Graeme Bold
Workplace Pensions Director.
Value for money consultation response
In an effort to deliver good outcomes for those saving for retirement, the government has set out a framework of metrics and standards to assess value for money across Defined Contribution (DC) schemes.1 Scottish Widows had the opportunity to respond to the consultation, and we’re supportive of the aims to improve governance and transparency to enable better outcomes for members. In particular, we’re supportive of the desire to determine the value of a pension scheme beyond just cost, by considering all factors that are likely to drive outcomes at retirement.
Although supportive of greater transparency and standardisation of reporting across the DC pension market, we have a few concerns. An emerging area of harm which DC pension savers are increasingly exposed to is at the point of pot consolidation, where the marketing of individual Personal Pensions and SIPPs encourages people to consolidate into pots which bear charges that can significantly exceed the charge cap applying to default investment options in Workplace Pensions. These can also contain exit penalties to discourage customers from leaving when they discover the impact of high charges.
We believe that it’s important that members are able to compare all factors which are likely to drive good outcomes at retirement, before they make critical decisions in relation to pot consolidation.
We are conscious of the government agenda to drive scheme consolidation, through greater governance and transparency. However, it’s critical to note that measures, such as short-term comparison of investment performance, which may drive scheme consolidation most aggressively could introduce new and significant risks to scheme member outcomes, including herding, sub-optimal investment strategies and concentration risk.
However, measures which do the most to reduce customer harm and improve scheme member outcomes, including the sharing of best practice and a focus on pot consolidation, are unlikely to drive an accelerated period of scheme consolidation. Clarity on the government’s final goals and metrics will be needed to properly assess the costs relative to the benefits.
Ultimately, a regime which requires those who are responsible for the design, operation and outcomes of workplace pension schemes to benchmark the value they offer to members, would lead to better customer outcomes.
Notes to Editor
[1] According to gov.uk, Value for Money: A framework of metrics, standards and disclosures.