What do Benefits Administration Clients Want from HRO?

Linda Merritt, HRO Research Analyst, NelsonHall

What HRO clients want falls into several buyer profiles based on familiarity with outsourcing and organization maturity. The NelsonHall Targeting Benefits Administration (BA) market analysis was published earlier this summer by Amy Gurchensky, and I noticed Amy included differences in client decision drivers by whether they were new to outsourcing or were already experienced in outsourcing. The concept crosses all types of HRO services and matches my running conversations with service providers. Let’s take a look at the following three buyer profiles through the lens of BA:

• Standard buyers
• Experienced buyers
• Progressive buyers.

Standard buyers: otherwise known as first time outsourcers are looking for reduced operating costs, better compliance with regulations, a way to transfer or minimize risk, updated technology and best practices, and improved participant communications channels. Employee and manager self-service and reducing HR administrative burdens are also popular drivers in the initial decision to outsource.

Experienced buyers: otherwise known as second generation outsourcers already have the basics in place and may be ready to broaden the scope of services, obtain more flexible technology, or increase participation in process streamlining to enhance efficiency and improve participant engagement. Changes may include adding new BA services or even consolidating vendors, but it can also include the decision to change to another vendor completely. Cost is still the number one concern, so contract renewals will not be a slam dunk. Providers who are on the ball with changing client needs and increased sophistication should be ready for thorough discussions on price, service, and value.

Progressive buyers: or sophisticated buyers may be ready to use the firm foundation they have built with their outsourcer to create the greatest possible business impact. In BA, this may include total benefits outsourcing where either pensions or retirement plan services are combined with health and welfare services under one vendor to:

• Lower total costs
• Simplify vendor management
• Integrate technologies across the services
• Improve the participant experience.

This is the time to bring out the most sophisticated offerings and analytics and focus on business value; leverage the value of benefits in employee attraction and retention; and optimize total program cost. Once again, existing BA vendors will be vulnerable to pricing concerns and client perceptions about the provider’s top-end capabilities and client retention will remain at risk.

As HRO matures and more clients gain experience in managing outsourced services, expect to see client needs change over time. Service providers can and do quickly tell which HRO profile a new prospect falls into by the language used, initial discussions on services, and outsourcing objectives, etc. It can be a bit harder to see when an existing client, even one satisfied with day-to-day services, is moving from one buyer profile to another. For clients new to BA, if you intend or even just hope to move up to the sophisticated buyer level, consider if the vendor who meets your initial needs will also meet your needs as your organization matures.

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A Look at Automatic Enrollment in the U.S. to Predict the Success in the U.K. and Potential Opportunities for HRO Service Providers

There is currently a global crisis of people failing to save enough funds for their retirement. This reality is faced by those nearing retirement, and it’s affecting millions more. Reasons for this range from a lack of an employer plan to it being too confusing to simply just not getting around to it. In an effort to manage the crisis, legislation has been enacted to facilitate the ease of saving.

 

In the U.K., the primary answer lies in the automatic enrollment (AE) requirement of the Pensions Act of 2008. The AE requirement compels employers to automatically enroll their employees into qualifying pension schemes and to contribute to the pension as well. AE will commence in October 2012 and will be rolled out in stages based on employer size until September 2016 with large organizations (i.e., those with more than 120,000 employees) starting first.

 

Trying to predict the success that AE will have in the U.K. is difficult, but perhaps the Pension Protection Act of 2006 (PPA) in the U.S. can provide some guidance.

 

Recently, Fidelity highlighted the positive impact that the PPA has had on participation rates among other things. Fidelity’s plans that offer AE have increased to 21%, up from 2% in 2006. Furthermore, the AE feature is a part of 63% of plans with more than 50,000 participants, and Fidelity has seen participation increasing as a result of AE.

 

The average participation rate for plans without AE is 55%; but with AE, the participation rate is 82%. More interesting is the effect that AE is having on younger employees, who are typically not too concerned with saving for retirement. For employees between ages 20 and 24 years old, the participation rate for plans with AE is 76% and only 20% for plans without AE.

 

While the PPA in the U.S. does not require AE by all employers, it is proving to be an effective way to encourage participation to actively save for retirement, and it can also provide further opportunities for HRO service providers.

 

In the U.K., for example, Capita has already won business related to the AE requirement of the Pensions Act of 2008. It was awarded a 7 year £105m contract by the U.K. Pension Regulator to support direct communications and transactional processes with employers for AE that began in October 2011. Capita’s responsibilities include:

• Communicating campaign messages to employers
• Communicating AE duty dates to employers
• Ensuring employers register with the regulator
• Operating a customer contact center
• Some enforcement activities such as administering compliance notices and penalties for non-compliance.

 

Shortly after Capita’s contract award, Xafinity became the first pension administration provider to launch an AE offering that:

• Identifies who to automatically enroll and when to enroll them
• Sets a course of action for all stakeholders
• Runs financial analysis on different scenarios and take-up rates based on employee data, and selects a strategy that supports corporate objectives
• Provides AE administrative services including member communications; employee identification; auto-enrolling, opting out, and re-enrolling employees; and reporting.

 

Expect to see more HRO service providers based in the U.K. and others doing business there to launch an AE offering. Some may be late to the game though since the first staging date is less than a year away and compliance can take ~18 months to achieve. It is an area with lots of potential and service providers like Capita and Xafinity are well-poised to gain the first-mover advantage.

 

Amy L. Gurchensky, Research Analyst, HRO, NelsonHall

 

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Where the Action is At in HRO

As a follow-up to my colleague Linda Merritt’s blog last week titled “HRO is Settling in for a Good 2011,” I thought I’d write about where the most action is at thus far. If you were thinking recruitment, good guess, but it is actually benefits administration leading the way in the number of announced contracts in 2011.

In addition to Mercer being awarded a pensions administration contract by Loomis UK Ltd., which Linda also wrote about Mercer in her February 23rd blog, a number of providers have announced important contract awards, including:

Fidelity Investments, after two big five-year contract awards in Q4 2010 by AT&T and Office Depot, in January Fidelity was awarded a five-year contract renewal for total retirement outsourcing (TRO) services by BP America, Inc., a subsidiary of BP. Fidelity will continue to provide administration and recordkeeping for BP America’s 95,000 DB and 48,000 DC and nonqualified deferred compensation plans for U.S. employees. Later in the same month, Fidelity was awarded another five-year contract renewal for TRO services by HP in North America. Under this deal, Fidelity will service all of HP’s retirement plan participants, adding 162,500 participants from EDS who were previously serviced by other providers. In total, Fidelity will serve more than 135,000 DC participants and more than 192,000 DB participants for HP.

Aon Hewitt, in February announced it had gone live with eight new benefits administration clients since the beginning of the year. Across these clients, Aon Hewitt has implemented 12 services including DB, DC, and H&W and has added more than 325,000 participants and retirees to its base of 22 million participants.

Capita, in February was appointed as a preferred supplier for the administration of the Teachers’ Pension Scheme (TPS) by the U.K. Department of Education. This is a seven-year, £80m contract renewal that starts in October 2011 and includes an additional three-year option. A week later, on a smaller scale, Capita won a three-year occupational health services contract by Technip. Capita will provide its Wellness Assessment Surveillance Portal, which gives centralized visibility of health surveillance records to Technip’s 3,000 personnel in Aberdeen and offshore locations.

So will benefits administration continue to be hot this year? I believe it will, though it might be hard-pressed to exceed RPO for the full year in terms of number of contract awards.  As evidenced in the examples above, there are huge volumes of benefit plan participants that are serviced and in today’s economy, clients cannot afford internal resources to manage these programs, nor do they have the expertise and most up-to-date technology. Handling benefits administration is vitally important to employees and retirees, whether it’s the ease of an annual online enrollment or the knowledge of a service center professional in answering DB and DC questions. And it’s not just large companies that need this expertise.  As I wrote in my February 25th blog, mid-market HRO is rapidly growing as well.

A final thought about what will continue to drive contract awards in benefits administration is that buyers are increasingly looking to consolidate their outsourcing services under one provider, as evidenced by Fidelity’s contract with Office Depot. This is a trend I believe will continue and from an employee and retiree perspective is a good thing. I was fortunate enough to leave my long-term employer four years ago with H&W benefits, DB & DC plans, and voluntary benefits, of which all four were provided by four different vendors. Sounds like I should play the number four!

Gary Bragar, Lead HRO Analyst, NelsonHall

Potential ExcellerateHRO Suitors: Who’s Suited?

In just the few short weeks since Hewlett-Packard repurchased all of Towers Perrin’s shares in ExcellerateHRO and the Watson Wyatt/Towers Perrin merger was announced, there has been considerable speculation on ExcellerateHRO’s fate. Will H-P retain it or put it up on the sales block?

H-P hasn’t demonstrated any interest in growing or even supporting its HRO business. And while ExcellerateHRO hasn’t made much headway in the multi-process HRO space, it’s a relatively strong player in benefits administration outsourcing. As a result, we believe – as do many in the marketplace –it’s a potential and solid acquisition target for providers who are already heavy into benefits administration or others interested in entering the space.

What does ExcellerateHRO have to offer potential suitors?

•  Its new technology investment in the BA7 platform, which offers enhanced self-service capabilities, allows for increased customization to enable benefits portals to look and feel more like the client company’s overall HR environment, provides more modeling capabilities, and gives plan sponsors improved reporting capabilities by enabling them to slice and dice data across multiple domains

•  34 million participants per claims of approximately 400 clients, the largest of which itself has 23 million participants

•  Strong experience in managing complex benefits administration relationships, e.g., companies with many different plan structures post M&A, grandfathered benefits, and those with complex formula calculations and offsets

•  Stock plan administration capabilities, which may see a requirement uptick as companies seek alternatives to salary increases

•  Flexible benefits administration capabilities in Europe, particularly in the U.K., which we estimate has high double-digit growth potential by 2013

•  About 20 clients in European pensions administration. European benefits administration business is estimated to generate approximately one quarter of the company’s revenue

All the above make ExcellerateHRO appealing to a select group of providers, especially those looking to bolster their technology capabilities in benefits administration and expand their geographic footprint beyond North America.

Who might be interested in acquiring ExcellerateHRO?

Fidelity, Hewitt and Mercer – to capture additional market share in the health and welfare and defined benefits/defined contributions spaces, as well as greater market share in the U.K. which will require additional servicing when auto-enrollment is introduced to pension schemes in 2012

Empyrean – following its failed ING acquisition, it may be interested in acquiring ExcellerateHRO’s health and welfare portfolio of business to gain more market share. The question in this scenario is what would happen to the remainder of ExcellerateHRO’s businesses? Perhaps they would be hived off to local providers in the U.K., e.g., Capita, and retirement administrators in the U.S.

ACS – the level of noise it has made in the HRO space following its launch of SyncHRO could signal acquisition interest. However, the integration challenges it faced with its purchase of Mellon might deter ACS from making another acquisition in the near-term

ADP – although highly speculative, it might be interested to enable penetration into the larger benefits administration marketplace and to gain defined benefits capabilities

Offshore BPO providers – ExcellerateHRO’s technology would provide the base for offshore BPO providers, most of who have acknowledged proprietary technology is an absolute must in order to effectively serve benefits administration clients directly, rather than as the offshore arm of an existing third-party benefits provider. However, a strong looming question is whether existing ExcellerateHRO clients would accept a purchase by an offshore organization, particularly if there was a threat that first-line contact for processes such as health and welfare were moved offshore

We’ll be keeping a close eye on developments on ExcellerateHRO’s destiny, and so encourage you to keep an eye on our HRO Insights blog for more on this and other hot topics!

Until next time, happy sourcing!

Helen Neale, Research Director, Human Resources Outsourcing, NelsonHall