Value for money (VfM) is under the spotlight again. The FCA has published an updated consultation on the new framework for contract-based DC schemes, with equivalent rules being established for trust schemes in the Pension Schemes Bill.
This consultation reflects industry feedback on the FCA’s original 2024 plans. While it has toned down some proposals, the broad strokes are the same: regulators want greater transparency, clearer comparisons and more competition between schemes.
At a time when employers are asking tougher questions about default investment performance and members are more engaged, DC governance professionals are under pressure to demonstrate value for money in clear and undeniable
terms. Those who fail to do so will find themselves under scrutiny.
The revised proposals acknowledge industry concerns around proportionality and the risk of over-simplistic league tables. The FCA also recognises trustees and IGCs should be trusted to make judgement calls on a scheme’s future prospects, rather than solely relying on backward-looking metrics. This will be relevant for schemes building private market allocations, where short-term performance may not reflect future growth potential.
That said, the main thrust is the same. There will be an onus on DC governance bodies to prove whether schemes are delivering value, measured across investment performance, costs and charges, and the quality of services provided to members. Where schemes fall short, the expectation is no longer just to explain, but to act – either by improving outcomes or, where appropriate, consolidating.
VfM is due to come into effect in 2028. This may feel like a long way off, but early action will ensure no surprises further down the line.
Data quality should be an immediate priority. Governance bodies should check they have reliable and consistent data across investment performance, costs and service standards, and whether this stands up to external scrutiny. Gaps are easier to address through planned improvements, rather than under the pressure of regulatory deadlines.
The new framework places greater emphasis on non-financial elements of value, alongside a requirement for a forward-looking estimate of future returns, which the industry has been lobbying for. Other new proposals include comparing schemes to a ‘commercial market group’ (rather than a small number of hand-picked schemes); the introduction of a ‘dark green’ rating category for schemes that demonstrate clear outperformance; and plans to create a central, government-run VfM database. We await further details on all these elements, but discussion about the potential impact on your scheme will be important.
DC governance bodies should welcome the opportunity to respond to this consultation. This engagement needn’t be complicated. Governance bodies can work with advisers to respond to specific parts of the proposals that may have unintended consequences, particularly for smaller schemes or those with more complex investment strategies. A little constructive feedback may help shape practical implementation.
Crucially, the consultation period can be used to stress-test your own scheme’s readiness. Asking “how would we demonstrate this today?” is often more revealing than reviewing policy papers in isolation.
One of the more encouraging aspects of the proposals is the inclusion of forward-looking performance metrics. This reflects a growing understanding that past returns alone are not always the best indicator of future member outcomes, and introduces both opportunity and responsibility. Forward-looking assessments must be backed up with clear documentation. Governance bodies must also be comfortable explaining judgement calls, particularly where schemes may temporarily underperform peers for strategic reasons. This could include decisions around de-risking, ESG integration or long-term asset allocation.
So how can schemes move forward? As before, the answer is prepare, prepare, prepare. Do not underestimate your biggest advantage: we have a good idea now of what the framework will expect. Starting to align internal reporting with the anticipated framework will make the transition smoother.
With implementation expected from 2028, the next two years should be used to strengthen data, governance and reporting. Trustees and IGCs need to stay close to the consultation, speak up where proposals create unintended risk, and build systems that allow them to demonstrate value for money clearly and confidently.
