Responding to the Department for Work and Pensions’ consultation on improving outcomes for members of DC pension schemes, Nest highlighted the importance of including risk in any assessment of performance.
Value is a multifaceted concept in pensions and headline investment performance does not in and of itself demonstrate value for money. Focusing on absolute returns, even when reported net, could even be counterproductive to interpreting value for money. A measure of the level of risk being taken to achieve performance – risk adjusted return – gives a much richer picture. Without this two-dimensional view there is a significant danger that schemes could chase short-term performance to the detriment of long-term member outcomes.
Automatic enrolment (AE) has brought millions of people into pensions savings, many for the first time, and the majority of automatically enrolled savers are not engaged with their pension. Research with Nest’s members shows an outcomes-based definition of value does not necessarily correspond to what customers are drawn to when they try to make sense of their pensions. It is critical the regulatory environment continues to protect consumers from the information asymmetries and behavioural biases they encounter in relation to pensions.
Commenting on Nest’s response, Mark Rowlands, Director of Customer Engagement, said:
‘Understanding how pension schemes deliver value for their members is one of the critical questions in pension saving, and the DWP is right to ask all schemes to consider how they can assess and express this for their members. Research shows that simply giving people more information isn’t the answer.
‘While investment performance is important, most savers are not engaged with their pension and research with Nest’s members show many are not even aware their pension is invested at all. For many, the idea of losing money is catastrophic as they equate pensions with stability and security. It is therefore vital any measure of value does not overly focus on headline returns that may inadvertently incentivise savers to take more risk than they’d be comfortable with. Investment performance metrics must also drive the right behaviours by schemes. Without a two-dimensional focus on the risk being taken to achieve performance, there is a significant danger that schemes could chase short-term performance to the detriment of long-term member outcomes.
‘The principle of value for money should also be applied to DC-DC pension transfers. Every month we pay out more than £1m to pension schemes with higher charges than Nest. Technology is making the transfer journey easier, but many savers could be transferring their pots without much evaluation of whether this is in their best interests. New regulation should be introduced which adds an element of friction into the process to slow decision making in certain important areas like pension transfers and fund switches.
‘Growing numbers of automatically enrolled savers are depending on well-governed schemes to provide good value for money for their retirement outcomes. Decisions around pensions are complex, and small changes can have long term impacts.’
The consultation from the Department for Work and Pensions closes on Friday 30 October.