Q&A: Value for Money in DC consultation
20 March 2023
Alyshia Harrington-Clark, Head of DC, Master Trusts and Lifetime Savings, asked Sarah Smart, Chair of The Pensions Regulator (TPR) for her views on the current Value for Money joint consultation between TPR, the Financial Conduct Authority (FCA) and the Department for Work and Pensions (DWP).
Alyshia Harrington-Clark: Why does TPR want to further explore value for money in DC pensions? Isn’t this already a priority?
Sarah Smart: Alongside its role as a regulator in protecting consumers, TPR’s remit is also to enable a properly functioning competitive market.
For defined contribution pensions, the concept of value for money is not as easily accessible as it is in other consumer markets, such as telecoms for example. Often, consumers don’t understand the final outcome of a lifetime of savings until 30 years down the line. By then it's too late to discover that the product that you've been using hasn't been delivering what you expected of it.
We've seen a savings revolution over the last decade, as millions more people are now saving into DC pensions thanks to the success of automatic enrolment, supported by a pensions industry that has helped to lay the foundations to build a nation of savers. But there are still challenges: people are still not saving enough, and we need to be certain that all savers receive value for money. That’s why, together with our partners at DWP, and at the FCA, we've launched this consultation to deliver a consistent and coherent framework for value for money across DC pensions.
What role do savers play in determining value for money?
DC savers rely on the pension system working as best it can over the lifetime of their savings. We know however, that most savers don't actively choose to be in a pension scheme and don't engage with it. The system is built and driven by inertia, which has so far played a key part in keeping employees saving.
However, it’s then incumbent on those who are governing the system or the products to ensure that savers receive value for money by default.
Workplace default arrangements for automatic enrolment are in scope at the moment, but we will also look at retail pensions later. The intention is for a phased approach so that once we've established a framework for workplace default arrangements, we can then look at workplace self select options, non workplace pensions and also pensions decumulation.
What will that mean for schemes’ data?
We want to define the data that DC schemes will have to disclose to demonstrate that good outcomes are being achieved. Currently, we have information asymmetries. Some schemes
have access to data to enable them to see how they measure up to other schemes, but many don't, and there is little consistency or comparability. The outcome is a real risk to savers that their money could be invested in poorly performing schemes.
In a properly functioning market, those who are making decisions on behalf of savers and those who are responsible for driving value - primarily trustees - need to have the tools available to them, to enable close focus on delivering good pensions outcomes.
We want this framework to provide trustees, advisors and employers with data that allows increased comparability, transparency, and competition across DC pension schemes. Our proposals would require DC schemes to provide standard metrics across three areas: investment performance; costs and charges; and services. That would bring a consistent approach to measurement and make sure there's comparability across providers and across schemes.
What happens if schemes are underperforming according to those metrics?
Underperforming schemes would be required to take action to improve the value they provide to savers or consolidate where this is in savers’ best interests. And if not, then they'll face regulatory action.
Our responsibility is to straddle the line between the theory of what looks good on paper and the practical considerations of what we and the industry can achieve that enables real change in the market.
We're working with our partners at DWP and FCA to get this right across all parts of the pensions market. We can then deliver the consistent regulation and outcomes that the public expect.
Value for money: a framework on metrics, standards and disclosures, a joint consultation between The Pensions Regulator, Financial Conduct Authority and Department for Work and Pensions, is open for responses until 27 March 2023.