Can riskier assets and performance tables get 'better value' for savers from UK's pension schemes?

Pensions savers stand to benefit from a new proposed framework ‘designed to shift the focus from costs to long term value’, the Financial Conduct Authority has said.

Together with the Department for Work and Pensions and the Pensions Regulator, the FCA has proposed a joint framework for workplace defined contribution schemes that will ‘provide greater transparency over how schemes are performing’ and ‘demonstrate value – not just costs and charges, but also investment performance, and service quality’. The FCA added: ‘This should lead to better value pensions, without savers themselves having to take action.’

Adrian Lowery, Financial Analyst at wealth management firm Evelyn Partners, says:

“It would be a welcome move to introduce greater transparency into workplace pension performance and it looks like a broadly positive initiative, but there are a number of considerations. That pension savers want ‘long-term value’ is not in doubt but it might prove tricky to measure and compare schemes on that basis.

“Defined contribution schemes are generally run by a pensions provider that is often a large insurer or asset manager. When employees are inducted into the scheme there will be a default option but usually members will be prompted to choose whether they want to be in a plain multi-asset fund, or a ‘target date’ fund or ‘lifestyling’ type of arrangement where the asset mix and risk profile evolves over time to become more conservative. The saver can also make their own single or multiple fund choices.

“It’s the funds that perform not the scheme, so how to judge ‘scheme performance’ in a way that is meaningful for savers? All schemes tend to have some funds that are labelled ‘Pension’, but that is probably not a sound basis for comparison. Comparing the performance of target date or lifestyling options between different schemes could be a complex task, but presumably the FCA thinks it is feasible. The FCA probably has in mind for multi-asset funds the sort of comparison that is already used across non-pension investment funds, where categories are based on the proportion of a fund that is in equities versus bonds.

“But I suspect the real driver of different savers’ pension performance is which fund(s) they choose, and how they manage their investments over time, not which provider runs their scheme. Which is probably why schemes have traditionally been judged on cost and fund choice, rather than on ‘performance’.

“It is a regulatory requirement to constantly remind people that past performance is not a guide to future returns, and this should be born in mind when considering any investment return league tables. Further research or advice is usually necessary. And given moves to encourage schemes to investment more in unquoted companies and infrastructure, future returns and potentially costs could differ significantly from the past.

“The FCA proposal comes alongside the Chancellor’s drive to get pension schemes to invest more in a range of private capital assets, such as infrastructure, private equity and early stage growth companies. As it is generally more expensive to invest in assets like this compared to ‘mainstream’ equities and bonds, funds that devote a proportion to private capital generally charge higher fees. How members’ savings would be funnelled towards such assets isn’t clear, and neither is it guaranteed that this higher-cost approach to asset allocation would generate higher returns.

“While we wait to see how the various Government and regulatory plans for workplace pensions play out, there’s a relatively simple message for the UK’s savers - particularly those who have accumulated a number of pots.

“One, check your pensions to make sure they are invested in a way that suits your age, or distance away from retirement, and your risk tolerance. Two, consider whether you can do some consolidation. Three, if you’re not sure about either of these consider taking advice from a good financial planner.”

ENDS

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