The big bang
Russell WrightSenior Vice President, Defined Contribution
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In most markets, competitive forces and regulations work together to help ensure consumers receive value for money (‘VFM’). This usually works. For example, at one end of the spectrum, there’s no need for independent committees to assess whether bakeries offer VFM on sourdough bread – despite the small fortune they cost at some bakeries! If the quality and price aren’t right, the market will compel the retailer to make changes.
Pensions, on the other hand, can’t rely solely on competitive forces and therefore require regulatory intervention. The 2013 Office of Fair Trading review of workplace pensions identified competition problems, resulting in the introduction and adaptation of VFM rules by regulators ever since.
Latest developmentsJanuary 2023 saw VFM’s big-bang moment – a joint consultation from the DWP, FCA and TPR for a new VFM regime covering all workplace pensions.
Their proposals are far more prescriptive, wide-reaching and data-driven than any previous intervention on VFM. The key points from their proposal include:
Disclosure requirements on data points related to the three areas of VFM: investment performance, costs and charges and quality of service.
A common methodology for all VFM assessments.
A requirement to publish whether the scheme:
offers VFM;
doesn’t offer VFM but could; or
doesn’t offer VFM and has in place no credible actions to achieve VFM.
Once implemented, these proposals will have far-reaching implications. An intentional one is to encourage consolidation in the market; the idea being that schemes with greater assets have a better chance of delivering VFM and good outcomes for members. But the concern is that if the new rules miss the mark, they could cause VFM assessments to be clumsy and unfair and ultimately not lead to better member outcomes.
How to do VFMVFM is an integral part of the work we do for our clients; this includes running the largest cross-industry VFM study in the industry since 2017. Through this, we’ve developed valuable insights regarding how to practically apply VFM assessments in a way that works for our clients, the industry and, more importantly, scheme members.
We used this experience and expertise to respond to the regulators’ proposal, with our key challenges to the consultation being:
Ensuring that the sheer volume of data disclosure doesn’t make effective VFM comparisons impossible (one section of the proposal would result in multi-employer schemes disclosing thousands of past performance data points, potentially leading to conflicting conclusions).
The absence of any reference to sustainable investing (including the management of ESG risks and opportunities and stewardship).
The importance of ensuring data is disclosed on a like-for-like basis across different schemes (for example, some schemes ‘stop the clock’ when they measure how long they take to process transactions when waiting for another party, whilst others don’t).
A call to include extra metrics for service areas that matter to members (and that ultimately determine whether they trust their pension provider or not). For example, call centre, complaints and service-level agreement data.
We hope our response, and those sent by many others in the industry, will help the government and regulators develop a final set of rules leading to practical and effective VFM assessments.
This latest suite of VFM proposals looks set to greatly impact the workplace pensions market. We hope that the final rules, when announced, will help improve standards and assist members in achieving good outcomes.