The Department for Work and Pensions is moving forward with a number of the proposals within its value for money (VFM) framework.
In a joint publication today (July 11) by the DWP, the Pensions Regulator (TPR) and the FCA, they said the framework intends to retain proposed reporting periods of one, three and five years, with 10 and 15 if available, to allow investment returns to be evaluated over appropriate periods of time.
This comes following the VFM consultation paper in January which proposed that pensions schemes will be required to disclose investment performance, net of all costs, as part of the new framework.
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.
In today’s update, DWP said it recognises that data may not currently be available, but it thinks the main focus for comparisons should be returns over at least five years.
“In future, we expect that schemes will be able to report on more historic returns,” it wrote.
“The VFM framework is designed to allow comparability. Most schemes enter three life-styling phases over a pension saving journey: growth, de-risking, and retirement.
“Respondents told us that these are often not based on a defined age, but instead years to retirement, with different schemes entering these phases at different ages dependent on member needs.”
DWP said it also intends to proceed with a forward-looking metric.
It said: “While we recognise that past performance is not always a guide to future performance, it is the best way to measure actual past and present value to members and is an essential metric for the VFM framework.
“Past performance of an investment strategy reflects the asset allocations by class of asset, which we think is important to inform comparisons of default designs.
“We acknowledge the suggestion to measure member outcomes using internal rates of return, however this would be a large change from our currently proposed metrics, which were supported by most respondents as an effective way to measure past performance.
“It could also result in additional operational challenges and costs to industry.”
The DWP said it recognises tension between requiring sufficient data to enable meaningful comparisons and the costs and complications of the disclosures.
Rachel Vahey, head of policy development at AJ Bell, said: "The metrics will cover a wide range of areas including past investment performance, charges, communications, and administration.
“But the intention is to boil all that down to a single red/amber/green rating, which the DWP expects to be published by the industry in league tables."
Vahey said these metrics are squarely aimed at professionals who will have the knowledge and experience to view them in the context of running a pension scheme.
“The danger is pension customers view any league tables out of context and make poor decisions on the back of them,” she said.
"Having a common framework will push pension schemes to compare the value for money they offer their customers.
“This will hopefully encourage, or even shame schemes, into improving their offering to customers - whether that means better investment performance, lower charges, slicker service or a combination of everything.”
The regulators will also be invoking their own benchmarks for schemes to hit and any persistent underperformance will be punished.
The DWP proposes regulators are given new powers requiring any persistently poor performing schemes to wind up and consolidate.
"This is only the first step in the value for money journey,” Vahey said.
“Further phases of this work will develop a similar framework for retail customers, both when building up pension pots but also when taking income.
“However, in doing so, the FCA needs to be careful to not just roll out the same version. Measuring and comparing value for money for pension customers requires an entirely different approach so the figures make sense."
Costs and charges
The roll out of the framework will be completed in phases, the first of which will be aimed at default workplace pension schemes.
Future phases will extend VFM assessment to drawdown pensions, as well as non-workplace and self-select pensions.
The VFM assessments will be designed for trustees, providers and independent governance committees (IGCs) to test whether schemes offer value for money.
Assessments will have to be compared against other schemes' arrangements and where there is continued underperformance, regulators will be given the necessary power to intervene, removing persistently poor performing schemes.
The consultation outlined 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.
However, in today’s publication, DWP said it proposed costs and charges to be captured within the VFM framework.
“We proposed to build on existing disclosures and limit new data to that necessary to enable comparison,” it said. “We proposed that schemes disclose total charges rather than ‘member borne’ charges.
“Our rationale for this was that the inclusion of employer subsidies would provide a more comparable metric.”
In addition, it said that schemes should disclose the total amount of administration costs to enable comparison of the quality of their services against the cost of those services.
Laura Myers, partner at LCP and head of the firm’s DC practice, said: “We believe that introducing a dedicated framework will help to underline the importance of VFM and focus the attention of governance bodies on delivering good outcomes for savers."
“The VFM process must not be another cumbersome compliance document for pension schemes which could potentially mislead savers by presenting incomplete information on the costs and charges they pay for their pension provision.”
Myers said the framework presents a real opportunity for the pensions sector, not only to improve the VFM delivered to savers but also the information reported to them.
“Properly implemented, a new framework could be the basis for a more informative, member-friendly report to replace the annual DC Chair’s Statement, which has become a ‘tick box’ exercise for pension schemes and is rarely read by savers,” she said.
“We hope the government continues to listen to the industry as this is implemented.”
sonia.rach@ft.com
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