Trustees must delve deeper to provide value for members

This is cause for celebration, but such positive outcomes are highly dependent on several factors, notably making sure members are in receipt of good value from their schemes.

Regulators and government are acutely aware of the importance of ensuring members get what they pay for. Since Labour leader Ed Miliband raged about ‘rip-off pension charges’ back in 2012, there have been several investigations into fees. The most significant of these resulted in the charge cap for defined contribution default funds of 0.75 per cent.

TPR is right not to define value for money; the trustee should do so knowing their membership and how they will engage with the scheme

Chris Roberts, Dalriada Trustees

In addition, the Department for Work and Pensions says trustees will have to publish costs and charges for DC members from November this year or face a £50,000 fine.

Clearly transparency is important, but relatively few in the industry believe value for money is a pure numbers story.

Horses for courses

The Pensions Regulator is unequivocal about trustees’ responsibility to assess value for money. However, the watchdog gives no single definition of what constitutes value for money nor how to assess it.

The reasons for this are clear: no two schemes are the same, so what constitutes good value for one could represent poor value to another, and the parameters will shift over time.

Chris Roberts, trustee representative at Dalriada Trustees, says: “Value for money will depend heavily on the demographics of the pension scheme. TPR is right not to define value for money; the trustee should do so knowing their membership and how they will engage with the scheme.”

What matters then is the trustees’ ability to understand their members and what good value means to them.

Matthew Doyle, managing director of Pension Quality Mark at the Pensions and Lifetime Savings Association, says: “Trustees need the information, tools and experience to make a judgment on value for money. If the skill to judge value for money is not on the trustee board, then it must be brought in.”

Where to look for VfM

While value for money varies across schemes there are key areas to review. Since April 2015, independent governance committees, under the auspices of the Financial Conduct Authority, must ensure members of contract-based schemes receive good value for money.

Ten IGCs together surveyed more than 15,000 DC members to understand what value for money means. With so many individuals, no one definition can apply, but the IGCs found four common areas.

The Aegon IGC report from 2017 lists: a fair charge for services received; valuable investment solutions; quality benefits and services; and effective communication and engagement with customers.

Kate Smith, head of pensions at Aegon, concedes the headings are broad, but argues they provide an important guide and act as a reminder that DC schemes need to look beyond charges to find true value.

Smith says: “None of this is rocket science, but it is about getting the message across: value isn’t just about charges, it’s about what is going on under the surface.”

The right tools

Even where schemes have established what good value for members means, challenges remain in getting the requisite information for analysis.

Lydia Fearn, head of DC at consultancy Redington, says: “Getting valuable information to the trustees so they can assess value for money is not as easy as it could be. [The pensions industry] is slow to use the technology that already exists.”

For example, Fearn says trustees could use online tools to make the member experience more efficient and save costs.

Yet PQM’s Doyle is concerned there could be too much focus on technology, reiterating the importance of understanding the membership needs rather than what the trustees are told their scheme needs.

“If I am a trustee of a scheme where most members are over 52 years old, blue-collar workers with no access to internet, then spending money to push them online is wrong,” Doyle says. “We need to look at what members use most in their scheme and get those right.”

There is widespread consensus that more should be done to allow trustees to better compare costs with their peers.

TPR guidance states: “You need to try to understand how your costs and what is provided for those costs compare with other options available in the market.”

Doyle says a lack of data in the UK against which trustees can benchmark their schemes makes comparisons difficult.

This may be a real hindrance in the quest for value for money if, as Dalriada’s Roberts says, trustees are already reluctant to fire underperforming managers.

Roberts says: “Trustees can be reticent to switch provider [or] manager due to costs or process issues. General apathy can be extremely damaging to members, as underperforming managers will impact the returns and poor providers will damage member engagement.”

More work needs to be done to better enable trustees to compare costs, but there have been recent innovations.

PTL, a professional trustee firm, launched Clear Funds to help asset managers inform DC schemes of the value of investment transaction costs. Meanwhile KAS Bank created a ‘cost transparency dashboard’ for trustees, which provides investment and scheme management cost analysis.

However, such tools inevitably focus on quantitative rather than qualitative areas. If today’s millennials are to be tomorrow’s millionaire retirees, then trustees must be equipped with the skills to assess real value for members right across the board.