Regulators propose DC-wide ‘value for money’ framework

The proposals, published on Thursday, push forward the drive to reduce pension costs and charges by providing transparent and comparable information, while providing more detail on how to practically use value for money tests to create pressure for scheme consolidation.

As well as allowing members and the industry itself to compare costs and charges, the proposed framework will allow trustees and independent governance committees to assess investment performance and service standards, which are also important in determining whether a particular scheme is delivering value for money.

It advocates improving data disclosures as a “starting point”, with the hope being that once the data is available, “market solutions” for using and comparing data “will begin to emerge”, with the framework as a whole building on existing regulatory requirements across both trust-based and contract-based workplace pension schemes.

Even the paper itself recognises the enormous challenge developing cross-industry comparability, and it will likely be some time before we see consensus on how this can be achieved

Helen Morrissey, Hargreaves Lansdown

Sarah Pritchard, executive director for markets at the FCA, said: “Consumers work hard for their pension savings and it’s important that schemes are really delivering good-value products.

“This issue is a complex one which impacts almost all pension savers, so it’s important that we get it right. The proposals will help all those making decisions on behalf of consumers to really challenge providers on value and allow better comparisons between products.”

David Fairs, TPR’s executive director for regulatory policy, analysis and advice, added: “Delivering value for money in pensions is a key priority for TPR – all part of our work to put savers at the heart of what we do. Regulators, industry and others must be able to effectively assess value for money to ensure good pension outcomes. The discussion paper sets out our ambitions for an industry-wide value for money assessment framework.

“DC savers rely on the pensions system working as best as it can over the lifetime of their saving – every penny counts. That’s why independent governance committees and trustees need a framework that provides a holistic assessment of what value for money means – beyond cost and charges – to allow them to hold their providers to account and deliver the best possible outcomes for savers.”

Transparency is a challenge

TPR and the FCA stressed the role transparency will play in ensuring effective value for money decision-making, advocating a “common framework” for disclosing key information, as the “availability of comparable information will make it easier for IGCs and trustees to compare the value for money their scheme offers”.

“This in turn will drive competition on performance through comparison and benchmarking,” the regulators explained.

The present inconsistency across the industry may stem in part from the different resources and data companies have made available, they said. 

While large workplace scheme providers tend to provide useful data for comparing scheme costs, they cautioned that “even here, industry has identified the need for better use of metrics to assess investment performance, quality of services and scheme oversight to drive a shift to long-term value”.

In sketching the outlines of a common framework, TPR and the FCA proposed looking at value through “three lenses”, these being “investment performance, customer service/scheme oversight, and costs and charges”. 

The regulators said: “We will expect schemes to make data on these publicly available. We are seeking views on how to get this framework right, though we also recognise that perfect standardisation is not possible. We propose that this framework is backward-looking rather than focused on projections to drive factual comparison.”

Commenting on the paper, George Currie, consultant in the DC practice at LCP, said: “The key areas identified by the regulators are clearly the most important areas to focus on and contribute most to the value members receive over their savings journey.

“Developing robust metrics and comparable benchmarks in these areas will not only help members, but also employers – who need to understand the value for money of different DC arrangements when selecting a pension arrangement that is appropriate for their employees.”

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, warned, however, that establishing a framework for comparison will not be easy.

“The FCA/TPR paper recognises that value for money is about more than just costs, and that factors such as investment performance and scheme oversight have an enormous role to play,” she said. 

“Developing a common framework for comparison will be a powerful tool in terms of making sure pension offerings are competitive across the industry, and those who lag behind will face serious scrutiny as to why.

“However, even the paper itself recognises the enormous challenge developing cross-industry comparability, and it will likely be some time before we see consensus on how this can be achieved.”

Schemes to disclose past investment performance

Moving beyond a simple analysis of costs, the new value for money framework is intended to take an “holistic view”, including factors such as investment performance and scheme oversight including customer service.

The document explains that, though past investment performance has “little value” in predicting future performance, there is empirical evidence to suggest that poor investment performance “is persistent”.

Though comparing investment performance with appropriate benchmarks is often useful in identifying persistent poor performance, the fact there are currently several different ways of measuring and disclosing data in this area makes comparisons difficult.

The common framework would build on the detailed value for member assessments that will have to be carried out by schemes below £100m from October this year, with the aim being “to achieve genuine comparability for groups of similar savers”. 

“Public disclosure of this information will enable judgments to be made as to whether savers’/consumers’ savings are on track and if their scheme’s investment strategy is performing in line with reasonable expectations,” the regulators explained. 

“IGCs and trustees that see continued underperformance should assess whether their investment strategy needs to change. Comparisons can also raise questions about the asset allocations used in scheme design.”

The regulators specified that past performance data should be disclosed net of costs to reflect members’ “experience of investment return”, adding, however, that this should be only one of a number of metrics used to assess performance, with “risk-adjusting return figures” also to be disclosed.

They added that benchmarking will be a challenge, but argued that “commercial benchmarks may emerge” following the disclosure of all the required data.

“In the absence of suitable benchmarks, schemes could compare their actual performance to a composite benchmark (eg, ABI Mixed Investment 40-85% Shares) or cash or inflation-linked indices (eg, CPI plus x per cent),” they suggested.

Customer service metrics will be challenging

Customer service, oversight and governance considerations will also factor into the common value for money framework.

The Department for Work and Pensions legislation, coming into force in October, already requires a wide array of aspects be considered when assessing value for money, which could provide a basis for the common framework.

It is proposed that the common framework would group these under three headings: member communications, scheme administration and oversight, and the discussion paper invites industry views on what constitutes good practice in each.

But the regulators acknowledged that developing comparable metrics to assess good value in customer services, for example, will be challenging “and may require a neutral convener”.

The difficulties presented make the regulators reluctant to “enshrine specific methods of measurement in regulation”, and they have deemed it “more appropriate to use our role to encourage industry work in this space”.

The deadline for industry responses is December 10.