Pensions people value: Government can “go further”
London, 22 February 2023
Part of the government’s current series of consultations aimed at improving defined contribution (DC) member outcomes involves designing a Value for Money framework to allow industry professionals and pension savers to compare DC pension schemes more easily. While Mercer, a global consultancy that delivers health, wealth and career solutions, supports the government’s ideas for the framework, it believes there are areas where the government could go further.
“We support the idea of a harmonised Value for Money framework and in particular, how that would give schemes a clear pass or fail,” said Gail Philippart, Partner and UK DC Consulting Leader at Mercer. “This makes it very clear to those governing schemes whether urgent action needs to be taken.
“While comparison with at least three other schemes’ investment returns is being suggested as a possible approach, we support the proposal in not just using investment return league tables. Comparison tables may lead to herding of investment strategies (as we have seen in different countries) and potentially, stifle innovation.
“Disclosure of administration and investment costs separately is a big step forward for transparency, allowing the proper assessment of providers in their role within DC pension provision.”
Despite the text of the consultation implying otherwise, Ms Philippart remarked that the title of ‘Value for Money’ suggested a renewed emphasis on costs. “We believe the new framework should support and require the delivery of higher quality, member-focused outcomes which represent good overall value rather than considering cost in isolation.”
Ms Philippart added that the framework lacked two elements that may lead to improvement of member outcomes.
“There is currently no link between investment targets and member outcomes in the proposed framework,” said Ms Philippart. “We believe there should be stronger focus on how the investment return targets are delivering targeted good member outcomes and not a simple cash or inflation plus target.
“Additionally, sustainability does not feature strongly. Both in the ESG sense and in the sense of the pension scheme continuing to be good quality and supported into the future (apart from the future investment return).
“Mercer research conducted in January 2023 indicates that circa 45 percent of DC schemes do not have ESG considerations incorporated into their defaults. We believe sustainability factors should be included in the Value for Money framework, as in general, people are happy to pay more for things if they are better quality or will last longer.”