Further work needed by regulators on value for money drive

In a feedback statement by the Financial Conduct Authority and the Pensions Regulator, the watchdogs outlined responses to their joint discussion paper which was published in September.

The two regulators announced proposals to force DC schemes to disclose more data around their investment performance, scheme oversight, and costs and charges.

At the time, they said greater transparency and disclosure would make it easier for people to spot when a scheme delivers poor value, as well as compare schemes.

However, in its feedback statement today, the regulators said they would need to continue consulting on this as there are a number of areas where there is no clear consensus as to the way forward. 

There was agreement that a holistic approach to assessing VFM was needed and that the three elements it had proposed were the right ones. 

Most respondents welcomed the proposals but there was less consensus on how to measure each of these elements.

Respondents expressed a desire for the regulators to build on the work that has already been carried out in VFM assessment.

Feedback to benchmarking was mixed, and many were, on the whole, not supportive of benchmarking VFM elements separately at this stage. 

 “Consumers should be able to have confidence that their pension is delivering value for money." Sarah Pritchard, FCA

The statement said this was due to the importance of taking a holistic view of VFM and the complexity of developing benchmarks that can account for the wide differences in scheme characteristics and investment objectives across the market.

Where possible, these respondents were keen that regulators "'carefully consider” whether there is scope to rationalise existing requirements rather than introduce new ones.

TPR’s executive director for regulatory policy, analysis and advice David Fairs, said: “We and the FCA are determined to drive a long-term focus on value for money across the pensions sector and welcome the depth and breadth of responses to our discussion paper on a common framework.

"Particularly welcome is the broad consensus from industry that we need a better assessment of value for money to deliver stronger outcomes for savers in areas such as costs and charges and investment performance. But we acknowledge this is a complex area and there were many views on our proposals which need further consideration."

Investment performance

The regulators proposed that public and consistent disclosures of investment performance data would better allow decision-makers to judge whether a scheme’s investment strategy was performing in line with reasonable expectations, and to consider if continued underperformance over the longer term would indicate poor scheme design and value for savers.

Many respondents agreed but they also emphasised the approach to disclosure must take into account the intended audience.

There were mixed views as to whether investment performance should be disclosed as net or gross of costs.

Some respondents thought that while reporting performance net of costs would better reflect member experience, it could lead to consideration of investment costs twice if also assessed as part of the costs and charges element. 

Respondents also had different and sometimes strongly held views on what the age cohorts should be. Some considered the time to target retirement date, or state pension age if that was not known, to be more useful than the DWP’s approach of actual age, whereas others expressed a preference for retaining consistency with the DWP’s approach.

“There was no clear consensus around the use of benchmarking,” the regulators wrote. “Some felt it would help prevent schemes from only comparing themselves against poorer performing schemes, whereas others were concerned it could drive schemes to ‘cluster towards the middle’.”

Given the different views on how best to disclose investment performance and in preparation for the consultation, the regulators said they will continue to engage with stakeholders to explore the following:

• Arguments for disclosing net investment performance and consider further which costs should be excluded under the calculation.
• Whether the metric should be backward-looking only or include consideration of expected future returns.
• Whether the publication of performance metrics by cohort is the best approach. If so, whether the criteria for cohorts should be based on age or years to retirement.
• The merits of prescribing a risk adjustment methodology and publishing other metrics, such as asset allocations, to support decision making.
• How comparisons and benchmarking should reflect broader elements of value, including ESG considerations and long-term investing.

FCA executive director for markets Sarah Pritchard, said : “Consumers should be able to have confidence that their pension is delivering value for money.

“The changes we and TPR propose will help achieve this – and over the long term, help deliver a more secure retirement for pension savers. We will continue working with industry over the coming months to make sure we get this right.”

For costs and charges, the regulators said while most agreed that using existing definitions for administration charges and transaction costs would prove helpful, it needs to consider whether effective comparisons require more detailed information. 

“We also need to give further thought as to whether it is necessary for investment costs to be disclosed and assessed separately if they are already netted off under-investment performance, or whether comparisons of costs and charges should only focus on administration,” they wrote.

Several pension providers also expressed concerns over limiting the assessment of services to a minimum standard which would encourage a "race to the bottom" as providers would be incentivised to only provide these minimums to keep their costs low. 

They emphasised that appropriate consideration should be given to the design of a service and oversight benchmark.

Minister for pensions Guy Opperman said: “Ensuring value for money for the record number of Brits now saving for retirement is one of my key priorities.

“While cost continues to dominate decision-making, this does not always lead to the best member outcomes. We want those making choices about where people save their money to take into account more than just price, and I look forward to progressing this work alongside TPR, the FCA and industry.”

The two regulators will continue to engage with industry and consumer groups in the coming months, with TPR, FCA and the Department for Work and Pensions to work together and publish a consultation towards the end of 2022, setting out proposals.

Phil Brown, director of policy at B&CE, provider of The People’s Pension, added: “This is a welcome step forward. Scheme selection in the workplace pension market now turns too much on charges and too little on the value that different pension schemes offer.

“Charges matter but outcomes matter more. Rigorous value for money metrics will enable those choosing pension schemes to better gauge which schemes will deliver good outcomes for members.”

sonia.rach@ft.com

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