It is extremely hard to assess VFM in a pension. Press activity naturally focuses on hard, measurable, factors such as charges and investment performance, but the industry has always felt there is more to it. Until this year however no one had managed to define what “more” might entail.
The PPI report suggests a number of softer factors such as governance and communications which should be looked at. The more of these factors that are present, the more likely a positive savings outcome will result.
The report identifies 3 positive outcomes which members can relate to:
Within these themes a number of individual factors can be identified which, where present, are more likely to result in a good outcome:
|Indicators of value||
1 primarily relating to workplace pension schemes
Of course not all of these factors are within the control of the scheme trustees and it could be argued they are not relevant measures of value. Contribution rates are clearly driven by the member (or possibly the employer), however it is likely that the willingness to contribute more in itself reflects an appreciation of the scheme and its features. The fact is that contribution rates makes a greater difference to the overall fund value than charges do, and schemes which encourage higher contributions are likely to achieve the best results.
The first round of annual reports from workplace pensions IGCs were published in March and it was clear that there was no common approach to assessing scheme value. That said, a strong governance report should indicate good value.
For example, in relation to transaction costs Royal London’s IGC found that we met their required principles in every area except one (which is acknowledged to be out with our control).
IGCs are also only obliged to look at workplace pension schemes during the accumulation stage of retirement. That said many of the features considered can be equally applied to individual and post-retirement pensions.
Royal London offers the same basic charging structure across both group and individual pensions, and appropriately targeted investment defaults for accumulation and decumulation stages respectively.
Assessing value for money remains a challenge for both trustees and pension scheme members. Ultimately however, members are looking to generate the maximum possible fund value at retirement and any factors which positively contribute to this are likely to the best outcomes. Charges must of course be fair and transparent but they are not the only, or even one of the most influential, measure of value.
Fiona joined the life and pensions industry in 1989. She is a Fellow of the Personal Finance Society, an Associate of the Chartered Insurance Institute and is currently Vice-President of The Insurance Society of Edinburgh. Fiona specialises in the areas of at retirement planning and pensions and divorce.