Timing

It is well over a year that we have been discussing VFM in pensions. The Pensions Minister congregated the great and the good on 26th January 2023 to tell us it was coming and the first consultation arrived the following month. We have had a consultation response and a promise of legislation (if possible) last year. In practice, the last Government chose to put pedalos in front of pensions and we now get a second consultation which will end in October this year. This gives us an idea of Government’s legislative timescale for the Pension Schemes Bill of which the VFM Framework forms a part, my guess is we are looking at early 2025 to get this legislation enacted, the second consultation has (at time of blogging) not been announced.

In press releases we trust

Indeed the oddest thing about the timing of the announcement of the consultation was that it was late on an August Tuesday with nothing published on DWP , TPR or FCA’s website.

It’s odd that major initiatives designed to improve the pensions of 20m savers are consulted on this way. I would be surprised if there is any substantive change between the proposals put out in 2023 (following the first consultation) and those put out today, but what changes there are will show how the new Government intends to progress the Bill into legislation and will be studied by those who do policy for a living.

The rest of us have to get on with delivering value for money and trust the line the press are fed.

Inclusivity

John Ralfe writes an interesting piece in the FT today questioning whether auto-enrolment is doing much good for low-earners. He points out that they don’t get much of a saving incentive, that saving often puts them into debt and that they should have the option of getting salary in lieu of the employer’s contribution. It is a fair challenge well explained.

If an Isa does what a pension does and does it more simply, then why bother with a private pension if you simply don’t have the cash to do so?

This is the challenge to pension value for money which the pensions industry has got to rise to. It cannot absorb a £48bn tax subsidy without demonstrating it is doing something reasonable with all that money. We have to make workplace pensions more valuable both to the low income saver and to the Exchequor

Putting pensions to work

Speaking with William McGrath yesterday, he reminded me that the profitability of institutional pensions is now primarily in buying them out in exchange for annuities. The margins being achieved by insurers are similar to the basic rate of income and corporation tax. In other words, the tax advantages afforded to DB pensions are being passed on to insurers as profit.

If our DB pensions are to provide the tax-payer with value for money, they should aspire to more than swell the insurer’s coffers. They need to be contributing to the economy through their investment and through the creation of surplus capital which can be used to improve pensions and reward employers for funding them. VFM has a consumer duty which includes tax-payers and sponsors.

Non-workplace pensions

I see Patrick Heath-Lay of People’s Pension continues to gripe about the likes of Pension Bee not being explicitly being covered by the VFM framework. The FCA are however stressing that VFM and the consumer duty are interchangeable and firms like Pension Bee might equally ask why the consumer duty doesn’t apply to master trusts. To the consumer , it makes no difference so long as they are getting a good deal from their saving.

And we really need to start thinking of pensions as more than about saving. The VFM framework has yet to consider pensioners and VFM for people who want to spend their savings. Here the workplace pensions have been hugely deficient allowing billions of pounds to transfer into drawdown and cash products that have no charge caps, little scrutiny on investment and no service standards.

If workplace pensions are losing money to poor value non-workplace pensions it is largely their own faults. As happened in Australia, it will be when workplace pensions have a VFM framework which the public can trust, that we will see the tide go out on SIPPs. Meanwhile the consumer duty is making it increasingly uncomfortable for poor quality SIPPs.

VFM and transparency

The VFM framework is currently targeted at employers, allowing them to establish whether the DC scheme they run or the master trust they participate in , is offering value for it and its staff’s money.

But it won’t be long before the public will want to see the traffic lights themselves. I hope that the pension dashboard will be able to offer traffic light ratings on pots in a future iteration.

There is no doubt that a number of occupational pension schemes are not offering good outcomes to their savers, statistically only 50% can be better than the average but a traffic light system that only flashes red to the worst offenders is still a fearsome idea for trustees and funders of commercial arrangements.

If , as is hinted at by details from the press release, evaluation of future performance may  be linked to participation in long-term growth assets that are off-piste to trackers, then many schemes that get by by having no investment ambition but low-enough costs , will find themselves in the red-zone.

There will of course be a backlash by those who see “off piste” as inherently too dangerous for workplace pensions. For workplace pensions that measure success in millions rather than billions under management this may be the case. But the Government has made it clear that short of mandating higher allocations to growth assets, VFM is its best shot at shaping the market.

The days when the investment of  DC savings was a hygiene factor are over. If workplace and non-workplace pensions are to rise to the tax-payer’s challenge, they need to raise their game in terms of VFM.