Defined contribution - how do they operate, really ?

[zag]

Can someone clarify the story in regard to the way that pensions (defined contribution in my case) work please ?

I feel a bit of aggro coming on in work in relation to the company pension scheme and need to get my head straight in advance of wading in.

I base my understanding of the operation on a number of assumptions - not all of which may be correct, so I am setting them out (starting at first principles) here.

*I work for a company
*That company provides/facilitates a defined contribution pension scheme for it's employees. For the first 5% contributed by an employee the employer will match the contribution.
*The scheme is created/established with trustees being appointed to 'manage it' or be the interface between employees/pensioners
*The trustees go off and appoint a broker to provide advice and a set of proposals from the market that is made up of pension providers
*The trustees ultimately decide which pension provider (called Hibernation for example) to go with, based on their own knowledge but weighed significantly by the advise and glossy brochures provided by the broker
*The pension provider has a range of their own funds (Hibernation cash fund, Hibernation equity fund, Hibernation middle-of-the-road fund) and also resells a range of other funds from other providers (Edinburgh cash fund, Edinburgh equity fund, etc . . .)
*Employees are given a choice of funds to invest in - but these funds must be pre-selected by the trustees, so not all funds sold/provided by Hibernation may be part of an employees scheme.

At the moment it looks like the following direct communications are frowned upon :
1) employee to broker
2) employee to pension provider
3) trustee to pension provider

The only authorised communications are from employee to trustee to broker to provider.

I presume (and am awaiting clarification from the trustees via the broker, etc . . .) that there is commission being charged in many places
1) when the employer pays over money to the broker monthly there is a management fee
2) when the broker hands over money to the provider there is a transaction fee and possibly a management fee
3) when the provider hands over money to buy funds from Edinburgh (i.e. not from within their own funds) there is a transaction fee

I would appreciate if anyone could highlight any errors or misunderstandings I have made in the above. I appreciate that I am asking about a specific instance (which nobody out there knows the details of), but I am wondering if the items above also apply to the generality of defined contribution schemes.

Cheers,

z

 

[rainyday]

Hi Zag - Your basic understanding matches mine, with a few clarifications.

In my case, the company HR dept also plays a role in administering the scheme on behalf of the trustees. So they handle basic queries, arrange deductions etc. It is also worth noting that 25% of members can force an election for member trustees if they wish.

In our case, what you refer to as 'the broker' is actually the pensions benefits consultancy, who act as independent advisors. There is a direct communications channel between the advisors and the members insofar as the trustees arrange annual information sessions, with presentations from the independent advisors (though the content is generally fairly superficial, there is time for Q&A afterwards). The investment fund managers also present their offerings in a 'beauty parade'.

In relation to fees & charges, each of the fund managers provide details of their fees (bid/offer spread & annual management fee) up-front, so the member can use this information in deciding choice of funds. The annual management fee is built into the fund unit price, just like any unit-linked fund.

I understand that other fees & charges (i.e. the fees charged by the independent advisors) are paid by the company and do not hit the members funds.

Hope this helps.

 

[agencycontractor]

I was a member in a defined contribution scheme setup in 1998.
The things I learnt about the scheme I was in are :

The charges were quite large.
eg out of all the income put into my fund over a 5 year period, the pension provider kept 20% for himself while the pension broker kept 14 % for himself.

In the booklets /brochures etc on the pension scheme it never mentioned what the broker charges were.It only mentioned the pension provider charges. I had to ask explicitly to the broker what he charged.

The trustee is supposed to act in the best interests of the members. ie he is supposed to get you the best deal as regards charges and the supposedly best investment fund etc. He is supposed to provide you with annual statements that come come from the broker.
In the five yrs I was paying into this defined contribution scheme for some reason the trustee never gave me any annual statements . When I left the company I was in I stopped paying into the scheme. The trustee was supposed to supply me with info on what pension options I had but for some reason never did.
So my advice is , is to make sure you have a good capable trustee who knows what they're getting into and operates in the best interests of the members.

 

[Savy]

From personal experience I would not be surprised if this was a trustee whose first letter starts with M !