Pension costs and member charges are important—they directly impact on retirement outcomes. They are a focus of regulators and others overseeing the pension industry, and this focus will increase into the future. A code of practice on transparency in pension charges has been proposed by the Pensions Council, and it is expected to take effect from January 2024.
The difficulty can be in making an appropriate comparison given the complexity of pension charges and the fact that seemingly small differences can have a significant impact over time. Costs do not directly correlate to value for money—this introduces additional dimensions such as the level, quality and effectiveness of service and investment performance that employers and members receive. One of our previous insights considered the investment aspects in more detail and how they can contribute to a value for money assessment.
In this insight, we share some of our experiences on costs and services and how we have helped clients navigate and validate this area.
Understanding existing costs and services
A good starting point is the costs in place today. Employers value an initial analysis setting out the costs that are being paid in the existing pension scheme structure—covering all of the services involved in running a pension scheme. This is particularly valuable where schemes may have been put in place some time ago and not reviewed. Itemising the costs allows employers to fully understand what is being paid, both by themselves and the members. Equating these costs to the services received is a sensible base point to begin any analysis of value for money.
This analysis should capture the costs of IORP II compliance (e.g. key function holders) and any costs that would fall away in the event of a transition to a master trust (e.g. ECB reporting, audit and any trusteeship fees). For many employers, this analysis allows market benchmarking—they can get visibility on the costs they are incurring relative to the services provided, which in turn allows for an assessment of how they compare to peer organisations.
The other issue employers are considering is in respect of the level of cost-sharing between members and themselves. With the move to a master trust, the requirement for fixed costs to be met are largely eliminated (e.g. trusteeship costs, audit costs). This allows a rethink on what costs employers bear and how they might vary in the future.
Investment range and associated costs
Employers should consider the range of investment options available to members and the total charges that get applied to each on an annual basis. Experience over the past 12 months has been that with the transition to a master trust, members can access the same or similar funds more cost-effectively. From a communication and member appreciation perspective, this is a key positive. More generally, lower investment costs lead to better member retirement outcomes, all else being equal.
Demographics and financials
While the magnitude of assets transitioning play a role in determining the costs that are payable in the master trust, the current and future demographics and expected cash flows are important to factor in. Employers with a young workforce and strong cash flow expectations offer a positive commercial proposition to master trust providers and as a result, achieve very competitive cost structures across the market today.
Costs are one component only. The other key positive is around services provided—with the regulatory compliance outsourced to the master trust, the focus can be on member experience and member outcomes. Clients have spoken positively about the pace at which technology offerings have moved forward, including innovations around communication and member engagement. We have found clients experiencing enhanced service levels, combined with cost savings, in the transition to a master trust.
Competitive tender exercise
For those who ran a market review exercise as part of the master trust transition during 2022, they have reaped the benefits from this as providers look to attract new business at competitive charging structures. There is also positive news for those only starting to transition—the announcement from the Pensions Authority at the end of 2022 means that employers now have some time in 2023 to, at a minimum, carry out a level of benchmarking of their existing provider to test the value they are getting.
For employers transitioning to a master trust, it is an ideal time to review the value for money they are getting. This goes beyond simply costs but as costs will dictate the net investment returns on members’ retirement savings, they are an important consideration. Having full cost transparency and an ability to benchmark costs and services relative to peers and other master trusts allows employers to give their employees the reassurance and confidence that they are proactively supporting retirement outcomes for members.
In transitioning to a master trust, a true and fair comparison will be helped by the following tips for employers:
- Ensure that all costs are captured in the analysis and employers are clear on the existing charges.
- Be aware of the investment fund mapping approach.
- There may be fixed and/or variable costs that need to be carefully analysed.
- Differences in services may be driving the differences in costs and identifying these will be important.
- The ability to review costs in the future should be factored in, particularly where there is growth in assets and/or membership.
The Three key actions to take now
The priorities for employers will be dependent on the decisions and actions taken to date:
- Already transitioned to a master trust: for those employers who have already transitioned to a master trust, the costs will largely depend on whether a market review was carried out and/or any renegotiation of charges with their existing provider. Where there has been little or no change in the costs, it will be important to track how costs evolve into the future.
- Planned transition to a master trust in 2023: for those employers who have transitioned, or will make the commitment to transition, to a master trust in 2023, there is an opportunity to carry out a value for money test relative to the wider market. In PwC, we have built up a unique understanding of the potential pricing terms (and services available) employers could achieve in the market based on the range of master trust selection exercises we have supported during 2022.
- Not considering a master trust at the current time: for those employers who are not considering a master trust at the current time, they too will benefit from keeping an eye on the master trust market and how costs develop. This will allow them to benchmark their existing standalone schemes and determine if they continue to deliver value for money.
We are here to help you
Making the right decisions for your pension scheme in light of economic and regulatory uncertainty can be challenging and value for money can be difficult to define. We are ready to help you navigate the master trust maze and reimagine your future pension offering. Contact us today.