Electricity scheme triumphant in Aegon charges challenge

The decision comes at a time when increasing regulatory scrutiny of pensions governance is making trustees think more carefully about how they assess value for members, and what they can do to improve value.

The Pensions Regulator last year found that just one in 10 small schemes and one in three medium schemes are meeting the watchdog’s expectations on assessing value for members. 

Not many trustees would test the market or push back on the provider, but with increasing governance requirements and scrutiny in this area more trustees are starting to do that

Maria Nazarova-Doyle, Mercer

This includes having good knowledge and understanding of the costs and charges paid by members. 

It also found that only 41 per cent of scheme trustees are researching and taking into account what members value. 

Trustees of the Electricity North West scheme, however, seem to be doing all they can to ensure members are getting a good deal. 

The DC section’s latest chair’s statement, signed off on July 15, shows that they carried out a review of the section’s fund charges with Aegon in December last year.

The trustee board compared against three other investment providers and subsequently asked Aegon to review its charges. 

“The challenge led to Aegon agreeing to reduce the charges for the Aegon BlackRock 40:60 Global Equity Index, Aegon BlackRock Market Advantage, Aegon BlackRock All Stocks UK Gilt Index, Aegon BlackRock All Stocks UK I/L Gilt Index and Aegon BlackRock Corp Bond All-Stocks Index,” the statement reveals. 

The reduction in these DC fund charges is expected to come into effect in autumn this year. 

Looking at the wider market

Lydia Fearn, head of DC and financial wellbeing at consultancy Redington, says schemes tend to review their provider at least every three years to make sure they are still suitable for the scheme. In addition, they might also carry out an annual light-touch review.

Charges are just one component of value for money, and Ms Fearn points out that “it’s the value that the member’s getting for the price they’re paying” that is important.

Trustees should therefore think about what members are paying, what they are getting from that in terms of value, “and how competitive that is in the open market”, she says. 

“You would expect that (and this doesn’t happen all the time) schemes do speak to the provider and ensure that the price is as good as it can be for the service they’re getting,” Ms Fearn adds.

Sometimes – if a negotiation is unsuccessful and other providers look more attractive –  trustees might decide to jump ship and make the switch. 

Earlier this year, the trustees of the Combined Nuclear Pension Plan announced that they had dropped Prudential as their DC provider, after member-borne charges for its default and other options were rated "poor" in an assessment of value for members.

“If we don’t feel we’re getting what we need from a provider, we will also look at the wider market,” Ms Fearn says. 

In terms of assessing value for members, there is no denying that the investment side is crucial. 

But Ms Fearn says she would also like to see more focus on member engagement and helping savers understand what they have got, how they can build on that, and then how they can access it. 

She says it is still very difficult for members to do that: “The more and more I look at providers, the more I see how slow it is for them to get on top of everything in terms of digital journeys,” Ms Fearn observes. 

“We’ve got to really think more cleverly about how we communicate with those members,” she says. 

While it is not necessarily cheap, and sometimes a lot of time and effort is required to work on branding, graphics and the look of communications, “if you actually then see members being able to do what they want to do really easily then that is value-add in my view”, Ms Fearn adds.  

More trustees push back on providers

Increasing regulatory scrutiny of scheme governance is doing the trick, says Maria Nazarova-Doyle, principal at Mercer, noting that it is becoming more common for trustees to challenge their providers and negotiate reduced charges.

It used to be that “not many trustees would test the market or push back on the provider” but “with increasing governance requirements and scrutiny in this area, more trustees are starting to do that”, she says.

In fact, now is quite a good time to do so, according to Ms Nazarova-Doyle – noting that the DC provider market is currently very competitive in terms of price.

“It’s a really good time for trustees to test the market – they don’t need to go to full tender, they can always just do a high-level cost quotation,” she says. 

If they find something better, they can move to a different provider. “But also it opens up that negotiation with your current provider when you realise that maybe they’re not as competitive to the market as they could be,” Ms Nazarova-Doyle adds. 

She notes that having carried out a review of other providers, trustees can use the findings as evidence to help negotiate with their current provider by showing what they could get elsewhere. 

Similarly, Rona Train, senior investment consultant at Hymans Robertson, says: “We generally find the best way to negotiate with providers is for trustees to carry out a review against similar providers and assess what fees (and support) would be available elsewhere." 

She adds: “This will not necessarily lead to a change in provider but can often lead to the existing provider ‘sharpening their pencil’ on fees or offering further services.”

At-retirement changes

Negotiating lower charges is not the only change the trustees have been working on over the past scheme year.

They have also reviewed their at-retirement policy for members. Prior to this review, DC members wanting to take an uncrystallised funds pension lump sum at retirement would have to transfer their pension pot out of the scheme. 

But “following the review, the trustees changed the policy to allow DC members to take an UFPLS directly from the pension scheme at retirement, with effect from April 2019,” the chair’s statement notes.

A member can choose either flexi-access drawdown or UFPLS to take their pension pot a bit at a time.

The UFPLS method means the member can take his or her tax-free cash gradually. Every time money is taken from a pension pot, 25 per cent of it is not taxed. The member must pay tax on the other 75 per cent of each lump sum. 

Some schemes might not be able to let a member to take an UFPLS directly from the scheme due to the administrative burden. 

Sometimes, in the trustees’ view, “it’s more work, it’s more [costly], it’s more governance oversight”, Ms Nazarova-Doyle says.

Ms Train agrees that some schemes still do not offer the option to take an UFPLS directly from the scheme due to the administration complexity and the operating cost. 

“Depending on the size of the scheme, allowing member choice on retirement flexibility creates administration-management difficulty,” she says.

Ms Train notes that “there is also a fine balance on choice and guidance/advice needed for members to select retirement flexibility that adds to complexity and risk for a scheme to enable this”. 

She adds that in some cases the majority of members in a scheme may not have built up enough funds to be able to consider this option, rather than cash. 

“This will change as admin systems, guidance and advice, and pot size at retirement increase,” Ms Train says.