Workers saving with large pension schemes will earn 26 per cent more upon retirement than those saving with smaller ones, a new study has shown citing higher costs and narrower asset classes.
The findings, contained in the 2019 edition of Pension Performance Watch released by Zamara Pension Scheme, show that the average expenses smaller pensions incur are more than double those by larger ones.
The report defines large pension schemes as those with assets above Sh1 billion. Those with assets below Sh250 million are classified as small while medium ones have assets between Sh250 million and Sh1 billion.
Zamara Chief Executive Sundeep Raichura said while a small scheme spends about 2.26 per cent of its assets on expenses, a larger scheme uses about 0.92 per cent while the industry spends an average of 1.21 per cent, eating into net returns of savers in smaller schemes.
“These expenses have a significant impact on members over longer periods in the way of reducing returns. A member in a larger scheme would accumulate a balance at retirement which is 26 per cent higher than the member in the small scheme,” said Mr Raichura.
The calculation is based on the assumption that workers join the schemes at 25 years and continue making equal contributions until retirement at 60 years.
Zamara cites costs such as trustee expenses, retirement benefits authority levy, investment management fees, custodial fees, audit fees and administrative fees as key costs impacting on the efficiency of schemes.
Large schemes are also able to diversify into new asset classes beyond equities and fixed income to earn higher returns.
Lead investment consultant at Zamara Neha Datta said small pension schemes would earn economies of scale by joining hands at the time of investing.
“Small schemes are inefficient to run as segregated schemes and should instead consider alternative structures such as joining an umbrella scheme,” said Ms Datta.
This will allow them to diversify investment into classes such as property and private equity, gain access to professional trustee services and experience less legal headwinds.
The report on expenses is based on the analysis of 100 pension schemes with net assets of Sh241 billion covering over 146,000 members.