It is perhaps inherently difficult to find an agreed definition of value for money, but some methodologies could act as a stopgap, argues Jonathan Stapleton.
In its report on pension costs and transparency, published on 5 August, the Work and Pensions Committee called for an agreed definition of value for money in a bid to better help members compare different schemes.
But, while member value for money is fairly clear in defined benefit schemes, is it as straightforward when it comes to defined contribution (DC) plans?
Age Wage chief executive Henry Tapper thinks it is. As he says: "Value for money to most of Britain's millions of consumers does not lie in the user experience of the product, nor the variety of fund choices, nor in the range of at-retirement choices. It lies in the simple equation - money in versus money out."
This is absolutely true - people really do judge the performance of their DC pot by the amount of money in it at the end. But is it really all about the amount of money you have at the end?
I compare it to driving down the motorway from point A to point B. A key metric of success is indeed the time it takes me to get to my destination. But I also want to arrive safely and in reasonable comfort too.
Likewise, value for money judgements of DC also have to take account of the bit in the middle. Yes, I would like a pot of £500,000 rather than £400,000 but I don't want to take undue risks to achieve the better outcome.
But the bit in the middle - the risk taken to get there - is really difficult to measure as part of a value for money judgement. If a lower-risk default had avoided a market downturn but was still in the lowest 25% of funds, would a member feel this was good value?
Until we get a better metric we can all agree on, methodologies like Henry's - measuring the performance of your fund against that of an average fund benchmark - look like the best option.
We just need to hope the benchmark doesn't include too many managers doing the investment equivalent of driving at 100mph on a rainy winter morning.
Jonathan Stapleton is editor of Professional Pensions
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