The landscape of defined contribution (DC) pension schemes is almost unrecognisable compared with the industry I joined some 20 years ago.
The majority of employers who engaged with pensions had defined benefit (DB) schemes. When these closed it felt natural to many to maintain the link with the employer and set up a DC arrangement under Trust. This has led to thousands of small/micro DC arrangements which have become somewhat unkempt as time (and regulation) has moved on.
The original premise for establishing an occupational DC scheme rather than a contract based arrangement was likely the wish to retain a paternalistic interest in employees’ retirement benefits, and keep some link between the business and the membership. To some the Group Personal Pension/Stakeholder market felt a little detached; a bit like cutting employees adrift from what had traditionally been a key employment related benefit.
Views on Value For Money
Fast forward 20 years and you have a whole new raft of legislation primarily focused on achieving Value for Money (VFM). In my experience people tend to view VFM in different ways:
- Some view VFM in terms of the range of investment options available to them and ultimately the costs of accessing those options.
- Others appreciate and see added value in the tools and guidance made available to members, are content to see their funds invested in the default investment arrangement and do not wish to actively make investment decisions for themselves. In an occupational DC scheme this latter group is placing a lot of reliance on the trustees and their advisers to ensure they deliver good outcomes for the members. By far the majority of DC scheme members fall into this latter category.
So how do we regulate this with a view to delivering good consistent outcomes for a large number of people with varying personal circumstances? Simple – we get everyone in massive schemes that have huge economies of scale and can deliver informative member-focussed support, low cost platforms and a range of investment options.
The Pensions Regulator (TPR) has suggested in its recent survey that 99% of small schemes (between 12-99 members) and 96% of micro schemes (between 2-12 members) are failing in their Statutory duties. I took a call from the ONS on one Scheme and I can attest to it being a VERY thorough set of questions (my ear is still numb). TPR is very much of the view that well governed schemes will tend to deliver better member outcomes all other things being equal.
However, the reality is that the spend per member to achieve good governance is disproportionate to the size of the scheme. This is not to say you can’t have a small well governed DC scheme, but many employers have a pension budget that will not allow that to be achieved. It could also be argued that that governance spend would be better directed towards contributions to the members. The biggest drag on improving member outcomes is the relatively low contributions being paid into DC schemes – the current auto- enrolment minimum contributions of 8% remain inadequate, although clearly a step in the right direction.
The other inconvenient truth about the occupational DC market is that, for small schemes, it is largely a legacy business and most legacy providers simply do not want the business. In some instances the product isn’t even fully compatible with a Trust as the provider does not really consider the Rules when processing movements etc. This means that even if an employer and the scheme trustees wanted to improve their existing small DC scheme they may struggle to do so.
Conversely, providers still actively working in the DC market have invested heavily to support their master trust and contract based offerings with a view to delivering lower costs, higher governance standards and overall better outcomes for members.
Trust in good governance
I appreciate there are employers who still want to maintain a link to the membership, and protect their interests. This can be done through a Governance Committee mandated to review the suitability of the provider and lobbying for better terms and functionality. I am Chair of our own Governance Committee and in the 5 years it has operated we have:
- Negotiated improved contribution matching provisions from our Group Board;
- Negotiated better AMC terms with our provider;
- Reviewed the suitability of the default arrangement and are in the process of changing this;
- Introduced annual pension roadshows for our employees;
- Introduced regular Scheme updates in our All Staff bulletins;
- Reviewed the ESG options available on the platform;
- Achieved PQM+ status for our GPP.
We will not stop there and keep looking at ways of improving the functionality for our colleagues. We manage to do this without a Trust structure, albeit we are slightly blessed with people who know about pensions within our business (strangely).
I think all employers need to take stock and consider the best interests of their employees. If they want to continue to provide support, look at setting up a Governance Committee. The costs will be lower (in time and adviser spend) and ultimately the net outcomes can be better, working alongside a strong provider who is committed to the market.