We live in a culture increasingly obsessed with metrics. Folk have been getting quite stressed lately in trying to decide on suitable metrics to assess compliance with Social criteria. Much more challenging than Environmental, it seems. Or Governance, where diversity might be ticked off by the proportions of female and male directors of a company (a better measure might be cognitive diversity, but how do you measure that?).
Right now the UK pensions industry is mired in a deepening debate about what constitutes ‘value for money’ (VFM), which has come to matter a lot since automatic enrolment pitched over 10 million people involuntarily into saving plans, labelled as pension schemes.
The two key regulators in this arena, the Financial Conduct Authority (FCA) and The Pensions Regulator (TPR), have been consulting jointly on VFM in defined contribution (DC) pensions, specifically so-called ‘default arrangements’ in workplace pension schemes, as this is where most of the money has been going. (I’ll skip over the dubious attractiveness of something labelled ‘default’ as a destination for savings.)
Narrowing their focus a little further, the regulators have been looking so far at how to measure VFM in the accumulation stage: perhaps because it’s a relatively young sub-industry and more money has been going in than coming out.
On 24 May, TPR and the FCA published a ‘feedback statement’, a distillation of responses to their consultation last September.
Pleasingly, there is recognition that “an excessive focus on cost” – which has been the main metric for some time – “may result in the other key elements of value not being given appropriate consideration, which is why we want to encourage a shift in focus to long-term value for pension savers.”
This won’t be easy. For one thing, contributions to DC pensions are largely invested on the stock market, where quarterly performance reporting still seems to rule and prevailing short-termism may often match the perception of politicians for whom the next election is their far horizon.
There was agreement among respondents to the consultation that the key elements of the holistic approach to VFM proposed by the regulators - investment performance, service and oversight, and costs and charges - were the right ones.
There was little consensus beyond that, however, with views from respondents often described as ‘mixed’, ‘diverse’, or ‘evenly split’. For example, there was no consensus as to whether benchmarking investment performance would improve decision making and member outcomes. Benchmarking in general was unpopular.
Agreement was strongest around customer service and governance. Many respondents rated governance the top factor in VFM because good governance trumps all else. The assessment of governance must involve looking forward, which would help move the VFM debate from focusing on past performance; but it is challenging to reduce this to a quantitative metric.
Not quite so difficult is measuring member communication and engagement, where there was strong agreement that the key is whether or it results in better member outcomes: for example, increased contributions or Pension Wise guidance take-up. Many also agreed though that quality of communication is subjective.
As noted, while recognising the need for a holistic approach to assessing VFM, so far the regulators are focused on accumulation, apparently intending to treat decumulation as a separate exercise. This does not make sense if the true measure of VFM lies in member outcomes.
It helps to step back and ask what is the purpose of saving via a DC pension? Aside from the fact that a DC scheme is not actually a pension at all, but simply a long-term savings vehicle, the real purpose is – or should be - to facilitate provision of an income stream in retirement. The degree of success in meeting that objective, bearing in mind the level of contributions (the regulators’ key fourth factor), is arguably the best measure of VFM.
But we’re not there yet. Ironically perhaps we used to be, when DC pots had to be converted into an annuity at retirement. Since the stable doors were flung open in 2014/15 however, we’ve been floundering. No wonder decumulation is out of the picture.
Here’s another consideration. What are we actually assessing: a product, or a process? Perhaps a reason why it’s so difficult to identify bases for comparison is that we’re thinking in terms of products, and seeing apple and pears: arguably the traditional industry view, I would say. But saving for a pension is – or should be - a process, with a definable outcome. We need to redefine the outcome.
Ian Neale, Co-Founder, Aries Insight
