New reforms to protect the private retirement savings of workers could see some people facing higher fees under a dual-pricing structure that will reduce the value of their pension pots, a pension adviser has warned.
The Independent Trustee Company says workers who have preserved pension savings at companies they used to work for will be vulnerable under the new rules, introduced under an EU directive. It estimates that thousands of people will be affected by “inequitable dual-pricing”.
The issue arises as many companies operating smaller pension schemes transfer them into “master trusts” from this year to comply with IORP II legislation, which has been transposed into Ireland law. Master trusts are group pension schemes handling the retirement savings arrangements for multiple employers.
The directive aims to improve the governance, risk management and transparency of pension schemes. As larger schemes, master trusts offer employers economies of scale on costs and remove a significant governance responsibility from the individual employer.
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The Independent Trustee Company (ITC) says that, under IORP II, more than 9,000 employer-sponsored pension schemes will be legally required either to substantially bolster their governance at additional cost to themselves or migrate the scheme to master trusts before the end of this year.
It is expected that most will opt for the latter.
However, ITC warns that under master trusts, “deferred members” — people who paid into a company pensions scheme when they worked there but who have since moved jobs — may be subject to differential or dual pricing, where they are charged investment or administration fees at a higher rate than current employees.
“Unlike stand-alone pension schemes, master trusts are proposing to use differential pricing for current employees and ex-employees,” says Glenn Gaughran, head of business development at ITC. “This means that thousands of workers throughout the country who have left employers in the last 30 years — leaving their pension benefits under the care of their former employer — could now be subject to higher charges than the employees currently working in these companies.
“This situation is wholly inequitable and, at a time when dual pricing is being regulated against in the insurance sector, there’s definitely a case to be made for the practice to be challenged when it comes to pensions.”
He said that former employees will generally be informed what decisions have been made on the transfer of their pension benefits to a master trust but they will not be given any choice in terms of structure, fees, investment direction or support services.
ITC says that while there are not very many options open to these former employees to avoid being hit with such higher charges, some could opt to move their pension pot into an individual structure called a buyout bond — giving them greater control and, ITC says, potentially reducing their costs.
