Assessing the value for money of defined contribution pension schemes

Three reasons we need a common framework to assess the value for money of pension schemes 

A common and uniform framework for assessing VfM across DC pension schemes will help the people profession better review whether the money being spent by their organisations on workplace pensions is being spent wisely.

There are three key reasons this is important:

1. Workplace pensions are not just another cost of doing business, but also an important recruitment and retention tool.
2. Pensions are a crucial aspect of employee financial wellbeing, with 83% of employees surveyed by the CIPD last year saying that being able to save for their future was important. The same research also finds that employee performance is more likely to suffer if they’re experiencing poor financial wellbeing, with 28% of employees reporting that money worries had negatively affected their work performance.
3. Workplace pensions represent a considerable investment for organisations, with many organisations contributing at rates of 6% or more of employee pay*. 

The framework must assess how much money is being saved in these schemes, and for how long

While it’s important that DC schemes offer value for money, this is unlikely to be enough to deliver good outcomes. Employers must also assess how much money is being saved in these schemes and for how long. That’s why we support proposals to:

• Remove the qualifying earnings threshold and reduce the age at which someone is automatically enrolled into a workplace pension.
• Gradually increase the minimum pension contribution to 12%, with at least half of that coming from the employer.

Five key factors will determine the success of the framework

Our recommendations concerning the joint VfM framework include:

• We support a phased approach to the introduction of the VfM framework, starting first with workplace default pension fund arrangements.
• We agree with the proposal for a forward-looking performance and risk metric, but propose that these future-looking forecasts will need to be reviewed to see if they have been both accurate and useful.
• Any metrics for assessing effective communication should be based on improving employee awareness of the workplace pension and on encouraging positive behaviours, mindset, and connections.
• We recommend cooperation between employers and pensions suppliers to ensure HR professionals get the quality of data they need to assess the value of their pension schemes. The quality of the data depends on employees giving up-to-date information (such as their current address).
• We support a centralised approach for the publication of the framework data. A ‘one-stop shop’ approach will make it easier for HR professionals, and their advisers, to get the information they need to carry out a VfM assessment of the existing workplace pension plan. 

*Our 2023 UK working lives survey finds that among employees who belong to a DC pension plan, 30% said their employer contributes 6% or more of pay, while our 2022 reward management survey finds that over two fifths of private sector employers contribute a minimum of 6% of pay.