The Friday Takeaway: It won’t be easy being (dark) green

Happy New Year to all Pensions Expert readers. We’re right back where we left off, with Pension Schemes Bill developments and a new consultation about the Value for Money assessment framework. I hope you’re all well rested, because it’s going to be a busy year.

Like many people, Kermit the Frog is a true hero of mine. (His appearances as a roving reporter on Sesame Street may well have been my first experience of journalism.)

He once famously sang that “it’s not easy being green” and I have a feeling that, in the years ahead, some defined contribution providers may well be thinking the same once the proposed new Value for Money framework is in place.

Industry commentators have welcomed the Financial Conduct Authority’s (FCA) pragmatism around its initial ‘traffic light’ system, which would have meant just one of three rating levels indicating that a scheme presents value for its members. The introduction of a “dark green” level for strong performance has been praised for adding greater nuance to the planned system.

However, the bar seems to be high. In the FCA’s paper, the regulator states that it expects “few arrangements would reach this standard”. This is largely because the definition of the “dark green” level states that any scheme achieving this rating would need to be “clearly outperforming most in the comparator group” with “minimal areas where improvements could be made”.

This would mean dark green pension schemes would have to demonstrate strong historical performance going back up to 10 years, with a high likelihood of this continuing – as demonstrated by yet-to-be-determined forward-looking performance estimates. They would also need to have lower costs, or at least not excessively high costs, and to demonstrate good quality customer service.

This last element remains rather vague from the details I have read of the paper so far. (It’s 212 pages and came out yesterday, cut me some slack.)

As Broadstone’s David Brooks has pointed out, there are metrics that can be used to measure and compare customer service performance, and these will likely be fleshed out by the consultation, which runs until early March. Bulk annuity market consultants have highlighted how customer service is becoming an important differentiator between providers, so why should this not also be the case for DC provision?

Another element that will require more work is post-retirement offerings. With the Pension Schemes Bill set to introduce a requirement for DC schemes to offer a default retirement option to members, surely in the years ahead the VFM assessment will need to take this into account. It’s wise to start thinking about this now.

Nick Reeve is editor of Pensions Expert.