Criterion's Nick Green provides his thoughts on the FCA's CP20/9: Driving value for money in pensions consultation.
I enjoyed last month’s ABI conference on future-proofing pension freedoms. In his talk, the FCA’s Sheldon Mills namechecked their consultation on value for money in pensions. With final rules due early next year, this is one that Criterion as a leading independent and not-for-profit Standards body is watching with particular interest.
Our interest is partly because of the impact it could have on key markets served by our stakeholders. But it’s also because the FCA intends to achieve the seemingly impossible: standardising something that is inherently subjective. Value for money is not just about price, and means different things to different people at different times – and that is something that makes defining standards really, really hard.
To its credit, the FCA seems to recognise this in its consultation, which proposes three measures of value for money: investment performance, service, and charges. It's instructive to look at these elements through the lens of other highly regulated, consumer-facing markets that have similar value measures; for instance, cars.
Which car is best?
Get any three petrolheads together and they will try at length to determine, once and for all, Which Car Is Best. (I make no excuse, incidentally, for using cars as an example here: surely there can be few markets worldwide subject to so much regulation but that yield so much customer choice.)
"Performance!" says the Ariel Atom owner. "Nothing is more important than performance! My car gets from zero to sixty in 0.3 seconds less than any other car I've driven. That means it is - objectively - at least 0.3 seconds better than anything you drive."
"Ah," says the Bentley Continental owner. "Performance is important; but it's not just about how quickly you get there. I want to travel in comfort and style, too. I am happy to trade those 0.3 seconds - maybe more - for little luxuries like carpets. And air conditioning. And, you know, doors and a roof."
"You are both idiots," says the Kia Picanto owner. "There's no guarantee that road conditions will ever let you exploit that Atom's performance, nor that half the toys on the Bentley won't be broken within a year. The only thing you can control are your set-up and running costs. My car cost buttons, runs on fumes and is under warranty for 7 years. Checkmate."
And so on, and so on. Of course, all these owners are right; or, rather, none of them are, which is why cars like the Ford Fiesta or the BMW 3 Series outsell any of these cars many times over. Those high-selling vehicles represent a compromise of the three characteristics in question, rather than the pursuit of any one of them to a logical extreme.
As a Standards body, we wrestle this with on a daily basis: how to get common agreement on apparently simple concepts that, on closer inspection, mean very different things to different observers. Sometimes the right approach is to find a compromise that works well enough for most people, most of the time, as with our Quotes and New Business messages for Annuities, which meets the needs of both generalist providers and also the Enhanced market. But sometimes the solution needs to reflect a fundamental incompatibility of underlying concepts, as we needed to do with valuation data, now supported by at single-contract level by Contract Enquiry and at book level by Bulk Valuation.
What might this mean for Value For Money?
The FCA proposes ‘to introduce an explicit definition of VfM.' - which sounds like it might offer an objective way of determining, once and for all, Which Pension Is Best. But even if it doesn’t achieve that – and can you imagine if it did? – it will surely define the parameters within which any credible, mainstream pension solution will be expected to operate, and what the compromises that are reasonable.
The potential impact on market dynamics of such a definition could be huge, both immediately and into the long term. Again, the car market might offer insights. Laws and regulation (licensing, taxation, carbon emissions, speed limits etc) define the sweet spot for mainstream vehicles, and do so with such precision that some manufacturers compete with themselves in that space. Volkswagen’s Passat is pitched against sister companies’ Audi A4 and Skoda Superb, and Renault’s Kadjar is nothing more than sister company Nissan’s Qashqai in a hat. It’s also worth noting that such definitions and associated enforcement procedures can yield tempting illicit transgressions. Yes, I’m looking at you, Volkswagen.
But that’s for the future. Right now, all eyes are on outcomes from the FCA’s consultation; and, as an exercise in standardisation, that will be absolutely fascinating.