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23 Oct 2015
by Debi O'Donovan

10 ways to check your workplace pension provides value for money

There is much head scratching and navel gazing going on in the pensions industry over a number of issues. One that keeps catching the attention is that of costs, charges and providing value for money for members in contract-based defined contribution schemes.

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There is much head scratching and navel gazing going on in the pensions industry over a number of issues. One that keeps catching the attention is that of costs, charges and providing value for money for members in contract-based defined contribution schemes.

Barnett Waddingham were kind enough to invite me to a discussion on this very topic this week. This is my list based on what Kevin O’Boyle, head of pensions at BT, Michael Chatterton, independent trustee at Law Debenture, Mark Futcher, head of DC at Barnett Waddingham, and Alex Pocock, head of DC investment at Barnett Waddingham, said.

10 questions to ask to find out if your workplace pension is value for money:

1. What is our organisation’s stance on value for money?
Just as some people would argue that Waitrose or Marks & Spencer provide good value, others swear by Lidl or Aldi. It all depends on what you use as a comparison. It is the same with pension schemes: is it just about cost? Or is it about providing better value? The National Audit Office says it's whole life cost and quality. Others say it's outcomes based on what was actually contributed. What is it that you are measuring? 

2. What are we paying?
Trying to get a breakdown of all costs is going be tough. So is picking through what is relevant and working out what can be reported. But the more that employers ask the questions, the more the industry will have to respond and be more transparent.

3. What is the total cost borne by each of our members?
Do you know what each of your members is paying for their pension? They'll pay an annual management charge (AMC) for their investments. Some employers then pay the administration charges, other choose to include the admin charges in the AMC paid by each member. What are your staff paying, and is it worth it (see point 4)?

4. Are we using all the benefits that we are paying for?
What do our admin charges include? For example, do they include employee communications, do they include governance? Or are those billed separately? Are we using the benefits to full capacity? Is the admin good and do staff access the support (e.g. call centres, online tools and so on).

5. What makes up our investment costs?
Costs here can be split between asset allocation, portfolio rebalancing (transaction costs) and platform costs. Asset allocation might be the thing that makes the biggest difference, so you may choose to balance your costs accordingly.

6. Are we paying the right amount?
This is the 'how long is a piece of string' question (refer back to point 1). Some employers compare costs against the contract they have with their adviser, others compare against Nest, some use the official charge cap (0.75), yet others refer to the NAPF (now renamed the Pensions and Lifetime Savings Association) survey on charges.
There is an argument that benchmarking against other schemes is a bad idea because every scheme is different and you should be looking for a member-to-member comparison, not scheme-to-scheme. You should also compare like with like (such as investment management styles: passive with passive, active with active).
Either way, it will not be a single number, it will be within a range.

7. Are you and your employees contributing enough?
Even if you think your workplace pension scheme is not the best value one out there, it is still a vastly better option to have staff in it than not. Therefore, if you do nothing else, make sure there are enough contributions (from both employer and employee) going into the scheme to ensure a good retirement outcome (and good does not mean statutory minimum).

8. Why bother engaging disengaged employees?
This is the biggest challenge to employers and good employers work hard at it for two key reasons. Firstly, pensions are expensive to offer. So the employer wants to see staff appreciating this spend. Secondly, employers know they will have a huge problem if staff can't afford to retire one day. The employer will realise it decades before the employees wake up to the fact. Those savings' decades make all the difference to future workforce planning and HR headaches.

9. What can go wrong with a charge cap?
If you set a charge cap too low then besides not being able to offer the engagement tools needed to get staff to contribute more (see point 8), you also risk forcing advisers and investment managers into poor value decisions. For example, the investment manager may know when the market is falling but cannot transfer the investment because they can’t afford the costs of doing so. Paying too little then leads to poor value for members.

10. Can we make up for low contributions by having better investment strategy?
Not really. It is better to have good contributions and 'cheaper' investments, rather than the other way around. Making investment choices too complex could also put off members. Most members want you to do it for them (so your default fund needs to be reviewed regularly to ensure it is fit for purpose), and to make it simple for them.

If you do nothing else, do this:
Ask the employees in your pension scheme for feedback.
What members say about the scheme is more valuable than any other comparison exercise. That will tell you about how valuable your scheme really is.

And, obviously, do point 7.

Debi O'Donovan
Founder
Reward & Employee Benefits Association (REBA)

Twitter: @debiodonovan @REBA_global

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