Smaller defined benefit (DB) pension schemes are facing higher running costs than their larger counterparts because they are struggling to find economies of scale against a backdrop of escalating fund management and custody fees, according to research.
The Pensions and Lifetime Savings Association’s (PLSA) annual survey found the average costs for operating DB schemes with fewer than 5,000 members was £787 per member, which is 63% higher than those with more than 5,000 members whose average cost was £438 per member.
The PLSA said smaller schemes were struggling to find cost efficiencies, particularly after increases in fund management and custody costs, which the survey found had gone up 32% since 2015.
The research, which polled 218 PLSA members representing 10.3 million members and £790bn of assets, found the mean running cost per member reported by UK pension schemes increased by 37% in one year to £546 in 2016, up from £400 in 2015.
The PLSA’s survey also found the number of DB schemes still open to new members dropped to 10% in 2016, compared to 21% in 2015. That figure is only 4% in the private sector.
According to the PLSA, rising costs, as well as economic volatility and low interest rates, are proving key factors in the decision to close to new members.
PLSA chief executive Joanne Segars (pictured) said: “Our analysis highlights a continuing problem for DB schemes. Higher operating costs, especially for smaller schemes, combined with widening deficit levels mean DB schemes are under pressure as never before. We can’t ignore the resulting risk to members’ benefits for all but the most strongly funded schemes and for these members the risk is they will lose 15-20% of their benefits.
“Our DB Taskforce is currently collaborating across the pensions sector to develop recommendations on how we can change the industry to improve outcomes for members and schemes. Our Annual Survey clearly shows that the running costs of a DB scheme is considerable for all schemes – and even greater for smaller schemes.”
The findings come after the publication of the Financial Conduct Authority’s (FCA) interim findings of its market study into asset management last month, which highlighted weak price competition in the industry and that the price of passive funds had fallen while active prices remained stable. It also noted a trend for sustained high profits for asset managers over a number of years – an average of 36% versus 16% for FTSE All Share companies.
