63: Annual value for member assessments from 1 October 2021
From 1 October 2021, the Occupational Pension Schemes (Administration, Investment, Charges and Governance) (Amendment) Regulations 2021 introduce a requirement for trustees and managers of most trust-based DC schemes with assets of less than £100 million to publish a detailed annual assessment of value for members. This must take account of accompanying DWP statutory guidance that can be found here.
Key points to note include:
- the requirement to assess and report on value for members will apply to schemes with total assets of under £100 million which have been operating for three or more years. For hybrid schemes with both DB and DC benefits, the £100 million threshold will apply to the combined assets. Schemes that hold only AVCs and SSAS’s and executive pension schemes are exempt;
- the assessment must be published for the first scheme year ending after 31 December 2021, and then annually. It must be included in the annual chair’s statement, published on a publicly accessible website, and reported to the Pension Regulator via annual returns;
- there is no precise definition of ‘value for members’, but the statutory guidance sets out details of three factors which must be taken into account: costs and charges; net investment returns; and administration and governance;
- investment returns and costs and charges must be assessed by comparison with three other schemes. Trustees must have a clear rationale for the schemes chosen as comparators and should include a scheme different in structure to their own wherever possible. The expectation is they will have more than £100 million of DC assets. Trustees must also have discussions with at least one of their comparator schemes about a transfer of members’ rights should their scheme be wound up. This is likely to mean obtaining at least indicative terms, albeit a transfer may not ultimately be possible;
- the default arrangement in the comparator need not be identical, while self-select funds must be compared with the nearest comparable fund. If the scheme has a legacy fund (eg with profits) it should be compared to the comparator’s default arrangement, where there is no direct comparison;
- investment returns, net of all costs and charges, should be evaluated over the longer term, going back at least five years, or longer where possible. If, after giving greater weight to default arrangements, the cost and charges and net investment returns are comparable or favourable to the comparators, then it is reasonable to assume the pension scheme represents good value for money. Higher costs and charges may still be good value if accompanied by higher investment returns;
- administration and governance must be assessed against seven factors set out in the guidance: promptness and accuracy of core financial transactions; quality of record-keeping; appropriateness of default investment strategies; quality of investment governance; level of trustee knowledge, understanding and skills; quality of communication with members; and effectiveness of management of conflicts of interest; and
- if the assessment concludes that the scheme does not provide value for members, trustees must say whether they are going to wind up and consolidate in a larger scheme. If not, they must state the reasons why, and the improvements proposed to ensure the scheme does provide good value for members within a reasonable period, likely within the next 12 months.
The value for members assessment builds on the government’s drive to tackle underperformance and inadequate governance, and to accelerate consolidation in order to achieve better value for DC members.
Trustees and managers of relevant schemes are advised to begin considering how to collate the financial details necessary to calculate and report on value for members. There may be difficulties in obtaining investment data and a possible capacity crunch as advisers and larger comparator schemes (such as master trusts) adjust to these requirements.
For schemes considering winding up and consolidation, the guidance makes clear that the associated costs should not be taken into account in assessing value but should not be a barrier in the event that winding up is in the best interests of members.
The route to winding up can be time consuming but the appropriate advisers and careful advanced planning will go a long way to ensuring it proceeds in the most direct and cost efficient way. Our experienced pensions team can help.