What is the first thing we all do when we find an item we like when out shopping? We look at the price.
But just because something may be low cost, it doesn't mean we are getting value for money.
I bought a pair of shoes the other week. They were £9, ‘what a bargain’ I thought at the time.
Fast forward a month and they have already split at one of the seams and are effectively useless.
Did I get value out of these? Of course not, but the cost is what enticed me to pick them rather than looking for a pair that may have been slightly more expensive but lasted me a lot longer.
It is the same with people’s pensions; value for members does not necessarily equate to ‘low cost’.
This is something the government and regulators have been working on for a few years now: how to make sure savers are getting value for money with pensions.
The Financial Conduct Authority recently published a consultation on its proposed framework to shift the main focus away from cost and get schemes and savers to focus on overall value.
As part of this, UK pension schemes will be rated on, and made to publicly disclose, investment performance, costs and service quality.
It has always been difficult for providers to know the value their schemes are delivering because comparison across schemes is difficult.
But by focusing on these metrics, schemes are more likely to be measuring the same things and will stop employers making decisions based purely on cost – service and investment performance will play a much bigger role.
Then poorly performing schemes will be required to improve or transfer savers to better schemes.
The government has previously said it expects savers will become more engaged once the value for money framework is in action. Is this likely?
If it is simple enough, I believe so, but is there ever simplicity when it comes to pensions?
Auto-enrolment means the UK has a large number of mainly unengaged pension savers who rely on default strategies to have enough money in retirement.
But I bet most of these could not tell you how well their pension is performing or what they even have in their pot.
Therefore, it will be very important that investment performance is communicated in a way that is easy for auto-enrolment savers to understand. Otherwise they will remain disengaged.
The more people understand something and what good outcomes there could be, the more likely they are to be engaged with it. This is something that needs to be achieved with pensions.
The jargon needs to be stripped right back and people need to be able to easily see what they can expect to earn in retirement and if they are on track.
