Current Trends and Issues - Oracleshift toward older, higher-paid workers. Conversely, after an early-retirement-based reduction in force, the remaining population may end up younger

Pension Administration Current Trends and Issues By Vincent C. Hrabinski Mercer Human Resource Consulting www.mercer.com An Oracle White Paper August 2004

Pension Administration

Introduction ....................................................................................................... 3 The Trends ......................................................................................................... 3

Financing........................................................................................................ 3 Demographics ............................................................................................... 5 Business Changes.......................................................................................... 8 Pension Policy ............................................................................................... 9

Effects on HR and Plan Administration...................................................... 12 Plan Changes: Biggest Impact................................................................... 13 Doing More with Less ............................................................................... 14 More Information Faster ........................................................................... 15 More Scrutiny .............................................................................................. 16 Delivery of Pension Services..................................................................... 16 Shared Services Model ............................................................................... 17

The Solution..................................................................................................... 17 Flexibility and Adaptability to Change..................................................... 18 Streamline Administrative Tasks .............................................................. 18 Integrated Solution ..................................................................................... 19 Internet Architecture and Self Service ..................................................... 19

Case Study: ConAgra, Inc. ............................................................................. 20 About Mercer................................................................................................... 21 About the Author............................................................................................ 21

Pension Administration Page 2

Pension Administration

INTRODUCTION For many years, pension plans and their administration went largely unnoticed. But with the recent history of poor investment returns, low interest rates, adverse demographic trends, and “cash balance” plan and corporate controversies, pension plans are garnering the kind of attention that words like “billions” and “deficit” bring.

In this paper, we explore some of the recent trends in retirement and defined-benefit (DB) pension plans. We also consider how the trends affect the administration of these plans and how Oracle’s PeopleSoft Enterprise solution can help organizations meet the associated challenges with high-tech solutions.

THE TRENDS

Financing Trends that affect many financial aspects of DB plans make them more costly to employers and place them under greater scrutiny by shareholders, employees, and regulators. These trends include the following.

Low stock prices and low interest rates. The sluggish economy has contributed to DB plan woes. When stock prices went from boom to bust, pension trusts that were invested in equities had fewer assets to cover their liabilities. In 1997, the annual return on a typical pension plan portfolio was more than 20 percent. In 2002, the return was -8.5 percent.1

At the same time, low interest rates have made those benefits more expensive. In the pension accounting world, future pension costs were valued by using the U.S. Treasury 30-year bond rate, even though the government no longer issues 30-year bonds. Further, because these bonds are no longer available for purchase, the published rate is artificially low, resulting in artificially higher pension liabilities.

Plan sponsors lobbied Congress to change to a rate based on corporate bonds—a higher rate that would reduce pension liabilities. Congress originally granted temporary funding relief in 2002, but that expired at the end of 2003. On April 12, 2004, the Pension Funding Equity Act of 2004 was signed into law, which provided

1 Mercer Human Resource Consulting, Inc. presentation, “Retirement Benefits in the U.S.—Responding to Today’s Challenges,” February 21, 2003, p. 3.


that certain liability calculations would temporarily replace the U.S. Treasury 30-year bond rate with a higher corporate bond rate. Without this new relief, plan sponsors were looking at significant pension costs.

The low interest rates and low stock prices have contributed to an overall underfunding of $350 billion in 2003.2

Figure 1: Annual returns of a typical pension plan portfolio3. Based on a portfolio invested 50 percent in

Russell 3000, 10 percent in EAFE (Europe, Australasia, Far East Index), and 40 percent in Lehman

Aggregate.

New accounting rules. Recent changes in how pension plans are reported in a company’s financial statements are also affecting pension plans. The Financial Accounting Standards Board (FASB) now requires companies to disclose their pension plans’ investment strategies, future cash flows, and future benefit payments.

Previously, companies could omit details about the types of assets held in a pension fund (such as equities and bonds), but under revisions to FASB’s Statement 132, companies must disclose:

Asset information: Investment strategies, which may include investment objectives, basis for allocating assets, and risk assessments, as well as actual and target asset allocation percentages and rate-of-return assumptions.

Contributions: Actual or estimated employer contributions for the next fiscal year and any later changes to this amount in interim financial statements.

2 Testimony of Steven A. Kandarian, executive director of the PBGC, before the Senate Special Committee on Aging, Washington, D.C., October 14, 2003. 3 Ibid.


Benefits: Payment projections for each of the next five years and a total for years six through 10.

Interim disclosures: Net periodic benefit cost by component and any changes in expected contributions from previously disclosed amounts quarterly.

For pension plans that have a calendar-year reporting period, many of these new reporting rules took effect starting December 31, 2003. These disclosure rules may fuel more questions from shareholders, employees, and analysts about a company’s pension arrangements and could prompt management to make plan changes.

Demographics In 2001, members of the Baby Boomer generation began to celebrate their 55th birthdays— the age that qualifies many plan participants for early retirement. Although many employees are continuing to work, the potential for pension plan costs is significant.

Aging population. The number of workers over age 55 will increase from 18 million in 2000 to 33 million by 2025 (approximately 25 percent of the population).

Figure 2: Past and projected number of workers over age 55, 1970–2025.

In the past, many of these older workers would have retired. But today, they either want or need to remain in the workforce for largely financial reasons. In the EBRI-ASEC 2003 Retirement Confidence Survey, 24 percent of workers age 45 and older reported they plan to postpone their retirement, compared to only 15 percent in the 2002 survey.4 Further, 25 percent plan to retire at age 65 and another 24 percent at age 66 or older. Therefore, roughly half of current workers expect to wait until at

4 Employee Benefit Research Institute and American Savings Education Council, 2003 Retirement Confidence Survey — Summary of Findings, 2003, p 1.


least age 65 to retire. In contrast, most current retirees reported they had retired by age 62.5

The financial implications of delaying retirement increase when you combine this trend with another demographic: Americans are living longer. A worker retiring in 1950 could expect to live another 15 years. Based on current life expectancy, someone retiring today should plan to live for 30 years of retirement.

As employees work longer, they accrue larger pension benefits. With longer life spans, those larger pension benefits are being paid for a longer period of time, are more expensive, and must be accounted for in the liability funding calculations.

Labor shortage. Although seemingly contradicting Baby Boomers’ remaining in the workforce longer and headline-grabbing news of layoffs and unemployment rates, many organizations will actually have to contend with labor shortages and loss of skilled workers in the future. In part, this is due to lower fertility rates and fewer new entrants into the workforce.

For several years, fertility rates have been dropping in the Americas, Asia, and Europe. Lower fertility rates mean fewer future workers to fund pension plans. In the past, lower U.S. fertility rates had been mitigated somewhat by immigration, but now many of those same regions are also experiencing lower fertility.

Figure 3: Total fertility rate.6

In North America, the number of children born per woman had been approximately 3.2 in the period 1950 to 1955. That figure is expected to drop to 1.7

5 Ibid. 6 Ibid.


children per woman in 2020 through 2025.7 (The “replacement rate” for a population is 2.1.)

Now consider that in North America, the ratio of working-age adults to retirees is 3:1. By 2020, that ratio is projected to drop to 2:1. Not only does this trend affect private pension plans, it will also affect government-supported programs such as Social Security.

Phased retirement. Traditionally, retirement has been a one-time event—a person works for several years at an organization and then retires completely from the workforce. But in recent years, older employees have continued to work part-time after retirement, returning as consultants/temporary employees or starting a new career.

A Mercer white paper on phased retirement noted that as knowledge-intensive service workers replace labor-intensive manufacturing workers, the productive lifetimes of older workers are extended.8 Although many organizations do not have true phased-retirement programs—due in part to current laws and regulations that prevent employers from making “in-service” distributions from pension plans—many have made arrangements that allow older workers who have specialized skills or relationships to “phase” into retirement. Some of the more prevalent approaches include reduced hours, special assignments, and temporary or consulting work (see table).

Approaches to Supporting Phased Retirement9

Reduced hours or schedules 47% Special assignments 45% Temporary work 42% Consulting work 42% Job sharing 17% Telecommuting 10%

By retaining older workers, organizations can capitalize on their specialized skills and transfer that knowledge to younger workers. But this trend may create administrative headaches and costs for employers that want to implement phased retirements without contravening the existing in-service distribution laws and regulations.

7 Charles Habliston, et al, Global Retirement Trends. Presentation at the 27th International Congress of Actuaries, March 22, 2002, p. 6. 8 Mercer Human Resource Consulting, Inc. white paper, “Phased Retirement and the Changing Face of Retirement,” May 2001, p. 2. 9 Ibid., p. 8.


Business Changes In addition to regulatory and demographic factors, businesses themselves contribute to pension complexity through mergers, acquisitions, and downsizings. These factors can increase financial exposures directly by adding more future pension plan participants and, indirectly, by incurring penalties for lack of regulatory compliance or even litigation from stakeholders.

Mergers and acquisitions. Although U.S. mergers and acquisitions (M&A) activity declined in 2001 and 2002, it has begun to pick up. In 2003, the total estimated value of deals increased to $525.6 billion from $457.9 billion, and the trend is continuing in 2004.10 Some of the larger recent mergers include Bank of America Corporation with FleetBoston Financial Corporation; Anthem, Inc. with WellPoint Health Networks; and The St. Paul Companies with Travelers Property Casualty Corp. Most of these organizations sponsored DB plans for their relatively large populations.

M&As affect the pension plans sponsored by both parties in the transaction. Prior to a deal, the acquiring firm needs to review the pension arrangements. In addition to acquiring the business, the firm also acquires its pension commitments. These liabilities can be so large that they’ve been known to derail a deal, but in most cases, future owners focus on mitigating the expense by determining whether or what changes need to be made. Often the final deal will contain grandfathered provisions and vested terminated employees from the target’s past mergers, committing the acquirer to a future of complex pension administration.

Downsizing. Companies downsize for many reasons—lack of demand for products or services, change in business strategy, or industry consolidation. Many of these companies sponsor large plans, and downsizing poses additional challenges to administration. Laying off workers or offering an early retirement window to reduce the size of the workforce typically requires performing mass pension benefit calculations in a timely manner.

Downsizing can also alter the employee demographics. Companies can use seniority to determine who stays and who goes, and the remaining population may shift toward older, higher-paid workers. Conversely, after an early-retirement-based reduction in force, the remaining population may end up younger and lower paid. In either situation, the company needs to evaluate its pension arrangements to ensure that it can meet its pension obligations of the remaining active employees.

Early retirement windows, in particular, can have a problematic impact on pension plan funding. They often include costly incentives and age and service supplements. The net financial effect of increasing plan liabilities, however, can be offset by overall gains of removing those workers from the payroll.

10 Mark Cecil, “The Year in M&A Ends on a Hopeful Note,” Mergers & Acquisitions Report, Thomson Media Inc., January 5, 2004.


When offering an early retirement window, employers must follow complex nondiscrimination rules and may need to allow a large employee population to choose whether to participate. Consequently, more or fewer employees may elect the window than anticipated. For example, in 2003, Verizon Communications offered early retirement with the expectation that about 12,000 employees would take the offer. In fact, more than 21,000 accepted—10 percent of Verizon’s workforce.11 The larger number of participants not only increased pension costs but also overwhelmed the company’s administrative processing capabilities.

Pension Policy Cash balance plan issues. In the 1990s, this type of defined-benefit plan actually gained in popularity. Its payout is defined by a hypothetical individual account balance rather than an annuity payable at a normal retirement age. But recent court rulings and government actions have essentially put a hold on organizations’ changing from traditional DB plans to cash balance plans.

Nevertheless, approximately 20 percent of Fortune 500 companies have implemented cash balance pension plans in recent years. The trend has, in many cases, made pension administration more complex. Some organizations have participants whose benefits were grandfathered. They must continue to accrue benefits under the traditional DB plan’s provisions. In other cases, the DB benefits were frozen, rather than converted, and the company needs to administer that plan plus the new benefits provided under the cash balance plan. Maintaining parallel structures is both complex and costly. Over time, as participants retire or leave, only cash balance participants will remain, but that process could take years.

Optional form disclosure and timing. The IRS will soon require plan sponsors to provide employees and their spouses with detailed information about Qualified Joint and Survivor Annuity (QJSA) and Qualified Preretirement Survivor Annuity (QPSA) pension payment options. Applying to most traditional DB plans, cash balance plans, and some types of defined-contribution plans, necessary disclosures will include eligibility rules, the financial effect of electing an optional form, and an analysis of their “relative value.” These new rules apply to pension payments beginning October 1, 2004, and because the disclosures had to be available starting 90 days prior to pension commencement, sponsors needed to start applying the new rules from July 1, 2004.

Clearly, these regulations will have an impact on administrative procedures, starting with change election forms but also other employee communications. Companies may need to change systems that generate this material, adding one-time design and implementation costs as well as ongoing administration costs to ensure regulatory compliance.

11 Peter J. Howe, “21,600 take Verizon’s buyout offer,” The Boston Globe, November 18, 2003.


Increased portability. As some organizations have moved to cash balance and other hybrid pension plan designs, their employees have been eligible to take vested termination or retirement benefits as a lump-sum payout rather than as a lifetime annuity. This option can increase the complexity and costs of administration.

For instance, for a traditional DB plan that has a small cash-out limit, the point where vested benefits can be paid automatically as a lump sum rather than an annuity increased from $3,500 to $5,000. The purpose of this increase, which occurred in the late 1990s, was to remove liabilities from the plan for terminated employees who had very small vested annuities. It also allowed those employees the ability to roll over the lump sum to another qualified plan, such as an Individual Retirement Account (IRA).

Some organizations provide lump sums for benefits greater than the small cash-out limit, but that may add to the administrative burden, because the plan must offer an immediate or deferred annuity at any age as well as the lump sum.

Many organizations also provide nonqualified pension benefits besides a pension from a qualified plan. Often, the companies offer these nonqualified benefits as a lump sum, which adds complexity to benefit calculations and administration to determine the qualified and nonqualified benefits and to pay out these benefits.

With the lower interest rates, the rate used to determine lump sums is lower. As with funding, the lower the rate, the greater the liability—that is, the greater the lump-sum payment. Therefore, organizations that make lump-sum payments in excess of the small cash-out limit are paying out more from the plan, possibly adding to pension funding concerns.

Reduced employee savings—401(k) participation and returns. Defined-contribution (DC) plans, such as 401(k) plans, also play a major role in employees’ retirement arrangements. In Mercer’s 2002 study of benefit plans, 57 percent of employers offered both DB and DC plans.12 The same factors that contributed to the decline in DB pension assets—interest rates and stock market volatility—also affected employees’ 401(k) accounts.

Consequently, we have seen DC plan participation rates decline. In 2002, 37 percent of employers cited reduced DC plan participation as their second biggest issue, after the underperforming assets.13 With fewer employees electing to join 401(k) plans, there could be increased pressure on DB pension plans to replace retirement income. An AARP study noted that 77 percent of Americans age 50 to 70 lost money in 2002 and 2003 and 67 percent had “adjusted their lifestyles” as a

12 Mercer Human Resource Consulting, Inc., Spotlight on Benefits: A 2002 Study of Benefit Plans, 2002, p. 16. 13 Mercer Human Resource Consulting and Mercer Investment Consulting, U.S. Report from the 2002 Global Defined Contribution Survey, 2002, p. 4.


result of losses.14 As already noted, some of these lifestyle adjustments include delaying retirement, which increases DB plan costs.

Social Security worries. The traditional design of retirement income featured the “three-legged stool”: the combination of employer-provided pensions, individual savings (either inside or outside a tax-deferred arrangement), and Social Security. In addition to the problems with DB and DC pension funding already mentioned, there are long-term solvency issues with Social Security, the third leg. It’s clear that the entire retirement “stool” is teetering on the brink of collapse.

The Social Security Administration reported in 2001 that for about one-third of 26 million families, more than 90 percent of their income came from Social Security; another third relied on Social Security for between 50 percent and 89 percent of their income.15

Figure 4: Percentage of income provided by Social Security to population over age 65.

According to the 2004 Annual Reports by the Social Security and Medicare Boards of Trustees, without reforms to Social Security, the expenditures from the Social Security Old Age and Survivors Insurance trust fund (mainly benefit payments) will exceed tax income by 2018. By 2042, the trust fund will be completely exhausted.16 The 2004 report includes a 75-year cost projection of Social Security. Expressed as a percentage of Gross Domestic Product (GDP), the cost of Social Security is

14 AARP Knowledge Management, Impact of Stock Market Decline on 50–70 Year Old Investors, 2002, p. 3. 15 Social Security Administration—Office of Research, Evaluation, and Statistics, Income of the Aged Chartbook 2001, April 2003, p. 4. 16 Board of Trustees, Federal Old-Age and Survivors Insurance and the Federal Disability Insurance Trust Funds, The 2004 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, March 23, 2004, p. 3.


projected to increase from 4.3 percent of GDP in 2004 to 6.3 percent in 2030 and 6.6 percent in 2078.17

To ensure benefits for future retirees, changes to Social Security are needed. The choices are limited and, for the most part, unattractive: reduce benefits, increase the retirement age (for example, from 65 to 67), or increase taxes to workers and employers.

Employee concerns over the viability of Social Security and the amount they will be able to count on for retirement income will affect when employees choose to retire and a company’s DB plan arrangements.

Government response to changes. In recent years, the government has instituted tax changes that affect both DB and DC plans. Between 2001 and 2004, the maximum DB payment limit increased from $140,000 to $165,000, and 401(a)(17) qualified plan compensation limits rose from $170,000 to $205,000. There were also enhancements for 401(k) and similar DC plans; elective deferrals increased from $10,500 in 2001 to $13,000 in 2004. “Catch-up” contributions of $3,000 were also made permissible in 2004. Because these changes provide plan sponsors and individuals additional tax benefits, some may be encouraged to maintain their current pension plan arrangements. But because most of these changes involve increasing maximums, they affect only a few high earners, which won’t be enough to offset the impact of low investment returns and demographics.

In its 2004–2005 budget, the Bush Administration has proposed to use the corporate bond index to calculate plan liabilities and lump-sum payments. This practice would have a considerable effect on DB pension plans, as the proposed rate would be higher, thereby lowering plan liabilities. Some of these funding provisions were enacted as part of the Pension Funding Equity Act of 2004.

The budget proposal also includes provisions for future cash balance plans. The Bush Administration is developing statutory language to ensure that these plans do not inherently violate age discrimination rules and provide new protections for older workers in plan conversions. If enacted, these proposals could provide significant support to DB plans.

As for Social Security reform, earlier in the Bush Administration, there was discussion of giving individuals the opportunity to invest a portion of their Social Security taxes in the stock market. There has been some renewed interest in this proposal as the stock market has improved, but such fundamental reform will take time. Details need to be developed, and there may be controversy on how to fund such changes.

EFFECTS ON HR AND PLAN ADMINISTRATION Pension administration is already one of the most complex HR functions. Plan sponsors have to maintain employment and earnings history of plan participants for

17 Ibid., p.11.


30 years or more and make monthly calculations, correct to the penny. Further, for vested former employees who left the company years (or even decades) ago, plan sponsors must maintain records and pay benefits based on the plan rules in place when the employee left.

In addition to macro forces that we have already discussed, there are additional internal forces that affect HR and pension administration:

• The need to do more with less.

• Employees wanting more information.

• Greater scrutiny from outside.

• Service delivery model changes.

New plan provisions and other changes in response to pension trends make record keeping and benefit processing even more complex and expensive.

Plan Changes: Biggest Impact With stock market and interest rate declines in the past few years, many pension plans transformed from being self-funded programs that did not require annual company contributions into money pits that needed hefty annual expenditures. These costs are borne by a company’s business units—and eventually by the company’s shareholders and customers.

In response, many employers are considering revamping their pension arrangements to provide more certainty of future benefit costs. Strategies include changing benefit formulas, freezing accruals, or even terminating DB plans and moving to DC plans. But although these changes may decrease future benefit costs, they may also increase both administrative costs and administrative burdens. In some cases, the limited flexibility of the current administrative system or processes can be the limiting factor in moving forward with plan changes. If the cost and burden of change is too high, employers may be forced not to move forward.

Any change to a pension benefit will result in changes in procedures and workflows; in forms, letters, and other employee communication pieces; and in systems used to calculate, administer, track, and pay benefits. Moreover, as we have shown, although plan provisions can be changed for future benefits, pension benefits already earned cannot be cut back. As a result, existing plan provisions may need to be grandfathered for certain employee groups, making procedures and systems more tangled.

For example, many companies that had a traditional DB plan and moved to a cash balance plan let certain employees remain in the existing DB plan and some to choose between the old plan and the cash balance plan but required all other employees to participate in only the cash balance plan. As a result, administrators had two sets of plan rules and three population groups to administer instead of one set of rules and one population.


From a “big picture” financial viewpoint, changing plan provisions may save a company significantly on benefit costs, but at the HR department or plan administrator level, these changes will likely result in additional one-time and ongoing administrative complexities and costs.

Doing More with Less In the current economy, organizations are asking HR staff and pension administrators to provide more services to employees, business units, and corporate leadership while keeping expenses down. Average estimated HR expenditures per employee increased more than 20 percent from $700 in 1998 to more than $850 for 2003.18

Figure 5: Average HR expenditure per employee.

Employees want more information about their pension benefits so that they can make educated decisions about their retirements. Administrators also need to provide business units and corporate leadership with more analytical and demographic information, letting those groups make strategic workforce and budgeting decisions.

Despite these challenges, many pension administrators rely on old systems and procedures to provide their services. The “mainframe plus spreadsheet” is still standard to calculate pensions in many organizations. With financial pressures, few resources are available to update or upgrade this approach, so administrators often fill in gaps with manually intensive, stand-alone solutions.

These competing mandates—to lower costs but provide greater service—are compelling administrators to be more efficient and make greater use of technology, especially self-service solutions.

18 BNA, Inc., HR Department Benchmarks and Analysis, 2003.


More Information Faster Workers who are approaching retirement want to know what kind of pension they can expect to receive and in what form of payment—for example, annuity for the employee only, annuity for the joint lives of employee and spouse or other beneficiary, or lump-sum payment.

As part of their decision-making process, many workers also want to know what their benefits would be if they retired now or postponed retirement until later. Others who are contemplating early retirement want to know whether they will have enough money to live on. And employees who have retiring spouses with pensions want to know whether they should take an employee-only annuity or one that provides a payment to either of them. All these questions can be exquisitely complex to process, and the results must be in a format readily understood by the average person.

Every time an employee picks a new separation date or new benefit commencement date, the pension benefit and options must be recalculated. Sometimes employees request estimates for three or more retirement dates. These estimates have taken six weeks or more to fulfill, with actual terminations and retirements taking even longer. Typically, this is not due to HR’s lack of interest or knowledge, but because HR staff needs to be exactingly correct with insufficient resources—human or technical. As may often be the case, there is insufficient or bad historical data.

To address these resource constraints, some HR functions have had to restrict when and how many estimates they would provide to plan participants, such as only one estimate per year, or providing estimates only to employees who are retirement eligible. For these same people who perform other financial transactions and purchases instantly over the internet around the clock, four to six weeks to get a pension estimate—or be told they cannot get one—has become unacceptable.

These problems become magnified in cases such as downsizing, where the demand for information can increase many-fold within a short period of time. Early retirement windows are becoming more common, and normally during the window of time where such an offer is made, a large percentage of eligible employees will request a number of pension estimates to help them make their decisions. Employers can receive literally thousands of requests within a short period of time, where the norm is usually only a small percentage of this number. In such cases, self-service applications for pension estimates become a necessity to administer such programs effectively without a tremendous increase in administrative costs.

Most employers understand that they need to increase the internal standard of servicing and provide information more quickly to employees.


More Scrutiny A study sponsored by the Senate Special Committee of Aging found that in 1995, 8.2 percent of pension payees were underpaid, up from only 2.8 percent in 1988.19 Potentially legal issues are inherent in benefit calculation inaccuracies, and plan participants and beneficiaries and regulatory authorities have begun to scrutinize them carefully.

Inconsistent processes and calculation methodologies, incorrect data, missing historical data resulting from administration staff turnover, undocumented rules and practices, and insufficient training contribute to inaccurate calculations. Some pension calculation rules can also be very complex, especially when dealing with grandfathered plan provisions, special rules for different groups (such as acquired divisions or subsidiaries), or low-volume, high-complexity calculations such as preretirement death benefits.

These organizations have a choice to invest in internal capabilities or to look for outside specialists to ensure accurate and consistent pension benefit calculations.

Delivery of Pension Services Web delivery. The internet has radically changed the delivery of many HR services to employees and management, including pension administration. Although actual retirement and termination processing remains largely paper-based to meet legal requirements, organizations can deliver benefit estimates and modeling via the internet or intranet in a real-time, 24x7 automated manner, thus dramatically reducing costs and improving service. As people become more familiar with Web-based transactions, it is quickly becoming the preferred way to obtain benefit information.

Many employers support a Web-based pension estimator. Although this tool is fairly common, it’s usually not integrated with the main pension administration system but rather is a stand-alone application. Employees have to enter all their earnings, service, and other pension data to produce very generic estimates. Often these estimators do not take into account unusual employment circumstances, such as service buybacks and grandfathered benefits, so employees find that they still need to contact live pension administrators for more accurate estimates.

More forward-thinking companies are moving toward Web applications that are part of the actual pension system and enable employees to perform their own estimates by using their own data, based on their specific employment circumstances. Some even let employees initiate their own actual retirements via self service. Further, in the most advanced implementations, Web delivery serves as the foundation for a highly automated system of data maintenance, pension calculation, communication production, and workflow.

19 Senate Special Committee on Aging, Shortchanged: Pension Miscalculations, hearing brief, June 16, 1997.


Integrated view of benefits. Employees increasingly want to see an integrated view of all their benefits—pension, savings, healthcare, life insurance, and estimates of what will be provided by Social Security. When employees decide to retire, they need to take all these factors into account. Many organizations provide annual benefit statements, either paper- or Web-based, as a snapshot. But that’s just a starting point for integration.

Shared Services Model To improve efficiencies and reduce costs, management is asking HR to evaluate moving from decentralized service delivery, where each operating division handles its own HR and pension administration, to a centralized shared services model, where one main center or a small number of regional hubs perform HR, payroll, and pension functions. In some cases, this shared services center is outsourced to produce even more efficiencies and savings, but in other cases, this center exists within the organization.

Although cost savings play a major part in the decision to share services, improved customer service is a significant benefit of this approach. Employees and managers know where to turn with their questions and processing requests, and a dedicated, expert administration staff provides higher-quality, more timely service with less rework.

This highly automated shared services system consists of both pension administration functionality and help desk functionality. Pension administration systems need to be able to manage the data, calculations, and other processing related to the administration of the plan. Help desk functionality is required to manage the call center portion of the shared services center. Such applications make sure that the incoming calls are intelligently routed to the appropriate service representatives. Call tracking, contact management, and knowledgebase applications also help the call center to effectively track and record call history, manage participant contact information, and also help the service representatives give appropriate and consistent answers by using an intelligent knowledgebase of pension administration questions and answers.

The impact of plan changes, doing more with fewer resources, assurance of accuracy, and recipients’ demand for service all have profound impacts on how pension administration is performed and the quality of the systems needed to support these tasks.

THE SOLUTION In a recent study by Mercer, companies said they wanted to use technology to lower HR administration costs:

• 74 percent said they also wanted to increase HR processing efficiency.

• 44 percent looked to employee and manager self service.


• 30 percent wanted to add new services without adding HR head count.20

Technology is the key to effective pension administration—ensuring that pension administration systems have the flexibility to handle plan changes quickly at low cost, the capability to manage comprehensive mass calculation, support internet-based self-service delivery, and automate all processing. Help desk functionality is also critical to make sure that your call centers and service representatives have the right tools to give your participants the best service possible when they have questions. And for many clients, the PeopleSoft Enterprise solution is the one solution they need.

Flexibility and Adaptability to Change With its state-of-the-art technologies, Oracle’s PeopleSoft Enterprise solution provides first-rate service to employees and retirees. Oracle’s PeopleSoft Enterprise Pension Administration supports dynamic benefit plan setup, including date-driven and rule-driven plan amendment changes, providing flexibility as your plans change. And it is a proven solution. Current customers use PeopleSoft Enterprise Pension Administration to handle all types of pension plans, including qualified and nonqualified, cash balance, final average pay, career average, and contributory plans. Many PeopleSoft Enterprise customers have a combination of such plans (some more than 100), including grandfathered provisions, which they manage with a single application.

Streamline Administrative Tasks PeopleSoft Enterprise Pension Administration is a full-featured solution that streamlines and automates administration for active plan participants and for nonactive participants such as retirees, other payees, and terminated vested participants.

By using PeopleSoft Enterprise Pension Administration, you can:

• Track communications, activities, election forms, verifications, and other paperwork associated with retirement processing.

• Track qualified domestic relations orders (QDROs) and domestic relations orders (DROs).

• Produce “trustee extracts” with complete payment and deduction information to pay participants.

• Produce actuarial extracts to greatly streamline the actuarial process by providing the clean, accurate data needed to create an actuarial evaluation.

• Track cash balances and manage contributory accounts.

• Create an extract to help populate the Form 5500 report.

20 Mercer Human Resource Consulting, Inc. “Transforming HR for Business Results—A Study of U.S. Organizations,” 2003, p. 25.


• Administer “buy back” and purchase provisions, which are common with contributory plans, particularly in the public sector.

• Produce single calculations or group calculations for benefits statements or early retirement windows.

Integrated Solution PeopleSoft Enterprise Pension Administration is completely integrated with the PeopleSoft Enterprise HR and payroll system. You no longer need to worry about the effort of synchronizing and integrating separate systems and the possible errors that occur during that process.

Internet Architecture and Self Service With the PeopleSoft Enterprise internet-based architecture, administrators and plan participants can access PeopleSoft Enterprise applications anywhere in the world at any time just by using a browser. We use this architecture to deliver self-service capabilities through which companies can significantly reduce cost and improve service by letting their employees calculate their own benefit estimates. Participants can create multiple what-if scenarios, varying their retirement age or retirement date and using different assumptions for future salary projections.

Organizations that implement PeopleSoft Enterprise Pension Administration can also combine these capabilities with Oracle’s PeopleSoft Enterprise HelpDesk for Human Resources to streamline and automate the pension call center and provide a total solution of data maintenance, benefit calculation and communication, and workflow.

PeopleSoft Enterprise Pension Administration advantages include:

• Effective-dated plan change to support grandfathered provisions.

• Flexibility, supporting multiple plans and multiple types of plans.

• Internet-based architecture.

• Self service.

• Integrated solution.

• Leveraging of existing PeopleSoft Enterprise systems.

• Ability to combine with PeopleSoft Enterprise HelpDesk for Human Resources to automate and streamline administration.


CASE STUDY: CONAGRA, INC. This major food processor has grown through acquisition over many years, resulting in a complex pension administration environment with more than 140 pension plans and many different types of benefit formulas. Some plans were administered by in-house staff at different locations; others were outsourced to different vendors by using a variety of systems. With an ever-changing environment of acquisitions and divestitures, ConAgra needed to change its pension administration model to ensure efficient and effective administration. As a result, it decided to bring all administration in-house by using a shared-services center and chose to implement PeopleSoft Enterprise Pension Administration as its single platform. ConAgra selected Mercer to implement the solution. Even before this tremendous effort was fully completed in 2004, ConAgra was already beginning to reap the benefits of its decision, as described by ConAgra administrators:

Cheryl McMahon, benefit specialist at ConAgra: “You are not losing anything. All the plan documents are in the parameters when a calculation has to be run. You don’t have to worry about re-interpretation of the plan documents every time you have a calculation to run.”

Ryan Husing, benefits supervisor at ConAgra: “With regards to form and letters, the biggest benefit through the pension module implementation is that we achieved commonality and consistency in forms and letters throughout all our plans.

“For many years, ConAgra was acquiring many companies, and as a result of those acquisitions, we also acquired a lot of different pension plans. In many of those cases, we used the forms and letters that the company we acquired used when they were administering the pension plans. So, as you can imagine, having over 100 different pension plans we administer in-house, we had quite a few cases where we were using different forms and letters—that’s not the case now.”


ABOUT MERCER Mercer Human Resource Consulting, one of the world’s leading consulting organizations, helps employers create measurable business results through their people. With more than 13,000 employees serving clients from some 150 cities in 41 countries and territories worldwide, the company is part of Mercer Inc., a wholly owned subsidiary of Marsh & McLennan Companies, Inc., which lists its stock (ticker symbol: MMC) on the New York, Chicago, Pacific, and London stock exchanges.

ABOUT THE AUTHOR Vincent C. Hrabinski is a technology and operations practice consultant at Mercer Human Resource Consulting, where he manages and implements human capital management and pension administration solutions for client organizations. He also consults with clients on evaluating human capital and pension system implementation projects.

Mr. Hrabinski has more than18 years of experience with defined-benefit (DB) pension plans, including 16 years of system consulting experience, where he has been involved in all aspects of DB pension system implementations for both U.S. and Canadian organizations.

Through his career, Mr. Hrabinski has gained extensive experience with the functional, technical, integration, and project management aspects of implementing human capital and pension administration solutions, ranging from small in-house systems to large-scale outsourcing and ERP solutions


Pension Administration: Current Trends and Issues Author: Vincent C. Hrabinski, Mercer Human Resource Consulting August 2004 Oracle Corporation World Headquarters 500 Oracle Parkway Redwood Shores, CA 94065 U.S.A. Worldwide Inquiries: Phone: +1.650.506.7000 Fax: +1.650.506.7200 oracle.com Copyright © 2004, 2005, Oracle. All rights reserved. This document is provided for information purposes only and the contents hereof are subject to change without notice. This document is not warranted to be error-free, nor subject to any other warranties or conditions, whether expressed orally or implied in law, including implied warranties and conditions of merchantability or fitness for a particular purpose. We specifically disclaim any liability with respect to this document and no contractual obligations are formed either directly or indirectly by this document. This document may not be reproduced or transmitted in any form or by any means, electronic or mechanical, for any purpose, without our prior written permission. Oracle, JD Edwards, PeopleSoft, and Retek are registered trademarks of Oracle Corporation and/or its affiliates. Other names may be trademarks of their respective owners.

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