Smaller DC schemes struggle to demonstrate they provide value for pension savers
Friday 14 September 2018
Many smaller pension schemes are failing to demonstrate they provide good value for members, new research by The Pensions Regulator (TPR) shows.
While most defined contribution (DC) scheme members - 86% or 6.8million people - are in schemes whose trustees are adequately carrying out a value for member assessment, a number of smaller schemes are not meeting the standards expected by TPR.
The annual DC survey (PDF, 1334kb, 35 pages) published today, highlights that the trustees of just one in ten small schemes, and one in three medium schemes, are doing everything which TPR believes is essential to assess value for members. This includes trustees having good knowledge and understanding of the costs and charges paid by members, and carrying out an annual assessment of the value the scheme represents.
The survey also found that only 41% of scheme trustees are researching and taking into account what members’ value.
TPR has also published findings from its thematic review into value for members in small and micro pension schemes (PDF, 96kb, 11 pages). Of the 68 chair statements reviewed, the majority provided inadequate or incomplete explanations of how the scheme’s costs and charges represent good value for members.
To address the issues highlighted in the survey and thematic review, TPR is:
- Reviewing its guidance to be clearer about its expectations of chair statements, including value for member assessments. The Quick Guide to Chair’s Statements has already been updated.
- Testing a more directive approach to delivering guidance as part of its work to drive up standards of trusteeship. The first topic area will be default investment strategies, including the considerations trustees should make about value for members.
- Continuing to take action against schemes which produce sub standard chair’s statements.
- Using its 21st Century trusteeship communications to 40,000 people who run schemes to drive up standards: the most recent theme was improving value for members.
David Fairs, Executive Director of Regulatory Policy, Analysis and Advice at TPR, said: “Poor value for members is a key risk which needs to be managed. Any small schemes unwilling or unable to assess value for members should seriously consider if members would be better off being moved to a bigger scheme which benefits from economies of scale.
“It is essential that members get the benefits they deserve from their pensions. Assessing value for members enables trustees to identify and address poor performing areas, in turn making a scheme more likely to provide good outcomes for pension savers.
“Through a number of initiatives, including our 21st century trusteeship programme, we have worked hard to push up standards. It is disappointing to see that in small and micro schemes there is still significant progress to be made.”
The DC survey also found that:
- Master trusts are the schemes most likely to have met expectations in all of the seven areas tested in the DC survey.
- The worst performing area across all schemes was investment governance with, on average, less than a quarter of scheme trustees meeting our expectations. This was largely due to the trustees of only 14% of small and 19% of micro schemes meeting expectations.
- Three quarters of respondents who receive 21st Century campaign emails found them to be clear. More than 60% of the trustees of medium and large schemes and master trusts took action as a result of receiving the emails. The trustees of the majority of micro schemes and half of small schemes took no action, because they felt they did not need to, did not believe it was relevant to their scheme, or had other priorities.
- All areas of the pensions landscape are coming under greater scrutiny as part of TPR’s clearer, quicker and tougher approach. TPR is being increasingly proactive and supervisory to target risks in different segments of the market. TPR will work more closely with the FCA to ensure that the risks to members of both occupational and contract-based DC schemes are consistently identified and addressed.
- Micro pension schemes have between 2 and 11 members. Small schemes have between 12 and 99 members. Medium schemes have 100 to 999 members. Large schemes have more than 1,000 members. A master trust is a scheme for multiple unconnected employers.
- The DC survey is an annual survey of trust-based occupational defined contribution schemes, and was conducted between January and March 2018.
- To achieve a score of 100% in the value for members section of the DC survey, the following criteria had to be met:
- the trustees must have a documented process in place to assess and report, at least annually, the extent to which member-borne charges and transaction costs represent value for members
- the trustees must research the characteristics, preferences and needs of members and take this into account when assessing value for members
- the board of trustees must:
- have very / fairly good understanding of the costs and charges deducted from members’ funds in default arrangements / self-select options and of the investment transaction costs
- be able to obtain all or most of the relevant information to carry out a value for members assessment
- TPR’s value for members thematic review investigated whether trustees are carrying out adequate assessments of the costs and charges paid by members, as reported in the annual chair’s statement. This should provide a meaningful narrative of how the relevant governance standards have been met, so members can understand when steps trustees have taken to assess the value of costs and charges. The review concluded that many trustees did not understand the requirement to carry out a value for member assessment and had not carried out an assessment that met the standards set out in the DC code of practice and supporting guidance.
- Thematic reviews allow TPR to conduct a structured, time-bound and risk-focused assessment on an important topic. TPR will continue to use thematic reviews to assess other areas of focus within the wider pensions landscape.
- TPR is the regulator of work-based pension schemes in the UK. Our statutory objectives are: to protect members’ benefits; to reduce the risk of calls on the Pension Protection Fund; to promote, and to improve understanding of, the good administration of work-based pension schemes; to maximise employer compliance with automatic enrolment duties; and to minimise any adverse impact on the sustainable growth of an employer (in relation to the exercise of TPR’s functions under Part 3 of the Pensions Act 2004 only).
Kimberly Middleton 01273 349554
Matt Adams 01273 662086