Andy Cheseldine gave , in 21 minutes , one of the most complete and articulate expressions of what makes for good value in a DC pension scheme. I hate the word “masterclass” but on this occasion it is appropriate and I hope that Pension Age will publish the recording of this session of its Annual Conference.
It was, as it was billed.
Value for (Member’s) Money is the crucial criterion for trustees and IGC members. It encompasses everything – not just the basic charging level in a DC scheme. In this session, Andy will look at what trustees need to consider; what should be measured, and with what relative weightings (not all features are of equal importance), against which criteria; how your own services rate against those benchmarks; and how to articulate the results to members, regulators, employers, service providers and, where relevant, advisers/intermediaries.
The balanced scorecard – the impossible dream
Andy is trustee chair at a number of schemes, most noticeably Smart Pensions. The approach he suggests is a very sophisticated version of that we adopted at the Pension PlayPen where you take the characteristics of a good DC pension scheme and weight them according to the relevence to your membership to get a scheme score that tells you how well your scheme is working towards delivering good DC outcomes.
Getting to a common definition of a balanced scorecard is an impossible dream. When we are trying to help small employers choose their workplace pension we found that whatever level of sophistication we employed in researching the providers, the scorecard became weighted towards the employer’s agenda – compliance, ease of use and headline cost.
The agendas of employers, regulators and members of workplace pensions should be aligned but they are not. The member wants the scheme to pay as much to him or her in retirement as possible. The employer wants to keep its costs to a minimum. The Regulator is primarily concerned with the risk of failure. So within the balanced scorecard , there are at least three versions of value for money for the trustee to tell and three audiences that might listen.
And there are not enough Andy Cheseldines to go round! While Smart Pensions benefits from this inclusive governance , what of the thousands of DC schemes not covered by the authorization framework, failing to meet the minimum governance benchmarks laid down by the Pensions Regulators?
While the major workplace pension schemes get the benefit of the high quality IGCs, what of the long tail of legacy that cannot benefit from the sophistication of Andy’s approach?
My issue – and I mentioned it in my question to Andy, is that the all inclusive balanced scorecard approach is actually a measure of how well the trustee is doing his/her job. It is not something that can be easily explained to anything other than a group of experts and by anyone other than an expert trustee. The approach has its place, but it cannot be the final word.
The final word
The only attempt I have seen from a regulator to formulate a common definition of value for money appears in the FCA’s CP20/09 document
The administration charges and transaction costs borne by relevant policyholders are likely to represent value for money where the combination of the charges and costs and the investment performance and services are appropriate
This definition looks at the issue of VFM not from the top down (as Andy’s does, as the Pension PlayPen did).
But the FCA – and the DWP in its recently published consultation on better DC outcomes, are looking at VFM from the member’s perspective. “By your fruits shall you be known..”.
Being brutally honest, however good the endeavors of trustees or IGCs, if they cannot improve member or policyholder outcomes , they have failed. What we need is not a means of measuring good scheme governance (which we have had within TPR for decades) but a means of measuring outcomes.
This is what both the FCA and DWP are edging towards, by focusing on what members are paying and getting from the pensions they invest into. For quality of service, read the confidence members have that whatever statement is made by the scheme that it provides quality is realistic. After reading IGC and Trustee Chair statements for the last five years, I do not expect to ever read that a scheme is giving poor quality of service.
There are independent measures, especially as regards data quality, that can be employed to measure service quality and people like Holly Mackay and her Boring Money team are busy finding them.
Customer satisfaction with service is temporary, but the impact of poor performance and of unnecessary charges is permanent. We should not make the mistake of ignoring the data. One of the reasons I hold Pension Bee in high regard is that their high service quality is backed up with a deep understanding of the quality of their data , their costs and their member outcomes.
The final word on value for money is not in a definition but in the phrase. We need to make “value for money”, the standard by which we judge our pensions and in that we need Andy, Holly, Romi and we need regulators with open ears.
Thanks to Pension Age for Andy’s session and a good day on Thursday