By Nina Blackett, Interim Executive Director of Strategy, Policy and Analysis at TPR
Explains why trust-based schemes must also seize this opportunity to shape one of the biggest revolutions in pensions policy since auto enrolment.
Thanks to automatic enrolment, 80% of the UK’s workers save into a workplace pension.
That’s millions of hardworking people who will largely rely on a defined contribution (DC) occupational pension to give them a decent standard of living when they retire.
Most of them have not made an active choice to save. And well over 90% of DC memberships stay within default arrangements. That means those people rely on the decisions their scheme’s trustees make on their behalf.
But good decisions can only be made by trustees who really understand what their members want and need, backed by good-quality data allowing trustees to understand how their default arrangements perform, compared with those of their peers. And when it comes to making decisions around value, consistent, comparable data has been in short supply.
TPR, FCA and DWP are working to change this. In January 2023, we published our joint industry consultation on a value for money (VFM) framework.
Now, the FCA, working with TPR and DWP, has launched a consultation on the structure of the framework. This will require pension schemes to:
publicly disclose investment performance, charges and service quality metrics, in the same way, at the same time
use that data to compare their performance against the market
undertake a step-by-step assessment, with a traffic light system for reporting VFM
take action as a result of their assessment to improve what they offer savers
Building a workable framework
We want the DC pensions market to be a healthy competitive market, with schemes driving each other on to do even better for savers. We want the focus of competition to be on genuine value – the investment returns and services received, for the price paid – not on cost alone.
We believe this consultation is an important point on our journey towards a pensions market with a laser-like focus on value. The consultation is the culmination of years of engagement with industry, with dozens of roundtables and discussions with diverse stakeholders to try and build consensus on a way forward.
We understand assessing value is not straightforward, but we believe the proposals outlined in the FCA’s consultation are a significant step forward in moving the entire pensions industry away from focusing on cost and towards improving value for savers.
Working with industry
We must not underestimate the scale of what we are trying to achieve on behalf of the UK’s pension savers.
We can’t deliver this change alone, and we don’t want to.
We want to work with industry to ensure the VFM framework achieves what we want it to: enable effective competition between schemes and facilitate employer choice, reduce the number of savers with workplace pensions that deliver poor value, and drive better value across the whole workplace DC market.
That’s why we encourage master trusts, which account for 95% of active memberships in the DC trust-based saving world, and large single-employer trusts, to adopt the framework early and help us learn what works and what doesn’t. This will help also to inform the legislative regime that will follow in the Pension Schemes Bill.
With so many DC memberships in master trusts, it’s clearly important we hear from these schemes. But we want trust-based schemes of all sizes to respond to the technical detail of the consultation, with a view to ensuring the final framework can be applied effectively to all trust-based schemes.
Pension scheme trustees are experts on their schemes and their members. We’d urge those responding to the consultation to tell us what they need to make the best decisions for their savers, bearing in mind that the framework needs to work across the whole DC landscape.
Quality of service and forward-looking metrics
We expect the proposed public traffic-light value rating system will make it easy to identify good value schemes. The framework itself will help drive better value through greater scrutiny leading to competition based on long-term value, rather than based predominantly on cost.
But measuring value is complex and there are a number of areas we’d like to call out to potential respondents.
We particularly want to hear views on how best to measure quality of service. This area has been challenging because of the many factors involved; the nature of service and the value it provides will be different across different demographics. So, we really want to know what metrics clearly demonstrate better outcomes for savers.
The FCA’s consultation does not include forward-looking metrics due to the complexities and gaming risks they present. We are keen to understand how these could be avoided and to understand if trustees use forecasts of expected returns to guide their decision-making, and if so what and how that works in practice.
We also urge trustees to consider the areas where we will need to update metrics on an ongoing basis to keep up with shifts in the economy, technological evolution and changing saver needs.
This consultation is a real opportunity for industry to have their say on a framework that could have as big an impact on pensions as auto enrolment did. FCA and TPR will be engaging with both contract-based and trust-based schemes during the consultation. We encourage all DC trustees to make sure they take this opportunity to help shape a future pensions industry which has value for savers at its heart.
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