VfM (Value for Members)
19th November, 2020
How can you assess the value for members if you don’t know what members value?
Let’s be clear from the outset that providing Value for Money (VfM) is a fundamentally good concept. Early in my career pension contracts were established with up front charges that took off one-third of the investment straight away; others were allowed to structure early encashment penalties of 95% of the fund value. Annuities were the only DC option where providers relied on 80% of their pension savers not using the Open Market Option and applying annuity rates that were 30% below the competitive line. Loyalty was not Royalty, even back then. Quite frankly, it was utterly embarrassing and activity that was never going to lead to good member outcomes.
So, if the objective of VfM is to provide good member outcomes (which in one context is actually code for alleviating the financial pressure on the State with our ageing demographic and in another is just simply the right thing to do), what should be included in a VfM assessment?
We all know of the infamous ‘competition alone’ quote from the Office of Fair Trading (OFT) in 2013, which established a focus on charges, although the OFT didn’t rule out competition. From a higher level we had the January 2015 EIOPA report on costs and charges of Institutions for Occupational Retirement Directives (IORPs). The Department for Work & Pensions (DWP) then introduced a range of charge control measures and governance standards from April 2015, including the charge cap.
The Pensions Regulator (TPR’s) VfM guide quite rightly states that there is no single approach to an assessment of value and it is important to understand what members value as far as possible. Outside of this, the focus is on charges:
- Focus on the value provided for the charges and transaction costs paid by members.
- Include only those services that members pay for, or where members share the cost with the employer.
- Consider the quality and scope of scheme provision as well as the cost.
- Look at how costs, and what is provided for those costs, compares with other options available in the market.
How do you value what the members pay for?
This is not easy to measure. Take the example of Salary Exchange. Technically, this is an employer-only contribution to a workplace pension, so the member hasn’t paid for anything in the pension – the easiest route to proving VfM! The shortest VfM assessment ever! But obviously not the whole story.
What about Salary Exchange where the employer adds some or all of its 13.8% NI saving to the member’s pension? That’s VfM plus! Probably even make a PQM standard.
Or what about an employer that retains the 13.8% employer NI to provide a group Private Medical Insurance arrangement for its workforce? VfM? Absolutely, provided the member values the PMI.
Different sides to the story
This is where we begin to see VfM from the many different angles. The employer is still under the delusion that a workplace pension is an employee benefit; the policymakers need the workplace pension to support the financial strain on the State from our ageing population; some employees see it as an additional tax (thinking that’s what their NI contributions were supposed to be doing); other employees (those that have engaged) see it as part of their personal financial planning, particularly in the transitional and decumulation periods.
VfM is an extremely important issue, highlighted by the current industry activity, including:
- DWP CfE on charge cap;
- DWP working group on small pots;
- DWP Improving outcomes consultation, for <£100m funds to provide VfM is at least equal to a DC Master Trust or wind-up;
- Financial Conduct Authority (FCA) driving VfM;
- FCA working with TPR to define VfM; and
- Possible extension of concept to DB schemes – (https://publications.parliament.uk/pa/cm201719/cmselect/cmworpen/1476/147608.htm)
In addition, the Pensions Policy Institute (PPI) July 2020 report (resolving the cost of deferred-members-final-report, July 2020), which has subsequently influenced DWP’s decision to establish the working group on small pots, suggests that charges are fourth in order of importance in creating good member outcomes. Disappointingly, effective member communications and scheme governance don’t even make it on to the PPI’s list. Conversely, paying in high enough contributions and making a good choice of retirement income vehicle at the point of retirement are not included in TPR’s VfM guide.
Not to be left out, the Association of Consulting Actuaries (ACA) has recently called for a “sharper focus” on value for pension savers, not just costs, warning that the charge cap is a “blunt tool” that will not deliver value for members in isolation. The association emphasised that whilst it “wholly supports” pension savers receiving good value, more attention must be given to improving defined contribution (DC) governance standards, focusing on value rather than just cost.
The DWP’s 2016 Pension Charges Survey found that charges were well below the level of the cap, with average charges between 0.38% and 0.54%, depending on the scheme type. At that time, the DWP concluded that the charge cap was operating as intended. In its 2020 call for evidence on the charge cap, the DWP considers potentially reducing the charge cap but accepts that other factors are at play in delivering VfM. Industry development over the last five years, such as Video SMPIs, apps and interactive forecasts are examples of this and further development should not be restrained. The charge cap therefore really needs to incorporate a budget for research and development (R&D) for the industry to continue to develop VfM.
So, what should be measured in VfM?
- How effective is our workplace pension at being scam proof?
- What’s our evidence of creating good member outcomes?
- What’s our assessment of ESG sustainability?
- What’s our R&D budget for development?
For me, all four would make a good start. Particularly the second one, which is the whole point of VfM, from the member’s perspective, but seems to have been omitted from every list I’ve seen so far, although it is regularly commented on in industry webinars.
My number one, however, is member engagement. You can really only assess value for members if you know what members value.
However, this doesn’t seem as easy to determine as we would all like. Member engagement levels are disappointingly low, although not for the want of trying. The most recent full member survey for one DC Master Trust elicited a 2.5% response, which potentially highlights one of the disadvantages of Automatic Enrolment (AE). If members don’t need to do anything at all during the accumulation period, why would they want to engage?
To help encourage this engagement, the industry has historically provided some of the least exciting support material possible, packed full of industry jargon. Even with some of the more positive recent developments, it is difficult to see where members will get value. The PLSA produced a wonderful template for the Chair Statement, all 17 pages of it! As good as it is, I really can’t see too many members reaching the end. So, should one of our VfM measurements be how many members have read and benefitted from the Chair’s Statement? If less than 5% read it, we agree to scrap it, as it is obviously not providing VfM and add the relevant stats to TPR’s scheme returns?
Engagement is not the same as issuing documentation to members, or telling them where to find scheme information on a website. That’s a monologue where we really need a dialogue. Member engagement creates understanding, ownership and feedback, in order to determine what members value.
Digital platforms will be important to develop member engagement. To engage members, video SMPIs and even video Chair’s statement have begun to be used. SIPs and Implementation Statements could be included but they will need to focus on what is important for the members. Ideally, these videos should have a guest presenter. I really want my SMPI video read by Ozzy Osbourne. This would be so much better than the six or so pages I get each year and subsequently use as a coffee coaster.
From the member’s perspective pension savings are personal. Trustees need to help members take ownership and develop their own personal journey planner, set their target outcomes, integrate with flex benefits, banking finance, financial wellbeing etc. for their life journey.
If we engage with members in a way they can relate to, they will begin to understand their pension savings and be able to identify what adds value. Until members understand what adds value and feedback, we are left trying to guess what they should value based on the asymmetric information argument.
Transition and Decumulation periods
Employees don’t stay in a pension arrangement for the pleasure of having deductions from their pay. Employees stay in a pension because they believe they will get real value from it. Key elements of Value for Member are therefore the Transitional and Decumulation phases. The PPI makes a very good point in its July 2020 report – a good choice of retirement income vehicle is important. Not all DC Master Trusts or GPP arrangements offer all options and some don’t offer any options at all. Importantly, the scammers are aware of this.
For effective member engagement, communications need to be connected with all three phases of pension savings: Accumulation, Transition and Decumulation. The COVID-19 economic impact will push more members in the Transitional phase, prior to full Decumulation. With redundancy and part-time work, members may need to take some pension income, while continuing to contribute when employment is available. This COVID-19 cohort will be a bigger challenge than ever before for providers, Trustees, Independent Governance Committees (IGCs) and the industry.
The Money Purchase Annual Allowance (MPAA) may need a rethink for a while, so that members can repay pension savings they used to support them through the COVID-19economic impact.
Here’s the thing…
Should VfM stand for Value for Money or Value for Member? Rather than get the FCA and TPR together and take the Harry Hill approach (i.e. fight), in a workplace pension, I believe that both are true.
A Hedge Fund Management company does not have the same culture as a Hospice specialising in palliative care for the terminally ill. With so many members of so many different employers, each with their own business culture and ethics, realistically how can a handful of IGC committee members of Trustees’ DC Master Trusts know what all of the members of their pension scheme actually value?
It must, therefore, be a two-way approach. The handful of IGC committee members of Trustees’ DC Master Trusts can only realistically determine Value for Money; the top level assessment of the services provided for the money paid, which I also believe does need to include the employer contribution on the basis that a pension is deferred pay for the employee. However, it is the employer and its pensions committee at the local level that can only realistically determine the Value for Member; the services their employees are actually using (or not) and the value of the supporting member engagement.
Where’s the value?
As mentioned, one disadvantage of AE is that employees can be entirely disconnected with their pension savings until they want to start taking some benefits – the accidental investor, with typically 80% invested in the default fund. Add to this the employer simply shifting its workplace pension to a behemoth arrangement, with no local support for members, it begins to feel like an environment where the workplace pension is a function of compliance with the legislative AE regulations, rather than an employee benefit. The result of which is not a positive Employee Experience (EX).
If an employer is not perceived by its employees to be engaged with the workplace pension, why should the employees bother? From an employee’s perspective, a Master Trust particularly can seem disconnected from a caring employer. Employers may appoint the governance responsibilities to a DC Master Trust or GPP, but it cannot abdicate all of its obligations if it wants its employees to value the benefit. This is a social responsibility for the employer, but it is also a control for the corporate risk issue of employees potentially not having sufficient financial means to retire.
Member engagement starts with employer engagement
The Defined Contribution Investment Forum feels that responsible investment is key to engaging members. However, while this is an important element, I believe the key to engagement in a workplace pension starts with the engagement of the employer.
So, rather than spend money on operating a DC single trust arrangement, the employer’s smart spend is probably to appoint a DC Master Trust or GPP for the operation, governance and high-level Value for Money. Also, why swim against the political tide?
The savings made then seem far better spent on establishing a positive EX at the local level. A positive EX will improve member education, member engagement and elicit the Value for Member, leading to good member outcomes. Where the employer engages members with specific value issues such as responsible investment, the employee connects their workplace pension with their personal circumstances and has the opportunity to make their money matter. With this the employer then also rescues the workplace pension and re-establishes it as an employee benefit.