The Pensions Regulator has just published a remarkable survey. As it says:

In August 2013, The Pensions Regulator (the regulator) commissioned quantitative research into the running costs of defined benefit (DB) pension schemes. The specific objectives of the research were:

• To understand the costs of administering a DB scheme;
• To contextualise and understand scheme costs against services received;
• To compare and contrast scheme costs by size, specifically at what size do scale efficiencies become apparent.

What they found instead was that costs for what they termed small schemes (those with 12 to 99 members, schemes with fewer than 12 members were excluded from the survey) were so variable that, even ignoring the top and bottom 5% of schemes, they ranged from £264 per member per year to £2,744 per member per year (over 10 times as much). This is far larger than any variation by size of scheme: the average for a small scheme is £1,054 per member per year, whereas the average for a very large scheme (more than 5,000 members) is £182 per member.

So the conclusions are clear: the costs of running a DB scheme are not primarily dependent on how big your scheme is, but how well you administer your scheme, how well you manage your advisors and service providers and how disciplined you are in setting an investment strategy and managing its implementation. For a small scheme, the irrelevance of size to costs is further illustrated by the following scatter graph helpfully supplied in the report, showing no correlation between total running costs per member and scheme size for schemes with 12 to 99 members:

This is not necessarily a call for more independent trustees. The proportion of small schemes which used independent trustees (22%) was not so much less than the proportion of large schemes (1,000 to 4,999 members) which used them (35%) and yet the variation in costs for large schemes (£80 to £689 per member per year) was not nearly as great. But it is a call for a much greater weighing of costs and benefits in the services trustees procure for small schemes.

So there is considerable work to do for small DB schemes, particularly with the additional costs likely to result from the Regulator’s recent proposals, which were consulted upon earlier this year. Another point that comes out of the survey is that the vast majority of schemes, of all sizes, regards the year in question where these costs were measured (2012) as having higher costs than an “average” year. Perhaps this is true, or perhaps there is some denial going on here about what the new normal looks like.

If you want to see how your scheme compares to others of its size, the Regulator has provided a handy checklist to capture the information. This would seem to be an exercise which many small schemes, if they are not already aware of this as an issue, would be well advised to carry out as a matter of urgency.

Sponsors are not currently getting good value from some of these schemes, particularly small schemes, which account for 1,689 (or 36%) of the 4,696 DB scheme universe (excluding hybrid and public sector schemes). The cost of defined benefit has been defined. And it needs to come down.