The Department of Work & Pensions, the Financial Conduct Authority and The Pensions Regulator have proposed key changes to the new value for money (VFM) framework for workplace pension schemes, following industry feedback.
Performance assessments will now follow a four-point ratings system, designed to more clearly identify top performers. The previous ‘red, amber, green’ traffic light rating system will be extended to show dark green for ‘strong performance’, l ight green for ‘good value’ with amber to indicate improvement is needed, and red to show poor value.
The regulators said this is in response to industry feel and to make comparisons between scheme performance clearer.
There had been fears that trustees or IGCs may be reluctant to award an ‘amber’ rating as this would potentially close them to new business, leading to a herding of green rating – which would essentially be meaningless.
The regulators are also proposing that these tests will not solely be made against backwards-looking investment performance metrics. The FCA said it was proposing to introduce forward-looking metrics which would be considered alongside past-performance as part of this VFM assessment.
Another major change is that trustees and IGCs will no longer be required to compare their workplace scheme against three other arrangements. This had led to concerns that some schemes may cherry pick their comparison to avoid ‘amber’ or ‘red’ ratings.
The consolation document on these new proposals says: “We now propose that arrangements be compared against a much wider commercial comparator group.” It adds that this will be enabled by a “central VFM database into which all arrangement data would be entered for the purpose of data quality, comparison and publication.”
The document also proposed using a standardised member survey to assess administrative and engagement metrics. The FCA and DWP said that further engagement with the industry is required to ensure these metrics work as intended, so further details on this are no include in this current consultation document.
Releasing the consultation document on these latest proposals, the regulators said the proposals aim to make it clearer how pensions perform, what they cost and what quality of service is provided.
When looking at setting up a performance tests the consultation also acknowledges that many schemes are currently evolving their investment approach – typically to include higher-charging private market assets, which could impact short-term performance, although with the aim of better diversification and driving longer-term value creation.
However it says the assessment process it proposes is designed to drive a “genuine focus” on long-term value generation. It adds that this assessment on value will require “nuanced judgments from Independent Governance Committees (IGCs) and trustees, based on open, transparent, comparative data.”
The new framework also sets out stronger governance, with clear expectations laid out for both trustees and providers. IT also details the steps trustees and IGCs must take when schemes are not giving members good value. This can include coding schemes to new business and moving members into better-performing arrangements.
Announcing this consultation — which runs until 8 March — the Minister for Pensions, Torsten Bell says: “It is simply too difficult for people to know whether their pension savings are working for them. That’s not right when we’re talking about something as important as people’s security in retirement.
“These proposals change that. Pension schemes’ performance will be public with a simple rating system. In future, savers will know if they are getting a good return or not.
“This is about being straight with people and making sure people’s savings work as hard as they did to earn them.”
FCA deputy chief executive, Sarah Pritchard adds: “Good value isn’t just about low costs – it’s about strong performance, good service, and transparency. We want to see a focus on value. By working with government and The Pensions Regulator, we will help secure better returns for pension savers.”
TPR chief executive, Nausicaa Delfas, said:”Millions of people rely on pension income to support them through later life. We have to make sure they get value for their money. This framework will empower decision-makers to either improve their scheme or consolidate out of the market. We want to hear the views of trustees to make sure we get this right and help transform pension saving for millions.”
