The Ultimate Guide to Good Governance
Governance is a crucial mechanism to catch mistakes early and ensure that your workplace pension scheme is delivering the best possible value. For...
*The Ultimate Guide
to Good Governance*
March 2018
It’s time to rethink exactly what good governance is, because it’s critical to the effective operation of a pension scheme.
Governance is a crucial mechanism to catch mistakes early and ensure that your workplace pension scheme is delivering the best possible value. For today’s pensions a sound governance structure can mitigate risks, avoid costly litigation and enhance efficiencies.
And, perhaps most importantly, it can also help ensure good outcomes for
you and your employees by bringing clarity and simplicity to a topic that many people find complicated. But how can you be sure you’re doing the right things for your pension scheme and its members?
Our ‘Five pillars of good governance’ provide the answers you’re looking for. Take a look and see what you need to do.
Written by John Buttress, Managing Director, Sales and Marketing
The five pillars of good governance
Value
This is about much more than a simple cost/benefit analysis.
Fundamental questions need to be asked and different scenarios explored. What outcomes are being targeted? Are they being achieved? And what are the costs and risks involved?
Risk
From financial to regulatory, and through to reputational, a high-quality governance process can help manage and mitigate different kinds of risks.
Reward
Pension schemes might be about the future, but they can be an attractive part of your reward package today. Benchmarking your scheme will demonstrate how it measures up, and highlight whether it’s meeting your reward strategy.
Compliance
Adhering to legal and regulatory frameworks is a minimum requirement. But good governance is about more than meeting the minimum. It’s about maximising potential to ensure processes are robust and compliant.
Monitor
Keeping a keen eye on your pension scheme means you can spot problems and opportunities faster. It keeps the focus on member outcomes, whilst protecting and supporting you.
Fundamental questions need to be asked and different scenarios explored. What outcomes are being targeted? Are they being achieved? And what are the costs and risks involved?
After years of encouragement from Italian opera singers and small, desert-based furry animals, we are all now used to the idea of comparing what we are paying for the goods and services we use.
We have also learned that it’s not just the price on the label that counts, but what we actually get for our money matters too. That’s whether it’s two-for-one cinema tickets, cuddly toys or, perhaps more importantly, the quality of the service or product we wanted in the first place.
In short, the search for value has become second nature to most of us whenever we’re spending our own money.
In the business environment, it is standard practice to market test the cost of big ticket items such as capital expenditure or large IT projects. However, it’s perhaps less common for companies to compare the cost of the goods and services they buy for employees.
The spend on employee benefits has increased significantly in recent years, particularly since the arrival of automatic enrolment, so how can companies be confident that they are getting value for money?
At its most basic, governance enables your people to understand how much you value them, and how much you’re investing in their future. Simple.
But done properly, this is about much more than a simple cost/benefit analysis.
Read on for our 5
quick tips...
1. Check your charges
On the whole, we are pretty good at finding a good deal for ourselves or haggling for a better price. When it comes to pensions, charges are the most obvious example of a variable element.
How can you be sure that your scheme is as good as can be? Test the water, benchmark against other plans and make sure that your provider has been challenged over the charges being deducted. Perhaps they could improve, or if not then find out what would need to change for the fee to reduce. It doesn’t hurt to ask, does it?
2. Check what your employees are paying
Members of defined contribution pension plans are subject to an annual charge taken from their fund by the pension provider.
Regulations now require that for any scheme being used as a qualifying workplace pension scheme (QWPS) for automatic enrolment the charge applying to the default fund is no higher than 0.75%. Since the majority of pension plans used for automatic enrolment are defined contribution arrangements, employers and trustees must satisfy themselves that the charge for the default fund is within the cap.
However, there are other costs associated with workplace pensions that can be harder to discover. For example, is there a charge for members who want to transfer their funds to another pension plan?
Are there additional fees or penalties if a member decides to take early retirement? And what are the management costs for investment funds outside the default?
3. Test your support
Now that the murky water of commission has been cleared away it should be very simple to understand what you are spending and what you are getting.
If it is not clear, ask why not. It may be that the amount you spend doesn’t need to change, but the services you receive can be amended to suit the actual needs of your scheme rather than simply continuing with the status quo.
However, like our personal bank accounts or insurance contracts, it can often seem like too much hassle to make a shift: ”If it ain’t broke…,” right? At the very least, that needs to change.
4. Understand your responsibilities
Regulations that came into force in April 2015 laid out new duties for trustees who manage pension schemes.
These new governance standards include a requirement “to ensure value for money to members.” So while members usually have the freedom to select their own choice of investment fund, trustees should always ensure that the default fund charges are within the charge cap and that other funds also represent ‘good value’ to members.
Similar rules apply for contract-based schemes, so employers should check what charges their employees are paying for any schemes that are used for automatic enrolment to ensure that the default fund fee is within the charge cap.
Whatever type of pension arrangement a company operates for its workforce, it should be remembered that the pursuit of value for money is a fundamental element in helping to achieve “good member outcomes”.
5. Share the news
Perhaps you’ll set yourself the challenge of improving your level of member engagement. Making sure that employees understand the benefits you are offering would mean they not only get the most out of them but also that they know how much money you are spending to provide them. A step further could be to widen your support and explore the opportunity to offer financial education in the workplace.
You can help your employees to understand their financial options, and once they’ve taken action to make their future more secure, they’re likely to be relaxed, focused, happy, healthy and productive. Win win.
But remember, it’s not just about the price. Running an audit of services will help companies understand how effective they are in complying with the complex regulations that cover workplace pension arrangements.
Benchmarking costs will also assist in checking that fee levels are competitive and that you’re getting a bang for your company’s buck!
Quality is vital to ensure the smooth and compliant running of your pension scheme, so it may well be worth increasing your spend (you get what you pay for in theory) if the end result is greater efficiency and less management time devoted to resolving problems.
Either way, if you don’t check, you’ll never know, so… “go compare!”
Written by Nick Frankland, Principal
ACTION POINTS
- Check your charges...and what your employees are paying
- Test your support. What are you getting for your fees?
- Understand your regulatory responsibilities
- Share the news - let your employees know about your scheme
The problem
A facilities management services company with around 3,000 employees wanted to improve the governance of its pension scheme and ensure it was providing best value for money.
The issues
Our reporting and risk management process improved the governance committee’s previous procedures. It allowed the committee to review whether the current scheme offered value for money. In particular, we reviewed whether the scheme:
- Could satisfy the company’s automatic enrolment obligations.
- Allowed members access to additional investment options.
- Allowed access to the latest flexible retirement options after April 2015.
- Offered online access to communication resources.
- Provided efficient administration and suitable investment performance.
- Met TPR’s quality features.
What solution did we come to?
We identified administration deficiencies leading to a full review of the provider. A decision to switch the scheme onto a modern administration system followed. This gave members:
Greater investment choice, with over 260 investment funds available.
A wider range of pre-determined risk rated portfolios.
The ability to convert to a self-invested personal pension scheme.
The latest product developments for flexible retirement planning.
A branded microsite with information on investments and flexibility.
Consolidation of their pension funds, using a bulk transfer process.
How we helped
For this company, our governance service achieved the following outcomes:
- Time and resource savings, due to the simplified administration processes.
- Compliance with automatic enrolment regulations.
- Best practice governance procedures, targeting good member outcomes.
From financial to regulatory, and through to reputational, a high-quality governance process can help manage and mitigate different kinds of risks.
One major area where you need to ensure your pension fund is ‘fit for purpose’ is the default fund – are you sure it really cuts the mustard?
Your supposedly solid choice is actually anything but – and that means unless you really scrutinise all nine options in detail, you’re creating a lottery for employees relying on it for their retirement. For evidence of this, look at what each default fund invests in. Some funds put almost all your employees’ money into the stock markets – as much as 85% as shown in the graph below. Yet others are doing the opposite, investing no more than a third in stocks, or equities as they’re known.
Four of the nine invest in “alternatives” – more exotic investments like hedge funds or commodities like metals. And three have opted for some kind of property investment.
As I’ve already said, some different ideas are to be expected.
So why does this variety cause a problem? The answer lies in how volatile each of these funds are – in other words, how big the swings on investment gains and losses are designed to be.
So why does this variety cause a problem? The answer lies in how volatile each of these funds are – in other words, how big the swings on investment gains and losses are designed to be.
That’s related in part to how much risk each fund is willing to take, which in turn depends on the investment return they’re trying to achieve. Again, you’d expect every default fund to have a similar level of volatility. That’s just not the case. Some funds are conservative, others are far more aggressive.
They don’t measure themselves in similar ways either – it’s a case of apples and oranges unfortunately. The chances are, you were sold your pension scheme complete with the default fund ready to invest in. Perhaps you got lucky, and your provider’s fund is one of the better ones we’ve analysed.
Others, frankly, should be cursing their luck. Even if you are in a “good” fund though, it might not be suitable for your workforce.
If your employees are all investment bankers with an understanding of stock markets and a tolerance for risk, then they likely will have no problem with being in one of the more volatile default funds.
If, on the other hand, you’re a business where many staff aren’t used to saving into a pension, you’re going to need the opposite – a fund that doesn’t throw up shocks or big short-term losses in employees pension pots.
So here’s what to do. Look again at what your provider is offering. Challenge them on it and ask for the detail. And if you’re not happy, seek some expert advice on how you could change things. It shouldn’t be this hard or this complex.
Written by Christos Bakas, DC Investment Consultant
What’s in your default investment fund – and why should you care?
Most companies have to offer a pension scheme in Britain today. That’s good – Britain needs to save.
Typically, you’ll look to a provider, probably one of the big life insurers, to help. They have a long history of offering company pensions and (understandably) boast of their expertise doing so.
If you’re in charge of pensions for your company, your provider probably took you through a range of details before asking for a signature on the dotted line. My advice? Look again at what you signed. And if you’re lucky enough not to have committed yet, then pause. All may not be as it seems and your employees could be the ones that lose out.
One of the details discussed will be the insurer’s “default fund” – the place where most of your employees’ savings will be invested and (hopefully) grow.
These are deliberately marketed as a solid, relatively uneventful choice, suitable for most people and not needing too much maintenance on your part.
And that’s supposed to be the point – it’s called a default fund for a reason, because it should be suitable for most people’s retirement saving needs.
It also shouldn’t matter that much which insurer’s fund you pick. In theory, their default funds are supposed to aim for roughly the same thing, in a similar way.
There should be some differentiation and clever ideas for sure, but nothing dramatically different.
There are nine big pension providers in the UK, household names all of them. Here’s the problem: every single one is taking a wildly different approach to building your default fund.
ACTION POINTS
Check your risks:
- Investment - is your default fund fit for purpose?
- Regulation - are you compliant with TPR's Code of Practice 13?
- Reputation - can you be sure your scheme isn't a ticking time-bomb?
The problem
A US-owned, City-based investment boutique with 80 UK staff, split evenly between investment and support roles, faced two issues with their pension plan. The level of staff investment expertise had created a demand for greater investment choice within their pension plan.
The issues
The existing plan was administered on an older insurance company platform with an outmoded charging structure. It needed a review and the key criteria were to:
Recommend a “suitable” default option for all members, keeping charges low.
Improve the investment range and include a Self-invested Personal Pension (SIPP) option.
Source a financially strong provider, and deliver a future proofed contract with active product development.
A full market and default investment review to ensure the scheme and its investment strategy were both correctly aligned with members’ needs.
After deliberation, we selected a diversified growth fund (DGF) for the growth phase with a lifestyle profile to reduce risk in the years prior to retirement.
Charges were minimised by using static asset allocation and passive funds.
The selected provider demonstrated market share, commitment to product development, investment expertise and low charges for their packaged default option.
Salary sacrifice was introduced in conjunction with automatic enrolment to optimise the tax efficiency of the members’ contributions.
How we helped
The new plan offers a compliant default investment option and meets the firm’s regulatory responsibilities for their qualifying workplace pension scheme.
The increased fund range (>250) allows investment staff access to funds from over 30 fund management groups.
Full SIPP functionality is available to members as part of the plan, making it simple for payroll to administer and very flexible for investment staff.
Lower charges were obtained for all members.
A communications campaign saw staff engagement increase and staff feedback was very positive.
Pension schemes might be about the future, but they can be an attractive part of your reward package today.
2015 total annual amount saved into workplace pensions: £81.8bn
Check your scheme’s blood pressure and BMI
Pension schemes: not the liveliest of entities, you might think. However, there are plenty of similarities between a scheme and a person.
About 16 years ago I became eligible for a biennial medical as part of the company’s employee benefits package.
It’s a comprehensive assessment which takes about 2 hours and includes all the things you’d expect like blood tests, height, weight and blood pressure measurements, ECG and a lung function test.
At the time I was pleased to get the benefit but probably not much more than that. It’s only as the years have gone by that I’ve come to really value this benefit and react to the results that come from it.
I headed off for that first medical not really knowing what to expect and came away generally pleased with the results, although there were a few recommendations about weight, diet and general fitness (some of which I paid attention to, some of which I probably ignored to start with!).
In fact it was the second medical which started to build my appreciation of value.
I now had the benchmarks from the first medical to compare against and I was able to see some improvements but a worsening in others.
These were both an encouragement and a warning. I went home, dug my trainers out of the wardrobe and conscientiously set off for a run that very evening.
But knee-jerk reactions aside, eight reports down the line I now have some solid data to look back on. With detailed information to hand about how I’m getting on, I have remained conscious of my wellbeing and have a general strategy to keep on the good side of the various biometrics.
Pension scheme governance can be like that. Once the scheme has been set up and is in place, all too often many people take the ‘if it ain’t broke…’ view that the scheme will tick along looking after itself and they don’t need to monitor it too closely.
Meanwhile, the more enlightened recognise the importance and value in undertaking a regular review of their scheme to ensure that all the working parts are functioning properly and they can make any necessary adjustments along the way.
So if a pension scheme were to go for a medical (otherwise known as a governance meeting), what criteria would it be tested on?
1. Administration
Administration is the heart of the scheme. If that gets clogged up the whole thing can start grinding to a halt.
We saw, during the first few years of automatic enrolment, that many administration systems were struggling to cope and scheme members suffered as a result.
Confidence in a scheme can be quickly lost if members receive incorrect statements or requests are not promptly and accurately actioned.
So the ‘doctor’s’ advice here would be to stay on top of your scheme administration, or if you don’t have the resource in-house, employ a professional pensions consultant to handle this for you.
2. Funds
Funds, particularly the default fund, are analogous to the lungs; fund performance is what powers the scheme on and it needs to be constantly monitored to ensure it’s delivering the expected outcome for the appropriate level of risk.
Investment markets are extremely dynamic, particularly in these uncertain times, and some funds are lagging their own benchmarks, never mind the performance of their competitors.
The action point here is to keep track of market and fund performance and make sure your funds, and especially the default fund (where, after all, over 90% of your scheme members are likely to be invested) are performing as well as expected.
3. Charges
And then there’s the scheme’s BMI – how heavy are the charges relative to the value provided? Since 2016 we have had the 0.75% charge cap for qualifying schemes but many schemes are still carrying weightier charges than they need to.
A regular review, with some benchmarking, should identify this and allow a negotiation to take place in order to achieve better rates for your scheme members.
Anyway, I won’t labour the analogy; ultimately it’s about what the scheme can deliver (sorry, couldn’t resist the pun). Independent governance should never be seen as a hassle or an unnecessary expense.
Done properly it can ensure that a scheme remains healthy and efficient, and achieves its objective of being a valuable part of a reward package, aiding recruitment and retention and allowing employees to retire with a decent level of income.
So if you haven’t assessed your scheme recently, isn’t it time to book in for a check-up?
Written by Alan Morahan, Managing Director
Adhering to legal and regulatory frameworks is a minimum requirement.
But good governance is about more than meeting the minimum. It’s about maximising potential to ensure processes are robust and compliant.
Who's afraid of the Big, Bad Wolf?
There are individual letters that we dread receiving (yes, some people still use the post).
- A coarse brown envelope from HMRC (sigh).
- An A4 envelope containing examination results (shudder).
- Almost anything from your GP (gasp).
We can now add an 'Automatic Enrolment - Notice of Inspection' from The Pensions Regulator to that list.
PANIC STATIONS!
One of my clients was the unlucky recipient of one such letter only a few weeks ago, which was followed a few days later by an unarranged visit!
For the past few years, we've been helping hundreds of employers comply with their automatic enrolment duties, where the underlying message has always been 'We want to get this right. And we don't want our name splashed across the media for screwing up our employees’ pensions'.
I’m sure that’s a view that you can relate to and understandably my client was more than a little bit concerned.
Thankfully, they have been incredibly diligent and were able to produce a full data trail for every automatic enrolment action that they have carried out in the past few years.
In fact, the review only took a short time, and once it was complete, The Regulator was kind enough to share the reason for selecting this particular employer for an inspection: ‘You had reported a zero in one payroll category, and we just wanted to make sure that nothing was missing.’
So, if you have re-enrolment approaching and another declaration to make, ask yourself three simple questions:
- Are your processes robust and accurate with a sufficient audit trail?
- Have you kept up with the changing rules over the past four years?
- Is it time to carry out a scheme health check to ensure you aren’t compounding errors?
Will you be ready if the Big, Bad Wolf knocks on your door?
Written by
Gavin Zaprzala-Banks, Principal
Gavin has worked in financial services for eighteen years. As Principal in our Guildford team, he is responsible for a portfolio of clients and works with a broad range of employers covering areas such as scheme design and implementation, governance and communication options.
Gavin is closely involved with the ongoing development of Punter Southall Aspire’s governance proposition and member communication programme.
Keeping a keen eye on your pension scheme means you can spot problems and opportunities faster. It keeps the focus on member outcomes, whilst protecting and supporting you.
Your Early Alarm To Catch Pension Mistakes
“The Pensions Regulator’s visiting us,” the HR director on the other end of the line told me. He sounded so agitated, he might as well have been talking about the devil incarnate. Clearly, this was not a welcome visit. But as it turned out, he was right to worry.
When we audited this company’s pension scheme, we discovered that a large number of employees had been wrongly categorised during automatic enrolment. This meant the company was non-compliant, and risked being hit with a very hefty fine. It’s a common story. Because the Government gave such short deadlines for automatic enrolment, many schemes were set up in a rush, and of course consultants didn’t have any models of how automatic enrolment should work.
It’s no exaggeration to say that we find similar mistakes every time we do an audit. But the very biggest mistake this company made wasn’t when they implemented automatic enrolment. It was in the following years – when they let their pension scheme run with only minimal oversight, without ever going back to check whether it was set up correctly or how it was performing.
All their problems could easily have been avoided with one simple measure: holding regular governance meetings, where key stakeholders review the fundamentals of the scheme. It’s no different to holding regular board meetings for your company, or regularly auditing your finances. Your pension scheme needs to be closely supervised to make sure it is well-run. Dealing with issues on an ad hoc basis means you end up fire-fighting and making mistakes.
It’s not just to do with automatic enrolment. Pension regulations are constantly changing. (For an industry with such a boring image, it’s certainly fast-moving!)If you ever believe your scheme is finally fully compliant and can be left alone, you risk being caught out.
Then there’s the performance of your scheme. We once reviewed a
pension scheme for a client that did not hold governance meetings, and found their existing provider was charging them much, much more than the market norm.
They were shocked, because they’d spent a long time making sure they’d chosen well. But the provider hadn’t been ripping them off. In fact, it had been a very competitive rate when the scheme was put into place – five years earlier….
With regular governance meetings, this could never have happened, because there would have been a safety mechanism in place to ensure the scheme was regularly reviewed, and that the company was getting value for money. Ultimately, we helped them reduce charges by 50% – saving tens of thousands over the lifetime of the scheme.
Of course, any number of problems can bedevil your pension scheme, from a lack of compliance and performance issues to low employee engagement and high numbers of opt-outs.
Governance meetings are the reliable system you need to catch these issues early - saving your company blushes, money and potential legal trouble – and to safeguard yourself, as well. So if you don’t hold pension governance meetings, or don’t hold them as often as you should, don’t wait any longer.
Written by Steve Butler, Chief Executive
Steve is the Chief Executive and disruptive force within PS Aspire, driving next generation thinking across the business to create innovative technology led solutions with the singular vision of redefining retirement savings.
He is passionate about integrating simplicity, flexibility and innovation into well designed retirement solutions that clients understand and value. Over a 25-year career Steve has led a number of new business start-ups and change management projects, most recently the expansion of Punter Southall Investment Consulting.
Our approach to governance
For us, PS Aspire's governance service was a real innovation, with significant attention to detail and robust management.
Chris Howse, Chief Financial Officer, EMCOR Group (UK) plc
Developments in UK pensions have triggered a series of consultations and proposed changes to legislation and regulation. We support our clients by providing updates on these issues and their implications for your scheme and its members.
Our governance service is a modern and effective solution to building a sustainable and successful DC pension scheme.
A detailed update of all significant market-changes to DC pension markets and legislation is provided as part of our governance service.
We are able to point out any issues of specific interest that may affect our clients’ schemes, to be incorporated into the governance meetings.
Here are a few key features of the PS Aspire governance service:
Annual governance meeting – held at either your offices or ours.
Secretarial services – agenda, papers, minutes and actions.
Consultancy services – using management information in conjunction with our analysis we provide a governance toolkit that will include:
- Quality features checklist – allows you to measure your scheme against The Pensions Regulator’s key criteria for DC schemes.
- A scheme-specific report detailing the ongoing performance of the plan and provider.
- Default investment report providing independent analysis of the default investment option.
Vision – a detailed newsletter covering relevant legislative developments.
In addition to the governance service, we keep our clients up to date with any major legislative developments as a matter of course, via briefing notes and consultant support.
ACTION POINTS
Check your data and audit trails
Hold regular governance meetings
Keep abreast of regulations
Review scheme performance and provider charges
