The concept of ‘value for money’ is a subject of perennial debates across financial services, which seldom result in meaningful agreement on what the phrase means. This has not stopped regulators putting VFM, be it value for money or for members, at the heart of recent reforms.
The Pensions Regulator (TPR) published plans to do just this as part of its 15-year corporate strategy revealed in March this year. The regulator has made a notable shift in the balance of its activities towards the rapidly growing defined contribution (DC) sector, and intends to ensure that it does everything it can to “ensure that savers, whoever they are and however they save, get the best possible retirement outcome from the pensions system”, according to CEO Charles Counsell.
Last year, the Department for Work and Pensions (DWP) proposed new rules for occupational pension schemes with more than £100m in assets, requiring trustee boards to produce “holistic assessments of how their scheme delivers value for members”.
With this new regulatory focus still in development, how can DC trustees and sponsors ensure they are delivering a robust service that demonstrates value for money?
Alongside the DWP’s reforms, the department plans to issue guidance to help schemes benchmark themselves against “three alternative schemes”, on factors including performance, costs, net returns, governance, and administration. This is partly to ensure trustees consider consolidation, but value for money is also a key factor.
Pinsent Masons partner Tom Barton says many larger DC schemes “have devised sophisticated value assessment methodologies” already.
“For schemes with assets of less than £100m, many will take the new governance requirements in their stride,” he continues. “However, for those less certain of their position on value, the more prescriptive nature of the assessment and associated reporting requirements may result in some discomfort. There’s no doubt about it, some schemes will find the additional governance burden too much – resulting in a move to master trust or finding scale some other way.”
For some of Barton’s industry peers, the feeling is that it is just as important to compare schemes within “a relevant peer group”.
CEM Benchmarking client relationship manager John Simmonds says if the intention is to drive the best possible outcomes for members, then any value for money assessment ought to be relative to key market participants. “There are a number of ways to benchmark,” he says. “You have to analyse what your members would have paid and what outcomes would have been delivered had they made similar choices within peer comparator funds. This can focus on cost, investment performance, customer service and product features.”
Kareem Rathore, partner at financial consultancy Hoxton Capital Management, adds that clients will also have many different requirements that will factor into their assessment of value for money.
These may include a clear and transparent fee schedule, online access to view performance and reporting requirements, a wide range of investment options, or a highly rated level of customer service from the provider, for example.
Many in the industry don’t see the issue of value as one that should necessarily bamboozle advisers, however. Maggie Kearney, director in Redington’s DC consulting team, for example, likens determining value in DC to choosing coffee at the supermarket.
“You can only do this with a comparator,” she explains. “You need to compare the taste of both coffees to make an assessment. For some people it isn’t just the taste – they might place value on a more attractive tin that the coffee comes in.”
It is the same for pension funds, Kearney continues. While some trustees will emphasise investment performance, others will place more importance on the attractiveness of member communications.
“The Pensions Regulator introduced its requirement for trustees to ‘smell the coffee’ when its 2016 DC code said a scheme is likely to represent good value for members where what is provided for the costs is appropriate ‘when compared to other options available in the market,” she explains.
Trustees and sponsors face several issues when trying to assess value. Cost transparency is one factor, although significant steps have been made on this in recent years thanks to the work of the Cost Transparency Initiative. This was established by several pension groups including the Pension and Lifetime Savings Association and the Local Government Pension Scheme to provided standardised, detailed fund cost reporting. While its focus has been on defined benefit schemes, DC schemes are also able to use its free templates.
Outside of costs, however, there is little uniformity across schemes on what to measure and how to measure it, Kearney says. “We think more detailed guidance would be welcomed by trustees to help them uniformly assess value for members, developing on the Financial Conduct Authority’s [FCA] work on value for money in contract- based workplace pensions.”
Last year, the FCA put the spotlight on the independent governance committees (IGCs) or governance advisory arrangements that oversee contract-based schemes. While some were “working well to provide value for money”, others were falling short of the regulator’s requirements.
In particular, the FCA highlighted that some committees did not demonstrate a sufficient level of challenge to information or assertions given by providers. It has consulted on a new framework and guidance for value for money reports.
This regulatory focus should not be taken lightly. Shiv Taneja is CEO of Fund Boards Council, an organisation that supports directors on mutual fund boards, and believes that ‘value for money’ is going to become a core principle across many more areas consumer- facing financial services.
Since 2019, UK-domiciled mutual fund boards have been required to produce an ‘assessment of value’ report, or AoV, scrutinising their offerings based on seven criteria set out by the FCA.
“I think it would be fair to say that the AoV process that the FCA has put in place for retail funds is the start of a process that will more than likely encapsulate other types of funds – including DC schemes,” says Taneja.
“IGCs in the UK have to produce a value for money report, cross-border funds are exploring a cost and charges review, so it ought to come as no surprise that other investment sleeves in the UK, like DC, should be undertaking a similar exercise for their investors/clients.”
Value for money should not focus purely on cost, but also on the breadth and quality of service provided to members. Auto- enrolment schemes must comply with the national charge cap of 75 basis points, but the DWP’s recent consultation introduced some flexibility on this – which could be key to facilitating innovation.
The £15. 5bn National Employment Savings Trust (NEST), one of the UK’s largest DC schemes, sets out 20 factors within five areas of assessment in its annual value for money report, published on its website. Alongside costs and performance, it lists economies of scale, its business model, retirement support, responsible investing options, and its role in the “auto-enrolment framework” as factors that feed into its value proposition.
Economies of scale have allowed it to venture into private assets, an area still inaccessible to many DC schemes. Redington’s Kearney believes that, while there is a way to go yet, the flexibility granted by the DWP has “moved the topic of innovation onto trustee agendas in a way it hasn’t been previously”.
“A continued focus on cost without guidance on how schemes can uniformly measure and evidence value will continue to hamper innovation into more costly diversifying investments,” she adds.
“So the issue of how to define value for members and innovation are intrinsically linked. Perhaps more formal guidance of how a trustee can determine value would also encourage innovation.”