Louise Farrand: The proposed use of tightly defined performance metrics, combined with a traffic-light rating system, could deter schemes from deviating from the norm.
To borrow from the great Oscar Wilde, for far too long the pensions industry has sought to know the price of everything, while focusing less on value.
But the government's shake-up of the value for money (VfM) framework has the power to reshape the defined contribution (DC) pensions market for decades to come. We see it as a timely shift away from an excessive focus on cost, often at the expense of investment quality and member outcomes.
We strongly support the ambition to reframe the conversation around value. However, as currently proposed, elements of the framework risk undermining this goal by encouraging conformity while discouraging long-term thinking and conviction-based investing.
We think pension schemes should be able to design strategies aligned with their beliefs and their members' needs.
Many schemes already do this, informed by detailed member research and behavioural insights. These approaches may not always deliver the highest short-term returns, but they often provide important benefits such as building trust, improving engagement, and managing risk over time.
Red light warning
Trustees and providers may become reluctant to take differentiated positions for fear of being labelled outliers. The result could be a market increasingly dominated by benchmark-hugging strategies, limiting innovation and reducing the potential for improved long-term outcomes.
This issue is particularly relevant when considering private markets investments.
Accessing these assets, which the government has actively encouraged through initiatives such as the Mansion House Accord, can give schemes diversification and the potential for long-term growth.
However, their performance often diverges from traditional benchmarks. In a system that penalises deviation from peer group averages, schemes may be discouraged from allocating to private markets altogether, opting instead for the perceived safety of passive equities.
As they say, to lead the orchestra, the conductor must sometimes turn their back on the audience.
The consultation's inclusion of forward-looking performance metrics also raises concerns.
Forecasting investment returns is inherently uncertain, yet schemes may feel compelled to present optimistic projections to avoid negative ratings. This risks encouraging the very herding behaviour the reforms aim to address.
Rather than relying on speculative projections, a more effective approach would emphasise narrative and accountability.
When schemes underperform, the focus should be on understanding the reasons why and the actions being taken in response. Performance improvement plans could provide a constructive framework for this, enabling schemes to demonstrate learning and progress rather than simply being categorised by a colour-coded outcome.
Near-term performance myopia
The proposed treatment of risk management, particularly in the lead-up to retirement, is another area of concern. As members approach retirement, protecting income becomes increasingly important. Strategies that hedge interest rate and inflation risks may reduce short-term fund values but improve long-term income security.
Under the current proposals, such approaches could be penalised, despite potentially delivering better real-world outcomes for members.
Finally, the introduction of a sanctions regime at an early stage could lead to unintended consequences. Schemes that fail to meet certain criteria, even if they provide overall value, may be forced to close. This would reduce competition and choice, ultimately harming members.
Balance over prescription
To ensure the VfM framework achieves its objectives, a more balanced approach is needed. This should include greater emphasis on qualitative assessment, recognition of long-term investment strategies, and a broader understanding of value that goes beyond short-term performance metrics.
The shift from cost to value is both necessary and welcome. But value cannot be captured through simple metrics alone. A successful framework must support informed judgement, encourage innovation, and allow schemes to act on their convictions in the best interests of their members.
Without this, there is a real risk that the system will deliver average outcomes. Members deserve better. In pensions, strength lies in the courage to think differently.
Louise Farrand is executive director of the Defined Contribution Investment Forum (DCIF)
