Regulators want to make it easier for us to see if we are receiving value for money from our pensions.
Getting value for money is a crucial consideration for any pension saver.
We want to be confident that once we eventually give up work, we will have enough money to tide us over, and that means putting an awful lot of responsibility on the shoulders of the people running our pension investments.
I need to have faith that the money I’m paying those investment heads will be rewarded in the form of a decent return on those investments so that I can enjoy some level of comfort in my old age.
There remain huge questions over how we measure that value for money though, and how pension savers can make more informed decisions about precisely who to trust with their pots.
And that’s why the financial regulator, the Financial Conduct Authority (FCA), and the Pensions Regulator (TPR) have published plans to develop a uniform framework for measuring value for money from defined contribution pension schemes.
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What represents value for money?
Of course, value for money is a pretty vague term, open to interpretation. The two bodies want to see pension firms publishing data in a uniform way covering:
- Investment performance;
- Scheme oversight (including data quality and communications);
- Costs and charges.
In effect, for the regulators, a well-run scheme is one that delivers a good investment performance, where the returns aren’t eroded away by excessive costs and charges.
The idea is that this common framework will make it easier for different schemes to be compared so that savers and trustees alike have a clearer picture of how the money is performing.
Inevitably, this isn’t going to be a quick process either. The two bodies have invited industry feedback by Christmas, and will publish a statement setting out the next steps in 2022.
What can I control?
Focusing on costs and charges makes sense for the regulators.
As Tom Selby, head of retirement policy at AJ Bell points out, while there are plenty of elements to a pension that are out of your control ‒ like the performance of the individual investments and how the scheme communicates with savers ‒ the amount that we pay in charges is something that we have some control over.
If we don’t like the charges a scheme levies, then we can move to a rival pension.
After all, those charges can make a big difference to the size of an eventual pot. Selby gives the example of two basic-rate taxpayers who each pay £2,000 a year into a pension, enjoying 4% per annum returns.
One saver pays 1% in charges, and the other pays 0.5% ‒ that difference might seem marginal, but over 30 years of saving it amounts to a £10,000 boost to a pension pot.
Does being cheap equal value for money?
It isn’t quite as straightforward as simply focusing on costs and charges though. Ultimately there’s more to delivering value for money than simply being cheap.
After all, paying a tiny fee for your investments doesn’t count for much if their performance is subpar. Equally, a rival fund may have charges that on the face of it look expensive. But if they are generating substantially higher returns than rivals, then surely that extra money is worth it?
Equally, there are other factors to a pension beyond the pure performance that will make a difference.
Some investors will put a premium on the quality of the communication they receive from the pension scheme, so that they are kept informed about exactly how their money is being handled.
As Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown points out: “Good customer service can prevent someone from moving products by pointing out that they stand to lose out on a valuable benefit they may not have been aware of – for instance a guaranteed annuity rate.
"Similarly, reminding someone to fill in beneficiary nomination forms can bring valuable peace of mind and many scheme members would see such interventions as crucial in their view of whether they receive value for money.”
Ultimately, as with most areas of finance, there is more to think about than simply the headline price.
Engaging with our pensions
One of the reasons that the government had to introduce the workplace pension scheme was that people weren’t already saving for their retirement. And that is in no small part down to the fact that many people find the whole process utterly mystifying.
Making it easier to compare schemes on a like-for-like basis on things like the charges you’ll face and the performance track record is one way to make the pensions world a little less bewildering.
However, there’s also an important role to be played by us as individual savers. It can be very easy to just ignore our pensions ‒ I know I’m paying into it, and in a few decades there will be a pot of cash I can use to pay for my life in retirement.
But this lack of engagement only increases the risk that we will be left with less than we really need once we give up work.
If we take a more proactive role in tracking how our pension is performing, then we are better placed to move when those pensions aren’t performing.