Value for Money – Will it make a difference?

Following on from my colleague Nina Cherry’s blog recently focusing on the consultation and proposed roll out of Value for Money for DC pension schemes, I wanted to share my thoughts on the initiative, what it means for the end consumer and ultimately, whether it will make a positive difference.

In principle I think it’s a good proposal, adding some additional consumer protection by applying measures to pension schemes to ensure that what they are offering, through Investment Performance, Cost and Charges and Quality of Services are essentially fit for purpose and providing the right outcomes.  This change is in line with wider moves in the industry to focus on value for money and customer outcomes.

The Pensions Regulator has been very clear on their stance and reiterated as part of their business plan that ‘those schemes that do not provide good value for money need to improve or leave the market.’ Corporate Plan 2023 to 2024 | The Pensions Regulator

If over time, the only schemes that remain are the ones meeting the standards, surely that can only be positive?  We have already seen signs of consolidation with the total number of occupational DC schemes having reduced by 67% from 3,660 to 1,230 since auto-enrolment commenced.  And the Value for Money initiative is set to drive further consolidation of a saturated market.

Whether the end consumer will really know what this all means is an unknown, mainly because there is an engagement issue generally for pensions but also because it’s unclear whether the scheme assessment status will be exposed to the consumer, as information released so far doesn’t specify this.  Perhaps it will be a metric that will end up on the Pensions Dashboard, or on scheme websites as a marketing aid.  If it is, and if consumers understand it, then this may trigger action direct from them.  Pension schemes need to be careful of providing a measure without a clear explanation because we fail at this in other areas.  Fund Factsheets that contain various measures and information on a fund for example, aren’t easy to follow and understand for those with limited knowledge of investing in funds.

We read time and time again that the pension market technology is so far behind other areas of wealth and the complexity of processing causes manual intervention.  If this is a supporting step to force innovation there’s more potential to capture the younger generation to taking an interest in their retirement at an earlier age.  While we could view this as another regulatory burden from what we have seen so far, the metrics to be supplied to enable the assessment should be existing data and perhaps not a huge overhead to be concerned about.

In time, we could be in the position where there is much less choice for consumers with only very large schemes in the market.  Could this be an unintended consequence of this regulation?   Or does it make sense for the Regulator to concentrate its oversight obligations on stronger well-run schemes?   Whether this matters or not will require some careful consideration and only time will tell as we hear more.

Pension schemes will need to step up and prove the value they offer, not just through costs and charges, but through the service they offer and how well their investments perform to earn their place in the market.