UK pension schemes face numerous governance challenges. These are wide-ranging, including among others, trustee board effectiveness, diversity and standards, member administration, member education and communication, supervision of service providers and monitoring investment performance.
01 Jan 2017
We think one of the biggest evolving challenges is to prove “value for money” and demonstrate transparency around costs. The collection of cost data is challenging, time-consuming and there is currently a general lack of understanding on this complex topic.
So what can UK pension schemes do to improve governance?
We think it is three-fold; structure, effectiveness of the Trustee Board and access to accurate and transparent data.
Policymakers and regulators are becoming increasingly focused on demanding improved governance of pension schemes, whilst numerous members still suffer with the prospect of reduced or a less secure retirement income. A number of regulatory standards and codes of practice have been issued to provide guidance for Trustees of pension schemes, which provides an improved framework. However, that is just one piece of the puzzle.
The PLSA’s discussion paper “Good governance – How to get there”, suggests that improved effectiveness, standards and diversity of Trustee Boards will have the biggest impact on improving governance. We agree with the PLSA’s viewpoint that diversity (technical knowledge, cognitive, background, gender, etc) of a Trustee Board will lead to better decision-making and therefore increase the chance of better outcomes for members.
We also believe that improved support from service providers, in respect of transparent and accurate data will assist Trustee Boards in the drive for better governance. They can only make decisions based on the information they have, and in our experience, they are fully reliant on their service providers to provide them with it.
There is a drive for greater transparency around costs, so what’s stopping schemes from tackling them?
Other than the lack of awareness and understanding of all the costs associated with managing a pension scheme, there’s a lack of understanding of the benefits of monitoring costs and the ultimate impact on member outcomes.
There’s strong evidence to suggest that the information provided will inform better investment decision-making, but in time we expect it to become a critical part of governance reporting to shareholders, and even members.
Until recently, no organisations in the UK could provide a comprehensive analysis of costs, let alone collect costs in a consistent way and present back to schemes in a meaningful manner. That’s where technology is helping, taking thousands of data points and turning this into a simple dashboard view.
Technology can capture large data sets, aggregate them, verify their accuracy and provide visualisation options that allows the end-user to easily understand the data whilst also offering the ability to perform further analysis. For example, KAS BANK’s innovative dashboard offers a comprehensive and transparent breakdown of costs associated with the management of a pension scheme, including benchmarking against other schemes for comparison. This information is available both online and via an App.
What key points do trustees need to consider when communicating costs to stakeholders?
If there’s one key message that underpins all pension cost analysis, it’s that ‘costs are not implicitly bad’. What is important is that they are understood fully and viewed in combination with a scheme’s risk and performance parameters.
The decision whether or not to communicate costs to members will differ from scheme to scheme. The best approach is to understand costs better and then report them in combination with the scheme’s risk strategy and performance, to demonstrate good governance.