Measuring value for money is difficult because it is completely subjective but there is a way forward, finds Stephanie Baxter
At a glance
- Value for money is difficult to assess because it is a very subjective term
- Trustees must understand the true cost of the default investment strategy
- Important to know what the members expect to get from the scheme
In any walk of life the value for money concept means different things to different people. Under the defined contribution (DC) governance rules that came into force just months ago, trustees are legally required to assess and report how their scheme provides value for money for members in the chair's annual statement.
With the first statements due by February, it was predictably a hot topic of discussion at the Pensions and Lifetime Savings Association annual conference in Manchester where a panel shared insight and experience with delegates.
Remember the members
AB pension strategies group managing director Tim Banks says putting savers at the heart of everything is "clearly what trustees, governance, sponsors should be doing" and that the focus on value for money is long overdue.
"Defining value for money with regards to the investment default strategy is quite frankly in DC just as important as defining investment beliefs. It's really surprising it's taken us this long to codify what each scheme thinks is value for money."
Trustees must understand the true cost of the default strategy according to Banks.
"Whatever measure is used for value for money, you need to understand not just the headline price, but how much is spent on each of the different elements," he says.
For example in a bundled solution the investment charge may be just a small proportion of the overall cost to the member. Banks does not think cheap is necessarily bad but that investment in DC should be treated as ring-fenced frontline services given that "it is the investment that will determine the outcome" for members.
BASF's pension scheme will be one of the first to issue the chair's governance statement. Pension manager Lynne Rawcliffe has been doing a lot of work on measuring value for money.
The scheme firstly looked at whether the default fund is for members who do not engage or if it is the best option for the majority, and does that make a difference?
"We decided it should be for members who do not engage because there is such a variety of members in our scheme that there wasn't really a best option for the majority," she explains.
The member only pays investment charges as administration is covered by the sponsor, which Rawcliffe thinks is "very competitive". Also, the funds are provided through an investment platform run by Mercer "who has an interest in negotiating charges where they can" because all their members pay the same.
She does point out however that it is not just about the initial costs: "It's about the value of what you get for what you pay. We're careful to monitor performance on the fund net of fees, and after transaction costs too."
A delegate pointed out however that the members would get better value if the company stopped covering the administration cost in return for higher contributions because they would have a bigger pot to invest. Rawcliffe says while it's a "good idea" that the scheme "could consider in the future", it is difficult given it also has a lot of defined benefit members for which the sponsor has to pay a third-party administrator to look after.
There have been concerns that the 0.75% charge cap which came into place in April will force schemes to downgrade investment quality, but the panellists say that does not have to be the case.
BlueSky chief executive officer Paul Bannister says his multi-employer master trust has reduced or held its member annual management charge (AMC) over the past seven years. Its target is to get under 50 basis points (bps) but not at the expense of having to replace their current offering with an "off the shelf lifestyle product".
Having no hidden charges or fees also demonstrates good value, he says.
Trustees must look beyond this to ensure members achieve the best possible outcomes, which is challenging as they will be different for every member.
Rawcliffe says: "We think of it as ‘is this what the member is expecting to get'? We may have our perspective of what value for money is, but what is the members' perspective?"
The scheme is planning to hold an online questionnaire to get feedback from both active and deferred members.
Part of the assessment will involve comparing with what other schemes provide. Banks acknowledges how difficult this is as "often we're not comparing apples and apples", for example trust-based schemes versus contract-based. This will also come as an extra cost to schemes. Rawcliffe would like some publicly-available information perhaps provided by the regulator to help trustee boards, particularly those from small schemes, to look at benchmarking.
Trustees will need to review how they measure value for money given that pensions is constantly changing, and it will be prudent to avoid complacency. As the benefits that members expect to get from the scheme could change as a result of regulatory amendments, this must also be reviewed regularly. The BASF scheme is looking at whether it could have a different default fund for different members depending on their personal details and criteria.
"At the end of the day we might feel it is offering value for money, but could it offer better value? There is probably always room for improvement," she says.
Questions trustees should ask
- How is the investment budget determined? Is it bundled or unbundled? Do you really know what is being spent?
- Would spending more give a better outcome?
- How do you allocate the investment budget? Where will you get the best value, and if you have 10 bps for example, what would you spend it on?
- What can you get elsewhere that is better/cheaper? If you had a higher budget, what would you want to give members and how would that influence their outcomes?
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