by Hetty Ahern
This blog first appeared in Citywire.
Getting the value for money (VFM) framework right could be transformational for savers and our industry. Getting it wrong would be disruptive and potentially destabilising for a competitive market that is essential for delivering most people's retirement.
It has been clear for some time now that many workplace pension arrangements are not sold sufficiently on the overall value for members but are focused overwhelmingly on keeping costs and charges at a minimum. Business being won and lost on a single basis point is a common theme when the topic of value for money is raised.
To improve returns for savers and diversify the assets held in pensions, something needs to change. That’s where the VFM framework, being consulted upon by The Financial Conduct Authority (FCA), comes in. We are strongly committed to making sure the “cost is king” culture shifts towards a greater focus on overall value. Making comparisons across the market on investment performance, costs and charges and quality of service is the right way to do that. However, developing the right metrics to make sure those comparisons are fair across a diverse range of products is not without challenge.
The metrics, as proposed, need finessing. While there will always be a debate about what is proportional when regulating our sector, there is a risk that the framework could go against the FCA’s secondary objective of growth and competitiveness. There are also areas where the VFM framework is at risk of duplicating the recently implemented Consumer Duty. It seems counter-productive to create a system where firms are required to assess their products twice against the same outcomes, in different ways. The metrics will also need to work for The Pensions Regulator (TPR)-regulated providers. Coinciding with the development of this framework is the FCA’s ongoing plan to streamline their rules. These two workstreams need to be joined-up.
The most important part of the VFM framework is the Red Amber Green (RAG) rating which providers’ arrangements will receive. The current proposals for the consequences of the RAG rating are overly punitive and could trigger short-term market disruption: if a workplace provider receives an amber rating, they must close to new business as well as write out to their existing employer customers. This is not consistent with the current approach, where amber ratings received by an Independent Governance Committee are viewed as a need for improvement; a warning to schemes rather than an immediate reprimand. An alternative to the FCA proposal which could work better, is to put in place interim steps between green and amber to act as a ladder of escalation.
The FCA’s consultation is silent on the potential conflict between a greater emphasis on investment returns for pension savers and the government’s broader agenda to increase investment in UK assets. In recent years UK equities have performed poorly against some of their global counterparts. Providers whose funds have a greater weighting towards investments in UK equities could therefore see their value for money rating deteriorate, incentivising them to invest elsewhere. Whether this conflict can be resolved is partly dependent on the outcome of the government’s ongoing pension investment review.
Another dependency is the next phase of the government’s pensions review, expected in the coming months. While the government’s own figures expect the VFM reforms to increase pension pots by up to £11,000, the most effective way to address pension adequacy for savers is to increase minimum contribution rates. The second phase of review, which will focus on adequacy, provides the perfect opportunity to finally set out a holistic plan to do this in a way that works for all savers.