Value for money is a tricky trustee concept - we caught up with independent trustee, Nick Boyes, to find out what it means to him
1. What does value for money mean to you?
Value for money is a tricky nut to crack. The problem lies in attempting to assign a tangible measure to intangible features, such as the availability of a good choice of investment funds or modelling tools on the provider’s website.
The ideal is where trustees are able to gain a good idea of the mixture of features that will produce a good pension outcome and are likely to be appreciated by the members. If they judge that few members will opt for anything other than the default fund, or will use the sophisticated modelling tools, then good value is achieved by focussing attention on the fundamentals, such as a well thought-out default strategy and clear and engaging communications.
The onus lies with the trustees to ensure that they understand all aspects of their scheme, and to determine whether the package is appropriate for their members and delivered at a reasonable cost.
2. Why is this important for schemes and trustees now?
To be frank, trustees should always have been looking at this, but the old maxim of ‘what gets measured gets done’ has come into play now that the Regulator has dragged value for money out of the shadows. This is particularly the case for schemes that are used for auto enrolment, where there are statutory limits on member-borne charges.
There is more to value for money than costs and charges however, and add-on ‘features’ such as administrative excellence and multiple points of member engagement should be considered as essentials if good outcomes are to be delivered and appreciated.
With the current low level of returns, pension funds can ill-afford the drag on investment performance that result from unnecessarily high costs. This means that some of the bells and whistles may have to be trimmed back. Awareness of the cost and effectiveness of the various elements of the scheme’s offering is the first step in determining what is essential and what can be jettisoned.
3. How important will measurement of value for money be over the next few years?
Many DC schemes were bought off-the-peg by the sponsoring employer and the trustees generally had to deal with what they were given. This means that the features and facilities that are available, together with the charging structure, have been beyond the control of the trustees.
In this scenario addressing value for money can be difficult, as it potentially implies renegotiating the existing contracts or changing to a new provider. This may result in additional costs to the employer since the advisers’ fees can no longer be hidden within commission payments.
There is increasing pressure to increase transparency of charging, however, and providers are likely to respond with offerings that enable trustees to determine the value for money within their propositions.
With pressure from the Regulator, trustees of DC schemes will have to engage with employers where the existing arrangements are no longer fit for purpose. This will either lead to changes which will promote better value for money, or trigger a decision to wind up the scheme and outsource the problem to a contract-based or mastertrust solution.
Nick Boyes is managing director of independent trustee firm Able Governance