The ‘red, amber, green’ proposed approach to value for money in defined contribution (DC) pension schemes has performed poorly in a recent behavioural finance exercise commissioned by The People’s Partnership.
The master trust provider commissioned the Behavioural Insights Team to test several different Value for Money (VfM) metrics with consumers, and presented the results to delegates at the Pensions UK Annual Conference in Manchester this week.
These included a three-point ‘red, amber, green’ model based on the proposal from the Financial Conduct Authority that was first published in August 2024.
Pensions Expert understands that the regulator has moved away from this approach in its ongoing work on VfM, with another consultation due later this year.
“Value for money metrics need to be clear and designed in a behaviourally informed manner to help guide savers towards better outcomes.”
Sujatha Krishnan-Barman, Behavioural Insights Team
The three-point model underperformed in consumer testing against a more detailed five-point model, as well as a factsheet-based approach, a “disaggregated ratings” approach, and a “net benefits plus service rating” model.
Sujatha Krishnan-Barman, principal adviser at the Behavioural Insights Team, said overly simple metrics and measures were seen by consumers as “gimmicky”. That said, adding more information “isn’t always better” and the way information is displayed can play a key role in the quality of decision-making by consumers.
“Value for money metrics need to be clear and designed in a behaviourally informed manner to help guide savers towards better outcomes,” Krishnan-Barman said.
Patrick Heath-Lay, chief executive at The People’s Partnership, said the research findings could help the industry “take control” of VfM metrics and help consumers understand the value of their pensions.
The highest scoring measure, according to the research, combined a “net benefit” score (consisting of five-year investment returns after charges minus the initial investment) and a rating out of 10 for customer service.
The second-highest performing option was a five-point colour rating. Pension “factsheets”, which were used as the experiment’s “control” as a representation of information currently available, also performed strongly.
Getting ahead of VfM regulations
Heath-Lay said the government had been clear that it wants the VfM framework to be operational by 2028, a “challenging” timeline for an industry in transition.
The People’s Pension wants to get ahead of the regulatory aspects of VfM, he told delegates, which led to the creation of the ‘Pound for Pound’ initiative earlier this year in collaboration with other master trust providers.
The consortium has drafted in Australian pension ratings company SuperRatings to support its work on evaluating value for money.
“Others are seeking to join, and it will inform the debate” on VfM, Heath-Lay said.
“It’s vital that consumers are easily able to compare the value offered by other pension schemes in a transparent and consistent way, particularly in advance of commercial dashboards being available.”
Patrick Heath-Lay, The People’s Partnership
In a press release announcing the research, Heath-Lay said: “Research tells us that people make decisions about transferring their pension very quickly, often in less than 24 hours. Too often, they don’t have the information they need to make a good, comparable decision, and they end up losing out.”
The Behavioural Insights Team’s research “shows that Value for Money metrics, designed for consumer use, is an idea with legs and is something that could ultimately lead to better outcomes for pension savers”, he said.
He also urged regulators to make VfM metrics suitable for use by consumers, arguing that the data was likely to be made available to them through other means anyway.
“It’s vital that consumers are easily able to compare the value offered by other pension schemes in a transparent and consistent way, particularly in advance of commercial dashboards being available,” Heath-Lay said.
