The PPI , governance and value for money


In my earlier post, I wanted to get to grips with the PPI’s new research paper on international experience measuring value for money but ended up focusing on a confusion about VFM and member contributions. Follow the link to see why I think we should not be conflating high contribution rates with scheme or member value for money.

The PPI paper draws out a number of key messages from other countries that are relevant to UK Defined Contribution (DC) practice and policy: to make things easy, I will stick to these, there are matters which the paper doesn’t cover but the paper is looking at what TPR is looking at “VFM on pension savings”.

The paper argues that

• A clear statement of and a consensus around the outcomes sought in assessing VFM are
a necessary precondition to effecting positive change in which outcomes are expressed
from members’ viewpoints as things that they value.

I agree. We are unlikely to get a global consensus, but the UK can learn from the world. In a DC world, it is the member (not the employer or provider or adviser) who needs to be the focus. Focussing on “member outcomes” is right – this is all about the person with the benefit and the person taking the risk.

By setting clear, measurable and comparative standards and benchmarks for
performance in the key areas of delivery – investment, administration, engagement – it
is possible to drive a more effective tendering process for these services to secure VFM.

The key areas of delivery chosen are interestingly random, administration and engagement are both aspects of “quality of service”, the key deliverable is a “big fat pot”.

This may be loose wording or may reflect an industry view, that scheme choice depends on qualitative rather than quantitative assessment. Certainly it is a lot easier to sell a scheme on soft factors than on investment performance and charges but is this really what VFM tendering should do?

Publicly available, consistent, robust and complete comparative data is a vital starting
point for authoritative VFM assessments and broader market context. The evidence
suggests that this requires a trusted regulatory framework to facilitate.

The regulatory framework in the UK is moving towards an analysis of VFM where net performance, data quality and costs and charges are measured by data. This is against the historic trend which has been to measure what the DWP refer to as “soft factors”- primarily “engagement”,

There are barriers to members exercising informed choice and so where choice is
provided it is unlikely to lead to good outcomes unless the choices available are
carefully designed and edited. Close, active governance will be required to manage this
process if good outcomes are to be achieved and maintained.

The report looks at Sweden where individual choices were made at the outset of its workplace pension saving project, the report concludes this was because of a high spend on Government advertising promoting choice, when this spend dropped away, so did choice. Now only 3% of Swedes actively self-select, though there is a legacy of self-selection which is not being reviewed, the PPI are bang on the money in heir analysis.

Achieving scale has positive impacts on costs, but diminishing returns will set in.
Large funds face new opportunities to achieve diversity in assets through unlisted or
direct investments to secure consistent high returns. Evidence suggests that this will
increase unit investment costs if these additional returns are to be accessed.

There is a weakness in this analysis. The VFM for members may flatten out when schemes grow past £500m in assets, but there are economies of scale to employers. The fixed costs of running a scheme – such as governance remain the same the bigger a scheme gets. So it could be argued that VFM improves for employers running their own schemes much faster than for members as schemes approach and breach £1bn AUM. In as much as employer costs prohibit extra employer contributions, the relative inefficiencies of small DC schemes are greater when employer costs are taken into account, this is a main driver for consolidation of smaller schemes. Theoretically employer contributions should rise when employers switch from running their own scheme to participating in a master trust.

Consistently positive real investment returns, within appropriate volatility
parameters – both upper and lower – are the most significant driver of VFM in terms of
net returns. But outcomes for savers in terms of meeting target income levels are most
influenced ultimately by the level of contributions.

I have dealt with this point (which is confusing) in my previous blog. The outcomes of higher contributions are only peripherally driven by the VFM of the scheme and are more a matter for reward and taxation strategies.

My take-away.

This is a really helpful and well-constructed paper which both through its modelling and its thought leadership, guides us to conclusions which are overwhelmingly right.

The paper endorses the UK approach to VFM, as described in the VFM discussion paper jointly produced by TPR and the FCA.

It is limited by not dealing with the conversion of pots to pensions (or any investment pathway) and it could be sharper when looking at contributions which it conflates at times with quality of service as a measurement of quality of service)

The role of the employer is critical to UK workplace pensions, they are responsible for the choice of scheme and with such diversity of schemes , that choice is difficult and needs a clear VFM framework if employers are to avoid deciding on costs and charges or purely on soft factors.

But members need to use the same metrics to determine their VFM and so consistency in terms of a common definition of value for money is required. By putting the member outcome at the heart of the VFM equation, the PPI is validating the UK view that VFM is about maximizing member outcomes. Where members are taking the risks, that is the best and only way to look at VFM.

The over-reaching Governance that manages VFM is simply a measurement of the member experience – defined as the value of money available to purchase or manage a pension.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to The PPI , governance and value for money

  1. Richard T says:

    In relation to Value for Money, it’s worth looking at this from EIOPA

    “The European Insurance and Occupational Pensions Authority (EIOPA) issued today a supervisory statement, which sets out the common principles needed so unit-linked products can offer value for money.

    EIOPA considers that reliably putting consumer outcomes at the heart of product design, distribution and monitoring processes is critical for tackling value for money issues. Hence it has issued a supervisory statement to outline how supervisory authorities will monitor manufacturers’ and distributors’ product oversight and governance processes.

    With this statement EIOPA highlights that while value for money is embedded already within product oversight and governance requirements, more convergence is needed in practical supervisory implementation.”

  2. Richard T says:

    Sorry, mistyped my email address …

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