Lessons on how to successfully integrate robust governance procedures in providing value for money in UK pensions must be taken from overseas, the Pensions Policy Institute has said.
The report, published on Thursday, stated that an “overarching focus on governance” could be a central tenet to a UK value-for-money framework, alongside clarity and consensus on outcomes.
The report reviewed recent developments in five other countries — New Zealand, the Netherlands, Australia, Sweden and the US — and considered how these might relate to a UK framework in this area.
The PPI also identified the need to create clear standards and benchmarks for performance, in order to drive a more effective tendering process to secure value for money.
Reading the report, it’s clear that investment performance, scheme oversight and customer support, as well as costs and charges, are essential components of any holistic assessment of value
David Fairs, TPR
Drawing on the experience of New Zealand’s KiwiSaver scheme, the research body said that building engagement metrics into the specification of performance standards allowed the country’s government to “drive the engagement action through the chosen default providers to facilitate better member choice” — an integral part of its value-for-money outcome.
From Australia, lessons can be taken in how comparative scheme data can be implemented for the assessment of value-for-money measures.
The PPI found that benchmarked performance testing in Australia was underpinned by reliable data, which gives the regulator the “authority to sanction underperforming products” and enables members to select better solutions.
Member choice unlikely to lead to good outcomes
Comparatively, data issues in the US hamper policy research around issues such as target-date funds, resulting in market-based alternatives being created that are not then publicly available, according to the report.
Additionally, in cases where member choice is relied on, the likelihood to consistently deliver good value-for-money outcomes is low, unless they are “carefully architected and edited”, the report stated.
In New Zealand, members are provided with a fund finder tool, which “guides members to select interactively from an appropriately edited set of options”.
The US experience of funds leakage and the Swedish example of continued investment in potentially fraudulent funds show that “reliance on member choice to deliver value for money is unlikely to lead to consistently good outcomes”.
The report also found that driving consolidation in the system can have positive impacts on value for money within smaller schemes, yet returns would begin to diminish for schemes with assets of around £500m, based on the experiences of the Dutch and US systems.
The report added that a reliance on scale effects to make a substantial improvement in outcomes for those on low to median incomes “may be misplaced”, as the impact on value for money is marginal.
Further, variations in investment have a more significant impact than charges, but contribution levels and governance are vital to good outcomes, according to the report.
Governance is key
Daniela Silcock, head of policy research at the PPI, said that “consistently positive, real investment returns” generated the most significant value-for-money outcomes, although income levels at retirement are most influenced “by the level of contributions members and their employers make”.
“In relation to external factors, while increases in scheme size have a positive impact on value for money, this scale effect can diminish once schemes reach a certain size, though as schemes grow they gain access to a wider range of investment opportunities,” she noted.
Yet underpinning all of these factors is the need for good governance, “which sets and monitors the delivery of services to schemes and their members”.
Silcock added: “These findings suggest that a UK value-for-money framework could include an overarching focus on governance and the way it relates to investment performance, member engagement, administration, and costs and charges.”
David Fairs, executive directive of regulatory policy, analysis and advice at the Pension Regulator, said: “Putting savers at the heart of what we do and ensuring that all savers get good value for their money is a key regulatory priority for TPR.
“As we jointly develop a common framework for assessing value for money with the Financial Conduct Authority, this comprehensive analysis of how other countries try and deliver value is very welcome,” he said.
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“Reading the report, it’s clear that investment performance, scheme oversight and customer support, as well as costs and charges, are essential components of any holistic assessment of value.”
The FCA and TPR are currently inviting comments on a joint discussion paper on driving value for money within defined contribution schemes.
“We’re seeking views on all of these areas through our discussion paper and we’d encourage the industry to have its say now before the December 10 deadline,” Fairs noted.
