DC Debate: Autumn Statement, VfM and governance

1.How will the government’s pushing back the outcome of the pension tax consultation until the spring affect the speed at which providers and employers revise their existing DC offerings?

Nigel Aston: A number of our clients have said that a change to a tax-exempt-exempt basis could cause them to radically change their employee benefits provision and they are reluctant to put in place other changes until they know the direction of travel. In the meantime, wherever possible, they are tackling the challenges of freedom and choice, but it is hard for them to commit fully in this environment.

Alan Morahan: While I am relieved that the government is taking time, the delay is bound to make all pension scheme stakeholders nervous about committing time and resource to further development of their DC offerings. However, providers, employers and trustees do need to continue to innovate as there is a real public need for alternatives to the offerings that existed prior to the new flexibilities.

Mark Pemberthy: It does introduce a real risk of planning blight by employers, and trustees may be reluctant to make significant scheme changes now in the fear they will have to revisit them in six months’ time. However, the cost and system implications of any significant change in tax relief will undoubtedly impact on some providers’ ability to invest further in their propositions.

Mark Futcher: General consensus seems to be that there will not be a radical change towards TEE. Providers are still focusing on driving through the pension freedom changes and delivering auto-enrolment. The added burden of a change due to the pension tax consultation is not on their agenda. Providers have been burnt before by revising offerings – or not – before legislation has been put in place.

Helen Ball: Given the potential for an extreme change to the tax system, it is highly unlikely that providers and employers will be rushing to modify their existing DC offerings until we have the government’s decision.

However, as many will have started to lay the groundwork for changes in advance of the consultation we would hope that innovation has slowed rather than stalled.

Steven Charlton: Uncertainty does not create good conditions for designing products, funds or services. The possibility of mandated change is even less conducive to making immediate changes to employers’ DC offerings. Any required change will likely bring about further member confusion. After the quantity of change that the industry has experienced, we must be due a period of quiet reflection.

Andy Dickson: Those responsible for running DC schemes are in the immediate aftermath of adhering to new governance requirements and responsibilities, with some already putting through changes in the investment design to support the new landscape. I expect we will continue to see this important area being addressed, irrespective of the tax consultation outcome, to ensure the investment strategy best supports how members will take their benefits.

2. Value for money has been a flashpoint for DC schemes over the past couple of years. But how is the assessment of VfM playing out in the real world?

Aston: The market for large DC schemes is highly competitive and that competition has helped drive value for money. Trustees are facing the challenge of moving beyond a simple evaluation of cost to thinking about true value. Work is also beginning on assessment of transaction costs, but being held back by the lack of regulatory guidance on the data that should be considered and the disclosures that need to be made.

Morahan: The difficulty is there is no common definition of what represents value for money. Initially, a number of people took the view that value for money was simply a measure of costs and charges and that a low charge scheme was what should be aimed for. There is now the recognition that trustees and their advisers need to understand what members will value most when assessing the overall value of the scheme and its individual components. As part of a value for money review they need to consider service levels and whether their scheme or provider is offering services which are either not used or not known about. There is no point paying for a service component if it’s not utilised.

I’m keen to see if any scheme is self-aware enough to consider that it doesn’t offer value for money and that its members might be better off in a larger more competitive scheme. Now, that would be an interesting outcome

Steve Charlton, Vanguard

Pemberthy: We see two broadly different approaches emerging, based on either a comparative or absolute assessment.

Comparative assessment is more straightforward, with scheme charges and service-level agreements being compared with relevant benchmarks based on scheme size and member profile, as well as external benchmarks such as the charge cap.

Absolute assessment is more challenging as it requires a degree of insight on member behaviour and outcomes, although arguably it is more powerful because of that.

Futcher: True VfM has really only been on the agenda for schemes since this summer. Even then we have seen diverse focus and engagement from clients. The larger plans whose sponsor is focused on risk within the business have engaged and carried out in-depth analysis. For the wider population where risk and DC is not at the forefront, it seems to have been missed or there is little appetite to engage.

Ball: Our clients have been grasping this particular nettle and, in a survey we carried out at this year’s National Association of Pension Funds (now the Pensions and Lifetime Savings Association) annual conference, 59 per cent reported that they had carried out a value for money assessment. In their opinion, the main challenges included understanding the definition, benchmarking, fund choice and the time involved in information gathering and data migration.

Schemes are also turning their attention to member engagement, and considering focus groups and segmentation into different member characteristics. However, the practical options available to each scheme will depend on its resources.

Charlton: It’s a little early to tell and even the first round of annual reports and accounts might not really set a benchmark for the measure. I’m keen to see if any scheme is self-aware enough to consider that it doesn’t offer value for money and that its members might be better off in a larger more competitive scheme. Now, that would be an interesting outcome.

Dickson: Member outcomes are derived from a range of factors, including investment returns, contribution levels, costs and member engagement. Obtaining a balance across these factors should deliver good value to members. For example, if there is no member engagement will members save sufficiently? Does it constitute value for money if the member missed out on valuable employer contributions and tax incentives?

3. As IGCs start to get off the ground, what can we tell so far about their likely level of effectiveness? How does this fit into the wider DC governance debate?

Aston: Very little, given it is such early days. Independent governance committees in the major insurers have recruited a group of experienced and independent-minded professionals who should be able to make a significant contribution to governance, and they are currently working through how best they can add value for members. One of the first – and substantial – challenges is getting hold of the data they need to do the job.

Ultimately a challenging IGC could be beneficial for the provider as their reputation will be enhanced and their offering improved

Alan Morahan, Punter Southall

Morahan: It’s too early to make a judgment on the effectiveness or otherwise of IGCs. A lot will depend upon how seriously the providers have taken the appointment of members of their IGCs. If they have taken the approach that they want an IGC which will truly challenge the business for the good of the scheme members we could see some really positive outcomes.

And, ultimately a challenging IGC could be beneficial for the provider as their reputation will be enhanced and their offering improved. Where I would be concerned is if the establishment of an IGC has been viewed as a compliance box-ticking exercise and the robustness of challenge is not forthcoming. I’ve not seen evidence of this but it may be too soon to assess.

A formal review into the effectiveness of IGCs is not scheduled to take place until 2017 but I would hope we would see evidence of the benefit or otherwise of them before that.

Pemberthy: In some ways IGCs have a harder job than the trustees of an occupational scheme or mastertrust in that many of them have had a huge task in reviewing legacy schemes, and we anticipate that this has dominated their workload so far.

Also, GPP and stakeholder charges tend to be set at scheme level, therefore IGCs are overseeing a much wider variety of arrangements than many other governance bodies.

We look forward to the first reports from IGCs so we can better understand how they are addressing these challenges. However, we continue to anticipate that employer level governance committees will continue to play a strong role in influencing positively member outcomes.

Futcher: It is difficult to judge the likely level of effectiveness, not until there is a point of crisis and we see action can we really pass judgment. The providers haven’t yet been truly challenged by IGCs, which we have seen coming through in the independent VfM reviews by trustees – the focus has mainly been around implementing the Independent Project Board recommendations.

Many of the IGCs are dominated by the same independent trustees/specialists and this allows them to view the wider market and make more objective decisions as to what the priorities are – each IGC will have different challenges.

Ball: The million-dollar question is whether providers will listen to and act on an IGC’s concerns. At the moment it is too soon to call. Arguably, DC trustees are in a similar position. They do not always have the power to make changes that would improve a scheme’s value for money, as a lot may be dependent on the resources of the sponsoring employer(s) and the setup of their administration provider.

Charlton: It’s been good to see providers taking the job of recruiting IGC chairs and members seriously. It will now be interesting to see if IGCs will have the clout to force changes where they deem it appropriate. It will also be interesting to see how far each IGC thinks its remit might extend and how this might evolve in the years to come.

Dickson: The boards include many of our industry’s most experienced and knowledgeable pension and investment professionals. I’m confident that the oversight IGCs now have over contract-based DC schemes and their approach to determine and monitor ongoing value for money, will not only be to act in the interests of scheme members they are overseeing, but will also add value to the wider governance debate.

Trustees with DC fiduciary responsibilities will look closely at how IGCs develop their approach.

4. Are you expecting any significant pension announcements in the Autumn Statement?

Aston: No, now that Workie has been unveiled, the focus has shifted to the 2016 Budget and potential changes to the taxation of pensions. The majority view seems to be that a move to TEE would not bring enough benefit to justify the costs, but a shift to a single rate of tax relief – presented as matching – seems more likely.

It would not be surprising if there were an immediate clampdown on tax relief on November 25. It could be seen by some as a harsh result, but it cannot be ruled out

Helen Ball, Sackers

Morahan: Given the announcement by George Osborne that he will respond to the tax consultation fully in the 2016 Budget, I think it unlikely that there will be anything significant announced in the Autumn Statement. However, the use of the word ‘fully’ does give him scope to do some further tinkering so we will be listening with bated breath.

Pemberthy: We are not expecting any significant pension announcements, however, the size of the prize of the tax relief consultation may be too tempting for the chancellor to avoid mentioning it completely. There may also be an update on the Office of Tax Simplification review into the merger of income tax and national insurance, which may have a significant impact on salary sacrifice. Given recent history we will be tuning in with interest.

Futcher: Given the recent announcement by the government that the market needs time and space to adjust to the reforms currently underway and that they would delay further consideration with regard to defined ambition, collective benefits and automatic transfers, it seems unlikely there will be any significant pension announcements.

However, with the push back of the pension tax consultation announcement until March, it may be that we will see the removal of salary sacrifice back on the table.

Ball: As the chancellor has confirmed that the government will respond to the consultation on pensions tax relief in next year’s Budget, we are not expecting any major announcements. March 2016 may not be much of a reprieve but, given the pace of recent change it was still a welcome respite.

However, given the huge leap in pensions savings this tax year (which was kickstarted by the tax-relief consultation), it would not be surprising if there were an immediate clampdown on tax relief on November 25. It could be seen by some as a harsh result, but it cannot be ruled out.

Charlton: No, but I think I said the same last year…

Dickson: Given the breadth and regularity of pension policy changes and government intervention in recent years, let’s say I would be surprised if there were no changes announced. I am not, however, going to try to predict what the focus may be!