Firms that could save between one-third and a half of their pension scheme costs under new arrangements are not acting to do so.
And their employees face the prospect of lower retirement income as a result.
Master trusts, where the pension schemes of a number of different employers are managed by the one group, are now available in Ireland as retirement scheme trustees wrestle with new rules that will significantly increase the cost and complexity of managing company pension schemes.
These rules — contained in an EU directive, IORP II, which is designed to improve the pensions outcome for workers — impose significantly more stringent standards on governance and risk management, which will cost 75,0000 mostly small pension schemes in Ireland substantially more to comply with.
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Those costs are generally borne by employers and while it is technically possible to have the pension scheme deal with them, PwC pensions partner Munro O’Dwyer says this would be difficult to organise.
PwC says the economies of scale in these larger funds will save employers some money, while they will also benefit financially from a reduction in costs associated with supervising such schemes in-house.
And employees will also benefit from lower management charges which means their retirement funds have the chance to grow more.
[ High price being paid for pension inertiaOpens in new window ]
[ Employers wary of new pension rulesOpens in new window ]
“It is difficult to see why companies would willingly take on an additional financial burden that will come with the new rules when they can in fact save money on the current cost of managing schemes,” says PwC pension partner Munro O’Dwyer. “In our experience, the savings could be as high as somewhere between one-third and one-half.”
On the employee side, he reckons the burden in management charges could be cut by a third.
“If you have employers paying €120,000 to manage their company pension scheme now, they could be saving around €60,000,” he says.
Part of this saving will come from competition in the market as the new master trust providers jostle for business.
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Ten master trust providers have been approved by the regulator. These include benefits consultants like Mercer, Aon and Willis Towers Watson as well as smaller consultants Investco and APT, both of which are owned by Irish Life. Then there are insurance companies like Irish Life, Aviva, Zurich and New Ireland providing trusts, as is the construction Industry Federation.
However, a survey conducted by PwC recently found that more than half of the employers surveyed had yet to decide on a move to a master trust and in excess of four in 10 were sceptical that it would save money.
Mr O’Dwyer attributes much of the inaction to inertia, saying that the level of public information on the changes is pretty low and that pensions themselves are generally a mid-agenda issue in terms of priority, meaning decisions are often long-fingered.
“It is very hard for any employer to defend not going down the master trust route, ” says Mr O’Dwyer. However, he thinks many companies will find themselves battling the full implications of the new rules news year before realising that it makes no sense to keep the burden in-house.
About 66,000 Irish occupational pension schemes have just one member, with another 8,000 having an average of just 20 members.
Pension regulator Brendan Kennedy has warned: “Proper supervision and value for money will not be achieved unless there is a much smaller number of larger, more efficient schemes.”
He added that consolidating pension schemes is a top priority for the regulator, the Pensions Authority, and master trusts are seen as an important way to do this.
