Pension schemes to disclose performance under value for money rules

The Value for Money consultation paper published by the government today (January 30) proposes schemes should disclose investment returns over three, five, 10 and 15 years, if available. 

This is because it may be difficult for some providers with vertically integrated business models or with single or combination charging structures to retrospectively determine the split between investment charges and administration charges for longer periods going back.  

The government said the proposals would encourage greater transparency and standardisation of reporting across the DC pension market, allowing trustees to make more informed decisions and employers to better compare the value and performance between schemes when choosing where to automatically enrol their employees.

Ensuring that pension schemes deliver value for money doesn't just mean low costs and chargesLaura Trott, pensions minister

Pensions minister Laura Trott said: “Ensuring that pension schemes deliver value for money doesn’t just mean low costs and charges. It also means that savers get good value from their investments and receive a quality level of service.

“Improving the availability and transparency of information and data on these key factors will enable schemes to compare and improve the overall value for money they provide, driving competition across the market. In addition, it can improve performance and help drive consolidation by removing underperforming schemes from the market.” 

'Reliable, useful, and comparable'

In addition, the government is also proposing disclosure of a forward-looking metric for target future performance. 

The government said while most investment performance data under the framework would be backwards-looking data, it recognises that future investment performance is what ultimately matters to savers. 

“Calculating reliable, useful, and comparable forward-looking projections of investment returns can be challenging,” it said. 

“However, we think a simple forward looking metric could supplement backward looking information.”

The government outlined that this would be helpful to employers and others in selecting and monitoring schemes and be useful where schemes have made changes to their investment strategies or cost structures.

“We recognise that schemes and providers may have an incentive to inflate expected returns to attract business, but over-promising is likely to be called out publicly over time.”

Alyshia Harrington-Clark, head of DC, master trusts and lifetime saving at the at the Pensions and Lifetime Savings Association, said: “In a regime where most workers are defaulted into saving, it is paramount they can be confident of receiving good value, irrespective of the type of scheme they find themselves in. 

“With this in mind, we are pleased to see the scope includes ensuring legacy products also provide value for money.”

Harrington-Clark added: “We will continue to work with government in creating a framework which considers different aspects of value, including net investment performance, costs, and quality of service, which is both workable for schemes, enables a meaningful assessment of value for those overseeing them, and avoids any adverse consequences, such as providers ‘herding’ towards an average rather than striving to outperform.”

Costs and charges

The consultation outlined there are three key elements of the value for money framework: investment performance, costs and charges and quality of services.  

The government said where a sponsoring employer undertakes to pay certain costs or charges of its workplace pension scheme on behalf of its employees, this has the effect of improving the apparent investment returns net of all charges. 

Therefore, it is proposing that investment performance should be disclosed net of the sum of member-borne costs and charges and all costs paid by an employer to a scheme or pension provider.

 This would allow comparisons of net investment performance to be carried out on a like-for-like basis.

“Our overarching aim for requiring publication of costs and charges data is for trustees and IGCs to see how their overall costs and charges impact on the overall value they provide to their members and how this compares to other schemes,” it said.

“We want them to be able to use this data alongside services data to compare the quality of services with the costs charged for those services.”

Simon Grover, director at Quietroom, said: "The consultation considers reporting requirements and we believe how this information is presented will be key to the success of the initiative. Standardised templates and reporting will certainly help with comparisons, and this is something that came through strongly in the work we did on the simplified benefit statements.

"But we should also use this as an opportunity to rethink how we communicate and engage with members so people really understand the value of their pensions. Metrics and commentary will get us so far, but this is an opportunity to rethink how we communicate value to savers."

The government has proposed building on the definitions that underpin existing disclosures – primarily ‘administration charges’ and ‘transaction costs’.

“We want trustees and IGCs to take account of costs and charges throughout the assessment process, starting with net returns,” it said. 

“However, we think that separate disclosure of costs and charges is also needed for clear comparison between schemes.”

We do not believe that requirements to disclose and assess additional information should be unduly burdensomeLaura Trott

The disclosure of investment charges only will complement the corresponding net returns metric, by showing how much a scheme is paying for asset management, including any performance-based fees. 

Additionally, the disclosure of all “service” costs (all costs aside from investment charges and transaction costs), as a percentage of assets under management, will highlight differences between schemes and assessment of whether the services delivered are worth the cost, it explained.

The government said the value for money framework will improve transparency, comparability, and competition between defined contribution pension schemes and help deliver the best possible value and long-term outcomes for pension savers.

Trott said: “We do not believe that requirements to disclose and assess additional information should be unduly burdensome. 

“We want to ensure that any regulatory requirements of a value for money framework are proportionate to the benefits that increased value for money brings savers. 

“We want to deliver good outcomes for those saving for retirement through policy that works in practice for the pensions market, whilst maintaining a focus on value for money for pension savers. This framework is designed to ensure that member outcomes are front and centre when decisions about people’s savings are made.”.

The consultation period runs until March 27, 2023.

sonia.rach@ft.com

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