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Home > Blogs > Anthony Harrington > Straight through processing (STP)—The new “must have” for DC pension schemes

Straight through processing (STP)—The new “must have” for DC pension schemes

Finance Blogger: Anthony Harrington Anthony Harrington

In late September, Mercer, the pensions administration and employee benefits specialist, fired off a press release that was intended to be a wake-up call to the trustee boards of UK pension funds. “Trustees should demand STP (straight through processing) for pensions administration,” the release thundered. Any number of ordinary folk reading a headline like that—assuming such material ever intruded into their world—would respond with a blank expression, or perhaps a polite “Come again?” or perhaps “Eh?”

Many pension fund trustees would be similarly nonplussed. However, Mercer is entirely right. STP is simply jargon for removing people from the loop and there is a crying need for this to happen for reasons we shall explain. Ordinary people would be moderately amazed to discover just how many times human hands and brains have to get involved in the chain of events involved in fulfilling a defined contribution pension plan’s investment strategy, and reporting the results of that fulfillment back to the trustees and, ultimately, back to the members. They would also be amazed how long this process can take in its current multiple-hands-on form.

Let’s start with a quick caricature of how things generally work today. The trustee board or the plan sponsor hires a plan administrator who works out the scheme’s investment strategy (how much of each monthly contribution to put in the various asset classes), and who constructs a panel of investment managers for the DC scheme.

This goes to a fund administrator whose job it is to collect the monthly contributions from the sponsoring company and to forward the cash and the investment instructions on to the investment manager organization.

The latter then buys units in the funds designated and reports back to the administrator, providing price information and trade confirmation details. The administrator then bundles all this into a report which shows the latest net asset value (NAV) of the scheme and provides a “state of play” report to the scheme members.

In the traditional human-hands-in-the-loop approach, the vast bulk of this information messaging is in the form of the humble fax. Opportunities for mistakes, figure transpositions, misinterpretations of instructions, omissions, and other errors abound at every point. Bear in mind that we are talking about someone’s pension here. (I said “sell stocks, buy bonds,” not “buy stocks, sell bonds” —what do you mean the stock market just lost 40%? Where’s my money?)

How is it possible to run the vast bulk of the UK’s DC schemes on faxes? Well, right now assets under management in DC schemes are tiny by comparison with assets under management in final salary, defined benefit schemes. So the industry is dealing with relatively low numbers. That state of affairs is changing. Final salary schemes are closing and members are being shifted to DC schemes. The work load in the DC world is going to go up exponentially in the next few years.

Having people writing, sending, receiving, and filing faxes is just not going to cut it, not unless you employ an army of clerks. And an army of clerks would make DC schemes fiendishly expensive to run. Ergo, you need STP, or automated electronic processing end to end. The industry is going to have to wake up and get a grip…

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Tags: automation , defined contribution , electronic processing , Mercer , straight through processing
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  1. bobswarup says:
    Fri Dec 04 08:38:27 GMT 2009

    It makes complete sense to look into ways of streamlining and making the administration of these schemes more efficient. Otherwise, the scope for error is worryingly scary as more and more people begin to participate in these schemes. It's worth noting that several major corporates in recent months have announced plans to close their final salary schemes to future accruals or even to new members. All of this means that the flood of people opting for DC schemes will accelerate.

    Of course, what this is does not address is a deeper issue. DC schemes place all the risk with the individual - if the plan fails to perform, they are left holding the can in retirement. Where DB left everything risk-wise with the firm - an equally unfair proposition - DC seems to have gone to the opposite extreme. Neither, I am afraid to say, looks entirely satisfactory to me. A think a genuine sustainable solution to the pensions crisis is still some way off.

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