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How easy will it be to comply with new investment performance reporting requirements?

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31 Aug 2023

The Value for Money framework is a positive step, ensuring pension schemes focus on value, says the PPI’s Daniela Silcock.

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The Value for Money framework is a positive step, ensuring pension schemes focus on value, says the PPI’s Daniela Silcock.

The government and regulator intend to implement a pensions Value for Money (VFM) framework, designed to ensure that members receive better financial outcomes. Investment is part of it; requiring providers to disclose asset allocation and investment performance metrics.

While there has been a mixed reception from industry on the methodology underlying the reporting of investment performance, there is general support for the aims of the VFM framework, to shift focus from cost to value.

But how easy will moves towards the disclosure of investment performance be for defined contribution schemes considering the complications involving data and scheme size?

Data issues have plagued the pensions industry, with pushes towards greater transparency underlying a general dissatisfaction with the data schemes’ produce. The VFM framework requires schemes to provide comparable investment metrics to highlight poorly and positively performing schemes.

However, it is worth delving into the infrastructure within and surrounding schemes to understand how likely it is that valuable data will be forthcoming in a speedy manner.

Personalised data

Pension scheme management and reporting of data is personalised and schemes are not required to produce consistent data that can be easily compared. As a result, the government and the regulator will, over time, set stricter rules about how data must be reported.

While stricter regulations on data will assist comparisons, they will also require schemes to in- vest in changing their internal processes. Looking at other developments occurring alongside the VFM framework – the pensions dashboard and automatic consolidators for small pots – it appears that more uniform data reporting will be increasingly necessary for schemes to allow participation in national arrangements.

This leads me to ask whether a process of requiring increasing levels of uniform data over time, which will require periodic adjustment, is the most practical approach. Alternatively, a larger exercise undertaken jointly by industry and government aimed at developing uniform data collection and reporting standards could ease the path for schemes to participate wholly in VFM framework reporting.

This approach may appear unattractive to the government and regulators as it will require time and resource and could delay the implementation of some ongoing projects.

However, Australia adopted this approach and as a result can easily and cheaply transfer pots and compare scheme performance. Alongside potential issues around data, some schemes may be concerned about appearing unfavourably on a comparison of asset allocation and returns.

Intensive investments

The UK DC market is a mix of schemes, with some still growing, as automatic enrolment was only introduced in 2012. This means that there are schemes which are growing in membership and assets under management that will be in a better position to undertake more complex and resource-intensive investments in a few years.

These schemes may compare unfavourably to their larger peers, though within a few years they may have similar offerings. Those reviewing the data may not have a sufficient understanding to take the impact of policies on previous scheme performance into account.

Underlying the production of comparative data are questions about the end user. Employers choose schemes on behalf of their employees, which means that most pension scheme members have little choice about which scheme they are in.

Therefore, the beneficiary of scheme behaviour, the member, is unlikely to benefit from the provision of comparisons, unless their employer uses them and chooses, or changes, their scheme as a result. Within automatic enrolment so far, scheme choice for many, especially smaller employers, has been based on ease and cost. It may require a further step, involving education with employers and/or employees about how to use and act on comparisons.

The VFM framework is a positive step in ensuring schemes focus on value and is likely to form an infrastructure which will help schemes provide better outcomes. But questions lie in how best to help schemes bridge the gap between where they are and where they would like to be.

Daniela Silcock is head of policy research at the Pensions Policy Institute (PPI).

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