Value for Money

VFM in DC pensions

Ruari Grant, Policy Lead, DC, examines the regulators’ proposals for a common DC framework.

What really is value? Whoever you are, and whatever industry or walk of life you come from it’s something you probably want and strive for. But it’s a nebulous concept and means different things to different people. The Pensions Regulator and Financial Conduct Authority have attempted to address this – in relation to pensions at least – in their recent joint discussion paper, Driving value for money in defined contribution pensions, which proposes a common framework to compare value across all DC schemes in accumulation. 

As this is a discussion paper, these proposals are not yet at formal consultation stage, and are – as such – still fairly loose ideas. In essence though, the regulators explore the suggestion that value in pensions is made up of three elements: investment performance, costs & charges, and scheme administration, governance & communication, all areas which PLSA has previously discussed as part of any value for money framework.

Their key premise is that providers will disclose defined metrics for each element, and that those overseeing schemes – trustees, IGCs, employers – will then be able to compare their scheme against benchmarks in each category.

Few would argue with the three key elements described above. Ultimately a pension is a savings vehicle intended to grow, so investment performance, combined with any costs that have a negative effect on a pot, must be front and centre in any discussion. And then a final element encompassing how the scheme is run, including on the all important ESG front, and how the scheme interacts with and services its members, is of course valuable.

So far so simple, then? The devil, however, will be in the detail, and the regulators’ thinking seems a lot more developed in some areas than in others.

Data is already available for investment returns and costs, and given the industry has been clamouring for years about the equal importance of each of these (rather than a focus on cost alone), their equal emphasis in the paper should make for pleasant reading. Investment disclosures net of costs will be widely welcomed for simliar reasons. 

That said, the regulators appear less clear about how all three ‘value’ elements interact with one another. For example, you might reasonably argue that the quality of investment governance, for instance, is inherently reflected in performance; so do you ‘count’ these components twice or once in a total ‘score’? It is not clear whether the regulators envisage the three elements should be assessed together or in isolation, and if the latter, how much each should be weighted.

The paper is also undecided on what constitutes the right level of detail for the right audience. Trustees appear to be the central recipient for the disclosures (though others, such as employers, are mentioned), but how they will be expected to utilise this information is left open to interpretation. Moreover, trustee knowledge itself varies greatly, so in this sense a once-size-fits-all approach would be – while an attractive idea – incredibly complex to implement. 

Then there’s the question of benchmarks, and where they should come from. The paper suggests various possibilities, from industry averages, and naturally emerging market benchmarks, to existing indices and even comparisons with NEST. Consensus on what constitutes the ‘right’ benchmark would be very hard to come by, but perhaps this reflects the wide ranging market we have, and therefore one which cannot be shoehorned into a series of generic benchmarks.

All this leads you to wonder what the real agenda is here. DWP has been pushing for greater consolidation in the DC market for some time, and it’s hard to see an outcome from these value for money (VFM) assessments that doesn’t conclude that some smaller schemes should be considering their options, when they may struggle to ‘compete’ in some areas – I’m thinking customer service – with the large mastertrusts.

The regulators do unfortunately overlook typical areas of strength of smaller schemes, such as higher employer contributions and other support, so these will need further consideration over their contribution to value.

So where does that leave us? Comparison to improve value is of course a laudable aim, and it is encouraging that the regulators are working together to address this. But it may be that their attention is better spent addressing the small number of very poorly performing schemes, without increasing the already considerable regulatory burden on the whole market. DC scheme trustees are – for the most part – already doing their best to ensure their members achieve good value in accumulation.