We’re expecting an update on the Value for Money framework in the upcoming pensions bill, alongside many other things…
Put simply, the Value for Money framework is about focusing on net returns and not just costs. It’s simple, right? The Government sees that Master Trusts are competing on cost – if you charge above 0.4% of AUM (assets under management) you’re not competitive. So, the Government is introducing a network of metrics with the overall aim of shifting to an outcome-based focus, i.e. “what’s the sum total of charges, returns and behaviour?”
We all know where the low-cost culture came from. Prior to automatic enrolment, a 1% member charge was considered low. Remember stakeholder schemes with the revolutionary 1.5% maximum charge for the first ten years and then 1% thereafter?
In 2015, the Government set a member charge cap for auto-enrolment scheme default funds of 0.75% of AUM, thinking that wouldn’t be too dramatic a drop from 1%. But it also set a real precedent with its discourse. Cost is key, and the auto-enrolment target group cannot tolerate high charges! Here are some quotes from DWP’s 2014 White Paper Better workplace pensions: Further measures for savers:
“…in a marketplace where members do not choose their workplace scheme and are defaulted into a fund, charging practices may need to change.”
“… the principal-agent problem – where the member doesn’t choose their workplace scheme [is] supported by evidence of high and unfair charges”
“Many employers are unaware of the level of their scheme’s charges and the impact that these have on the retirement income of their employees.”
Unsurprisingly, new schemes and the infrastructure surrounding these set out to offer the lowest cost options available. If low charges are good, then lower charges must be better, right?
So here we are, 10 million plus new savers and 13 years of automatic enrolment later, trying to change the culture. Government and industry agree that investing in illiquid assets and infrastructure will improve portfolios. Net-zero and climate-change friendly investing has become a major priority. And I don’t think anyone would argue against the idea that net returns are more important than charges on their own. But, changing a culture is harder than anyone realised. It’s not just scheme behaviour we are tackling; advisers and investment platforms are set up to respond to demand for cheap assets with high return potential. Even employers, who are not privy to our nuanced pension debates, are generally choosing based on cost.
I think that Master Trusts are waiting to see who will move first. If one scheme takes the leap and increases costs and no one follows suit, will that scheme lose a sizeable amount of business? What if it increases charges and still doesn’t get an increased return? I don’t think we can underestimate how hard it is to change an entire investment culture.
It’s a bit of a catch-22. Regulation is pushing one way and business another. We can’t exactly set a charge minimum… so I’m not at all sure what the answer is.
No one is at fault here; everyone was acting in what they thought was the best interest of savers. But unless we find some way of breaking the impasse, it will be a long road to change.
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