In a joint discussion paper on delivering value for money in pension schemes, out today (September 16), the regulators said greater transparency and disclosure would make it easier for people to spot when a scheme delivers poor value, as well as compare schemes.
The regulators stopped short of proposing collecting a new set of data, however.
Instead they said they wanted to build on the existing data, primarily ‘administration charges’ and ‘transaction costs’.
Defined contribution workplace pension schemes are already required to disclose the costs and charges that members can expect to bear or have borne to date.
Asset managers too have to disclose and assess the value for money offered by the investment funds they provide.
The regulators said they would build on these existing requirements when implementing measures for all DC schemes.
They said: “While some parts of the pensions industry currently offer value for money, there is an inconsistent approach in different parts of the pensions sector. This may be related to the resources and data firms have made available over time to assess value.
“For example, the very large workplace scheme pensions market has good data to compare scheme costs. However, even here, industry has identified the need for better use of metrics to assess investment performance, quality of services and scheme oversight to drive a shift to long-term value.
"Some schemes, especially larger ones, are managed at much lower cost than the industry average, with providers competing primarily on price.”
They added requiring additional public disclosures would come at a cost and schemes, and their savers, would ultimately bear these costs. However, delivering poor value was coming at a cost too, they explained.
“Any measures would therefore need to be designed in a way that is proportionate."
“Ultimately, we want a system that drives the pensions industry’s focus and resources into ensuring DC pensions offer good long-term investment performance, and higher service standards, at reduced costs and charges."
Options for disclosure
The regulators identified several options for how costs and charges could be presented.
One option was to use the existing definitions - administration charges and transaction costs – to separate the fixed ongoing costs, such as annual management charges, from the variable costs incurred from transactions.
Ultimately, we want a system that drives the pensions industry’s focus and resources into ensuring DC pensions offer good long-term investment performance, and higher service standards, at reduced costs and charges.When schemes of under £100m assets under management carry out their more detailed value for money assessments, they will then be required to use these definitions when comparing their costs and charges to those of other schemes.
The regulators said cost disclosures using these definitions will “most easily facilitate the use of the same metrics" across the whole pensions landscape, helping individuals to understand the costs and charges for all their pensions in the same way.
They said in the future, pensions dashboards or other similar comparison tools may include costs and charges information, so adopting this standard approach now may help with such future developments.
A second option was to split the current definition of administration charges into two components - fund management and pensions administration.
While the existing disclosures were aimed at members, this option would help decision makers such as trustees and employers act more effectively to generate value for money for members the regulators said.
Comparisons
The regulators want to allow stakeholders to assess and compare pension scheme value on a consistent basis and members to switch schemes if needed.
They said the intention of the framework was for trustees and independent governance committees to be able to compare their scheme with similar schemes to assess their comparative performance, which should help drive improvements in value through lower costs and charges, improved investment performance and higher standards of services.
“We will expect schemes to make data on these publicly available. We are seeking views on how to get this framework right, though we also recognise that perfect standardisation is not possible,” it said.
“We propose that this framework is backward looking rather than focused on projections to drive factual comparison.”
But they warned some older products had features or guarantees - such as guaranteed annuity rates - which could mean that switching to a modern product may not always be in the customer’s best interests.
“Care would be needed to mitigate the risk that customers switch inappropriately and without considering all elements of VFM, including the valuable features and guarantees of some legacy products,” they warned.
The latest discussion paper builds on the joint pensions strategy published by the FCA and TPR in October 2018, which outlined how the regulators will work together to tackle the issues facing the sector over the next five to ten years.
At the time, the joint strategy identified the lack of comparable information as a key factor behind the lack of effective competition and value for money in the pensions market.
Sarah Pritchard, executive director for markets at the FCA, said: “Consumers work hard for their pensions savings and it’s important that schemes are really delivering good-value products.
“This issue is a complex one which impacts almost all pension savers so it’s important that we get it right. The proposals will help all those making decisions on behalf of consumers really challenge providers on value and allow better comparisons between products.”
The FCA and TPR are inviting comments on the discussion paper by December 10, 2021 and will publish a feedback statement setting out next steps in 2022.
David Fairs, TPR’s executive director for regulatory policy, analysis and advice, said: “Delivering value for money in pensions is a key priority for TPR – all part of our work to put savers at the heart of what we do. Regulators, industry and others must be able to effectively assess value for money to ensure good pensions outcomes. The discussion paper sets out our ambitions for an industry-wide VFM assessment framework.
“DC savers rely on the pension system working as best as it can over the lifetime of their saving - every penny counts. That's why independent governance committees and trustees need a framework which provides a holistic assessment of what VFM means - beyond cost and charges - to allow them to hold their providers to account and deliver the best possible outcomes for savers.”
sonia.rach@ft.com
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