As the defined contribution (DC) sector continues to debate the details of the Value for Money framework, pensions minister Torsten Bell has called for the industry to embrace the overarching aims of the regime to improve outcomes for members.
Speaking at the Pensions UK Annual Conference in Liverpool this week, Bell acknowledged that the proposals were complex but emphasised that this was necessary.
“The question is, can we get to a better place than today?” the minister said. “What matters is what we’re trying to do overall. What are we trying to do that Value for Money can help with, and where are there some trade-offs?”
He said it was “implausible” that Value for Money (VfM) could be implemented without some form of transparency on investment returns, but also acknowledged the risk of “herding” to avoid the VfM regime’s more punitive effects for poor performers.
The minister explained that there were lessons to be learned from Australia’s pension system and other DC systems, particularly around how people and organisations respond to different incentives. He emphasised that this was a key point of discussion between the Department for Work and Pensions (DWP), the Pensions Regulator, and the Financial Conduct Authority.
A DC investment ‘peloton’
However, Bell also said he was “not particularly worried” about the potential for DC schemes to produce similar investment returns through the VfM regime.
“It is a good thing to see a narrowing of the current dispersion in returns… We do want to chop off the bottom of the dispersion. It’s not a good thing to have a very wide distribution of outcomes.”
“It is a good thing to see a narrowing of the current dispersion in returns,” he argued. “To be blunt about it, you do want to chop off the bottom of the dispersion. It’s not a good thing to have a very wide distribution of outcomes. That’s what marks the current UK system out.”
In response to a questioning likening ‘herding’ to a cycling race peloton, Bell said this could be a positive outcome.
“What happens overall if there’s a peloton? The average is faster,” he said. “That is what we’re aiming to achieve.
“We don’t want everyone doing exactly the same thing because people have different members, but also because people should have different views about the right way to deliver the highest returns… It’s true that there [may be] some risk aversion, but at the moment there are some returns that aren’t strong enough.”
Two regulators, one track
Calls to consolidate regulatory regimes have increased in recent years, amplified by the dual regulatory structure overseeing the VfM regime. The Financial Conduct Authority (FCA) has led most consultations, with the Pensions Regulator (TPR) encouraging input from the trust-based section of the industry.
Pensions Expert asked the pensions minister whether this approach could undermine the success of VfM, and what the likelihood was of a future sole regulator for the pensions sector.
On VfM, Bell emphasised that the DWP, FCA and TPR were “absolutely together” on delivering the framework.
“There are not two tracks running different Value for Money processes,” the minister said. “There is one process.
“It’s obviously right that sitting behind it is a different regulatory structure, but in terms of the experience of Value for Money for pension schemes [and] savers, the approach needs to be identical, and I’ve made that very clear with both regulators.
“In fact, I think they are working more closely than they’ve ever done, because everybody agrees that what we care about is good regulation. People don’t know what kind of pension they’re saving into, and so the experience of it needs to be identical across the two regimes.”
However, Bell declined to be drawn on the idea of a future single regulatory regime or authority, emphasising that his priority was the outcomes of the VfM framework.
He added: “I’m focused on making sure, when it comes to guided retirement, Value for Money, the scale test, and all the rest, that I’m providing clarity to the whole industry about outcomes and the experience for savers. I think that’s what people really care about.”
