Where next for “value for money”?



Value for Money is the holy grail for the fiduciaries of workplace pensions. In this article I outline how the providers of workplace pensions are going about establishing value for money and looking at ways to improve things in future years. If you are involved in auto-enrolment, then this work will become increasingly important as people start asking just what is going on with all the money deducted from salary.


We are within a couple of months of the reporting season for the Independent Governance Committees (IGCs), their kid brothers the Governance Advisory Arrangements(GAA), the chairs of DC master trusts (MTs) and single employer occupational schemes.

All will have to report on the value for money (VFM) offered to members of the workplace pensions.

Last year was a trial run, few of these fiduciary bodies made much of an attempt to work out if members were getting a good deal and phrases such as “in our opinion members are getting value for money” were issued with virtually no basis of evidence.

This year we thought would be different.

Following the April 2016 Chair reports, the leading IGCs have appointed consultancy NMG to provide market research on what their members think of them, this, we are told, will be used as a proxy for VFM. The cost of the market research reverts to the insurers and we are not going to see the outputs as this information is proprietary and bound by the usual Non-Disclosure Arrangements. In short, the NMG work looks more useful to marketing departments than to consumers.

The NMG research is really directed at the user experience of the workplace pension and is not outcome driven. We know that outcomes of workplace pensions depend on the investment of contributions; while a good user experience can influence member engagement, which influence contributions, the thrust of the FCA and the OFT’s concern about workplace pensions has been about the conversion of contributions into good results in later life. It is not how a scheme looks, but what it does that is the regulatory focus.


VFM focusses on default investment options

The FCA has consistently focussed on VFM as a funds issue. The appointment of European fund analyst Novarca resulted in a paper delivered in early 2015, which triggered a call for evidence. The result was DP15/2: Transaction Costs Disclosure: Improving Transparency in Workplace Pensions, published late in 2016, shortly before the FCA’s Asset Market Study.

Both documents are critical of the failure of funds to fully disclose charges, the latter scathing of both fund managers and investment consultants for allowing a system of poor disclosure and high charges to persist.

DP15/2 set out a series of proposals which could enable fiduciaries to properly understand the “money” that was slipping from member’s funds into the accounts of various intermediaries. Indeed, the paper coined the term “slippage” as a way to record what was going missing.


The local Government Pension (LGPS) scheme gets there first

While these consultations have been going on, the LGPS has adopted its own way or reporting on costs and charges to a fund. The LGPS has a £260bn asset base. In future all 950 asset managers being used by the 89 individual funds within LGPS will report not just on overt fees but on the hidden transaction costs to the LGPS advisory board using a consistent series of templates.

This is something of a breakthrough as the solution did not come from the fund managers but from a most unusual source – Unison – the Union. Unison initially commissioned Dr Chris Sier, Professor of practice at Newcastle University Business School to provide it with an analysis of the money being spent by the LGPS on fund management costs. The information was achieved through FOIA requests and in the teeth of some opposition from the funds industry.

The pressure told off and the templates for information which emerged from this work have now not only been adopted by the LGPS advisory board, but by the Investment Association. Indeed, these templates look the obvious way for the FCA to require slippage to be recorded.

If you want a detailed exposition of what lies behind this standardized approach, Chris Sier’s paper is available here http://tinyurl.com/jd6c7ty. The Standard is not complicated but modelled on the Dutch disclosure code. It focusses on overt costs (rather than implicit costs which are unmeasurable for these purposes), it covers management fees and performance fees and reports on turnover costs in a very pragmatic way, It also reports on overt customer costs and even gives narratives on the difference between expectations and reality (e.g. disbursements).

The data called for is data every asset manager already collects to manage their own businesses. The issue is not whether the data can be provided, but whether there is a will to be transparent.


What’s next?

Work is already underway to create a utility that can illustrate how each fund is delivering value and what that value is costing. The hope is we will shortly be able to see how each of the 960 fund managers supplying services to the LGPS are doing against each other and against certain benchmarks.

Evidently, the platform on which such a utility sits could also supply VFM reporting to IGCs , GAAs , MTs and the chairs of single employer DC trusts.

We are too late in the reporting cycle tor this utility to deliver for 2017 statements, but – with the momentum built up over the past three years, we can expect to see a satisfactory way of reporting on value for money, emerging by April 2018.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to Where next for “value for money”?

  1. John Mather says:

    The thinking and fixation on fees and costs worries me we are in a competitive market and if this is becoming a cartel then the regulator needs to lower the cost of entry to encorage competition

    If low cost robo advice impacts as much as is the news creators would have us believe then the herding effect will maximise losses for the pension account. Sale price of the asset disposed of will have downward pressure on price and aquired asset will rise on demand.

    The good news I suppose is that they will do this at a “low cost” The beneficiaries of the increased volatility will be the managed and advised who use research and intelligence instead of mimicking the lemming.

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