The financial services industry is now better understood for the transparency shed by consumerists such as Dr Chris Sier on the costs and charges we pay for the funds, platforms and policies into which consumers invest. We may not fully understand complex issues such as ownership and agency, but professionals can now compare and contrast the cost of products using standard measurement frameworks such as the CIT templates.
But we are a long way from finding a common way of expressing value and recent work by Tesco and Ignition House for the DWP suggests that the workplace savers who work the tills and stack the shelves know that value is more than price. The message from independent research was that what people valued was a good financial outcome and a reasonable quality of service, whether they were shopping for groceries or investing for their retirement.
This message has not been lost on Government. In September the FCA and TPR jointly issued a discussion paper outlining the framework for value for money in DC pension schemes. This follows guidance from the DWP for occupational pension schemes on assessing value for their members which was issued over the summer. The FCA is delivering a follow up to their CP20/9 paper aimed at IGCs and GAAs which should be published by the time you read this article.
Just as there appears to be a move away from “cheap is best”, so there appears to be a more plural perception of what “value might be”
What these papers have in common is a broadening of the debate about value for money from a focus on costs and charges to a broader investigation of what people are getting for the money they are investing and the cost of its management.
So what does this mean in terms of best practice?
So far, attention has been focused on costs and charges and performance as separate items. Quality of Service has been determined by various frameworks. The FCA/TPR paper suggests that a more standard approach is needed and is calling on the pension industry to come up with a suite of metrics that can determine the service offering of a product using a consistent measure. If no consensus can be found, the paper suggests that the Government could sponsor a standard created by BSI (or similar) and accredited by UKAS.
Since templates already exist for measuring costs and charges and performance (the DWP have provided a performance reporting template in recent guidance on consolidation), there appears to be an emerging framework for value for money reporting.
But we are at an early stage and what is being presented is only a “discussion paper. It will be interesting to see what the outcome of all this measurement will be. The BSI standard is the kitemark which you either receive for your product or you don’t.
This binary approach has governed most VFM reporting with the overwhelming conclusion being that “XYZ product provides value for money”. But the approach to performance and cost suggests a more graduated approach may appear, perhaps with a score for performance and cost that indicates what historic outcomes will have been.
Just as there appears to be a move away from “cheap is best”, so there appears to be a more plural perception of what “value might be”. Many savers, investing for the future, may want to know not just the outcomes of their saving in terms of net returns, but the impact of their savings on the environment, society and good governance (ESG). We could almost refer to clean and dirty performance, though the value for money measurement of ESG may well start by looking at the greenium (the cost and charge of ESG activity) relative to its impact – perhaps measured in terms of success in stewardship).
Implicit in such thinking on “value” is that value must respond to what matters to members and here there is considerable diversity of thought. If value is primarily about member outcomes, should outcomes be measure by the capital reservoir within the pension pot or the income stream that pot purchases?
Most workplace pensions can show a clear link to work but no clear link to a pension after work. Will consumers come to consider pots without clear investment pathways, less valuable? Will this be the opportunity for a new kind of value to emerge where the tough decisions on how to turn a pension pot into a wage for life are offloaded to a large multi-employer scheme with the capacity to share longevity risk across cohorts of savers?
To my mind, the debate about what is valuable in a financial product is specific to what it is setting out to do. That is why we should consider value for money in a pension plan in a different way to value for money in an ISA or a savings account. People value pensions as a means to stop working and the tax-treatment of pension saving (exempt, exempt taxed) is still based on pensions providing people with a taxable income in retirement.
Extraordinarily, we are not measuring the value for money of a pension plan by the pension arising from the contributions paid. This may be where the VFM journey ends up, though we are a long way from getting there yet.