The charges debate has drowned out analysis of several other issues that have an equal or greater impact on the eventual size of retirees’ pots. Gill Wadsworth reports
While many hours have been spent debating pension fees, considerably less attention has been paid to scrutiny of the performance of workplace schemes. This was the view of attendees at a Corporate Adviser pension roundtable held in association with Standard Life last month.
For Standard Life head of pensions strategy Jamie Jenkins, the focus on charges for auto-enrolled workplace schemes has distracted attention from the bigger picture of assessing value for money, which creates a danger of eroding performance and outcomes in the name of lower fees.
Jenkins said: “There is a strong focus on charges, but to what extent is that to the exclusion of all the other things that derive value? If we look ahead five years and the charge cap is at its lowest level, so people are charged a minuscule amount for their pensions but have very low contributions, poor coverage and inappropriate investments, then I don’t think we will have succeeded.”
Jenkins argued that while debating the charge cap is important, it should not be to the exclusion of all else. He said: “We need to be talking about the other stuff or we will be sitting here in five, 10 and 20 years, finding that people have under-saved and are underinvested. We cannot solve the savings crisis by relying simply on a charge cap.”
The controversial 0.75 basis points charge cap applied to auto-enrolled workplace pensions comes up for review next year, and the panel held a range of views on how they expected the fee to change.
On the whole, they agreed the cap is acceptable at its current rate, but they raised concerns that some schemes were missing out on additional services or investment strategies since these were too expensive to be delivered for 0.75bps.
Hymans Robertson partner and head of DC consulting Lee Hollingworth said: “Sometimes we have had to compromise on downside risk protection in the glide paths we designed because the fund we want that gives those attributes can’t be delivered within the cap. So we end up blending them with another fund. It’s a compromise and an example of where the charge cap isn’t working.”
Capita Employee Benefits divisional head of marketing and research Robin Hames said the Office of Fair Trading report – which was the catalyst for the introduction of a charge cap – focused on the cost of investment, rather than the additional services that come with a workplace pension. Consequently, any reduction in the charge cap could see providers pull back from offering members ancillary services in the future.
Hames said: “Providers do not price in ancillary services, so if the government drives fees down too much, it will stifle the investment side and providers might also say ‘OK, I provide a savings vehicle for that money and nothing above that’.”
JLT Benefit Solutions client relationship director Stephen Coates (right) said the review should result in a change in how providers break down their fees. Notably, he expects to see clarity on how the fee is split between investment and other services.
Coates said: “We need greater transparency on a regulatory basis for splitting investment and product benefits because typically that doesn’t happen at the moment. Providers need to be clear about what is add-on and what is core.”
As part of the 2017 review, there is an opportunity for the Government to introduce charge caps on post-retirement products, including drawdown. The panel speculated on the likelihood that caps would come into force from next year in retirement.
Hollingworth said: “I expect to see some charge cap in the post-retirement world. The evidence shows that the industry isn’t regulating itself and we might need some regulation to ensure fairness in that space.”
Hames agreed: “We will see a charge cap in the post-retirement world. We all use the cliché that pension saving is no longer a cliff edge, but with products it still is. If you draw some money down, you will not have a charge cap on that, while the remaining money in your pot does.”
Delegates agreed that the focus on fees has detracted from an appreciation of value and agreed there are difficulties in understanding what is meant by value for money, and the danger of fixating on investment performance above all other factors.
Standard Life head of investment solutions Jenny Holt said: “Yes, returns are important, but there are other features that people value. Risk management, flexibility and future-proofing all have intrinsic value but they are harder to measure.”
Delegates said they are all working to develop a clearer understanding of value for money, but a single model against which they can measure DC funds does not exist.
Coates said: “There is disparity as to what DC providers are offering. We should call for a model for a basic pension product, which shows what you should get, against which you can measure your own fund. At the moment we are just talking about price and basis points. How do you determine whether that gives value for money?”
But defining value for money and applying it to a disparate group of people at varying stages of their savings lifecycle proves problematic.
Hollingworth said: “In the early years, protection and downside risk doesn’t matter – it’s all about contributions. It’s only when the value of investments outweighs contributions that risk protection comes in. That leads to a design which transitions from absolute growth assets in passive to a fund with a target to protect value.”
Hames said that by splitting the lifecycle strategy into smaller stages, providers will be better able to deliver value for money since members will be exposed to the right services and investments at the right times.
Hames said: “There needs to be a range of default strategies and more pinch points, where you can change direction and switch lanes. It is difficult for people to see 30 or 40 years ahead. If you look at 10-year periods and say ‘OK, this is where I am now, what does the next five to 10 years look like?’, then maybe they can change strategy.”
However, Coates said neither providers nor advisers are equipped to support a more segmented or flexible approach.
He added: “We don’t gear advice and product design towards that. Most of the providers don’t support that. The communication comes, at best, five years before age 55 or five years before retirement date.”
Holt said providers are working to develop solutions for a diverse membership.
She added: “Defaults are a compromise as they are trying to meet the needs of the many, but having options around that, and allowing people to fine-tune it, will be important.”
But Hollingworth said employers, rather than providers, are best placed to provide a more segmented approach to default strategies. “Providers have to offer something that will be a compromise, while large employers can engage on an individual level, have multiple defaults and build a directional model with some guidance that is based on individual characteristics.”
The importance of employers and members being able to measure the performance of their default funds was identified as a key issue. The current state of affairs sees millions of workers auto-enrolled into funds delivering widely differing performance – and when they come to retire, they will be within their rights to ask why a particular default was chosen. Last year a report from JLT Benefit Solutions surveyed 10 major default funds and found that over three years, their performance varied from plus 3 per cent to plus 9.5 per cent a year.
Delegates pointed out the difficulties of comparing funds with entirely different objectives and of picking the right time period against which to measure performance. Different types of workforce would also need to be considered. But there was general agreement that more work was needed to find ways to demonstrate which funds are doing what they claim to do and which are not.
Jenkins said: “A benchmark could not be crude; it needs to look at what the fund is trying to deliver and whether it does what it said on the tin.”
Hollingworth agreed, adding: “Benchmarking is a really complex challenge. We might need to try to segment benchmark data so that it reflects the importance of where you are on the journey.”
The delegates also considered the difficulties of benchmarking less tangible elements, such as member communications and risk protection.
Coates said: “Benchmarking needs to include a combination of factors – not just your performance. It should be about downside risk and volatility and future-proofing. You can measure those and build a straw man and say that a typical default fund looks like this.”
While there may be demand for performance measurement in default funds post auto-enrolment, LCP partner Andrew Cheseldine warned against attempting to create a benchmark too quickly, since a lack of track record makes it hard to determine any real sense of performance.
Cheseldine said: “You cannot look at three years of data and decide how well a fund has performed. You could just as easily draw conclusions from looking at who betted on what at the 3.30 at Haydock.”
Hames agreed, adding that volatility is also important when assessing how well a default fund has performed.
He said: “The duration is relevant. In the space of couple of years, you could go from thinking [the default] has been a pile of rubbish to saying, after a period of aggressive markets, ‘this is the best default fund I have ever invested in’.”
Ultimately, the panel agreed that benchmarking was needed and that it should encompass qualitative and quantitative elements, but they accepted that such a tool was not yet within reach.
Benchmarking is just part of the challenge, however. The one theme that emerged from the roundtable event is that costs may be a key to performance, but they are far from the only thing you can control to improve member outcomes.■