Alan Morahan: Time to check your scheme’s BMI

Like human beings, pension schemes need a health check from time to time says Punter Southall Aspire managing director, DC consulting Alan Morahan

About 16 years ago I became eligible for a biennial medical as part of the company’s employee benefits package. It’s a comprehensive assessment which takes about two hours and includes all the things you’d expect like blood tests, height, weight and blood pressure measurements, ECG and a lung function test.

At the time, I was pleased to get the benefit but probably not much more than that. It’s only as the years have gone by that I’ve come to really value this benefit and react to the results that come from it.

I headed off for that first medical not really knowing what to expect and came away generally pleased with the results, although there were a few recommendations about weight, diet and general fitness, some of which I paid attention to, some of which I probably ignored to start with.

In fact, it was the second medical that started to build my appreciation of value. I now had the benchmarks from the first medical to compare against and I could see some improvements, but a worsening in others. This was both an encouragement and a warning. I went home, dug my trainers out of the wardrobe and conscientiously set off for a run that very evening.

But knee-jerk reactions aside, eight reports down the line I now have some solid data to look back on. With detailed information to hand about how I’m getting on, I have remained conscious of my wellbeing and have a general strategy to keep on the good side of the various biometrics.

Pension scheme governance can be like that. Once the scheme has been set up and is in place, all too often many people take the ‘if it ain’t broke…’ view that the scheme will tick along looking after itself and they don’t need to monitor it too closely.

Meanwhile, the more enlightened recognise the importance and value in undertaking a regular review of their scheme to ensure that all the working parts are functioning properly and they can make any necessary adjustments along the way.

So, if a pension scheme were to go for a medical – otherwise known as a governance meeting – what criteria would it be tested on?

Firstly, administration – the heart of the scheme. If that gets clogged up the whole thing can start grinding to a halt. We saw, during the first few years of auto-enrolment, that many administration systems were struggling to cope and scheme members suffered as a result. Confidence in a scheme can be quickly lost if members receive incorrect statements or requests are not promptly and accurately actioned. So, the doctor’s advice here would be to stay on top of your scheme administration, or if you don’t have the resource in-house, employ a professional pensions consultant to handle this for you.

Secondly, funds. Funds, particularly the default fund, are analogous to the lungs. Fund performance is what powers the scheme on and it needs to be constantly monitored to ensure it’s delivering the expected outcome for the appropriate level of risk.

Investment markets are extremely dynamic, particularly in these uncertain times, and some funds are lagging their own benchmarks, never mind the performance of their competitors. The action point here is to keep track of market and fund performance and make sure your funds, and especially the default fund, where, after all, over 90 per cent of your scheme members are likely to be invested, are performing as well as expected.

And thirdly, charges. This is the scheme’s BMI – how heavy are the charges relative to the value provided? Since 2016 we have had the 0.75 per cent charge cap for qualifying schemes but many schemes are still carrying weightier charges than necessary. A regular review, with some benchmarking, should identify this and allow a negotiation to take place to achieve better rates for your scheme members.

Ultimately it’s about what the scheme can deliver. Independent governance should never be seen as a hassle or an unnecessary expense. Done properly it can ensure a scheme remains healthy and efficient, and achieves its objective of being a valuable part of a reward package, aiding recruitment and retention and allowing employees to retire with a decent level of income.