Elston Consulting has written guidance to help trustees assess and report on value for money in defined contribution (DC) schemes.
In a whitepaper today the firm set out guiding principles to use as best practice when meeting The Pension Regulator's new governance requirements that came into force in April.
Under the new rules trustees must design the scheme's default investment strategy in the best interests of members, ensure financial transactions are processed promptly and accurately, and assess whether costs and charges represent "good value". Each year the chair of trustees must sign an annual governance statement to confirm this.
Good value should be distinct from a focus on cost alone and should be reviewed both qualitatively and quantitatively, according to the paper, which was welcomed by the Society of Pension Professionals (SPP).
Good value should be based on the four key areas of governance, communication, administration and investment, said Elston Consulting managing director Henry Cobbe. He believes these will enable schemes to deliver good outcomes for members within the scheme's investment policy. Trustees should consider creating a good value policy document that covers all this as well as formalise a qualitative and a quantitative approach for defining and measuring these aspects.
SPP president Duncan Buchanan said the paper would stimulate discussion and debate around what value should look like for investment performance." He warned the new requirements on trustees would present "challenges" in the coming months.
Guiding principles for trustees:
- Have a clear and consistent process for structuring and preparing the annual governance statement. Trustees should refer to legislation and regulatory guidance and agree a checklist of contents.
- Make sure definitions and terms are clearly defined, with reference to any legislative and regulatory guidance. This means that the default investment strategy is designed in the members’ best interests.
- Ensure evaluation process is transparent and measurable. A good value policy should be articulated, evidence should form a quantitative and qualitative assessment of how good value can be measured.
Questions for schemes to ask consultants
1) What is the current asset mix over time of the default strategy and is this still appropriate to the memberships’ demographics, needs, and risk capacity?
2) Which benchmarks best represent each asset class, and the strategy as a whole?
3) What is the policy and actual performance for each of the components of the strategy, and for the strategy as a whole for each cohort of the membership?
4) Does the difference between the actual performance and the policy performance of the strategy evidence value added to, or subtracted from, risk-adjusted returns for each cohort of the membership?
5) Is that difference explained by tactical allocation changes, component fund performance, fees, or other implementation decisions recommended by the consultant/manager?
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