Mike Ambery, Retirement Savings Director at Standard Life, part of Phoenix Group said: “We welcome this renewed focus on value for money as a mechanism for boosting outcomes for savers and a joined up approach between the FCA, DWP and TPR should bring consistency. Comparing schemes based on service quality and investment performance rather than just costs and charges has the potential to ensure schemes are addressing key customer priorities as well as potentially boosting long-term returns by encouraging investment in possibly higher cost, higher return assets like infrastructure and private equity. A public red/amber/green rating along with the policy of transferring poor performing schemes into better ones could improve transparency in the industry and ultimately enhance people’s retirement savings. The resulting consolidation of pensions arrangements will enable economies of scale, which in turn could increase the diversification of investments and reduce costs, while not impeding innovation as service is a key part of the framework. It would be good to see access to financial wellbeing tools and signposting to advice and guidance included in the framework as they play a critical role when viewing saver outcomes in the round.
“Imposing consequences on schemes for providing poor value for money has seen success in countries like Australia, where Superannuation schemes (supers) are subject to an annual performance test. The test enables regular comparisons between supers on a number of metrics, including investment performance. If the test is not met for two consecutive years, funds will be penalised and effectively blocked from accepting further money and effectively exit the market. Performance tests have led to increased consolidation, and while fees are generally higher in Australia than the UK to manage service sustainability over the long-term consolidation has led to greater economies of scale which should help to bring them down over time. In the UK, it will be vital that people know what to do if their scheme has a red, amber or green rating – whether it’s a personal decision or, for example as in the case of Master Trust schemes, a decision on behalf of members.
“It’s critical that alongside the framework we retain a focus on savings adequacy, as under-saving remains the UK’s single biggest pension challenge. We hope to see the Government move to raise minimum auto-enrolment contributions as part of the Pensions Review announced by the Chancellor.”
LCP Partner and Head of DC, Laura Myers said: ‘We have long advocated a change in emphasis from cost to overall value, so the new focus of the VFM framework on a wider range of measures of value is welcome. But there are a number of risks with the new approach. One is that high quality schemes run by individual employers, often with the benefit of an employer subsidy, may not score highly in the eyes of the government compared with giant master trusts, even if member outcomes could be as good if not better. It is important that the government does not focus on size for size’s sake. There is also a risk that schemes will be so afraid of even an ‘amber’ rating that they will be more risk-averse and afraid of being outliers. This could lead to ‘herding’ of investment strategies rather than rewarding schemes which are willing to innovate and invest for the long-term. In short, there is a risk of the law of unintended consequences coming into play with this consultation”
Progress for long term value for workplace pensions savers
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