The greatest tech challenge for pensions right now is not the pension dashboard. Dashboards are in the hands of DWP, Maps, the PDP and the Regulators and until the new PDP Chair arrives, we have to get on with doing the things pension providers should be making sure our schemes have clean data. Consumers have no choice but be patient.
The greatest tech challenge is delivering the VFM Framework which may well have its dashboard before the pension dashboard, one that should be delivered privately using open-source data – a utility for employers and trustees that could be the envy of the world.
The DWP has set the two pension regulators the task of bringing the fiduciary and consumer duty together to create a disclosure framework for pensions (starting with workplace pensions).
This disclosure regime, known as the VFM Framework will allow those who take decisions for savers, employers, and trustees to measure the value of the service they offer to savers and see if it measures up to certain Government set thresholds.
The tech challenge is to create a means for employers and trustees to search for their scheme results and compare them with alternatives. This could lead to a validation of the workplace pension was offering value, or it could kick-start a review, resulting in a change.
That search will need to be easy, allowing employers to identify the workplace pension it uses and compare performance , costs and services with comparables – as you’d compare a house , office or business. While the framework would not initially be aimed at savers, the dividing line between the pension knowledge of most business owners and their staff is grey. Usage of such an utility might include journalists, savers and advisers, curious for different reasons.
The bare-bones analysis of workplace pensions will consist of three “RAGs” – traffic light indicators of whether the scheme is green (good), amber (dodgy) or red (failing). They will assess investment performance and the quality of services offered. Costs and charges could also be compared.
Behind these bare bones is what the DWP are calling a “data center”, showing detail. The detail will show VFM experienced by savers of differing ages with differing periods to retirement. There may be measures of value for risk taken and services will be tested against objective measures such as “opt-outs”, “voluntary contributions” “completion of death nomination forms” and the accuracy of member record keeping.
Employers will have access to as much information as needed to review their scheme’s VFM. The extent to which employers engage will depend on the framework’s capacity to deliver intelligible, intuitive metrics in an easily searchable manner.
What the DWP is currently looking for is a technology solution that can translate data that is already accessible and deliver it in a way that makes employers and trustees want to make the effort. For some trustees, it is not a matter of choice, trustees of stand-alone DC schemes with assets of less than £100m already have to consider if they are offering value and if they’re not, hand over the keys to a commercial master trust.
Such single employer trust-based schemes account for only 3,000 out of the 1,200,000 employers who’ve chosen workplace pensions for staff. For the remainder, reviewing the workplace pension remains voluntary. Most employers didn’t decide on their scheme during the staging of auto-enrolment, they did what their business advisers told them was easiest for payroll and for the firm’s finances.
Some of these decisions are now being questioned by staff with growing pots. Some employers will continue to see the workplace pension as none of their business, but many business owners have skin in the game and will want to review their pension both as an employee benefit and as their own pension pot.
Typically, business owners have financial advisers and the VFM framework could represent an opportunity for advisers looking to diversify their business model.
The key is easy access to VFM data. The VFM framework is not a pension finder service like the pension dashboard, but it does identify and compare each scheme for the value it’s offering for saver’s money.
In terms of its objectives the VFM framework is doing what any other dashboard is doing, creating metrics that allow decisions to be taken. Delivery will require new ways to solve old problems – it is primarily a data management challenge.
The Government has called for the pension industry’s help. There is a very short window of time to engage with the DWP’s consultation which ends on 27th March. The DWP’s response is likely to be published in midsummer so that a bill can be brought before parliament this year. If this subject interests you, you should read the consultation and respond to the questions it asks. The link is here
So many words written about concepts that don’t yet exist. Does anyone believe that a dashboard will ever see the light of day.
Sounds like Brexit
Regulators are attracted to the idea that more data means more empowerment. It feels rational and objective but doesn’t behavioural economics show us people cannot easily process a multitude of data so switch off? Or rely on gut feel and all the potential behavioural biases that we are all prone to.
In the states, we have the Fee Disclosure regulations per ERISA 408(b)(2) – from the service providers to the plan administrator (typically some of the same individuals as the plan sponsor or employer), and ERISA 405(a) – from the plan administrator to the plan participant. ERISA stands for the Employee Retirement Income Security Act of 1974.
In the states, services provided and plan designs can vary widely, as can the investments made available by the plan’s investment fiduciary.
In the states, the fee disclosures, perhaps America’s Value for Money equivalent, are complex and opaque – even though we have tens of pages of regulatory requirements surrounding the disclosures, repleat with required statements and exhibits. Even something as simple as providing investment benchmarks for performance measurement is a clouded process.
Here’s the Government Accountability Office’s 2021 assessment:
“… we found that 40% of participants don’t fully understand fee information and 41% don’t know they pay fees. … We recommended … plans’ fee disclosures should include fee benchmarks—e.g., an average fee among comparable funds—to help participants compare the values of investment options. …”
Perhaps the GAO overlooked the fact that the Department of Labor’s final regulations specifically considered using benchmarks comprised of comparable funds – and rejected that alternative: “… However, benchmarks are more likely to be helpful when they are not subject to manipulation and are recognizable and understandable to the average plan participant, as is the case with broad-based indices … For this reason, the final rule retains the proposed requirement that a benchmark must be a broad-based securities market index …”
https://www.gao.gov/products/gao-21-357
As a result, there are no benchmarks for the “default” investment applicable to a significant minority of all plan participants in America’s individual account plans – Target Date Funds. And, in plans where the participant can invest in the employer’s common stock, the appropriate benchmark is the S&P 500 index. Make any sense to you?
Here’s my thoughts regarding America’s equivalent to Value For Money from a study/presentation delivered 10+ years ago, coincident with implementation of America’s individual account plan fee disclosure regulations:
“Over the next ten year’s, let’s increase the fees paid by individual account plans, like the 401(k), by hundreds of millions of dollars per year to deliver newly mandated fee and investment information that no participant specifically asked for, few will read, even fewer will understand, and still fewer will correctly apply in their investment decision-making. Practical experience and careful evaluation of the proposed regulation cost benefit analysis suggests that perhaps, at most, 10% of participants will (benefit) … However, the other 90% of participants will experience no identifiable savings (as they do not spend any time researching fees today), but will incur … costs … (as most fees are ultimately paid by participants).
… At best, the Participant Disclosure regulations are inconsistent in how they position the required disclosure information. For example, The regulations warn about the impact of fees and use those concerns to require extensive, detailed, specific disclosure of various fee information but fail to suggest, let alone require the plan sponsor to focus any attention whatsoever on the main reason for differences in fees among plans – by failing to require disclosure of a comparable “all-in” fee for plans of comparable size and composition.”