Ian is a rock – he is a touchstone for the pensions industry, if you want to know what it is thinking ask what he is thinking. This is what Nico and Darren do in their 24th podcast on VFM.
Ian runs Muse Advisory, a business about pensions governance. One ot the things Muse does is help employers procure new workplace pensions – either because they are giving up an own trust occupational scheme or because they are switch master trusts in the secondary market. Most of Muse’s work involves trustees, I don’t get the sense they do much with group personal pensions.
So not only is Ian a touchstone in terms of industry thinking, he is right at the heart of the debate about value for employers and trustees.
Listening to this podcast, I finally get why price is so important to the decision making process of the employer on whether to wind up the DC trust or switch master trust. This is all about the weight of assets and the received wisdom that it is always in the members interest to pay less rather more for a pension.
Ian talks us through the decision making process and though he starts out discussing “value” , the bulk of his exegesis of the process focusses on how the headline AMC eventually determines what members of the workplace pension scheme get going forward.
And this is very much about liability. The employer cannot demand that the workforce pay more for their pension. Indeed, the bigger the gap between what people pay as an AMC before and after the decision, the lower the liability of the people taking that decision to criticism or worse.
Since the main benchmark of value is price, so the principal driver for change is price. There is not much courage in this conviction, frankly it’s a cop-out and everyone knows it.
If you go to a top-advisory firm like Muse, you get a workplace pension based on value, if you don’t – you get a broking service – or more likely, nothing. This has to change.
Consulting on value
The “value proposition” of a workplace pension , as defined by the DWP in its consultation on VFM is a combination of what a member gets in the pot (a product of net performance), what the member gets by way of costs and charges (a measure of transparency) and the quality of service from their provider (a measure of support).
“Performance, transparency and support” looks like a better equation for VFM than the price of the AMC, but this equation is harder to measure and crucially, it is not a legal construct. In a strange way, price is.
And Ian is on very strong grounds when he says that though Muse focus on quality of service and consider price, the decision has to be price based, because there is no legal protection for employers to base their decision on anything but price.
I am sure Muse will, as Ian claims, provide a much better VFM assessment than that which emerges from what the DWP are working on, but that is Muse’s value proposition. Most employers will not have the purchasing power to employ Muse and would – otherwise , select providers purely on price. The point of the DWP’s VFM assessment is to introduce a means for employers to decide on value and not on price – and if they feel protected by the RAGs of the VFM assessment (choosing green over amber and orange) , then the VFM assessment will be doing its job.
The job of the VFM assessment
Necessarily, the small number of DC consultants capable of running worthwhile procurement exercises on workplace pensions, will focus on a small number of employers who will have workplace pensions worth the expense. But there are only a few thousand such employers in the land. It is a small pool.
For the remaining employers – well over a million of them, there is currently no one to advise them that value is more than price. If – as I believe it will – the DWP moves the primary focus of the VFM assessment from the small number of occupational schemes that currently do assessments to the large number of employers who have never thought about pension value at all, then it will have been worthwhile.
The assessment’s real value to consultants
I suspect that at the really top end of consultancy, which is where Ian and Muse are; -the VFM assessment will have little immediate impact. It will not create new business , consultants such as Muse are already consulting beyond the sophistication of the proposed assessment.
But by establishing that VFM is the criterion by which DC workplace pensions are judged, it could have a lasting impact on the decisions employers take. Were , for instance, an employer to decide to choose a pension with a higher AMC – because of the scope and ambition of its default investment fund, this might be justified by a the green performance rating attached to the new pension. If a change was made on the quality of service, the RAG could be the trigger for that change.
Which could mean that in future, employers choose pensions which are more rather than less expensive, and do so on the basis of value. Explaining the decision to members may not be as hard as many pension experts think. Ignition House’s work on including costs on simplified statements suggests that many savers look at AMCs and say “so what?”.
The public are well aware that buying on price is usually a false economy, but buying on price is how DC procurement works right now. If we move from price to VFM, we may be moving to something that the public better understands.
Put another way, the real value of VFM assessments to consultants, is that it returns their work to the real world where people save for a bigger pot, not for a lower price. This radical view – which I’ve come to thanks to Ian’s and other podcasts in this series – is what makes me so excited about what’s to come when the DWP unveil its consultation response later this month.