There was a time when received wisdom was that once a DC pension scheme had sufficient assets, the way to ensure the best member outcomes was to switch to an unbundled model. Investments are handled on a dedicated investment platform and administration is carried out by a third-party administrator in return for an employer fee. However, times have changed, and traffic is no longer one way. It may be time for employers and trustees to take a second look at what bundled providers can offer.
Cost is often an initial driver for considering bundling. Unbundled administration charges are commonly calculated on a per member basis, and with the abolition of short service refunds some employers have seen member numbers and administration costs escalate far quicker than before.
A move to a bundled proposition shouldn’t really be based on savings for the employer unless those costs put employer contributions under pressure. So how can trustees be sure that a move to a bundled proposition makes sense for members? Considerations can probably be broken down into three sections.
- Member engagement – this is important:
· for members, because making good decisions can make a huge difference to their income in retirement, and what they get back is dependent to a large degree on what they pay in.
· for employers, because without at least some engagement, employers fail to get a return on their investment in the scheme in terms off attraction and retention of workers.
In the past, this has been an area where unbundled solutions delivered more. Glossy annual statements knocked the spots of the dense text offered by insurers. But times have changed.
Aviva is able to develop communication campaigns that are tailored to the needs of the scheme, reflecting the benefits on offer. Innovative ideas like augmented reality can quite literally make communication come to life for members.
Costs can be included within the member charge or be met from an employer fee.
It’s not just about written communication of course. Most of us access information online. We get the information we need when we want it, we bank online and want pension information online too. Aviva has invested heavily in improving the digital experience for members. In addition to a website, there’s an app that gives members immediate access though their mobile phone. Personalised video statements sent by email can enhance annual benefit statements.
While the best third-party administrators may offer similar services, the scale of bundled providers like Aviva means we can keep investing each year.
The gap between unbundled and bundled member charges has been closing. Efficiency savings and a competitive market has driven down the charges for bundled pension schemes. The differential in charges is smaller than it’s ever been.
Member charges in an unbundled scheme will almost always be lower, but the benefit to members is regressive. Fees paid by the employer are usually on a per member basis, but the benefit is greatest for 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 should consider the lifetime charge on members pension pots when making a comparison of options too. 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% a year. As a member could be invested in a drawdown product for 25 years of more in retirement, high charges in drawdown can easily undo the hard work of trustees in minimising charges during accumulation.
In contrast, most Master Trusts offer drawdown within the scheme. In the case of Aviva Master Trust, drawdown charges are the same as in accumulation.
Charges can be very low, and indicative charges can be provided with minimal data about the scheme.
- Investment performance
This can have a huge impact on member outcomes and traditionally unbundled schemes have been able to access more sophisticated investment solutions. This has changed, with bundled providers operating open architecture platforms capable of accommodating increasingly sophisticated solutions.
Performance can’t be assured. There’s no guarantee that greater sophistication will result in greater long-term returns, but it may be worth investigating what a bundled solution can accommodate. It’s also worth looking at what the difference in member outcomes might be if alternative investment solutions were adopted.
Advisers can help with your decision
Whether you’re considering a move to a bundled platform or taking a bigger step to Master Trust (which can still deliver many of the same bespoke elements as an own trust scheme), independent advice from an experienced adviser is key.
And with more employers and trustees changing the structure of their scheme, the good news is that the number of advisers with experience of moving from an unbundled to a bundled solution is growing.
Dale Critchley, Policy Manager for Workplace Savings and Retirement, is an expert commentator with over 30 years’ experience in a variety of roles within the workplace benefits market. He is an Aviva spokesperson specialising in issues relating to workplace pensions and is regularly featured in the media.