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.

 *https://www.fca.org.uk/publication/market-studies/ms16-1-3.pdf
  

Back to Index


Similar News to this Story

Stars of the Future Voting Is Now Open
Stars of the Future highlights the rising talent in the actuarial industry. We know how hard you all work to qualify as actuaries and this is the pe
Delivering Future Readiness for Insurance Carriers
Ever the double-edged sword, advances in technology have arguably driven the greatest change to the industry that insurance has ever witnessed. As tec
LGPS Legislative Logjam
The queue is building. Apologies for the alliteration in the title, but a recent client discussion got me thinking about the huge volume of outstandin

Site Search

Exact   Any  

Latest Actuarial Jobs

Actuarial Login

Email
Password
 Jobseeker    Client
Reminder Logon

APA Sponsors

Actuarial Jobs & News Feeds

Jobs RSS News RSS

WikiActuary

Be the first to contribute to our definitive actuarial reference forum. Built by actuaries for actuaries.