There is widespread support for the revised Value for Money (VfM) regulations, but the industry is calling for further refinements particularly around forward-looking metrics, to deliver good member outcomes and ensure a ‘robust put proportionate’ assessment process.
Some providers have raised concerns that the inclusion of forward-looking metrics when assessing overall value will be misleading if based on a range of assumptions, and could enable poor performers to evade scrutiny.
Concerns were also raised that these new data requirements will expose weaknesses with technology systems and infrastructure that are currently being used across the pensions sector.
These various views were expressed in responses to the Financial Conduct Authority’s consultation on its revised VfM proposals, which closes next week.
In its response, TPT Retirement Solutions welcomed the regulator’s moves to improve transparency and member outcomes through a strengthened VFM framework.
However, it says it is concerned about the transparency around forward-looking performance metrics, and the potential to “dilute” key performance data, which takes into account past performance and costs.
In its response TPT says: “Good performance remains the clearest and most objective evidence of value experienced by members, and so regulators should be wary of diluting the importance of this – especially in the growth phase – with subjective forward-looking metrics (FLMs).
“TPT understands the inclusion of FLMs as a measure to avoid herding and encourage more diversified investment strategies, including in private markets, however, direct comparison of metrics based on different sets of assumptions risk being misleading, so these metrics should have a qualitative role in contextualisation, rather than quantitative.
“Creating composite metrics of backward and forward performance could be particularly misleading, and create a mechanism for poor performers to reduce scrutiny and accountability. “
TPT adds that alignment with other Pensions Bill reforms, specifically guided retirement, is another area where there is a need for further refinement.
It says: “While ‘decumulation VFM’ may be a phase 2 objective, incentives to focus solely on pot appreciation, rather than targeting specific retirement outcomes, at the 5YTR and at-retirement points, risks undermining a crucial development in DC propositions over the coming years.”
TPT also argues that VFM, as the government’s chosen tool to evidence the quality of a scheme, must have an interaction with other reforms, notably around scale and consolidation.
Meanwhile, in its consultation response Zedra also highlight issues around forward-looking metrics although they want to see greater use of them, particularly in the run up to retirement.
Anne Sander, client director and head of the Zedra Governance Advisory Arrangement says: “Greater objectivity and consistency in the metrics used to evaluate value should support improved member outcomes over time
“However, aspects of the current proposals risk leading to distorted assessments and we have suggested a number of targeted improvements.
“In particular, we believe the framework should require five-year forward-looking investment performance metrics, alongside one-year measures for cohorts within five years of retirement and at retirement.
“This would provide a more meaningful assessment of the value members can reasonably expect to receive.”
Zedra also says it is important that GAAs and IGCs have transparency over the capital market assumptions underpinning forward-looking metrics. “This would enable effective challenge of those assumptions, better assessment of backward-looking outcomes, and provide an additional safeguard against potential gaming.”
In its response Lumera says that the new requirements will potentially expose weaknesses with many of the legacy technology systems currently being used across the pensions industry.
Lumera chief commercial officer Peter Roos says: “The proposed VFM framework marks a decisive shift to evidence-based outcomes. While the direction of travel is positive for members and the market as a whole, a more demanding regulatory environment will quickly expose gaps in the infrastructure of schemes still relying on fragmented legacy systems.
“To meet the VFM requirements and thrive under the new regime, schemes and providers will need access to consistent, high-quality data, the ability to monitor performance in near real time and the operational resilience to report in a standardised way.
“In this sense, VFM is not just a governance reform – it is a technology catalyst. We would expect to see schemes accelerate transformation programmes and bring forward significant investment in their technology systems, administration and data.”
