Eagerly awaited since the announcement of the Mansion House reforms last year, the Financial Conduct Authority (FCA) last Wednesday published its consultation on “The Value for Money framework”. The consultation closes on 17 October. 

The Pensions Regulator (TPR), the FCA and the Department for Work and Pensions (DWP) have for some time now been working in partnership to develop a framework to improve the value schemes deliver for savers and enabling comparisons to be made across the defined contribution pension landscape including contract-based and trust-based schemes. This is the culmination of that work although there is still a way to go yet. 

The King’s Speech confirmed the introduction of a Pension Schemes Bill which will include, amongst other things, legislative measures to ensure all pension savers are saving into schemes which delivering value through the value for money (VFM) framework. The Bill will establish a standardised test for value for trust-based defined contribution (DC) schemes.

In publishing the consultation, the FCA was clear that although the consultation relates to rules for FCA-regulated firms operating contract-based pensions, the framework is based on earlier work with the DWP and TPR. Indeed, TPR has published its own press release encouraging trustees of trust-based schemes to respond to the consultation and has also posted on Linkedin encouraging the same.

Background

VFM has become an ever-increasing focus for the pensions industry over the last few years. Back in 2021, TPR and FCA published a joint discussion paper on developing a common framework for measuring VFM in DC pension schemes. 

Our blog from March 2023 sets out the VFM steps that then followed on from the 2021 joint paper, including the introduction of legislative “value for member” requirements for occupational DC schemes with less than £100million of assets.

VFM was once more brought into sharp focus last year with the Mansion House reforms, which first announced the proposed VFM framework to be constructed by the FCA and policed by the FCA and TPR. 

What is the purpose of the new framework?

Within the consultation document, the FCA notes that “The need for regulatory interventions in the market for workplace pensions in accumulation arises from a combination of challenges – competition failing to maximise long-term value for savers, information asymmetries and principal-agent problems.”

As mentioned above, the FCA has again worked with the DWP and TPR on the development of the proposed framework (the “Framework”) and it is designed for application across the DC workplace pensions market. FCA notes that it will continue its joint work with DWP and TPR to ensure “common standards can apply across both contract and trust-based schemes”.

At this stage, the FCA is clear that the Framework is solely aimed at professionals – suppliers, IGCs, employers and their advisers. According to the FCA this reflects their role – and the limited degree of engagement and potentially financial literacy of many savers. However, the FCA notes that it is possible that “greater transparency could support a degree of greater engagement by savers if they are able to compare the performance of arrangements”.

The Framework is designed to work in conjunction with the Consumer Duty and wider FCA policy interventions on pensions.

The objective of the Framework according to the FCA is twofold:-

  • To reduce the number of savers with workplace personal pensions that are delivering poor value; and
  • To drive better value for money across the workplace DC market through greater scrutiny and competition on long-term value rather than predominantly cost.

The proposed framework

FCA is proposing that the Framework will consist of four key elements as follows:-

1.         It requires the consistent measurement and public disclosure of investment performance, costs, and service quality by firms for all such arrangements against metrics that the FCA believes will allow VFM to be assessed effectively.

2.         It enables those overseeing and challenging an arrangement’s value – IGCs and Governance Advisory Arrangements (GAAs) for contract-based schemes – to assess performance against other arrangements and requires them to do so on a consistent and objective basis.

3.         It requires public disclosure of assessment outcomes, including a Red Amber Green (RAG) VFM rating for each arrangement.

4.         It requires firms to take specified actions where an arrangement has been assessed as not VFM (Red or Amber).

The FCA’s underlying thinking is that disclosure of a consistent set of metrics under the Framework will provide a granular view of performance, with the initial data publications providing a baseline of information on the market. This will allow tracking of performance against metrics over time. The FCA is clear that it initially it expects to see a proportion of arrangements rated amber or red and therefore be required to address poor value. 

FCA proposed actions for arrangements rated as offering poor value

In terms of how the FCA proposes that firms address poor value, it proposes the following:

  • A firm action plan will need to be agreed by the firm with their IGC, and submitted to the FCA. The plan will either set out improvements sufficient to achieve a green rating, or set out other actions, such as transferring affected savers to a better value arrangement.
     
  • Firms responsible for an in-scope arrangement rated amber or red will be required to communicate the rating each year to any employer then paying contributions. The communication will advise the arrangement’s RAG rating and set out next steps that the firm intends to take to address the poor value. The communication will also contain any recommendations to the employer.
     
  • Firms should not accept workplace pensions business from new employers on terms that do not provide value for savers. The FCA will also introduce a requirement that a firm cannot accept business from new employers into an in-scope arrangement rated amber or red. This latter measure was announced as part of the Mansion House reforms so will not come as a surprise. 
     
  • Firms must take action under the Framework to address poor value, which in the event of persistent underperformance is likely to involve transferring savers to an alternative arrangement. However, the FCA acknowledges this may throw up its own issues in terms of member consent requirements which will need to be worked around. 

How might the Framework evolve? 

The FCA acknowledges there are different ways in which the Framework, and data required to implement it, could evolve and the Framework be extended. Again it seeks industry views regarding how they see the Framework developing and expanding. 

The FCA notes in terms of its future aspirations for the Framework that “An aim in future phases will be to support consumer understanding and decision making when making choices around which provider and product to use. We equally aim to promote effective competition in the interests of pension savers across the pensions markets”. 

It is hard to argue with that!

Comment

The consultation document has been broadly welcomed by the pensions industry. 

However, some have highlighted concerns about the potential for unintended consequences. The FCA does in fact address this in the consultation document. It acknowledges that one such possible consequence is the risk of herding (providers make changes to stay close to the “average” of what is being measured to avoid being penalised for underperformance) – this is a risk that has consistently remained a real concern for the pensions industry since the concept of VFM first got off the ground. 

The FCA note that its proposals aim to reduce that risk and that it has not proposed “red lines” or “regulator-set benchmarks” and will not consider doing so until they have experience of the data.

Another possible consequence levied at the Framework and which the FCA again acknowledges, is the risk of an increased focus on cost. Again, the FCA is confident that the Framework is designed to shift focus from cost to value and notes that the FCA is seeking to reduce this risk through the proposed assessment process.

Another point raised on the consultation document is that the FCA is simplifying a very complex topic. On that though, one might point to the length of the consultation document itself (220 pages) as evidence that the FCA appreciates it is a very complex topic that will require no small amount of work to implement and that there are still many points left to consider many of which it is asking the industry to do via consultation responses (there are 46 questions in total that it has posed in the consultation document). 

A final matter noted in the consultation document is specifically in relation to the proposed assessment of investment performance and the omission of forward-looking measures.  In assessing it, the FCA is clear in the consultation that its focus will be on factual, historical information that can help show past value and support meaningful comparisons. It notes previous calls from the industry to include forward-looking metrics and acknowledges the value in doing so, but will not be including those for now.

Overall though, the consultation document is being viewed as a very positive step forward for the industry and there appears to be significant industry confidence that it will go some way to properly addressing longstanding VFM issues and concerns.