Transfer value calculations - administrator vs actuary

Recent years have seen a growth in actuaries supplying and promoting their own systems for calculating transfer values. Instead of administrators programming and automating their own systems, many actuarial firms are now encouraging trustees to use applications, providing access to administrators under licencing agreements. With varying levels of sophistication and integration, these actuarial systems range from basic macro-enabled Excel workbooks to web-based applications.

Promoted to trustees as the best option to reduce actuarial costs and improve maintenance, adopting actuarial TV calculators can have tangible benefits. However, the limits, operational impact and true cost of adopting these systems should be considered before simply accepting them; and most critically, a conversation should be had with the scheme’s administrator about how the system will be used and what impact it will have on their processes and controls.

There’s plenty for schemes to consider and the decision on which system to use can be a complicated one. Here are a few things to think about before making a decision, along with a few questions that trustees should ask before going ahead.

The benefits of administrators managing CETVs…

For data and systems:

• Fully integrated workflows and processes reduce errors and improve assurance and data integrity. The use of actuarial TV calculators can often mean that the administrator needs to manually enter/transfer data between systems and then manually enter the results into letters and statements.
• Ongoing system maintenance, versioning and core code changes are covered by the administration agreement. What will happen to the actuarial tool if an administrator updates their systems, and the tool is no longer compatible?
• Administrators’ systems usually have data validation and warnings built in as part of their calculation routines.
• Administrators’ systems are covered by their information security and system management provisions and measures, while external systems supplied by trustees for administrators are commonly not. Accountability for the security and integrity of third-party systems sits with the system supplier, which will be the Trustees and/or the actuary. Systems not designed and managed by the administrator will fall outside of their systems management frameworks.

For the scheme/employer

• Ongoing administration costs are kept lower, as actuarial systems can often invite additional costs to cover the extra manual administration steps need to operate them.
• Administrative costs for bulk transfer calculation processes are lower, as they can be produced on the administrator’s platform.
• No additional administration training costs or licence agreements are incurred by switching to new systems.
• The actuarial service becomes more portable, as the scheme is not reliant upon the actuary’s systems to produce transfer values.

For members:

• Faster response times as the use of third-party systems and manual data entry can slow processes down.
• Transfer values can be published and made available to members online in real-time through the existing member portal. This is commonly not possible when a third-party application is used.
• Member correspondence and communication outputs are automated through the administration system, again reducing the risk of errors from manual inputs. Outputs from most actuarial TV calculators require the administrator to manually copy the results into member letters.

The other side of the coin – some limitations

In the interests of balance, it’s important to note that there are some downsides to having your administrator calculate transfers. Depending on the size and make-up of your scheme, and the agreement you have with your actuary, there are some things to consider, including:

• Initial setup and programming of the administration system can be expensive, especially for highly sectionalised schemes. Programming and testing transfer calculations can be very time consuming so setup costs from administrators can sometimes be high.
• The actuary will be required to provide checking and sign-off on changes and updates, which may incur actuarial costs.
• The actuary may be required to provide regular factor updates, which can increase ongoing management costs.
• The administration service will become less portable as transfer calculations reside on administrators’ systems, increasing implementation costs when the scheme moves.

It doesn’t have to be an either/or decision - a hybrid model may be an option.

This works particularly well when the largest sections of membership with the highest volume of transfer activity are programmed on the administrator’s systems, with smaller sections using the actuary’s system.

Capacity is also something to consider. Should the scheme experience a high volume of transfer requests due to a scheme change or new communication, efficiency and costs may be negatively impacted by the use of third-party TV calculators.

A decision should be made having consulted with both the actuary and the administrator. The benefits of each approach should be considered, and the additional work required by the other party to support that solution needs to be taken into account. We believe focussing on what gives the best service to members should be at the centre of any decision – what will give them the right information at the right time and in the right way, without costing the scheme additional time and money to provide it. Whichever solution is implemented, it’s important for trustees to understand each solution’s limitations and what the impact could be on future strategic projects and communication exercises.