Small scheme fees: making sure schemes are not ripped off

As final salary pension schemes improve their funding positions and their membership matures, trustees and sponsors face crucial decisions regarding their end game options. Typically, they must choose between buying out the benefits or continuing to run the scheme. Comparing these two options requires a key consideration: the ongoing costs of the scheme versus the premiums charged by insurers.

Costs and Challenges for Smaller Pension Schemes

For smaller schemes, the decision can be particularly challenging. Few insurers offer buyout quotes, and the costs can be disproportionate. Addressing these costs has become a focus for both the Pensions Regulator and the industry. However, are the conclusions drawn from the data accurate, or are there other questions to be asked?

Insights from the Pensions Regulator’s Survey

The Pensions Regulator conducted a survey in 2014 to analyse the cost of running a defined benefit scheme and how costs vary based on the number of members. The resulting DB scheme costs comparison tool is valuable resource for trustees DB scheme costs comparison tool | The Pensions Regulator. The chart below, summarising their findings, shows the average cost per member and the minimum/maximum costs (based on the 5% and 95% percentiles).

Cost Analysis: Large vs. Small Schemes

The data indicates a significant reduction in costs per member as scheme size increases, leading to the argument that consolidating smaller schemes to adopt the large scheme approach of automation and shared costs is the best way to reduce expenses. However, an alternative interpretation of the chart, looking at the minimum cost suggests that the advantages of consolidation from a cost perspective are much reduced.  Therefore, a different question could be asked – what are those schemes with lower costs doing differently?

Findings from KGC Associates Surveys

KGC Associates regularly surveys the costs various providers charge for actuarial and administration services across different scheme sizes. These surveys, available on their website (https://www.kgcassociates.com/), show a wide range of per-member costs for smaller schemes, with some costs not dissimilar to those of larger schemes. What remains unclear is which types of firms are producing these lower costs for smaller schemes.

Observations and Recommendations

Based on our submissions to these surveys (which are consistently at the lower end of the costs range) and anecdotal evidence taking on new schemes from other providers, it appears that large providers specialising in larger schemes (and presumably using a consolidated approach) charge the highest per-member fees for smaller schemes. This appears to contradict the received wisdom that a large scheme approach can be easily applied to smaller schemes to achieve savings.

We believe smaller schemes can be managed more efficiently and personally by a small team of experts supported by technology. Rather than forcing these schemes into automated processes with myriad tick boxes, a more commercial and value-focused approach is needed. The focus should be on investigating how smaller schemes can be run most efficiently and engaging with specialists in smaller schemes rather than adopting a mantra that big is beautiful in all things.

Call to Action for the Pensions Regulator

There is value in the Pensions Regulator collecting information on the actual fees paid by individual schemes through their annual scheme return, including a broad split of what was paid for individual services and which providers were appointed. This data could help identify best practices and cost-effective approaches for managing smaller pension schemes, possibly with engagement with those schemes paying significantly more than average and producing information to allow schemes to evaluate their current arrangements more effectively.

By addressing these points, trustees and sponsors can make more informed decisions about their end game options, ensuring the financial health and sustainability of their pension schemes.

To benchmark your fees, you can also visit Summary of likely scheme costs – Atkin Pensions

Nick Atkin

Director