otal UK and ExcellerateHRO joined forces to pull together numerous and disparate pension and benefits programs, resulting in an outsourcing match made in heaven.
In the final years of the 20th century, several major integrated oil and natural gas companies in Europe walked down the aisle. These giant enterprises stretched across the continent and into the farthest reaches of the planet. Altogether, they numbered tens of thousands of employees, many of them the beneficiaries of disparate pension plans. When the mergers ceased, one company—Total SA—remained. In the United Kingdom alone, this vast organization served more than 16,000 pension plan members spread among 13 different defined benefit and defined contribution plans.
Effectively managing the various plans was hampered by national regulations requiring separate boards of trustees for each; 13 sets of different lawyers, administrators and auditors; and 13 different HR systems and processes. Each board had as many as eight trustees, all of them meeting four times a year on average. Added up, the associated costs were huge. “It was hugely inefficient,” said Lester Farrant, group pension manager for Total UK in Bristol, England. “Any time there was a change in legislation, each of those pension schemes and their boards had to go to their lawyers for advice in how to deal with that change in legislation. We realized that if all the pension schemes were merged into one from an administrative standpoint, you’d only have to get that advice once.”
Hence, the decision by Total UK in early 2001 to outsource its benefits administration functions to Towers Perrin. Four years hence, Towers Perrin and EDS combined their respective expertise in HR consulting and outsourcing to form ExcellerateHRO , which offers a flexible portfolio of HRO services on a global basis to mid-size and larger employer organizations. When the outsourcing contract came up for renewal in July 2007, Total UK re-signed and extended it for another 48 months. “They’ve supported us through one of the most complex pension plan mergers in the UK market and have consistently delivered on their commitments,” Farrant said.
The HRO deal certainly ranks as among the more complicated and successful, given the oil company’s compelling need for an alternative to administering 13 different pension plans. Total UK originally mulled the idea of merging the plans and managing them internally, but the information technology systems required to effectively address the combination of so many different schemes quickly deterred such musings. After determining that outsourcing was both cost-effective and efficient from a human resources standpoint, Towers Perrin got the nod to take on the task of first standardizing and then managing the pension schemes. “In essence, we inherited a complex web of HR systems and processes that needed to be harmonized, as the company’s workforce continued to expand,” said Craig Martin, delivery manager at ExcellerateHRO in charge of the Total UK account. “Two of their pension schemes were administered in-house, and the remainder were spread among different third-party administrators. All the benefits were structured underneath. Insofar as the diverse benefits provided members, I can say this—the UK petrol industry has one of the most complex benefit structures in the world.”
Refining a Strategy
The backdrop to the need for a more refined way of administering pensions at Total SA was unfurled in 1999, when the Paris-based oil and gas company acquired Petrofina in Belgium for $11 billion to become Total Fina. Shortly thereafter, the new enterprise acquired Elf Aquitaine to become TotalFinaElf—a mouthful, to say the least. In 2003, the merged entities were renamed Total. Within all these companies were the legacies of other acquisitions over the years, each with its own pension scheme. For example, in 1990 Total had acquired Bostik (formerly Boston Blackening Company), a global adhesives company with operations in the UK. It also owned Spontex, a maker of plastic gloves, although it recently announced a plan to spin off the company.
The oil and gas industry mergers were dubbed “mammoth” by the European trade press at the end of the last century. The merger frenzy was fueled, in large part, by the industry’s desire to consolidate as Europe moved toward a single market. In the case of Total, the post-merger company was challenged by the need to consolidate its operations, systems and processes across Europe and the rest of the world. Today, the integrated oil and gas company—its wide-ranging activities run the gamut, from oil exploration, production, and refining to retail sales at service stations—employs more than 95,000 people in over 130 countries. In the UK alone, its operations include exploration and production of petroleum and natural gas, oil refineries, retail marketing of petrol, trading in oil and gas, and the production of oil-derived products like bitumen. Total UK is the fourth largest oil and gas concern in the country, generating more than five billion pounds annually in revenues.
To get a firmer grip on Total UK’s crazy-quilt of pension schemes, the company’s HR group formed a project team in 2000, headed by the former finance director of Petrofina, who was retained in a consulting capacity. Farrant had been chosen as the UK group pension manager, and was vocal about his views to streamline the various schemes into one. “I was in early on, and without sounding too conceited, was a major player in all the events that followed,” he explained. “What I had to do initially was find a single group of lawyers and auditors to run a single pension scheme. The big HR concern, however, was who would administer the scheme. At the time we had 13 separate administrators out there, and Towers Perrin wasn’t one of them.”
Since two of the pension schemes were managed in-house, Farrant considered the idea of merging and managing all of them internally. In effect, the remaining schemes were outsourced, albeit to a parade of third-party administrators. “My particular concern about doing it all internally was the impact on IT (information technology),” he said. “Administering a scheme for 16,000 people’s pensions, taking all the data from the existing administrators and putting it all into one setup, would be monstrous for IT to tackle. Doing that in-house, I concluded, would be a risky route when there were a number of proven suppliers out there with the expertise and technology to do it for us.”
Another problem damping internal pension management was the UK government’s penchant for habitually altering the country’s pension scheme rules and regulations. Farrant fretted that Total UK’s IT group would struggle to garner the resources and expertise to maintain constantly changing pension data in the IT system, keeping it up-to-date with each successive legislative reform. “We’d have to recruit transition specialists and data transmission specialists to see us through such a process,” he said. “It was a big risk, and that’s when we decided to outsource.”
Farrant took on the role of HRO champion within Total UK, eventually convincing the pension scheme project team to endorse the concept. Altogether, the company fielded proposals from 10 potential outsourcing providers, among them Towers Perrin. Farrant had met an executive from Towers Perrin the previous year, liked the fellow’s sales pitch, and had kept in touch. “As a salesman he did his job keeping the door open,” he quipped. “We culled the list down to four potential suppliers and then made site visits to each of them. All then did formal presentations to the board of trustees, which had the responsibility for awarding the contract. It was what we call a ‘beauty parade,’ with each of the prospective vendors describing their systems, their disaster recovery processes, the training of staff and whether or not they were dependent on any other companies for maintaining their systems.”
Although Towers Perrin did not have the least expensive bid, Total UK’s trustee board chose it as the outsourcing provider. “Cost wasn’t our overriding priority, given that the pension schemes altogether represented nearly one billion pounds,” Farrant explained. “We had to have confidence that the provider would be in the market long-term to deliver what we wanted, and have the IT support and staff available to handle the massive data transference. We also liked their people and business philosophy, and the fact that they and we didn’t want a client-support type relationship. We both wanted a partnership, believing that a common business view is the best way to achieve success. Once we lined up all those factors, the winner was clear.”
ExcellerateHRO hit the ground running. “We decided the best way to reduce costs for Total UK and streamline management of the pension schemes and their multiple vendors and administrators was to appoint project managers internally, instead of them appointing them,” said Martin. “We decided on a phased-in implementation, given the data transference challenges. We would take on one pension plan and then another, minimizing the impact and delays to their business. Within two years, each scheme was transferred from the previous third-party administrator to a new solution delivered by us.”
The concept of partnership is key to the provider’s benefits administration services in the UK. ExcellerateHRO has a model calling for it to work with clients in a consultative way to understand their business and specific requirements. “We essentially want to be perceived as an extension of our client’s organization,” Martin said.
Farrant said the relationship was critical to helping Total UK consolidate the 13 separate pension schemes. “They have been open and honest with us, managing our expectations through effective communication, providing resolution of issues, and demonstrating genuine commitment to partnership and high-quality customer service,” he added. “They’ve met all their service level agreements to date.”
Once the various plans were merged from a systems standpoint, ExcellerateHRO took on the customary functions of pension administration: processing retirement transactions, running benefit payroll and associated statements, maintaining member records, managing bank accounts, and responding to member queries, in addition to providing services on ad hoc projects. But, it was the harmonization of the pension schemes that Excellerate HRO is most proud of. “Frankly, it was a steep learning curve because of the sheer number of disparate HR systems,” Martin acknowledged. “Neither we nor Total UK could predict the scope of the transaction processes. During the implementation phases, various complexities emerged, requiring that we set up a second project team to help move things along, managing low-priority projects like benefits statements. This helped free up the primary team to transition the core HR systems and processes.”
Farrant’s primary job now is to manage the outsourcing relationship with Excellerate HRO. “My team is also there if a member has a specific query that requires company input, but only in the context that we are acting as part of the ExcellerateHRO team,” he explained. “We also have a statutory obligation to maintain the pension scheme account and produce an associated annual report that includes a balance statement and profit and loss statement. Consequently, we have an accounting function in Bristol to maintain the trustee bank account.”
The four-year extension to the contract costs roughly the same on an annual basis as the original contract with ExcellerateHRO, once inflation-adjusted expenses and additional costs to the pension scheme wrought by the UK government are taken into account. “We’ve seen a huge raft of pension legislation the last few years,” Farrant notes. “For example, we now have to pay a levy to the Pension Protection Fund in the UK to help other pension schemes that are in trouble financially. When we first signed with Towers Perrin, that cost didn’t exist.”
He estimates that Total UK pays ExcellerateHRO approximately a quarter million pounds a year for its services. “Compared to what we were paying before to all the lawyers and auditors on the 13 separate schemes, we are saving a lot of money,” he added. “I wouldn’t be surprised if overall savings are in the range of a million pounds or more annually.”
Although Farrant has preached the benefits of pension administration outsourcing to Total SA senior management in Paris, he doubts the parent company could take on worldwide benefits outsourcing, given the wide variances in pension schemes across the world. “In France, pensions could be half of someone’s salary, whereas in the UK our state pension is less than 5,000 pounds a year,” he explained.
When the four-year contract with ExcellerateHRO expires in 2011, Farrant is sanguine the status quo will continue. “The trick in any partnership is to make sure that the profit is high enough for the provider to want your business, but not so high that they price themselves out of the market,” he said. “The bottom line is for everybody to win.”