The Department for Work & Pensions (DWP), Financial Conduct Authority (FCA), and The Pensions Regulator published the Value for Money (VfM) framework published today – the first industry-wide regulations that will apply to all workplace pension schemes.
This revised framework addresses a number of key concerns raised by the industry during the consultation stage, particularly in relation to the potentially ‘overwhelming’ number of data points assessed and prioritising investment performance and service quality as key metrics. The government and regulators have also addressed concerns related to employer subsidies.
The VfM framework will require pension schemes to assess scheme performance across investment performance, costs and charges and quality of services. In a joint statement the DWP, FCA and TPR emphasised that those who fail to demonstrate value for money using these new metrics will be subject to appropriate measures or actions.
This follows comments by the chancellor Jeremy Hunt in last night’s Mansion House speech that schemes that do not deliver good outcomes for members will be closed down.
A full timetable for implementation has yet to be announced, as this will require primary and secondary legislation. However the government confirmed this framework will initially only apply to default arrangements.
A joint forward – issued by Mel Stride, the secretary of State for the DWP, Laura Trott minister for pensions Louise Davey, director of regulatory policy, analysis and advice, at TPR and Sarah Pritchard, executive director of markets at the FCA – said this new framework will for the first time ensure there is a “a clear set of comparable metrics and standards for schemes to assess value for money.”
It adds: “Our joint work to create a disclosure framework for the holistic assessment of value for money is key to making this a reality. It means that the same requirements will apply across the whole DC market enabling consistent and comparable assessments regardless of the type of scheme a workplace pension saver is in.
“This will improve the availability and transparency of standardised scheme data, enabling trustees, providers, IGCs, employers and the people who advise them with the information they need to ensure savers are getting the best possible value. We will not hesitate to take action against consistent underperformance, and we will require schemes to discontinue or consolidate to a better run, better performing, value for money scheme.”
Industry leaders welcomed this publication of this framework, and the fact it responded to industry feedback. prioritising investment performance and service quality and reducing the potentially overwhelming amount of return data.
However the Pensions and Lifetimes Savings Association said it had previously raised concerns about the volume of proposed disclosures and was pleased to see this had been simplified. However the PLSA adds it was “disappointed” that decumulation offerings and non-workplace schemes remain outside the scope of this framework. “We have highlighted before that members can often be vulnerable to marketing for transfers from workplace schemes to considerably higher-charging consolidators, so these products need to be within scope if we are seeking a comparison across the whole DC market.”
It added that as the DWP has highlighted elsewhere decimation propositions vary considerable across the market. “Given the detrimental effect that poor or no support can have, we would like to see this included in VFM assessments.”
Aegon also welcomed the decision to simplify the volume of data being used to assess whether a scheme was delivering value for money for member.
Aegon UK head pensions Kate Smith says: “We support the concept of a value for money framework, applying across the whole defined contribution pensions market, as it will allow greater transparency and comparability.
“We believe the right approach is to start small, focusing on the key data sets that are of the most importance to deliver value for money and improve member outcomes. We welcome the clear signs that the government has listened to the pension industry’s concerns and cut back on the potentially 100s or even 1,000s of data points. These risked swamping decision-makers with data, risking losing sight of key messages, with little practical value in improving member outcomes. Starting with gross rather than net of all costs and charges is helpful.
“Greater standardisation of data will help comparability, but it’s important that the framework isn’t overly prescriptive, and that trustees and governance committees are able to use their experience and expertise to supplement hard data to determine value for money. Context will be key.”
She adds: “We are also supportive of a phased approach to delivery of the value for money framework over several years, although a timetable has yet to be published. The government and regulators have confirmed that phase 1 focuses purely on default arrangements. We also support the initial audiences being primarily trustees, Independent Governance Committees, providers and advisers. Some employers may also take an interest, but we agree the framework is not currently appropriate for members. A phased approach gives time for the framework to evolve, to understand what works and is useful and what isn’t, as differ types of pensions are included.”
She said that there is clearly still a lot of work still to be done. “Further consultations, primary legislation and importantly secondary regulation setting out the phased timetable will be needed.” This could mean that implementation comes after the next general election she adds.
“We want all pension savers to have the confidence they are saving in pension schemes which provide good value for money regardless of the type of scheme they are saving in. Consistently poorly performing pension schemes should be wound up, with pension benefits transferred to better value for money schemes.”
Standard Life workplace managing director Gail Izat says: “The Value for Money framework represents a huge opportunity to empower both pension professionals and savers. By introducing consistent measures across a complex market, there’s scope to create greater comparability and transparency of outcomes.
“We welcome the fact that government and regulators have taken on industry feedback and have decided to place more of an emphasis on investment performance and quality of service. The expectation levels of members on customer service keeps rising and it is only right that pensions keep up with expectations.
“Ensuring comparability of investment performance is one of the most complex areas and care will need to be given to ensuring appropriate benchmarks are selected and in comparing performance at different stages of the saver’s journey.”
LCP partner and head of DC Laura Myers says: “Delivering VFM to all members, regardless of what sort of pension arrangement they are in, is essential to building and maintaining trust and confidence in pensions. We believe that introducing a dedicated framework will help to underline the importance of VFM and focus the attention of governance bodies on delivering good outcomes for savers.
“We welcome the fact that the Government has addressed some primary concerns about key issues such as employer subsidies being included and the sheer volumes of return data. The VFM process must not be another cumbersome compliance document for pension schemes which could potentially mislead savers by presenting incomplete information on the costs and charges they pay for their pension provision.
“In the round, the framework presents a real opportunity for the pensions sector, not only to improve the VFM delivered to savers but also the information reported to them. Properly implemented, a new framework could be the basis for a more informative, member-friendly report to replace the annual DC Chair’s Statement, which has become a ‘tick box’ exercise for pension schemes and is rarely read by savers. We hope the government continues to listen to the industry as this is implemented.”
Broadstone head of DC workplace savings Damon Hopkins says: “Despite best efforts to increase engagement and understanding of retirement savings, we simply can’t expect the average saver to be an expert in investments. Therefore, it is incumbent on the industry to ensure the default strategies that the majority of savers are invested in produce value for money through fair fees, strong performance and ultimately support adequate retirement savings.
“With significant variation in the design of investment strategies, it is inevitable they will produce variable investment performance. These proactive measures aim to mitigate the consumer harm from this differential by either encouraging consolidation or prompting schemes to review DC investment strategies and/or providers.”
