Can DC pension regulation align and simplify around VFM?

It’s an interesting time right now for those involved in DC regulation. This blog suggests that if we can find a single definition of value for money that is acceptable to TPR and FCA, then we can massively simplify DC pension regulation and had pension choice back to employers and savers

I  believe the current debate around a single definition for value for money could provide us with our best shot at simplification in a generation,

The current focus is on benchmarking value for money in DC pension schemes. We are  still waiting for the DWP’s response to its 2019 consultation on Investment and Innovation which considered the consolidation of DC schemes.

Trustees and advisers are wondering

“Will changes need to be incorporated into any new VFM guidance and if so , will those changes align with the radical proposals in the FCA’s CP20/9 consultation?”

The FCA have highlighted three areas that contribute to VFM in their recently published consultation:

• charges and costs,
• investment performance, and
• quality of service.

I for one would support this radical simplicity as opposed to the 6000 words of guidance from tPR. The history of  TPR’s thinking of what makes for a good occupational DC scheme is a long one. It started with Ian Costain’s 6 good outcomes in 2010 which ballooned into 6 principles and  36 features two years later. 

How did defining what made for value become so complicated?

Looking back at the original 6 outcomes, I am struck by how easy the are to understand . 10 years ago, we could measure value as simply as this’

1. Appropriate contribution decisions
2. Appropriate investment decisions
3. Efficient effective administration
4. Protection of assets
5. Value for money
6. Appropriate decumulation options

The 36 features were designed to underpin 6 new principles but both the principles and the  features were a different kettle of metrics. If you want to read all the principles and  features, I’ve appended them to the blog. I said at the time and hold to this day that it was the over-complications of the original 6 good DC outcomes that has blighted discussions on value and money ever since.

Neither the features or principles included  “value for money”  but in they form the value for member guidance – and in an unhelpful way – they have moved the agenda away from what mattered to the consumer so that DC governance has become a matter for experts.

Currently TPR regulated entity are required us to look at the services members get for the charges they pay and for us to make our own evidence based assessment of value, based on TPR specified criteria when compared to other similar options available in the market :

• Scheme management and governance
• Scheme investment and governance
• Communications
• Administration

It is up to each scheme to make  the comparison and provide evidence based conclusions.  Schemes  do not use comparative metrics, other than to consider the publicly available member charges other schemes make. A few conscientious trust based schemes  reference independently rated risk-adjusted returns on the default fund

The  requisite VFM statement, which reflects the VFM assessment is published in the Chair’s Statement in the Scheme Annual Report and Accounts.

One large multi-employer scheme told me that

“it  did publish a member focused version of the assessment for many years but it was hardly ever viewed by members and has been discontinued”.

From October this year , the statement will have to be published on a publicly accessible site and we are already seeing progressive schemes like Nestle ,  publishing their value for members statement within the Chair Statement (it’s at 4.2). The problem is that what is published is not for the common person and I suspect that won’t get read either.

Too complicated for the ordinary person

To my mind, if a concept as simple as value for money has become so complicated that nobody reads a value for money report, something has gone wrong.

Something went wrong with the guidance on VFM 8 years ago and it is not till tPR gives up on the 2012 principles and establishes a simple definition of value for money as suggested by the FCA, that we have any chance of  getting VFM reports read by ordinary people.

I feel that there is now a chance to achieve the radical simplification in the way we present schemes to members and I will be doing everything I can to get tPR and FCA into one “virtual” room.

The prize of creating a single definition of value for money to which we can all sign up, is not just that we can junk the current guidance but that we can offer employers and ordinary savers, a way to compare pensions in a way that improves outcomes and helps ordinary people turn their pension pots into a retirement plan.

Appendix; TPR’s  6 principles and 36 features of a good pension scheme

The six principles

Principle 1 – Schemes are designed to be durable, fair and deliver good outcomes for members.
This principle covers the features necessary in a scheme to deliver good outcomes for members, including features such as the provision of a suitable default fund, transparent costs and charges, protected assets and sufficient protection for members against loss of their savings.

Principle 2 – A comprehensive scheme governance framework is established at set-up, with clear accountabilities and responsibilities agreed and made transparent.
This includes identifying key activities which need to be carried out, and ensuring each of the activities has an ‘owner’ who has the necessary resources to carry out the activity.

Principle 3 – Those who are accountable for scheme decisions and activity understand their duties and are fit and proper to carry them out.
This principle ensures that those who are given accountability or responsibility for a key governance task are able to carry this out. The principle will cover definitions of fitness and propriety for accountable parties and also conflicts of interest that may arise.

Principle 4 – Schemes benefit from effective governance and monitoring through their full lifecycle. This principle looks at the ongoing governance and running of the scheme, including the internal controls and monitoring needed to ensure that the scheme continues to meet its objectives, and continues to be run with the best interests of its membership in mind.

Principle 5 – Schemes are well-administered with timely, accurate and comprehensive processes and records. This principle is informed by our previous work on record keeping, looking specifically at the administration processes required in a DC scheme.

Principle 6 – Communication to members is designed and delivered to ensure members are able to make informed decisions about their retirement savings. This includes all communications to members during their time with the scheme – from joining through to making decisions about converting their pension pot into a retirement income, including promotion of the Open Market Option.

The 36 features

1. All beneficiaries within a pension scheme are treated impartially and receive value for money.
2. All costs and charges borne by members are transparent and communicated clearly at point of selection to the employer to enable value for money comparisons to be made and to assess the fairness to members of the charges.
3. Those running schemes understand and put arrangements in place to mitigate the impact to members of business and/or commercial risks.
4. Those running pension schemes seek to predominantly invest scheme assets with entities regulated by the Financial Services Authority or similar regulatory authorities. Where unregulated investment options are offered, it must be demonstrable why it was appropriate to offer those investment options.
5. Those running schemes understand levels of financial protection available to members and carefully consider situations where compensation is not available.
6. Products offer flexible contribution structures to members and/or employers (over and above minimum scheme qualifying thresholds).
7. A default strategy is provided which complies with DWP default fund guidance and scheme investment strategy.
8. The number and risk profile of investment options offered must reflect the financial literacy of the membership. Different ranges of investment options could be offered to different membership groups.
9. Investment objectives for each investment option are identified and documented in order for them to be regularly monitored.
10. A process is provided which helps members to optimise their income at retirement. Principle two: Establishing governance A comprehensive scheme governance framework is established at set up, with clear accountabilities and responsibilities agreed and made transparent. Features:
11. Sufficient time and resources are identified and made available for maintaining the on-going governance of the scheme.
12. Those running schemes support employers in understanding their responsibility for providing accurate information, on a timely basis, to scheme advisers and service providers.
13. Accountability and delegated responsibilities for all elements of running the scheme are identified, documented and understood by those involved.
14. Those running schemes establish procedures and controls to ensure the effectiveness and performance of the services offered by scheme advisers and service providers.
15. Those running schemes establish adequate internal controls which mitigate significant operational, financial, regulatory and compliance risks.
16. Arrangements are established to review the on-going appropriateness of investment options. Principle three: People Those who are accountable for scheme decisions and activity understand their duties and are fit and proper to carry them out. Features:
17. Those running schemes understand their duties and are fit and proper to carry them out.
18. Those running schemes act in the best interests of all beneficiaries.
19. Those running schemes are able to effectively demonstrate how they manage conflicts of interest. Principle four: On-going governance and monitoring Schemes benefit from effective governance and monitoring throughout their full lifecycle. Features:
20. Those running schemes are open and honest with their regulators and regulatory guidance is addressed in a timely and effective manner.
21. Those running schemes regularly review their skills and competencies to demonstrate they understand their duties and are fit and proper to carry them out.
22. Sufficient time and resources are made available for monitoring and reviewing schemes to ensure that they continue to meet good practice and continue to include the essential characteristics established under Principle 1.
23. Those running schemes maintain procedures and controls to ensure the effectiveness and performance of the services offered by scheme advisers and service providers.
24. Those running schemes maintain adequate internal controls which mitigate significant operational, financial, regulatory and compliance risk.
25. Those running schemes take appropriate steps to pursue and resolve all late and inaccurate payments of contributions.
26. Those running schemes monitor the on-going suitability of the default strategy.
27. The performance of each investment option, including the default option, is regularly assessed against stated investment objectives. Principle five: Administration Schemes are well-administered with timely, accurate and comprehensive processes and records. Features:
28. Member data across all membership categories are complete and accurate and is subject to regular data evaluation.
29. All scheme transactions are processed promptly and accurately.
30. Administrators maintain and make available their complaints process.
31. Administration systems are able to cope with scale and are underpinned by adequate business and disaster recovery arrangements. Principle six: Communications to members Communication to members is designed and delivered to ensure members are able to make informed decisions about their retirement savings. Features:
32. All costs and charges borne by members are disclosed to members annually.
33. Members are regularly informed that their level of contributions is a key factor in determining the overall size of their pension fund.
34. Scheme communication is accurate, clear, understandable and engaging. It addresses the needs of members from joining to retirement.
35. Members are regularly informed of the importance of reviewing the suitability of their investment choices.
36. Those running schemes clearly communicate to members the options available at retirement in a way which supports them in choosing the option most appropriate to their circumstances.