From next February, trustees of defined-contribution schemes are required to produce a “Chairman’s statement” as part of the scheme’s annual report to members. Included in this must be a statement as to whether the trustees consider that the charges and transaction costs of the scheme’s underlying investments represent “good value for members”.
This has caused some confusion and annoyance as “good value” is not defined anywhere in the legislation and the Pensions Regulator’s guidance is a little vague and general.
There has also been a barrage of criticism that the “good value” requirement is only applied to costs and charges. In a defined-contribution scheme, where the scheme member bears all the risk, the investment performance is surely the most important factor in deciding whether the scheme represents “value for money”.
However, to comply with the legislation, it would appear that, at present, best practice can be summarised in the following points.
- The trustees should set out a clear process for structuring and preparing the statement and maintaining an audit trail. The trustees must establish what the costs and charges actually are. While some will be easy to establish, others such as bid/offer spreads may need help from the investment manager.
- The trustees must ensure that the concept of “good value” is in accordance with the legislation and regulatory guidance. You may need to consult your legal adviser.
- The trustees’ evaluation process should be transparent and measurable. The evaluation process must not be seen simply as a device to drive down costs. It will inevitably involve some level of subjective judgment but this should be the same for each year’s statement, so that members can make valid comparisons.
- The statement must be presented to members in an easily understandable form and in plain English, with no pensions jargon or acronyms!
- The above procedures should be kept under review and amended as necessary. The concept of “good value” will undoubtedly evolve over time. The trustees must not regard this process as an annual box-ticking exercise.