What are the new VFM regulations, and how will they impact trustees?
There has been a lot of talk about ‘value for money’ regulations, but we prefer to think about ‘value for members’. This isn’t just about cost and fees, but the whole range of services offered that will influence member outcomes, from administration and governance, investment strategy and returns to options at retirement, engagement, communications and digital capability.
These new rules, from The Pensions Regulator, came into force in January this year. They require trustees of pension schemes that have £100m or less in assets to undertake a detail assessment to see if their current plan offers value for its members. Trustees will be required to compare their own offering with three other schemes, which will have to include at least one master trust.
Normally it is the largest schemes that have to comply with new regulations first. Here, quite rightly, it is the reverse. The government and regulator are concerned that many small single-employer trusts are not necessarily providing value for members. These regulations require trustees to evidence that they are delivering value for members and to take steps to address the issue if they are not. This is likely to involve consolidation into a larger scheme, such as a master trust.
Consolidation has been happening for a number of years now. But what are the perceived barriers for trustees when it comes to moving now?
Bigger really can be better when it comes to pension provision. Larger providers have the economies of scale that enable them to deliver a range of additional services and better outcomes for members.
However, for trustees of smaller schemes there are still some barriers to moving. Some mature schemes may have legacy issues, for example members with a protected retirement age or a higher tax-free cash entitlement. Some may feel they cannot wind up their trust because it has a GMP (guaranteed minimum pension) underpinning it. With some schemes the sponsoring employer covered the administration fees, but often this is paid for by the member with larger commercial schemes. But these are all issues that can be overcome.
What does the future look like in terms of pension consolidation?
We have already seen many single-employer trusts consolidating into master trusts, many looking to pre-empt these VfM regulations. For corporate sponsors this can lead to cost savings, as well as delivering better outcomes for member — and many employee benefits consultants and corporate advisers are already giving good advice to these schemes on what their best options are. The new rules are likely to further accelerate this trend.
There have been concerns that this could create capacity issues for the industry, but we do not foresee this being an problem. As a leading master trust provider we have been preparing for these changes and have invested in systems and platforms to deal with this increased demand and enable us to onboard more schemes in future.
In time I think we will also see some smaller master trust providers merge with bigger players. But at L&G we continue to invest in both our master trust and group personal pension (GPP) proposition, with the aim of
being one of the providers that is here for the long term.
How is L&G providing value for its employer clients and scheme members?
The government guidelines on assessing value for money for members lists three factors that trustees need to take into account: costs and charges, net investment returns and administration and governance.
If you look at the Legal & General master trust you can see we are delivering on these as well as providing a range of other services designed to benefit members. This includes guidance around accessing pension benefits and retirement planning tools, as well as increased investment into our customer service proposition, digital capability and member experience. There are a lot of steps providers can take to engage and communicate with members, all of which can help drive better outcomes. Alongside this we have a strong commitment to sustainability and ESG-investing, which is a core part of our investment strategy.
When looking at value for members, it is important to look to the future. This isn’t just about where we are now, but where we are going, and at L&G we are continuing to invest in all aspects of our DC proposition.
