Investment performance should be at the heart of value-for-money assessments for defined contribution (DC) pensions, according to The Pensions Regulator (TPR) chair Emma Douglas.
Speaking at the Sackers conference last week, Douglas highlighted growing expectations around value for money and the role of default arrangements in improving member outcomes.
Contributions make the biggest difference to outcomes, followed closely by investment performance net of fees, she said.
“We know that it is contributions that make the most difference to member outcomes – how much you pay in does matter – followed closely by performance net of fees.”
Douglas stressed that past performance is not “necessarily the guide to the future” and said savers would not fully know whether they had been investing in a good default fund until they started taking their money.
Providers typically price within one to five basis points of each other, she said, making differences in investment returns more significant than small differences in charges.
The Value for Money framework puts performance net of fees back at the “heart of the conversation” and includes forward-looking metrics, Douglas said.
“If the framework leads to a 1% improvement in investment returns for the average saver who started saving at 22, it could lead to a 30% bigger pot,” she noted.
TPR and the Financial Conduct Authority (FCA) will ask trustees and independent governance committees (IGCs) to assess themselves against the framework, with the regulators monitoring their responses.
The regulators will also consult on a code of practice setting out how they expect the assessments to be conducted.
Default pensions
TPR will also work to ensure the system has the right defaults, as most members do not make an active choice.
Douglas said: “About 75% of DC pension holders aged over 45 don’t know they have to choose how to take their money at retirement, and face the risk of running out of money in later life.
TPR’s objective of getting more people on track for a secure retirement means ensuring that default pensions are well structured and provide better value for members, she continued.
Trustees should consider factors including housing, health, family circumstances and other sources of wealth, which can influence which default pensions are likely to work best for different groups of members, Douglas said.
“We don’t expect one size to fit all in terms of defaults,” she said, adding that getting members into the right cohort and understanding their circumstances could enable better outcomes.
The benefits of default pensions, including a glidepath that is right for the member, should be available to millions more as the industry enters a “new chapter” for pensions, Douglas concluded.
