The checklist of factors a consultant or adviser must weigh up when deciding whether a scheme or provider is delivering value for money is a lengthy one. Is cheapest always best? Are members paying for functionality they never use? How will the default cope with a bear market? How does the plan use technology? Is the governance structure enhancing value for money? Where will retiring members be signposted? And will the admin system fall over? Every one of these complex areas is a significant element that intermediaries advising employers and trustees must take into account. The extent to which each will be relevant will depend on the member population profile, the employer’s objectives and the type of industry. So what issues lie behind each of these factors and how are consultants and advisers actually comparing schemes and making their ultimate recommendations to clients?
The value of MAF
Speaking in a debate at a Corporate Adviser round table event in London last month, delegates agreed probably the first and most easily accessible point of call for advisers and employer when carrying out due diligence on an occupational pension scheme is the Master Trust Assurance Framework (MAF). MAF currently comprises 22 accredited providers that are listed on The Pensions Regulator’s (TPR) website. Delegates at the event, held in partnership with Nest Pensions, were keen to point out that there are two tiers of accreditation and emphasised that type two is a lot tougher type one.
Nest Pensions director of business development Helen Dowsey said: “With type one, you have all the controls, but a provider hasn’t yet demonstrated they’ve delivered. With type 2, they have shown they have adhered to the framework they have set, and delivered on it. When you have got that continuation of type 2 being achieved every year, you have demonstrable evidence you are doing what you should be doing.”
But with the impending tougher new rules on master trusts set to take effect from October for all providers in the market, not just those on TPR’s list, will MAF become redundant? Furthermore, given the fact that
some schemes with MAF accreditation do not give their lowest earning members tax relief because they are set up on a net pay basis rather than a relief-at-source basis and they earn less than the income tax threshold, should MAF even be giving them the very real endorsement it bequeaths? For members earning more than the earnings threshold but less than the nil rate band, all the governance in the world isn’t going to make them feel like their scheme is working for them if they are missing out on 20 per cent of their contributions, it was argued.
But speakers at the event were not convinced that the inability to offer relief at source should be a fatal black mark against a scheme, arguing the role of MAF is to assess whether the scheme is robust, not whether it is offering tax relief in a way that benefits a particular group of members.
Nest Pensions senior business development manager Robin Armer said: “It boils down to the trustees of the scheme having the responsibility to deliver the things it tells members it is going to do in the simplest format. It you have this investment structure, and take contributions in this manner – MAF measures how that framework is developed and put in place. You start to see what is rigorous and robust and where the gaps and flaws are in other models.”
Conduent head of DC pensions Mark Pemberthy did not believe that MAF should be removed for schemes not offering relief at source. Pemberthy said: “That would be quite a contentious move. Both net pay and relief-at-source are legally valid ways of operating schemes. You could argue for different populations that one would be more appropriate than the other. It is a scheme selection and design issue and sits with the employer. It would be very harsh to make that an absolute requirement for something like MAF.”
For Hymans Robertson DC investment consultant Jesal Mistry, ensuring members get value for money covers considerably more factors than are covered by MAF. Therefore, simply picking a MAF scheme will never be enough, although it was a useful help in going through the matrix of questions needed to determine which scheme was suitable for the client. He said: “MAF is about whether schemes are operating the right way but it could be argued value for money is something quite different. Having MAF is not a guarantee of value for money for members”
Delegates at the event said the tests for value for money against which they ranked providers used the regulator’s framework as a starting point for a matrix approach, but after this a more nuanced interpretation of the scheme and how it met the needs of the population was needed.
Barnett Waddingham associate Martin Willis said: “To be fair the value for members framework, while it is fairly woolly, asks what services are being provided, how much do they cost and are they being performed well. That is a standard matrix. The hardest bit is looking at value in a relative manner. Is it as good as someone else is getting in the same situation?”
Mistry said: “Some elements are easier to quantify, like charging structures, investment returns. Then there are elements such as communications. That is more relative. If they are doing communication, is that impacting on behaviours? That has value if people are paying more in. Although the problem with providers’ communications is that they are very generic.”
Willis agreed, adding: “It is not just whether a communication has been done but has it delivered anything? Did it drive behaviours?”
LCP co-head of trust consulting Stacy O’Sullivan warned that there was a fear that value for money checks carried the danger of it turning into something like the risk register, ‘fished out’ once a year, checked to see if anything had changed and then filed away
Pemberthy highlighted a potential risk of divergence between trust and contract schemes. For trustees the code is really explicit, he said. “It is a pretty comprehensive process and takes up a lot of bandwidth. The regulator is reviewing small and micro schemes – taking a qualitative view. The risk is that it then puts a lot of focus on the process of value for money and takes away from what the scheme is doing for members. On a contract-based scheme you wouldn’t do an explicit value for money test – you would be looking at how well the scheme is working, how it is meeting the objectives of the employer and how it is serving the members. It is more outcomes based. There is a risk that by focusing on the process, you lose focus on the outcomes,” said Pemberthy.
Value and cost
Speakers agreed that cost should not necessarily be the primary driver for scheme selection, saying that paying more for asset management to ensure good outcomes for a wider range of members was money well spent, and would meet the value for money requirement. But several said that all things being equal, cost would always be seen as one of the big factors in scheme selection, given the fact that it is so clearly identifiable and the impact of higher costs so easily demonstrable.
Pemberthy reminded delegates that there had been a huge focus on the charge cap and the fear it could come in lower. “Cost doesn’t equal value, but it is the most measureable thing. It does take a degree of bravery for cost not to be one of the headline factors. But the whole industry is getting much more confident about how it engages and starting to evidence and articulate where that value comes from.”
Comms, tools and fund choices
Delegates grappled with the issue of whether members appreciated lots of features deemed necessary by the pensions industry. Delegates at the event agreed that caution was needed in placing too much value on the communications, tools and extra fund choices offered by some ‘bells and whistles’ providers when making assessments. Whether functionality was suitable for the membership was seen as a key issue for the value for money calculation that sponsors and their advisers had to make. Regardless of how cheaply an additional range of funds or set of tools is offered, if they are not being used by the membership, and are never likely to be, then arguably their cost reduces the value for money of the scheme, it was argued. Yet at the same time, on the other side of the coin, in an ideal world, all members would be logging in, accurately assessing their own risk profile and navigating their way to their ideal fund selection.
Pemberthy said: “One has to ask how engaging are the tools to encourage people to model future outcomes? Should we be spending money on those if members are not using them? Not many are, so do they need them? On a principled view the answer is yes. But is it a good spend of the money when 90 per cent aren’t using them. Yet saying that, that would be a dangerous route for value for money to go down.”
Armer said that the regulator’s guidance discusses the members’ needs, the extent to which members understand what the services are for, and whether services are insufficient or excessive. But the context for all this is that most members don’t understand what is on offer.
He added: “What about schemes with vast ranges of investment choice that are used by 1 or 2 per cent of the members? What cost is there in providing 250 funds for two members to use 10 of?”
Mistry added: “Everything you offer has to be about a better outcome. Is 250 funds going to make a better outcome? So it comes back to really making sure the default is right.”
However Willis cautioned that not every employer had a completely disengaged
workforce. He said: “There are some employers where fund choice is valued. Where that is needed, it is an active piece of consulting.”
And Pemberthy noted that with most providers you are not paying much more for the extra fund choice.
The degree to which support structures around retirement are in place was considered to be an area of growing importance in the scheme selection process. While most people with maturing auto- enrolment pots are likely to take cash because of their low fund size, this situation will quickly change, meaning schemes
need to start showing they are dealing with the decumulation journey, or at least the start of it. The biggest concern here was that members could accumulate in a heavily regulated, low cost, well-governed scheme, only to be catapulted into a high cost, unregulated pension freedoms environment at the end of the journey.
This transition from institutional to retail pricing was seen as a potential return to the open market option challenges of the pre-freedoms world.
Willis said good work was being done by consultants and providers where they were in situ, but there was an issue for members in schemes where there was less support. Armer meanwhile said: “There is a real challenge coming from an AE low charge saving environment. When you want to take money out, the cost is likely to increase from 30bps to 150bps. That doesn’t feel like a fair charge for access to your money. For our membership that is a big challenge. The challenge for the industry is innovating.”
Pemberthy cautioned: “That charge structure is not the universal situation. Plenty of workplace schemes will have very similar if not identical charges in decumulation and accumulation.” He did not believe it would be right to move to a regulated decumulation environment, just when market practice was evolving.
Mercer Jelf head of benefits strategy Steve Herbert said: “This problem is a legacy of how the legislation was introduced. There has to be a commercial imperative and a drive to do it. At some point down the line, there will be regulation undoubtedly.”
Willis suggested that auto enrolment could mean people engaged less, only to be presented with a huge amount of choice in retirement. He added: “They have never had to make a pension decision with defaults, and then they get to retirement and it is “oh my goodness so much choice”.” He cited the example of people taking DB pensions early at a penalty when they also have a DC pot.
Mistry added: “People do the same with their tax-free cash. People just take it. They don’t know they don’t have to.”
Dowsey said: “We have done an analysis of our membership coming up to retirement. We have got a small number of members who are close to retirement and they have a few hundred pounds in their pots. But it will become a problem. We have 1 million members over the age of 50. They will also be taking their pots at some time in the next 15 years. This is good planning time for us to get something in place.”
Delegates were also concerned about members facing decisions with falling mental capacity. Armer noted that most drawdown had been adviser-led, meaning at some stage the advice could be to annuitise. But advice was not likely to be available to those with £30,000 or £40,000 unless robo provided a solution.
Asked whether there was a case for master trust drawdown, Pemberthy said that such a development would be complex because the scheme would not know what other assets people have got. “Getting people to look at the whole of their whole assets is essential when they are in retirement,” he said. Pemberthy suggested we needed to move beyond looking at the pension as the sole income generator in retirement. “We need to try to incorporate that knowledge of pensions and put it alongside the other assets. Freedom and choice gives us that opportunity.”
He added: “We have got to be careful we don’t beat ourselves up too much. There is an issue with not saving enough in a pension, but there is also an issue with not saving enough full stop. Savings rates in the UK are below 5 per cent of earnings. In most DC schemes, we are already ahead of that. Pensions need to be part of the wider debate around savings habits.”
Herbert added: “The pension word is toxic. But we have pension freedoms now, so let’s take advantage of them.”
The high-profile failure of one master trust’s admin systems raised the question of whether vertically integrated schemes are likely to have as robust governance as those buying in resources from multiple players.
Mistry said: “When problems like this occur internally, it begs the question how independent in reality were the trustees. Are their hands tied by the fact they have to use a provider’s investment solutions and admin solution? Could they have looked at that and asked whether it offered genuine value for its members? What if it isn’t value?”
Willis added: “There is the governance structure within the product itself, which should be doing the majority of the job. But you should have a larger governance structure at employer level. I would argue that product-based governance in a master trust should be the starting point.”
O’Sullivan added: “I always think governance is a nice to have. But not investing contributions? If you can’t get the bread and butter right you are not giving anyone the opportunity to say ‘is the rest okay?’.”