Understanding the ‘needs’ of your DC pension scheme members
Last week saw the new Under-Secretary for Pensions, Richard Harrington, sign-off on The Pensions Regulator’s (TPR’s) new, revised Code of Practice 13 for DC schemes. We’ve had an idea of what was going to be in this new document for a while, but I’ve been keeping my thoughts to myself to see what aspects of the consultation version remained in the final Code which comes into force on 28th July.
I was particularly keen to see whether the Value for Money section of the Code retained the reference to identifying the characteristics of scheme members, or what I and my colleagues have been referring to as understanding the members’ ‘needs’. These quotes in particular caught my eye and imagination:
“… We expect trustee boards to make efforts to understand the characteristics of their members and, where possible, their preferences and financial needs, and to take this into consideration when exercising their judgement about what represents value for members” (P.27, 116)
And this one:
“…In our view, charges and transaction costs are likely to represent good value for members where the combination of costs and what is provided for the costs is appropriate for the scheme membership as a whole, and when compared to other options available on the market”.
Who is the end user?
With the extracts above in mind, the development of a retail product isn’t too dissimilar to how TPR encourages pension scheme design. It harps back to the mantra that our members need to be treated like consumers. Everything is relative. We no longer appraise products and services relative to their direct competition, but to the wider world. Members are expected to shift their mentality from a retail environment, which bends over backwards to accommodate their diverse needs and preferences of consumers, to a work environment more akin to a Henry Ford mentality.
The point I am trying to illustrate is that this is a natural progression in the pensions world. Automatic Enrolment was implemented because we know that employees won’t sign up to pensions of their own volition, consequently, demonstrating value in the absence of instant gratification and the lost opportunity cost of say buying a car, is even more important. If we’re not investing in a product that we believe doesn’t meet our own individual requirements, then it could result in further disengagement.
Companies invest billions in understanding their consumers, so that they can develop products that are more likely to appease their target market; a pension should be no different. Just because it has become compulsory, doesn’t mean we should deploy a product with a one-size fits all approach – it is a mentality that lends itself to the modern world.
There is also the matter that the buyer isn’t actually the end user. The person tasked with sourcing the market and finding the best product is not the same as the person who’ll use it. This pressure increases the responsibility and the need to know your member.
It’s much like buying a birthday present. Most of the time, you would buy the recipient a present based on their preferences, so that when they unwrap your gift their face isn’t masked by that look of disappointment. However, with an unwanted present, we can eBay it or put it in the cupboard for an unsuspecting frenemy, yet with a pension it will dictate our livelihood during retirement, so understanding the requirements of members is particularly important. This is how Trustees must now think about their schemes:
- What is the appetite and ‘needs’ of the scheme members?
- What do they want to get out of the scheme/their retirement savings?
- Does the scheme deliver this?
- What’s a reasonable cost for the scheme compared with how well it matches the perceived ‘needs’ of members?
How to better understand members?
At Capita Employee Benefits, we have long advocated the use of data to better understand employee behaviour and decisions to feed this back into the design process.
Our Member Segmentation tool allows meaningful analysis to be undertaken. A demographic segmentation of scheme membership allows us to identify their likely retirement needs, risk appetite and other characteristics which are vital to informing investment design, engagement and communications and, vitally, allowing Trustees to demonstrate that they’re doing their job properly.
If you know what your membership wants, and what a reasonable cost might be, it’s much easier to “sell” the benefits and therefore create a more engaged membership. Reasonably, this could also be said to have a positive effect on member outcomes - the Holy Grail of running a DC scheme!
And now, given TPR’s focus on members’ ’needs’, ‘characteristics’ and ’preferences’, running a scheme based on a strong understanding of members will also allow Trustees to evidence compliance with key aspects of the new DC Code of Practice 13.
For Trustees, the critical question when designing or assessing a DC scheme is no longer ’what are the needs of members of DC schemes?’ (a question answered in so many Statement of Investment Principles in the past), but ’what are the needs of members of YOUR DC scheme?’.