FCA backs ‘chain-linking’ for default fund performance

The Financial Conduct Authority has publicly backed plans to ‘chain-link’ default fund performance when compiling industry wide comparison figures.

Speaking at the Corporate Adviser Master Trust and GPP Conference John Reynolds from the FCA’s pensions and funds policy department said he was conscious of the issue of some providers effectively ‘burying’ poor past performance by launching new default options.

Discussing how the industry is working towards a new framework of metrics to help compare ‘value for money’ across different providers, Reynolds said he was supportive of metrics that ‘chain-linked’ previous and current default to give more representative picture of the performance of members’ investment funds.

On a five year timeframe this could involve two years of the more recent default launch coupled with three years of a previous default.

This panel discussion included the three main regulators for the pensions industry who set out the challenges faced  in devising a new ‘value for money’ framework, designed to provide more effective metrics for comparing pension schemes.

It was clear there was agreement between the main regulators covering different parts of the workplace pension market.

The Pensions Regulator policy delivery lead Lisa Leveridge said it was important that this framework had a more qualitative approach. She said TPR was currently looking at how to address issues such as costs, given the wide range of charging structures and the fact that many schemes will impose different costs on schemes of different sizes. 

She said TPR was actively looking at how this information could be expressed as an annual percentage charge. 

Reynolds added that the purpose of this new value for money framework was to drive better outcomes for pension members and savers. However he stressed that as it currently stood the information would be designed for professional industry users, rather than ordinary investors, although he said that members will get to see the results of these value for money assessments. 

“We are aware of the potential for wrong decisions, as we extend this framework into other areas,” he said and this would be something that the regulators remained cognisant of as it developed this work. 

Department of Work and Pensions DC pensions policy manager Des Healy added that the government did not want to see members opting out of an AE schemes, for example, if it performs badly against they Vfm assessment – and risk losing employer contributions. He said he wanted to see schemes do more to drive up standards, or to encourage more consolidation to deliver better member outcomes.

Healy says that the the government is calling for evidence from the industry and would look to take this into account when developing this value for money framework. He said he would also like to include ‘forward looking’ metrics’ as well as past performance data when it came to analysing value for money on investment performance. He said that the government continued to look at the example of similar legislation in Australia.

He added that he did not forsee such drastic action as schemes being closed down after two years if assets underperformed.  One aspect under consideration was whether a two-year time frame was reasonable to assess these issues. 

The panel admitted that there was a risk that these metrics regarding value for money might curb innovation across the sector, with providers opting for more vanilla or middle-of-the-road propositions, however Reynolds said he did not think this was a significant risk.

Leveridge said that by looking at a range of metrics she hoped this would encourage more diversify of offerings. She added that when it came to the comparing scheme much of the focus to date had been on cost which did not always deliver optimum investment portfolios for members.

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