Smaller DC Pensions Struggle to Demonstrate Value

Size matters when it comes to UK defined contribution (DC) pension plans, according to research from The Pensions Regulator (TPR), which finds that smaller plans are failing to provide good value for their participants.

TPR’s annual DC survey found that just 10% of trustees in small plans, and one-third of trustees in medium-sized plans, are doing everything TPR says is necessary to assess value for members.

“Poor value for members is a key risk which needs to be managed,” David Fairs, an executive director at TPR, said in a release. “Assessing value for members enables trustees to identify and address poor performing areas, in turn making a scheme more likely to provide good outcomes for pension savers.”

Fairs added that small plans that are unwilling or unable to assess value for members should seriously consider if members would be better off moving to bigger plans that benefit from economies of scale.

The survey found a strong correlation between the size of a plan and the number of key governance requirements it meets. It found that all master trusts met two or more applicable requirements, compared to 85% of large plans (more than 1,000 members), 59% of medium ones (between 100 and 999 members), 20% of small plans (between 12 and 99 members), and 22% of micro plans (between two and 11 members).

Over half of defined contribution participants (54%) were in plans that met all five key governance requirements, which despite rising from 2017, still leaves 46% in plans that have not met all the requirements.

The five key governance requirements covered by the survey are:

1. Trustee boards must possess or have access to the knowledge and competencies necessary to properly run the plan.
2. Trustee boards must assess the extent to which charges/transaction costs provide good value for members.
3. Core financial transactions must be processed promptly and accurately.
4. Trustees of master trusts must meet independence requirements.
5. Trustee boards must ensure the default investment strategy is appropriate for their members—applicable only to plans with a default investment strategy.

At least 95% of members were in plans meeting the first, fourth, and fifth requirements. Approximately 86% were in a plan that met the second requirement, and 63% were in a plan that met the third key governance requirement. The survey also found that only 41% of trustees are researching and taking into account what members’ value.

To address the issues brought up by the survey, TPR said it is reviewing its guidance to be clearer about its expectations of chair statements, including value for member assessments. It said it is testing a more directive approach to delivering guidance to help improve standards of trusteeship, particularly concerning default investment strategies, and the considerations trustees should make about value for members.

“Through a number of initiatives, including our 21st century trusteeship program, we have worked hard to push up standards,” said Fairs. “It is disappointing to see that in small and micro schemes there is still significant progress to be made.”