One key tactical point for employers may be in deciding whether they want to pass some costs on to the employees
The cost of setting up a pension plan varies greatly from scheme to scheme and largely depends on the level of advice required around issues such as scheme design and investment. Once set up, ongoing adviser costs are generally more comparable.
In practice, a group personal pension for a few hundred people who all work at one site could be set up for between £10,000 and £20,000, with ongoing costs of around £10,000 per year and an annual management charge deducted from the members’ funds of around 0.5%-0.6%.
Adviser services can potentially be paid for by fees, by commission, or a mix of both. Commission is recovered by an annual fund management charge being applied to each member by the provider, which is passed onto the adviser, and this extends throughout the entire life of the arrangement. A 100% commission-based approach is only possible with a contract-based plan.
Paul Macro, head of defined contribution pensions at Aon Consulting, says: “One of the first points of consideration is whether the employer wants to pass most of the costs on to the employee. The services an adviser provides can be paid for by fee or commission, and if it is commission, the members will pay via charges on their funds.”
A part-fee and part-commission arrangement is also possible whereby the initial costs are met by the employer, but the ongoing costs are met by payment of commission. This is a very common model. In this instance, the annual management charge might, for example, be 0.7%.
If the ongoing costs are met by the employer directly, this is likely to reduce the annual management charge to around 0.5%, but where an employer chooses to pass all costs onto the member (with all payments to the adviser paid via commission) then the members’ costs could still be 0.9%.
David Barker, managing consultant at Mercer Human Resource Consulting, adds: “The distinction should be made [between] whether the employer wants a DC arrangement to mean ‘defined contribution’ or ‘defined cost’.”
The costs involved in a trust-based scheme will be different to a contract-based plan. “If the scheme is trust based, then the option to pass [adviser] costs onto members is more limited but still possible. The employer would normally be expected to meet the set up and ongoing consulting costs, together with the admin costs (which could be say £30-50 a year per member), with the member meeting just the investment charges, which could be anything from 0.1% a year for a tracking fund to in excess of 1% for a specialist equity fund,” adds Macro.
A difficult issue is that the adviser’s work will include an element of advising the company, so an organisation may ask itself whether the employee should be paying for that, albeit indirectly, through commission.
Very often employers are not fully aware of whether commission payments represent value for money.
“The biggest worry of adviser-led solutions using commission is that the adviser will tend to use past performance for judging future investment returns, and with poor results,” says Barker. He adds that a trustee who is advised by a fee-based adviser is likely to make better choices and will have a much wider range of investment professionals to select from. This is a particularly pertinent consideration as less than 10 pension providers are currently willing to pay advisers commission, which has curtailed choice.
In addition, schemes will require a communication strategy and the cost will depend on how much support is offered by the chosen provider, the type of arrangement (trust- or contract- based) and the employer’s overall communication strategy.
The employer may also need to arrange additional benefits, such as a death-in-service and permanent health insurance policy, at around £1,500 to £2,000 per policy.
After the initial set-up costs, an adviser will be required for ongoing work, typically attending two meetings a year to review the plan with the pensions steering group, and producing an annual report reviewing admin strategy, investment performance, member communication, take up and other issues. If recent years are anything to go by, the adviser will also be in touch to brief on legislative updates. All of this ongoing adviser input might amount to between £10,000 and £15,000 a year.
There will also be the cost of a HR team member whose role includes liaising on a day-to-day basis with the life office and dealing with member queries. This might take a few hours a month for a contract-based scheme rising to half a full-time job for a trust-based pension.
Adviser costs for a typical GPP
Planning and design
1. Preparation and attendance at brainstorming day.
2. Modelling of contributions from employer and employee perspective.
3. Full scheme design document drafted for agreement.
4. Detailed project plan including communication strategy agreed.
Adviser cost: £10,000-£12,000
1. Review of provider market taking into account the organisation’s requirements.
2. Obtain quotes and terms from providers.
3. Select best providers and best terms and provide written recommendation.
4. Establishment of pensions steering group/trustee board.
Adviser cost: £4,000-£5,000 for single contract-based provider
Payroll and admin requirements
1. Liaison with administrator and payroll/HR teams to agree parameters.
2. Confirmation of requirements and establishment of appropriate procedure.
Adviser cost: £3,000 – 4,000 (allows for 3-4 site visits)
1. Employee group presentations on site.
2. One-to-one meetings to discuss pension options as required.
Adviser cost: £1,500 per day on site
Administration and project management
1. Liaison with chosen administrator.
2. Telephone calls and contact.
3. Project management.
Adviser cost: £3,500 – £4,000 Budgeting your running costs