UK defined benefit schemes overspend £300m each year, report finds

Defined benefit (DB) pension schemes in the UK overspend by £300m (€351m) each year on unnecessary running costs and inefficiencies, according to Spence & Partners’ latest scheme running costs report, Reducing running costs for defined benefit pension schemes.

Spence & Partners – which is one of only four firms appointed by the Pension Protection Fund (PPF) Specialist Administration and Actuarial Services Panel – conducted research accessing the running costs of DB schemes with between 100 and 9,999 members. It examined administration, actuarial and investments costs.

For schemes below 1,000 members the cost of inefficiencies in these areas amounted to £75,000 and increased to £160,000 for schemes with 1,000 to 4,999 members.

Schemes with 5,000 to 9,999 members saw the biggest cost of inefficiencies at £300,000. Overall average schemes with more than 1,000 members saw the cost of inefficiencies total £105,000.

According to Spence & Partners, these inefficiencies occur in DB schemes where scheme advisers interact and share data between each other.

The current typical operating model is complex and not well-automated, the firm pointed out, adding that typical DB scheme systems are fragmented with data moving between as many as five different systems on average.

This lack of automation in the process leads to an overuse of spreadsheets, data manipulation off-system, and basic tasks performed by overqualified resources.

Savings

Spence & Partners has calculated that removing inefficiencies could save an average 1,000-member scheme £105,000 per year in running costs. The savings come from automation of unnecessary checking processes and oversight that add no value.

Spence & Partners added that beyond cost savings, modernising DB operating models has broader benefits for scheme trustees and employers.

These include reaching insurance buyout or superfund consolidation quicker for schemes aiming at a settlement endgame. For schemes planning to run on, it generates more surplus for sharing with members or sponsors.

Modernising operations also reduces operational risk by improving data integrity and cyber risk by holding information in a single, secure system. It also improves the service that scheme members receive by freeing up administrators’ time to focus on the customer experience.

Alistair Russell-Smith, head of the corporate advisory practice at Spence & Partners, said the pensions advisory and administration market is fragmented, with a wide variety of systems being deployed to manage schemes.

He said: “Many schemes are serviced by older software, augmented by a range of sticking plaster solutions to get them to provide a basic service for pension members and fulfil their regulatory requirements. This creates inefficiency within the market.”

He pointed out that every pound companies spend on running their pension schemes is a pound not spent on member benefits or other company priorities.

This is not just a challenge for individual but also for policymarkers, Russel-Smith stressed, adding that using modern processes and systems is necessary for plugging DB schemes into the Pensions Dashboards in a timely and cost-effective way.

He continued: “The good news is there are already a range of newer, more efficient operational models available in the market for schemes looking to reduce running costs. Options to cut costs include using bundled services, switching to a sole professional trustee, moving to multi-trust solutions, or joining a DB master trust.

“Most of these have had significant investment, use technology effectively, and in some cases rely on just one system to manage all data flows.

“Our calculations show these solutions just need to be adopted by more schemes to access the £300m a year of savings.”

Read the digital edition of IPE’s latest magazine