A growing key phrase in the regulatory world is ‘value for money’. In its Business Plan for 2021/22, the FCA placed emphasis on product providers offering good-value products. And over the last month, in quick succession, it has published two papers on how to measure and develop value within pensions.
This is probably just the tip of the iceberg, and we can expect to see a lot more about value for money over the next few years.
Let’s look at those papers. The first one is a joint discussion paper with The Pensions Regulator (TPR) on developing a common framework for measuring value for money in defined contribution pension schemes. This should allow trustees and independent governance committees (IGCs) to compare their scheme’s costs and charges, investment performance and service standards with similar offerings from other providers.
Value for money has always been a tricky concept to get to grips with, primarily because it’s subjective. The things I value and so would pay more for, you probably wouldn’t, or maybe not as much. Therefore, how can you say something offers value for money for someone else? And how can you say a pension offers value for money for a population of thousands of people, all of whom have different priorities and needs?
It has always felt that the FCA interpreted value for money as ‘low charges’ and concentrated only on this angle. That’s why it’s refreshing to see the FCA and TPR widen out the discussion on what value for money really means.
They do still place a high importance on costs and charges – and that’s fair enough; high charges can quickly erode a pension’s worth – but they also include other elements such as investment performance and choice, service, and good communications. All of which are important in driving higher contributions. And higher contributions typically make the most difference to the amount paid out.
The regulators also seem determined to place metrics and numbers around it so that it can be measured and compared. And this may be where the regulators’ good intentions fall down. Although they recognise that value is more than just cost, charges are easy to measure and to put a number on. Communications and service less so. In practice, the measurement of value may still end up being more biased towards cost.
As a way of judging and comparing them, perhaps IGCs will give them a ‘Tripadvisor five stars’ rating. This kind of reductive assessment is handy when you’re looking at where to spend an afternoon on holiday, maybe less so when looking at whether your pension scheme will meet a client’s long-term retirement needs.
The second paper from the FCA is a policy statement which takes the concept of measuring and comparing value for money another step forward. It wants IGCs and GAAs (Governance Advisory Arrangements) overseeing workplace pension schemes to judge and measure whether – and to what extent – the workplace pension offers value for money. It they don’t think it does, then they have to ask the provider to take corrective action to improve it. This may be an interesting conversation. The IGC has to be working completely independently of the provider to have real bite.
If they are unsatisfied with the provider’s response, then the IGC or GAA could inform the employer that there are other pension schemes that offer better value for money. If there was a financial adviser involved in the workplace pension, then this might make for an uncomfortable conversation.
This new policy doesn’t only affect workplace pensions. From last February, providers have had to offer non-advised customers taking out drawdown, or transferring from one drawdown contract to another, the opportunity to invest in investment pathways. The IGCs and GAAs oversee the investment pathway solutions, and in the future will have to assess whether they offer value for money. Again, if they judge they do not, they must ask the provider to make improvements.
It's unlikely that the value-for-money steam train will stop there.
Once the framework – and perhaps the mechanism for awarding ‘Tripadvisor stars’ – has been created, it’s easy to see how this could be rolled out to other types of pensions. The FCA is having a close look at non-workplace pensions. In future, financial advisers could conceivably be asked to include a judgement of the value for money their recommendation offers – either when recommending a new product or at review – and why it offers better value for money than other pension schemes, including any workplace pensions the client may have (even if they no longer pay into them).
Value for money is slipping into pension parlance and pension practice. In future, advisers may have to include a value-for-money judgement in ongoing advice to clients. And while none of this sounds unreasonable at first glance, you hope this metrics-based approach doesn’t end up being to the detriment of personalised, expert advice, as that’s something you can’t put a value on.
This article was previously published by Money Marketing
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