The latest consultation on a new value for money (VFM) framework marks a significant step forward for the industry. There is much to welcome in the direction of travel: a forward-looking approach for investment returns, a stronger focus on quality of service, and an ambition to drive higher standards across the market. Overall, this is progress, and progress we support.
However, one notable change in this consultation risks undermining the framework’s long-term effectiveness. The collection of engagement data points has been reduced to one single metric: how many savers have completed a nomination of beneficiary form.
We recognise that measuring engagement is not easy and getting industry consensus is difficult but it’s too important not to be fully included. And my concern is if it’s not fully included in the framework at launch, it’s unlikely to be included in the future.
If the aim of the VFM framework is to improve member outcomes, increase transparency and help people select the best scheme, engagement needs to be there.
Engagement is not the goal; outcomes are
This is not about encouraging engagement for its own sake. Simply saying “we want people to engage more” is meaningless unless we are clear about what me mean by engagement and why it matters.
Our hypothesis, supported by experience and evidence, is that engagement generates buy-in; engaged members make better decisions. Inertia is incredibly powerful at getting people into pensions, and auto-enrolment has been an incredible success on that front. But inertia alone does not deliver good outcomes over the long term.
We have seen the results. Since the introduction of auto-enrolment, 11 million new people have joined workplace pensions. Yet the majority are contributing at the minimum level, a level that for most is simply inadequate for a comfortable, happy retirement. That is not a failure of auto-enrolment but a consequence of people not being engaged beyond the point of default.
What engagement actually changes
When people are engaged, there are measurable, improved outcomes as a result. There are a greater consolidation of old pots and more transfers. More people review their contribution levels and try to better understand their investment choices.
Over time, these behaviours translate into better outcomes, ultimately measurable as a higher ratio of income in retirement.
Engagement can be measured, scored and tracked in a meaningful way; not as a vague, abstract concept, but as a set of observable member behaviours that correlate with better financial outcomes.
Every other consumer-facing industry tracks engagement with its customers. You name the industry and businesses will track and analyse engagement data to improve products and services. This data is collectible and comparable as part of the framework; it is hard to argue that pensions are the one exception when it comes to engagement metrics – particularly given the scale and importance of the decisions involved.
A captive audience, and a responsibility
The workplace pensions industry has a captive audience. Millions of people are already enrolled and saving. It’s now a question of how to help them make better decisions that improve their long-term financial security and wellbeing.
The VFM framework rightly focuses on outcomes. But outcomes do not exist in a vacuum. They are shaped by behaviours, and behaviours are influenced by engagement.
Removing engagement metrics because they are hard to standardise risks sending the wrong signal. It implies engagement is a “nice to have” rather than a core driver of value for money. Also, my concern is that anything left out at this stage is unlikely to be included in the future.
Looking ahead
We support the ambition of the VFM framework and there is a great deal of positive momentum in the consultation. But if we are serious about improving retirement outcomes, engagement must remain part of the conversation.
Inertia will continue to play a vital role in getting people started. But better decision-making, and better outcomes, require more than defaults alone. Engagement may be difficult to measure, but it is far too important to ignore.
