Pensions - Articles - Larger schemes more likely to display DC quality features

 Research published by The Pensions Regulator indicates that large defined contribution (DC) schemes are more likely to display the quality features necessary for good outcomes for retirement savers than smaller schemes.

 The regulator tested for quality features in more than 300 trust-based occupational DC schemes in areas including investment, governance standards, value for money and communications to members by carrying out both quantitative and qualitative research. The findings show mixed standards across the trust-based DC landscape.

 Three-quarters (75%) of large schemes have at least 15 of the 21 features tested present – compared with half (51%) of medium schemes and under a fifth (18%) of small schemes.
 
 The findings are consistent with those of the regulator’s governance surveys, which show that small schemes with between 12 and 99 members and medium schemes with between 100 and 999 members generally display poorer governance than their large counterparts with 1000-plus members.

 The regulator’s chief executive Bill Galvin said:

 "As a result of automatic enrolment, the vast majority of workers will be saving for their retirement in workplace pension schemes. We want to see workers auto-enrolled into high-quality, value for money schemes, where those running the scheme are properly engaged and fully focussed on the interests of a largely passive membership.

 “This research supports our view that schemes benefiting from economies of scale are more likely to display the features of good governance and to provide value for money. In addition, the research makes it clear that many existing small and medium-sized schemes fall well short in the quality features we regard as necessary for good outcomes.
 
 “Later this month we will consult on our regulatory approach, including setting out the standards that we expect of all trust-based DC schemes. Our communications to employers will encourage them to choose schemes that can demonstrate they are compliant with our principles.”

 A selection of the findings are covered in more detail below:

 Investment

 Feature: those running schemes monitor the ongoing suitability of the default strategy.

 Schemes were asked how often they monitored the ongoing suitability of the default fund for their membership. Overall 46% of schemes monitored the suitability of their default fund at least annually, including 39% of small schemes, 61% of medium schemes and 70% of large schemes.

 Governance

 Feature: Those running schemes regularly review their skills and competencies to demonstrate they understand their duties and are fit and proper to carry them out.

 Just under half (47%) of schemes undertook trustee training and/or skills reviews at least annually. This included 37% of small schemes, 65% of medium schemes and 84% of large schemes.

 Feature: those running schemes are able to effectively demonstrate how they manage conflicts of interest.

 Overall, 55% of schemes had a mechanism for identifying and managing conflicts (such as a policy, or register of interests) including 45% of small schemes, 77% of medium schemes and 94% of large schemes.

 Feature: those running schemes maintain procedures and controls to ensure the effectiveness and performance of the services offered by schemes advisers and service providers.

 53% of schemes had procedures in place to monitor the effectiveness and performance of advisers and/or service providers and reviewed their performance at least every three years, including 46% of small schemes, 71% of medium schemes and 78% of large schemes.

 Feature: Those running schemes maintain adequate internal controls which mitigate significant operational, financial, regulatory and compliance risks

 Schemes were asked whether they had a formal process in place for identifying and recording risks, such as a risk register, and whether they also reviewed the effectiveness of the scheme’s risk management and internal control systems at least annually. There was a significant difference between the proportion of larger schemes and small schemes that maintained adequate internal controls to mitigate significant risks. Overall 32% of schemes had these procedures in place including 21% of small schemes, 54% of medium schemes and 83% of large schemes.

 Value for money

 Trustees were asked how confident they were that charges incurred by members will represent value for money. Overall 25% of schemes were very or confident of this, including 19% of small schemes, 37% of medium schemes and 51% of large schemes.

 Contributions

 Feature: products offer flexible contribution structures to members and/or employers (over and above the minimum scheme qualifying thresholds).

 Around two thirds (67%) of schemes offered flexible contribution structures, including 68% of small schemes, 62% of medium schemes and 76% of large schemes.

 Member communications

 Feature: scheme communication is accurate, clear, understandable and engaging. It addresses the needs of members from joining to retirement.

 Schemes were asked whether they had a mechanism in place to assess the effectiveness of member communications. Overall, 54% could demonstrate this feature, including 46% of small schemes, 68% of medium schemes and 87% of large schemes.

 Feature: members are regularly informed of their level of contributions as a key factor in determining the overall size of their pension fund.

 Overall, 77% of schemes reported informing members of the importance of contribution levels, including 73% of small schemes, 86% of medium schemes and 90% of large schemes.

 The full report on the 2012 DC quantitative features survey, along with a summary report, can be found here