Providers will be required to give granular figures of performance net of charges paid by different types of employer customers under value for money (VFM) proposals put forward by the Government today.
The proposed VFM framework will cover investment performance, costs and charges and quality of services, enabling trustees to make more informed investment and governance decisions and employers will be better able to compare the value and performance between DC schemes when choosing where to automatically enrol their employees, says the Government.
Legacy products are to be included within VFM disclosure rules that seek to achieve common standards across all types of DC pensions, both occupational schemes regulated by The Pensions Regulator (TPR), and group personal pensions overseen by the Financial Conduct Authority.
SSAS and EPP arrangements are excluded from the new rules, but the government is considering extending the framework to cover self-select options, non-workplace pensions and DC pensions in decumulation in a second phase.
The FCA and TPR both expect to conduct further consultations on detailed rules following the closure of the current consultation. They anticipate the VFM framework will accelerate market consolidation and will move the focus of purchasing from cost towards a broader interpretation of value.
The VFM framework aims to disclose returns net of all costs, and will consult further with the industry on how to achieve this, given the varied charging structures of providers and their different impacts on different cohorts of savers. To address this, the consultation proposes that employers be grouped into employer cohorts for disclosure of data.
Each scheme would divide up its employers into these bands and report net returns for each band. We are also considering an alternative or additional disclosure against bands based on the number of pension savers for an employer. This is similar to the approach already used by IGCs, where each provider with its IGC discloses data by bands, both for assets and number of savers, to a third party acting as the central hub and compiler for comparison purposes. For each band, net returns would be disclosed as the range for that cohort as well as the average. To exclude outliers, the rules could require disclosure of the range of net returns for the employers representing the middle 80 per cent within the cohort. This would exclude the bottom 10 per cent and top 10 per cent of net returns.
Performance will be reported at ages 25, 45 and 55 under the proposals.
With profits and guaranteed annuities will be flagged within VFM metrics under the proposals.
The consultation backs ‘chain-linking’ of performance, where schemes and providers are required to track the investment returns experienced by the broad group of savers in the default when it was initially set up, rather than tracking the investment returns corresponding to the product’s current investment strategy. This is an approach adopted by Corporate Adviser for the Corporate Adviser Pensions Average (CAPA) data set.
Mel Stride, secretary of state for the Department for Work and Pensions says: “Ensuring that pension schemes deliver value for money doesn’t just mean low costs and charges. It also means that savers get good value from their investments and receive a quality level of service.
“Improving the availability and transparency of information and data on these key factors will enable schemes to compare and improve the overall value for money they provide, driving competition across the market. In addition, it can improve performance and help drive consolidation by removing underperforming schemes from the market.”
David Fairs, executive director, TPR says: “Under existing measures, it is not possible to accurately scrutinise schemes to compare value relative to others on the market. That is why trustees need a framework which provides a holistic assessment of what VFM means to allow them to hold their providers to account and deliver the best possible outcomes for savers. We believe that a system driven by inertia must ensure that all savers receive value for money by default.”
Sarah Pritchard, executive director of markets, FCA says: “It is hugely important that the industry, consumer groups and other stakeholders continue to be part of our joint work to make the VFM framework as effective as possible. While our focus at this stage is on workplace defaults, we have clearly signalled our intention in the future to consider extending the framework to workplace self-select options, non-workplace pensions and pensions in decumulation.”
Alyshia Harrington-Clark, head of DC, master trusts and lifetime saving at the PLSA says: “In a regime where most workers are defaulted into saving, it is paramount they can be confident of receiving good value, irrespective of the type of scheme they find themselves in. With this in mind, we are pleased to see the scope includes ensuring legacy products also provide value for money.
“We will continue to work with government in creating a framework which considers different aspects of value, including net investment performance, costs, and quality of service, which is both workable for schemes, enables a meaningful assessment of value for those overseeing them, and avoids any adverse consequences, such as providers ‘herding’ towards an average rather than striving to outperform.”
Phil Brown, director of policy at People’s Partnership, provider of The People’s Pension, said: “We’re encouraged by the ambition of these proposed measures and welcome the commitment to implementing value for money metrics across retail and occupational schemes. To ensure savers can easily compare their provider’s performance, making pension companies prominently display their value for money data on pension dashboards would be the most sensible future approach.
“This framework has the potential to reshape the workplace pensions market, and in time, non-workplace pensions as well. Given the scope of the Government’s ambitions, it’s important that they get the value for money metrics right by measuring the value added by pension schemes and recognising the different challenges by schemes serving the whole of market.”
Philip Smith, DC director, TPT Retirement Solutions says: “The current system relies on inertia and low engagement; the onus is on pension providers to provide both oversight and value for money, which they do with varying degrees of effectiveness to their largely disengaged customer base. The consultation should result in bringing the standards that currently apply to trust-based pensions schemes to DC savers, providing consistency and greater value transparency. This should bring the important benefit of driving increased engagement.”