MHM COMMENT: VALUE FOR MONEY IN DC PENSION SCHEMES
Value for money or “VFM” (sometimes meaning value for members) has been in sharp focus for the Pensions Regulator (TPR) and those responsible for the management of defined contribution (DC) pension schemes during the last few years.
With increased scrutiny comes increased regulation and reporting requirements, inevitably leading to increased costs. In our opinion, this could lead trustees and sponsoring employers of smaller schemes – meaning assets of less than £100 million as far as government is concerned – to conclude that running their own DC scheme is no longer worth the trouble.
Ironically, this could have the opposite effect to what government and TPR would like to see, with well-run schemes, supported by paternalistic employers, being closed in favour of large, less personal schemes.
Requirement to assess VFM
The regulator recently revealed that only 24% of DC schemes met its key governance requirement to assess the extent to which member-borne charges and transaction costs provide good value, with larger schemes, such as master trusts, more likely to meet it.
Interestingly, TPR added that as larger schemes were more likely to assess VFM, only 11% of the total population of DC members were thought to be in schemes that failed to meet TPR’s expectations. Lots of schemes failing, but each with relatively few members.
TPR was rightly concerned that, of 208 schemes with under £100 million of assets, who were asked about their awareness of the assessment requirement, a massive 64% reported they were unaware of it. Presumably, appropriate action will now be taken to improve both awareness and compliance.
Strong message
At the time the survey results were unveiled by TPR, we at MHM observed via our LinkedIn page that TPR was issuing a strong message to pension trustees which basically said: “do it properly or wind it up”.
We believe many modern DC pensions represent very good value but there are lots of very small or micro schemes, often linked to legacy pension providers (e.g. Phoenix, ReAssure, Utmost etc.) that are now wrapped up in closed contracts, collectively worth many millions of pounds of people’s money where service standards are poor and where investment strategies may be outdated and no longer appropriate to the members.
In our opinion, these micro schemes with legacy pension providers should be the main focus of the regulator’s attention.
Many such schemes may have become “paid up” some years ago but they remain the responsibility of the associated employers and trustees, even if no further contributions are being paid. It may take time, but TPR does now appear to be taking a tougher stance on non-compliance, with fines and improvement notices becoming more common.
Good value does not just mean cheap
Guidance on VFM clearly states that it is not all about the price that member’s pay for participation, with added value being demonstrated through investment performance (net of charges), good governance and additional support through communication strategies and online tools to educate members.
Indeed, it was interesting to see that one of the UK’s largest authorised master trusts, The People’s Pension, recently announced a modest increase in its annual charges to no real objection from members and other stakeholders.
The press release explained that the increased charge was to ensure that the scheme continued to meet rising regulatory fees and inflation costs that all master trusts must pay “but most importantly to continue to provide good value and a high level of service to customers”.
We have no problem with that when our experience is that The People’s Pension delivers on these laudable commitments. Sadly, the same cannot be said for many other pension providers who quietly continue to levy much higher charges on their unsuspecting members, coupled with service standards that fall well below par.
Contact us
The challenge of delivering and demonstrating VFM, while complex on a number of levels, is not insurmountable. And, with patience and persistence, it is also possible to engage even the most reluctant pension provider to achieve the desired outcome for your scheme.
Whether you represent a well-managed scheme that is contemplating its future in light of increased regulatory pressure, or a frustrated trustee/employer/adviser trying to do your best with an uncooperative pension provider, we would be pleased to hear whether you share our views on the future of smaller pension schemes.
Contact: David Hodgson
MHM Pension Services Ltd
T: 01423 229029
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