Managing costs in defined benefit schemes

The focus is often on value for members in defined contribution schemes, but defined benefit (DB) trustee boards must also be able to show scheme sponsors that they are running their scheme cost-effectively.

As professional trustees, we are often asked by sponsors to review the cost base of their schemes to find out if:

• Charges are competitive
• There are any unnecessary or legacy costs to be managed
• The scheme as a whole is cost-effective.

We work with many different schemes, each with their own levels of maturity, assets under management and sponsor strength. That gives us the oversight to develop a deeper understanding on the operations of key professional advisers such as investment consultants, lawyers, and actuaries, and a clearer picture of what typical costs should be for a scheme of a given size or complexity. We can put that knowledge to work to help schemes address questions on running costs through some key actions:

Renegotiating rates

Scheme circumstances and characteristics change over time, and so does the market. It’s important to re-negotiate or compare providers to keep receiving the best value. If a scheme is paying too much for a service, that could drive a review of rates with the existing provider, or a wider retendering exercise based on more up-to-date expectations.

Checking the scheme is still with the right providers

Trustees may have appointed an adviser in the past on the basis of prestige, or because it linked to other relationships at the sponsoring company. In the intervening years, the original reasons for the appointment may have been lost or no longer be relevant. As a result, fees and services can get out of kilter with the needs of the scheme and with market rates.

Building a realistic view of your cost base

It’s also important to have a clear picture of what a realistic cost base looks like before starting negotiations. Trying to negotiate down to an unrealistically low fee could result in damaging the quality of service the scheme receives.

Scrutinising your expenditure

Schemes can easily build up unnecessary costs or legacy arrangements over the years. To help understand and remove these, we run exercises across a whole year to look both at fixed costs and one-off costs associated with specific projects. Being able to examine every invoice that a scheme receives gives us a realistic picture of where savings could be made, whether charges are reflective of value received, and if there are costs that no longer bring value or benefit to the scheme.

Considering wider corporate practice

Employers may just want reassurance that the scheme is being run cost-effectively and in line with the rest of its business. That could mean looking at a scheme in the context of wider corporate practices. For example, a blue-chip consultant might look like a poor match for a small, legacy pension scheme, but it could be part of a wider relationship within the company. The employer may know and like the consultant and value the consistency of a single provider.

To help us carefully control and manage costs for all the schemes we work with, we build close relationships with major providers across the pensions market. That puts us in a good position to negotiate effectively on behalf of all the schemes we work with. Even if there is no direct pressure from a sponsor to improve value for money, keeping a close, regular check on scheme costs is an ongoing and essential element of good governance.

How ZEDRA can help

ZEDRA’s team of Pensions, Independent Trustee and Governance experts is on hand to guide Trustees and Independent Governance Committees (IGCs) through all aspects of Trusteeship and Pension Governance.