Articles - Bundled vs Unbundled doing the sums

There’s a lot of technical jargon when it comes to pensions. Which is why the use of ‘bundled’ and ‘unbundled’ always amuses me slightly. Amongst harsh sounding terminology like ‘uncrystallised funds pension lump sum’ and ‘trivial commutation’, ‘bundled’ and ‘unbundled’ sound kind of fluffy.An unbundled pension scheme is one in which investments are handled on a dedicated investment platform and administration is carried out by a third-party administrator, paid for by the employer.

 By Dale Critchley, Policy Manager, Aviva

 A bundled pension scheme is where admin and investments are managed by a single provider usually paid for by deduction from member benefits.

 For a long time, the received wisdom was that once a defined contribution pension scheme had sufficient assets, the way to ensure the best member outcomes was to switch to an unbundled model. Times have changed however - bundled propositions have improved and traffic is no longer one way.

 Cost is often an initial driver for considering a bundled scheme. Administration charges in unbundled schemes are commonly paid on a ‘per member’ basis, and with the abolition of short service refunds, (members of occupational pension schemes with less than two years qualifying service could get a refund on contributions), some employers have seen administration costs escalate far quicker than before.

 In a bundled proposition, administration charges are included in the member’s Annual Management Charge, rather than as an additional fee for the employer to pay.

 However, a move to a bundled proposition shouldn’t be based on savings for the employer - unless those costs put employer contributions under pressure. So, there are sums to be done!

 The gap between unbundled and bundled member charges has been closing. Efficiency savings and a competitive market have driven down charges for bundled schemes. The differential is smaller than it has ever been.

 Member charges in an unbundled scheme will almost always be lower, but the benefit to members is regressive. A flat-rate, ‘per member fee’, paid by the employer, provides the greatest benefit to those with the largest funds. Younger employees with small funds could be better off if the admin fee were simply paid as an increased employer contribution.

 Trustees, or those with governance responsibility over an unbundled scheme, should also consider the lifetime charge on members’ pension pots - especially if drawdown isn’t an option within their scheme. The FCA found that charges for drawdown in retail products varied from 0.4% to 1.6% per annum*. As a member could be invested in a drawdown product for 25 years or more in retirement, they can easily undo the hard work of trustees who helped to minimise charges during accumulation.

 In contrast, most Master Trusts offer drawdown within the scheme and often drawdown charges are the same or very similar to accumulation charges.

 Investment performance and the ability to engage members are also reasons why bundled pension schemes are on the rise – as long as the sums add up.


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