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Need to know:
- Defining value for money in DC pension schemes is complex, involving not just investment performance, but also communication, digital engagement, and responsiveness to employers and members.
- New regulations and initiatives, such as the Pension Schemes Bill and Mansion House Accord, are reshaping the landscape, with consolidation and a forthcoming value-for-money framework adding both opportunity and uncertainty.
- Specialist pension consultants play a key role, helping employers navigate provider differences, assess net performance, and stay informed on evolving best practices.
When it comes to defining value for money for defined contribution (DC) pension scheme members, employers find themselves in shifting sands. There is much to consider, from investment performance to the government’s Mansion House Accord, which encourages pension providers to invest more in private markets, with 17 major providers committing to allocate 10% by 2030.
Value for money goes beyond investment returns. Employers also want to make sure their chosen provider will be responsive, both to members and HR leaders, and communicate to all in plain English.
The digital revolution means many providers are offering apps and innovative ways of engaging with members, all of which are important to consider as part of their overall value for money.
Change is also on the horizon. The Pension Schemes Bill recently introduced a value-for-money framework for pensions, following work and industry consultation from the Pensions Regulator (TPR), Financial Conduct Authority (FCA) and Department for Work and Pensions (DWP).
The government believes that consolidation will improve value and efficiency for members; but introduces uncertainty for employers that are reviewing their pension arrangements at present. As Steve Budge, partner at LCP, says: “Rather than kind of fast-tracking things, consolidation is almost having the opposite effect. It’s actually slowing decisions down, because everyone’s trying to see where this is going to land first and which providers will still be around in future.”
All this means it is hard to establish what best practice looks like in a fast-evolving pensions world. So, where do employers start when it comes to assessing value for money?
Seek specialist help
If possible, it is much easier to be guided on value for money by specialist pension consultants. They will have detailed information about the different providers and will help employers to work out their priorities. Ruari Grant, head of DC and master trusts at the Pensions and Lifetime Saving Association (PLSA), says: “For a lot of employers, they take a lot of the strain and distill the noise and the change that’s going on into the salient bits that the employers need to know and think about, when they’re choosing schemes.”
Peering behind the curtain at one consultant, Mark Futcher, partner, head of DC and workplace wealth at Barnett Waddingham, says: “We research the whole of the market. We ask providers a lot of questions, probably too many. We ask them a comprehensive set of questions every six months and ask for updates on any big changes they make. Plus, we see them regularly to kick the tyres.”
Key metrics
Employers should look at net performance as a key metric of value for money, adds Grant. “I think the fundamental for all schemes is net performance, because that is important, whoever [the employee is], whether a low earner, or whether [they’re] wealthy,” he explains. ”If [they are] saving into a DC pension, the goal is for that pot to be as big as it can be at retirement, and obviously costs and charges and the performance of the investments are the two things that underlie how big that pot will be.”
Benefits consultants will have extensive data on net performance which schemes can refer to for more information. The value-for-money framework will help schemes, because each scheme will be required to publish all its framework data on its website, along with its rating, which will be a traffic light system.
There are no plans yet for all this information to be aggregated in one place, but the work will be done in due course, in the hope of making it easier for employers to compare pension providers. And if a scheme’s provider is rated green, this is clearly a positive sign.
Review what providers are doing
Providers are evolving fast, trying their best to keep up with the government’s direction of travel, fast-evolving technology, and each other. For that reason, it is important to keep track of what they are offering. Communication is a great example, says Budge. “What we are seeing on communications is much more app-delivered approach. There are pros and cons to that, but if [employers] are supportive of it, then [they] can have a much more regular touch point.”
