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I recently took part in a DC Schemes - More detail on the Value for Members Assessment and actions to be taken webinar (a sequel to the first part held last November) joined by legal and pensions experts from CMS and Punter Southall Aspire to look at the detail and answer questions.
I looked at the tricky issues pension trustees may encounter in performing an MOT for their defined contribution (DC) scheme, working to the DC Code and guidance issued by The Pensions Regulator (TPR) in March 2022. Each pension scheme’s circumstances are different, but early assessments have already resulted in improvements made to the value for members (VFM) of the scheme or a transfer to a master trust. However, most DC schemes still need to perform their VFM assessment.
Delivering optimal member outcomes
Pension trustees consider the best valued features but often only work with feedback from a minority of more vocal members. In some trust-based DC schemes, members bear the whole costs of governance, administration or communication services via the composite annual management charge (AMC) so the pension scheme trustees are bound to include an evaluation of these key features (which members have no choice in). In other schemes, the sponsor recognises this cross subsidy in one way or another, which could also be considered in a VFM assessment.
What’s valued most
Trustees are reliant on investment returns and total costs data to evaluate the fund range ratings/risk ratings - including new environmental, social and governance (ESG) integration - and place a value on these new features available to all members. VFM assessment will look at both growth in pension funds in the accumulation stage and investment for members to enjoy income drawdown via retirement pathways in the decumulation stage.
Ultimately, the most tangible result is delivery of the highest pension on time for each member. As individual retirement dates can change, trustees need to evaluate how effective the administration of such changes is. It impacts directly on either the lifestyle or target dated funds many trustees have selected as the default investment, which the majority of members settle for.
Trustees are not applying a higher value to pension schemes with higher contributions, which is the sponsor’s choice. The Pensions and Lifetime Savings Association (PLSA) quality mark ‘PQM’ goes beyond minimum requirements. To meet PQM standards, the employer offers all employees a minimum contribution of 12% (with at least 6% from the employer) or 15% for PQM Plus. To help make pension projections relatable, the PLSA redefined its Retirement Living Standards as ‘Minimum’, building to ‘Moderate’ and then ‘Comfortable’. A Responsible Investment Quality Mark is in consultation too, offering a new standard to which DC schemes can aspire and a member-focused way to demonstrate activities in this area.
Trustees need to evaluate the effectiveness of member communications, including traditional offline tools, any face-to-face meetings offered and online facilities to change contributions, investments and personal details etc. Consolidation vehicles like master trusts have higher budgets than many own trust schemes, but still face the same challenges of ensuring communications are relevant to each member.
Post assessment – pass or fail?
Sponsors of DC schemes demonstrating poor value will need to agree next steps and devote resource and budget to improving member outcomes. The alternative of consolidation into a master trust also needs to meet agreed aspirations to deliver optimal member outcomes. With sponsor resources often stretched, careful scheduling of the whole project including selection process and launch is needed.
Trustees of a DC pension scheme which fails the VFM test but is in surplus will need to agree the wind up with the sponsor, including use of any sponsor reserves to defray expenses. They’ll need to review their powers to augment members’ fund accounts and making a bulk transfer to the chosen consolidation vehicle.
Hybrid schemes in deficit that fail the test will need to agree a programme for change with the sponsor including the recovery plan.
When considering the transfer of a DC section to a master trust, trustees need to be mindful of protecting members’ tax-free cash by facilitating the potential transfer back from the master trust to the hybrid scheme at retirement.
If your DC scheme passes the VFM test and the scheme continues, the pension trustees and sponsor need to agree the content of each annual reassessment as part of an ongoing progressive improvement programme. This may include three new comparator schemes within the MOT test and will be dependent upon changes made to improve member outcomes.
Next steps for regulation
The joint framework on VFM tests is to be agreed TPR and the Financial Conduct Authority and will be announced in 2022, along with a revised format for the annual Chair’s statement where the results of the assessments are disclosed. So watch this space for more…
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