Trustees need to make sure they’re asking the right questions of advisers, finds Sara Benwell
The DC pensions landscape has undergone a period of intense change. This means that the role of the consultant has grown ever more important as DC trustees struggle to cope with each tranche of regulation.
Many consultants do a brilliant job of updating those responsible for the governance of DC schemes on the key issues they need to consider.
When Pensions Insight surveyed schemes, 46% of schemes said that their consultants proactively suggests new ideas and share best practices to evolve the scheme. A further 26% said their consultants keep them apprised of regulatory issues that may require changes to the scheme.
This proactivity is promising, but for the remaining 28% of schemes the picture is more worrying. Some felt that their consultants were reactive, responding only to the issues raised by the scheme and 1% said they rarely communicated with their advisers at all.
For those schemes – it is crucial that trustees and manages have a deep understanding of industry issues so that they can identify the topics which must be raised with advisers.
Even for lucky schemes with proactive advisers, it is important to understand the core issues to sort the wheat from the chaff and challenge consultants.
In times like these, where change is frequent and often sudden, it is crucial that all scheme staff go to meetings armed with a list of questions, to ensure they are getting the most out of their advisers.
1) Value for money
One issue that should be at the top of the agenda is value for money. The regulator is continually putting pressure on schemes to not only define value for money, but also prove that they are offering it members.
Unfortunately, value for money is a woolly concept that can be defined in many ways, and measured accordingly.
Ask your advisers if they have a framework for measuring value for money”
This is an area where consultants should be able to help. Ask your advisers if they have a framework for measuring value for money and use it to measure how well your scheme is doing.
However, it’s important to challenge these frameworks. Good questions include: Are we prioritising cost over value? Have we thought about what our members would value as well as what the pensions industry values? And are the objectives achievable and measurable?
Value for money is an issue that will only grow in importance. By ensuring that your scheme is able to demonstrate that it provides value now, you can avoid headaches later down the line.
2) Freedom & choice
It’s now been two years since freedom and choice legislation was introduced, and already the industry has been criticised for not moving fast enough.
Of course, not all freedoms are appropriate for all schemes. But while not offering drawdown may be the right decision for a scheme, it is important to be able to demonstrate that any perceived reluctance to offer freedoms is strategic rather a symptom of an inability to move with the times.
Consultants can help both in evaluating what members are currently doing and also projecting what members may do in the future. It is worth asking whether you are missing any tricks in the at-retirement space.
As DC grows and projected pot sizes get larger – it is also worth evaluating whether defaults need to change again. Consultants can help evaluate your current offering and look at best practice solutions from other schemes.
We know that most schemes are regularly reviewing both default arrangements and at-retirement options in light of freedom and choice. However it is worth taking a second look to make sure that you are offering the right options for the right reasons.
In less than a year the UK will be leaving the EU. This will have significant impacts for schemes on everything from investment strategy to governance requirements.
It’s never a good idea to have kneejerk reactions to market moves, and having a plan can help with this. Ask what impact Brexit is likely to have on your investment strategy and what changes may need to be made.
It’s also worth asking about how market moves might affect members on the cusp of retirement and working out a communications strategy.
Many people are panicked about Brexit already, so a robust communications strategy that explains what might change in their pension and why - is crucial.
4) Interest rates and the economy
While consistently low interest rates are not as disastrous for the DC world as they are in DB, they can still cause problems.
It is crucial to get a sense of what members are planning to do”
Drawdown has made this more acute. If people are planning on staying invested, but haven’t communicated that to their scheme they could end up in a strategy that is no way near fit for purpose.
This divergence between equities and bonds mean you either need a ‘middle way’ default or a way to find out what members are planning to do at retirement. Ask your consultant for tips on getting members engaged and working out what the right default path is for members.
5) Guidance and advice
Of course, member engagement only works if people understand the options.
Already, forward looking schemes are offering paid for or robo-advice solutions. This is a trend that will only grow particularly as drawdrown becomes more popular among members.
Ensure that advice options are clearly signposted”
If you want to do more to help members, your advisers can help identify solutions that can put people on the right track without breaking the bank.
Some schemes may find their employers are unwilling or unable to pay for advice for members.
In those cases it is doubly important to make sure you are flagging Pension Wise and pointing people to independent financial advice. If you have your consultants review your communications to ensure that advice options are clearly signposted, you can’t go far wrong!