Whether running-on for surplus or targeting a full scheme buy-out, sponsors should have a laser sharp focus on managing the costs associated with their defined benefit pension schemes as costs continue to escalate. The pensions consulting market has grown significantly in recent years (circa 13% p.a. for each of the last three years), driven by inflationary pressures, special projects like GMP equalization and buy-outs, and legislative changes.
As a result, the pensions consulting market is now estimated to generate revenues of approximately £3 billion per year, and sponsors are inevitably shouldering the burden.
Consideration of pension scheme expenses should also include their accounting treatment as, despite efforts to standardize treatment under IAS and UK GAAP, our experience suggests the true cost is often obscured by a patchwork of different approaches. As a result, the administration costs and consulting fees associated with running a defined benefit pension scheme have successfully evaded proper scrutiny.
Accounting Rules: IAS vs UK GAAP
Under both IAS 19 (Employee Benefits) and FRS 102 (UK GAAP), the intention is that administration and non-investment management costs are charged to the sponsor’s P&L account.
Typically, but not always, this results in the following expenses being included in the P&L, under IAS 19 and FRS 102, as a separate item for pension scheme administration costs:
How Much Are These Fees?
For individual schemes, these expenses are around 0.25% of assets annually on average. However, costs vary dramatically by scheme size as large schemes benefit from economies of scale and small schemes face disproportionately high per-member costs due to fixed overheads.
Given the growth in fees in recent years it is perhaps unsurprising that there have not been any industry wide surveys on pension scheme costs recently. However, we broadly estimate that schemes with circa 50 members incur administration costs (including consulting fees and non-investment management costs) of approximately £2,000 per member, per annum. This compares to the very largest of schemes, such as the USS with over 500,000 members, which incurs costs of £76 per member, per annum, according to its latest published Value for Money assessment.
However, this disparity has long been recognised by the pensions industry with the Pensions Regulator raising questions about the sustainability of smaller DB arrangements.
What’s Not Included?
Investment management fees are required to be netted off the return on scheme assets, bypassing the P&L entirely. Whilst this treatment is sensible from an accounting perspective it hides real costs.
Further, from June 2025, sponsors have been able to treat VAT on investment management services as corporate input tax, reclaimable under the standard VAT rules. This tax treatment contrasts with their exclusion from financial reporting, creating a disconnect between accounting and fiscal perspectives.
Inconsistent Practice: A Fog of Interpretation
Our experience is that real-world accounting treatment of scheme expenses varies widely, with approaches further muddled depending on whether scheme expenses are met directly by the sponsor or by the scheme. Some schemes clearly identify scheme administration and non-investment management costs and pass these through the P&L, whilst others include them within net asset returns or as capitalized costs. This inconsistency means it is difficult to assess, compare and manage the true cost of these arrangements, with schemes potentially appearing more efficient than they actually are, as the true administration and consulting fees become hidden within the various disclosures.
Conclusion
Defined benefit pension schemes are expensive to run and are only getting more costly, despite being largely legacy arrangements with significantly improved funding positions. Accounting standards aim to clarify costs but inconsistent application and exclusion of key expenses mean the picture remains unclear. With the rapid rise of consultancy fees and VAT rules evolving, sponsors should be carrying out an honest review of what their scheme truly costs and ensure this is accurately reflected in their accounting disclosures.
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We hope you've found this article of interest.
If you'd like to discuss it, or any other matters where we may be able to assist you, please contact Chris Parlour on Chris.Parlour@puntersouthall.com