I was “distressed” to read of a new way of extracting fees from the sponsors of DC pensions, the value for money review/assessment. http://tinyurl.com/ju4ppnp

Ok – I wasn’t distressed – I was cross! Value for Money is not as complicated as “experts” would have you believe!

Chris Roberts, professional trustee at Dalriada Trustees, said one of the most difficult aspects is “defining what value for money is”. A key concern is getting the best possible member outcomes and encouraging additional contributions while “doing whatever you can in terms of communications”.

and there was me thinking it was about funds- oh wait!

Trustees should also be focusing on investments and making sure they are providing returns, he (Chris Roberts) added

This is clearly beyond the scope of ordinary mortals  – we need experts.

many trustee boards “paper over the cracks” with “a light touch value-for-money review”.

Concludes Chris Roberts (a professional trustee)

 “If you’re not going to do a value-for-money review right, don’t do one.”

Bottom line – as any consultant will tell you, this is tough- you need an expert.

This wheeze, paid for out of whatever pot is earmarked for funding workplace pensions (e.g. the contribution pot), enables trustees to discover whether they are getting value for money. Of course it has to be careful not to be over-critical

“ (trustees) need to be very careful of the messaging to members on anything that could be mistaken as critical of value – unless of course it really is bad value – in which case the trustees have not done a very good job to date”.

It is hard to imagine a Chair’s statement that is going to say “we have a rubbish scheme because we are rubbish trustees”.

The value for money review seems to be an endorsement of the scheme and of the trustees and by extension of the consultants who helped set it up. Like the concerns about IGCs putting members off saving by criticising the insurer, the advice (from Mark Futcher of Barnett Waddingham) suggests the VFM review is a kind of placebo , a part of a communications strategy.

We learn from the same consultancy that the VFM review should have a broader terms of reference.

When assessing value for money, “every aspect which contributes to making DC needs to be reviewed, such as administration, governance, providers, consultants and suppliers, communications and engagement, contributions, costs and charges, investment and at-retirement framework.”

Presumably, those conducting these VFM reviews will be independent of the existing consultants providing admin, governance, comms and er..consultancy. This process could have an infinite regress with the existing consultants auditing the VFM consultants and so on, but that would be silly (or would it – please forward this idea to the DC strategy team -ed.)

The cost of such an analysis could sufficiently erode member value and inflate the “money” spent , to make a good scheme bad. In any event, the process would muddy the transparent waters to no obvious benefit than the consultant’s.

Trustees have no need, no money and won’t find value!

Trustees and IGCs do not need to be using consultants to assess VFM. They need to be using their experience and their conviction. What they need is data. They need to know how much value has been generated by asset managers and how much money this has cost. The cost is of course the hard bit as it involves looking behind the AMC and seeing what has been leaking out of the fund by way of hidden charges (Loch Ness monster stuff).

There are of course a lot of other things that a member pays for than asset management. Members have to pay for communications, admin, governance and er…consultancy though not all these costs are born out of the AMC either, most of them are born out of the employer’s contributions to a member’s pension pot.

There is a project underway to try and benchmark the value for money of these non-investment services, it has been commissioned by the IGCs from a consultancy called NMG. I very much hope that the findings of this research will be made public and not just used by the marketing and strategy teams within insurers for “benchmarking” purposes.

I am far from sure that consultants, who are often part of firms offering services on the broader list, can be expected to be objective in assessing value for money. For “objective”, substitute “deeply conflicted”. Trustees must be able to measure the value of their outsourced service suppliers, independently of those suppliers. Self assessment is crucial ,trustees should back themselves as judges.

Consultancy – who really pays?

NMG will be measuring things within the AMC, those costs incurred outside the AMC, typically considered “DC consultancy” are part of a different conversation, one about the employer’s commitment to the long-term outcomes of the member.

If DC trustees were as tough on employers as DB trustees they would be querying the employer’s covenant (by way of contributions). They would be looking very closely at any expense passed on or incurred directly by employers on behalf of the DC scheme. (for instance the cost of AE middleware or additional payroll software). For these costs are at the expense of higher employer contributions to a scheme.

The Trustees must be aware that  the contribution into a DC plan is the a priori determinant of outcomes. Though investment returns will eventually form a larger proportion of the DC pot, they cannot be achieved if the money wasn’t put in the pot in the first place

Ensuring that there are as few impediments to greater contributions as possible – is within the trustee’s gift. That means being extremely careful not to commission unnecessary reviews.

We aren’t there yet and we won’t be soon; especially if we allow consultants to audit the expenses of consultants.

Value for Money – self assessment preferred