VfM : Assessing Value for Money in Defined Contribution Default Funds

In this report, we ask whether the cost of pension scheme membership in the UK (we use the total expense ratio or TER) offers value for money to the ‘average' member, by which we mean the 90-97% of employees who will be automatically enrolled into the default fund. The key features of a pension scheme's VfM are the design and cost of the default asset allocation strategy, plus scheme costs, such as administration, marketing and communication. In most cases, the stated cost of asset management is not the biggest component of the TER. However, it is not always clear what other component costs cover and whether these should be paid for by the member. In some cases, the member charge increases when a member leaves the scheme or transfers their pot to another scheme. Good governance requires VfM to be maximized, while recognizing that ‘cheapest' does not always mean ‘best' and that the quality of services such as administration is as important as their cost. Good governance also requires the regular assessment of how the scheme is delivering VfM