Pensions Regulator research highlights need for DB scheme trustees to keep investment charges under control

Out-Law News | 14 Apr 2014 | 2:29 pm | 2 min. read

Nearly a quarter of defined benefit (DB) pension scheme trustees do not know how much the scheme is paying in investment charges, even though these form the second largest expense for all but the largest schemes, according to the Pensions Regulator.

New research on DB administration and running costs, published by the regulator, also shows how small schemes are paying nearly four times as much per member in running costs when compared to large schemes. It has published a new online checklist to help trustees and employers understand what they are paying and assess the value for money of their scheme compared to others of a similar size.

Pensions expert Simon Tyler of Pinsent Masons, the law firm behind, said that costs and charges in DB schemes had not come under as much recent scrutiny as those in defined contribution (DC) schemes, as they are borne by employers rather than pension scheme members. However, this was likely to change in the near future, he said.

"The regulator and the Department for Work and Pensions have focused a great deal of attention on costs and charges in DC schemes," he said. "This has resulted in the proposals to introduce a charges cap from April 2015. However, this does not absolve trustees of DB schemes from trying to keep costs down."

"Trustees of DB schemes should look at their investment charges in particular and see if they are getting value for money. The Pensions Regulator's new focus means that employers will soon start asking trustees what they are doing about this," he said.

IFF Research, working on behalf of the Pensions Regulator, surveyed 327 private sector DB schemes between September and November 2013. It sought information on the costs of scheme administration, trustee fees, actuarial fees, legal fees, covenant, investment charges and other external costs. Scheme administration made up 37% of the reported costs, while investment costs made up 22% of the reported costs.

The research showed that the average cost per member of running a small scheme with between 12 and 99 members was £1,054 annually; nearly four times higher than the £281 cost per member for large (1,000-4,999 member) schemes and nearly six times higher than the average of £182 per member per year reported by the small number of very large (5,000 or more member) schemes surveyed.

"We are not trying to tell DB pension schemes what their charges should be," said the regulator's interim chief executive, Stephen Soper. "Our aim is to put the information out there in order to start a dialogue on costs and help trustees and employers assess whether they are receiving value for money ... This research clearly demonstrates the huge variation in what employers pay for their scheme expenses. There will be many reasons for this, including quality, quantity and pricing."

"Many trustees are struggling to understand what they are paying for, particularly in the investment arena. There is a compelling mutual interest for employers to engage with trustees about their approach to scheme investment, and the regulator's forthcoming DB code will set a clear direction for just this type of collaboration," he said.

The Pensions Regulator published a draft DB code of practice for consultation at the end of last year, alongside proposed changes to its regulatory strategy which would take into account its new statutory objective to minimise the impact of scheme funding requirements on employers' sustainable growth. The draft documents called for better communication on funding between trustees and employers, and a "more integrated" approach to managing funding risks by trustees.