Unbundling DC pricing unlocks 'value for money'
Henry Tapper says removing NDAs between operators and fund managers is a critical step in the journey towards assessing value for money
The Financial Conduct Authority is commissioning a template to discover undeclared investment costs in the funds we use. It has finally published PS17/30, which gives independent governance committee (IGCs) the right to use it in earnest. The Department for Work and Pensions is working in tandem on disclosures by occupational trustees. A great deal has happened but there is more to do before the public can clearly see if they are getting value for money from operators of their workplace pensions.
The next critical step is for fiduciaries (trustees and IGCs) to disclose the proportion of the member charge that is being spent on fund management and the part retained to manage the member experience and pay the operator. This is what is meant by "unbundling the price".
Price unbundling will likely meet with opposition both from the operators and the fund managers. Most investment management agreements between operators and fund managers are subject to non-disclosure agreements (NDAs) to protect this information from being used against the commercial interests of the providers of these services.
But it is critical that these NDAs are removed and that the public can look through to the behind-the-scenes pricing of their workplace pensions.
It is widely acknowledged that the value of a workplace pension falls into two parts. The first - the investment part - can be measured by looking at risk-adjusted performance and the total cost of fund management (what the operator pays and what is left in the fund as transaction costs). The other part is the "member experience"; this is a subjective measure of the quality of administration and engagement offered by the provider and is set against residual costs within the member charge after the fund costs have been deducted.
It is so important to unbundle the fund costs because these two aspects of value make separate contributions to the overall value of workplace pensions and should not be confused. The investment part drives the outcome, which we know is considered much the most valuable by members (2016 NMG research for IGCs). The member experience has value in keeping members engaged and helps them make good decisions (like paying in more), but its value is less direct.
For the moment we need to focus on the investment part and must be able to score value for money on it, discretely from any score we give to the member experience. This creates a hygiene in the measurement.
In the longer term, we can experiment by conflating the investment measurement and the measurement of member experience together, using some formula that can allow us to measure the overall value of the workplace pension. But that is step two; we don't need to go there just yet.
To suppose that we are there yet is to be naïve. We are very far from knowing what operators pay for funds. We will know what part of the overall fund cost is not met by this charge as this is what the template being developed by Dr Chris Sier and his team will show us.
Once we know what operators are actually paying fund managers, we will be able to know whether they are getting value for money on our behalf or simply dumping much of the cost of funds on the members by allowing fund managers to be rewarded by the back door. As you can imagine, there's considerable capacity for the investment management agreements to work against the member!
The cost of financial services is invariably higher than ordinary people think; it is the function of the marketing departments of fund managers and pension operators to keep it that way. It is the job of good governance to ensure that full disclosure is made. The next few months will decide how close we can get to the nirvana of full disclosure.
Henry Tapper is director at First Actuarial
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