There was widespread support from the industry for the new value for money framework set out by the Department of Work & Pensions, The Financial Conduct Authority and The Pensions Regulator.
Many welcomed the revisions made to the earlier proposals, particularly the inclusion of forward-looking metrics alongside backwards-looking performance data.
Hymans Robertson head of DC investment Alison Leslie says this forward looking data would be an “essential part of the value for members assessment.”
Leslie adds: “We also welcome the pragmatic approach shown to the disclosure of costs and charges for vertically integrated firms, as well as the reduction in reporting period to 10 years from 15 years.”
These changes were also welcomed by the Pensions Management Institute. Helen Forrest Hall, chief strategy officer says: “The new framework is a positive step towards better saver outcomes. Streamlined service quality indicators, more focused cost and performance measures and a broader comparator group show regulators have listened.”
The PMI also welcomed the introduction of a four-point rating system, to benchmark schemes’ performance, saying this was an improvement on the previous ‘traffic light’ system or red, amber or green. Forrest Hall said this change was a “win for fairness and competition”.
The proposals suggest having two ‘green’ categories: dark green to show outstanding performance and a light green rating to reflect fair value for money.
Aegon pensions director Steven Cameron also welcomed this change. He said: “We had particular concerns over the Red, Amber, Green ratings proposed previously, and in particular the commercial cliff edge between green and amber rated arrangements, with the latter having to close to new employers.
“We welcome the move to a four rating system, with light and dark green, but the implications will need to be thought through in detail to ensure the new approach avoids unintended consequences.”
Others though were more hesitant. Leslie said: “Whilst we understand the purpose of the new category we still believe few schemes will use the ‘not value’ category unless a bulk transfer is imminent — making the need for an amber category almost redundant.”
Leslie also had concerns about the use of a “central repository” for schemes to benchmark their performance against. Previously it had been suggested that trustees and IGCs might pick three schemes to compare their performance against.
Leslie says: “The use of a central repository whilst on the face it makes sense, needs to be used with caution particularly given the use of differing assumptions by schemes as this could lead to misleading and inconsistent comparison approaches.”
Cameron adds: “One of the most significant changes from previous proposals is the creation of a centralised data base which will compile commercial market averages to aid ratings. While this replaces the self-selection risk of governing bodies selecting their own three comparator arrangements, the stakes for making sure the averages are fair and meaningful are high.”
He adds: “We’re also pleased the FCA has removed some of the data metrics within the framework. The previous proposals included a huge number of data points, not all of them particularly relevant to value for money, and risked governance bodies losing sight of the wood for the trees.
“We support removing 15-year investment past performance. It also makes sense to defer most customer service metrics around engagement for now.”
The PMI says there was still work to be done to ensure the new VFM framework was a success. Forrest Hall says: “Ambition must match reality: schemes face heavy pressures, and added burdens must stay proportionate. Clear communication will be critical to avoid confusing members. We will work with Government and regulators to ensure the rules are practical, consistent across schemes, and deliver long-term value for savers.”
Standard Life workplace managing director Gail Izat adds: “The Value for Money framework will play an important role in the pensions market in the years to come so we welcome the additional certainty that this consultation provides regarding its implementation.
“In recent years many of those who select pension schemes have focused on costs, albeit with a growing emphasis on additional factors. The framework will progress that trend towards a more rounded comparison including additional factors such as investment performance including forward looking metrics.
“There has clearly been a lot of interaction between FCA, TPR and DWP in developing the system and we’d like to see this continue as the framework is implemented to ensure consistency between the contract and trust-based worlds. ”
Philip Smith, DC director at TPT Retirement Solutions adds: “We’re pleased to see the VFM consultation published today, the product of years of hard work between both regulators, government and industry.
“Consolidation is a central trend in DC pensions, however, achieving significant size alone doesn’t guarantee better member outcomes. VFM is therefore the vital tool to hold schemes to account, so that members benefit from effective scale, driving greater efficiency, governance and innovation.
“Crucially, the VFM framework will lead to increased scrutiny of the investment performance of DC schemes, and help employers and advisers move away from cost-dominated provider selection. Over time we would also hope that the framework is extended to objectively assess the quality of guided retirement solutions, which will become increasingly important to outcomes as the DC generation matures.”
“Ultimately, these proposals could be a game-changer for pension savers by making sure their money is working harder for them, providing clearer information and greater confidence that their retirement savings are being managed with their best interests in mind. Poorly performing schemes would be required to improve or transfer into better-performing ones, meaning savers shouldn’t need to take action to benefit from stronger returns.”
