From the blog: Trustees of occupational pension schemes that provide money purchase benefits are now required to assess and report annually on the extent to which member-borne charges and transaction costs under their scheme represent good value for members.

While trustees are under a legal obligation to do this, there is currently very limited regulation on how they should go about it. Although I understand the Pensions Regulator is planning further guidance in this area, it may come too late for many defined contribution scheme trustees, who will need to determine how they will assess good value in time for their first chairman’s statement. 

Provided trustees can show that they have followed a thorough process, considered all relevant factors and reached an objectively reasonable conclusion, it is difficult to see how the outcome could be successfully challenged

In the absence of further regulatory guidance then, provided trustees can show that they have followed a thorough process, considered all relevant factors and reached an objectively reasonable conclusion, it is difficult to see how the outcome could be successfully challenged.

So, how should trustees go about this and what do they need to consider? 

A robust process

Assessing good value will involve several steps including: 

  • identifying the member-borne costs and charges under the relevant scheme;

  • obtaining any relevant information and member feedback;

  • assessing the quality of scheme services; and

  • recording the outcome of the assessment. 

Trustees might want to draw up a good-value policy in order to keep a contemporaneous record of their approach and the factors that they consider to be relevant. 

Relevant factors

  1. Cost v quality – Assessing good value is not simply a question of cost – trustees need to identify the member-borne costs and charges, and the services to which they relate. They must then assess the quality and relevance of these services. 

  2. What do scheme members value? –The regulator has said that trustees “need to understand what [their] members will value most when assessing the overall value of the scheme”. Trustees will need to decide how to do this and how much weight to give to members’ views given that members may attribute high value to things that, in reality, are not critical to delivering good outcomes and low value to things that are.

  3. Benchmarking – Value is a relative concept. Therefore, as well as looking inwards at their own scheme, trustees will need to look outwards to the market to see if the costs and charges of their scheme are good value relative to what other similar schemes are delivering. Trustees should also benchmark scheme services to ensure that they represent good value for members.

  4. Component costs – As well as looking at the headline rates of member-borne costs and charges, trustees will need to look at each component that makes up the overall cost to assess whether every element represents good value.

  5. Cross-subsidies – Most pension plans operate on the basis that members with larger funds cross-subsidise those with smaller funds. While the presence of cross-subsidies is not an indication of bad value in itself, trustees should set out clearly how they are used and their justification for them. Trustees may also need to decide at what point cross-subsidies become poor value for particular members.

  6. Scheme discounts – Can employer A’s scheme represent good value if the members of employer B’s scheme are paying less for the same services? Given the test is whether charges represent good value and not best value, different pricing does not automatically mean that the higher charging scheme is not good value. However, trustees should be in a position to demonstrate what steps they have taken to secure a good deal for their scheme.

Francois Barker is head of pensions at Eversheds 

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