Thursday, 21 September 2017

    This story is brought to you by Pensions Insight

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    New research: What drives scheme choices?

    What are pensions managers, HR directors and trustees’ most important scheme governance priorities? Pensions Insight, in association with NEST, asked them

    All but the very smallest employers have now auto-enrolled, and as a result there are more than 7.5 million new pension savers in the workplace. With so many people now saving for retirement (even if they aren’t yet saving enough), the importance of good pension scheme governance needs to rise rapidly up employers’ to-do lists. For this research, we asked pension managers, human resources directors and trustees to give us their views on scheme governance practices and priorities. 

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    GOVERNANCE PRIORITIES

    We asked respondents about their single most pressing governance requirement. They were asked to select one option from a drop-down list. ‘Acting in members’ best interests’ was by far the biggest priority, with 61% selecting this option. Among the group of respondents that described themselves as influencers (see ‘About the research’ box, opposite), this figure rose to 75%.

    Across the whole survey group, 13% selected ‘establishing value for money’, but 30% of those who described themselves as decision-makers chose this as their most important concern. ‘Communicating’ was also important for one in ten overall. However, respondents were less concerned by factors such as ‘implementing a fit and proper test for trustees’ (no responses) or ‘issues around managing conflicts of interest’ (2%).

    We also analysed the comments of those who answered ‘other’ to this question (14%). A total of 5% of respondents said that they considered all the factors listed as equally important.

    ‘Balancing the best interests of members and business demands’ was a concern for two respondents, and investment performance, either in general or in relation to value for money, also rated highly on the list of ‘other’ priorities.

    Ensuring that the scheme continues to thrive is the ultimate test of governance, and 79% of respondents were confident that their scheme would not fail. That rose to 83% in the influencer group and 60% among decision-makers. However, that still leaves 21% of all respondents who were not confident about their scheme’s future. 

    ‘Balancing the best interests of members and business demands’ was a concern

    CHOOSING A SCHEME

    Most respondents took between a month and a year to choose their scheme, with 48% taking between one and six months, and 30% between six and 12 months. Regardless of decision-making time, threequarters of all respondents said their choice was made with support from a third party.

    We asked respondents what indicators of quality were important when it came to choosing a scheme. The most popular response was ‘awards and recognition’ (39%); 25% said that ‘mastertrust assurance’ was a key factor. While this suggests that third-party validation is important in general, kitemarks such as PQM Ready status (18%) and Defaqto’s 5-star rating (13%) were regarded as less significant. However, smaller companies were more likely to see the benefit of these – of the 18% of respondents who chose ‘PQM Ready’ as an indicator of quality, 63% were from companies with fewer than 1,000 employees. Responsible investment was also important, with 26% citing evidence of responsible investing, such as being a signatory to the UN’s Principles for Responsible Investing, as a factor. Other indicators of quality listed by respondents included low charges and company-specific benchmarks.

    PRIORITIES FOR THE WORKFORCE

    When it came to selecting one element of a scheme that respondents considered the most important to their workforce, 41% rated ‘keeping members’ money safe’ as the priority. Investment performance (21%) and easy-to-understand communications (16%) were the second and third most highly rated.

    Despite respondents’ interest in responsible investment when choosing a scheme, no-one rated ‘invests in a socially and environmentally responsible way’, or ‘options to invest according to ethical or religious beliefs’ as the most important criteria. When asked what scheme information they would use to help engage members, ‘approach to environmental issues’ (2%), ‘social issues like human rights’ (2%) and ‘corporate governance’ issues (0%) were low on the list.

    In comparison, ‘fund performance’ (46%) and ‘awards or badges of quality’ (18%) were highly ranked. Just over half of respondents (57%) said that they had tried to engage their workforce using these factors.

    Helping members decide what to do with their money when they reach the age of 55 is still a relatively low priority. One in ten respondents said that ‘providing options for getting an income when they retire’ was most important. A more encouraging 64% believed that offering a retirement income solution was part of their duty of care, and a further 18% said that they were not sure. Several respondents said that they would use flexibility of retirement options and long-term outlook to help engage employees.

    INVESTMENT STRATEGY

    ‘Strong oversight and governance’ (26%), ‘clear performance objectives’ (24%) and a link to the ‘needs of the workforce’ (20%) were the three top priorities for respondents when it came to investment strategy. Only 2% were interested in a range of fund choices, perhaps demonstrating the overwhelming importance of the default fund for most scheme members.

    Scheme investments are typically monitored quarterly (51%) or twice-yearly (25%). However, 15% only monitor it annually – and 5% admitted that they had never monitored investment performance. The same proportion (5%) assess investment performance monthly.

    Among those that only monitor their fund annually, ‘strong oversight and governance’ was by far the highest-ranked factor (75% of those who monitor annually). For those that monitor their funds twice-yearly or more, clear performance objectives take precedence.

    “Lower volatility with lower returns is not a satisfactory performance”, cautioned one respondent, showing that although cost may be important, value for members and well-documented objectives are more significant. Overall, our survey found that decisions on choosing a scheme are often based on the provider’s track record and external recognition; once the decision is made, the focus turns to quality governance, coupled with acting in members’ best interests.

    Engaging members is still heavily focused around fund performance, with little attention given to factors such as responsible investment, or even the ultimate goal of retirement options. It’s encouraging that eight out of ten respondents were confident about their scheme’s prospects for the future. Giving the other 20% that same level of confidence is the next challenge.

    To read the full report, click here

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