Cutting charities’ pension costs with consolidation
Do you run a pension for your employees? And, if so, what sort of pension arrangement it is? A workplace pension, or defined contribution scheme, where members pay into their own pot of money? Or a final salary scheme, which are the sort of pension arrangements which charity employers may have responsibility for and which they could find burdensome.
All employers now must give access to a workplace pension and pay a minimum level of contributions to them by law. It is your responsibility as an employer to set this up and is effectively a pot of money that your employees own, and that you and your employees contribute to regularly, with a view to the pot growing until your employees are ready to draw on it.
Your employees have control over where the money is invested and how much they pay in, subject to some minimum levels. Workplace pensions are a straight-forward and tax efficient way to save for retirement that most people take advantage of.
But there is a world of pensions beyond this – a more complicated world of saving for retirement. This is the defined benefit pension scheme, or sometimes called a final salary pension. These are the pension schemes that were established prior to workplace pensions becoming the norm.
They work by making a promised amount of pension by you, in which you need to put money aside now to fund your employees’ future pension. It is your responsibility as a charity employer to make sure there is enough money in it and if necessary top up the account. Final salary money is held with trustees so in a separate account to your business.
Whilst the idea sounds straight-forward, final salary pension schemes come with a raft of pension rules and regulations. These include having to carry out regular valuations of the money needed to pay for the promised benefits, rules around what trustees can and can’t invest money in as well as other rules around setting ESG (environmental, social and governance) policies, ensuring fairness for members if they leave the scheme, and how pensions should increase both before and after retirement.
The upshot of this is that it can cost around £1,000 per member per year just to pay these pensions. Bearing mind that the pension itself might only be slightly more than this, these schemes start to look very expensive to run.
So, who pays the cost of running these pensions? Typically, it will be you, the charity. A direct hit on the balance sheet of charities which spend a huge amount of time raising money for good causes – and to pay their pension costs.
The good news, however, is that the world is changing and there is much work being done to reduce the huge costs of running these pension schemes. Like many things the cost of running a pension scheme falls into two categories: fixed costs which have to be paid regardless of the size of the scheme - for example, fees relating to meeting increasing regulatory burdens and red tape - and then additional costs of administrating the scheme for each member.
Higher costs per member
This dynamic means that smaller pension schemes typically end up with higher costs per member than larger schemes. And at the smaller end of the market (with under £1,000 pension payment members) it makes sense for pension schemes to really think about whether it is efficient to continue to run on a standalone basis or join up with others to consolidate into a bigger, more cost effective scheme.
Larger schemes typically pay costs of up to 80% less per member than small schemes, and given that these costs can be paid for 20 years plus, the crystalised value of these savings can reach into millions of pounds. Money that would arguably be better used within the charity itself.
In addition to this, mounting regulatory requirements for pension schemes are taking their toll on many skilled professional trustees and even driving them out of their roles. But if it’s too much for the professional trustees, what does this mean for lay trustees of small charity sector schemes?
New research from Charles Stanley Fiduciary Management amongst professional trustees of UK defined benefit pension schemes found that two-thirds (62%) are finding regulations too burdensome and overly complex and so are planning to step down from their role within the next three years – many far sooner.
The survey revealed that 44% said they didn’t have the right knowledge for the job, 41% said the reporting requirements were too onerous and 24% said the role was taking up too much time.
According to the Pensions Regulator, the number of pure defined benefit schemes with professional trustees on their boards stood at 1,538 out of 4,797 in 2020/21, which leaves over 3,200 schemes run by non-professionals - often a scheme member, finance director or charity trustee.
Burden for lay trustees
Most professional trustees work for the largest schemes, and so it is the lay trustees that run the smaller end of the market. Whilst this group of amazing people do a great job, if professional trustees of large schemes are struggling, the key question becomes how are trustees of smaller schemes within charities coping?
Some of the trustees of smaller pension schemes have been trustees for 20 years, some have worked for the company running the scheme – they are emotionally invested in their schemes and don’t want to walk away, but clearly now is the time to seek a new type of support as an option for their schemes.
So, what is the answer. Pension consolidation is one option, where schemes come together to run as one. This isn’t a new concept for the charity sector, which has historically run some its pension schemes together, initially via the Pensions Trust, which was historically for the charity sector only.
With changing rules, however these multi-employer schemes are now open to all types or business, bringing a diversity of industry and culture to them. There are also now new players in the consolidation market, like Stoneport, with new ideas and the benefit of not having a legacy book to service. So, the industry is reacting to demand and a new world is emerging.
The new world is an interesting, exciting one. With over 4,000 final salary schemes in today’s total market, and the charity sector being a subset of this, consolidation could take us down to less than 100 schemes. These would be super schemes, run in the most efficient way, with healthy transparent competition and providing the best governance services available in the market.
Comparable service and fees
If we compare pensions to the banking sector, in 1784 there were over 100 provincial banks in the UK. There are now 15 retail banks in the UK, providing comparable services with different interest rates being the main distinguisher. Pension consolidation clearly has a lot to learn from banking and standard minimum levels of service, and comparable fees will be key to this. Schemes which can’t meet the standards will need to consolidate with others in order to adhere and compete.
So, how does your pension scheme look compared to others? There are some key questions to ask. Have you undertaken a review of your costs recently? And how do these look compared to the market? How good are the communications that you send out to your members? Are they getting the messages they need to in time to make the important decisions needed to secure their retirement?
Are you up to date with recent regulation requirements? If not, do you have the right adviser support network around you to address this? Also, do you have time to deal with this, or has the time come to outsource this to a third party consolidator who would take the hassle away and let you focus on running your charity?
Pensions are changing and there are some great opportunities out there to grasp and make things better for your charity and your employees. Maybe it’s time for a change?