Two major pension bodies have called for the Financial Conduct Authority to rethink its traffic light ratings in the proposed Value for Money assessments for workplace pension schemes.
In their response the FCA’s consultation on this framework both The Society of Pension Professionals (SPP) and the Pensions Management Institute (PMI) have broadly welcomed this initiative, but both expressed strong reservations about how the current ‘traffic light’ ratings would operate. They also raised concerns on the volume of data schemes will be asked to collect and disclose under these rules.
The SPP is proposing that the amber rating be changed, so that instead of being a broadly negative assessment, it is considered instead as “VFM with room for improvement”.
The SPP response says: “Despite there being three indicators, in practice the outcome is binary, VFM or not VFM and the current proposals therefore place overtly negative connotations on an amber rating. This could be solved by making an amber rating “VFM with room for improvement”. And for that improvement to be deliverable, and required to be delivered, within a definitive timeframe of say two years.”
The SPP adds: “Furthermore, the ability for decisive action for red rated schemes is critical for the success of the framework. Until firms have the ability to do bulk transfers without savers’ individual consent for contract-based schemes, the framework is really lacking a key component to make it successful.”
The PMI also expressed similar concerns, saying as it stood the current Red Amber Green (RAG) assessment was “too blunt and severe”. The PMI’s chair of its policy and public affairs committee Tim Box says: “In reality, under these proposals, anything short of a green rating is a failure. We would prefer a rating system that recognises situations where only minor improvement is needed and also gives recognition of where VFM expectations have been exceeded.”
Both bodies also expressed concerns about other elements of this framework, particularly around the extensive set of disclosures proposed by the FCA. The PMI says that that the FCA is requiring too much detail in some places, and this may compromise providers’ ability to clearly demonstrate VFM in the areas that have the most impact on savers.
Box adds: “If the VFM framework is to succeed, it is vital that providers are not hamstrung with requirements that are overly complicated and onerous.”
He highlighted the issue of the FCA requiring schemes to disclose UK and non-UK assets, particularly as this will not form a direct part of the VFM assessment process.
However it is known that the government would like to see UK schemes invest more widely in the UK to boost the economy — although schemes may want the flexibility to invest in jurisdictions they believe will deliver the best long-term investment returns for members.
Meanwhile the SPP has made a number of other recommendations to improve this framework. This includes suggesting that non-workplace pension products should be brought within the scope of any new VFM framework in due course; that the proposed threshold of 1,000 members should be halved to 500; and that service quality metrics need greater attention.
SPP president Sophia Singleton adds: “The SPP supports many of the proposals being put forward within this consultation and the overarching objective of improving value for money, but at the same time we are concerned about the volume of data that the proposed framework will require providers to collect and communicate, which in some cases appears disproportionate.
“We also believe that a change to the proposed amber rating is necessary to increase the effectiveness of the framework and increase the chances of delivering value for money for more savers.”