The simplest way of looking at the shift from DB to DC in the UK over the past 25 years as a risk transfer from collective (underwritten by a sponsor) to individual (with no underwriting – even where there is a sponsor). This risk-transfer is generally acknowledged.
The distinction is fundamental, so it is surprising that from a governance perspective, DC “schemes” are treated as providing collective risk mitigation. This is an unchallenged tenet of DC governance; but it ignores the experience of savers, who when it comes to turning DC pot into a wage in retirement, are still on their own.
Why do we treat DC savers homogeneously? Why doesn’t DC governance look at each individual saver as taking his or her own risks? Why are SIPP value assessments focusing on fund performance and MIFID II charge assessments rather than the outcomes of “self-investment”. Why do IGCs and GAAs treat workplace GPPs as “employer schemes” and why do occupational schemes consider “value for member” as if the member was still in a DB scheme?
There are of course some economies of scale which do mitigate risk collectively. Collectives can bargain for better prices from asset managers and pass discounts on to savers. But in his recent Value Assessment for SJP, Robert Gardner admitted that economies of scale across administration costs are “very modest” and that SJP are still looking for ways to pass them on to the SIPP holder.
At the pinch point where savers stop saving and start spending, collective advantage is minimal. It is encouraging to see the Nest Guided Retirement Fund begin operating as a default in July, good to see brave trustees such as those at Refinitiv offering scheme draw down. However, most savers into workplace pensions will find themselves when they want their money, in a fund designed for them to save from – not to spend from.
DC workplace schemes treat savers homogeneously because they haven’t found ways to treat them individually and governance mirrors this short-coming. The risk is concentrated in occupational DC schemes which neither provide advice or investment pathways. These schemes are governed like DB but do not provide members with scheme pensions.
It is time that those who manage DC savings platforms are challenged to manage the risks experienced by savers individually and this starts with measuring those risks. Currently saver risk is measured in the various value for money reports on a top down basis. Performance, costs and charges and quality of service are determined by trustees, IGCs and platform managers using the techniques of DB governance assuming that there is a single sponsor bearing the risk. But as we started by agreeing, the risks experienced in DC are experienced by DC savers.
They include the risks associated with hidden costs, sequential risks associated with investment administration, risks from poor record keeping and the fundamental risk that those managing the default and fund choice choose investment solutions that mitigate the wrong risks and burden savers with opportunity cost.
These risks can only be assessed by comparing the money-in, with the value-out (time weighted contributions against net asset values). This approach is commonly dismissed as overly data-intensive, at risk from GDPR and lacking comparables.
But data science and data is improving and the GDPR makes the rights of ownership clearer. Morningstar launched the UK Pension Index in 2019 as a “rules-based, blended index designed to capture the returns from the ‘average pension pot’ of the UK Pension Holder”. .
The tools now exist for those assessing VFM, to do so by looking at the risks experienced by savers. By doing so they will put right what is currently wrong. DC schemes will finally start assessing “Value for Money” as it touches the individual and not the sponsor. DC Governance must reflect that DB and DC are different. Only when it does, can governance start focusing on the saver, who now takes the risk.