Helen Dowsey from mastertrust Nest looks at whether and how value for members can be defined and measured.
A workplace pension, albeit less reliant on engine power or guaranteed sunshine, is no different and should also be assessed on the value it offers members to help them achieve the best possible retirement.
A well-designed diversified default fund is a vital aspect of providing value
But what exactly does value for members mean? How is it defined and measured?
In its defined contribution code, the Pensions Regulator states all members should receive good value from their pension scheme, with providers required to carry out a value assessment at least once a year.
Employers need to consider more than just the costs and charges of a scheme if they want to give their employees true value. Do the charges offer value over the long term? Are governance structures robust and do they act in members’ interests? Are members paying for functionality they never use? And, is the administration system fit for purpose and built to last?
But comparing schemes is by no means black and white; some elements are easier to quantify than others.
Communications are more subjective, for example, how a scheme’s communication is impacting member behaviour and whether members value the scheme.
A well-designed diversified default fund, subject to regular review of its asset allocation and manager selection, is a vital aspect of providing value.
But with so many savers choosing to remain in the default, how can employers be sure that it delivers every member with the best possible retirement outcome?
At Nest we use a single-year target date fund model. When a worker enrols, their money is invested in a retirement date fund based on the year they are expected to retire.
While the majority of members remain invested in the default fund, it is also important to empower those members that want to actively engage with their pension. But how do you ensure there is the right amount of choice?
Employers need to consider if schemes with large ranges of investment choice that are used by only a small proportion of members are really providing value.
They also need to determine what providing a vast choice of funds does to scheme charges. The evidence suggests that offering too many funds overwhelms employees and creates what psychologists term ‘choice overload’ and ‘fear of regret’, which result in savers being less rather than more engaged with their pension.
When employers are considering if their chosen scheme provides value for their employees, the regulator’s framework acts as a starting point, but after this a more nuanced interpretation of the scheme and how it meets the needs of its population is required.
Helen Dowsey is director of business development at mastertrust Nest
