We are all nosey and love to know things about other people. It helps us work out where we stand in the pecking order. Are we missing out, or are we one of the lucky ones? There’s no getting away from comparison, whether it’s the neighbours, the kids or our colleagues.
Pension schemes are no exception. They just use a fancier concept called “value for money”. There are already rules and regulations that explain how we should assess the value offered by different pension schemes, and how each scheme should publish its findings. But the Government says it wants to update the rules and require even greater disclosure. That will delight the nosey folks because it means we will get to find out even more about what is happening in other pension schemes besides our own. The idea behind this is that people can check if they’re getting a good deal or not, and drive a better bargain in the future.
We’ve been told to expect the new draft regulations at some point this Autumn, so we’ll have to wait and see what the detailed legal requirements will be. It’s also unclear when they will take effect, but most people are working on the basis that it could be a while before we get to that point.
Once we do have new rules in place it will change the way that trustees, employers and advisers compare their pension schemes to others. It could also affect who they will need to help them with that comparison.
DC scheme trustees and independent governance committees (IGCs) who have already spent the best part of the last few years working on “value assessments” will need to re-think how they go about it. Here’s three examples of ways in which they might change going forwards.
New infrastructure will be needed to help trustees and IGCs manage lots of additional bits of data. That data will need to be captured, stored, shared and discussed. Yes, I’m afraid so – best look away now if you have a nervous disposition around reliance on technology and other third parties. It might lead to interesting questions around who has accountability for delivering the necessary data and what happens if the party who is supposed to provide it to you lets you down. It seems likely that automated systems will need to develop to help with this process, and that contracts might need dusting off to check that they cover the appropriate terms.
There are some really good DC consultants who curate thoughtful checklists of factors which are relevant to both value for money discussions and also decisions about consolidating individual employer schemes into master trusts. These comparisons underpin a lot of the to-ing and fro-ing in the DC marketplace at the moment because they help employers and trustees to benchmark the different providers. Because the advisers set the criteria that consider the different pros and cons of each provider, they play an important role in any projects involving a change of pension arrangement. We can only guess at the impact that the upcoming regulations will have on those advisers, but suspect that they are going to be very busy tailoring their existing criteria to incorporate the new and updated requirements.
This leads onto a related point. It’s fairly common for today’s value assessments to compare one year to the next, the aim of a good scheme being to show that value is improving over time. There are lots of consultancy firms out there who are good at supporting the assessment process.
It helps if your value for money score in one year can be easily rolled across and compared to your score in the next, by application of similar criteria and tests. During the year of transition to the new arrangements though, there’ll be no straight line development from one year to the other. You won’t be able to show an improvement of 5 per cent, say, in your scoring if the scoring system has changed in material ways. That means communications with members and customers will need to be considered carefully. Switched on trustees may want to think about preparing the ground for this over the next few months, to start plotting their way through the changes.
It’s difficult to do too much until we see what the new regulations say. But as soon as they are published, we can expect a flurry of activity in this space.