If you are the trustee of a scheme that provides defined contribution (DC) benefits, make sure you understand your legal obligation to assess value for members. You should also understand what elements contribute to the value your members get from the pension scheme.
Published: July 2016
Last updated: March 2024
28 March 2024
Changes to align the guidance with our new code of practice and minor editorial amends throughout. Information moved to separate costs and charge restrictions guidance.
8 June 2023
New paragraph added to active member discounts.
22 September 2022
New section added on the flat fee threshold on active and deferred pots.
23 September 2021
Important note added at the start of the guide about the new legal requirement for smaller DC schemes to carry out a more detailed value for members assessment.
30 September 2019
Minor editorial change. Insert 'the explanation of' into 'you are required to publish the explanation of your value for member’s assessment'.
5 August 2019
Small updates to reflect that an industry led body, the Cost Transparency Initiative, has produced standardised templates which we encourage trustees to use to obtain information about costs and charges from their provider. Other minor changes have been made including editorial changes.
28 July 2016
First published.
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Important
For scheme year ends falling after 31 December 2021, this guide will not be relevant for all schemes.
From this date, certain schemes must carry out a more detailed value for members assessment. This involves self-assessing the quality of the administration and governance with reference to seven key metrics and comparing their costs and charges and net returns against three other schemes.
This will apply to you if your scheme has:
- less than £100 million total assets according to the most recent audited accounts (for hybrid schemes total assets includes the defined benefit element)
- operated for at least three years
- a most recent year-end that falls after 31 December 2021
And:
- you have not notified us that it is in the process of winding up
Read the statutory guidance on value for members assessments on GOV.UK. This is intended to help you understand the factors to consider as part of the detailed value for members assessment, including how you might carry out a comparison against three other schemes.
If you decide that your scheme is not offering value, and you cannot remedy this, you should consider transferring members’ benefits to another scheme and winding up your scheme unless you have a very good reason for not doing so. If you do not transfer the benefits of members to another scheme, you must make any improvements necessary to ensure the scheme does offer value. The statutory guidance provides some factors to take into account when making these decisions.
You must explain the outcome of the detailed value for members assessment in the annual chair’s statement and publish the explanation on a publicly accessible website. You must also provide the following information to us in your scheme return:
- whether you consider the scheme to be good value
- whether the scheme was considered good value the previous year (once you have carried out at least two detailed value for members assessments)
- if you have concluded that the scheme is not offering value, whether you propose to transfer members’ DC benefits to an alternative scheme and whether you intend to wind up the current scheme
- if you do not propose to transfer members’ benefits, the reason why and the improvements you will make to ensure the scheme does offer value
Schemes already winding up
Trustees of schemes that started winding up before the deadline for their chair’s statement do not need to prepare a more detailed value for members statement provided they have notified us of the scheme’s new status via Exchange.
You must continue to provide an explanation of your value for members assessment in the chair’s statement and explain why you are not carrying out the more detailed version.
Introduction
Most members of DC schemes rely on others to make the important decisions about their fund and to deliver and assess value for them.
Before carrying out your value for members assessment, consider the following key points:
- All members should receive good value from their pension scheme, regardless of whether you have a legal duty to assess and report on value for members annually.
- There is no single approach to an assessment of value – you should develop your own policy which reflects the circumstances of your scheme and its members.
- It’s important for you to understand what your scheme’s members value as far as possible but, ultimately, you need to use your judgement to determine whether the scheme offers good value.
- Your assessment should involve considering the quality and scope of scheme provision as well as the cost.
- You need to try to understand how your costs and what is provided for those costs compare with other options available in the market.
- You should strive to ensure that your scheme continues to provide good value for the full period that you are responsible for your members’ funds.
Legal duty to assess value
We have included below an illustrative approach that the trustee boards of relevant schemes may wish to use to comply with their legal duties and to meet the value for member standards in the code of practice. However, different methods are likely to be appropriate depending on the scheme. In particular, less complex schemes with a small number of members may find that it is proportionate to take a simplified approach.
Whatever approach you choose, you should document the steps you take. You must explain the steps you have taken to assess value for members in your chair’s statement. This should include explaining how and why you have reached your conclusions.
You must carry out the assessment at least annually, which means your focus should be on the value provided by your scheme for the charges and transaction costs paid by members across the preceding year and the influence that could have on future outcomes for those members. You might also find it useful to consider the value provided to members over previous years if this provides helpful background information for the assessment.
You need include in your assessment only those services that members pay for, or where members share the cost with the employer. Even where members cover only a small proportion of the overall cost of a service or bundle of services, you still need to assess the value for members of those services. You should explain the basis of any cost sharing when you report on your assessment in the chair’s statement.
Broader elements of good value
The overall value offered by a scheme, as opposed to the value for members assessment required by legislation, is likely to be influenced strongly by additional factors.
These include:
- The scheme’s governance framework – the effectiveness of the trustee board and its interaction with both service providers and the employer can affect the overall value provided to members.
- Security of assets – whether arrangements are in place to protect member benefits in the event of the scheme being wound up.
- Employer contribution to the cost of services – in some schemes, the employer might cover many, if not the majority of, scheme costs, such as all administration costs.
- The value for money of services paid for by the employer – if employers are paying for poor quality services it is likely to be in members’ and employers’ best interests for that money to be spent in a different way.
- Employer contribution to member funds – if employers choose to pay a higher rate of contributions to member funds, over and above the automatic enrolment minimum, this could be considered part of the overall value offered to members. The same principle may apply where employers offer contribution matching arrangements that encourage members to contribute more than the automatic enrolment minimum.
- Value over the longer-term – see examples below.
Examples of value over the longer-term
Scheme A provides online communications and tools for its members. Research indicates that the members who access these find them very helpful and use them a lot. However, currently only a small proportion of the overall membership uses them. The trustees of scheme A could consider whether further promotion of the services would make more members aware of them and encourage greater use over time. In these circumstances, the trustees could be justified in allowing time for the full value for members provided by the service to be realised.
Scheme B provides an investment fund which (like most funds) has a performance target that extends beyond a one-year time period. In this situation, the trustees could be justified in focusing on an interim analysis of how the fund is performing in relation to the relevant costs and whether it is on track to meet the target by the relevant date.
Although the above factors do not form part of your legal duties, you may wish to refer to them in the chair’s statement to provide context for your report on the value for members assessment.
You should still set out clearly in your write-up of the assessment any particular member-borne costs and charges that do not represent good value and the action you have taken, or plan to take, as a result.
Illustrative approach to assessing value for members
Step 1: Gather information on what the scheme provides for members and at what cost
You may find it useful to collate and review a wide range of information before carrying out the assessment. Questions to consider include:
- What services (including investment products) do members pay for across the four core areas of scheme governance and management, investment, administration and communications? This should include services where the costs are shared between members and the employer.
- What do members receive for what they pay? For example:
| Scheme governance and management |
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|---|---|
| Investment |
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| Administration |
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| Communications |
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- What are the charges and transaction costs associated with those services? This involves identifying particular charges and transaction costs, including service provider, trustee and investment product costs (that are not excluded), which are passed on to members. It also involves breaking down bundled costs into their component parts where possible and proportionate. You should include investment transaction costs as far as you are able – refer to the box on transaction costs below. An industry led body called the Cost Transparency Initiative (CTI) has produced a suite of voluntary templates and guidance designed to help trustees understand and compare the costs of their investment services by using a standardised reporting format. We recommend you use these templates when requesting charges information.
- What are the costs of comparable services? You could start by referring to the websites of similar schemes that have published this information. Similar schemes can be defined according to factors such as size, membership profile, what is offered by the scheme and whether they operate a similar balance of member- and employer-borne costs. For example, if your scheme’s member charges relate to investment costs only, try to compare it with schemes that share costs in the same way. However, as far as possible, you should also seek to discover the costs of services used by other schemes generally. For example, check if there are comparable services available on the market for a significantly different cost from what you are paying.
- Are there any relevant one-off costs, such as investment transition costs? If so, questions to consider include:
- What was the event?
- Did it occur within the past year?
- What was the cost?
- Will there be further costs?
- Why did it take place? For example, to seek improved investment performance?
- Does it offer good value for members and why?
- Did you review market conditions before making the change?
Transaction costs
- Transaction costs are defined in regulations as the costs incurred as a result of buying, selling, lending or borrowing investments. They can have a significant impact on members’ fund values. Currently, providers are not subject to any reporting or disclosure requirements in respect of transaction costs, which can make it difficult to obtain a full breakdown of costs. Financial Conduct Authority regulated entities have a duty to provide certain information about costs and charges when requested so you should be able to obtain this information.
- You can use the CTI templates referred to above to help you gain an understanding of the types and levels of transaction costs that are incurred by different investments and how best to include them in your value for members assessment. To determine whether the costs are appropriate for a fund, consider factors such as the fund’s investment style (eg active or passive management), the underlying investment instruments (eg equity, bonds or property), the value traded, the return generated, any risks mitigated and the general trading environment.
- Transaction costs are typically categorised as explicit costs and implicit costs. Explicit costs are directly observable and asset managers and product providers should be able to provide you with information on these costs. Examples include broker fees, transaction taxes and custody fees. Implicit costs cannot be observed in the same way but will also result in a reduction in the total amount of capital invested. Examples include bid-ask spreads and market impact. You should be aware that implicit costs can have a significant impact on net returns.
- When you report on your value for members assessment in the chair’s statement, you might find it helpful to separate costs into those known with certainty (eg transaction tax), those known with a reasonable degree of accuracy (eg spread costs) and those which have been estimated (eg market impact).
- Given the complex nature of transaction cost disclosure, you should contact your asset managers and product providers well ahead of your scheme’s year end to ensure the information can be collated on a timely basis and that the costs are appropriate. The CTI templates enable the reporting of transaction costs in a standardised way. If your asset manager or provider is unable to give you the information you ask for, you should ask them why and record this in the chair’s statement. This should include any steps you have agreed with them to get this information in future years.
- Where you are provided with only limited information, you may wish to engage with the relevant party to enable you to take a view on certain transaction costs and whether unidentified or unquantified costs are justified by the return they generate. You should assume the role of a demanding consumer in your relationship with your asset manager or provider, making use of advisers where necessary.
- When reviewing investment mandates in the future, you should consider including disclosure of transaction costs as both part of your selection criteria and as a contractual term.
- The Investment Association has issued voluntary industry guidance on enhanced disclosure of charges and costs incurred by UK-authorised funds.
Step 2: Assess the scope and quality of scheme services to members
When you assess the scope and quality of the services provided, you may find it useful to consider a range of factors, particularly:
- member need
- performance
The type and extent of information that you should seek to obtain for this part of the assessment will vary according to the nature of your scheme and its membership. You should therefore take a proportionate approach to the time and cost involved.
Member need
Key question: Are the benefits provided by the scheme’s services suitable for, relevant to and valued by members?
You could start by considering member characteristics, such as age, salary, fund size, contribution rate and the range of funds they are invested in. This information can help you to build a basic membership profile and it might help you to create categories of members.
You could also consider seeking member views on particular services. Proportionate to the size and characteristics of your scheme, this might include asking members about their:
- use of particular services, eg online modelling or fund switching
- expectations of services
- the extent to which they understand what particular services are for
- opinion on the strengths and weaknesses of what is provided by services, including whether anything is missing
- investment risk appetite
- range and type of investment choices available to them, and whether this is sufficient or excessive
- ability to make investment decisions, including whether they would make use of help or guidance in this area
- understanding of the potential level of retirement income their fund will provide, including how this could be influenced by different choices
- preferred type and style of communications, including online information and tools
- financial awareness and need
- anticipated retirement date
- preferred way to access their benefits
- views on overall scheme governance
There are many sources of information you could use, including surveys, employer-led workshops, member panels, feedback from member-nominated trustees and issues or themes arising from member complaints. Master trusts might also find it useful to seek employer feedback on service quality, eg through an employer working group.
Detailed information on methods of member engagement is set out in the communicating and reporting guidance. Where information gathered in relation to members is insufficient for you to reach a firm view, it might be helpful to also consider looking at available research that is not specific to your own scheme, eg the members' perspective on workplace pensions report from Price Bailey.
While taking account of member views, you should use your judgement to conclude whether your scheme’s services are meeting member needs. This is particularly important in situations where you succeed in engaging with only a small proportion of members or groups of members.
Performance
Key question: Have the scheme’s services to members performed effectively over the past year and do you believe they will continue to perform effectively?
Factors you could consider include:
- whether services have helped you to comply with your legal duties
- whether services have helped you to meet the standards in our code of practice
- how services have performed against both scheme objectives and objectives focused on what the service is aiming to achieve for members, particularly in relation to investment returns net of fees
- whether service providers have met service level agreement targets
- whether service level agreement targets are appropriate
- regularity of service performance reviews
- whether risks have been identified and appropriately managed
- technological capability of the scheme and services
- level of member complaints about services
- whether the scheme auditor has highlighted any particular areas of poor value
- changes made to the scheme or services in the past year that could have an effect on future value for members: this might include changes in staff or pricing or the introduction of new IT software
For specific information on how to measure performance in these areas, refer to the guidance on the trustee board, scheme management skills, administration, investment governance and communicating and reporting.
Step 3: Evaluate the scope and quality against the costs
You should now be in a position to take a view on the scope and quality of your scheme’s services to members relative to the costs.
Consider the following questions:
- Does the scope and quality of each service provide good value for the relevant costs and charges incurred by members?
- Does the scope and/or quality of a particular service justify any differences in cost when compared to similar schemes and other options available in the market?
The second question is important because even if you determine that a particular service is delivering good value based on an internal assessment of cost and quality, your view could change if you discover that similar schemes pay less for the same service or that comparable services are available on the market to other schemes at a much lower cost.
Sources of relevant comparable information for large schemes are likely to include competitive tendering, sharing information through an adviser or professional trustee where permitted, commissioning an independent consultant or using an appropriate benchmarking service. It might suit less complex schemes with a small number of members to focus on carrying out online research, bearing in mind that any schemes required to prepare a chair’s statement should publish their costs and charges on a website. Another option would be to request support from a professional adviser or accountant.
You should take a proportionate approach to this process of comparison, including a thorough consideration of cost and benefit. It will not be proportionate to use a method that will incur a significant cost unless it is likely to return a worthwhile benefit for members in the future.
When you have reached a conclusion on the two questions above, you will need to use your judgement to determine the extent to which your scheme’s members are receiving good value for what they pay.
In coming to a view, you should consider any significant impact from cross subsidies. These may relate to the amounts that different members pay, cross-subsidies between different membership groups, or between sections of a scheme where the scheme has more than one section.
Step 4: Report on the outcomes and take action to address poor value
Trustee boards must set out the levels of particular charges and costs and to explain their value for members assessment in the chair’s statement. If you have documented clearly each stage of your assessment process you will be in an excellent position to comply with this requirement.
Reporting the outcomes
A best practice approach is to describe:
- your preparations for the assessment
- the process you followed to carry out the assessment, including the factors you considered
- the outcomes from your assessment
- the reasoning for your decisions and conclusions
- how you will address any areas of poor value or reasons why you cannot address them
Where you have used a scoring or rating system to help you make decisions, this should be supported by clear explanatory narrative. In the chair’s statement you should include details of any areas where the costs of services are shared between the member and the employer, including the basis of the cost sharing. However, you do not need to include in the statement all the supporting information and evidence that you used to reach your conclusions.
Read further information on how to complete the chair’s statement.
You are required to publish the explanation of your value for members assessment along with costs and charges information (which must include an illustration of the compounding effects). This must be free of charge to members and must be accessible without the need for a password. You must produce and publish a default SIP for your default arrangement and, if you have at least 100 members, you must also produce and publish a SIP. Publishing all these documents in the same place will make it easier for members to access them.
You should consider the potential for producing a summary of the key outcomes from the assessment and either sending it to members with existing communications or publishing it on your website.
Addressing poor value
It is important to improve or remedy areas of poor value where possible. In some cases, decisions to change the scheme or elements within it rest with the employer but it remains your responsibility to address poor value as far as you are able. It is important that you are able to work effectively with the employer.
Depending on the issue, there are various ways you can improve value for members. For example, it might be appropriate to:
- remove unused services
- re-tender for services
- simplify or standardise services
- obtain a scale-related discount, eg to reflect an increase in the scheme’s size, membership or assets
- reduce a charge
- challenge the relevant service provider directly: see the scheme management skills guidance for further information on how to work effectively with and scrutinise service providers
The trustee boards of large schemes could also consider whether there is potential to negotiate lower costs, even if the costs they pay are the market standard for schemes of a similar size.
If an appropriate measure to address poor value is likely to incur higher costs initially, eg an investment in technology to help simplify or standardise a service, you could be justified in taking this action if it will result in reducing costs in the longer-term and will not unfairly disadvantage any particular group of members.
In some circumstances, it might be sensible to work with the employer to close the scheme to new members or to close the scheme altogether and transfer members and their pots to a different scheme. For example, a large scheme might be able to provide members with benefits that are only available through economies of scale and professional governance. Winding up an existing scheme can be a valid and effective way of addressing poor value where the evidence justifies this action and the costs of doing so are not out of proportion to the expected benefits for members in the longer-term. You will need to consult the trust deed and scheme rules for information on who has the power to wind up your scheme and it is important to seek legal advice before making a decision.
Ongoing monitoring and evaluation
Even where you can report confidently that member-borne costs and charges in your scheme represent good value, this may not always hold true. Therefore, you should guard against a deterioration in value for members with ongoing monitoring and evaluation.
Good practice
Although you are required to carry out a full review of value for members at least once a year, it is good practice to ensure that you have arrangements in place to enable the ongoing monitoring of services provided to the scheme, and that discussions and decisions relating to scheme services take account of any potential impact on value for members.
It is also good practice to consider any developments during the year that could affect good value. This could include:
- any changes to the law
- number of both new members and members who have left the employer and/or stopped contributions
- whether the scheme has switched between products or changed investment platform
- whether new risks have emerged
- whether new technology has become available on the market which could influence the relative competitiveness and sustainability of certain service providers
- the level of and reasons for member complaints
To help you evaluate service providers on a continual basis, you could invite representatives to board meetings to offer updates on how services are performing and any challenges they are facing. This might be particularly helpful where you have recently negotiated improved service levels. In some cases, it might be more appropriate for one of the board members or the scheme secretary to request particular information from a service provider and report back to the full board.
Any decision to engage with service providers should be proportionate to the costs involved and you should also assess their performance against defined targets, measures and/or objectives on a regular basis. For many schemes, this will be at least quarterly, although less complex schemes with a small number of members and that carry out fewer transactions might find it appropriate to review performance less frequently unless a particular issue arises. The review frequency may also depend on the level of involvement the provider has in the scheme.
Where relevant, you should also have a process in place to evaluate the performance of any remunerated trustees on your board. For example, this could form part of an annual board effectiveness review.
Refer to the guide on scheme management skills for information on monitoring the performance of service providers and evaluating board performance.
You should review your approach to the value for members assessment each year and consider whether it remains fit for purpose in light of external market developments, changes to your scheme’s membership demographic, growth in scheme assets and your medium- to long-term strategy for the scheme. To support this process, you could consider meeting or sharing information with other trustee boards to compare approaches and discuss ideas. You may also wish to consider whether there are opportunities to learn from practices and approaches adopted by independent governance committees in relation to contract-based schemes offering money purchase benefits and meet with them or share information where appropriate.
You should not assume that the process you adopt to carry out the value for members assessment for the first time is necessarily the right one. When reviewing your approach you should consider whether examples of good practice have emerged in the industry or in guidance that you could use or adapt.
You are required to publish certain sections of your chair's statement. However, to allow a greater level of comparison between schemes in the future, you could consider publishing your chair’s statement.