2009-04-08

By Editor, CIR

Companies that operate defined contribution (DC) pension schemes face mounting costs from members who are no longer employees, warns Towers Perrin.

The professional services firm says companies are paying administration costs for all DC members, including the growing numbers who have left the company. These are estimated at around £95 per person per annum.

It gives as an example a large employer with 10,000 DC members (4,000 current employees, and 6,000 former ones) which would be paying around £1m a year on DC costs, of which £0.6m would be for ex-employees.

Auto-enrolment into pension schemes from 2012 will exacerbate the problem says Towers Perrin, because it will lead to more DC members and may well draw in employees who are likely to have short careers.

It suggests that "the DC legacy challenge" can be tackled either by reclaiming administration costs from these scheme members or, alternatively, by setting up the plan so that when an employee leaves the company, their pension money ceases to be the responsibility of the employer or trustees.

"Employers need to wake up to the DC legacy issue, and quickly," says David Bird, a principal at Towers Perrin.

"If companies focus entirely on the Defined Benefits challenge, they risk incurring significant costs from this "hidden DC legacy" and in such a tough financial climate few can afford to ignore the potential cost savings."

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