When it comes to expenses, trustees face having their belts tightened

In an environment where efficiency and enhanced transparency will be watchwords for 2015, industry figures might need to tighten their belts and resist a few paid-for lunches, according to governance experts.

Amid prolonged low yields and poor economic growth keeping scheme funding tight, charges for expenses by trustees and managers may be pored over by management and employer teams.

Scrutiny on running costs for defined contribution schemes could be encouraged next year by the imposition of the charges cap for auto-enrolment schemes, which aims to reduce the ultimate costs for members.

Adrian Boulding, pensions strategy director at insurance company Legal & General, said: “Wherever you are on the food chain, you’ve got to keep an eye on costs.”

Wherever you are on the food chain, you’ve got to keep an eye on costs

Adrian Boulding, L&G

Characterising the pensions industry’s status quo on expenses, Boulding said he thought trustees generally abide by the acid test, “spend as if it was your own money”.

If such a code went industry-wide, the cynic might say schemes could hit full funding by the end of the month. 

But Boulding saw challenges for schemes in the ongoing control of outsourced managers’ expense claims, even if they follow an initially securely written contract.

In-house managers, paid for under employer charges, naturally become part of an employer’s (ideally) tightly run ship, while scrutiny of outsourced managers must be ongoing, and requires retendering and retesting to ensure value for members.

Setting budgets

Marian Elliott, head of trustee advisory at Spence & Partners, advised trustees to set a budget for running costs at the beginning of each scheme year, accounting for anticipated activity during the next 12 months.

This budget should make the allowance for fees and disbursements explicit, alongside fees relating to external advisers, she said.

“What is deemed to be in or out will depend on what has been agreed with the employer, and the nature of the trustee appointment,” said Elliott.  

“The main thing is clarity and trustees should set and monitor budgets for their own costs, in the same way as they would for external advisers or scheme managers,” she added.

Ian McQuade, client director at governance specialists Muse Advisory, said he thought both schemes and employers had reached a very firm position on expenses.

“Many organisations now limit any claims of travel to standard class on trains or planes, and ensure suppliers are only repaid based on their own staff expenses policy,” he added.

This type of policy, along with the introduction of upper limits on accommodation costs, allows scheme to establish an explicit position on expenses and eliminate persistent grey areas.

McQuade also raised a key point that extends beyond expenses into the realm of management fees. 

“[It’s] in everyone’s interest to keep those expenses under control. Probably in the past five years things have tightened up around expenses,” he said.