DB inefficiencies push scheme overspending to £300m a year

Defined benefit (DB) pension schemes are collectively spending up to £300m more than they need to each year due to inefficiencies and lack of automation, research from Spence Partners has revealed.

For the research, Spence assessed the running costs of DB schemes with between 100 and 9,999 members, examining the administration, actuarial and investment costs.

Whilst these are the main areas that savings from improving operational efficiency would come from, the research found that current typical operating model is complex and not well-automated.

In particular, the research showed that inefficiencies often occur in DB schemes where scheme advisers interact and share data between each other, revealing that typical DB scheme systems are "fragmented" with data moving between as many as five different systems on average.

It also argued that the lack of automation in the process leads to an overuse of spreadsheets, data manipulation off-system, and basic tasks performed by overqualified resources.

As a result of these inefficiencies, Spence found that the average 1,000 life DB scheme overspends £105,000 each year.

Extrapolating this across the 3,000 DB schemes with between 100 and 10,000 lives, Spence estimated that removing these inefficiencies could save up to £300m a year across UK DB schemes.

Beyond cost savings, Spence argued that modernising DB operating models also holds broader benefits for scheme trustees and employers, including reaching insurance buyout or superfund consolidation quicker for schemes aiming at a settlement endgame, and generating more surplus for those schemes planning to run-on.

It also suggested that modernising operations would cut back on operational risk by improving data integrity and cyber risk by holding information in a single, secure system, as well as improve the service that scheme members receive by freeing up administrators’ time to focus on the customer experience.

Spence & Partners head of corporate advisory practice, Alistair Russell-Smith, said: "The pensions advisory and administration market is fragmented, with a wide variety of systems being deployed to manage schemes.

"Many schemes are serviced by older software, augmented by a range of sticking plaster solutions to get them to provide a basic service for pension members and fulfil their regulatory requirements.

“This creates inefficiency within the market. Every pound companies spend on running their pension schemes is a pound not spent on member benefits or other company priorities.

"This is a challenge for policymakers as well as individual schemes. Using modern processes and systems is necessary for plugging DB schemes into the pensions dashboard in a timely and cost-effective way.

“The good news is there are already a range of newer, more efficient operational models available in the market for schemes looking to reduce running costs.

"Options to cut costs include using bundled services, switching to a sole professional trustee, moving to multi-trust solutions, or joining a DB master trust.

“Most of these have had significant investment, use technology effectively, and in some cases rely on just one system to manage all data flows. Our calculations show these solutions just need to be adopted by more schemes to access the £300m a year of savings.”

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