A consultation on common measurements for comparing defined contribution pension schemes’ value for money will be launched towards the end of 2022, says The Pensions Regulator (TPR) and the Financial Conduct Authority (FCA) in a discussion paper on the policy initiative launched today.
Regulators say a common approach across industry should allow access to consistent data on investment performance, costs and charges and service standards.
A discussion paper on the consultation published today shows industry stakeholders divided over some of the complex questions that relate to disclosure.
The industry is divided over whether risk-adjusted returns should be an element of a scheme’s VFM assessment. Several respondents argued reporting risk-adjusted returns represents little value for members and is likely to add complexity. These respondents noted that in the absence of a consistent methodology prescribed by the regulators, comparisons would not be achieved. Some believed that risk-adjusted ratios would not act as a reliable proxy for the comparison of schemes’ individual investment strategies, as they vary according to the specific needs of their membership.
Other respondents argued that risk-adjusted disclosures give a more accurate indication of how a scheme generates its returns and whether its strategy is suitable for its members. They noted that risk adjustment will reflect the value added through risk management, especially in periods of increased volatility. However, many respondents noted that risk-adjusted returns would only support decision making for professional audiences and would likely confuse retail consumers.
The consultation will consider whether returns should be disclosed net or gross of charges, the age cohorts for which performance data should be revealed. Regulators also plan to include service standards in the VFM metrics, although some stakeholders challenged the idea of a minimum standard for service, suggesting this could incentivise a ‘race to the bottom’ as providers look target these minimum standards to keep prices low.
Performance data for master trusts and GPPs, across three age cohorts, including risk/return data, can be found at www.capa-data.com.
Minister for Pensions Guy Opperman says: “Ensuring value for money for the record number of Brits now saving for retirement is one of my key priorities.
“While cost continues to dominate decision-making, this does not always lead to the best member outcomes. We want those making choices about where people save their money to take into account more than just price, and I look forward to progressing this work alongside TPR, the FCA and industry.”
David Fairs, TPR’s executive director for regulatory policy, analysis and advice, says: “Particularly welcome is the broad consensus from industry that we need a better assessment of value for money to deliver stronger outcomes for savers in areas such as costs and charges and investment performance. But we acknowledge this is a complex area and there were many views on our proposals which need further consideration.”
Sarah Pritchard, the FCA’s executive director for markets, says: “Consumers should be able to have confidence that their pension is delivering value for money. We will continue working with industry over the coming months to make sure we get this right.”
Laura Andrikopoulos, head of governance, Hymans Roberson, says:“We are pleased to see the FCA and TPR recognising the complexity in identifying a few simple metrics to compare value for money in DC pension schemes. Whilst we welcome greater transparency and consistency in this area, particularly between Trust and Contract-based schemes, an overly simple approach may give misleading impressions of value. For example, lower costs but a poorer quality investment strategy and little flexibility at retirement do not necessarily represent better member outcomes or value than a higher cost scheme. A few simple metrics won’t necessarily bring a level playing field for all DC members. It is vital that the focus is not just on cost but on long term member outcomes.”
Steven Cameron, pensions director at Aegon, says: “We welcome the move to greater consistency in the broader measurement of value for money across workplace and in due course non-workplace pensions. We hope this strikes the right balance between data analysis and using the expert judgement of Independent Governance Committees and Trustee Boards.
“However, it’s critical that there is consistency with the ‘price and value’ elements of the FCA’s New Consumer Duty which will apply to contract-based workplace pensions and non-workplace pensions. The FCA’s current deadline for complying with the New Consumer Duty is April 2023 which risks possible divergence if the joint FCA / TPR framework will be subject to further consultation towards the end of this year.”
Tom Selby, head of retirement policy at AJ Bell, says: “When it comes to auto-enrolment the employer will have chosen the pension scheme on behalf of their members – meaning there is a significant power imbalance between buyer and seller.
“The weakness in these competitive dynamics means savers are potentially in greater danger of receiving poor value-for-money – which is one of the reasons a charge cap on default funds was introduced.
“It therefore makes sense for regulators to focus their attention on this part of the market. If comparability can be improved, trustees and employers should be in a better position to compare the value on offer from different providers across the market.
“However, it is much less clear how standardised value-for-money metrics could be applied to the non-workplace pensions market.
“People who invest in products like SIPPs are already engaged and will hold a range of different investments depending on their risk profile and long-term goals. Applying a one-size-fits-all assessment of value would therefore be of little relevance or use to people with diverse investment approaches.
“Instead, the FCA’s work on the introduction of a new Consumer Duty – due to be rolled out over 2022/23 – will help make sure these consumers experience good outcomes.”
Phil Brown, director of policy at B&CE, provider of The People’s Pension, says: “This is a welcome step forward. Scheme selection in the workplace pension market now turns too much on charges and too little on the value that different pension schemes offer.
“Charges matter but outcomes matter more. Rigorous value for money metrics will enable those choosing pension schemes to better gauge which schemes will deliver good outcomes for members.”
Gail Izat, workplace managing director at Standard Life says: “Competition plays a crucial role in the workplace pensions market, driving providers to improve and delivering outcomes for savers. However, due to the complexity of pensions it is sometimes difficult to make meaningful comparisons between products on other than the most limited of metrics. I’m therefore delighted to see the progress being made by DWP, TPR and the FCA in working towards standardised definitions of value for money. This should allow decision makers to compare products on a truly like for like basis, taking into account the many elements that make up a pension. Further consideration should be given to how the framework can be adapted for direct consumer use, enabling meaningful comparison of potentially complex issues such as investment performance, service and cost.
In particular it is great to see the FCA TPR joint strategy bearing fruit. Consumers will want to know that they are receiving value regardless of who regulates their pension and the cross sector commonality suggested by this process will aid this.”
