With the launch of value for money framework consultation, the pension industry has welcomed the increased focus on value but is split on whether the framework will help drive government’s agenda to boost investment in productive finance.
The Pensions Regulator (TPR), The Financial Conduct Authority (FCA) and the Department for Work and Pensions (DWP) are working in partnership to develop a framework to improve the value schemes deliver for savers and enabling comparisons to be made across the defined contribution (DC) pension landscape including contract-based and trust-based schemes.
The FCA has launched its consultation for contract-based schemes ahead of the DWP introducing equivalent legislation for trust-based schemes in an upcoming Pension Schemes Bill.
Under the proposals, pension schemes will be required to publish and be compared on metrics that demonstrate value, including on investment performance, costs and charges, and service quality.
Mary Cahani, head of DC client engagement at Investo said it was “important” to focus on ensuring good outcomes for members’ retirements in every decision made by trustees and key DC stakeholders.
She said: “This collaboration to design a common framework for implementing Value for Money for workplace DC pension schemes is of great interest to scheme providers, trustees and members and will be welcomed across the industry.”
She said that asset managers can support the objective of the framework by fostering collaborative relationships with DC pension scheme stakeholders to improve member outcomes during the accumulation stage and solve [some issues relating to] retirement income.
She said: “That involves providing access to various investment strategies across alternative or public assets through a value-add approach during the accumulation stage of the members’ journey, as well as flexibility and personalisation for comprehensive retirement planning.”
Chris Cummings, CEO of the Investment Association, said: “I have long said that the DC pensions market should focus on value over cost. This expands the investment opportunities open to schemes. The inclusion of investment as a Value for Money metric in its own right should be helpful.”
He added that value-driven approach to investment could also help the government achieve its agenda to see more DC schemes allocate assets to private markets where it makes sense for investors.
He said: “We have actively contributed to this aim through our work with the FCA to introduce the Long Term Asset Fund (LTAF), providing the foundation for pension funds to benefit from access to private markets.”
Mike Ambery, retirement savings director at Standard Life, part of Phoenix Group, agreed that the framework has the potential to boost long-term returns by encouraging investment in possibly higher-cost, higher-return assets like infrastructure and private equity.
He added that the public red/amber/green rating proposed by the regulator, along with the policy of transferring poor-performing schemes into better ones could 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.
However, the new public rating system creates a risk that schemes will be “so afraid” of an amber rating that they will be more risk-averse, according to Laura Myers, partner and head of DC at LCP.
She said: “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”.
Steve Watson, director of policy & research, at NatWest Cushon said that in order to meet the government’s focus on productive finance, it is important that this framework isn’t “too heavily focused on cost and past performance”.
He said: “If these two metrics carry too much weight, they could inadvertently drive ‘middle of the road’ investment strategies that exclude more expensive assets like unlisted equities.”
He added that to exclude forward-looking performance is a “missed opportunity”.
He said: “To not include them may push schemes away from those productive UK assets the government wants pensions to pursue and again drive pensions towards a middle ground.”
In a press briefing ahead of the consultation launch, Nike Trost, head of asset management and pensions policy at FCA said that the watchdog had been “toying” with the idea of forward-looking metrics versus backward-looking metrics “for some time”.
She said: “We’ve landed on a range of backward looking metrics on the basis that they’re factual, they’re reportable. But we are asking some questions in the paper around what merit there is in terms of adding forward-looking metrics into the mix.”
Trost added that backward-looking metrics were “easier” to obtain.
Nina Blackett, executive director of strategy, policy and analysis at TPR added that the consultation lays out what the concerns are around forward-looking metrics such as gaming.
She said: “But it does invite contributions from the industry as to how can we make this work. I would encourage everyone to really think about that. Forward looking is really important for investment, so how can we do that? Let’s work together to come up with the way to do this best.”
She added that the consultation sets out where the regulator is at now, but the duo is “eager” to have industry contribute its thoughts on that.
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