The Financial Conduct Authority (FCA) and the Pensions Regulator (TPR) have launched a new consultation on their proposed Value for Money assessment framework for defined contribution pension schemes.
The 46-question consultation will inform the details of the Value for Money (VFM) framework that is to be introduced through the Pension Schemes Bill – which itself is currently being scrutinised by members of the House of Lords.
The new consultation includes a proposal to introduce forward-looking metrics related to projected future investment performance. Respondents to the previous consultation had called for forward-looking metrics to be introduced alongside investment performance reporting.
The FCA, which is leading the development of the VFM rules, is seeking feedback on two different ways of incorporating forward-looking metrics into the overall assessment.
“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.”
Torsten Bell, minister for pensions
The regulator has also stripped out a number of the data points it was initially planning to collect for the VFM assessment, in a move that has already been welcomed by providers.
One small but significant change from the previous consultation, released in August 2024, is the introduction of a four-point rating system in place of the red-amber-green plan initially put forward. Two green rating levels – light and dark – have been proposed.
The consultation paper stated that the introduction of the dark green rating would allow the VFM system to identify “top performers”.
The change follows a study by The People’s Partnership and the Behavioural Insights Team, published in October, that showed the three-point traffic light system underperformed in consumer testing against other value assessment options.
‘Traffic light’ approach to VfM underperforms in consumer testing
The ‘red, amber, green’ proposed approach to value for money in defined contribution pension schemes performed poorly in a behavioural finance exercise commissioned by The People’s Partnership, as Pensions Expert reported last year.
The FCA’s new value assessment definitions
The FCA’s consultation paper set out brief definitions of its proposed four-point rating system. The two green ratings are designated as “value”, while amber and red ratings are designated “not value”.
Dark Green: This has been introduced to identify “top performers”. The FCA said these schemes would have few or no areas that could be improved.
The consultation paper states: “The arrangement is clearly outperforming most in the comparator group and there are minimal areas where improvements could be made. We expect few arrangements would reach this standard.”
Light Green: Schemes receiving this rating may still have areas for improvement, but these would be to increase their value for money scores.
The consultation paper states: “The arrangement is delivering value, but there are areas that could/ should be improved. We would expect this would be a more common value rating than Dark Green.”
Amber: These schemes “can be improved” to provide value for money, under the FCA’s definition.
The consultation paper states: “The IGC or trustees must believe improvements are possible within three years to make the arrangement value for money. Despite this, the firm or trustees may still decide that a bulk transfer is the best course of action for members.”
Red: Applied when a pension scheme “cannot be improved to reach value”. Trustees or IGCs “must transfer where in [the] best interests of members”.
The consultation paper states: “A bulk transfer must follow where this is in the best interests of members. A transfer may not always be possible (i.e. would not be in best interests). In those cases, the firm and trustees must still take action to improve value where possible.”
VFM proposals to ‘help secure better returns’
Sarah Pritchard, deputy chief executive of the FCA, said: “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.”
Nausicaa Delfas, TPR’s chief executive, added: “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.”
Torsten Bell, the minister for pensions, said: “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.”
New rating system ‘must be thought through’
Steven Cameron, pensions director at Aegon UK, welcomed the light and dark green proposal and the removal of the “cliff edge” threat of moving from green to amber under the initial plan.
However, he said that “the implications will need to be thought through in detail to ensure the new approach avoids unintended consequences”.
Ben Infield, senior policy adviser on long-term savings at the Association of British Insurers, also welcomed the “more nuanced approach”.
“The inclusion of forward-looking metrics is also vital, to ensure schemes aren’t penalised for investing in global and UK private markets where long-term investment can deliver greater value over time,” Infield added.
“Plans to apply the framework consistently across both trust and contract-based schemes will also help to ensure a level playing field for providers and clear outcomes for savers. We look forward to continuing our close work with the FCA, TPR and the Department for Work and Pensions through the consultation, paying close attention to the revised scoring assessment.”
Aegon’s Cameron warned that the introduction of forward-looking metrics introduced the risk of “subjectivity and a lack of comparability”, as the regulator has proposed a flexible approach to assumptions and approaches.
The consultation is open until 8 March 2026.
