Value for money in pensions – why it is so important?

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We have seen two regulatory publications over the pandemic one from the FCA and the other from the pension strategy team of the DWP. The FCA have produced CP20/09- “Driving value for Money in Pensions” and the DWP the less snappy “Improving outcomes for members of contribution pension schemes”. Veteran readers of such tomes have been surprised by the alignment of purpose and even of method. The challenge laid down by Frank Field in one of the last inquiries he chaired for the Work and Pensions Select Committee is being addressed and we are moving towards a single definition of value for money.

We are not there yet but we have come a long way from the Pension Regulator’s 36 characteristics of a good DC scheme, a document so dense that it has sunk to the bottom of the regulatory mire. The FCA have condensed their thinking into a relatively concise formulation of how we might all consider value for money.

The administration charges and transaction costs borne by relevant policyholders or pathway investors are likely to represent value for money where the combination of the charges and costs and the investment performance and services are appropriate.

The result was chaos with little consistency other than almost universally it was thought that the pensions within the IGCs terms of reference were providing good value for money

The three legs to the stool are costs and charges, investment performance and quality of service and the discretion in the value assessment is confined to the assessment of what is considered “appropriate”.

I am sure that we will find a more memorable set of words over time, but it is certainly a starter for ten and when the DWP published their proposals for the upgraded value for member assessments , the FCA’s formulation was clearly to the front of their mind.

What purpose does a VFM assessment serve?

Since the formation of Independent Governance Committees in 2015, VFM has been a means to protect vulnerable consumers from having their pension pots eroded by poor performance, high charges and bad service. The OFT had remarked that “the buyer side of the DC workplace pensions market is one of the weakest that the OFT has analysed in recent years”.

The OFT stopped short of referring workplace pension providers to the Competition and Markets Authority, and the FCA accepted Independent Governance Committees (IGCs) as a means to enable consumers to “engage with  or understand their pensions”.  The OFT’s market study into workplace pensions from which these quotes are taken is now 7 years old but engagement and understanding of what consumers have bought, remains a central issue for UK regulators.

Benchmarking  

The FCA chose not to prescribe a definition or detailed guidance on value for money assessments but to leave each IGC the option to define their own. What developed was a variety of templates based on the individual bias’s of IGC members and the influence of their various advisers. The result was chaos with little consistency other than almost universally it was thought that the pensions within the IGCs terms of reference were providing good value for money.

What was not addressed was the question “relative to what”. The FCA has been clear that VFM assessments need to find a way to compare different kinds of workplace pension, they are even explicit in naming potential comparators

“We think it is difficult to conduct a meaningful assessment of VFM when an individual provider’s schemes are reviewed in isolation…The scope of this comparison would be a matter for the IGC. For workplace pension schemes, this could include not-for-profit options such as NEST or The People’s Pension.

Implicit in this statement is the inference that the approach adopted for workplace pensions could be adopted for other kinds of pensions. The Value Assessments being conducted by fund platform providers such as SJP and Hargreaves Lansdown would make interesting comparisons on their value for money using the definition set out by the FCA.

Impact of VFM assessments

While the OFT saw the purchaser of a workplace pension as its consumer, the FCA and TPR have moved on to considering purchase as a matter for the employer. TPR has now explicitly stated that it considers the default position for small DC schemes is to wind themselves up so that assets can be consolidated into larger schemes capable of improved VFM.

The FCA are less explicit about what they expect IGCs to be telling their providers, although many of the smaller Group Personal and Stakeholder Pensions run by insurers will be sub-optimal , based on TPR’s measure (£100m in assets within the scheme). The FCA have now accepted that within a grouped contract based arrangement, an employer can be deemed to have its own scheme if the funds themselves or the  terms on which funds are offered to members is bespoke to the employer.

The FCA is proposing that IGCs will in future be required to assess not just the standard VFM of the workplace pension but the individual VFM for each employer. This would be a major undertaking for providers. The IGC Chair for Standard Life tells me that his provider has over 50 sets of terms for employer schemes and a variety of default funds, all of which would need analysis for value for money.

If any of these employer schemes is considered not to be offering value for money (by comparison with other workplace pensions) , the IGC may be required to bring this to the attention of the sponsor of the employer scheme.

A change of tone and substance

Both TPR and the FCA are now talking about publishing guidance for the purposes of trustees and IGCs and GAAs on how to assess VFM. One whole chapter of the DWP’s consultation is devoted the specific measurement of VFM (right down to templates of performance tables for target dated funds),

It is inevitable that the diversity of approaches adopted so far will be reduced and we will see more standardisation.  A common definition means a common application of that definition although some discretion remains in the inclusion of “appropriate” in the definition.

However, the devil is in the detail and the detailed assessments resulting from following some of the published guidance in these consultations suggest that trustees and IGCs are going to be hard-pressed to meet the guidelines , let alone make comparisons between their scheme and others.

There needs to be a simplification of the outputs of these assessments so that meaningful comparisons can be made. Inevitably this will mean a more objective approach to the assessment with data being analysed for what it tells IGCs about the costs and performance experienced by members and what that analysis tells the IGCs about the quality of data they are analysing.

It is clear from reading the output of these consultations that VFM is going to be the central plank of the Government’s focus on ensuring members getter better outcomes from their DC schemes. It will be interesting to see how much further the common definition of value for money extends into other forms of pension provision and other financial services

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About Author

Henry straddles the world of traditional finance and FinTech and is an active entrepreneur who helps people make good pension decisions. He founded AgeWage and the Pension PlayPen to map the pensions genome and ensure everyone gets data driven information on value for money

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