The FCA ,TPR and DWP have made it clear that they are uncomfortable that workplace pensions are being chosen on price.
There are good reasons for this, the first of which is that low-price usually correlates with poor investment and service performance leading to poor outcomes and poor value for the money invested. The money in question is saver’s money – the outcomes impact the quality of their retirement and make them more dependent on the tax-payer in retirement.
The second is linked, if we are to have tax-incentivized pensions, the tax-payer is a stakeholder in the outcomes. It is up to the Government as agent for the tax-payer to make sure that workplace pensions are value for money and are bought on value not just “money”.
The third and most controversial reason for emphasizing value over price is that “low-cost” investments mean that money is invested in lowest common denominator funds – ETFs , passive pooled funds etc. It means there is no budget for the kind of investments that the Chancellor, the Prime Minister, the Lord Mayor of London, Sir Nigel Wilson and other notables are calling for – to build back Britain through productive capital patiently financed.
Taken together, there is a kind of argument for an inverse price cap where companies are prevented from competing on price and required to compete on something else – but what else. Should we require a workplace pension to invest at least 50% of their AMC in investment management fees – for instance? Perhaps we should go further and require funders of workplace pensions to show that at least 0.3% of money managed is spent on investment? Nick Lyons, the London Mayor wants a minimum 5% of money in workplace pension to be patient capital invested in illiquids. But these answers don’t help employers choose – what should employers be choosing on?
The obvious answers are performance and service, both of which improve outcomes in different ways. Good investments provide bigger pots that pay bigger pensions. Good service encourages more savings and pot management meaning that more money is concentrated in fewer funds – leading to better investments and lower costs.
I don’t think we need an inverse price cap but I do think we need transparency on what cost and charges in workplace pensions buy. I’m more interested in paying for good quality investments than paying for the profits of pension providers. So any disclosure of costs has to unbundle the investments from the service.
But to my central question. If I am not to buy on price, what should I buy on.
The answer to that is not as easy as “investment and service” since we don’t have a proper way of measuring either. Investments are measured either by past performance or by a subjective assessment of future performance. Service can be measured by the reaction of those getting it (trust pilot et al) and empirical evidence that service standards are being met and surpassed.
But these measures are not being used in the majority of instances where employers are choosing a workplace pension for their staff or even when trustees are choosing a consolidating master trust when winding up their DC occupational scheme.
The reports I get from Sarah Smart at the Regulator to Michael Ambery and Callum Wilson at Hymans Robertson, is that most such decisions are being taken on the basis points of the headline AMC. This is having all the perverse consequences spelt out above and is thwarting the VFM agenda of the DWP, TPR and FCA.
In this blog, I explain why I think employers buy mainly on price. I suggest we don’t make it easy for them to buy on anything else.
A better way of choosing pensions for staff
Let’s be clear, not much has changed since 2013 when the OFT wrote this conclusion to a report that led to insurers setting up IGCs.
The OFT got it right, IGCs have improved things but they haven’t cracked VFM. Employers do not use IGC VFM statements (or Trustee Chair VFM statements) in choosing pensions. That’s because VFM is currently poorly defined, inconsistent and badly explained.
People know that I want to change the way we talk about the performance of pensions so that we focus on what the members get not what the funds say they give.
There are lots of good reasons to move to analysing performance with reference to people’s experience – the inputs and outputs of their saving. But in the context of the VFM Framework, the most important reason why we have to move towards analysing member data is that the results are interesting enough to replace the headline AMC as the main determinant in employer buying decisions.
Employers are indeed bad buyers. They aren’t born bad buyers , they become so because they don’t get the information they need to be good buyers.
I would argue that the fault is not with the employers but with a system that gives them too little help in making decisions.
Moving to a proper quality standard that takes into account the experience savers and employers have with their workplace pension is very important. It’s important enough for Romi Savova to engage with the DWP about -even though Pension Bee isn’t yet part of the VFM Framework.
Moving to a proper standard to measure performance is even more important. Net performance works for DB but it does not work for DC and especially the fragmented DC system we have in this country. The proposals in chapter IV of the VFM Framework to use outdated DB techniques are simply not fit for purpose.
On Tuesday of next week , I will be renewing our discussions with the DWP, FCA and TPR, hoping that with the support of consultants and pension providers in the room, we can move to a more intuitive, accurate and cheaper way of measuring how our workplace pensions have done.
Learning from the past is a start, it is not the end. Helping employers making good decision going forward means starting with the basics and building. The consultants like Hymans Robertson can help us pick the winners of the future but we must start by assessing the past and sorting out if we have a problem or not.
The VFM Framework cannot do more than get employers into a position to know whether they need to take action. It cannot be the only means for them to choose, most will need more help to get the right workplace pension for them and their staff.
But we do need more than net performance tables and a crude RAG test, employers should expect a better way to choose than simply price, and we should be looking for the best way to do that.