The terms "value for money" – monitored by IGCs for workplace pensions – and "good value" – assessed by trustees of occupational pensions – are not defined in legislation.
Assessment of "value for money" means many things to many people. Most agree it is not merely about charges, but cannot agree exactly how it is linked to charges.
Surely, it is related to all features and all services received by policyholders and members, and all costs and charges too?
Quality counts – at the time of writing, Cristiano Ronaldo had scored 279 goals in 236 games for Real Madrid. Top hat!
He seemingly beat Bayern Munich on his own this week! All would agree he is a player of the very highest quality.
He wins matches and competitions for his club. But is he "value for money" at the £80m transfer fee in 2009 plus all his wages since? What about netting off the commercial value of shirt sales?
He probably represents overall value for money, but who is to say? It nicely illustrates the dilemma – expensive and cheap players can both be good value or poor value.
This analogy is stretched somewhat – some football clubs seem to have no budgetary limits and some owners will place success above all concept of relative value.
Where the analogy applies is that different clubs need different players.
Sutton United have to find cheaper players than Real Madrid, but as good as they can get within their budget. Whatever their budget, they still beat Leeds United!
So surely "value for money" has a link to costs too? Yet there is a growing tendency to play down the role of charges in this attempt to bring in all features into an assessment.
Some people go further to say that costs and charges are a very small component of the assessment. How can this be? The phrase "value for money" implies the value received FOR the money paid. The words here are a clue.
If I buy a car, the quality of the car counts. What type of car do I want? There are very different types to say the least. But I judge potential cars against their cost. I am not indifferent to the cost.
Into this debate stepped the syndicated research commissioned by 11 Independent Governance Committees (IGCs) last winter and reported upon in many recent IGC annual reports.
This asked policyholders to rank the importance of many features. Levels of charges ranked low – not even in the top 15 most important features.
Care is needed with this research. Some have leapt onto it to support the notion that costs are not a main feature.
Yet the top ranking issue for policyholders was investment returns achieved on their investment funds. Of course, policyholders receive investment returns net of costs and charges so it could be argued that costs and charges were ranked equal first!
With such research, everything rests on the phrasing of the questions. The research also showed that the policyholders had very little knowledge of what charges and costs they are paying.
So this doesn't resolve the debate, although many parts of the research were very interesting.
Other consumer research in other fields shows that aspects such as customer service rank much higher in importance for customers than price. So in pensions, clearly, the quality of all services and features count – they may count for the largest share of value for money – as personified by Cristiano Ronaldo. But costs count too. Finally, if going for high quality, seek the real thing, rather than a poor imitation!
Considering all features is correct but, beyond that, one should assess what features have the most importance or value to the policyholders and members. Engaging with policyholders and members to understand their views on value should be done as far as reasonably practicable.
This is a difficult area for some governance committees, as it is not easy to obtain representative member views. Also, recent research has highlighted a lack of understanding of pensions by most policyholders and members – do they know what they are evaluating?
We need to be honest here – in the main they do not.
In short, a drive to consider all features on one side of the equation cannot be at the expense of cost on the other.
This blog first appeared in Pension Funds Insider. To continue reading, please click here.