Keeping track of value in DC

Objective markers of value, cost and performance have become ever more crucial to DC pensions following the coalition government’s crusade across the pensions industry.

Steve Webb’s tenure brought auto-enrolment, the 0.75 per cent charge cap, independent governance committees and set the stage for a clampdown on transaction charges – all in the name of good member outcomes.

Beyond the soundbite, a good outcome for members boils down to the adequacy of their retirement income, itself a subjective measure.

It can have bells and whistles on but if it’s not needed or not wanted then it’s a waste of money

Roger Mattingly, PAN Trustees

A positive outcome for members will be driven by their experience through the savings journey and the extent to which the reality of retirement lives up to expectations.

Growing pressure

The pressure on DC vehicles to produce an adequate level of retirement income will only increase as the pendulum swings away from defined benefit provision.

Current retirees and those set to retire in the next 10 to 15 years will likely receive portions of savings from both DB and DC schemes. Beyond then, UK pensioners will be fully reliant on DC pots.

A March briefing note from the Pensions Policy Institute said the number of people in the UK saving into a DC scheme is set to increase to around 14m by 2020, up from just 4m in 2012.

And according to research consultancy Spence Johnson, by 2024 there could be around £800bn of assets in DC, compared with the current £310bn. It is widely estimated that 90 per cent of this will be held in default funds.

Duncan Buchanan, partner at law firm Hogan Lovells and president of the Society of Pension Professionals, says rising flows into DC are changing the market.

“For the last 30 years DC has been the Cinderella – that’s changed a lot,” he says.

“DC is where all the money is going now, new money, and we’re now seeing and sensing that the [Department for Work and Pensions], the Treasury and the [Pensions] Regulator are now focusing very much on DC policy.”

According to Roger Mattingly, managing director at professional trustee company Pan Trustees, VFM and GMO are also dominating discussions at IGC and DC trustee meetings.

“IGCs are poring over the whole subject of value for money, and as an industry we’re looking at the concept of a standard set of principles and concepts,” he says.

“It’s not a moment in time,” he adds. “It’s a moveable feast, a question of keeping the monitoring and assessment there on an ongoing basis.”

Value for members can be pared down to four key ingredients, says Mattingly, some more quantifiable than others:

Ultimately, trustees need to get down to the nitty-gritty of what members are getting, he says. “It can have bells and whistles on, but if it’s not needed or not wanted then it’s a waste of money.”

Measuring performance

The 0.75 per cent charge cap was introduced in April with the aim of protecting members from high charges.

Henry Cobbe, managing director and head of research at investment consultancy Elston Consulting, says the cap has led to a focus on cost rather than value.

“We’ve seen schemes at the top end of the cap delivering better value for money,” says Cobbe.

Buchanan also questioned whether the charge cap was the right thing for members over the long term.

“For default funds in the charge cap the options are pretty limited, largely passively managed funds and indexed trackers,” says Buchanan.

“The trustee’s role becomes how to cut costs and have cheap investments. I think trustees want to be more paternalistic.”

According to Cobbe, DC governance to date has focused on individual funds within a strategy rather than how those funds interact over the course of a member’s glide path.

“Those individual funds don’t determine outcomes, it’s the overall combination… and how those funds are actually mixed together to deliver the outcomes,” he says.

Cobbe says investment governance must aspire to a 360° view that gauges absolute returns and risk-adjusted performance on a cohort-by-cohort basis.

The UK’s leading mastertrusts currently use a range of benchmarks to assess the performance of funds across different investment strategies.

State-sponsored scheme Nest uses inflation-plus benchmarks, while rival Now Pensions opts for both cash-plus and risk-weighted measures.

Cobbe, who worked to create the FTSE DC benchmarks adopted by the Lighthouse Pension Trust in January, says the industry needs to develop a broad evaluative framework that includes benchmarking performance against inflation through accumulation.

“At the moment everyone is coming up with different glide paths but its impossible to measure the impact of that glide path,” he says. “We’re not saying our glide path is the only one in DC, we’re saying here’s a methodology.”

Service value

Many trustees will evaluate funds on the basis of information from investment advisers, manager presentations and fund factsheets.

Andy Cheseldine, partner at consultancy LCP, says over the past year managers have increasingly quoted risk-adjusted returns against fees on fund factsheets.

“That hasn’t been around that long,” he says. “It will be much more useful once we’ve been through a couple of cycles of the market.”

Member administration and communication must also be delivered within the charge cap.

Poor value in administration typically only occurs when something goes wrong, says Cheseldine.

However, he says administrators can add value through being proactive and targeting cost saving and efficiency.

Cheseldine advises trustees to assess the reading age, accuracy and timeliness of all member communications to ensure the best chance of engagaing members, and in turn, delivering value.

“Communication shouldn’t just be about disclosure – stuff the regulator requires you to send,” says Cheseldine. “It should be about engaging members and helping them to understand their options.”