A] Prelude*
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https://expatpensionholland.nl/global-pillars-systems
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B] Costs versus end value
The proposed Value for Money (VFM) framework for pension schemes has sparked positive reactions in the industry, as the joint approach turns focus away from cost and towards overall value, which includes service and investment performance. But some are concerned that the new rating system could oversimplify metrics, stifle innovation and lead to standardized investment strategies that may limit savers’ benefits.
Pension specialist Laura Myers: “We have long advocated a change in emphasis from cost to overall value, so the new focus of the VFM framework on a wider range of measures of value is welcome. But there are a number of risks with the new approach. One is that high quality schemes run by individual employers, often with the benefit of an employer subsidy, may not score highly in the eyes of the government compared with giant master trusts, even if member outcomes could be as good if not better.”
“It is important that the government does not focus on size for size’s sake. (Something we often see in many countries.) There is also a risk that schemes will be so afraid of even an ‘amber’ rating that they will be more risk-averse and afraid of being outliers. This could lead to ‘herding’ of investment strategies rather than rewarding schemes which are willing to innovate and invest for the long-term. In short, there is a risk of the law of unintended consequences coming into play with this consultation”.
Specialist Tom McPhail: “This overall framework will present a challenge to the commercial viability of pension schemes that don’t meet the standards. Ultimately those that fail this test won’t be around much longer and, as such, it is vital to engage actively with this consultation.
“This work was derailed by the General Election so it’s good to see it back on track. There is a lot to like in this consultation; the focus on investment returns, charges and member services is now fairly widely accepted. Dovetailing this work with the government’s productive finance agenda will still prove a challenge. The adoption of the Red Amber Green traffic light system may be seen as overly simplistic for what are a complex array of scheme metrics. It is also disappointing the FCA appears to have rejected the inclusion of forward-looking metrics within the investment performance work; this was an opportunity to develop an interesting and innovative approach to investment decision-making.”
Specialist Jamie Jenkins says: “This is a welcome development for workplace pensions and should start to redress the balance between price and value, which has become overly focused on the former. There are certainly lessons to be learnt from a similar initiative in Australia but, with a sensible implementation approach, this could be a very valuable exercise in building on the success of automatic enrolment.”
Specialist Emma Douglas: “We welcome this focus on encouraging value for money in defined contribution schemes and improving outcomes for savers. The right environment is needed to move the focus onto performance and overall value rather than simply cost.”
“We’re pleased to see the commitment to have the Value for Money framework as a standardized test across defined contribution schemes because it’s important that all pension schemes offer value to pension savers. It is encouraging to see government and regulators joining forces and we look forward to reviewing and responding to the consultation.”
Specialist Mike Ambery: “We welcome this renewed focus on value for money as a mechanism for boosting outcomes for savers and a joined up approach between the FCA, DWP and TPR should bring consistency. Comparing schemes based on service quality and investment performance rather than just costs and charges has the potential to ensure schemes are addressing key customer priorities as well as potentially boosting long-term returns by encouraging investment in possibly higher cost, higher return assets like infrastructure and private equity.”
“A public red/amber/green rating along with the policy of transferring poor performing schemes into better ones could improve transparency in the industry and ultimately enhance people’s retirement savings. The resulting consolidation of pensions arrangements will enable economies of scale, which in turn could increase the diversification of investments and reduce costs, while not impeding innovation as service is a key part of the framework. It would be good to see access to financial wellbeing tools and signposting to advice and guidance included in the framework as they play a critical role when viewing saver outcomes in the round.”
“Imposing consequences on schemes for providing poor value for money has seen success in countries like Australia, where Superannuation schemes are subject to an annual performance test. The test enables regular comparisons between supers on a number of metrics, including investment performance. If the test is not met for two consecutive years, funds will be penalized and effectively blocked from accepting further money and effectively exit the market!”
“Performance tests have led to increased consolidation, and while fees are generally higher in Australia than the UK, to manage service sustainability over the long-term consolidation has led to greater economies of scale which should help to bring them down over time. In the UK, it will be vital that people know what to do if their scheme has a red, amber or green rating – whether it’s a personal decision or, for example as in the case of Master Trust schemes, a decision on behalf of members.”
“It’s critical that alongside the framework we retain a focus on savings adequacy as under-saving remains the UK’s single biggest pension challenge. We hope to see the Government move to raise minimum auto-enrolment contributions as part of the Pensions Review announced by the Chancellor.”
Specialist Pete Glancy: “The proposed Value for Money Framework makes sound logic, taking a long-term, holistic approach which will help savers boost their pension wealth. At the moment workplace pension administrators often make decisions on pension schemes based solely on price. By allowing value to instead be calculated across all types of defined contribution pension scheme on a fuller set of criteria, the new framework will consider factors which should lead to better retirement outcomes for pension savers.”
Specialist Mary Cahani: “It’s important to focus on ensuring good outcomes for members’ retirements in every decision made by trustees and key DC stakeholders. This collaboration to design a common framework for implementing Value for Money for workplace DC pension schemes is of great interest to scheme providers, trustees and members and will be welcomed across the industry.”
“Another important development is the regulators’ efforts to address the advice gap between pension saving and retirement. If effectively designed, this initiative has the potential to empower key stakeholders to suggest products or solutions based on target market profiles. This would bridge the advice gap, enabling pension scheme trustees to provide guidance and support to individuals, empowering them to make better pension-related decisions and ultimately leading to improved outcomes for pension savers.”
“All this further highlights the need for collective efforts from providers and trustees to take accountability and provide transparency, aiming to focus on the needs of pension savers and build trust in the system. Asset managers can support this by fostering collaborative relationships with DC pension scheme stakeholders to improve member outcomes during the accumulation stage and solve for retirement income. That involves providing access to various investment strategies across alternative or public assets through a value-add approach during the accumulation stage of the members’ journey, as well as flexibility and personalization for comprehensive retirement planning.”
C] Finally
Great to see that there is a strong focus for DC pension plans on comparing results between plans and not only looking at costs but also at service levels and return on investments.
In which process it seems vital that innovation is not hindered by a system that rewards playing safe. Finally we value the Australian approach that if a provider does not meet the limit for two consecutive years, they are forbidden to attract new capital.