When someone buys a car, all sorts of different factors might influence which one they plump for.
How fast it is. Its eco credentials. Even the boot size. People weigh up the pros and the cons to try and get the best value for them.
What’s more, they can take a test drive to see if the ride lives up to expectations. If not, they can move on and find another runner.
Workplace pensions aren’t like that. Most people haven’t made an active buying decision based on performance factors. And the actual value for money a scheme provides isn’t clear to the saver until it’s too late to do anything about it, sometimes 30 or 40 years into the future when they access their pots.
Trustees have a fiduciary duty to act in their members’ best interests. To try and make sure that every penny of savers’ hard-earned cash is working as best it can to give them a good retirement outcome. A duty to ensure that all savers receive value for their money.
We want to make that easier for those governing schemes. To give them the tools they need to make good decisions, drive competition and raise standards across the whole market.
That is why in our open public consultation on the value for money (VFM) framework with our partners at the Department for Work and Pensions (DWP) and Financial Conduct Authority (FCA) we have proposed introducing a new system of public disclosure of meaningful, comparable metrics across the three pillars of value: investment performance, cost and charges, quality of services.
This would be backed by a holistic assessment process where trustees and independent governance committees (IGCs) would have to ask challenging questions of themselves and the data to be sure that schemes are really providing the best value possible for their members.
Understandably these proposals have already generated a lot of interest and engagement from industry. Colleagues from across The Pensions Regulator, DWP and the FCA have met extensively with industry and spoken at many events over the last few weeks to get their views on the proposals and to encourage constructive consultation responses.
With that in mind I wanted to clarify a few elements of our approach and what we want to achieve through this work.
- Why are we focusing on defaults? Well, because of the combined efforts of employers and schemes since the advent of automatic enrolment we now have many millions more savers putting something away for their retirements. However, the system is built on inertia and with no active choice made by most savers we believe it’s vital that they receive value for money by default. So, in phase one that’s our focus. But we do make clear in the consultation that in phase two we will consider extending to self-select options, non-workplace pensions and defined contribution pensions in decumulation.
- Why is our approach focused on data disclosures? We believe that production of standardised, consistent, comparable data will allow schemes and regulators to effectively understand how they are performing relative to their competitors and the market as a whole. Using large amounts of data in pension schemes to guide performance isn’t a new concept and indeed has been part of defined benefit regulation for some time. What we want to hear in consultation responses is practical examples of how schemes currently use data to deliver value for savers and compare their performance.
- Who is this data for? The data is for trustees, IGCs and providers so that they can take action to improve value for savers. We expect it to be used by their advisers to enhance the support they provide schemes and employers and also by us, as regulators, to give a level of assurance that no saver can be in a poor value default for a sustained period of time.
- What is our overall goal? We want to ensure all savers receive value for their money, it’s plain and simple. That means schemes don’t just focus purely on cost but look to deliver real value. We want to use the VFM framework to drive improvements across the whole market. That means good schemes getting even better. And poorly performing schemes either improving or getting out of the market.
We don’t pretend to have all the answers now – and in a number of areas of the consultation we propose options for how we may go forward. That is why I would encourage industry, pension schemes and providers, employers, consumer groups and others to engage with our consultation before it closes on 27 March 2023.
Help shape our thoughts and contribute towards delivering pensions that work for everyone.
By Sarah Smart
TPR Chair