Need to know:
- Workplace pension regulators are looking at how value for money can be clarified in defined contribution (DC) pension schemes.
- Value for money is a difficult thing to pin down, as there are so many interactive components.
- Ultimately the employer is one of the greatest contributors to delivering value for money from a DC workplace pension.
The regulators of workplace pensions – the Financial Conduct Authority (FCA) and the Pensions Regulator (TPR) – have been increasingly concerned that members of such schemes should be getting value for money. In September, they published a joint discussion document outlining what they expect employers, and the pensions industry serving them, to deliver.
Defined contribution (DC) arrangements have become the most common type of scheme since the introduction of auto enrolment, the government’s default workplace pension saving framework, in 2012.
A qualified success
Purely in terms of uptake, auto enrolment has been a roaring success, with more than 10 million extra people saving into pension schemes than before it was introduced. But contributions into DC schemes are often relatively low and thus sometimes unlikely to deliver meaningful income in retirement. These small funds can easily be undermined by high fees, poor investment performance or bad governance and this is at the root of the regulators’ concerns.
Peter Glancy, head of policy, pensions and investments at Scottish Widows, says: “What the FCA and TPR are jointly concerned about is that money is moving between trust- and contract-based arrangements as either workplace schemes or individual pots are consolidated into one place.”
Glancy says that each different part of the market, such as workplace DC, group personal pensions, master trusts, have different rules about value for money, while some have none at all.
“The regulators are looking at what value-for-money frameworks exist in the market, and which bits work best,” he adds. “They then want to take the best bits and apply them to everything in the market, so there is a consistent framework applying to all these regimes.”
This, he says, should give people a better understanding of the value for money offered on the schemes they are in, or have been in the past. This will be important as when the pensions dashboards come on stream to allow consumers to find lost pension pots and consolidate them.
A complex conundrum
“While everyone agrees that value for money is a good thing, it is a very difficult thing to quantify or provide standards on,” says Alyshia Harrington-Clark, head of DC, master trusts and lifetime savings at the Pensions and Lifetime Savings Association (PLSA).
In the past there has been a focus on costs. The charge cap – a government-set limit on certain fees attached to DC auto-enrolment schemes – was put in place to protect members’ pots. But, says Harrington-Clark, some of the things that may have been considered extraneous may add considerable value to a scheme.
“How do you value a fantastic communication strategy that engages members and encourages them to save against lower costs, more efficiency and a higher return on investment?” says Harrington-Clark
These are exactly the kinds of things the regulators, employers and providers are trying to grapple with. “Though we all know good, and poor, value when we see it, it’s very difficult to articulate the real difference into how it should be achieved.”
Mark Pemberthy, head of DC and wealth at HR consultants Buck, says that a “simple, common sense approach” is required for employers to be confident of delivering value for money through their workplace pension schemes. It’s not “rocket science”, he adds, and is essentially the difference between what the member gets and what they pay to receive it.
However it is difficult to place into a code that might be applied to all, says Pemberthy, as different organisations will have different requirements. “Just over the past six to 12 months, we’ve dealt with organisations that want major projects on operational alignment, where we deliver straight-through processing into their HR system and everything happens seamlessly,” says Pemberthy. “Others are quite happy uploading spreadsheets into an extranet and they have a bigger focus on something else.”
That may mean dialling up or down the weightings for other aspects of the scheme. But it is not easy to reduce that work to a metric that demonstrates value for money taking account of all the various nuances at play.
The difficulty with comparisons is many pension scheme members don’t know what they have and some are not interested in finding out. Therefore, regardless of dashboards, it is the role of the employer that makes a far bigger contribution to value.
“We think it’s much more important that employers are engaged and care about the quality of schemes they provide and getting members to appreciate what they have to make the most of the benefits on offer,” says Pemberthy. “It’s important for members’ long-term financial wellbeing as well as their retirement adequacy.”
Pemberthy is a believer in outcomes rather than features, and that comes down to the experience rather than a metric. “Low charges are important, but a really intuitive and frictionless experience for members is an absolutely integral part of achieving good outcomes,” he says. “Whether it needs to be encapsulated into a number that you can directly compare to another scheme is less important in a workplace DC environment.”
Not everyone agrees. Henry Tapper, founder and executive chairman of benchmarking organisation AgeWage, believes all pension schemes can be scored on their value for money using an index that assesses returns against fees paid.
AgeWage has devised a methodology that analyses who is getting value for money in pensions. “For a DC scheme, an individual score is more appropriate, because [employers are] reporting to members about their specific circumstances, and they’re the ones taking the risk,” says Tapper.
Others who have developed metrics have developed top-down approaches based on scheme-wide assessment, says Tapper. “The simple idea is that we should report to people on how they have done individually, rather than on some kind of scheme metrics, which is an abstraction that doesn’t mean anything.”