One of the most contentious parts of the new value for money framework is the proposed ‘traffic light’ test — which requires schemes to give themselves a red, amber or green (RAG) assessment.
At a recent Corporate Adviser round table event consultants, trustees and providers discussed the potential unforeseen consequences of this new requirement, and how it might impact the broader market.
One potential huge risk is that some schemes will ‘polish’ the data, in terms of their own RAG assessment and when they are required to compare themselves with two other providers, according to Mercer master trust head of engagement Tom Higham.
“If you look at a comparable metric, say ‘Managed Portfolio Services’, most report differently. In year one of a VFM framework most people will do similar. I don’t know who will hold these providers to account and interrogate the data. It doesn’t happen now. That is the big challenge. You need a body to go into providers and do that.”
George Currie, senior consultant at LCP, added : “Hopefully the regulators will work in tandem to do that assessment piece. The idea is that regulatory capacity will be freed up by having fewer schemes.”
He also pointed to the Taskforce on Climate Related Financial Disclosures where the regulatory approach was relatively light touch, and then became more exacting in subsequent reporting years, saying the same could happen here.
Currie said he was also concerned about firms meeting the green threshold, but not making more improvements to their schemes that could augment value. He didn’t want a flat green line. He said that the amber and red ratings were also both a blunt tool.
Paul Tinsley a professional trustee at Dalriada suggested the monetary impact on employers had not been fully considered.
“What is an employer going to do with ambers and reds. To make a change it is going to cost money. If you want to put the employer off from auto-enrolment it is potentially a great way to do it.” He added that disengaged employers could mean disengaged employees. “You need to be careful about behaviour patterns this is going to create,” he added.
Barnett Waddingham partner and head of DC Mark Futcher discussed how schemes can be improved by employers and employees better utilising what is on offer and that can be better than switching: “Most employees are not using the services their employer provides for free, so you could refresh that.”
Providers could be on a journey of improvement in a cyclical pattern and that might need to be taken into account. Senior consultant at Mercer, Emma Roberts added it was a “massive assumption” that most employers would be looking at league tables.
Maintaining a competitive market
Futcher suggested that the RAG rating would be a snapshot in time. But he added that he was most concerned about the nine or 10 providers he would recommend, and that we needed that number to have a competitive market.
He said he did worry about the impact of these RAG assessments on schemes that hit a difficult part of the investment cycle or were moving platform. The important thing was that there was a plan for putting them back on track. This could lead to some suspending new business, or being forced to fold, if they could not maintain a higher VFM rating.
“I would say the big commercial providers are likely to be green. And amber is basically red for the amount of time they would be out of the market.
“You would start losing employers hand over fist. You would do everything not to be amber. You mention an improvement plan but there is no middle ground where you do that without catastrophic commercial issues.” This could lead to many exiting the market he said.
“If smaller MTs fold then fine. We should not have 34.” But concerns remained about how many may be forced to exit as a result of an amber rating.
Currie said: “A large traditional provider even if they get amber, they have the resources in place to put changes in place. Could some not-for profits struggle? If standards are evolving, they don’t have the same resources to improve quality under VFM and that is an open question. It would be difficult if Nest got an amber rating?”
Roberts was concerned about the hit to confidence: “Member confidence is key. We don’t have great member confidence anyway. People still go on about Equitable Life. If we have news about ambers and reds and consolidation. It can lead to a lack of consumer confidence,” she added.
Herding threat
Paul Waters, partner and head of DC markets at Hymans Robertson said there was a big risk of herding around investment. Schemes might not want to be judged on a “backward looking measure over a relatively limited time horizon”.
Specifically, around investment strategy there is a potential for providers and trustees “to shy away from decisions in member interests’ longer term but which are deemed too risky commercially in the short term,” he added.
Currie said: “What this framework misses to an extent is if we look at the provider market at the minute, default strategies all serve slightly different markets, and types of membership. With schemes that focus on the retail or hospitality sectors, for example there’s a very different type of risk appetite within the membership compared to some other schemes. Herding risks flattening that.”
There was also a discussion around the very difficult investment circumstances of the past few years on which schemes might be judged.
Private markets
The government is pushing schemes to invest more in private markets and productive finance. But there was debate as to how these asset classes fit into this new VFM framework.
Ruari Grant, senior policy lead DC and Master trusts at the Pensions and Lifetime Savings Association pointed out the difficulty of working out performance from private market assets.
“If someone says we invested x amount in private markets and we expect that to start looking good in a few years, therefore we are green, are they [regulators] saying you can do that? They won’t include forward metrics at this point. There is no consensus on a comparable basis.”
Currie said they could have a standardised basis for projections based on SMPI, while Roberts suggested a stochastic approach to forward-looking metrics.
Tom Chalkley, senior DC consultant at Isio added: “It is the same challenge. What do you consistently present to the market to demonstrate the context? It is going to take time. Those that are committed to doing private market investments, allowing their assets to ramp up, it might not be the best performing.”
Good engagement versus bad engagement
Futcher suggested engagement is not just looking at an app and perhaps easily moving out of the default fund but about creating good friction.
Indeed, some high engagement can lead to behaviour that can damage member outcomes such as chasing performance, taking out too much money and withdrawals which could even be driven by scams.
Mercer’s master trust head of engagement Tom Higham asked: “Is good engagement logging on to an app? Or logging on and doing things really easily and not having to change things but letting them sit for two years. So, it is about being actively aware.” He said when they reported back to trustees, they look at investment in terms of members knowing where they are invested. “You don’t score people positively on investment switches,” he added.
Grant said: “Things such as percentage of members taking a tax lump sum over £30k, that wouldn’t evidence great engagement. On all of this, some [PLSA] members liked the idea of looking at outcomes and end member behaviour rather than [measuring] logging into an app.”
Tinsley discussed various stages of engagement which could range from recognising you are in a scheme, receiving a joining pack or a simplified benefit statement or having log in instructions in a drawer.
Reactive would be receiving a communication. Proactive could be signing for the app or even reading a fund fact sheet he said. “But what has triggered the interest? Is it curiosity, a positive interest, or a scammer getting a member to do something?”
It could be finding out about an expression of wish form, or consulting Pensions Wise, education and more.
“You can follow a member journey through and what they are reading and taking any action. That leads to understanding and eventually control and ownership. To talk about engagement to work out how VFM works with engagement, you have to understand all the parts.”
Higham added: “It comes back to consistency of data and reporting. As an industry you have to agree to all of those metrics. It is a huge reporting job, but you would be comparing apples with apples. You can then tell an engagement story. That is the easier measurable bit, easy with a lot of data.
“Then measuring experience and emotional response. Did I have a significant event and were they there for me? Do I feel like I am enjoying an adequate retirement. That is hard to measure but it is the optimal outcome.”
Currie added: “I would like to see metrics and engagement being practical outcomes based as people transition from the saving to the spending stage. Engagement with your retirement age. Have you completed your Expression of Wish form? We know that is low. That is hugely valuable, and we can measure it easily.
“The other point is tax free cash – you can take it early, but it has an impact on later life income. Measuring whether people are taking out lump sums at the right point of the investment cycle is really important and actually could have a cross-over into how defaults are designed. Practical, action-oriented outcomes-focused engagement metrics are going to make a difference.”
Vulnerable customers
There was also debate about how providers treat vulnerable customers, particularly with this definition more recently widening.
Higham asked: “How do we measure service to vulnerable customers consistently across all providers now that they are a significant proportion of the population?”
Their experience can be tricky to quantify, he said. “If the customer has had vulnerability identified and addressed and given the appropriate support to make the right decision and has the best outcome that is the experience you want.”
Futcher added: “Consumer Duty is FCA-driven and lots of master trusts do not believe they are caught by it. We think this is wrong. In spirit, it ties with fiduciary duty to create better member outcomes.”
He adds that given the importance and size of money involved in the retirement decision it is almost as if everyone should be classed as vulnerable.
“This is the largest pot of money they will ever have access to in their life. For it to fall outside Value for Money feels wrong. Many people make the wrong choice.”
Regulations should enable people to make better decisions throughout their savings and retirement journey, and encourage scheme to operate in a way that delivers good member outcomes. Delegates thought that both VFM and Consumer Duty were an important part of this, but wanted to see these regulatory frameworks dovetail together.
