- trustees of DC schemes have a legal duty to produce a Value for Members (VFM) assessment and include findings in their annual Chair statement
- the VFM assessment can have a significant impact on members’ savings and help safeguard positive member outcomes
- when compiling the VFM assessment, trustees should adopt a proportionate approach, based on the characteristics of their scheme
- it is strongly recommended that DB schemes assess value for members to help ensure good member outcomes
Trustee toolkit online learning
The ‘How a DC scheme works’ module contains a tutorial on ‘Value for members and charges’. You must log in or sign up to use the Trustee toolkit.
Value for members
Making sure your scheme members are receiving value for money is fundamental to being a good 21st Century trustee.
Whatever your scheme type or size you should be taking steps to regularly assess the extent to which charges and transaction costs deducted from members, for goods and services relating to running the scheme, provide good value in relation to the benefits and services received by members.
You should consider that value for members does not necessarily equate to ‘low cost’.
The Value for Member Assessment – it’s your legal duty
In most cases, members of DC schemes rely on the trustees to make important decisions about their fund, including the level of costs and services provided, and to deliver and assess value for them.
Trustees of DC schemes have a legal duty to assess these costs and charges and include the assessment in the annual Chair statement.
Therefore, VFM assessment forms an integral part of a trustee’s duties and the results of the assessment can have significant impact on members’ savings and help to safeguard positive member outcomes.
How to do your VFM assessment
There is no ‘one size fits all’ approach to VFM assessments, as the range of services available can vary significantly from one scheme to the next, often depending on the size of the membership, the nature of benefits and in some cases how long the scheme has been operating.
It is therefore up to the trustees to determine a proportionate approach to their assessment based on the characteristic of their scheme. However, this approach should be a framework that the trustees repeat each year. There are some simple steps that all trustees should follow:
- gathering information on all costs and charges in a timely manner to ensure the assessment is completed by the statutory deadline
- considering whether the benefits and services received in exchange are of good quality and meeting the needs of the membership. Trustees should consider at a minimum the following key areas:
- scheme management and governance
- investment governance
- comparing these costs and charges to other options on the market
- reaching a conclusion and agreeing next steps (ie any actions required to address poor value), documenting the approach taken and to be used as evidence of the assessment
- reporting on the outcome of the assessment in the annual Chair’s statement
For further detail see our illustrative approach and guide to value for members.
What to do if your scheme isn’t providing good value
Where the VFM assessment reveals services offering poor value to members, it is vitally important that trustees investigate such matters to identify what steps can be taken to improve conditions.
There will be occasions where the power to make the required improvements sits outside of the trustee’s powers. In such cases, it is important that trustees utilise their relationship with the sponsoring employer and or service providers to introduce positive change, as it is ultimately the trustee’s responsibility to address areas of poor value.
There are a variety of ways in which trustees can choose to approach improving value for members within their scheme, for example:
- remove unused services
- re-tender for services
- simplify or standardise particular services
- some schemes may be able to obtain scale-related discounts
However, trustees should take care to consider whether costs of change can be justified by reducing member-borne charges or improving services in the long term, and will not unfairly disadvantage any members.
It will not always be possible for trustees to improve conditions for their membership within their current arrangements. When such circumstances arise trustees should consider whether members would benefit from the scheme being wound up and transferring benefits to a different arrangement.
Larger schemes through economies of scale are often able to offer lower costs for members without detriment to the quality of the services provided. Trustees should also be aware that changes to Legislation in April 2018 removed some of the barriers to winding up by simplifying the process of bulk transfers without consent of money purchase benefits without guarantees and further guidance is available from the DWP.
Risks of failing to carry out VFM assessments (enforcement and on members)
Where trustees fail to carry out their annual VFM assessment or to meet the standards for VFM assessments we have set out in the Defined Contribution Code of Practice (No.13), they risk jeopardising positive member outcomes.
Trustees are required by law to undertake the assessment of member-borne costs and charges annually and to provide an explanation of their assessment in their Chair’s statement, failure to do so can result in penalties for which the trustees are personally liable to pay and further regulatory intervention.
Value for members and DB schemes
Whilst there is currently no legal duty on DB schemes to annually assess value for money, we strongly recommend trustees do so to help ensure good member outcomes. The Department for Work and Pensions’ recent White Paper (published 19 March 2018) proposes that in the future,/ trustee Chairs of DB schemes produce an annual Chair statement, which would likely require the inclusion of a VFM assessment.
Examples of good behaviour
Trustees on the board recognised the importance of engaging with members when they were undertaking their VFM assessment. They therefore sent out a survey to gain insights as to the needs of the members. The results of the survey showed that a significant proportion of the membership was unhappy with the current scheme communications, and would prefer being contacted via email rather than letters. The trustees therefore worked with their service provider to introduce an email platform to deliver electronic communications.
Undertaking broad comparisons
The trustees of a small DC scheme recognised that they should undertake a comparison of costs and charges placed on members, with like for like arrangements. However, the trustees were mindful that the comparisons should not just be limited to similar schemes, as it may be possible that members be better off in alternative arrangement.
After undertaking a comparison of the costs and charges, the trustees came to the conclusion that members would receive better value for money if the scheme was wound up and benefits transferred into a larger scheme. The larger scheme in question, through economies of scale, was able to offer lower costs for members without detriment to the quality of services provided.
Drafting for members
The trustees of a DC scheme were required to relay the findings of the VFM assessment in the Chair’s statement. As this is how scheme members primarily learn of costs and charges and how they impact on their benefits, the trustees were mindful that the statement provide a meaningful narrative as to how the costs and charges were assessed and how services received represent value for members.
The trustees therefore drafted the statement using plain English and ensured the document was well positioned to members. They used TPR’s Communicating and Reporting guide for guidance on writing in plain English.
The trustees continuously monitored the level of services provided to members. This helped them identify any potential impacts on value for members and allowed them more time to handle issues as they arose.
The trustees also took a long term view, considering any developments in the upcoming year that may affect value for members; these were then discussed at trustee meetings.
The developments included:
- any changes in legislation or regulations
- number of both new members and members who have left the employer and/or stopped contributions
- whether the scheme has switched between products or changed investment platform
- whether new risks have emerged
- whether new technology has become available on the market which could influence the relative competitiveness and sustainability of certain service providers
- the level of and reasons for member complaints