Lack of an agreed definition of value for money is posing many challenges for the industry. Kristian Brunt-Seymour looks at research by the Pensions Policy Institute which suggests a number of solutions
At a glance:
- Value for money is not just about cost but also administration, governance and engagement
- Could be benchmarked and measured as in Holland, France and Belgium
The Pensions Policy Institute (PPI) has put the spotlight on the challenges of measuring and delivering value for money in workplace defined contribution schemes.
Its 60-page Value for Money in DC Workplace Pensions report commissioned by Standard Life pointed out there is a lack of consensus resulting from the failure to reach an agreed definition of the concept.
There is a consensus among some in the industry that value for money is reflected primarily by higher retirement incomes.
However, the PPI said other factors should be considered rather than just focusing on costs, such as administration, communication with members, and governance. Charge levels alone should not be taken as an indicator of outcomes, and therefore be considered together with levels of return to provide an insight into value for money.
The report highlighted it would be difficult for independent governance committees (IGCs) and trustees to attain the best member outcomes for all members. Instead they may be required to make decisions broadly in members' best interests.
As a result, organisations are tackling value for money in different ways. Some are reducing or simplifying charging for members while others are using consumer research to assess the likely behaviour of their membership to adopt a suitable approach.
The PPI said in the absence of an agreed definition of value for money, trustees and IGCs could focus on areas such as delivering better outcomes.
Good governance was seen as key to achieving this through communicating the importance of contribution rates and setting the right investment strategy for the membership.
Also, freedom and choice means the debate around the subject should take into account the decumulation phase, in which IGCs may need to play a role.
PPI senior policy researcher Melissa Echalier says one of the main challenges is the concept means different things for different people depending on the demographic of the trustees and members.
Yet good governance and interaction with members may ensure the majority of specific needs are met.
"Even if you get identical members they can have different priorities such as their attitudes to risk," she says. "Security is important in that there's no mis-management that lowers the value of the pension scheme. However, this management could also mean different things to different people with some feeling a volatility-managed pension fund is best for example.
"There's an argument that if you build up individuals' capacity to assess the value of the information they're receiving, they're more likely to have trust in financial services including pension schemes.
"The big question is how that would be provided whether it's through employer provision or employees finding out for themselves. It's also about the level of detail you provide to them and whether there's one piece of information that would really make a difference to them."
Engagement in pensions needs to be tackled to improve value for money according to Royal London pensions specialist Fiona Tait. She adds IGCs and pension providers should play a key part in this. They could look at individual circumstances in more detail, recommending where the most beneficial financial advice could be obtained, Tait says.
Even those addressing value for money are still adapting to the shift away from defined benefit (DB) to DC which has put the emphasis of decision-making back on trustees, providers and members. As a result, they need to find their feet with all the changes over the past few years.
"There's a lack of engagement in general," says Tait. "Pensions are very long-term vehicles by-definition and it's very easy for both the providers and consumers to focus on the basic stuff.
"In the DC world, the thing often affecting a person's final pension is down to consumer choices. As a result, there is an opportunity for pensions organisations to help people make good decisions including value for money. These may not be directly measurable but would provide value for money if we help people understand how much they should contribute, how long they need to save for and the reasonable income when they retire."
"Consumers might not appreciate value for money until they start to actually take their pension. So if pension providers can do more to communicate what they're actually doing during that accumulation period it gives people a better idea of the services they offer such as managing the volatility of the fund, which people can see quite easily," she adds.
Measuring and benchmarking
First Actuarial director Henry Tapper believes lack of trust in the pension system is affecting views over value for money. This in turn is being fuelled by costs and fees associated with schemes including hidden costs extracted through the pricing of pension funds rather than annual management charges. In some cases, Tapper believes these hidden charges can be greater than the obvious costs shown to members.
He adds that measuring and benchmarking value for money is essential to provide a holistic view on pension funds, which has been achieved in France, Belgium and particularly The Netherlands.
"Fundamentally there's been insufficient will to change things and the big winners of the shift from DB to DC have been on the supply side," he says.
"As a result the buyers have had the money coming through that they expected and a portion of their funds has gone into scheme charges, which in some cases has reduced the value of their pension by 30% or more.
"Places like France, The Netherlands and Belgium have similar pension systems to ours, particularly in terms of investment. Yet they've created benchmarks of what's good in terms of fees and charges by declaring full cost charge disclosure. These include having an index on asset allocation, alpha generation, hedging, volatility and transparency which clearly show people's return from their funds.
"We want organisations like the PPI and IGCs to start working with these countries to develop these systems and then build on them further. It's not just about understanding the value of money but measuring it and benchmarking it against the best."
Independent pensions consultant Jonathan Parker predicts that IGCs and trustee chairs may come up with their own set of measures as they look at value for money over the next year to 18 months.
"What we may end up with is some sort of dashboard approach each IGC board will develop. These will look at a variety of value for money measures," Parker says. "Costs and charges will definitely be one along with potentially contribution rates, communications and financial advice."
There has long been a debate about value for money and the introduction of IGCs and new governance requirements for trust-based DC schemes is one step towards tackling the issue. Benchmarking and measuring costs and charges could be ways to address it further. Providers and schemes should take the varying demographic of trustees and members into account, while ensuring effective administration and appropriate member communications.
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