The costs of keeping those who are no longer employees in a company's defined contribution (DC) pension scheme can no longer be ignored by employers, and will be the next major pensions issues, warns Towers Perrin.

The global professional services firm said that firms are paying costly administration charges of around £95 per person per years for former employees until they retire, meaning an employer with 10,000 DC members, made up of 4,000 current employees and 6,000 former ones, would be receiving a £1million bill at the end of the year. £0.6million of these DC costs would be for ex-employees.

The problem will only be exacerbated by the introduction of auto-enrolment from 2012, as it will result in more DC members, some of whom are likely to have short careers.

As a way of approaching the impending issue, Towers Perrin said firms should recover the costs of administration from the legacy DC members, and set up a DC plan which would take the responsibility to pay employees once they leave the company away from the employer or trustees. This, Towers Perrin says, is one of the reasons employers champion paying money into a personal pension plan for employees, rather than into a company sponsored plan.

David Bird, principal and DC expert at Towers Perrin, said: "Employers need to wake up to the DC legacy issue, and quickly. If companies focus entirely on the DB challenge, they risk incurring significant costs from this 'hidden DC legacy', and in such a tough financial climate few can afford to ignore the potential cost savings."

- Pensions Age April 2009

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