While pension administration outsourcing is common practice for a number of medium- to large size plan sponsors, or those that do not have the in-house expertise to administer plans, Morneau Sobeco is proposing a concept that takes pension administration to the next level—total pension outsourcing (TPO).
TPO, as Morneau calls it, is a pension administration and governance solution, ideally for plan sponsors with a closed defined benefit plan or one that isn’t expected to change in the future. Frederick Vettese, vice-president and chief actuary with Morneau, says when a plan sponsor closes its DB plan and implements a new defined contribution plan, for example, the focus shifts for the plan sponsor from the old pension plan to the new one. But, he explains, just because the plan is closed doesn’t mean it doesn’t need any attention. “Maintaining a closed DB plan takes up just as much time.”
This new service is designed to lessen the burden of operating and administering two plans or that of a DB plan on autopilot. In the model that Morneau presented at a plan sponsor roundtable on Oct. 28, the responsibility for tasks such as administration, investment management and monitoring, actuarial funding and accounting valuations would be on the shoulders of the TPO. The plan sponsor would remain the sponsor for legal purposes, but the TPO would do all (or most) of the tasks that were once the responsibility of the plan sponsor—and ideally for the same cost.
With this new concept, plan sponsors would pay a flat fee to the TPO provider, who would, in turn, pay the other providers. Morneau is also offering an investment guarantee within the model to perform, on average, 100 basis points above or below the targeted benchmark. If the TPO provider performs below this corridor, the flat fee would be adjusted 15% downward, and if it performed above the corridor, fees would be adjusted upward 15%.
Morneau estimates that by using the TPO model, plan sponsors will spend 75 to 100 hours less on governance activities; and that with administration and legal departments working together in the same firm, efficiencies can be gained.
This may seem like a dream come true for some employers, but the ones at the roundtable were a bit hesitant. One attendee suggested that the proposed yearly reporting to members and the sponsor would need to take place on a more frequent basis in order to build confidence and trust. And others raised similar concerns—mainly, being left out of the loop until something disastrous happened.
However, Vettese said that this concept has gained ground in the U.S., and although it is relatively new to the Canadian market, he expects it will take off here as well.
Should the concept take hold here in Canada, it would be a change from the current model for managing and governing a pension plan that most sponsors have in place. Change can be good; it’s the speed at which the change happens that can be detrimental.
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