The FCA and Pension Regulator’s joint discussion paper DP21/3 issued in September called for input from the industry on how to create better retirement outcomes for savers in both workplace and personal DC plans. The first challenge for “Driving Value for Money in defined contribution pensions” is this; how should we define and measure value for money?
Fees and charges are the obvious starting point. For auto-enrolment pensions excessive costs have largely been banished through the 0.75% charge cap, with the exception of small pot deferred pensions (the subject of a separate consultation earlier this year). Meanwhile the new ‘comply or explain’ VFM rules for small schemes from October will likely drive further market consolidation or innovation. Even for personal pensions, regulator focus and competition have driven the worst market practice away.
But fees are only one side of the value equation. Which is better: a low-cost scheme with below-average investment performance, or one topping the charge cap and above-par returns? Would a scheme with decent investment performance be better value for money than an average-rated fund with a super-engaging experience than encourages members to increase their contributions?
It’s vital not to make best the enemy of good, and create a standardised VFM reporting template that is not too onerous for providers to submit or trustees to absorb. This joined-up approach by both regulators to answer this question and establish a framework to help measure value is most welcome.
Core elements of value for money (adapted from DP21/3)
Investment performance
On the surface it’s very easy to measure investment performance, but as the discussion paper notes there is no standard way to do this. The multifarious benchmarks in use make it near impossible for professionals and savers alike to make direct comparisons between schemes.
FCA and tPR propose disclosing actual and risk-adjusted performance net of costs, over long time periods to discourage inappropriate risk-taking, with potentially different metrics for specific cohorts based on years left to retirement. Let’s leave selection of the right risk-adjustment method to the actuaries – as long as it’s standardised and the performance metric is comparable against a single, relevant benchmark. Should self-select investments be excluded? I believe they should, on the basis that self-directed savers are more likely to be mindful of performance and keep a watch on their funds. It would be great to see firms reporting on overall portfolio performance against the single benchmark, at least to members. The technology to do this already exists; done right, it would surely improve engagement as well as retirement outcomes.
Quality and Service
Which brings me to the third strand of customer service and scheme oversight. Communications and flexibility top the list here in terms of importance to employers, with administration, governance and reputation lowest priorities. Features like post-retirement options have increased most in importance over recent years. This multiplicity of factors illustrates how hard it could be to establish a VFM framework in this category.
The paper suggests focusing on administration, governance and communications. Failures in any of these can lead to poor outcomes but measuring them may be more art than science. There are no standard KPIs for administration so the suggestion to use an organisation like PASA to adjudicate is a good one. Scheme trustees, IGCs and GAAs are charged with governance, but again this is judgment-based (and who polices the police?). Lastly, communications can be measured best by the member actions they generate, or more typically, don’t! What’s for sure is there is room for improvement across the board here (we often wonder if providers’ executive teams ever try to use what they offer their customers).
DP21/3 gives us much to chew over then. The initiative is well-intentioned, but will it work? I hope it succeeds, but I think it needs a logical extra step; translating something aimed at trustees and employers, to end customer communications. People power has worked well for campaigns like MakeMyMoneyMatter. What if there were a single measure, a kitemark if you will, that denoted a good scheme? And what would happen if a firm’s CEO had to write to clients to explain how and why their pension plan did not hit the mark this year?
