Regulators should require performance benchmarking for VFM – Banks

Governance of DC pension schemes is hamstrung by a lack of comparability around investment performance, warns AllianceBernstein managing director, pensions strategies group Tim Banks.

Banks is calling for pension regulators to require independence governance committees and trustee boards to include some form of performance benchmarking in their value for money assessments.

A year ago FTSE Group launched the FTSE UK DC Benchmark Index Series, a suite of indices developed in conjunction with investment research and advisory firm, Elston Consulting. The new range of products has been designed specifically as a performance benchmark for UK Defined Contribution (DC) pension schemes.  

LCP partner Andy Cheseldine predicts that the FTSE indices will be increasingly used as IGCs and chair statements are rolled out. He says bigger schemes are already using the FTSE DC indices, but agrees that usage is less widespread amongst smaller schemes.

The index series represents the performance over time of a simple two-asset portfolio that moves progressively away from growth assets to income assets, and is measured for discrete cohorts of savers grouped by expected retirement date.  The methodology can also be used to create custom benchmarks for any given DC default strategy glide path.

Banks says there has been a vacuum in the benchmarking of pension schemes ever since data firm DCisions exited the market several years ago.

Banks says: “If we had a really robust level of governance we would not need the level of prescriptive regulation that we are getting. It is surprisingly that it has taken this long to decide that we should codify value for money and recognise the dynamic nature of it.

“FTSE is benchmarking on an age cohort basis defined contribution schemes. This give is a simple level of compatibility and can be customised to be scheme specific. This allows schemes to understand whether they are above or below the average.

“When I look at the FTSE indices I think this is what independent governance committees and chairman of trustee boards should be chomping at the bit to get hold of, but nobody seems to be doing it. Nobody is doing or taking up the legacy of decisions. We have a £350 billion industry with no real approach to benchmarking. Why is the regulator not saying you should have to have this sort of information to make value for money decisions? The regulators should be prescribing a set of tools and approaches that can aid those charged with governance both in terms of market compatibility and in risk versus return. This would lead to better outcomes for members.”

Cheseldine says: “There is no common ground on performance and no regulator saying ‘this is what you should use to understand how your performance has been’. Bigger employers are using the FTSE DC indices, and it is early days and I predict there will be greater use of them over the coming year.

“We are writing to IGCs asking what they are doing with regards to assessing value for money. How much they will be wiling to disclose is debatable. They don’t want to wash all their dirty linen in public, but on the other hand, if they do not show us what they are doing to assess value for money then we won’t be recommending them.”