In its seventh year, KGC Associates' survey finds trustees need to engage more with administrators. Michael Klimes looks at the findings.
- Large schemes have more sway over administrators
- Trustees need to work on value for money aspect
- Chair’s statement has had little impact on DC administration
The concept of 'value for money' has certainly gained traction during the past year. The creation of independent governance committees (IGCs) and the Transparency Task Force (TTF) have brought attention to the notion.
While much of the discussion tends to focus on investment fees and charges, administration also merits consideration. The Pensions Regulator (TPR) wants trustees to improve governance and demonstrate value for money across the board.
The latest KGC Associates Administration Survey suggests trustees could be doing more here. Up to 20 firms took part and were asked to produce costs for eight different life scheme sizes covering 200, 500, 1,000, 2,000, 5,000, 10,000, 15,000 and 20,000 members.
The survey breaks fees down in four ways: administration, pensioner costs, treasury and accounts as well as implementation. For 2016, implementation is no longer included in the Total Year One Costs part of the survey. All year-on-year comparisons have been amended for consistency.
Unit cost per member
The survey looks at ongoing costs for maintaining the pension scheme and created a unit cost per member (UCM). This is the combined cost of administration, pensioner payroll and treasury and accounts, divided by the number of members.
Differences in UCM between small schemes and large schemes remain notable. For instance, to administer a 200-member scheme the most expensive UCM is £105, [see Chart 1] while the most expensive UCM for a 20,000 life scheme is £21.50. [see Chart 2].
But what is interesting is the biggest life schemes are able to get 100% of core services regardless of how much they pay [see Chart 3]. The tipping point is a scheme with 5,000 members.
Schemes with 10,000 and 20,000 members get the same deal and it does not matter what they pay. "Usually we find at the very big end there is a lot more buying power and we expect bigger schemes to have better value in terms of what they receive on core services," says KGC Associates director Kim Gubler.
At the smaller end of the scale, for the 200, 500, 1,000 and 2,000 life schemes, this is where what you pay has an effect on what you receive. What explains this? Gubler suggests the larger schemes might have providers that offer non-core services within their standard fees.
The implication is trustees at smaller schemes should look closely at the services offered by providers, as what they offer varies. "People [trustees] should not just be looking at what the fee is. It is what you are getting for the fee because obviously what we do [in the KGC survey] and evaluate is not just what firms are charging but what they provide as the standard core of services," continues Gubler.
Keeping up with the evolving profile of a scheme's membership is critical for trustees as it has a bearing on the administration required. In the defined benefit (DB) sector a scheme can close to future accrual and new members, which most have already done.
Ensuring trustees are not paying for tasks that are no longer needed means contracts have to be revisited at meetings with administrators. "On the DB front you might not want to be sending out benefit statements for example," observes Gubler.
Unfortunately, the survey shows the number of schemes that have meetings purely about administration included in their core fees is low.
For the smaller schemes around a third of firms offer one administration meeting, for a 2,000 life scheme seven firms offer two administration meetings, decreasing to six for a 5,000 life scheme. For the three largest schemes, just over a quarter of firms offer two administration meetings.
These meetings are contrasted with trustee meetings where administration is touched on in far less detail. A 200 life scheme usually has one trustee meeting, a 500-member scheme has two meetings a year and 1,000-20,000 member schemes have four annually.
For Gubler this gap suggests trustees are not being proactive enough on administration. "When trustees are focusing on the operation of the scheme, which is effectively the governance, there are still not many one-to-one meetings where trustees are really holding their administrator to account for what they are doing.
"If you always keep your administrator at arms' length and give them just ten minutes in a trustee meeting, or even sometimes have an administration report rather than the full stewardship report, then you are never going to drive change through."
Not engaging with administrators is also reflected in the survey's finding the annual governance statement signed by the chair of trustees has not had much effect. In a change from last year, defined contribution (DC) trustees must now provide information in their scheme return about how they comply with certain requirements of the 2015 legislation.
Only 35% of administrators have been asked by their schemes for enhanced reporting to evidence compliance with the code, however.
The lack of meetings focusing on administrative issues and enhanced reporting means trustees can fall short in fulfilling their value for money duties. Gubler concludes: "The main message you can see from the survey is people have got to look beyond the pound signs to understand value for money and what they are getting. They need to engage more to drive up governance of the scheme."
Defined benefit (DB) schemes that provide GMPs must revisit and, where necessary, top-up historic cash equivalent transfer values (CETVs) that have been calculated on an unequal basis, a landmark court judgment said last week.
Technology platform PensionSync has partnered with quantum employment pioneer My Digital to help contractors and employers manage pensions as more workers do temporary work for multiple firms.
Capita Pensions has partnered with data technology solutions firm Intellica to tackle the GMP equalisation challenges facing pension schemes.
The Hewlett Packard Retirement Benefit Plan has reappointed EQ Paymaster as its third-party administrator (TPA) for five years.
Schemes and their administrators have rightly received much praise for ensuring that pensions have continued to be paid in full and on time during an unprecedented period of disruption.