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By Pádraig Floyd

Pension scheme fees have been recently scandalised as too high in reports, yet criticised as being pushed too low by industry. Pádraig Floyd finds out where the issue of fees currently lies.

The issue of pension scheme charges has become a hot topic in recent years. Media stories of pension fund charges stripping vast sums from an investor’s pot grew into promises from industry, regulator and politicians that charges would be under close scrutiny.

Yet many argue pressure on fees has, in fact, been downwards and for those who may have grown their fees, there will be several others whose margins have been squeezed hard.

Buck Consultants head of technical services, and president of the Society of Pensions Consultants, Kevin LeGrand says even if fees are not being reduced, there is considerable pressure to deliver the same thing for less. As a result, organisations are reassessing what they want from their providers.

“Many are considering which services and the level of those services they may require,” says LeGrand. “In some cases they are choosing to give up their well known provider in favour of a smaller firm. It’s a bit like buying a branded food product and then trading down to a supermarket’s own brand.” In essence, the quality is the same, he says, but the badge is an unfamiliar one.

And the pressure to reduce fees is generally being exerted by the principal employers rather than trustees, particularly where a procurement-led process is being used effectively, says Isinglass Consulting director Paul Charles.

“Large adviser firms tend not to discount heavily – maybe five per cent to seven per cent – depending on the existing relationship. Many employers are seeking alternatives, such as smaller firms or niche players who can pick up some of the work for a lower cost.”

Streamlined services
Such an approach may also result in the bells and whistles being dropped in favour of a more streamlined – and potentially much cheaper – service. Alternatively, they may choose to unbundle and cherry pick exactly what they want from a number of providers.

Another alternative might be to postpone projects altogether if you are happy to do without, but this can only go so far, says LeGrand.

“There are some things you cannot avoid. With auto enrolment, even if you believe you have a suitable scheme, you must still look at the options and particularly at the process of auto enrolment, too.

Atkin director Marian Elliott says the costs of any pension service needs to be weighed up against the benefit it offers to the scheme, and this is equally true across both the DB and DC arenas.

“Fees make a big difference to the eventual outcome for members – whether they are deducted directly from their pension pot or whether there is an opportunity cost, in that expenses paid to providers could be used to provide additional benefits to members or additional security for benefits already accrued.”

Therefore, any pension scheme cost must be measured against the additional options, service enhancement or governance improvement offered to determine whether this represents good value, she says.

The role of DC charges

Nowhere is that more glaringly obvious than in the charges paid by individuals in DC schemes.

The brouhaha stirred up by last year’s BBC Panorama programme, while sensational, has never fully died down and with good reason, it would seem.
A survey conducted by SCM Private last year looked at 100 pension funds and found that in addition to basic charges, there were hidden costs that came about from high levels of trading within the funds.

“It is quite shocking that managers are only holding investments for an average of nine months”, says SCM founding partner Gina Miller. Her shock acted as a catalyst, however, as she launched a campaign in partnership with consumer and trade bodies at the end of January calling for greater transparency of fees.
Miller says: “These costs are not declared in the annual charges, so it can be difficult for investors to find out what things cost. And if you can’t find out, how can you make an informed choice?”

These concerns are equally relevant to occupational DC schemes. National Association of Pension Funds chair Mark Hyde Harrison called the current pensions system “a mess” in his inaugural speech last October.

“We need a radical rethink of the way we ‘do’ pensions in the UK. If we don’t, then too many people will save into a pension only to find themselves shortchanged in their retirement,” he said.

DC already covers five million people in the UK and auto enrolment will increase that number considerably.

This is important because although the individual DC member takes on the investment risk, it is often the employer that pays some or all of the administrative charges, certainly in the trust-based arena. Proper controls will ensure best value for not only the employer, but the member as well. It may also head off any nasty surprises in the future from underperforming DC arrangements.

More room for improvement
Even if there is some downward pressure on fees, it is not as great as it should be, according to Elliott, who says there remains a disparity in fees paid by schemes of a similar size for a similar level of service provision. One scheme where Atkin acts as independent trustee recently discovered a review of tenders yielded fees that varied by as much as 100 per cent. As a result, the scheme changed providers and is now enjoying fee levels of around two thirds of what they paid before, with no reduction in service levels. In fact, she says, the service has improved.

But it can be difficult for trustees to gauge in advance whether a lower cost option will represent a good solution for the scheme, she adds.

“Running the scheme properly is, of course, imperative and no trustee would want to cut corners or reduce the level of service provided to members in the quest for a lower fee rate. It is therefore crucial that any fee review is done with the specific objectives of the scheme in mind and a provider chosen which represents good value but also with which the trustees are comfortable.”

Ultimately, employers want to know how much things will cost, not over the next generation, but in the coming year, and that is not an unreasonable or impossible place for trustees to work from, says Hamish Wilson & Co managing director Hamish Wilson.

Managing costs is about finding a proportional way of meeting the trustees needs, says Wilson. This can be done he says by stripping back the trustees’ focus to those things alone that add value to the governance process.

“Much of the time, we lose sight of how important the covenant is and look at the technical provision, which is most often a best estimate. A lot of over-engineering is being done in that area and so schemes should take a more proportional approach.”

So, as far as he is concerned, trustees should concentrate on the strength of the employer, avoid getting bogged down in minutiae and finally, have a very strong hold on their relationships with providers.

Independence of an adviser is paramount, says Wilson. If a consultant has no vested interest or relationship with an investment manager, they will not feel obliged to put their offering in front of the trustees and in effect, getting paid for marketing their own products, he says. That will save time and therefore money. But more importantly, it means the scheme will have a greater grip on conflicts of interest.

“Even if you use different parts of the same firm, there is a lot of commonality. The same culture, same research and it is a ticking timebomb influencing their behavior,” Wilson says.

“The trustee needs to think what will happen if it all comes crashing down. That should drive their behaviour today, not tomorrow.”

The subject of fees is important and people never want to pay more than they have to for anything.

If you can, hand on heart, say your scheme delivers the best possible service for the resources placed at its disposal – while allowing a little room for improvement – then you’re clearly doing a good job. If not, maybe it is time to reconsider the options.

After all, it may not only be the employer who will thank the trustees for saving some money. In this DC world in which we live in, it is likely to be the scheme member too.

Written by Pádraig Floyd, a freelance journalist

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