Author: John Yates
Defined Contribution (DC) pensions are on the rise. More members are being enrolled, and more contributions are being paid, resulting in an increase in DC pension assets.
Your workplace pension is likely to be your biggest reward spend after pay and ensuring this is aligned to your objectives and the needs of your members, whilst maximising value for money is key.
But what is value for money and how do you measure it?
A Value for Money Framework is being introduced jointly by the Department for Work and Pensions, the Financial Conduct Authority and The Pensions Regulator, which will look at three key areas to assess value for money for all DC workplace pension schemes: the quality of services, investment performance, and charges.
Here's how it works:
Key considerations for delivering value for money for your employees
1. Quality of services
By reviewing your workplace pension provider's overall proposition, you can consider whether they are aligned to your objectives and the needs of your members.
For example, if your members are relatively young, digital engagement and access to other non-pension savings options will be key requirements. For older members, access to the full range of retirement options together with the availability of guidance and advice will be important. If your scheme is particularly complex, you may need to focus on a provider with a robust administration platform and good service.
Some members can find pensions bewildering and the most tangible aspect of the pension will be the quality, clarity and relevance of the communications they receive. A scheme that offers good communications using a variety of media to engage members with their workplace pension and the options available helps members make good decisions now to achieve good outcomes in retirement.
2. Investment strategy and performance
Whilst all workplace pension schemes must have a default fund, they differ in design and therefore performance in different market conditions. It is not uncommon to see the majority of members remaining in their workplace pension default investment funds. Research from the Department for Work and Pensions1 suggests that investment performance contributes around 60% of a member's overall pot at retirement, with the remainder from contributions less charges. So, the quality of the default fund is therefore a key consideration for assessing value for money.
According to CAPA data, over the five years to December 2024, the difference between the best and worst performing default fund amounted to around 60% (9% a year)2. So, £1,000 invested in January 2019 could have grown (ignoring further contributions and charges) to between £1,150 and £1,750 depending on the default fund selected.
Past performance is, of course, not a guide or guarantee for the future, but ensuring your default fund is suitably designed to drive investment performance towards the top of the league table rather than the bottom will have a huge impact on outcomes for your members. Research from Legal & General suggests that increasing investment performance by only 0.5% a year over the lifetime of an average member can increase their retirement savings by 11% .
3. Charges
Within a workplace pension scheme, normally, all the associated charges including administration, investment management and communications, are paid by the members. This is typically represented as a percentage of each member's fund value, with some schemes also applying a charge to the contributions paid.
The Department for Work and Pensions suggests the average workplace pension member charge is around 0.5% of the member's fund value per year 3. Good quality schemes with healthy average contributions and fund values can certainly attract much lower charges. Reviewing your scheme's charges against other schemes of a similar size will therefore give an indication of how reasonable the charges are and whether these could be reduced to improve value for money.
It is however important not to consider charges in isolation, but if you don't have the lowest charges available, it is important to be satisfied that your scheme is driving value for money through the quality of services and default fund investment performance.
Improving member outcomes
You can also review your members' engagement with their pension to consider whether they are planning effectively. Data you hold, together with data from your pension provider, will enable you to understand the likely needs of your members by looking at demographics such as age, gender, earnings, etc. You can then consider issues such as:
- Are they saving enough?
- Are they invested appropriately?
- How engaged are they with their pension?
- How often do they log in to view their pension details?
By understanding the likely needs of your members, you can design a communication strategy to engage them. This can address information about their pension and the options available to them, relative to their likely goals and objectives.
Ask your workplace pension provider for support. Most have communication materials, email campaigns and webinars your members can join which are all available for no additional charge. Importantly, by measuring where you are today, you can review the impact that your communications have on member engagement and outcomes and see whether you are moving the dial on outcomes for your members.
Final thoughts
The growth of DC workplace pension members and assets has led to an increased focus on governance and value for money.
A good workplace pension scheme offers value for money through good investment returns net of charges, together with a strong overall proposition aligned to the needs of the members. It also ensures members have access to relevant and timely information and support that they will need to make good decisions from day one through and into retirement. If you would like to understand the value for money offered by your workplace pension scheme and where improvements could be made, please get in touch with us and let us help you give your employees a future to look forward to.
