This diagram shows us the points where we can do well in our “journey” as DC investors. It’s a useful starting point in working out how we create value for money for ourselves.
This article shows that how much we get out of a DC plan is mainly due to the decisions we take.
But while most of the value is created by good decisions about contributions, investment and the “pay-out”, we can add value by understanding where we are incurring unnecessary cost
In 2011, a European union looked at the relative importance of each of these areas in terms of the eventual outcome – a pension in retirement. This is what they found
This chart shows that the really big risks (the ones down the bottom) are taken at joining and during the saving period of a DC pension. Some of these risks are behavioural (member understanding and contributions), some of them investment related (market risk and conflicts of interests -COI) but a great proportion of the risk comes from charges, record keeping, administration and IT systems, things that are down to the operation of a DC pension scheme.
The chart below (for the accumulation phase), shows how little of the workplace pension risk is born by the provider or the employer
What good governance can do.
Good governance should therefore be primarily focussing on making sure members are making the right decisions (since the majority of the risk relates to them doing the right things).
Part of this is to help members take the right decisions on the choice of provider. For this, we need “independent governance”. The Government is keen that we have the help of “independent governance committees (IGC)” who can give us an idea about whether the workplace pension provider they are analysing, is giving good value for money. Ideally we should be able to consult the reports of these IGCs and work out which provider is best for us.
But it’s not as easy as that. Not only do the workplace pension providers governed by IGCs form only part of the universe of DC pensions we can chose from, but also – their reports don’t really enable us to compare one scheme with another.
That’s because they use opinion rather than data in their analysis of the value and money that each provider offers.
The table below looks at the operational issues that good governance should be monitoring on behalf of the consumer – to ensure that the provider risk during the accumulation (saving) phase of a workplace pension , offers value for the money that members pay for in fees.
From these tables, we can see that there are a great number of factors that those who are governing workplace pensions, need to take into account. The decision to move from one workplace pension to another can easily be put off because the overall decision is just too hard.
This is what actually happens. Most employers do not switch providers because they have no easy way to work out if this is in the best interests of members.
If it is hard for employers – it is even harder for members and for those who aren’t in workplace pensions at all – but just want all their money in one well-managed pot.
What is needed?
What’s needed is a simple way of helping employers and members compare their options. With employers that means which workplace pension, for individuals that means comparing what they are getting from a workplace pension and what the “outside” alternatives are. For members who aren’t in workplace pensions, that means looking at options to consolidate around a non-workplace pension – for instance – Pension Bee SIPP.
We need a system that helps people compare value and money (and value for money). But we don’t even know the “money” bit yet.