FCA opts for softer approach to charges comparison in DC schemes

In a policy statement published on Monday, the City watchdog said the most significant issue raised in the feedback to its value-for-money consultation was around the level at which charges comparison should be conducted. 

To address concerns raised by the industry, the FCA said its final rules will allow independent governance committees and governance advisory arrangements some flexibility to decide how best to conduct the comparison. 

In particular, the regulator changed its policy to afford IGCs greater flexibility and judgment around both the types of information to consider, and how to assess and compare the information. 

The three broad value-for-money concepts outlined by the regulator today – costs and charges, investment performance and service – feel like the right ones, with key considerations like environmental, social and governance factors likely to be captured within these

Tom Selby, AJ Bell

It said: “We maintain our view that, in many circumstances, the most meaningful level for the comparisons of cost and charges is at the individual employer arrangement level, since it is at this level that members experience the service offered by the particular firm at a price which is particular to that arrangement. 

“However, we also recognise that in some cases comparing costs and charges at a more aggregated level (ie, cohorts of similar employer arrangements) is also appropriate and can provide a meaningful basis on which IGCs can compare VfM.

“Some combination of the two approaches may also be appropriate — starting at the higher level and then drilling down to look at outliers, for example.”

The final rules allow IGCs to decide which level of assessment is the most appropriate and proportionate way to assess the company’s scheme and which value-for-money assessment is the most useful for members.

The regulator added: “We have made some changes to the rules to reflect the responses to our consultation. 

“The majority of these changes introduce additional flexibility into the rules, giving IGCs more discretion around how they choose to conduct VfM assessment, and do not impose further requirements on IGCs.”

‘A systematic framework’

The FCA first began consulting on proposals in June 2020 to determine value for money in workplace pensions to ensure members are getting the best possible result. 

In the consultation published at the time, the regulator brought forward proposals to make it easier for both IGCs and GAAs to compare pension products and services to determine whether members are being treated fairly.

Monday’s policy statement set out the final rules that require IGCs and GAAs to take into account three key elements of value for money: costs and charges, investment performance, and services provided, including member communications.

The FCA said it expects IGCs to challenge their pension provider on costs and charges to their clients and to flag any rival scheme that may be offering lower administration charges and transaction costs.

If the IGC is not satisfied with the governing body’s response the relevant employer should be notified, it added.

The rules also state that they must assess and report on value for money, particularly through comparison with other options on the market, set out their overall assessment in their reports about whether the scheme or pathway investment provides value, and explain how they have assessed value in their reports and keep relevant evidence they relied upon for at least six years.

The FCA said the new rules were a step towards “a more systematic and transparent framework” for assessing value in pensions, which will enhance IGCs’ ability to compare pension products and drive value on behalf of the consumers they represent.

The regulator said assessing value in pensions was “complex”, and while the new rules will provide greater consistency and clarity, it believes further work is required to improve the comparability of value elements across the market. 

Tom Selby, head of retirement policy at AJ Bell, said: “Ensuring people get good value from their pensions is a key priority for the government and UK regulators.

“The three broad value-for-money concepts outlined by the regulator today — costs and charges, investment performance and service — feel like the right ones, with key considerations like environmental, social and governance factors likely to be captured within these.”

He added: “Automatic enrolment is the primary context for this renewed focus, with millions of people thrust into retirement saving for the first time and the majority contributing through inertia rather than by making an active choice.

“It is therefore crucial that policymakers are firmly focused on ensuring these members continue to receive value for money from their scheme. 

“Ultimately, costs and contributions are the two key elements retirement savers have total control over, and therefore ensuring costs are as low as possible must remain a priority.”

In September, the Pensions Regulator and the FCA launched a joint discussion paper asking for input on standardised metrics and benchmarks for measuring the three key elements of value for money. 

In the paper, they announced plans to force DC schemes to disclose more data around their investment performance, scheme oversight, and costs and charges.

This article originally appeared on FTAdviser.com