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...
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?
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?
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.
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”.
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
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:
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: