Amber alert: Industry weighs risks of Value for Money ratings

With defined contribution (DC) schemes set to receive either green, amber or red ratings as part of their VfM assessments, pension schemes and regulators alike recognise the commercial and reputational risks schemes will face if they receive a rating that is any shade other than green.

At the Pensions UK Investment Conference this week, an industry panel debated the ramifications of a possible amber rating. “There is a behavioural element to this, and nobody wants to see an amber rating,” said Phil Butler, deputy chief investment officer at People’s Partnership, a master trust pension scheme.

“We don’t want knee-jerk reactions, but it does give trustees the opportunity to sit down with their advisers and reassess their investment strategy.”

Joey Patel, The Pensions Regulator

Butler added: “Yes, it can be constructive from a trustee’s point of view, but you need to be careful from an unintended consequences perspective. The scheme might be rightly amber. However, you don’t want to find out you are amber because of a data error, and by then it is too late. That is the worry.”

Seeking to reassure, Nike Trost, the Financial Conduct Authority’s head of asset management, funds and pensions, said: “I think we will be looking at a lot of green ratings – different shades, but a lot [of green].”

Joey Patel, the Pensions Regulator’s director of policy, pensions reform, added: “Even if a scheme is rated amber, that doesn’t mean they now need to exit the market and transfer their members out. Within the framework, there’s a lot of room for improvement. We don’t want knee-jerk reactions, but it does give trustees the opportunity to sit down with their advisers and reassess their investment strategy.”

Butler agreed: “As long as there is dialogue, you can work through these things.”

All this does not mean that the regulators’ teeth will not come out if necessary. Trost added: “There will be schemes which look at the numbers and have to ask themselves hard questions…

“If we have a VfM framework, we need to recognise that some [schemes] will be ‘value’ and others will not be value. We recognise the challenges that amber brings, and red certainly brings, but that is the point of a value metric.”