving, and in the TPA context this could lead to a drop in service levels, or a sudden loss of historical knowledge of the scheme.

Your contract with any TPA should cover this kind of eventuality, and will generally stipulate that the insolvency of the TPA gives trustees an option to terminate the contract (rather than terminating automatically). It may also trigger requirements for specific exit services connected to the transition to a new administrator. The question is, of course, whether a TPA undergoing an insolvency process can meet those requirements, and do so at an appropriate standard and cost. At the same time, multiple schemes may be seeking to transition to a new TPA quickly, and market capacity could limit schemes’ negotiating strength.

None of this is a desirable situation for a scheme to find itself in – so what, if anything, can schemes do to mitigate their risk?

  • The first priority is to review the terms of the contract with your TPA, to check that provisions dealing with this kind of situation are appropriate – for example, giving you the option to terminate described above, and providing commitments about business continuity during any transition period.
  • Consider whether you have a dedicated team working only on the administration of your scheme, or whether a whole team provides services to your scheme alongside many others. As a practical matter, the Regulator encourages all schemes to maintain a procedures manual that will help to protect them in the event that historical knowledge is lost or key personnel are unavailable. There must be a detailed record of how the scheme is run, how benefits are calculated, and so on; you should also check that this is kept up-to-date and accurate. This is sound advice for all schemes, including those that use in-house administrators; whether or not a scheme’s administration is outsourced, the trustees remain responsible and accountable for the administration of the scheme.
  • Data is always a key issue for schemes, so consider whether your standard requirements for data back-up and control are sufficient. In a transition period, you may need to monitor service levels more frequently and more closely than normal to ensure that core scheme financial transactions continue to be processed accurately and promptly, systems are maintained appropriately and data is regularly backed-up and tested.
  • You should also be aware of what measures your administrator has in place for business continuity and disaster recovery, and how it ensures that it has financial resources to put any problems right. Is the scheme adequately protected if things go wrong, including under any insurance/indemnity provisions?

Helen Powell is a PSL Counsel at Allen & Overy LLP

Comments published on Pensions Talk do not necessarily reflect the views of Allen & Overy or its clients.

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