The Financial Conduct Authority (FCA), The Pensions Regulator (TPR) and the Department for Work and Pensions (DWP) yesterday issued a joint consultation on proposals to create a framework for workplace pensions measuring value for money (VFM), as Rachel Vahey, head of public policy at AJ Bell, says the changes will make it easier for workers to judge whether their pension is good value.
Rachel Vahey, head of public policy at AJ Bell, comments:
“The government and regulators want to make it easier for people to know if their workplace pension is good value. People are generally used to making decisions about whether the products and services they buy present value to them. But pensions are different; partly because trying to figure out if you are receiving value for money is far from a simple exercise.
“They’re asking pension schemes to check how well they’re doing in three important areas: how much they charge, how well investments are performing, and the quality of their service. Each scheme will then be placed into one of four categories: strong performance, good value, needs improvement, or poor value.
“Most workers don’t get to pick which pension scheme their employer uses, but having clear information about how the scheme is doing means you can have better conversations with your employer to make sure it’s a good choice. This information is also handy if you leave your job, as it can help you decide whether to keep your pension where it is or move it to a scheme that’s performing better.
“Hopefully the new proposed requirements will give some workplace pension schemes a nudge to shape up, or risk losing their membership.”
Investment performance to be judged on what could happen as well as what did happen
“One of the challenges faced by the FCA is the possibility of ‘herding behaviour’ developing, where schemes decide to adopt investment strategies that include less risk so that they are never in danger of becoming an outlier when comparing value for money assessments.
“In an attempt to prevent this from happening, and encourage investment in diverse assets, including private markets, the rules propose including forward-looking investment metrics.
“However, this approach comes with significant challenges. Although it’s easy to see why the government wants to encourage workplace pension investment in private markets, measuring performance that has not yet happened opens the possibility that some schemes will ‘game the system’ by including overly optimistic returns that in practice may never materialise.”
