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Employers warned over cost of deferred DC

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UK - Employers need to address the extra costs associated with administering defined contribution (DC) schemes for deferred members, as large firms could be spending over £500,000 on ex-employees, Towers Perrin has warned.

David Bird, principal and DC expert at Towers Perrin, said “it is not uncommon for employers to have more deferred members than active members in DC schemes”, because the average amount of time spent at a company is falling.

For example, Towers Perrin suggested administration costs in the UK are estimated to be around £95 per person per year, and a large employer could have 10,000 members of a DC scheme of which 6,000 are deferred. This means they could be paying around £1m on administration costs, of which more than half - £600,000 - would be for ex-employees.

To combat this issue, Towers Perrin has suggested two possible ways of addressing the “DC legacy”: by either paying contributions into a personal pension plan, such as a group SIPPs, group personal pensions (GPPs), or stakeholders, or placing the costs of administration onto the legacy members.

The firm admitted this would reduce the pension pots of legacy members, but saida similar process already occurs in GPPs and stakeholder pensions so it is “not exactly radical”, and suggested more firms operating DC schemes will do this and ask members to contribute to administration costs.

It said employers cannot “change the deal half way through” so would need to inform members that this would be how it works, though Bird suggested it is a “reasonable thing to do”.

This is particularly important as the introduction of auto-enrolment in 2012 will mean “more people joining up for such a short time and employers ratcheting up the costs”, so those employers looking to cut DB costs and perhaps implement or improve DC arrangements should look at the potential costs and impending legislation to make it fit for purpose, according to the consultancy.

Members of occupational trust schemes tend to pay the investment charges while employers pay for the administration, but a way of reducing costs would be to get the member to “pick up all the tab”.

Bird suggested if employers do want to bear some of the cost burden then they can increase their pension contributions to offset the costs.

Towers Perrin added that with the advent of auto-enrolment and personal accounts employers should not put in place a DC plan that they will have to “tinker with” to get it to meet requirements, especially as its corporate pension survey from 2008 revealed 79% plan to maintain their company pension scheme after 2012.

Bird said: “Employers need to wake up to the DC legacy issue, and quickly. If companies focus entirely on the DB challenge, they risk incurring significant costs from this ‘hidden DC legacy,’ and in such a tough financial climate few can afford to ignore the potential cost savings.”

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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