Fees and charges swallow up €6 in every €10 in a pension fund - quite the byline. In April 2021, a report was published claiming that average pension costs in Ireland could be up to 3% per annum. These headlines can clearly create concern for pension savers and for those responsible for the stewardship of staff pension arrangements.
While these headlines may not reflect reality, questions still arise. What steps can companies take to ensure that their pension arrangements are delivering value for money? And how does the pension regulator expect companies to assess this?
With the introduction of new pension regulation, there is the potential for pension fees and costs to increase. Governance standards will be increased across the pension industry and there is a necessary cost to achieving this. As an indication of the level of change, in a June Consultation the Pensions Authority highlighted a near 100% increase to the revenue that it needs to receive to oversee compliance with the new regulations.
At the same time as these regulations are being introduced, pension provision is changing. There is a marked push towards technology based solutions, increasing development of self-service support models and there is significant competition across the pension industry.
So what does this all mean for pension costs and charges?
Large pension schemes typically have the ability to deliver a value for money proposition to pension savers.
Key to realising this value is reassessing what is important to deliver in terms of advice and support. The cost of delivering pension benefits has reduced significantly. This reduction is being driven by investments in pension technology which, in turn, can deliver a high quality experience. The incremental use of technology has a nil cost relative to support from pension advisers, which has clear cost implications.
So what action is required for large pension schemes? There is clear value in assessing whether your existing pension approach is appropriate and optimal and whether there would be value in considering alternatives.
The level and nature of pension support provided can usefully be examined. Key questions to pose include; what is the support trying to achieve, can the success be measured, and what is the perceived value of that support. This will help facilitate a discussion exploring whether a different approach might be adopted.
For smaller pension schemes, it can be more challenging. The weight of regulation being introduced and the costs of complying with that regulation may simply outweigh any effort to reshape pension arrangements. This is leading to consolidation in the market where smaller pension schemes combine to realise economies of scale.
This is reflected in the Pensions Authority consultation on the fees where it references “a significant per scheme charge” being introduced. This may all conspire to make smaller pension schemes simply uneconomic.
Actions taken around pension costs and efficiency are likely to be scrutinised. A 2021 consultation issued by EIOPA (a financial regulatory institution of the EU) identifies that pension regulators are expected to assess the efficiency of pension schemes and the value for money offered to members and beneficiaries. The Irish Pensions Authority has recently commenced an engagement process with defined contribution schemes (extending an equivalent engagement with DB schemes from 2020). It will be looking to understand the value for money offered.
It is acknowledged that achieving efficient pension arrangements can be complex. Consumer driven price competition can be weak in pension markets. This reflects the complexity of pension charges, the long term nature of pension savings and that relatively small differences in costs can compound over years to make a significant difference to the value of pension funds accumulated.
Challenging how pension arrangements are provided is an exercise worth undertaking. The market backdrop is a pension market that can deliver high value and efficient solutions. Headlines calling out pension costs of 3% per annum are a long distance from what is achievable. Based on our experience supporting clients in the first 6 months of 2021, member costs of 1% per annum may look high in the very near term.
Pension regulations are changing and market solutions have developed strongly in recent years. You need to ensure your pension arrangements are fit for purpose and cost effective. Employers should consider the following actions:
What pension supports are provided to employees at present? How much does this cost - both from an employer and an employee perspective? Would these costs benchmark well against peer schemes?
You should consider whether existing pension supports add value, relative to their cost. What changes might be considered to be more effective or efficient? It can also be useful to understand what similar organisations do.
New pension regulations could impact incurred costs. They will also bring increased scrutiny and challenge. How would you articulate to a regulator that value for money is provided to pension savers?
Where you believe change should be considered, you need to determine what you want to change, what is feasible to change and what the implications of pension change might be. For example, what benefits might you realise when a review exercise is undertaken.
Where changes are made (or where changes are not deemed appropriate) it is important to maintain regular oversight of pension arrangements. The key is to have clarity around what the support is trying to achieve and to measure the success of the support relative to the cost.
Reviewing pension arrangements can be complex with their myriad of structures and costs. It can be unclear who can support you in an independent, unbiased and expert manner. We have deep market knowledge and experience of similar exercises. We can support you in ensuring that your pension scheme delivers value for money and meets the expectations of the pension regulator.
We are ready to help you as you navigate these issues. Contact us today.