Value for money in pensions is tough to define. With most products and services we can judge value at the time – we look at the price and we can see enough about the performance of the product or service that we can take a decision.
Defined contribution pensions are different because value is only really observed in retrospect, often after 30 or 40 years have passed. Only then do we know how the investments at the core of the DC pension have performed. By the time value is clear, it’s usually too late to correct a bad decision.
Understanding how to anticipate the future value offered by a workplace pension in advance is therefore very important. Savers need to be able to compare different products and schemes and make an educated judgement about what will best suit their needs. This will be difficult. We can never really know the future, but well-designed, standardised value for money measures should offer people some pointers.
This need is only going to become more acute as pensions dashboards become a reality in the coming years. People will be able to see all their pensions side by side and make judgements about which have performed best. That will naturally lead to questions about consolidation and which schemes and products will outperform others in the future. If providers don’t have a clear, standardised way of showing value then people will resort to second-best means of making decisions. This is already difficult as charges are often not clear. People have a tendency to overweight past performance, that may not persist and stick with incumbent providers when they may not offer the best value. They may also be overly influenced by the strength of a provider’s brand.
There’s a lot to like in the Financial Conduct Authority’s recent consultation paper on value for money. The FCA’s approach sees value of money as being made up of three key components: investment returns, administration and charges. That, potentially, leads to an assessment that is both clear and focuses on what savers really need to know.
Our main concern about this approach is that it still risks being too retrospective. The engine of value for the majority is the quality of decision making around the default fund they are invested in. To a degree, that should be evident in how it has performed in the past, but past performance is not a reliable guide to future performance. The difficult part of showing value for money to the saver is capturing the skill with which the default fund is managed in a way that is easy to understand and which can be compared between pension funds.
The Chair’s Annual Statement isn’t working as intended. Originally intended as a member facing document, the Chair’s Annual Statement (CAS) has become a compliance item, shorn of any real communications benefit. As TPR had no discretion in how it implemented the law relating to this statement, schemes were fined for minor infractions and schemes responded to this with more text and extensive legal review. I’m sure there were plenty of wry smiles when TPR fined the FCA staff pension scheme for failings in its CAS but this sort of thing should have given all concerned pause for thought.
We need a different approach to the statement. Splitting it into a compliance
document, intended to be read only by TPR and other professionals, and a member facing document would make sense. As would looking for overlap with existing regulatory communications. Master trusts are in a slightly different place here due to the requirements of the authorisation regime and the supervisory return and larger master trusts are subject to one to one supervision. We shouldn’t be afraid of an open and rolling conversation with the regulator.
As with other parts of the pensions sector, there’s work to do before we can honestly say that we are communicating the undoubted benefits of our products in a coherent way.