VfM: Industry balks at benchmarking
Pardon the Interruption
This article is just an example of the content available to mallowstreet members.
On average over 150 pieces of new content are published from across the industry per month on mallowstreet. Members get access to the latest developments, industry views and a range of in-depth research.
All the content on mallowstreet is accredited for CPD by the PMI and is available to trustees for free.
Transparency on value would allow savers to compare different defined contribution schemes, but industry has shown resistance to schemes being benchmarked, a new statement by the Pensions Regulator and the Financial Conduct Authority shows. The regulators will develop a common approach to measuring value for money and consult on this later in the year but agreed to continue to work with industry and consumer groups to overcome the differences of opinion.
In a feedback statement on driving value for money, published on Tuesday, the regulators have summarised responses to a discussion paper from 2021 that will inform consultation proposals towards the end of this year. The statement does not provide a policy response, as respondents did not agree on several points, and some were opposed to benchmarking; the regulators have therefore announced that they will engage further with industry and consumer groups.
“We will start a programme of further work to examine the options we think are likely to be the most effective and proportionate. This will mean that we need to engage further with the industry to enable us to fully understand the potential impact of our proposals on the industry and savers,” they said, adding: “The Government has expressed its willingness to legislate to introduce the VFM framework for the schemes regulated by TPR, and we will work closely with DWP to achieve this. We aim to consult on our proposals towards the end of 2022.”
Pensions minister Guy Opperman said ensuring value for money for people saving for retirement was one of his key priorities.
“While cost continues to dominate decision-making, this does not always lead to the best member outcomes. We want those making choices about where people save their money to take into account more than just price, and I look forward to progressing this work alongside TPR, the FCA and industry,” he said.
David Fairs, TPR’s executive director of regulatory policy, analysis and advice, said he welcomed the depth and breadth of responses: "Particularly welcome is the broad consensus from industry that we need a better assessment of value for money to deliver stronger outcomes for savers in areas such as costs and charges and investment performance. But we acknowledge this is a complex area and there were many views on our proposals which need further consideration."
Consumers should be able to have confidence that their pension is delivering value for money, noted Sarah Pritchard, executive director for markets at the FCA. “The changes we and TPR propose will help achieve this – and over the long term, help deliver a more secure retirement for pension savers. We will continue working with industry over the coming months to make sure we get this right,” said Pritchard.
What did the industry say about VfM?
The regulators received 61 responses from pension providers, trustees, independent governance committee and their advisers, but, surprisingly, none from consumer groups other than the FCA’s Financial Services Consumer Panel.
Most respondents welcomed greater transparency and access to pensions data provided that proper consideration is given to how this information would be presented to the target audience, said TPR. “However, there was less consensus on how to measure each of these elements,” it added. “Feedback to benchmarking was mixed, and many were, on the whole, not supportive of benchmarking VFM elements separately at this stage of our work.”
On investments, "many respondents agreed that consistent disclosure of performance metrics is necessary to enable better VFM assessment, although they also emphasised that the approach to disclosure must take into account the intended audience”, and views were mixed on whether performance should be shown gross or net of costs. There was however broad support for publishing performance metrics based on age cohorts, as members in lifecycle strategies tend to have different investments depending on age.
Most respondents agreed with the use of risk-adjusted returns to reflect the value added through risk management, but again there was no clear consensus around the use of benchmarking, the regulator noted. “Most agreed that other characteristics such as scheme size, investment objectives as well as member and employer demographics would need to be accounted for by benchmarks. There was general agreement that a commercial benchmark was likely to emerge over time, although concerns were raised about the possible quality of such a benchmark.”
Given the different views on how best to disclose investment performance, the regulators said they will continue to engage with stakeholders to explore, among others:
- Arguments for disclosing net investment performance and consider further which costs should be excluded under the calculation.
- Whether the metric should be backward-looking only or include consideration of expected future returns.
- Whether the publication of performance metrics by cohort is the best approach. If so, whether the criteria for cohorts should be based on age or years to retirement.
- The merits of prescribing a risk adjustment methodology and publishing other metrics, such as asset allocations, to support decision making.
- How comparisons and benchmarking should reflect broader elements of value, including ESG considerations and long-term investing.
While investment performance is quantitative, most respondents were in favour of including a qualitative element to value for money, to recognise value added from customer service, for example.
The majority of respondents were in favour of using the current definitions of administration and transaction charges for costs and charges disclosures, but the regulators said they need to consider whether effective comparisons require more detailed information. “We also need to give further thought as to whether it is necessary for investment costs to be disclosed and assessed separately if they are already netted off under investment performance, or whether comparisons of costs and charges should only focus on administration,” they said.
