Research reveals 'useful lessons' for UK in developing VFM DC pension strategy

The UK could learn "useful lessons" on the most effective way to target a value for money (VFM) strategy for defined contribution (DC) pension schemes, the Pensions Policy Institute (PPI) has suggested.

The report, which was sponsored by The Pensions Regulator (TPR), considered UK VFM practice against the context of recent developments in five other countries: New Zealand, the Netherlands, Australia, Sweden and the USA.

It found that a clear statement of and a consensus around the outcomes sought in assessing VFM were a “necessary precondition to effecting positive change in which outcomes are expressed from members’ viewpoints as things that they value”.

It also suggested that setting clear, measurable and comparative standards and benchmarks for performance in the key areas, such as investment, administration and engagement, could deliver a more effective tendering process in relation to VFM, as seen in the re-tendering process for default Kiwisaver providers in New Zealand.

In addition to this, the report identified publicly available, consistent and robust comparative data as a "cornerstone" and "vital starting point" for authoritative VFM assessments and broader market context.

However, the evidence suggested that this would require a "trusted regulatory framework to facilitate".

The report also argued that consistently positive real investment returns, within appropriate volatility parameters, are the “most significant driver” in terms of VFM in terms of net returns.

Despite this, outcomes for savers in terms of meeting target income levels were most influenced by the level of contributions made.

Whilst the benefit of scale in cutting costs was highlighted in the research, it also revealed that diminishing returns typically set in at around £500m, as seen in the experience in the Netherlands and USA.

Commenting on the findings, PPI head of policy research, Daniela Silcock, said: “The different approaches that countries have taken to providing VFM in pension schemes has allowed us to draw out useful lessons for the most effective way to target a UK VFM strategy.

“Key elements of infrastructure which support VFM frameworks internationally include: consensus between all relevant parties (for example, government, industry and employers); clear, measurable standards and benchmarks for performance; and, publicly available comparative data.

“In relation to scheme behaviour, consistently positive, real investment returns, generated the most significant VFM outcomes, though retirement income levels are most influenced ultimately by the level of contributions members and their employers make.

“Interestingly, in relation to external factors, while increases in scheme size have a positive impact on VFM, this scale effect can diminish once schemes reach a certain size, though as schemes grow, they gain access to a wider range of investment opportunities.

“Underlying all of these factors is the need for good governance which sets and monitors the delivery of services to schemes and their members.

“These findings suggest that a UK VFM framework could include an overarching focus on governance and the way it relates to: investment performance, member engagement; administration; and, costs and charges.”

Adding to this, TPR executive director of regulatory policy, analysis and advice, David Fairs, said: “Putting savers at the heart of what we do and ensuring that all savers get good value for their money is a key regulatory priority for TPR.

“As we jointly develop a common framework for assessing VFM with the Financial Conduct Authority, this comprehensive analysis of how other countries try and deliver value is very welcome.

“Reading the report, it’s clear that investment performance, scheme oversight and customer support as well as costs and charges are essential components of any holistic assessment of value.

“We’re seeking views on all of these areas through our discussion paper and we’d encourage the industry to have its say now before the 10 December deadline.”

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