George Coats analyses what UK schemes can learn from how Norway achieved lower investment fees and higher levels of participation.
Statements from the Federation of Small Businesses (FSB) highlight “fears” that administrative costs would be “extortionate” and a “pensions ticking time bomb will cost small firms £2,550”.
But five years ago Norway implemented a series of reforms which led to a third of the total workforce gaining their first occupational pension and drove down costs.
If the UK is to emulate Norway’s success, schemes need to improve the efficiency of their payroll systems and promote competition on price among defined contribution (DC) fund managers.
They should follow the Norwegian schemes' example of using the reform as a basis for negotiating down existing fees, and so protect more of the retirement income of their members.
The OTP
In mid-2006 Norway implemented legislation requiring private sector employers to provide all their workers with a minimum mandatory occupational pension, called the OTP.
At the time, high costs associated with DC schemes were a barrier to the spread of pension schemes among small companies.
And while the law made provision mandatory and set the minimum contribution level to be paid by employers at 2% of a gross wage for those that opted for a DC plan, it did not set a ceiling on fees.
The Confederation of Norwegian Business & Industry (NHO) responded by forming a procurement association.
“We didn’t believe there was enough competition among pension providers,” said Alexander Henriksen, adviser for pensions and insurance at the NHO. “Under the previous DC cost structure an employer with 10 full-time employees would have to pay contributions of NOK40,000 (£4,560) in the first year.
In 2004 administration and asset management fees would have added an additional NOK18,578 (£2,070), or around 46% of the contribution, he said, with the employee paying the asset management fee.
He added: “After the introduction of the procurement association the fees for the same plan with the same total yearly contribution would be NOK943 (£105), or 2.3% of the contribution."
Race to the bottom
The competition among pension providers, in Norway primarily life insurers, to gain a share of the new market was aggressive.
Jørund Vandvik, head of Nordea Life & Pensions, said the "intense" price pressure on the market led to "ridiculously-low" prices.
He said: “This led to changes in our operation model. Most of our clients communicate with us electronically on a monthly basis via their payroll systems.
"So we have more or less now the same number of back-office staff as before but some six times more clients.”
Anders Skjevestad, deputy-CEO of Vital, saw the same evolution. “Many of these new companies, like big grocery chains or big taxi companies, had a lot of part-time employees.
“So the amount of work to establish and manage these agreements was much bigger than we had expected. It’s no secret that all the life companies struggled in 2006 and 2007 because we didn’t have all our planned systems in place.
“But we invested heavily in employer portals so they send over the files themselves. It’s a self-service approach.”
Another result was that existing DC clients demanded that their costs be reduced to the OTP level.
“It started with the OTP and then spread to the rest of the market,” said Vandvik. “Maybe the players that went for this market share did not expect that to happen but obviously two-level pricing could not go on for long.”
