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How should we define value?

09/04/2023Topic:  Tag CACEIS Pension Fund

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Consistency is the name of the game when it comes to measuring factors such as value for money. The Department for Work and Pensions, The Pensions Regulator and Financial Conduct Authority are all working together to deliver a consistent regulatory framework, where the same requirements will apply across the whole market to drive consistent and comparable assessments between Defined Contribution (DC) schemes.

It could be argued that a consistent value for money framework should extend across the entire financial service sector, covering pension schemes, asset managers and wealth managers – and applying to all types of pension arrangements. At the end of the day, value for money is there to help consumers and focusing on DC schemes appears too narrowly focused.

The overall aim of this framework is clear: Drive improvements in the value DC schemes provide to members and ensure they receive better retirement outcomes. Furthermore, there is a recognition that the focus needs to shift from costs to value, and there needs to be a more consistent and standardised approach to assessing value for money. Three components of the framework include investment performance, cost and charges and quality of services – driving more consistency across these areas will enable more comparisons across the industry.

There is also a clear acknowledgement that focusing on costs can potentially preclude opportunities to diversify into other asset classes, such as private markets, limit a pension scheme’s ability to drive better risk-adjusted returns and potentially have other unintended consequences, such as reducing the quality of pensions administration We also have to remember that recently, in the Chancellor’s Mansion House Reforms’, there was a clear aim to support expansion of the UK economy by encouraging pension schemes to invest in high growth companies, which will increase costs.

Furthermore, the value for money framework seeks to accelerate consolidation in the DC market if schemes do not meet long-term member outcomes. Investment performance will be a component of this as proposals will require schemes to compare their performance against those delivering economies of scale.

Implementing this new framework will require primary legislation.

However, over the past two years, value for members has been a key topic of conversation during our master trust roundtable events, with focus on what value should look like.

A recap

Some of the requirements and commentary outlined in the new VFM framework are themes that we’ve actively discussed at out master trust roundtables over the past two years. For example, we discussed the drive for lower fees (because of the focus on costs as a factor in determining value) which could potentially drive allocation to passive funds or mandates, putting schemes in a position where they are sacrificing flexibility in their ability to invest in broad, active asset classes or private markets.

Michael Callari - Business Development ManagerThe environmental context is key, which sometimes gets lost in value for money discussions. These practical points are really key to understand. For example, the allocation by pension schemes to private assets has grown in in the last couple of years as they seek to access diversified sources of returns for their members – which is a positive move. However, private assets are more costly and those pension schemes allocating more to this asset class may have seen their total cost of ownership moving upwards. But the outcome they are trying to achieve for members is more diversification, which adds value to members pensions saving.

If we stay on the theme of context and move back to investment, the active strategy component of a pension scheme’s investments is a clear target when it comes to value for money discussions. This was made clear at one of our roundtable discussions “It becomes particularly challenging when active management has not demonstrated value for members – it has not delivered extra return or delivered those returns at lower risk. But it is delivering extra cost. However, the backdrop to this is key – in the last few years, it has been relatively easy to get return through unsophisticated approaches, but we are now entering a new norm and we should see active managers demonstrating value, so there has to be some forward-looking thinking in terms of what value could look like”.

It’s so encouraging to see that the VFM framework now has a focus on investments as a value for money component. This was outlined clearly in the Government’s response to the consultation outcome to the VFM framework. 

Learning from outside of the UK

The Pensions Policy Institute (PPI) has done some great work on looking at value for money regimes outside of the UK.

One conclusion they came to is that “variations in investment have a more significant impact on value for money than charges, but contribution levels and governance are vital to good outcomes”. This means frameworks that look outside of just charges will have a greater impact on value, combined with education and other initiatives, such as additional contributions and stronger governance. In this respect, it’s good to see that the new value for money framework is now incorporating ‘investment’ as one of the factors to determine value.

Another factor from PPI’s research is that scale does not necessarily mean cheaper costs. In their study of cost transparency regimes, once a scale of £0.5bn is reached, the impact on reduced charges is negligible, using data from the Netherlands, until the very largest scheme sizes are reached. 

Asking the opinions of those that count

Do we need to do more work with members in what they perceive as good value for money? Another concept discussed at our master trust roundtable was education in helping members understand the concept of value for money.

Connecting research that has already been conducted with consumers back into value for money is another pathway to explore. For example, the FCA’s recent Financial Lives survey showed that 81% of adults surveyed would like the way their money is invested to do some good as well as provide a financial return. And as consumers become more engaged with climate change, they are likely to expect their pension scheme providers to contribute to positive environment and social outcomes and this might be a factor for them in determining value.

Comparisons against other scheme arrangements

The VFM framework is focused entirely on the DC sector – is more context needed to really define what we mean by value? Should we focus on making comparisons against other retirement savings pathways, such as SIPPS?

Where is sustainability?

More prescriptive metrics around ESG and climate risks are not included in the VFM framework – only guidance. The framework was very clear about the requirement to look at performance and risk, the latter covered by annualised standard deviation and maximum drawdown. However, in today’s environment climate risk factors should be an equally important consideration as annualised standard deviation. Climate risks could have an impact on asset values (and therefore returns) and understanding how pension schemes are managing these risks should form part of the value for money framework.

The data already exists today for pension schemes to understand how much of their portfolio, and to what degree, is exposed to climate risks through carbon emissions reporting.  It’s an area that’s now too big to ignore when looking at risks.

Furthermore, consumers are now more engaged on the topic, and regulators acknowledge the impact of climate risks to the financial system.

As outcomes for DC pension savings are most effected by investment uncertainty and volatility, climate risk has to be an important consideration.

The Value for Money Framework

I’ve summarised the framework below:




Gross returns over 1, 3, 5, 10 and 15 years


Return net of charges over 3, 5, 10 and 15 years

Risk based metrics

Annualised standard deviation and maximum drawdown over 1, 3, 5, 10 and 15 years


Requirement to link performance if strategy has changed – rather than starting from scratch (possibly to hide poor performance)

Asset allocation

Show asset allocation as part of the VFM framework – and outline allocation in their defaults to eight key asset classes (cash, bonds, listed equities, private equity, property, infrastructure, private debt and other).


Encouragement to also report on sub-asset classes (eg UK, Non-UK, Sectors, Long Term Asset Funds)

Forward looking metrics

Further work will be undertaken

Costs and charges

Disclosing costs and charges as an annual percentage charge to enable market-wide comparison

Member communications

Development of standardised member satisfaction survey including potentially ‘the perception of the quality or impact of ESG integration’


Clarify how schemes should measure transaction times. Not benchmarked but make available


Initially decentralised approach to deliver on the aims of transparency and accessibility (each scheme making available their VFM report) but with same reporting periods. Aspiration to work towards centralised way of reporting.

VFM comparisons

Introduce tightly defined criteria for comparisons. When conducting a VFM assessment, comparisons will be required against schemes of sufficient scale to deliver good outcomes. Recognition that regulator-defined benchmarks will take time to develop.

Assessing VFM

Framing of assessments will be key for context. Will review assessments and identify areas of best practice.


Intend to include a metric that captures economies of scale as part of the VFM assessment. Scale allows a scheme to operate with lower running costs, improved governance and to have access to more diverse investments. Larger schemes also have greater financial resilience to withstand economic shocks.


Consider scheme’s ESG approach in comparison with others

Chair statement

Recognition that there will be overlap between the VFM assessment and the chair statement but the two will co-exist for a period of time.

Education remains key

One of the factors raised by the PPI in their discussion paper on ‘what can other countries teach the UK about measuring value for money in pension schemes is education’. They cited that ‘It is possible to have a meaningful discussion with members about what represents VFM in workplace pensions; but to achieve this, it is necessary to deliver some basic education to compensate for wide levels of poor pension understanding’.

Education and context are important as each member will have their own interpretation of value for money and service. This will have to be something that the VFM framework considers developing a standardised member satisfaction survey.

In closing, it’s positive so see the shift away from just costs to other factors when determining value for money. We hold our first ‘Master Trust Working Group in October and value for members is going to be a key topic on our agenda.

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