Value for Money (VFM) has always coveted star status on the pensions governance agenda and the latest post-auto enrolment patch-up legislation has finally brought it centre stage. From April 2015, trustee boards and independent governance committees (IGCs) are required by law to assess VFM for members. First, they will have to define it.
There is no consensus on what VFM means in practice. So how can we design a practical framework, which governance bodies can use to meaningfully assess VFM in their schemes? At its simplest, VFM assessment weighs the cost to members against the benefits that they receive in the form of investment returns, administration and communications. The Pensions Regulator also makes it clear that what members value should be at the heart of any assessment. The basis for any meaningful VFM analysis will be quantitative answers to the questions:
- 'How much do members pay?'
- 'What benefits do members receive?'
- 'What do members value?'
Out of our analysis we can derive two central metrics: absolute and relative VFM. Absolute VFM looks at a scheme in isolation. It asks whether a scheme can be considered to provide VFM on its own merits; are the members engaged and happy that the scheme is delivering what they want? Relative VFM looks across the wider market. We take each data point in the member-value-weighted cost-benefit analysis and determine how the scheme fares against its peers.
"Excellent communications help members to understand the importance of saving for retirement and how they can interact with their benefits"
Trustees and IGCs should start by establishing what members pay for the benefits that they receive. This will be difficult. While the joint industry code should make it simple to identify a scheme’s explicit charges, members’ pots are also eroded by transaction costs, which can be substantial and opaque. The plethora of explicit and implicit costs levied on members, especially in legacy arrangements, will need to be painstakingly unravelled and quantified.
There is a danger that we get completely caught up on cost. Where workers bear the brunt of the charges on a product that they may never have signed a contract for, of course cost is an integral issue. But could even the lowest-charging scheme claim to offer good VFM, if members’ contributions are always invested late and often into the wrong funds?
"Good administration drives good member outcomes but goes largely unseen. It can be measured through comprehensive data audits, contribution reconciliation exercises and measurement of service performance "
We therefore need to look carefully at the benefits members receive and their quality. Administration, communications, investment and at-retirement support are all essential in ensuring that members have control over their benefits, understand their options and have enough money to meet their retirement objectives.
Good administration drives good member outcomes but goes largely unseen. It can be measured through comprehensive data audits, contribution reconciliation exercises and measurement of service performance.
Excellent communications help members to understand the importance of saving for retirement and how they can interact with their benefits. Management information, focus groups and member feedback all help us measure communication efficacy.
In-depth investment analysis will ensure that the scheme’s arrangement is performing in line with its objectives. Because trustees have a wider obligation to the beneficiaries, they should also seek to understand the composition of the scheme’s membership; members’ financial status and aspirations. If the majority of members are being defaulted into an investment arrangement that is not in line with their financial objectives, it is hard to see how a scheme could claim to provide good VFM.
High-quality estimates of costs, comprehensive audits of administration systems, in-depth investment analysis and detailed data on communication efficacy should form the basis of VFM monitoring. Most important, though, is how we reconcile this information with data from member surveys, focus groups and management information, on what features the members value and how much they value them.
This exhaustive process generates a dataset from which we can score schemes for the absolute VFM that they provide their members. We can understand immediately what members feel the scheme does right and the areas that they think need improvement. Our analysis also gives us the metrics we need to make meaningful comparisons across the wider market, to determine the relative VFM; a powerful tool for driving better member outcomes.
This article first appeared in Pensions Insight Magazine