If your pension scheme can’t prove that it’s delivering true value for money, then it may face the threat of being wound up.
Small pension firms have been warned that new rules coming into force next month will force them to close if they can’t prove that they are delivering good value to their pension savers.
From 1st October, new regulations are being introduced, directed at defined contribution pension schemes with less than £100m in assets.
From this point, the schemes must compare their costs, charges and investment returns against three other schemes, as well as carry out a self-assessment of how their scheme is being governed and administered according to seven key metrics set out by The Pensions Regulator (TPR).
The findings will then have to be reported back to TPR, so that the schemes can demonstrate definitively that they are providing a real return to the savers using that scheme.
Failing the test
If the scheme is unable to prove that it is delivering value to its savers, then it will be expected to wind up and move its savers into an alternative scheme. Alternatively, it will have to explain what steps it is taking to turn things around and deliver a better return to those invested in the scheme.
As TPR pointed out, the success of the automatic enrolment pension system has meant that millions of people are saving into defined contribution schemes, many of whom likely would not have started putting money aside for retirement otherwise.
That offers a fantastic opportunity to set those people up for some comfort in their later years, but it will be squandered if the schemes in which they have been enrolled aren’t actually delivering much in the way of value.
As a result, smaller schemes will have to prove they can offer the same value as their larger rivals or else face the likelihood of being closed down.
Is bigger better?
The big question here is why small schemes are apparently more likely to provide poor value for money to their savers.
Certain assets and investments simply aren’t open to smaller schemes on account of the smaller amounts of cash they have at their disposal, compared to larger schemes. Larger schemes can also benefit from economies of scale, which lower the costs of using them.
The thinking is that by pushing firms towards consolidation, we may end up with fewer pension schemes overall but those that are left will be large enough to be able to deliver investments in a wide range of assets, improving returns, while also cutting costs.
Of course, while there is some logic to this attitude, the reality is that big isn’t automatically better. There will be some small schemes which are brilliantly run and make the most of the assets they invest in, providing their members with an excellent return.
Equally there will be some large schemes which completely waste the advantages open to it, which are poorly run and managed and leave savers facing a mediocre return, at best.
However, it’s clear that if you’re invested in a smaller pension scheme your scheme is going to have to prove that it’s cutting the mustard in order to keep hold of you, or else start making arrangements for you to move to a rival scheme.
Prove your worth
It’s notable that this latest warning comes hot on the heels of the publication of a new ‘value for money’ framework, published by both TPR and the Financial Conduct Authority which focuses on pushing pension schemes to show exactly what value they are providing to savers.
As we covered last week, the aim of the framework is to get pension firms to publish information on things like investment performance, scheme oversight, and costs and charges in a uniform way.
Not only will that improve transparency, so that savers have a better idea of what they are getting for their money, but it will also make it easier to compare different schemes should we decide to move our cash elsewhere in the hopes of enjoying a more significant return from our saving.
Ultimately, one of the reasons that we needed the automatic enrolment programme in the first place was because pensions are not always the most accessible area of financial services. Plenty of people had no idea how they worked, where their money went or what sort of return they would get, and so put off getting started.
The current drive to improve transparency and force schemes to demonstrate how they are delivering for their savers is a useful step away from the mystique that has thus far shrouded the pensions industry.
If we better understand our pension schemes, then we are then in a more informed position to decide who we want looking after that money