HR pensions spotlight | Are you ready to talk about 'value for members'?

Last year, the Financial Conduct Authority consulted on changes to the value for money rules for workplace personal pensions and self-invested personal pensions (SIPPs).

Focus on value for money is also increasing for occupational (trust-based) defined contribution (DC) schemes.

In an earlier spotlight, we discussed proposals to change the law in October 2021 so that the trustees of most trust-based DC schemes (or schemes with a DC section) with assets of less than £100 million will have to complete an annual, more detailed, value for members assessment taking account of new guidance. If the trustees conclude that the scheme does not provide value for members, they must say whether they are going to consolidate (that is, terminate the scheme and transfer its members to another scheme such as a DC master trust) and, if not, the reasons why and the action they are going to take to improve value for members.

On 21 June 2021, the government published its response to that consultation. The response confirms that this new requirement will start to apply in the first scheme year ending after 31 December 2021. Where the scheme offers both defined benefit (or final salary) and DC benefits, the £100 million threshold will apply to the combined assets. The response estimates that around 1,800 schemes will be in scope.

Not just smaller schemes

On the same date, the government launched a call for evidence in which it asked for views on "how to … further accelerate the pace of consolidation for schemes under £100 million", and confirmed that DC schemes with assets of between £100 million and £5 billion are also in its sights. The paper says that the government will "continue to review the asset threshold below which schemes must conduct a comprehensive value for members’ assessment (currently £100 million)" and "invites views on how a similar but more tailored approach could be applied to schemes above £100 million".

What this means for employers

Employers who support a trust-based DC scheme or section where the scheme has assets of less than £100 million, might want to discuss "value for members" with the scheme's trustees in the next year or so with a view to agreeing the best way forward for the scheme.

Employers who are already considering options for small or legacy DC schemes or sections should note that the trustees will not have to carry out the new, more detailed, value for members assessment if they notify the Pensions Regulator that the scheme has started to wind up before they are required to prepare a chair’s statement.

What is value for members?

The Pensions Regulator recently consulted on a new, combined, code of practice for the trustees of occupational pension schemes.

The new draft code includes a module dedicated to value for members. It confirms that trustees "must, at least annually: calculate the charges and, as far as they can, the transaction costs borne by members’ funds; assess the extent to which the charges and costs represent good value for members; [and] explain their assessment of value for members .. in the annual chair’s statement."

It also confirms that "value" is not just about the amount of the charges. For example, trustees should "make efforts to understand the characteristics of their members in a manner proportionate to the scale, size, and resources of their scheme" and, when doing their assessment, can use "publicly available industry research reports" to compare their scheme with ones which are similar.

The Pensions Regulator's value for members guidance provides more detail. From October, it will also be necessary to consider investment returns.

For trust-based schemes with assets of less than £100 million, there is also the final statutory guidance issued in connection with the October 2021 changes.

It says that, in completing their more detailed assessment of value for members, trustees should take account of costs and charges, net investment returns, and administration and governance. Investment returns and costs and charges must be assessed relative to three other schemes. (Another change being introduced this October is to require the trustees of DC schemes of all sizes to publish net investment return information.)

Costs and charges which are higher than those in the comparator schemes can still represent good value if they are accompanied by higher investment returns.

Net investment returns should be looked at over the long term (not just the last year), with long-term underperformance of investments being an indicator of poor value.

There are seven metrics to consider when reviewing the value provided by scheme administration and governance. In each case, the guidance provides more detail:

• promptness and accuracy of core financial transactions (investment of contributions, investment switches, transfers and payments to members);
• quality of record keeping;
• appropriateness of the default investment strategy;
• quality of investment governance;
• level of trustee knowledge, understanding and skills to properly exercise functions and operate the scheme effectively;
• quality of communication with scheme members; and
• effectiveness of management of conflicts of interest.

There is specific guidance for cases where there are "legacy funds", for example, with-profits funds, funds with guaranteed annuity rates, or funds with defined benefit underpins.

Osborne Clarke comment

Employers who support a trust-based DC scheme or scheme with a DC section might like to discuss the October 2021 changes (for schemes with assets of less than £100 million), with their legal advisers and with the scheme trustees. Trustees will soon need to begin collating the information needed to conduct the more detailed value for members assessment, particularly if their scheme year ends during the first half of 2022. For this they will need, for example, to engage with their advisers for additional, comparative, information and with their administrators to assess the administrative metrics.

The sooner this is done the better, particularly if improvements may be needed in advance of the scheme's first reporting date and consolidation is not the preferred option in the short term. The results of that review may also help the employer and trustees decide whether sufficient improvement is possible in the timeframe available to them.

If there is concern that a scheme or section does not provide value for members, then trustees either need to take action to improve that value or take steps to transfer the DC members to a larger scheme offering better value, such as a DC master trust. There are project costs and a number of issues to consider here, particularly if employees are contributing to the scheme, and trustees will need to engage with the scheme employers to agree the best way forward for both the employer and scheme members.

Legal advice can help employers understand the options under the scheme, their obligations towards the workforce and the trustees' powers and duties. Please contact your usual OC contact or Claire Rankin (details below) if you would like further information on how we can help.