/ SCHEME SIZE /
The choice and structure of a scheme ’ s default fund – used by members who have not made an active fund choice for their savings – is driven in part by the charge cap , the maximum annual management charge that can be applied to a default fund . Set at 0.75 per cent per member , or a combination of a flat-rate fee plus a percentage of funds under management , the cap is the same regardless of the number of members or assets under management in a scheme . It must include all admin and fund management costs . The balance between those two elements affects the investment strategies used by any scheme – heavy admin charges leave little room for manoeuvre when it comes to fund charges .
“ There are no constraints for small schemes in determining investment strategy ,” says Richard Butcher , director at independent trustee firm PTL . “ But if a scheme is negotiating terms on a billion rather than a million pounds , you ’ ve got more
DOES SIZE MATTER FOR YOUR WORKPLACE SCHEME and what should you do about it ?
• Your employer selects the workplace pension scheme your company will use so , even if you feel it ’ s not optimal , you won ’ t be able to choose to use a different scheme
• While you could simply exit your workplace pension and take matters into your own hands , you would potentially risk losing out both on contributions made by your employer and on other tax efficiencies such as salary sacrifice
• Ask tough questions about how your workplace scheme handles the retirement flexibilities available to over-55s . A well-designed default fund ( for any scheme size ) should pave the way to letting you choose between cash withdrawals , flexible drawdown , annuity purchase , or a mix of all three . The default strategy should support that through continuing to offer some investment growth even as you reach retirement
• One benefit of a smaller company pension scheme is that you could have some direct input into how it is run , by becoming a trustee or sitting on a governance committee
• Your pension statement will show the charges being applied by your scheme , which , if you are in the default fund , must be within the 0.75 per cent charges cap . It will also tell you who runs your scheme – even if it is branded with your employer ’ s name , it may still be run by a third party . If it is a group personal pension or master trust , it is being run by a big provider . Even if it ’ s a scheme run by your company just for a small number of employees , that doesn ’ t mean you should be concerned – many small schemes are exceptionally well-run
“ There are no constraints for small schemes . But if a scheme is negotiating terms on a billion rather than a million pounds , you ’ ve got more bargaining power ” bargaining power . The challenges of staying in the charge cap are the same for all schemes . But larger ones tend to have modern default strategies . Many smaller schemes ’ defaults are anchored around annuity purchase and haven ’ t reacted to choice and freedom .”
With auto-enrolment forcing businesses to provide workplace pensions , the lure of large-scale low-maintenance options such as master trusts will prove irresistible to many , due to the cost and time involved in running small in-house schemes . Size doesn ’ t guarantee quality , but it can lead to better governed , cost-efficient and flexible pensions . But whatever the design , if you ’ re not paying enough in , you won ’ t build up the funds you need for retirement .•
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