Pensions
Henry Tapper, chief executive officer of AgeWage , says things are about to change Value for money
G etting value from pension spend is a theme I return to regularly but most employers are no clearer on the answer than they were when I started asking seven years ago. For most employers, the regular pension contribution is just another compliance cost. Since the outcomes of the investment into workplace pensions may be forty years away, what is going on now at the National Employment Savings Trust (NEST) or Legal & General (L&G) or any other workplace pension is secondary to the smooth running of the pension interface and the maximisation of any efficiencies that can be gleaned from salary sacrifice or the tax status of the contribution structure (net pay v relief at source). Unless you, as an organisation, run your own scheme, the capacity to do much about what is going on at any workplace pension is limited. However, things are likely to change with initiatives from the pension regulators and especially the Financial Conduct Authority (FCA). Plans are afoot to provide pension information to employers about the value for money they are receiving from their pension provider relative to comparable schemes. So far, it is only the independent governance committees of the insurance companies which run workplace pensions that look likely to be charged with this work, but moves are afoot to align the Pensions Regulator (TPR) which looks after master trusts. If you are in a master trust and have your own special
terms and/or funds, you will find your scheme will be benchmarked against others to ensure you are getting value for money. In the consultation paper Driving value for money in pensions (https:// bit.ly/2BMzgQC), the FCA argues (see Annex 2.6) that “the combination of the complexity of pensions products and the misalignment of incentives for employers means that the demand side of the market for workplace pensions is weak. There is limited incentive for firms to ensure that their products provide value for money for their members”. Savers have it hard, too. The FCA continues (see Annex 2.7) with “If an employee is unhappy with their workplace pension scheme, they have little option other than to continue to make contributions to the scheme, opt out and keep their pension saving in the scheme or opt out and transfer their pension saving to a new scheme”. Of course, savers do not get the option to choose their workplace pension, but they do get the option to bring pension pots together. Recent research by the Financial Times suggests that many consumers are being advised to move out of good value workplace pensions into poor value SIPPs (self-invested personal pensions) because they are not receiving advice to stay. Since fiduciaries cannot give advice, clear information on value for money is considered the next best thing. So how do we define value for money? The FCA has a rather clumsy definition: “The administration charges and transaction costs borne by relevant
policyholders or pathway investors are likely to represent value for money where the combination of the charges and costs and the investment performance and services are appropriate” (see section 4.14). Even for a simple scheme like NEST, an employer’s ‘administration charges’ might include a lot that staff don’t see including payroll and consultancy costs. Add these to all the costs that impact a member’s pot and it’s possible to work out the ‘money’ side of things. The ‘value’ of the workplace pension could be measured either by intangibles such as the ‘quality of service’ that the employer and members get or by the outcomes of the investment of contributions. Whatever the basis of calculating value for money, it is clearly a task for experts and primarily the calculation needs to be data driven. It also needs to be consistently applied (if benchmarking is to work). This is why independence is so important and why the FCA and TPR are so hot on good governance. If value for money is to mean anything, it needs to come out of an independent assessment of what an employer is receiving. Happily, we have a well-developed system of governance in this country which is capable of delivering independent governance not just at a macro level on a pension provider but to the granularity of individual schemes within a multi- employer framework. In this the UK are uniquely placed, and members of the CIPP can look forward to being empowered to properly understand the value for money they get from their pension provider. Let’s hope that CIPP members rise to the challenge and exert their right to get to know their workplace pension. n
...clearly a task for experts and primarily the calculation needs to be data driven.
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| Professional in Payroll, Pensions and Reward |
Issue 63 | September 2020
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