Who really pays DC scheme costs?

It’s common for DC schemes to pay a great deal to consultants to let their trustees tell much the members are paying in costs and charges. This information is provided to members in trustee chair statements. The same thing goes on with IGCs and GAAs who also publish chair statements.

All these chair statements have one thing in common, they are pretty well unread by the people they are produced for. Why?

Well for one thing they are now written by lawyers and signed off by trustees; the amount of genuine trustee communication in most statements looks minimal. This is not surprising, many professional trustees are either embedded into legal firms or are lawyers by training, lawyers dominate the regulators and chair statements are considered a matter for compliance not engagement. The easiest way not to get read is to produce a legally compliant document as not only does it de-risk regulatory sanctions but it eliminates complaints from the membership.

Another reason trustee statements don’t get read is because they don’t talk to the wallets of their members (perhaps I should replace wallet with smartphone). Imagine a chair statement that started like this


I am your Chair of the Trustees,

In the past year, the trustees incurred costs of one point one  million pounds. I and my colleagues paid ourselves three hundred thousand pounds, we paid lawyers one hundred thousand pounds, consultants as much again and we paid auditors and communication specialists another hundred thousand pounds. We incurred disbursements of a further five hundred thousand pounds which covered the cost of scheme secretarial , data management and the salaries of the pensions management team. All these costs were passed on to your employer who made contributions on your behalf of ten million pounds into the trust we oversee.

We have reviewed the result of our work and can find no discernable improvement in the outcomes of your savings than had the employer participated in Nest or anyone of ten other leading master trusts that would have allowed your employer to participate in their scheme. If we had not been running the trust, we estimate the employer’s costs for pension management would have fallen to one hundred thousand pounds , leaving one million pounds next year which could have been paid into your pension pots , giving you a pension pay rise of 10%.

We have decided to pack it in and will be winding up the scheme without more ado. Before we do, we are asking your employer to increase contributions to your pot by 1%pa, being a cost to the employer of the saving made by us packing it in. It is that 10% pension pay rise

If you’d like to see how your scheme did last year, this report will tell you, it will also tell you how much you’d have got in the average scheme and we provide a league table showing how we compare  both with schemes similar in size to us, but also to Nest and a few other very big master trusts, one of which you will be finding yourself in next year.

If you would like a personal assessment of how your pension pot has done relative to others, please press here and we will arrange for one to be sent to you.

Regards  – your Chair.

In recent conversations with my bright friends , focus has been on engaging members to pay more, not on getting employers to pay more. The truth is that my bright friends are not too keen on schemes consolidating and would look askance at this letter. They would prefer for value for money to focus on the minutia of cost and charges, on the impact of market timing, on risk adjusted returns , on pre-retirement de-risking strategies and on light-bulb moments when members wake up to their not getting the kind of pension they might have anticipated.

No one seems to stop and ask whether the best way to boost pensions is to cut down on the fixed costs of running a scheme , by letting someone run it for you at a fraction of the cost.

If we are serious about improving member outcomes, we need to start with the unpleasant fact that the vast majority of corporate pensions are DC and run by single employers with hopeless duplication of effort. While it suits lawyers, consultants and others to replicate work hundreds of times, just tinkering with boiler-plates, it does not suit the member- not at all.

Putting apart the arguments for scale to improve investment outcomes (accessing illiquids), the simple argument that any money paid by an employer for scheme management is ultimately met out of the contribution rate, holds good.

This goes for governance and any other costs incurred. It goes for subsidized record keeping, investment management and for the cost of all the communications (whether read and used or not).

All of these things should be (and aren’t) included in a value for money assessment.

We are left with a most curious situation where chair’s statements tell members of the value of the scheme but not the scheme costs while members are told of the costs of their investments but not their value.

This has to change

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to Who really pays DC scheme costs?

  1. Bob Compton says:

    Great article Henry, I have waited 10 days to see if any Lawyers, Trustees or Actuarial Consultants, would comment, but I see nothing, I wonder why?

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