By Ken Anderson, Director, DC MOT Leader, Mercer
A striking 50% of UK employers conducted their last DC provider review in 2021 or earlier, according to Mercer’s latest DC MOT Report. Paying unnecessary fees, even when they only look like a small percentage, can significantly erode retirement savings over time, reducing the impact of both employee and employer contributions. With employee benefits making up employers’ second largest hiring expense, it is important that these funds are put to work.
Here are five tips for employers looking to improve the value of their pension scheme, for the benefit of both the organisation and its staff.
1. Review and renegotiate regularly
Often, the best value is achieved by employers who regularly review their service expectations and fees and come to the negotiating table with their pension provider. With charges falling across the market in recent years, and the government’s ongoing focus on value for money, many employers might not realise that they’re paying higher than market rate.
The only way to discover whether your scheme is delivering value is to regularly review the services received and fees paid, and negotiate them where appropriate. Mercer’s free DC MOT review can provide a benchmark to compare your scheme to those of your peers, helping you determine whether you might be able to increase value.
2. Consider what your peers are paying
Mercer’s DC MOT research shows a wide variation in the pension fees paid by UK employers, ranging from less than 0.1% to more than 0.6% per annum. The most common fee band is between 0.3% and 0.4% per annum, which is what one-quarter of employers say they pay.
The fees quoted by your provider depend on a variety of factors, including the size and type of your scheme and the complexity of its investment strategy. However, knowing where you sit compared to other employers may help you negotiate your charges down or increase the service you and your employees receive. Or both!
3. Look at the services provided
Your fees may look reasonable at face value, but consider the breadth of services that are included. Bundled services, such as auto enrolment management, financial wellbeing support or employee education, might already be included in your agreements with other providers or may be carried out in-house.
Review all relevant providers to understand what you’re paying for and to whom. Many employers are paying for services they do not need or have duplicated elsewhere, and a detailed review can help weed out these unnecessary costs.
4. Consider negotiating even over small amounts
Even small changes to your fees and fee structure can make a big difference to members, meaning their contributions – and, of course, your employer contributions too – stretch further.
For example, a reduction in fees of just 0.1% per annum on a £50,000 pension pot over 40 years could translate into an extra £2,000 in savings. For a single person living a minimum lifestyle, that’s about two months of retirement income.1
And remember, it’s not just about charges, it’s about value. It’s about what you and your employees receive for that fee. So be sure to consider the levels of service and support your existing provider can deliver relative to others in the market.
5. If possible, point to your scale
Pension providers typically charge on a sliding scale, meaning the larger your scheme, the smaller percentage of fees you may pay. This is because providers often look to increase the size of their portfolios, which improves their access to investment opportunities, and so they will compete to win the business of significantly sized schemes.
Where size is in your favour, be sure to point it out. And if you have multiple DC schemes its worth considering consolidating them into one.
Even as charges fall across the pension market, and as the government homes in on value for money, many employers miss opportunities to interrogate what they pay. Stakeholders must consistently ask: how can we maximise our contributions by finding ways to increase value?
A diligent approach to assessing, benchmarking and negotiating the services your people receive for the fees they pay not only protects member savings but can enhance overall scheme performance, helping ensure your benefits spend delivers great value.
About the Mercer DC MOT
Mercer’s DC MOT is a free audit of your company’s pension practices. It benchmarks your scheme and broader benefits package against those of other UK employers, and against Mercer’s view of best practice.
The results will help you understand how you stand compared to your peers, as well as whether your business can save money, increase value and reduce risk in your benefits offering.
Learn more about benchmarking your DC scheme here.
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