Anybody buying a new car or booking a much-needed holiday usually likes to spend some time to ensure they get the best value for their money. A workplace pension, albeit less reliant on engine power or guaranteed sunshine, is no different and should also be assessed on the value it offers members to help them achieve the best possible retirement outcomes.
But what exactly does value for member mean when it comes to pensions? How is it defined and measured?
In its DC code The Pensions Regulator (TPR) states that all members should receive good value from their pension scheme, with providers required to carry out a value assessment at least once a year.
Employers need to consider more than just the costs and charges of a scheme if they want to give their employees true value, such as do the charges offer value over the long term? Are governance structures robust and do they act in members’ interests not the shareholders? Are members paying for functionality they never use? And, is the administration system fit for purpose and built to last?
But comparing schemes is by no means black and white. Some elements are easier to quantify than others – including charging structures and investment returns. Then there are elements such as communications that are more subjective – for example, how a scheme’s communication is impacting member behaviour and do members value the scheme?
A well-designed diversified default fund, subject to regular review of its asset allocation and manager selection is a vital aspect of providing value for member. But with so many savers choosing to remain in the default, how can employers be sure that it delivers every member the best possible retirement outcome? At NEST we use a single-year target date fund model. When a worker enrolls with NEST their money is invested in a Retirement Date Fund based on the year they are expected to retire. Identifying the target date in this way allows NEST to maximise growth of members’ pension pots.
Whilst the majority of members remain invested in the default fund, it is also important to empower those members that want to actively engage with their pension. But how do you ensure that there is the right amount of choice available?
Employers need to consider if schemes with large ranges of investment choice that are used by only a small proportion of members are really providing value. They also need to determine what does providing a vast choice of funds do to scheme charges. The evidence suggests offering too many funds overwhelms employees and creates what psychologists term choice overload and fear of regret which result in savers being less rather than more engaged with their pension.
NEST approaches the challenge of choice by offering five distinct fund choices over and above the default. This focused range of funds provides members with real choice without overwhelming them.
When employers are considering if their chosen scheme provides value for their employees, the Regulator’s framework acts as a starting point, but after this a more nuanced interpretation of the scheme and how it meets the needs of the population is required.