Questioning service providers, understanding member preferences and striving to ensure effective governance can all help to boost value, explains Legal & General Investment Management’s Emma Douglas.
Action points
Gauge member needs and preferences
Do not be afraid to challenge service providers
Consider other opportunities to boost value, such as consolidation
It is tempting to assume that low cost equals good value, but there are many factors to consider.
In the event of underperformance, trustees should challenge their service provider
Value means different things to different people. Placed in order of importance, some members may put price above all else. Other members may be prepared to pay more for a better experience or a solution designed to deliver a better outcome in retirement.
Take time to understand your scheme
A trustee board should therefore first aim to understand the particular needs and preferences of its scheme members.
A survey can gauge member views but this is not always possible. The trustee board may need to use their best judgment based on the scheme demographic.
Trustees should use this information to agree a set of value-for-money principles. These include:
The key elements of the scheme to be measured
The standards to be achieved
The actions trustees are prepared to take should a particular service fall short of expectations
Recent member research shows that people place ‘good returns’ above anything else. This might seem obvious for defined contribution pensions, but how do you measure it?
Investment performance against benchmarks is one way, but other factors should also be considered. Participants also ranked the security of assets and the financial strength and reputation of the provider high among their list of priorities.
Good governance drives value
Underpinning all this is the need for effective scheme governance. Trustees need to request sufficient information from their service providers and investment managers. They could also consider appointing a professional adviser to benefit from their knowledge of best practice.
In the event of underperformance, trustees should challenge their service provider. In the annual statement they should disclose any action taken, as well as full transparency of the costs and charges paid by members for the respective services.
There are many questions trustees should be asking. Are the investments performing in line with benchmarks? Do the solutions represent the risk appetite of the members?
Trustees need to think about whether they could secure a better deal by renegotiating contracts with their service providers, and whether switching service provider would help deliver better value.
Furthermore, is the administrator meeting its key performance indicators? Trustees should consider how many complaints members have made and whether these complaints were addressed.
In most cases, trustees should be expected to be able to drive improvements. However, there may also be situations where this is not possible and a change of service provider should be considered.
Trustees may even consider a scheme wind-up and consolidation to deliver better economies of scale, leading to better value for members.
Emma Douglas is head of DC at Legal & General Investment Management
