The emphasis on value for money in workplace pensions is arguably the next stage of evolution for the sector, representing something of a refinement compared with the blunter instrument of price caps, though costs and charges remain a component of VFM too.
Value has always been part of the discussion of course, but it is now a more codified priority for both TPR and the FCA and comes with a new set of demands on schemes, trustees and IGCs. Many new requirements came into force in the second half of 2021, with a parallel regulatory discussion about what VFM means and how to measure it.
In September last year, TPR and the FCA issued a discussion paper, inviting views on developing a holistic framework and related metrics to assess VFM in all FCA and TPR-regulated DC pension schemes – both workplace and non-workplace.
For the proposed framework, the regulators said they wanted to look at value through three lenses – investment performance, customer service/scheme oversight and costs and charges.
Consultants and schemes will want to keep an eye on the discussions, but it is likely to be the regulations and rules now in force for workplace DC that they are most concerned with.
New rules
From 1st October 2021, the Occupational Pension Schemes (Administration, Investment, Charges and Governance) (Amendment) Regulations 2021 introduced a VFM requirement. For the first scheme year that ends after 31 December 2021, and at intervals of no more than one year thereafter, trustees of relevant schemes with under £100 million of total assets, which have been operating for 3 or more years must carry out a more detailed assessment of how their scheme delivers value for members.
The rules require the assessment to include a comparison of reported costs and charges and fund investment net returns against three other schemes, and a self-assessment of scheme governance and administration criteria.”
That self-assessment of administration and governance comes under seven headings. Promptness and accuracy of core financial transactions; Quality of record keeping; Appropriateness of the default investment strategy; Quality of Investment Governance; Level of trustee knowledge; Quality of communication with scheme members and Effectiveness of management of conflicts of interest.
There are further granular requirements. For example, under core transactions, the DWP lists payment in and investment of member and employer contributions, transfers between schemes, transfers and switches between investments within a scheme and payments out of the scheme to beneficiaries.
For the regulatory completist, the FCA took the lead on another aspect of VFM with a policy statement and changes to the conduct of business sourcebook governing independent governance committees that came into force a few days later on 4th October 2021.
This added a set of five new rules and guidance points for IGCs which covered much of the same ground, for example asking that IGCs take into account the three key elements of VFM: costs and charges; investment performance; and services provided (including member communications) and assess and report on VFM, particularly through comparison with other options on the market.
Trustee cynicism
Some are a little cynical about quite where this process leads. PTL managing director Richard Butcher says: “In a workplace personal pension, when it comes to VFM it is incredibly complex. I am not sure any disclosure will help drive market behaviours, without just driving down naked costs. Yet as regulators now accept, cost is only one aspect of the VFM equation. Low cost does not equal good value.
“We are still at a fairly early day on this. At the moment, there isn’t a standard template for doing the relative assessment. The difficulty is around the requirement that we look at schemes of a similar nature. Say I run an IGC and have an employer with 1,000 employees. I can’t tell what terms they would get from someone else without taking it to market, so all you can do is get a pretty blunt comparison. Certainly not accurately enough to write to an employer and say we think you would be better off going to this provider over here.”
In terms of how schemes are responding, Hymans Robertson head of governance consulting Laura Andrikopoulos says schemes are at a relatively early stage but also notes that comparative pricing may already be proving to be a significant headache.
She says: “Very few schemes will have yet completed a value assessment under the new requirements, and most are likely to be at the early planning stage. This is already throwing up some challenges, for example if a smaller scheme is not yet in talks with any master trusts they will have to decide how to get comparative pricing. They may face difficulties doing this if they are not genuinely seeking to move to a master trust – already as there is a cost for master trusts to quote terms to any scheme.”
Barnett Waddingham partner Andy Parker says: “Many schemes have end of March/April year ends, so thoughts about complying with the new requirements are not yet fully formed. Trustees of most schemes should now be aware of the new requirements and, if they have under £100m of assets, then they will be clear that something new needs to be done.
“Many will be awaiting guidance from their advisers as to the best way to meet the requirements and we expect that advisers are currently working with the master trust fraternity to understand how assistance can be provided to benchmark the current scheme charges and investment performance, as required.
“Although the new approach may be deemed ‘best practice’, I am not expecting many £100m+ schemes to follow suit – in any event, we already consider the relative value offered by our client’s schemes alongside the absolute rating that is covered for chair’s statements.”
Chair’s statements
Parker says: “Trends should be drawn out in the information contained in an individual scheme’s chair’s statement; trends such as how charges and transaction costs have changed over time and the impact on benefits, trends on the way the trustees have been running and reviewing the scheme, to name a couple and this is being done to a degree. But, in my experience, very little has become available to give details of the trends across schemes.
“Perhaps the question to ask is “who is noticing what trends are being revealed”? The Chair’s Statement has been made into a multi-page document, which will now become even longer with the requirement to show net investment performance information as well, and which forms part of the already ‘not very well read’ annual report and accounts. It also includes a copy of the latest Statement of Investment Principles and Implementation Statement. Your average member will not read these documents, so another piece of work is required – to produce a summary of the contents. More work, but again, no guarantee that anyone is going to pay any notice.”
In terms of member outcomes, Andrikopoulos adds: “Undertaking a value assessment with approximate pricing and details of services available under a new arrangement may not give a full picture of what arrangements would look like should the scheme genuinely undertake a market review exercise.
“It may also focus attention too much on headline pricing rather than the quality of services provided under each value category. It is the latter which constitutes true value. Member outcomes for example are likely to be significantly impacted by the quality of an investment strategy. It is quite possible that a more expensive (higher AMC) strategy could produce better member outcomes than a cheaper one. As such, it is vital that real value is assessed rather than simply the lowest annual management charge for members.”
Parker says this also has an impact on comparisons too. He adds: “The approach to what is included in VFMs does seem to vary from scheme to scheme. Some focus heavily on the investment and charges part of the scheme design, while others give a more rounded overview.
Of course, the whole initiative is explicit about the fact that it may trigger consolidation if the comparison does not show a scheme in a good light.
Consolidation push
Parker says: “There is no doubt the new requirements to be followed in the production of a VFM assessment are influencing consolidation activity. In some cases, it will be because existing schemes just don’t offer members the same opportunities and the same overall value as many of the new, innovative offerings in the DC marketplace.
“In other cases, the VFM is seen as part of the continuing raft of new regulations which trustees have had to review, consider and comply with which has proven to be a step too far for some and the benefits of outsourcing these requirements has become increasingly attractive. Not that value is necessarily being improved elsewhere, just that the burden of proof has become too great.”
Andrikopoulos adds: “The new regulations have been put in place to encourage consolidation for smaller schemes. Value for Members is therefore now very much linked with market consolidation. Given the practical difficulties of schemes complying with the new regulations without a formal tender exercise to move to master trust, it seems likely that consolidation plans may be brought forward.”
AgeWage executive chair Henry Tapper says that he is mostly positive about developments
with the sector shaking some old, bad habits. He says: “My question is whether this impacts the ordinary person? Are these things doing any good? As the ordinary person never really gets to see this, the way to decide if they are doing any good, is whether it focuses the trustees’ minds on what really matters – the value they are giving in terms of member outcomes.”
“While there is nothing wrong with worrying about whether you are spending huge amounts of members’ money on unnecessary costs and charges, it cannot be all you are thinking about. We are also moving on from saying the value of the scheme is about the soft values around about comms, and all we should be doing is encouraging people to pay more.
“That is rubbish way of looking at things. What we should be thinking about is the efficiency with which the money is invested – that it is invested in a way in which they are going to get more money out.
“It gets away from this forensic approach of nailing the cost of everything down. Costs don’t
work like that. They squidge about. What we need to do is get to a point where we understand where the true value is coming from the investment and whether the investment is making money or not.”