How should pensions governance and scheme decision-making be divided between employers and providers such as mastertrusts? Pensions Insight asked a panel of experts

When you outsource your DC pension scheme, what governance responsibilities should still sit with the employer and does this vary depending on the size of the company?

Paul Budgen (PB) It makes very little difference as to how big an employer you are or whether you’re investing in master trust or a contract GPP scheme - your regulatory and legal responsibilities are the same. Having said that, the amount of due diligence or the internal compliance and governance structures within larger employers does mean that you would see a lot more oversight of their pension scheme supplier which would fall into their normal compliance and governance processes. But that would be related to how an employer runs his business rather than necessarily anything that is specific to the pension scheme.


Kim Nash (KN) I sit on a master trust and an IGC so I’ve seen it from the provider side, and I also sit on governance committees for employers to oversee their schemes. Generally where we’ve seen that employers have wanted to engage, has been around making sure the investment strategy is doing what they want it to do. Quite a lot of employers set up their own bespoke investment strategy, rather than taking an off-the-shelf one from the provider. There’s an engagement piece that they need to have with the investment strategy and also around communications and engagement for the membership, so making sure that their employees’ needs are being serviced by the provider is important. Just holding the provider to account and making sure that they are reviewing their performance, making sure they’re obliging with their contractual obligations and their members are getting a service that they need is also key. We have seen that’s been quite varied in terms of the level of involvement the employers want to take and that’s not always directly linked to size, I think quite a lot of it is culture within the organisation as well.

What are the best ways for master trusts to incorporate feedback from members and employers?

KN I think that’s one of the biggest challenges with a master trust and how it’s set up - actually trying to get direct feedback from members. In general you find the population is fairly unengaged so it’s quite difficult to get that feedback. With the master trust that I’m involved in, we’ve looked at giving members an opportunity to be able to feed into our processes so they can speak direct to us if they want to. Other people have considered member forums, so getting a group of members together and talking about the offering, trying to get some feedback that way, and meeting directly with the employers so that you can get feedback from their membership direct from them. It’s helpful to have engaged employers on board that you can have that conversation with.

Bob Wells (BW) We’re in a GPP with a governance committee, so it’s a slightly different scenario, but we have two governance meetings a year where each employer is entitled to send a delegate, and the vast majority of them do. We also insist on the employer sitting on the governance committee, so the ultimate employer, i.e. Thyssenkrup UK, has a delegate on the committee as well as each of the subsidiary companies having a delegate. As a governance committee, we engage with the primary employer at a governance level, as well as with the subsidiary employer.

When thinking about governance priorities, what ranks higher – acting in members’ best interests or control of costs?

KN I don’t think having the lowest cost offering is necessarily the best, and it’s not in members’ best interests for us to just try and beat down the costs that they’re paying. Costs do have an impact but so do an awful lot of other items, such as investment returns or just getting members to pay more in. And to get them to increase their contribution you need them to be engaged so you need an engagement programme that goes alongside it.

PB The infamous quote from Oscar Wilde ‘some people know the price of everything and the value of nothing’ comes to mind. Pension schemes are a bunch of things. You’ve got to join it, put contributions in, keep an eye on charges, and also understand the kind of performance you’re getting on a risk-adjusted investment portfolio. It’s keeping all those things in balance and making sure that the scheme is fit-for-purpose, that it is matching what members want but also that ultimately, we are all acting in the members’ best interests.

BW If you are acting in the members’ best interests then value for money is just one of a variety of things we look at. Performance is important, as is performance against your peer groups and also to make sure you’ve got the right risk profile according to your membership. Acting in the members’ best interests is a little bit of everything we do, and value for money is just one of the parts that goes towards making up what we do as a governance committee.

How important is a scheme’s investment strategy in deciding which master trust to go for?

KN It isn’t the deciding factor. How the provider is going to link in with the employer, how they are going to work together, the culture and how the engagement going to work are equally important. The default and how that’s going to work is an important focus, as is looking at how risk is measured and whether that fits in with the requirements of the membership. A lot of it just comes down to knowing what your membership is and making sure what you’re providing is fit-for-purpose for them.

BW When we started to build our DC scheme in 2011, we needed to look into communications as well as the investment strategy, and how they could fit in with each employer. Each of our employers, subject to minimums, can set their own contribution rates for each company. Even within each company different groups of workers can have different contribution rates.

PB Aligning investment strategy to membership and thinking about how you manage risk is key, and that’s one of the reasons why our research led us to including a foundation phase within our default fund strategy. For those entering our scheme before the age of 30, their asset allocation might be around 30% in equities and as they get older they’ll then go into our growth phase which has got more like 50% in equity markets. It made sense for us as the scheme trustees, taking responsibility for the investment strategy, to have a foundation phase, get people into the savings habit, moving onto the growth phase and then through into whatever retirement option they were looking at. When we’re talking to members and employers at the smaller end of the scale, there is a big emotional pull about integrity. They want to be able to trust that the provider that they’re investing with is going to do the right thing. They don’t want to be overwhelmed with detail about transaction costs or currency hedging. We made the communications as simple as possible. You have a target date fund set to your state pension age and if you want to look further into it you can do, but the trustees and the Chief Investment Officer are responsible for the strategy on your behalf. We do have five other funds that people can select, but less is more. If you give people 200 fund choices they don’t make a choice, you overwhelm them.