A quick recap
Whilst Trustees of all DC schemes have a duty to assess costs and charges, since 1 October 2021 the Occupational Pension Schemes (Administration, Investment, Charges and Governance) (Amendment) Regulations 2021, has imposed additional obligation on trustees of specified pension schemes with assets of under £100 million who have been operating for 3 or more years. Such trustees must carry out a holistic assessment of how their scheme delivers value for members. The outcome of this assessment must be reported in the annual Chair’s statement and include consideration of reported costs and charges, fund performance and other measures of scheme governance and administration. Costs and charges and fund performance are assessed relatively, based on comparison with other schemes, whereas administration and governance is assessed on an absolute basis.
There are 7 metrics of administration and governance - promptness and accuracy of core financial transactions, quality of record keeping, appropriateness of default investment strategy, quality of investment governance, level of trustee knowledge, understanding and skills to operate the pension scheme effectively, quality of member communication and effectiveness of management of conflict of interest. What if the trustees conclude that a scheme is not providing good value? In such a case, the trustees should consider whether VfM can be improved rapidly and cost effectively or whether the scheme should be consolidated into a larger scheme or wound-up.
There is a lot of detail for trustees to consider. Both the DWP and TPR have produced guidance which trustees may find very useful.
Our Top 10 Tips
We have been helping our clients in providing practical guidance and training to assist them in their assessments. Our top tips are:
- There is no ‘one size fits all’ approach to the assessments; this is because all schemes are quite different in terms of size of membership, nature of benefits and age of scheme. Consider what is appropriate and relevant for your scheme. In particular, trustees should determine a proportionate approach to their assessment based on their scheme and this approach should be repeated each year.
- Project planning will help to ensure that the information is collected in good time and that the appropriate people and resources are involved.
- The guidance says that it is good practice to engage members when undertaking the assessment. The simplest and cheapest way of doing this could be to include a list of questions on which the trustees would welcome members’ thoughts in an annual newsletter with a dedicated email address for members to reply. Other options include setting up a dedicated online and/or postal survey. Trustees should also use their judgement to determine whether their scheme offers good value. Be prepared to document the process so it’s easy to summarise rationale and findings at the end.
- When it comes to choosing comparator schemes, trustees should have a clear rationale for the schemes chosen. Compelling reasons could include that the scheme is a similar size to the relevant scheme or has a similar number of members. At least one of the comparator schemes must have a different structure to the scheme in question - for example, schemes not used for automatic enrolment could be compared against at least one scheme that is. We are watching out for developments in this area as there may be further supporting guidance or commercial benchmarks which emerge in due course. The Regulations require trustees to have discussions with at least one of their comparison schemes about a transfer of the members’ rights if their scheme is wound up.
- In terms of costs and charges, the guidance recommends a tabular format is adopted that takes into account the costs and charges for each default and self-select fund. Most weight should be given to the costs and charges in the default fund and trustees should compare the costs of their own default arrangement with another scheme’s default arrangement even though the investment strategy may not be identical. Trustees may find it helpful to refer to a set of templates produced by The Cost Transparency Initiative when carrying out their assessment. An important timing point is that trustees should contact asset managers and product providers well ahead of the year end to collate information. If the costs and charges are higher than the comparator scheme, this is not a ‘fail’; Trustees should consider whether there are mitigating circumstances such as higher than average performance.
- In terms of net investment returns, the DWP guidance states that long term underperformance will be a key driver of poor value for members. The focus should be on long term performance rather than the short term. Again, trustees should give more weight to default arrangements in their assessment. If the outcome is that the net investment returns are lower than those in the comparator scheme, there needs to be a clear strategic choice which explains this outcome. The DWP has produced tables which illustrate how returns could be reported, which trustees may find useful.
- Administration and governance is the one area where a comparator is not needed. Although there are 7 categories, these can be grouped into 3 broad headings - member communications, scheme administration and governance and oversight. Where tasks have been delegated to third party administrators or other suppliers, responsibility for those functions still remains with the trustees. Therefore, trustees should ensure that the performance of their scheme administrator and other providers are closely and regularly monitored. Member involvement may be recommended under this metric; as stated above, TPR says that an example of good behaviour is sending a survey to gain insights as to the needs of members. The guidance says that all the criteria should be satisfied for a scheme to satisfactorily demonstrate value for members from an administration and governance perspective. If one or more criteria are not met, the trustees should consider the impact of this on the overall quality of administration and governance and the quality of services in general.
- When making their assessment, the guidance says that the trustees should be able to explain how the scheme delivers value on all 3 metrics. Trustees should not give excessive weighting to costs and charges and are expected to give more weight to net returns and their ability to properly manage the scheme over the long term. If the assessment concludes that the scheme does not provide value for members then TPR says it is ‘vitally important’ that trustees investigate such matters to identify what steps can be taken to improve conditions. Where the trustees take corrective action, this should be carried out immediately.
- The outcome should be reported in the Chair’s Statement, alongside an explanation of the assessment, rationale as to whether all measures have been met, and summarised results. How to present is very much a trustee decision based on their knowledge of the member communication needs and preferences. It must be in plain English and ensure the document is well positioned to members – because this is how scheme members primarily learn of costs and charges and how they impact on benefits. TPR uses the phrase “providing a meaningful narrative”. TPR have laid out their “best practice” considerations for what this should describe and emphasise that if the process of assessment is documented well, then this will be easy to set out in the Chair’s Statement at the end of the process. There is no need to include supporting information and evidence used to reach conclusions to avoid information overload. The outcome must also be reported in the scheme return and on a publicly available website.
- There is a requirement for ongoing monitoring. Although you are required to carry out a full review at least once year, the guidance states that it is best practice to have arrangements in place to enable the ongoing monitoring of services provided to the scheme and that decisions relating to scheme services take account of any potential impact on value for members. It is also best practice to give consideration to any developments during the year that could affect good value including changes in legislation, whether new risks have emerged and the level of and reasons for member complaints.
If you would like further information or advice in relation to conducting your scheme’s VfM assessment, please contact Kate Granville Smith.