Pension and benefits administration 2030: overall financial wellbeing

During the COVID-19 pandemic, everyone rapidly shifted the way they shop or interact with their providers, including public pension and retirement.

In brief

• Five key questions arise for the future of pension and benefits administration
• Senior executives from almost 100 leading organizations explored and discussed their vision of delivering better outcomes
• Five strategic themes emerged from the recent EY Innovation Studio initiative

During the COVID-19 pandemic, everyone rapidly shifted the way they shop or interact with their providers, including public pension and retirement. New or enhanced contact centers, digital and self-service capabilities for members, beneficiaries and employers became the norm. The limitations of wet signatures, paper copies or in-person requirements became apparent. The new way of working includes more self-service-based, electronic and paperless processes and continues to create increased efficiency, better customer satisfaction and overall outcomes.

Unfortunately, the pandemic also revealed significant gaps in retirement, health and broader financial wellbeing even among public sector and higher education employees, members and retirees. Most systems already had several offerings beyond the traditional defined benefits, but some leading systems expanded their scope, focusing on members’ broader financial wellbeing without the need for additional employer or government contributions.

The recent EY Innovation Studio initiative, Reframing Retirement, focused on retirement and financial wellbeing outcomes in 2030. Senior executives from almost 100 leading organizations explored and discussed their vision of delivering better outcomes across several key dimensions. Insights from these leading executives and the Reframing Retirement sessions may add value for public and higher education systems, their senior executives, and boards to create their refined vision and navigate successful implementation as fiduciaries answering the above questions. Five relevant, strategic themes emerged:

1. Strategic direction

Public and higher education pension and retirement systems have a clear fiduciary duty and member best interest purpose and mandate defined decades ago. The interpretations of these mandates vary considerably. Some systems have a product and transaction focus on effectively processing pensions while some aim to be a guardian of members’ financial wellbeing. As public and higher education pensions are rarely sufficient anymore as a sole source of income in retirement, and defined contribution or hybrid solutions are increasingly common, public and higher education fund trustees should ask these questions:

• How does our mandate and fiduciary duty to act in members’ best interest focus on financial outcomes for members in retirement? How does it cover broader aspects impacting the financial wellbeing of members during their working life and retirement?
• How can we add more value for our members within our scope? How do we pivot from product and transaction focus to member value across the ecosystem?

The financial situation for many members changed significantly over the years, and new retirement solutions and options require intensive outreach and member choices. This acted as the catalyst for leading funds to think and act broader to add value for their members. Leaders are pivoting to a broader financial wellbeing and outcome interpretation of their scope. The hidden question: Does this create extra costs beyond our scope? The simple answer: Generally, no. It is a consequence of increasing complexity for members through adding defined contribution or hybrid solutions. This broader interpretation and more effective financial wellbeing support are consequential steps for addressing prior policy decisions.

2. Member and employer enablement

Pension, retirement and financial wellbeing are critical long-term aspects requiring many informed decisions throughout a working life and retirement. Trustee boards should ask these questions:

• How do our mandate and fiduciary duty cover broader member enablement to better support them with adequate income in retirement?
• How can we adequately expand our outreach and member portal capabilities, and leverage our position to create an ecosystem of partners to better enable our members to make informed retirement decisions? What can we learn from the private retirement world?

Better member retirement outcomes create more than social and employee satisfaction value. They create more economic spending power for the state’s retirees.

Public employers are mandated actors in pension and retirement systems. Regular data and payment interactions as part of employee payroll, handling queries or confirming retirement are key tasks. Pensionable salary definitions, different data requirements or misalignment to pay cycles make servicing pension funds effortful for participating employers. From our experience, up to 40% of administration costs for funds come from this area directly or indirectly, and the current level of employer enablement substantially lags behind for most plans. End-to-end straight-through processing and full seamless integration with employer payroll or clearinghouse solutions that have up-front electronic validation are rare. Unnecessary, often manual administration efforts and costs for funds and employers are the consequence. And poor data quality requiring significant effort before members retire is the result that costs billions every year. Leading pension funds and trustees should ask these key questions:

• What would effective employer enablement, end-to-end straight-through processing and partnership culture look like? What are the benefits for each stakeholder?
• What initiatives are the most beneficial short and long term? What capabilities and information should an effective digital employer self-service portal have to maximize value?
• What is the business case for change that justifies short-term investment while benefits are generated for decades?

3. Member and employer interactions

Living through the pandemic emphasized three key aspects for both members and employers:

• Digital and self-service by default are practical and valuable for members, employers, and funds and systems.
• Members, employers and funds experienced good and bad customer experiences in the moments that matter; and, in a social media age, good customer experience becomes non-negotiable.
• Data is a key tenet of all public and higher education pension and retirement businesses. Poor data creates significant rework and unnecessary effort often years after its origination for all stakeholders. Insufficient data governance efforts and ineffective enablement and interactions across employers, members and systems are often at the heart of the issue. It reveals an insufficient internal business focus on getting data right as soon as possible and weaknesses with automatic interfaces across all technology systems and solutions, starting with employer payroll.

For each of those three aspects, the expectations of key stakeholders evolved from “why?” to “why not?” As one leader summarized the pressure to act on systems: “If I can buy a car, a house or a vacation with three clicks from my device, it will be difficult to explain to members and employers why we need a signed paper form and why the retirement process takes many days or weeks.”

4. Efficiency and effectiveness

Public and higher education systems and trustees are fiduciaries that act in members’ best interests. And, as many systems receive public employer contributions ultimately paid from taxpayers’ funds, they have a broader public duty. High levels of efficiency and effectiveness across the systems’ ecosystem seem a reasonable expectation. Yet, comparisons of annual cost per member to administer show large differences and significant opportunities for improvements. Sample analysis shows root causes and opportunities in areas including:

• Lack of complete and seamlessly integrated systems and solutions across employers’ payroll systems, including self-service and up-front comprehensive data validation
• Lack of use of block chain solutions for pension administration
• Rare use of predictive analytics, artificial intelligence and machine learning to make better decisions in areas such as employer payroll or fraud detection
• Rare use of “the next best question” and bot contact centers to structurally reduce call and contact volumes while individual call length may increase
• Rare existence of strategic administrative governance committees on the board of trustee level with full transparency on costs, capabilities and gaps across the ecosystem as well as existing and future technology evolution including single-touch payroll for employers
• Rare use of truly strategic, comprehensive long-term delivery, operating and technology strategies with clear roadmaps to evolve and continuously improve

The outcomes of such improvement opportunities are compelling, sizeable and long-term sustainable. Yet, few systems have more than a short-term cost focus and mostly tactical strategic plans that address existing gaps. A constant “lagging behind” the art of practical is the consequence. One hidden restriction is rarely outlined: many systems must annually get budget and investment approvals from relevant state budgets. Common fiscal pressures mean this process commonly challenges funds’ long-term planning and necessary large-scale transformational change. Substantially higher ongoing operating costs that far outweigh occasional investments in efficiency and effectiveness negatively impact stakeholder outcomes. 

5. Ecosystem scope

Initially public and higher education pension systems had four key stakeholder groups:

• Participating employers
• Members and beneficiaries
• Government, treasury or comptroller’s office as policymakers and fiscal co-provider
• The fund or system itself

That rapidly grew with retiree health care, defined contribution, hybrid and other plans, and common use of private sector record-keepers. The expanding use of defined contribution offerings creates a fundamentally different level of importance and complexity in interacting with members and employers. Plus, as data and payments are key tenants, banks and the associated state treasurer as “outsourced” payment agents add even more complexity. As retirement needs continue to evolve for members, private retirement and savings solutions, health care and often social security further expand the universe. Each of these stakeholders has two aspects in common:

• They impact efficiency and stakeholder experience for funds, members and employers in the pension and retirement universe with the funds or systems in the center.
• Each stakeholder group has its own set of unique business processes, technology, and data needs and standards that drive complexity and administration cost and lead to poor experiences, particularly for members.

Three elements of a compelling business case for change

As leading peers pivot from effective delivery of relevant pension transactions to member value and outcomes, they create formal pension and retirement ecosystems. Effective collaboration and focus on standardizing or seamlessly connecting business processes, data, technology and communication generate better outcomes for all ecosystem participants.

The pandemic acted as a catalyst for the transformation to focus on value, outcomes and ecosystems for public and higher education pension and retirement systems and key stakeholders. Leading domestic and global peers evidence compelling business cases for change with three key emphases: (1) humans, particularly employees, members and participating employer HR staff at the center; (2) innovation of the way things are done and use of everything new at scale; and (3) technology transformation at speed including the look across other relevant industries and global solutions that have proven to deliver transformational outcomes unheard of in the US public and higher education markets. The discussion shifted from “why?” to “why not?” and members and stakeholders expect better outcomes.