M&A and Changes of Ownership are Red Flags

Strengthening Risk Management in Outsourcing Relationships for Pension Funds

Avida International has found that the risk management of outsourcing relationships in pension funds often fails to adapt adequately when circumstances change. This is one of the key findings from over 50 interviews conducted by Avida International with pension fund executives and directors regarding strategic outsourcing in the pension sector.

"The pension sector is never static. Whether it’s new legislation, mergers and acquisitions, or the departure of key personnel, the dynamic environment demands continuous adjustments. This also applies to how outsourcing relationships are monitored and managed,” says Gerben Schreurs, partner at Avida International.

M&A and Changes of Ownership are Red Flags

Mergers and acquisitions (M&A) and changes of ownership among suppliers, such as fiduciary managers, investment managers and custodians, pose significant risks for pension clients. These events can disrupt service quality, alter strategic priorities, and introduce operational uncertainties. The integration processes often lead to staff turnover, cultural shifts, and changes in strategic focus, potentially impacting client service. Additionally, such transitions may divert a supplier’s attention from existing clients as resources are redirected towards integration efforts. For pension funds, which rely on stability and consistency in managing long-term liabilities, these disruptions can pose significant risks. Ensuring proper oversight and maintaining open communication with suppliers during periods of transition is essential for mitigating these challenges

Change Requires Extra Vigilance

When significant changes occur within an organisation, executives and management often focus on strategic reassessments and transformation processes. Under the pressure of changes such as the Future Pensions Act (Wet Toekomst Pensioenen, WTP) and the implementation of the Digital Operational Resilience Act (DORA), the entire sector appears to be in a state of flux. This development calls for new strategies and adjusted Target Operating Models. However, Avida International’s research reveals that there is often insufficient attention paid to the specific risks these changes pose to daily operations.

Risks in Outsourcing Relationships

“From the over 50 interviews, it became clear that risk management related to outsourcing relationships is too often pushed to the background. While executives and directors focus entirely on major changes, the day-to-day risk management of outsourcing relationships remains unchanged and, consequently, underemphasised. This is concerning,” says Paul Boerboom, partner and founder of Avida International. “Enhanced oversight is urgently needed, especially when, in addition to regulatory changes, there are additional transition risks due to organisational shifts at a pension provider or when there is higher staff turnover.”

Without additional focus on outsourcing relationships, risks in the supply chain, such as operational errors or compliance issues, can negatively impact the stability of the pension fund. It is crucial that executives not only pay attention to the ‘big changes’ but also to the structural processes that ensure the continuity of their fund.

What Should Be Done?

Pension funds would do well to proactively strengthen risk management of outsourcing relationships during times of significant change. This includes closely monitoring performance indicators, ensuring questions are answered accurately, timely, and completely, and more frequently evaluating the collaboration on soft aspects and the ‘early indicators’ of potential future problems. Only in this way can pension funds navigate sector changes without losing control over daily operations.

To further support pension fund executives in managing outsourcing risks effectively, Paul Boerboom and Gerben Schreurs of Avida International are involved in the Nyenrode Business University course ‘Uitbesteden in de Pensioensector’. This programme provides valuable insights and practical tools to optimise outsourcing strategies and strengthen governance in a rapidly evolving sector.

Avida International helps pension funds develop a robust strategy for their outsourcing policies, carefully considering both sector changes and day-to-day risk management. This ensures that pension funds remain resilient even in turbulent times.

Authors:

Paul Boerboom & Gerben Schreurs