The VFM debate will have far-reaching implications for workplace schemes and should broaden the conversation to include what makes pensions better
Q. What impact will DC governance and transparency reforms have on workplace pensions?
A. Everyone should welcome the new independent governance committees and master trust governance boards that will be scrutinising the extent to which schemes are delivering value for money.
These committees will perform a valuable function in ensuring objective and independent scrutiny of the operation of schemes – and it is to be hoped that the discussion will extend to what members actually value in their workplace pensions and go beyond the debate around charges.
Charges are the ‘money’ in value for money. What these committees will hopefully do is highlight the fact that there has not been sufficient focus on what providers are giving in return for the money, which is of course the value.
Q. What conclusions do you expect the value-for-money debate to reach on issues relating to investment strategy, in particular with regard to default funds?
A. We are already starting to see that, while all auto-enrolment default funds are meeting the benchmark in terms of cost, their performance can vary dramatically. Now we have three years of performance under our belts, we can start talking about how it is impacting returns.
Recent research from JLT Employee Ben-efits found that the performance of the top 10 DC default funds has ranged from around 3.5 per cent to 9.5 per cent per annum over the past three years, with volatility ranging from 5.3 per cent to 11.3 per cent.
This report has certainly broadened the conversation around how default funds are performing and how scheme members could be worse off over the long term simply because their employer had chosen an auto-enrolment fund that was not delivering.
The difference between the best and the worst is massive and, compounded over a saver’s lifetime, the wrong default could add up to tens of thousands or even hundreds of thousands of pounds in missed returns.
We can expect the governance committees to perform a valuable task here in highlighting both good practice and bad.
Q. What approach will governance committees take to the impact of the charge cap and the extent to which it could be stifling communications and optimal investment strategies?
A. No one has objectively looked at what the full impact of the charge cap has been. It will be good for this debate to explore the extent to which the charge cap is either helping or impeding the delivery of value.
Q. Value for money is part of the equation but what about adequacy of contributions?
A. The level of contributions is of course a huge factor, if not the biggest factor in determining retirement outcomes. But we need to handle this debate with care.
It is easy to say 8 per cent is not enough, and there is clearly a debate to be had about how to increase it from there. But we should not frame this debate around 8 per cent being a bad thing at a time when most people are contributing only 1 plus 1 per cent.
Yes, we need to look beyond 8 per cent, but we need to make sure we get there first and that people stay in for the journey.
Q. How should the value-for-money debate be taken into the decumulation space?
A. Retirement decisions are clearly enormously significant. You could decide to put your money into a good product, take a good income over a long time and get a fantastic result; or, at the other extreme, you could take all of the savings you have built up over your working life and give them to someone who simply steals the lot.
You simply cannot say this is a marginal difference in outcomes. It is a huge one.
In the first year since Chancellor George Osborne’s pension freedoms, we have taken only a small step on the journey towards better outcomes. We are yet to see what the impact of pension freedoms will be on those in later life and we will need to remain intensely focused on this issue for the foreseeable future.