Value-for-money in non-workplace pensions

A look at the FCA’s recent consultation paper raises the question: is this an opportunity missed to improve governance and value-for-money in non-workplace pensions?

We make pensions very complicated, but at its heart, they are deferred consumption: saving for retirement rather than spending now. A simple equation of money in now and money out later. And this is why value for money is so important.

For DC pensions, value-for-money is the third main driver of outcomes, after the amount of money going in, and the time it has to grow. It is also the key driver that we, as trustees or pension providers, can control.

Value-for-money is about more than costs, of course. There are many drivers of value and they are all important for savers’ retirement outcomes. Just think about the impact that a poor net investment return or an out-of-date de-risking programme could have on retirement benefits, for example.

It is, therefore, no surprise that this is one of two priority workstreams in the TPR and FCA Joint Regulatory Strategy, with a joint discussion paper building on the work of each regulator individually. The latest of these, from the FCA, was CP21/32 on improving outcomes in non-workplace pensions.

Workplace pensions, particularly auto-enrolment schemes, have made enormous strides in improving value-for-money since rules were first introduced in April 2015.

The most obvious intervention, the charge cap, has proved a blunt tool. In reality, competitive pressures have had more impact on reducing costs; most DC schemes moving to master trust are finding terms at less than half the level of the cap.  

Independent Governance Committees (IGCs) and Governance Advisory Arrangements (GAAs) were also introduced in 2015 for FCA-regulated workplace schemes. IGCs have a similar role to trustee boards, to act in the interests of the members and oversee the delivery of value-for-money in the round.

The FCA reviewed IGCs/GAAs in 2020 and, according to a comment in CP21/32, found a “mixed picture” regarding their effectiveness. PTL’s view, having participated in many IGCs and operating a GAA, is that while they could be said to be mixed in approach and output, universally, they have improved outcomes.

It is therefore disappointing that the FCA did not take the opportunity to extend the remit of IGCs and GAAs to help further improve savers’ outcomes in non-workplace pensions at this review. Non-workplace savings represent £470 billion of accumulating pension funds, and the fact that they are personal savings doesn’t make them any less important for savers’ retirement prospects.

Competitive pressures are different for non-workplace pensions, without the same push to reduce costs. There is also much more variety, serving different needs and objectives, which makes any sort of charge cap impractical. Advisers play a role by recommending plans they consider to offer value, but many more plans are now taken without advice. Independent oversight and challenge based solely on the savers’ interests is an obvious solution and this is, of course, what IGCs and GAAs can provide.

Non-workplace savers are also changing. In the past, most of them had an adviser and those that did not tended to be investment savvy, enjoying making their own choices. Now most non-advised savers are worrying over selecting a provider and choosing investment funds, with limited knowledge, and have a tendency to stick with cash. There is also considerable inertia among those who lose the relationship with their adviser.

The FCA’s proposal in CP 21/32 to address this problem is for providers to offer default funds to non-advised savers. Experience from workplace provision suggests that default funds are popular with savers and need good governance structures.

The final part of the picture is the FCA’s drive to put customers’ interests at the heart of everything regulated firms do, in the form of FCA’s strengthened General Consumer Duty and the obligation to provide ‘fair value’. This has the potential to improve value-for-money across the FCA landscape, including non-workplace pensions, if it is rigorously implemented by providers. The FCA may want to see how it beds in and how much it helps the non-workplace value problem before considering additional good-governance measures.

In summary, non-workplace pensions also need strong governance to deliver and improve value for money. Default funds will only go part of the way. In IGCs and GAAs, the FCA has kept in reserve one of the most practical multi-tools in the kit bag. The General Consumer Duty will leave providers with the tricky task of delivering value for money without the benefit of an independent perspective.

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