I was interested to read about the Department for Work and Pensions (DWP), The Pension Regulator (TPR) and the Financial Conduct Authority’s joint consultation on value for money in the pensions market.
Apparently it seeks to gather views and evidence on the metrics, standards and public disclosure of data required under the proposed value for money framework.
I have no idea what this framework is or how it links to the previously announced FCA research into drawdown or the Consumer Duty.
The DWP, TPR, FCA and likely at least one firm of consultants. What could possibly go wrong?
FCA executive director of markets Sarah Pritchard says the proposals will help ensure schemes deliver against value for money in the round and that “transparent and consistent disclosure of the key elements of value for money will better identify underperforming schemes. We know that most workplace savers don’t engage with their pension and must trust the system to deliver value for them.”
That doesn’t make a lot of sense to me.
She also says: “This new value for money framework will help shift the focus of competition away from short-term cost to long term value for savers, and ultimately better retirement outcomes. It will encourage schemes and providers to take a longer-term view on the types of investment they build into their default designs.”
I have no idea what this means either.
Anyway, the DWP, TPR, FCA and likely at least one firm of consultants. What could possibly go wrong?
Most regulators always confuse value with price
The consultation has already started and is planned to be completed by the end of March.
I won’t be surprised if it is much later than that we get to hear about the findings. And I will be astonished if the conclusions are not mostly negative. Why? Because most regulators always confuse value with price. And, in my experience, they are very sceptical when it comes to the professionalism of advisers.
Having said that, when they take aim at pensions drawdown, they will be shooting at an open goal. Forgive me for these very simple broad-brush numbers…
Let’s take a 65-year-old with a £1m pot going into drawdown. Their adviser has suggested, given their risk profile, it would be reasonable to aim for an income of £40,000 gross.
The portfolio will be based on active funds, managed by a discretionary fund manager (DFM), and will involve an ongoing service to ensure it remains appropriate.
The example does not reflect the importance of a trusted adviser relationship but it frees up about £17,000 per annum
The charges for this service include the Oeic costs, the adviser’s platform costs, the DFM fees and the adviser’s service fees.
The “value for money” team will look at this model and conclude the total annual costs to the clients are around 2% or – to be blunt – £20,000.
By any standards, that is serious money. But, of course, the clients are getting regular reviews and access to financial planners if and when required.
The team might then look at some alternative investment solutions for this example client. How about investing the £1m into a Vanguard 80/20 Life Strategy fund with an ongoing charges figure of 22 basis points, costing the investor £2,200 each year? No DFM fees. No platform fees. No adviser fees. If the client needs some financial planning advice, they can pay a fee of around £200 hour to get it.
I appreciate this example does not reflect the importance of a trusted adviser relationship but it frees up about £17,000 per annum. Again, serious money.
And, of course, a professional and competent adviser could outperform the Vanguard or other low-cost proposition. But it might be necessary to demonstrate when thinking about propositions in the new world of Consumer Duty.
Malcolm Kerr is an independent consultant
“Most workplace pensions are not engaged with by the investors’. Surely Education, education, education is a better resolution than looking at ‘price/value’.
What happened to ‘Consumer Duty rules’?
Why bother with Vanguard and their 22 basis points Malcolm? The client could in principle do everything self-service and not pay a third party for anything. Advisers, fund managers and their combined fees ARE a significant expense and they MUST be justified in terms of ALL the value they add, or fail to. The only relevant tests are the subjective ones applicable to individual client situations and outcomes. More general ‘objective’ testing is as ineffectual in this area as the sweeping statements too often made in favour of either ‘passive’ and ‘active’ investment. As you so rightly observe, the FCA will confuse ‘value’ with ‘cheap’.
WTAF was the point of this article?
‘If the client needs some financial planning advice, they can pay a fee of around £200 per hour to get it’
Not if they come to my door! Take on a lifetime of unlimited liability and career risk in exchange for a few hundred quid? I’ll pass if you don’t mind.
More clueless theorising from another non-practitioner.